-- Posted by Neil H. Buchanan
In a recent post here on Dorf on Law, Professor Robert Hockett discussed some important policy analysis and advocacy in which he has recently engaged (with co-authors), including a legislative proposal to help homeowners who are unable to stay current on their mortgages. Hockett's work is in that category of insightful analysis that seems screamingly obvious as soon as a smart person says it, but that was not being said at all until that person came along.
The starting point of Hockett's analysis is that troubled mortgagors can be usefully grouped into categories, and that different policies will be helpful for people who fall into the different categories. As he points out, "one size fits all" really makes no sense here. Until Hockett and his co-authors got to work, however, one size fits all was really all we were getting -- and it was failing miserably.
Here is my thumbnail summary of Hockett's categories of troubled borrowers: (1) People who really cannot afford to be homeowners, and who only ended up owning homes because they were pulled into the bubble of the 2000's; (2) People who could probably be homeowners in a normal market, but who need one-shot principal reductions from their mortgages to make it possible for them to be viable as long-term homeowners; and (3) People who are not in fundamental trouble, in terms of their long-term economic viability (and ability to afford a mortgage), but who are being harmed by perversely rigid mortgage rules that effectively treat good borrowers as deadbeats, threatening to dispossess people who are really in no more than passing financial difficulty.
Hockett et al. offer policy solutions for each group, with the "bridge loan" idea for the last group being the focus of his Dorf on Law post. As far as I can tell, all of his proposals are worthy additions to the policy menu.
So what is my problem with Professor Hockett today? He says that it is important to concede the existence of the probably-small first group (the people who never should have been encouraged to apply for -- and who certainly never should have been given -- mortgages in the first place), without "falling too quickly for the 'baby out with the bathwater' line taken by many who mistake the crisis for 'proof' that the American fixation on home-owning tout court is ill-conceived."
As regular readers of Dorf on Law know, I have been on a bit of a campaign to demonstrate that it is a bad idea for people to own their own homes -- or, at least, that home ownership is not the presumptively great idea that everyone thinks it is. I have been publishing posts on this general topic since mid-2008, with one of the most recent ones being a post last June in which I wondered why "the market" was not already solving the renter/owner imbalance. (Short answer: Markets are not as clever as some people think.)
Even though Professor Hockett was clearly not targeting me with his comment that I quoted above, he does raise some interesting questions:
First, are there people who believe "that the American fixation on home-owning tout court is ill-conceived?" Absolutely, and I am one of them. To me, it is amazing that we tell people to put all of their money into an undiversified portfolio. All of the supposed advantages of home ownership (neighborhood stability, building nest eggs, etc.) are achievable without putting people in this ridiculously risky situation. While I have conceded that there might be insurmountable obstacles to unwinding the mess into which decades of bad (though well-meaning) policies have gotten us, I have no hesitation in saying that the American fixation on owning one's own home is -- to say the very least -- ill-conceived.
Second, is the recent foreclosure crisis "proof" of the ill-conceived nature of our housing preferences? Again, yes. At least, the crisis has made all too real the previously hypothetical dangers of undiversified investing. Of course, Professor Hockett's point is that the never-should-have-owned group is small, and that the rest of the homeowners can be turned back into stable homeowners, if only we can figure out ways to get through this crisis.
I agree with that, and I do fervently hope that we can figure out and implement methods -- especially those methods that Hockett and his colleagues have devised -- to minimize the pain and loss of the current crisis. Still, even if we could minimize the damage from the crisis, that does not mean that it was a good idea to put so many people into mortgages in the first place. Even people who are not in any of the "troubled borrowers" categories on which Hockett focuses have suffered from the housing bust, with personal wealth being devastated, retirements delayed, and lives disrupted. And the rate of return on housing, over the long term, has been lower even than the return on simple savings accounts. The harm goes far beyond the losses by subprime borrowers.
If we were starting from scratch, I do not think that we would simply say, "If we could make sure that everyone who takes out mortgage can avoid default, then we should encourage people to own their own homes." We would need to be sure that there is an affirmatively good reason to encourage home ownership. It does not throw the baby out with the bathwater to look at a crisis and say that the underpinnings of the crisis were the attitudes that governemnt policy had reinforced.
Therefore, third, we must ask whether there are good reasons to keep people in their own homes right now. The answer to that, of course, is a resounding yes. Rent-to-own would generally be a bad idea, because it would simply put people on the path toward home ownership. What we need (both immediately, and in the longer term) are paths from ownership into renting -- where the houses to be rented are the very houses that people have lost to foreclosure. The good news is that the federal government has called for proposals to create just such a program.
The value of Hockett's proposals is that they take the crisis as we find it. The current situation will stabilize most quickly if we follow the advice to create, inter alia, bridge loans for the people in Hockett's third category. This, perversely, reinforces the policies that encourage home ownership. That is not a bad thing, however. Some of the people who view the crisis as proof that broad-based home ownership is a bad public policy objective understand what second-best thinking entails. The only thing worse than spending trillions of dollars over the course of decades, convincing people to own their own homes, would be to leave them hanging when they foolishly did as they were told.