The Revolt of the Renters

New York comes in third, after California and Florida, in its share of America’s outstanding subprime mortgage debt. But not all New Yorkers welcome Congress’s attempts to bail out homeowners. After all, why should renters bail out homeowners when they don’t even own a home?

On Monday, a New York resident, Martin S., wrote on the Web site, “Do not bail out greedy homeowners and builders with my money!! Let them suffer the consequences of their greed.”

More than 42,000 people have logged onto this site since it opened less than a month ago. As of yesterday 2,236 of them were residents of New York State. Many signers have posted comments that do, indeed, sound angry, reacting against costly bills making their way through Congress that would use government funds to bail out homeowners who cannot meet their mortgage payments.

Their frustration is understandable. The Federal Housing Administration, which is part of the Department of Housing and Urban Development, already has a program to help homeowners in trouble, the FHASecure program, which has helped 150,000 homeowners who are struggling to pay the refinancing of their mortgages and is authorized to help up to 500,000 households.

And yet today the House of Representatives votes on the Neighborhood Stabilization Act of 2008, sponsored by Rep. Maxine Waters, a Democrat of California. The bill would authorize Uncle Sam to give states and counties $7.5 billion in grants to buy foreclosed properties, and lend them another $7.5 billion at a 0% interest rate for the same purpose.

The Congressional Budget Office, sanguinely assuming that states will repay their zero-interest loans, estimates that the Waters bill will cost “only” $8.4 billion over five years. It’s such an irresponsible bill that the House leadership must be bringing it to a vote to make another housing bill look reasonable by comparison.

Sure enough, tomorrow the House will vote on a cheaper bill, with an optimistic price tag of “only” $2.7 billion over five years, sponsored by the chairman of the House Financial Services Committee, Barney Frank. Entitled the FHA Housing Stabilization and Homeownership Retention Act of 2008, it would allow the FHA, which has been insuring home loans since the 1930s, to step in and refinance about $300 billion of mortgages over four years.

Mr. Frank’s bill was voted out of committee last week 46 to 21, with 10 Republicans joining Democrats, signaling that the bill would have little trouble in passing the House.

Here’s how the program would work. If homeowners feel they can’t pay their adjustable rate mortgage because rates have jumped, they could refinance at a more favorable rate through their lender with an FHA loan guarantee. The lender, if willing to participate, would offer a fixed rate loan, and lose 15% of the outstanding original loan because he would have to pay the FHA 5% of the loan’s value — an insurance and administrative premium — and write off another 10% from the current value of the property.

In exchange, the lender would be protected against default and against a future drop in interest rates. If the homeowners still could not manage the payments the FHA would compensate the lender and take ownership of the property.

Because this is a new type of home buyer assistance, it’s impossible to know how many would take advantage of the new program. CBO estimates that about 500,000 loans with a value of approximately $85 billion would be refinanced — the same group that qualifies for FHASecure. Still, a price tag of $2.7 billion vastly underestimates the cost, and a more realistic calculation would be closer to $4.5 billion.

Whatever the cost, if Mr. Barney’s bill succeeds in the House, the Senate needs to pass an equivalent bill in order for the legislation to reach President Bush’s desk. This requires the support of the ranking Republican on the Senate Committee on Banking, Housing, and Urban Affairs, Alabama’s Richard Shelby. The price of Mr. Shelby’s assistance is substantial reform of government-sponsored enterprises that buy home loans, Fannie Mae and Freddie Mac. Whether the chairman of the Senate Banking Committee, Chris Dodd, will give in is an open question.

The 2,236 “angry renters” from New York would not be disappointed if the bill failed. Nor would other groups, for the legislation’s distribution of benefits among Americans is uneven. The Mortgage Bankers Association estimates that the delinquency rate — those who are behind in payments — was 6% in the fourth quarter of 2007, and the foreclosure inventory was 2%. In other words, 92% of homeowners were keeping up with their payments.

Some states would benefit more than others from a housing bailout, according to a Wharton Business School professor, Todd Sinai. Lenders and investors in California, Florida, and New York — relatively wealthy states — hold more than 40% of the nation’s subprime mortgage debt, and would reap the most benefits. The bottom 40 states collectively have almost the same fraction of the debt, 36%, and would be helping to pay for the program with little benefit.

Although many observers worry that the problems of a few Americans in a few states could spill over to the rest of us, this is not a reason for passing duplicative government programs. As another New York resident, Patrick O., wrote on yesterday, “Let the market correct itself without government interference. I’ve been waiting for the bubble to burst for a long time. Fair is fair.”

Ms. Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. She can be reached at