The GOP says that bailing out underwater homeowners rewards people who borrowed irresponsibly. But most of the homes entering foreclosure today were bought with prime mortgages.
This much, everybody knows: Subprime mortgages were at the heart of the U.S. housing crisis. Banks blithely lent money to reckless borrowers who didn't stand a chance of ever paying down the debt on their new homes. They defaulted, and dragged down the economy with them. That was our original sin, the reason for the country's fallen state today.
As a result, when people bring up the idea of allowing Fannie Mae and Freddie Mac to write down the principal on homeowners' mortgages -- in other words, forgive some of their debt -- as a way of boosting the economy, it tends to be met with incredulity from conservatives. Whatever happened to personal responsibility!? they ask. Here's a piqued example from Senator Bob Corker, a Republican from Tennessee:
Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom. It is absolutely egregious....
Corker and his GOP colleagues are missing something important. Today, the foreclosure crisis isn't just hurting borrowers who took out subprime mortgages. Those debtors have already been through the ringer. Now, responsible borrowers who took out plain vanilla mortgages are suffering.
Yesterday, researchers from the Federal Reserve Bank of New York published the graph below. It shows that, midway through the Great Recession, the majority of homeowners in foreclosure had taken out prime mortgages. In fact, about two thirds of foreclosure starts since 2010 have involved borrowers who took out 30-year fixed-rate amortizing mortgages. In other words, they took out what was supposed to be the safest, most responsible loan they could. Before 2010, only 40 percent of homes entering foreclosure were attached to 30-year fixed-rate mortgages. The borrowers who are falling behind today also have higher credit scores and have been making payments on their houses longer than those who defaulted early in the crisis.
The Fed's explanation: The recession happened. In 2006, people defaulted because they bought too much house. In 2012, they're defaulting because the entire housing market tanked, the home which they made a 20 percent down payment is underwater, and they've lost their job. The Fed says:
The shift in the composition of new foreclosures from borrowers with nonprime mortgages to those with prime mortgages reflects the fact that falling house prices and rising unemployment tend to impact all borrowers in a local housing market, not just nonprime borrowers. As a result, traditionally safe borrowers began falling behind on their payments as they felt the severe effects of the housing bust and high unemployment.
To review: When we talk about helping homeowners, we're talking about helping a lot of people who made reasonable decisions, who did exactly what economists and politicians had been urging them to do for decades, and have now been victimized by circumstances. Is that so "egregious"?