Consumer Law

Senate bill and moral hazard

By Alan White

by Alan White

The Senate today passed its version of a housing crisis bill, stripped of most provisions that could help homeowners facing foreclosure. The provision that would have permitted bankruptcy judges to modify interest rates and reduce mortgage balances to the current value of a home was removed last week. No provisions remain to facilitate either refinancing or modification of mortgages to stem the tide of foreclosures. The only help for homeowners comes in the form of $100 million for counselors.

Builders and lenders, on the other hand, would get billions. A tax credit for buyers of foreclosed homes, as well as aid for states and cities to buy foreclosed homes, would prop up the prices of REO (real estate owned, the growing inventory of homes owned by mortgage servicers.) The chief motivation for mortgage servicers to work out loan modifications with homeowners is that the alternative, foreclosure, now results in huge losses. Fitch Ratings currently estimates loss severities for subprime mortgages at 50% to 60%, i.e. foreclosed homes will sell for less than half of the mortgage debt owed on them. While the need to deal with the increasing inventory of foreclosed homes is real, subsidizing their purchase is a dubious strategy. It reduces the pain felt by servicers who go ahead with foreclosures, and tilts the balance (albeit minimally) in favor of foreclosure and away from workouts.

The least appealing and most expensive feature of the Senate package is $25 billion in tax subsidies for home builders, who admittedly are going through hard times, but who are hardly more deserving than the millions of homeowners looking in vain toward Washington for help. Perhaps the greatest moral hazard of all is created by Senate campaign funding.

Full post as published by CL&P Blog on April 10, 2008 (boomark / email).