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CEI: Congressional Action May Worsen Subprime Crisis
By Alton Gary Simpson
A report from the Competitive Enterprise Institute examining the subprime crisis argues that the various proposals before the U.S. Congress to address the problem may instead make things worse. According to "A Non-Prescription for Confronting the Subprime Crisis" authored by CEI analysts, John Berlau and Eli Lehrer, "To date, the crisis has been relatively minor, a small decline in homeownership combined with a small uptick in foreclosures, with well-off investors absorbing the bulk of the damage. Doing too much could turn a minor crisis into a major one affecting ordinary Americans."
Arguing that the people whom were hurt the most by the subprime crisis were real estate investors and reckless lenders, the report notes that the decline in home values, and the increase in foreclosure and delinquency rates have had little impact on the average American homeowner. With that as the setup, CEI's analysts advocate that Congress' prescription to the subprime crisis should be to do nothing. The report concentrates its criticism on the following proposals that are up for consideration:
• The Federal Housing Finance Reform Act (HR 1427), which contains a provision to tax Fannie Mae and Freddie Mac to create an "Affordable Housing Fund" of approximately $450 million per year with an official objective of building one million new affordable housing units through grants, subsidies and insurance programs. "A Non-Prescription for Confronting the Subprime Crisis" states that this legislation would not address the subprime crisis and could reduce homeownership. Among the reasons cited for a decrease in homeownership are the encouragement of the building of more rental housing, downpayment assistance for marginal buyers may increase default rates, and taxing Fannie Mae and Freddie Mac may result in a decrease in credit availability.
• Increase the Fannie Mae and Freddie Mac conforming loan limits. Under HR 1427, the conforming loan limits would be raised from the current $417,00 to $622,000 - higher in certain high-cost areas. The authors of the report said, "There is no good reason for people buying houses at that price level to get any help at all from the government-sponsored enterprises."
• The Expanding American Homeownership Act (HR 1852) would expand FHA's mandate to allow it to write more insurance, insure zero-downpayment and subprime loans, and make more loans overall. Messrs. Berlau and Lehrer believe that this would increase the number of subprime loans to marginal borrowers, thus possibly exacerbating the subprime crisis by "providing guarantees to poorly managed lenders making loans that should never have been made in the first place." They also cited a statistic that higher FHA market share correlates to lower rates of homeownership.
• The Mortgage Reform and Anti-predatory Lending Act (HR 3915) received particularly scathing criticism from CEI's analysts. "This and similar proposals would go beyond improved disclosure to essentially outlawing certain types of loans ... limiting the choices of both lenders and borrowers," they said. "A mandated 'cheaper' loan that requires larger cash payments at one time may hinder borrowers' abilities to achieve other financial goals, such as sending a child to college." They also pointed out that it could worsen the housing crisis by making it harder to get home loans.
• The Mortgage Forgiveness Debt Relief Act (HR 3648), which would change the tax code so that people who negotiate a workout of their foreclosure aren't held liable for income taxes on the forgiven debt received the authors' support, although they note that it would do nothing about the current subprime crisis. They also said that it could slightly increase default rates, interest rates or both, by making it easier for people in default to walk away from their mortgages.
Arguing against both overregulation and bailouts from government agencies, Messrs. Berlau and Lehrer concluded that these interventions would worsen the market's ability to correct the problem by repricing risk.
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