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Capitol Comment
by Senator Kay Bailey Hutchison
Free Markets, Personal Responsibility Can Help Housing Decline
March 7, 2008
There is no greater symbol of the American Dream than home ownership. In a country that prizes freedom and economic independence, Americans’ homes are a lifelong investment and, for many, their primary asset. However, in recent months, a decline in the U.S. housing market has threatened the financial security of many Americans and has placed the nation’s economy at risk. As lawmakers scramble for a fix, it is preferable that solutions be guided by free market principles, rather than sweeping government intervention or taxpayer-financed bailouts.
A fair assessment of the situation is the first step to an appropriate response.
During the final quarter of 2007, home prices declined 8.9 percent -- the largest year-to-year drop in the 20-year history of the index. In January, sales of existing homes dipped to a 10-year low. Though some are able to shoulder the burden of zero or negative equity, others can’t afford their mortgage payments. This has led to a rise in foreclosures. Almost all homeowners have been affected, because low home sales and foreclosures have created a housing surplus that has driven down home values. Falling home prices have placed many homeowners in the precarious position of owing more on their mortgages than their houses are worth.
Yet, there are some positive indicators that are often overlooked. The U.S. Census Bureau reported that homeownership rates were still near an all-time high at the end of 2007. Of the 51 million American households financing their homes, 93 percent pay their mortgages on time, with only two percent of these households in foreclosure. Further, according to the Mortgage Bankers Association, foreclosures among prime loans and Federal Housing Authority (FHA) loans have remained stable since 2001.
But it is the disproportionate rise in subprime adjustable rate mortgages that are in default and risk foreclosure that is cause for real concern. These loans are granted to borrowers who don’t qualify for the best market interest rates. They are periodically adjusted to a range of market indexes, as opposed to a more stable fixed rate mortgage. Only 13 percent of all outstanding mortgages are subprime, but defaults on these loans accounted for 50 percent of the foreclosure starts in the third quarter of 2007. These foreclosures negatively impact the overall economy and require a measured response to help prevent or combat recession.
In the last year, the Federal Reserve has implemented multiple interest rate reductions to avert recession and make adjustable rate mortgages more affordable. Congress enacted a law in 2007 that extends mortgage insurance premium deductibility and makes mortgage forgiveness non-taxable for three years. Last month, Congress passed, and President Bush signed into law, a broad stimulus package. The stimulus plan raises the loan limits for the FHA and government sponsored entities (GSE) Fannie Mae and Freddie Mac. Congress now should quickly consider bipartisan legislation to modernize the FHA and reform regulatory oversight of GSEs and the Federal Home Loan Banks.
The housing industry has also been actively involved in efforts to help stabilize the market. They have begun streamlining the process of modifying subprime loans and making resources more available to borrowers facing foreclosure. HOPE NOW, an alliance of private sector businesses assisting struggling homeowners, recently announced that, since July, loan modifications or repayment plans have helped more than 1 million borrowers avoid foreclosure.
Responsibility also rests in the hands of homeowners. Many homeowners were tempted by low rates and rising real estate values, yet chose not to make careless investments. Stabilizing the housing market will improve their home values over time, and reward their efforts. Those who are underwater but are able to make their mortgage payments should fulfill their obligations. On the other hand, borrowers who legitimately cannot afford their mortgages must reach out for help and demonstrate that they want to keep their homes. In order for any government or private sector initiative to be effective, homeowners must be willing to learn about and use the resources made available to them.
There are some in Congress who would enact sweeping government intervention, but many of the tenets of such measures are unnecessary, costly, and counterproductive. Our approach to the housing downturn should provide responsible relief but fall short of a bailout. We must allow the market to correct itself, while lending aid to those at greatest risk.
Sen. Kay Bailey Hutchison is Chairman of the Senate Republican Policy Committee.
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