Governor Should Heed Friedman, Not Bush, on Mortgage Relief

0

By GEORGE PASSANTINO


DataQuick Information Systems reports that over 52,000 homes in California have gone into foreclosure this year and at least 172,000 California borrowers defaulted on mortgage loans in the first three quarters of 2007.


With the dark economic clouds of these foreclosures increasing across the state, Gov. Arnold Schwarzenegger, who claims to be inspired by the late Nobel Prize-winning economist Milton Friedman, didn’t sound like a staunch free market advocate when he recently offered up his housing bailout.


Facing a perceived mortgage “crisis,” Schwarzenegger is attempting to use the power of government to solve the problem. Much like the plan recently proposed by President Bush, Schwarzenegger’s fix centers on an agreement with the largest mortgage servicing companies to “voluntarily” freeze interest rates on adjustable rate mortgages for a set period of time. So much for the power of the individual that Friedman championed.


There are several flaws in the idea of “voluntarily” freezing rates.


First, it is disingenuous to call the plan voluntary. When government seeks a voluntary commitment in one hand, you can be sure that the hammer of regulation is hidden behind the back in the other hand.


While such a freeze may not necessarily be a financial bailout of the S & L; variety, it is certainly a moral bailout. Investors in mortgage companies are being forced by government fiat to eat a financial loss that rescues others from their own bad decisions.


Families who didn’t overextend themselves to buy a house that they couldn’t truly afford are probably wondering where their handout is. But being fiscally prudent doesn’t get the government’s attention.


Equally troubling, Schwarzenegger claims his freeze will encourage responsible borrowing because it only applies to people who are current on their notes but who can’t afford an anticipated rate adjustment. It doesn’t take a Nobel Prize economist to figure out that many borrowers who actually can afford a looming rate adjustment, and who entered their loan agreements willingly, will nonetheless seek relief since others are getting assistance.


And what about people with debt? Does someone who finances tens of thousands of dollars worth of home entertainment equipment and luxury automobiles and whose monthly debt obligations have increased dramatically because of lavish spending qualify for this relief? They can’t afford their mortgage payment because of that flat screen TV, so let’s help them out.


Most troubling, this freeze misses one fundamental reason that so many Californians turn to adjustable rate mortgages and other exotic loans in the first place: The price of housing in California is simply too high.



High prices


The Business Journal recently reported the median price of a home in Los Angeles is $525,000. According to statistics from the California Building Industry Association, Los Angeles remains the least affordable market for housing for the 11th straight quarter. Here, only 6.3 percent of homes could be purchased by a median income family. Nationally, that figure is six times higher at 43.1 percent.


With such high prices is it any surprise that five of the 10 areas with the highest foreclosure rates nationally are in California, or that in some markets there are actually more foreclosures than new homes for sale?


The price of regulation in California both in hard dollar fees and in the costs of time can easily add $50,000 to the cost of each house. That translates into $300 or more being added to each monthly mortgage payment. In many jurisdictions, the cost of regulation is even higher.


At the same time, anti-growth activists have become experts at manipulating the California Environmental Quality Act and other laws to stop housing developments or force delays that result in significant increases in the cost of building new houses. Simply put, the harder it is or the longer it takes to build a home, the more that house will cost because of interest payments and construction expenses. Providing regulatory relief to homebuilders would do far more to help homebuyers than a rate freeze ever could.


If Schwarzenegger wanted to stay true to his philosophical allegiances to Milton Friedman, he would have said that falling housing prices and some borrowers defaulting on their mortgage loans demonstrates that the housing market is behaving exactly as it should be to correct itself. Families patiently waiting for this market correction, and for housing prices to fall to affordable levels, will have to wait even longer because the governor just rewarded people for buying houses they couldn’t afford.



George Passantino is senior fellow at the Reason Foundation in Los Angeles. He was a director on Gov. Schwarzenegger’s California Performance Review.

No posts to display