Dean Baker's Recommendations to Congress Regarding the Housing Bailout

From the introduction of congressional testimony in April by economist Dean Baker of the Center for Economic Policy Research.

The current situation in the housing market is potentially the largest economic crisis in the post-World War II era both for the country as a whole, and the millions of homeowners facing the loss of their home. By its actions, Congress can help to either ameliorate some of its worst effects, or exacerbate the problems. For this reason, it is crucial that it consider carefully the implications of any legislation.

The Hope for Homeowners Act of 2008 is an ambitious effort to address the crisis created by the collapse of the housing bubble, and the epidemic of predatory subprime mortgages over the years 2003-2007. In assessing the merits of this proposal, it is important to realize that there are large differences in the state of the housing market across the nation. Policies that may be appropriate for some parts of the country may not be appropriate for other parts of the country.

In my comments, I argue that the mortgage guarantee program that is at the center of the Hope Act may be useful for parts of the country where housing prices are not abnormally high, but that this program is not well-suited for areas that still have bubble-inflated house prices.

Specifically, the program in bubble-inflated areas:

1) Will lead to situations in which homeowners spend far more on housing than renters would pay for comparable units;

2) Will lead to situations in which homeowners are unlikely to accumulate any equity at the point when they leave their home;

3) Will fail to stabilize prices.

I also argue the effort to stabilize prices in bubble-inflated areas is counter-productive. Insofar as it succeeds, it makes homeownership less affordable for young people and families moving into the area. I also briefly describe an alternative "own-to-rent" proposal that would guarantee moderate-income homeowners facing foreclosure the right to remain in their home as long-term tenants paying the fair market rent.