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| Franks: More failed policies won't lift housing market | ||
| Posted: June 1, 2009 | ||
| By Rep. Trent Franks Arizona Republic |
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| According to an April report, Phoenix is now leading the entire nation in the number of home foreclosures. Valley bankruptcies reached a 41 month high in March, and in the city of Maryvale, approximately one in two homes are in foreclosure. The West Valley in particular has been hit especially hard, having experienced a severe spike in foreclosure rates in the cities of Surprise, El Mirage, Peoria, and Glendale over the past many months. Amidst such seemingly dire news for homeowners, it is crucial for us to reflect on the lessons we've learned over the past few years by considering the policies that helped contribute to the current mortgage crisis, and what we can do to address them. Unfortunately, much of the turmoil in our financial markets is rooted in failed government policies affecting the mortgage industry, through government sponsored enterprises such as Fannie Mae and Freddie Mac, as well as in corrupt rating agencies who fueled false confidence in the stability of incredibly risky loans. And while many lenders proved to be unscrupulous, so did many borrowers. In 2006, there was a 44% increase in mortgage loan fraud filings in 2006, often stemming from borrowers materially misrepresenting their income, assets, or debt, forging documents, or simply lying about whether the property would be occupied as a primary residence, when in fact it was purchased for investment purposes. The Boston Federal Reserve concluded that the main reason for foreclosures in the subprime market has been the decline in the value of their homes, supporting the conclusion that these homeowners never intended to pay their mortgages at the higher reset interest rate. Instead, they bet that their home would continue to appreciate, allowing them to refinance before the expiration of the lower “teaser” rate. One piece of legislation in particular that fueled the cascades of foreclosures was the Mortgage Forgiveness Debt Relief Act of 2007. I was one of only 27 Members in the U.S. House of Representatives and the only Member of the Arizona Congressional Delegation to vote against this legislation. While the bill did lower taxes for a small number of Americans and the motive behind it was admirable, the broader effect of the bill was largely overlooked by Members of both parties. Previous to that legislation, the IRS considered forgiven debt as "income," and therefore collected taxes on it. The unintended consequence of the bill -- which modified tax laws for residential property to limit the amount of taxable forgiven debt -- was that it often made it more financially rational for homeowners to walk away from their home rather than to fulfill one's contract with the bank and struggle to keep it. Due to the bursting of the government-fueled housing bubble, the majority of houses purchased between 2004 and 2007 are "under water," meaning the owner's mortgage is greater than the value of the home. Although the foreclosure process has traditionally been an involved, expensive and time-consuming process, policies such as the Mortgage Forgiveness Debt Relief Act made voluntarily foreclosing and going through the seven-year credit rehabilitation suddenly easier than paying even the most conservative and conventional of all home loans, the 30-year fixed rate mortgage. Enacting more of the same failed policies -- that is, embracing extreme federal intervention and nationalization of the housing market -- will not restore our ailing housing market. When the government intervenes and decides when prices are too high and when they are too low—based on political and media-driven interests rather than objective economic calculations—the result is an artificially manipulation of the market, hampering the market’s natural corrective tendencies and extending the timeframe in which such corrections occur, thereby spreading the damage to a wider population than would otherwise be adversely affected. These are the exact causes that helped shape our current financial crisis in the first place. Government should encourage the injection of private capital into the mortgage industry again to shore up home prices, stop the precipitous decline of housing values, and reverse the destructive flood of mortgage foreclosures. Federal lawmakers can best help the marketplace normalize by sending a clear message of certainty that there will not be a mortgage bailout enacted and that the government will not engage in risk management with the private sector. Taxpayers at large should not be asked to absorb any of the risk; the risk should be shouldered by the private sector. Lawmakers must also be wary of hastily passing legislation that creates a "cure" worse than the disease. For instance, despite its misleading title, last year's American Housing Rescue and Foreclosure Prevention Act provided enormously costly corporate bailouts, imposed additional tax increases, and created slush funds for politically motivated organizations. None of these are solutions to our mortgage crisis. A viable alternative to massive government-interventionist "solutions" to the housing market must first and foremost protect law-abiding taxpayers by refusing to burden them with subsidizing market failure, fraud, and poor investment decisions. We must also reject slush funds for political activist organizations; encourage personal accountability and responsible borrowing, lending, and investing; stimulate the creation of wealth; and address the fact that Fannie Mae and Freddie Mac remain at the core of the housing problem. Only by remaining committed to these tried-and-proven principles will we restore stability and profitability to the mortgage industry. Rep. Trent Franks, a Republican, represents the 2nd District of Arizona in the U.S. Congress. He is a member of the House Armed Services Committee, the House Judiciary Committee and vice chairman of the Subcommittee on Commerical and Administrative Law. ### |
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