In Saturday’s New York Times, Martin S. Feldstein, in an Op Ed entitled “How to Stop the Drop in Home Values”, argues that continuing declines in home prices are at the heart of America’s housing crisis and can only be stopped through a government plan that reduces borrowers’ mortgage principal … “when it exceeds 110 percent of the home(s) value.”
Mr. Feldstein’s plan of government sanctioned loan forgiveness would neither stem declines in home values nor contribute in any meaningful way to solving the current housing crisis. Quite the contrary, such a plan would ensure the permanent demise of the American housing industry and threaten all consumer lending. Never again could lenders make mortgage loans to homeowners with the assurance that they would be repaid. No – if we adopted Mr. Feldstein’s plan – lenders would be forever at risk that the commercial contracts freely entered into between themselves and homeowners would be at risk of government-sanctioned contract abrogation.
Risk of default by homeowners due to all sorts of circumstances – death of a borrower, divorce, and other unforeseen events - is not a new business phenomenon. Such business risks are routinely accounted for by mortgage lenders and priced into the mortgage rates we all pay. However, government intervention of the sort proposed by Mr. Feldstein has never been anticipated as it is profoundly counter to the principal of sanctity of contract - the most fundamental principal of American capitalism and the system of American jurisprudence.
Not only would a plan of government-sanctioned contract abrogation surely contribute to a mass exodus of lenders’ capital from the mortgage lending industry, its impacts likely would extend well beyond mortgage lenders and would cause the cost of all consumer credit to increase dramatically. In the end, the home affordability index would decrease as a result of Feldstein’s plan due to higher interest rates - resulting in more not less – disruption to the housing industry and the economy generally.
Mr. Feldstein is correct on one important point, however. And that is that millions of American homes are unable to be refinanced – despite historically low interest rates – due largely to the fact that many of these homes are either underwater (meaning the current loans balance exceeds the current property value) or the home’s owners fail to qualify for refinance loans due to tighter credit standards. Read 'Refinance America'.
However, to Mr. Feldstein and others promoting principal loan forgiveness as the simple answer to America’s housing crisis, while I agree that the problem is serious and that the solution requires government intervention and support, I suggest we not sacrifice the systems of American capitalism and jurisprudence in the process.