A Housing Bill That's Better Than Nothing

The housing bill working its way through Congress is better than nothing, but not much. Already about one in twelve American families with mortgages owes more than their house is worth. And home values continue to slide – the Treasury Department estimates another 10 to 15 percent drop before hitting bottom.

At this rate, by next year nearly one in four families with mortgages will be under water. That’s about 12 million homeowners. Some will keep paying their mortgages. But four million are already behind on their payments, and that number is likely to grow as the economy slows. The betting is that eight to ten million who will default -- either because they can’t afford to the payments or because they figure it doesn’t make any sense to keep paying for a house worth less than what’s owed on it.

It’s a giant problem and not just for people losing their homes. It's a problem also for neighborhoods becoming ever more blighted by empty houses that reduce other property values, for towns and cities whose property-tax revenues are plummeting, and for the economy as a whole.

But because the original mortgage lenders resold the rights to collect on the mortgage loans, they no longer have any incentive or authority to refinance them on terms that allow people to stay in their homes and avoid these personal and social costs. Ideally, there'd be an auction system through which investors could buy up the loans at discounts that reflected their riskiness, and then do the refinancing. But there's no such system. The most efficient way of achieving the same objective is for the government to buy up the loans and do the refinancing itself. Given the social costs at stake, it makes perfect sense for government to take on these risks as long as the government gets a pro rata share of the profits, if any, when the house is resold.

This is essentially the current bill in Congress. But under pressure from Republicans and from the Treasury, its eligibility rules are drawn so narrowly as to make refinancing all but impossible for the millions of homeowners who owe more than their houses are worth -- the very people most in danger of defaulting. The Congressional Budget Office predicts that the bill will lead to no more than 500,000 refinancings out of many millions needed.

And now it turns out the White House doesn’t even want to go this far. Bush is threatening a veto.

Message from earth to Washington: Wake up before the housing crisis makes the recession into a depression.