Problems with preventing foreclosures

[13 December 2008]

By Rob Horning

I have this sense that I should be cheering on the efforts of FDIC chair Sheila Bair, who is seeking to ensure that more TARP bailout money goes toward helping prevent foreclosures. I am probably supposed to be glad that she’s fighting for the little guy against Wall Street bankers and other undeserving beneficiaries of socialism for the rich. But instead, the idea of helping homeowners out with their mortgages makes me angrier than helping out irresponsible industries. Haven’t home buyers had enough help already on their mortgages in the form of tax breaks and Fed-orchestrated interest rate adjustments? Helping keep or put people into homes they couldn’t afford is what has caused much of the economic mess we’re in to begin with. Continuing down that road seems foolhardy—solving the problems of a burst bubble by reinflating it.

And mortgage modification programs—hard enough to implement since securitization has made it near impossible to figure out who owns the loans—often don’t work. People who have their mortgage rejiggered to prevent foreclosure often end up redefaulting.

But what stokes my anger about foreclosure prevention is that I can relate directly to the decisions that got underwater homeowners where they are. Many of them were making poor decisions at my level, accepting the sorts of deals that were available to me but that I didn’t pursue. They took advantage of the housing bubble while prudent (or timid) people like me didn’t, and now that they are facing consequences, part of me—the vindictive, reptilian-brain part—wants them to suffer. Instead society is poised to reward them for their poor decisionmaking at the expense of chumps like me who didn’t follow the herd into McMansions in the exurbs. 

Thanks to an apotheosis of various ideological strains prevalent here—rugged individualism, fetishized private property, the freedom of open space, the need for consipcuous consumption and identity display through possessions—American society has a tendency to make homeownership seem like the ticket to legitimacy and adulthood, as if it’s the only way to mark a seriousness about belonging to your community. This tends to discourage other forms of community organization as well as making homeownership appear more of a boon than it often proves to be. Felix Salmon cites recent research into the pleasures of home ownership that yielded results that seem almost unbelievable, considering the prevailing attitudes:

I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home. Several factors might be at work: homeowners derive more pain (but no more joy) from both their home and their neighborhood. They are also more likely to be 12 pounds heavier, report lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships. She is also less likely to consider herself to enjoy being with people… The results are robust after controlling for reported financial stress.

Homeowners use their homes to retreat from society and lessen their awareness of their true interdependence with it. To a degree, people focus on their houses to the exclusion of the surrounding community—building good fences, making good neighbors, that sort of thing. This apparently can become an unhealthy withdrawal. So maybe I shouldn’t be so angry—resisting the mantra of homeownership has saved me a lot of psychic misery.

Anyway, I completely agree with Salmon’s reaction:

It’s idiotic. I don’t expect Americans to all go to Germany and realize how happy people are when they don’t need to worry about all the stresses which accompany homeownership. But I do think that substantially all of the upside to homeownership in recent years has been a function of rising house prices. Now that’s come to an end, it’s hard to see why anybody would want to buy.
In fact, if Americans could be persuaded that rent payments aren’t “wasted money” and that owning often makes less financial sense than renting, I think the rate of homeownership might, happily, drop substantially. But it’s not going to happen. The ideal of homeownership is deeply embedded in the American psyche, and any datapoints which don’t fit into that ideal are automatically discarded.

Rent is not “throwing money away” anymore than buying food at the grocery store is “throwing money away” since you didn’t plant your own garden and raise your own livestock. Shelter is something you consume; it’s not an investment. Bailing out homeowners is rewarding the people who treated housing as an investment and not a consumption good, a fulfillment of personal need. Preventing foreclosures is often a matter of rescuing people from their failure to properly assess risk, not from some unforeseen natural disaster. Let’s not pretend this is any different from bailing out imprudent or inept investment bankers.

Published at: http://www.popmatters.com/pm/post/problems-with-preventing-foreclosures/