I don't want to get too technical, but what exactly does the Post mean when it tells readers about Congressional plans to help "distressed borrowers facing foreclosures, which are at the root of the financial meltdown." Of course banks have taken large losses on foreclosures, but they would also take large losses under almost any conceivable plan to slow foreclosures. Some of the proposals would have the government pick up a portion of their losses, but I don't know anyone other than John McCain who thinks that the taxpayers have an obligation to protect the banks from their incompetence and make up their losses. The root of the financial meltdown is the collapse of the housing bubble which has led to a situation in which tens of millions of homes are now, or soon will be, worth considerably less than the amount owed on mortgages. The resulting losses to banks can come from foreclosures, but it can also come through partial write-down or short sales. This article also tells readers that the rules in the bill approved by Congress last summer are preventing re-negotiations in markets with rapidly falling prices, because the government will only guarantee 96.5 percent of a new loan, not 100 percent. It's not clear why this should be a problem. Why would the government want to use taxpayer dollars to guarantee a new mortgage in markets where house prices are falling. This will lead to a situation in which the homeowner will again find themselves underwater. They will likely make a short sale when they move, getting a strike on their credit record and ending up with no money in their pocket. In addition, during the years that these homeowners are in their homes, they would almost certainly be paying far more on their mortgages than they would have to rent a comparable unit. In other words, if the government's policy on mortgage is preventing homeowners from taking out new loans in markets with rapidly falling prices, then it is probably a good policy. It is avoiding a waste of taxpayer dollars that would only aid banks, not homeowners.
--Dean Baker
