The Stone City

Words Made to Last

Friday, September 07, 2007


Tim Lee has written a very perceptive summary of the political problem caused by increasing foreclosures of non-performing mortgages. He concludes:
I also don’t fully understand what’s so terrible about simply allowing foreclosures go forward. Obviously, it’s always tragic when people lose their homes, but what’s ordinarily tragic about a foreclosure is when someone loses equity they built up over years of hard work. But that’s not the situation here. Almost by definition, sub-prime borrowers are borrowers who put little money down and paid below-market rates for the first couple of years of the mortgage. It is, in short, not that different from renting. As a renter, I hardly consider it a crisis when I have to move every couple of years. So why is the foreclosure of a sub-prime borrower a crisis requiring government intervention?
The first comment is also worth thinking about:
Widespread foreclosures require intervention because they affect housing values, public safety and the tax base, and there's political pressure from the non-foreclosed households to do something about it.

Let's look more closely at these sources of political pressure.
Housing values: the government is under continual pressure from homeowners to inflate housing values, which does not enrich society as a whole and therefore must come at the expense of non-owners (renters and the young). This situation remains out of equilibrium because owners are more stable and more vocal than renters, and so wield more political power. But here the owners are calling for more overt intervention in their favor than previously: instead of distorted tax law, the government must actively shift cash to prevent houses being sold cheaply.
Public safety: this is a new one to me. Perhaps the commenter is afraid of a wave of newly homeless people wreaking havoc in the streets, or of properties sitting empty and gradually subsiding into the weeds. I can't tell.
Tax base: the property tax base is indeed threatened; thus local governments will try to get a bailout -- no matter how inefficient -- from state or federal level governments. But precisely when this threat is most serious, the state governments will themselves be most worried about loss of their own revenue; this pressure should be self-limiting.

In sum, the calls for a bailout are mostly an extension of the current systemic bias in favor of homeowners.