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ECONOMIC ANALYSIS: Reforms could create barriers to homeownership

November 26, 2007

Thanksgiving is my favorite holiday. Maybe it is because no one wants me to help cook, or perhaps it's due to the stream of college football. Mostly I think I like it because it is such an unhurried, fun, shared day.

This year, many of us gathered for Thanksgiving at family homes and we gave thanks for the many gifts life brings us in this nation. What many of us didn't conscientiously dwell on is how important the simple act of homeownership may be.

There has been much media attention to the subprime market for real estate over the past many months. Virtually no news cycle is without analysis and commentary about the woes and home foreclosures. The saddest of all these stories are about families trying to keep their homes as adjustablerate mortgages rise.

It is impossible not to be worried about these events. But what worries me most is the potential unforeseen consequences of policies aimed at preventing another subprime mess. Here's why:

There has been a little thoughtful research on the role homeownership plays on poverty. A consensus-if such a thing happens in economics-is that homeownership provides a solid source of wealth creation, a buffer to income variability, and a source of equity that can be drawn upon to finance a business investment, a college education or unexpected expenditures. In short, homeownership is an important step up the rungs to prosperity.

Most of the subprime loans did not go to those in borderline poverty, but instead went to far more affluent families trying to build equity in a home. The overwhelming majority-upward of nine out of 10-of these homeowners continue to pay their mortgage, and enjoy their homes.

A subset of subprime borrowers unwisely purchased adjustable-rate mortgages. These have inched up quickly, and a minority are in danger of losing their homes. The good news is that real growth in foreclosures is far lower than the usual snapshot of data suggests (the change in bankruptcy laws made 2006, the benchmark for most of our reports, an usually low year for foreclosures).

Knowing that financial markets work, and that banks are profit maximizers, also makes me sanguine about the subprime mess. Foreclosures are unprofitable for lenders, so that given some time to respond, most will permit significant renegotiation with borrowers.

However, my biggest worry is that policymakers (primarily Congress) will overrespond to the mistakes of borrowers and lenders. I think thoughtful policies like easing the way for mortgage refinancing would be helpful. But I fear the spread of unintended consequences of punishing lenders. Markets already are punishing the miscreants-as well they should. I just hope Congress and state legislatures don't rush to place more barriers on homeownership, with the inevitable effect of denying more families homeownership opportunities.

It is a modest, but meaningful, wish for this season of Thanksgiving.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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