According to CNN, there is talk in Congress about bailing out the mortgage industry.
Of course, all the talk is about directing help toward the crooks and liars who created the crisis in the first place; the homeowners who were suckered into borrowing too much money will get nothing. What I found sort of unbelievable was this:
Fannie [Mae] and Freddie [Mac] have a Federal charter that requires them to provide liquidity and stability to the mortgage market. However, those organizations made it clear on Friday that any help will be limited.
…
Freddie has pledged to invest $20 billion in new subprime mortgage products. However those loans have to meet much stricter underwriting standards. (emphasis added)
I’m not an economist, so maybe I’m being simplistic. Still, it seems to me that there is no reason to have or encourage a subprime market, which by definition involves extensions of credit to people who are unlikely to be able to repay the money they are borrowing, all predicated on the belief that housing prices will rise indefinitely. For the most part these borrowers are not deadbeats, they are people who are borrowing more than they can’t afford to repay.
What would happen if these people could not get these ill-advised loans? If there are enough of them, then their withdrawal from the housing market would result in a lessening of demand for houses at the prices currently being asked. The laws of supply and demand (unless they’ve been repealed) would seem to indicate that existing home prices would fall until those same people, or many of them, could buy homes that they could afford. This would mean that a lot of people who currently own homes would not be able to realize huge capital gains when they sell, but they do not have a constitutional right to such gains, and in any event it is impossible to sustain ever rising home prices in the face of stagnant real income. If we want stable increases in home prices we need stable increases in median incomes, something we haven’t seen in a long time. As it is, the subprime lending market appears to function more as an artificial price support system for real property, than as a necessary lending mechanism for people with bad credit. This particular housing bubble has burst, and the inevitable damage is being done. The question is whether we want to allow a repetition, by allowing or encouraging subprime lending in the future.
It could be argued, possibly, that there is a natural floor for housing prices, which can’t go lower than the cost of building homes. Perhaps the cost of building a home would price the subprime borrower out of the market completely. I don’t know if that argument would have merit, but if it does it assumes that every house we build must be of the McMansion type that is now the norm. Perhaps if we imposed some sanity on credit markets it would have the salutary side effect of encouraging the building of reasonably sized and priced homes.This trend toward ever larger homes has taken a toll on Americans, who feel it necessary to keep up with their own perception of how rich they should be. This Sunday’s Times carried a Book Review of Falling Behind: How Rising Inequality Harms the Middle Class by Robert Frank, in which the reviewer notes:
… Between 1949 and 1979, the rising tide of the American economy lifted all boats more or less equally. In fact, the incomes of the bottom 80 percent grew more rapidly than the incomes of the top 1 percent, and those of the bottom 20 percent grew most rapidly of all. But since 1979, gains have flowed disproportionately to top earners. In an economy where the wealthy set the norms for consumption and people at every rung strain to maintain the consumption of those just above them, that spells trouble. In today’s arms race, the top 1 percent are armed to the teeth and everybody else is scavenging for ammunition. Between 1980 and 2001, Frank notes, the median size of new homes in the United States rose from 1,600 to 2,100 square feet, “despite the fact that the median family’s real income had changed little in the intervening years.” The end result? Frank methodically presents data showing that the typical American now works more, saves less, commutes longer and borrows more to maintain what he or she views as an appropriate standard of living.
The subprime borrower is, oftentimes, a person who would be perfectly prime if he or she were buying a home that was reasonably priced or reasonably sized (If not, then the individual is so far below prime they should not be buying a house). If Fannie Mae and Freddie Mac feel it is government policy to support the subprime market they are doing the subprime borrower no great favor, but they are enabling the scammers and contributing to an unhealthy spiral of rising home prices in a country with flat income growth.
