Huffpost Politics
THE BLOG

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Howard Glaser Headshot

No "Moral Hazard" In Obama's Housing Plan

Posted: Updated:

With the administration ramping up efforts to avoid a renewed housing death spiral, some people will argue that the plan rewards risky behavior and sends the wrong message to borrowers who pay their mortgages on time.

The opposite is true: the effort directly protects those borrowers and the hard earned equity they have put into their homes.

This is a significant and welcome shift in the administration's strategy to stabilize housing market.

They have recognized that the complexion of the mortgage crisis has changed. This is no longer about risky subprime loans -- its about home value declines that have made default a rational economic choice for homeowners.

These homeowners have dutifully paid their mortgage but find the value of their home has declined due to the risky conduct of others. If all those people do the rational thing, and just mail in their keys to the lender, the housing market would implode in a way that would be catastrophic. (As many as one third of American homeowners -- 11 million-- are "underwater" on their mortgage).

What the administration move is all about is to prevent a "run on the housing market" by standing behind housing values, just like they would step in to prevent a "run on the bank" by standing behind deposits.

They are seeking to persuade people to stay in their homes by aligning the mortgage debt with the asset value, which is only viable path to real housing stability.

Some people will argue that the administration is rewarding risky behavior and sending the wrong message to borrowers who pay their mortgages on time. The opposite is true: the effort directly protects those borrowers and the hard earned equity they have put into their homes.

For hundreds of thousand of families, they did everything right: took out a loan they could afford and paid it on time, every time. Nonetheless, the value of their largest asset --the home they were depending on for retirement, perhaps to help fund college-- has declined due to factors out of their control, including the reckless acts of others. Strategic default is the homeowner's rational option.

But that action, multiplied throughout the economy, would be a market disaster from which there would be no recovery.

There is no "wrong" in providing an incentive to extinguish the old loan and replace it with a new one. The investor takes a huge loss (rationally they should to avoid a greater loss if the home value declines further), the borrower is not getting unearned benefit (because the rational interest of the investor is to take the loss). And the homeowner has all the obligations of new loan. No free rides for anyone.

As I see it that is the target of this effort -- exactly to protect the "good mortgage payer" from being the collateral damage of reckless acts of others.