Fannie Mae and Freddie Mac’s Plan Can Be Boon for Georgians

It has taken awhile, but Fannie Mae and Freddie Mac has announced a new, innovative policy aimed at homeowners currently at the risk of foreclosure.  This particular policy holds special potential to Georgians that have been impacted by housing more than most states with a recent study highlighted by showing us as having the highest rate of foreclosure filings in all of the US.

A deep slump in housing, particularly Atlanta, is one of the reasons why our state economic recovery has been slower than the rest of the US.  Even though we can point to an improved economic performance in 2012 where our job growth was among the highest in the Southeast at 1.9%, we are tied with Mississippi for the highest unemployment rate in the Southeast at 8.6% as of December 2012.

On March 1, a small segment of homeowners will be allowed to cancel their debt, but only under a special set of circumstances, which include:

  • not being more than 90 days late on your mortgage payments;
  • making at least 55% of their monthly income toward those payments; and
  • documenting a specific hardship, such as relocating for a job or death of a spouse.

The reason why the rules are so strict is due to the unintended consequences that arise from moral hazard.  Moral hazard is an economic concept that says rewarding risky behavior will only lead to more risky behavior in the future.  Certainly, we can look back and realize that consumers took on loans that they should not have.   Therefore, economists are reluctant to bail out homeowners because that would encourage irresponsible borrowing in the future.

The best aspect of this proposal is that homeowners taking advantage of canceling their debt are subject to surrendering up to 20% of their personal assets.  This “poison pill” will minimize instances where people take advantage of this policy to enrich themselves at the expense of taxpayers and investors that hold an interest in both Fannie Mae and Freddie Mac.

This is exactly the “out of the box thinking” that will not unduly compromise the fundamentals of our core free market economy, while also providing a reprieve for Americans that made a good faith effort in paying their debts.  One can certainly argue that the financial industry misled them with loan products that they did not fully understand, so granting them this avenue appears fair and reasonable.

While it is unfortunate that a slow economy makes it harder for many households to stay current with jobs remaining scarce, there is just too much downside in allowing a large number of homeowners to cancel their debts.  Financial markets would surely penalize future homeowners as lenders would be less likely to extend credit if they believe the government will implement policies that would cancel debts at a whim.  Banks would respond by lending less and that will drive borrowing costs higher.

A growing Georgia economy requires a healthy housing market and this policy is a step in the right direction.


2 thoughts on “Fannie Mae and Freddie Mac’s Plan Can Be Boon for Georgians

    • Thanks for taking the time to comment! Please consider following me on Twitter @econprofaj. I apologize for the late reply, but I’m still getting used to the blogging aspect.

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