Saturday, May 31, 2008

Housing Policy Incoherence Part III: Why Help?

Part I of this series discussed a framework to determine which borrowers should be helped with their mortgage problems. Part II outlined which parties might be help these borrowers, and this part will outline possible motivations as to why we might want to help these borrowers.

Reasons to help borrowers fall into several categories:

Altruistic Reasons. At the most basic level, some people believe we should help borrowers just because they're in trouble. Usually the desire to help for this reason is tied to a perception the borrowers are victims, are suffering, etc. This concern is outlined in Robert Shiller's New York Times piece, The Scars of Losing a Home, and derided by Yves Smith in a Naked Capitalism post. Since resources are limited, proposals to help borrowers for these reasons need to sort out worthy borrowers from unworthy borrowers (e.g., borrowers who committed fraud or who don't need help).

Collective Local Good. Foreclosures have an adverse effect on neighborhoods both by depressing values and creating blighted vacant homes (discussed in more detail in a previous post). Some proposals focus on minimizing this effect by helping borrowers. Often these proposals encounter arguments that they unfairly benefit borrowers who don't deserve help; a speculator's foreclosed house is just as big a drag on a neighborhood as a deserving homeowner's foreclosed house, but does that mean we should bail out the speculator?

Collective General Good. There is a theory declining home values and foreclosures will have a general negative economic impact, and we will all benefit from proposals which will help minimize foreclosures. A variation on this theme is that proposals to help these borrowers will help financial institutions also under stress from the mortgage crisis. These proposals also run into arguments that they unjustly benefit bad actors.

Obviously, these motivations are not mutually exclusive; a plan may be driven (and often is) by all three motives. Still, the motive for the help is important to consider because many of the specific objections to a plan are not relevant depending on the the plan's goal. For example, if you think avoiding foreclosures is necessary for the general economic good, you might be just as willing to help a borrower who committed fraud to get his loan as you would be to help someone who was duped by a loan broker.