The financial mess that exploded a year and a half ago exposed the massive housing bubble in the United States that had been steadily growing for years. As a nation, we still have yet to completely recover from its violent pop. More frighteningly than the slow recovery, however, is the lack of a coherent response from the federal government to adequately address the very circumstances that allowed the housing bubble to grow as it did.
Though certainly not as intricate as bank reform, preventing another national mortgage disaster poses a unique challenge to economic policymakers. Unlike Wall Street, where dominoes fell sequentially, a few mortgage defaults won't cause a crisis — gauging the mortgage crisis is more subtle. Imagine an ice cube tray: When the water spills over from one square to another, the potential for a flood increases exponentially. Once defaulted mortgages reach a critical mass, a crisis is born — the ice cube tray is flooded. The response to mortgage defaults and the disastrous trading of mortgage−backed securities has been much more measured as a result of this subtlety and complexity.
That measured response, President Barack Obama's $75 billion loan modification, "Making Home Affordable" program, has fallen short of expectations. As such, the administration announced Monday that it would endorse the short−selling of the nation's most troubled mortgage assets. That's right: a federal short−selling program.
Under this new program, the lender will receive $1,000, and the government will not only step in and actually mediate the shortselling process, effectively strong−arming the lender into accepting a lower payment, but it will also offer up to $1,500 to the individual for "relocation assistance." Not only does the borrower get to sell the property back to the bank for less than what was paid initially — rather than file for foreclosure — the borrower's credit, the program stipulates, is more or less maintained. Furthermore, under the program, the lender can't sue the borrower for breaking the terms of a legally binding contract — the mortgage agreement.
With this short−sale program Americans who irresponsibly spent well beyond their means are absolved of all responsibility. They have no legal obligations, and their credit remains intact, allowing them to do it all over again. The consequences are suddenly removed as a result of this program, and the individual has no incentive to change behavior or reckless spending patterns.
Now certainly, not all individuals struggling to make mortgage payments have been so egregious. With unemployment around 10 percent, people losing jobs and benefits are running out of ways to keep a roof over their heads. It is for these individuals that the "Making Home Affordable" act was intended — and on whose behalf the government is well within its rights to provide incentives for lenders to restructure contract terms, as it has done since November.
But the Americans who decided to enter into a mortgage agreement knowing full well they could not afford it must be held accountable for their choices. Though the solution to this problem lies outside the reach of the market's invisible hand, these consumers deserve neither a decent credit rating nor $1,500 for "relocation costs" courtesy of the American taxpayer. Rather, they deserve to have their feet held to the fire, to bear the consequences of their reprehensibly irresponsible actions.
Furthermore, returning to the ice−cube−tray analogy, with a massive spike in short−sales, our mortgage "tray" would flood very quickly. Even more rapidly decreasing home values would set the stage for real estate investors to swoop in once again and begin building the bubble anew. The government should keep a close eye on the mortgage sector, but it is most certainly overstepping its bounds with this short−selling program. It needs to let Americans learn a hard, valuable lesson: If you can't afford it, don't buy it.
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Teddy Minch is a senior majoring in political science. He hosts "The Rundown," a talk show from 3 to 5 p.m. every Friday on WMFO. He can be reached at Theodore.Minch@tufts.edu.
