Housing cents in Congress is not housing sense.

Any punditry on government tinkering on the path to a mortgagee bailout that includes this sentence in the opening paragraph probably shouldn’t be taken seriously:

First Congress produced a timely and well-crafted stimulus.

Sebastian Mallaby wrote that in today’s Washington Post. It’s wrong, even if it miraculously results in actual spending on the part of recipients who understand that it’s a loan against future tax increases. Welfare is hardly a stimulus. However, that’s not the most egregious statement. Instead, this:

Of course, some fall in house prices is necessary. But absent federal action, market failure will cause real estate to fall further than the basics of supply and demand would justify. …

Naturally the market failed, because if supply and demand don’t match, the market clearly failed. Buyers aren’t able to prefer a lower price than sellers will accept. Sellers aren’t able to prefer a higher price than buyers will pay. The value each places on her preferred price can’t possibly rule out a short-term willingness to agree. Can’t we all just get along?

It doesn’t get better.

… In a healthy market, foreclosure would be rare, because it pays for a lender to forgive, say, 20 percent of a loan rather than booting the homeowner out and seeing 30 percent of the property value evaporate in the process of eviction. But because mortgages have been sliced up and distributed among far-flung investors, it’s difficult to get their consent for partial forgiveness. Homeowners get dumped on the street, and more value than necessary is destroyed.

Perhaps this is true. I’d like to read a source for this. But how does Mallaby know what specific resolution would be appropriate? Is a 20 percent forgiveness wise for the lender? Do they get the chance to work out these details with the borrower? Would the borrower be able to pay the remaining 80% of the loan? And how much financial gain resulted from the slicing and distribution of mortgages? Does that gain offset the value destroyed by the current crisis? These questions matter. We should have answers before we jump to a federal bailout of anyone.

So, although Congress would be wrong to launch a broad attempt to prop up home prices, it would be right to address the market failure that produces excessive foreclosures. The Senate is working on a smart reform that would begin to do this: It would give service companies that collect mortgage payments on behalf of creditors a legal safe harbor, allowing them to forgive part of a loan without having to fear that a few opportunistic creditors will sue them for being soft. Lenders as a whole would benefit, because the measure would reduce wasteful foreclosures. The flow of capital to future home buyers would not be compromised.

Again with the “market failure”, but more useful is Mallaby’s endorsement of Congress rewriting contracts it no longer deems acceptable under its subjective, uninformed economic analysis. How might that affect the loan market – housing and beyond – in the future if borrowers and lenders know that the key to limiting their own risk is to fail big? The last sentence demands proof more compelling than Mallaby’s wishful thinking.