Senate Housing Bill Actually Makes Sense

Congress is usually so incompetent on economic decisions that the rare occasion on which it does something right is enough prompt a double-take. But the Senate’s Housing bill may just be one such display of competence. As Sebastian Mallaby at WaPo explains, the bill is aimed at rescuing not just distressed borrowers, but the neighborhoods they inhabit:

…there is a case for preventing profligates from harming bystanders. When homeowners fail to pay their debts and go into foreclosure, their homes stand empty and attract looters and squatters, dragging down the value of neighborhoods. Falling home prices depress consumer spending; the economy gets rockier, driving home prices down further. It is this threat of a negative spiral, not sob stories from homeowners, that warrants limited federal assistance to families facing foreclosure.

Foreclosures are wasteful, and under normal circumstances lenders might forgive late payments and wait to collect the sums they are owed rather than waste money foreclosing and taking a huge write-off. But because mortgages have been sliced and diced into chunks owned by banks and institutional investors with different sets of interests, timetables, and agendas, its next to impossible to get all the lenders to cooperate.


So, although Congress would be wrong to launch a broad attempt to prop up home prices, it would be right to address the market failure that produces excessive foreclosures. The Senate is working on a smart reform that would begin to do this: It would give service companies that collect mortgage payments on behalf of creditors a legal safe harbor, allowing them to forgive part of a loan without having to fear that a few opportunistic creditors will sue them for being soft. Lenders as a whole would benefit, because the measure would reduce wasteful foreclosures. The flow of capital to future home buyers would not be compromised.

When it comes to government regulation of markets, less is usually more. But the extraordinary set of circumstances which produced the subprime crisis and the credit crunch may be one of those rare cases that warrant some kind of intervention. This time, it looks like Congress got it right.

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