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The Moral Hazard of Not Helping Homeowners

The New York Times [comes down](http://www.nytimes.com/glogin?URI=http://www.nytimes.com/2008/11/11/opinion/11tue1.html&OQ=_rQ3D1Q26refQ3Dopinion&OP=75b3f926Q2Fko3xkHQ7DQ5EQ226Q7DQ7D(Q26kQ26Q24Q24Kk..k..kQ7DQ5DQ7BMQ7BQ7DMk..(t3.EJ(Np) hard today on the Bush Administration and the Treasury Department for failing to move forward with a plan to help modify the mortgages of homeowners in trouble. As the Times points out in its editorial, yes, there will be some controversy over any attempt to help troubled borrowers, because some who aren’t worthy may get help, or those who make their payments on time will think it unfair. But with millions of mortgages looming, it’s in everyone’s best interest to stop the housing slide – and to do it before it takes down the entire economy.

From the Times:

Treasury Secretary Henry Paulson does not seem like the sort of man who suffers fools gladly. Yet, he apparently is tolerant of, or powerless against, a White House that remains opposed to direct government action to prevent foreclosures — a program that is essential to keep millions of Americans in their homes and head off an even deeper financial catastrophe.

Nearly three weeks ago, Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, told Congress that the agency was working closely with Mr. Paulson’s department to develop a robust anti-foreclosure plan. Since then, the Treasury Department has balked and equivocated while the White House has argued that it is already doing plenty to help homeowners.

Well, actually, it’s not. But, on the other hand, the government has been more than generous to insurance company AIG, offering it a second bailout after it ran through all the cash from the first one. It’s fine with American Express suddenly declaring itself a bank holding company to get discounted funds from the Federal Reserve. Why punish American Express for extending credit to anyone with a pulse? No moral hazard there. Automakers are next in line, and never mind that some of their troubles stem from an inability to come up with the kind of cars people really want to drive. When it comes to homeowners, the government gets squeamish. Maybe it’s that they just don’t have the kind of powerful lobby they need to get their voices heard. There should be a debate, and a healthy one, about whether to halt the decline of housing prices with programs to keep people in their homes, or whether the market simply must fall to provide the painful correction it needs. But let’s move beyond debating specifically whether homeowners deserve help. A well-designed program can eliminate much of the possible abuses in any loan modification effort. And if it’s misusing government help we’re so worried about, let’s keep our eyes on the banks, who took the help they were given and used it for their own purposes. Millions of foreclosures coming down the pike will hurt everyone – from dragging down home values, to adding blight to a neigbhorhood, to holding back any kind of economic recovery. So let’s stop pretending there’s a moral high ground that can’t be comprised when it comes to homeowners. The government lost that lofty position a few weeks ago, when it opened its wallets to investment banks, insurance companies, and god knows who else, and, for all intents and purposes, forgave all the finanicial games they played. To then turn around and point the finger at homeowners is nothing more than scapegoating the most vulnerable, and it will come back to haunt all of us in the end.

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