I know that no one believed this was possible two years ago, but since prices have been falling across most of the country, and quite rapidly in many markets, reporters might have come to realize that it is in fact possible for house prices to fall. But, apparently falling house prices is still not a concept that many reporters can understand. If they did realize that house prices could fall then they would be discussing this possibility in the context of the Office of Thrift Supervision's proposal to have the federal government buy up bad mortgages, paying the current market price of the homes. The plan would give the current holders of the mortgage a certificate equal to the difference between the money outstanding on the mortgage and the current value of the home. The reports then tell us that if the house price does not rise back to the amount owed on the mortgage by the time it is sold, then the mortgage holder will eat the loss. That's fine, but what happens if house prices fall further? I didn't hear this scenario mentioned in Market Place's discussion of the proposal on the radio this morning, or indeed in any other reporting on this proposal. Those of us who were not surprised by the collapse of the housing bubble fully expect that house prices in most of the country will continue to fall. This means that the government is likely to take large write-downs on mortgages that it purchases based on current market prices. If we put up $90 billion to buy up loans ( a number suggested in a WSJ article earlier this week), the losses could easily be in the $20 billion to $30 billion range. These losses would be equal to 0.6 percent to 0.9 percent of the budget. This is not a devastating cost, but it's a thousand times as large as many of the earmarks that prompt front page outrage at the Washington Post. Who benefits from this money? Oh yeah, bank CEOs and shareholders would be the main beneficiaries.
--Dean Baker
