Joe Pitts, February 20, 2009

President Obama recently released his plan to aid the troubled housing market -- a plan I fear may be the kind of policy that creates as many problems as it solves.

The problem in the housing market is the result of a number of factors. A combination of easy money, government meddling in the market, irresponsible borrowing and irresponsible lending all led to an inflated demand for housing. This led homebuilders to increase supply -- a fundamental economic reaction to rising demand. As long as demand stayed high, and supply just behind it, prices continued to rise. Thus, people could purchase a house with no money down and feel secure knowing that the value of the house would rise with the market.

But the problem with all market bubbles is that they always burst. When this bubble burst, home prices fell. Declining prices and rising interest rates on adjustable rate mortgages led to an increase in foreclosures. Suddenly people who had borrowed too much were unable to even sell their homes because prices had fallen and they owed more than the value of the home.

Falling demand also means there is a glut of empty homes on the market. This is contributing to the falling prices. Prices will continue to fall, or at least remain low, until the empty houses on the market are sold and demand reaches equilibrium with supply.

There is no doubt we need a plan to help struggling homeowners, but as with all plans, the details matter. Unfortunately, Obama’s plan seems to be furthering much of the same flawed government behavior that got us into this mess. And the plan fails to keep those who behaved irresponsibly from benefiting at the expense of those who are playing by the rules.

For example, Fannie Mae and Freddie Mac -- the formerly quasi-government corporations that have since been nationalized -- had a great deal to do with expanding the housing market into the subprime market and creating the bubble. Without the backing of Fannie and Freddie, many banks would not have been able to continue pushing ever more risky mortgages. Fannie and Freddie bought a great deal of these subprime mortgages from the banks, thus removing any motivation for the banks to sell mortgages that would actually be paid back.

When Fannie and Freddie were on the verge of collapse because of this risky behavior, the government stepped in and nationalized the corporations. Their role in the current meltdown should have been reason enough for the government to dramatically scale back their position in the housing market. Yet President Obama’s plan does the exact oppositehanding Fannie -- and Freddie more authority to get more involved in the market. The old saying comes to mind -- two wrongs don’t make a right. It does us no good to temporarily fix the housing crisis by using the same government involvement in the market that may very well lead us back to where we are now.

There are other problems as well. Part of the plan would work with lenders to reduce payments for a term of up to five years. This sounds an awful lot like the ballooning adjustable rate mortgages that helped build the housing bubble and eventually led to its bursting. We cannot recreate the conditions that got us into this mess in an effort to solve the crisis.

Obviously, some homeowners have fallen victim to circumstances beyond their control. But the concern with the government involvement in this issue should be to minimize the moral hazard that exists when government bails out irresponsible behavior, setting a precedent whereby people are discouraged from acting responsibly in the future. Unfortunately, this plan does not seem to take the necessary steps to ensure that people who took out loans they knew they could not afford, and banks that issued loans they knew would not be repaid, will not be bailed out along with the responsible individuals.

The question remains, what do we say to the millions of families that may be struggling to make their payments but have planned prudently and made the necessary sacrifices to remain current in their payments. What do we say to the 90 percent of the American public who are playing by the rules yet see irresponsible individuals and lenders receiving a government bailout? Obama’s plan creates an incentive for failure.

There are people in trouble who did not do anything wrong, but have fallen victim to forces beyond their control. If these people can, by mutual consent with their lenders, extend or rewrite the terms of the loan in a way that will allow them to stay in their home, they ought to be able to do that. We should be looking for ways to create win-win situations that allow people to stay in their homes and keep more families from falling into foreclosure. We must move forward with prudent government policies that do not distort the market but temper the excesses of greed.

Congressman Joe Pitts, a Republican, represents Pennsylvania's 16th Congressional District, which includes Lancaster County and parts of Chester County and Berks County.