Tuesday, October 25, 2011

Heartless Liberals Want to Make People Homeless

Okay, the title to this post was a bit of fun.  I know liberals don’t want to make people homeless.  But they are certainly acting like it. 

President Obama recently began a campaign called “We Can’t Wait”, which is basically a justification for the excessive use of executive order to legislate from the White House.  Particularly, he is using the executive order—a power that is supposed to be used for mundane activities like directing the positions of troops in wartime—to enact parts of his jobs plan that were too unpopular to be passed by Congress. 

One executive order the president has issued instituted price controls on mortgage refinancing and nullified certain provisions in mortgage contracts preventing borrowers from refinancing in certain circumstances. 

I hear you scratching your head already.  “If people with underwater mortgages can refinance more easily now,” you may be asking, “how is that making more people homeless?  Surely it means fewer people will have their homes foreclosed upon.” 

Sure, on the surface it seems that way.  But remember, in economics we have to look for both the seen and the unseen.  What is seen is that many mortgages get refinanced and that difference in cost may be enough to keep some marginal home owners in their homes.  What is unseen is the shaken confidence of mortgage lenders, who now know that the government can come in and rewrite their contracts with borrowers at will. 

To compensate for the potential losses that could result from such third party interference with what are usually assumed to be binding contracts, lenders will have to charge more initially for mortgages (in either closing costs or slightly higher interest rates.)  These higher costs will prevent marginal homebuyers from purchasing homes and force them to rent instead.  The increased demand for rental homes, consequently, will drive up rents and cause marginal renters to become homeless. 

And as a result of trying to help underwater homeowners, President Obama will have callously thrown poor renters out of their homes and onto the streets.  Or, in other words, heartless liberals want to make people homeless.

Okay, I realize no one wants to make people homeless.  Liberals aren’t trying to kick people out of their homes because they are cruel and capricious—they are doing it because they are economically illiterate.  But whenever this topic comes up in the news or in the blogosphere, liberals always like to frame the debate as those on the left want to help people who are in trouble, and those on the right don’t care about people losing their homes. 

In actual fact, the debate is between which of two policies causes the least amount of damage—the one where we rewrite a few contracts in order to save a few homeowners from foreclosure, or the one where we respect contracts and thereby keep prices on homes down for everyone.  Neither side wants people to be homeless; one side just understands that indirect help can often be better than direct help. 

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