In a rare case of everyone being right, today current HUD Secretary (since June) Steve Preston said Congress wrote inflexible rules for helping refinance unworkable mortgages, and Barney Frank blamed the Bush administration for forcing Congress to write unworkable rules. As one person in The Washington Post story notes, this is because the middle ground between helping everyone in trouble and forcing people to suffer the consequences of their bad mortgages is no ground at all. The program in question, Hope for Homeowners, allows the FHA to insure a new mortgage as long as the lender takes a loss and the homeowner splits future equity with the government. How effective is this?
The three-year program was supposed to help 400,000 borrowers avoid foreclosure. But it has attracted only 312 applications since its October launch because it is too expensive and onerous for lenders and borrowers alike, Preston said in an interview.
Awful. Fed Chair Ben Bernanke and FDIC Chief Sheila Bair have spent a lot of time harping on foreclosure prevention, but there's been no change, for the primary reason that it's a real political no-go to make the program enticing enough for lenders and mortgage holders to go into it. Basically, it prompts questions from people who don't have foreclosure problems, such as, "How come nobody's refinancing me?" But the problem with that approach is that pretty soon you end up with a lot of empty houses on your block, a lot more people accessing social safety nets, and broad aggregate damage to the economy as people's credit and finances are destroyed by foreclosure.
I spoke about some of these issues on Monday with Conrad Egan, head of the National Housing Conference, who recalled a pithy saying: "If your neighbor's house next door is burning, you can't be critical of what started the fire, you gotta put the fire out." He didn't add that if you don't, pretty soon the whole neighborhood goes up in smoke.
-- Tim Fernholz