The Case for Mortgage Intervention

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"The Case for Mortgage Intervention"

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With John McCain apparently endorsing the sort of intervention into the housing market that a lot of progressives, myself included, have been calling for he’s predictably enough getting slammed from the right by Mark Steyn and others. I’ll rise to McCain’s defense. Steyn writes:

Will massive government intervention restore the health of the American property market? It’s not clear to me why the government needs to buy up all these mortgages. We talk of “keeping people in their homes”, but in what sense are they “their homes”? Many of these home “owners” obtained such ridiculous mortgages that they have minimal equity in them: Losing “their homes” is, in that sense, little more in cash terms than losing the security deposit on your rental apartment. Listening to all these proposed government interventions designed to stave off reality, I’d rather leave it to the market.

I think “restore the health” of the property market would be too strong. But as I’ve argued before it’s a mistake to think of a mass foreclosures situation as just an endless reiteration of what happens when one family gets foreclosed on and loses their home. If one house gets foreclosed on, the bank seizes the house and sells it off. Maybe they wind up losing something on the loan gone bad, but they don’t lose all that much and nobody else really notices that anything of interest has changed. But when you have a whole bunch of foreclosures in your area, you run the risk of a catastrophic drop in home values unless there’s for some reason a large net inflow of people into the area. If only one area was suffering mass foreclosures, then the very fact of the falling prices might be enough to induce a net inflow of people. But if a whole bunch of areas have a whole bunch of foreclosures, then you wind up with a lot of people losing their homes and a lot of empty, basically worthless homes.

This situation is bad for all homeowners. You don’t want to be in the position of looking to sell your home in Miami order to take that new job in San Jose at a time when Miami is littered with foreclosed-on homes that nobody wants to buy because, hey, only so many people want to move to Miami.

Meanwhile, in the long run the situation rebalances. A bunch of people who bought homes they can’t afford lose their homes. And a bunch of homes whose occupants have been kicked out plummet in value. Suddenly the homes that people previously couldn’t afford are affordable, and everyone who was previously without a home winds up back in one, with houses having re-adjusted downward in value. There are so many people in the country and so many homes to occupy, so one way or another the great wheel of history will turn and people will wind up living in the houses. Mass rewriting of problematic mortgages will produce the same outcome as simply letting history run its course, but if done right it ought to get us to that outcome more smoothly (without, for example, producing a reverse-bubble in which housing prices fall too low) and with less inconvenience. By now, economic problems have become so multifaceted that one doubts that anything in particular will “fix” the problem, though perhaps if the Bush administration had embraced this idea nine months ago we could have averted the situation. Still, McCain is quite right to support something along these lines, and since Obama has made similar noises, in an ideal world both candidates could push congress to move toward a fair and effective solution to the housing crisis.

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