Mortgage crisis may be a blessing
TEXT OF COMMENTARY
Bob Moon: We're starting to see the effects of tighter lending standards. Mortgage applications are at six-and-a-half year lows. That's according to the Mortgage Bankers Association. Fewer buyers in the market will drive down home values even further.
But as commentator David Frum sees it, that harsh reality might not be the worst thing for the country.
David Frum: These are tough times for American homeowners. Many borrowers are defaulting on their mortgages. Others are facing sharp drops in the value of their houses. The larger mortgage market is in crisis.
I don't want to speak of this crisis cold-bloodedly, but markets are cold-blooded things and there's a reason why market watchers often call downturns "corrections."
At the peak of the housing boom, mortgage debt as a share of household assets had risen to an all-time peak of over 40 percent. The equity Americans held in their own homes had dropped below 50 percent, an unprecedented low.
Those trends are going into reverse. Hard-pressed homeowners are selling their houses and taking their losses. Lenders are taking their losses too, writing off mortgages on an enormous scale.
As a result, the United States will soon be a little poorer than it used to be, but also probably much less indebted.
Debt -- leverage as they call it in business school -- is a powerful tool for maximizing profits. It is also a dangerous tool that can maximize losses. When businesses pull back after a shock, they call it de-leveraging. What we may be seeing now is a massive de-leveraging of the consumer economy.
I'll hazard a prediction: In 2009 and 2010, we will see home equity rise again. We will see mortgage debt as a share of household assets decline. And as Americans realize that they can no longer count on their houses and stock portfolios to grow automatically, we may begin to see a rise in savings rates, which had tumbled almost to zero.
We've been warned for years that Americans need to save more, borrow less and work longer into life. The shock of 2008 may at last transform those warnings into welcome changes of behavior. If so, this mortgage crisis may be a blessing in disguise.
Moon: David Frum is a resident fellow at the American Enterprise Institute. His latest book is called "Comeback: Conservatism That Can Win Again."