Sunshine on the Housing Debate

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I agree with Dana Chasin that the time in act to stop the decline in the housing market is upon us, but I disagree with his weather report on the New York Times editorial. The Times has the central point right: As a practical matter, the proposed housing bill and the bankruptcy bill are alternative — not complementary — approaches. If the housing industry believes it can get millions of bad mortgages off its books by selling them to the FHA (and making taxpayers guarantors), then the industry will continue to fight to the death a bankruptcy bill that will force the industry — not the taxpayer — to eat substantial losses on the worst loans. In other words, they will take the best deal on the table and block any other deal.

So far, the industry has been getting exactly what it wants: useless voluntary non-plans. Next up is a Congressional plan to put the taxpayer in the line of fire. The one plan the industry has lobbied ferociously against has been a bankruptcy bill that would cost taxpayers nothing, would leave hundreds of thousands in their homes with refinanced mortgages, and would cause the mortgage investors to bear the full costs of their underwater mortgages.

I think that Dana agrees that the bankruptcy bill is a good idea, but he argues that a bankruptcy amendment just can’t get the votes. After all, all the Republicans and a lot of Democrats just voted to make bankruptcy harder for families in trouble. All true, and all shameful, but the 2005 vote was not taken in the middle of a housing crisis. Moreover, bill was written by the credit card industry, with huge concessions to the car lenders. There was nothing in the 2005 amendments about home mortgages, so this bill reverses nothing from the 2005 amendments.

Dana is exactly right that there is a political judgment call in the middle of this housing mess: What can Congress actually get done? I think the idea that housing investors should still be calling the shots in Washington is plain wrong. Housing investors made billions exploiting the fact that there were no decent safety regulations on home mortgages. Now that the whole Ponzi scheme has collapsed, they want to write the rules on who will take the losses. I understand that negotiation is necessary and I want to keep an open mind about the Frank bill, but I think it is time for Congress to step up and decide what is best for the public, not what the industry will let them pass.

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