Obama, the Homeowner's Helper or Enabler?

Will the new federal mortgage rules aid homeowners facing foreclosure or encourage borrowers to live beyond their means?

By No Means a Cure

Updated October 26, 2011, 05:07 PM

Pete Sepp is the executive vice president of National Taxpayers Union.

Taxpayers will likely greet the president’s latest mortgage refinancing plan with skepticism -- the same that fueled Rick Santelli’s Tea Party rant in 2009 and continues to show up in polls. Their feelings are not unfounded:

For decades elected officials claimed that the housing giants Fannie Mae and Freddie Mac were not backed by Washington; yet, by the end of this fiscal year they will have received a taxpayer bailout out of $169 billion.

Even as property prices plummeted, property taxes -- supposedly based on home values -- didn’t. According to the latest Census data, between mid-2007 and mid-2011, state and local property tax collections nationwide have risen more than 20 percent, even as income and sales tax receipts were declining or flat. And as our 2011 ballot guide shows, governments are asking for more.

When given the opportunity to simply allow conforming limits for federally backed loans to stay at a mere $625,500, last week the Senate -- with unanimous support from Democrats voting that day -- boosted the amount to the bubble-era level of $729,750. So much for middle-class concerns.

Foreclosures are terribly destructive events for everyone, but besides the obvious economy-wide recovery, what can help to ease housing woes over time?

Fannie and Freddie should be gradually divested from the federal balance sheet; all future aid for homeowners should be financed transparently (and more selectively) through annual appropriations.

Federal policies should incentivize greater development of nongovernment home financing methods, which are more prevalent abroad. One concept in the U.S. that deserves encouragement: private mortgage insurance, an excellent risk-management tool that helps diminish taxpayer liabilities in the overall market.

State and local governments should reform their own policies. Aside from high taxes, research from the Heritage Foundation’s Ron Utt and Wendell Cox make a convincing case that harsh land-use rules worsen affordability and lead to excessive mortgage debt.

Though the president’s plan seems modest, there’s still a major temptation in Washington to just reinflate the housing bubble using taxpayers’ resources. Doing so would eventually cause more pain than it cures.