Liberal Economist Says Barney Frank's Bailout Mostly Benefits Banks

The American Prospect reports:

A new bill sponsored by Rep. Barney Frank, chairman of the House Financial Services Committee, directs the Federal Housing Authority (FHA) to buy up loans that are facing foreclosure. If the bill passes, the FHA will guarantee new mortgages at a price 15 percent below the current appraised value of the house. This would require the current lender to take a hit, since it will not get back the full value of the home, but even 85 percent of the full value of the home is likely more than the lender would get by foreclosing. In principle, homeowners will also benefit, since they get to stay in their home with a new lower-interest mortgage.

The big problem is that prices in many markets are still hugely inflated by the housing bubble. This means that even a price that is 15 percent below the appraised value is actually more than the house is likely to be worth in the near future. Prices are likely to drop further, leaving the government holding the bag.

It's also not a great deal for homeowners. They will be paying far more in ownership costs than they would pay to rent a comparable home -- taking away money that they could be spending on their kids' health care, child care, and other necessary expenses. The families also don't end up with any equity in a house with a falling price.

There is an easy way around this problem -- just set the guarantee price at a multiple of annual rent of a comparable home (15 to one, for example). Rents never got out of line with reality even at the peak of the bubble. A guarantee price grounded in rent would therefore reflect the fundamentals of the housing market.