O come, all ye with negative equity

The Obama administration has a great idea: they are going to prop up the housing market by pressuring Fannie Mae and Freddie Mac to give people more house than they paid for.

The administration is afraid that people who have negative equity, i.e. they owe more than their houses are worth (also known as being "underwater"), will make the immoral but economically rational decision to stop paying their mortgages. Sometimes these underwater borrowers mail their house keys to their mortgage lenders, a practice so prevalent it has been given the name "jingle mail."

Under the administration's proposal, banks would receive a subsidy for reducing underwater borrowers' principal, and would then hand the loans off to FHA, putting the taxpayer on the hook in the event of default.

Bear in mind, underwater borrowers are not necessarily distressed borrowers. They can afford their mortgages, they just don't want to pay them anymore.

This proposal benefits a small subset of homeowners on the basis of their presumed imminent immoral behavior, creating an ethical death spiral at the expense of: people who aren't able to afford to buy houses; people who bought houses and paid off what they owed without government handouts; and people whose equity has dwindled as a result of the housing crisis, but who are still above water and therefore not eligible for Obama's jingle mail bailout.

Remarkably, at the same time that some in the Obama administration are talking about unprecedented aid to people who can afford to pay their mortgages, others are talking about taking away one of the last perks the middle class enjoys: the mortgage interest deduction.

Obama's deficit reduction commission has set its sights on the mortgage interest deduction, which will be worth approximately $131 billion in 2012. These are extraordinary times, they tell us. The scope of the deficit makes every government program and perk subject to elimination, they tell us.

Every program, that is, except for a jingle mail bailout for underwater borrowers who can afford to make their mortgage payments.

In my circle of friends and acquaintances, there are a number of people who have bought houses in the last few years. We're not flippers, we bought for the long term. Our equity has evaporated during the housing crisis, but we aren't going to stop paying our mortgages, despite the fact that no one is offering to write down our principal. And without exception, if we lose the mortgage interest deduction, we will lose our houses.

I've often wondered what it would take for me to don a mask and run through the streets breaking windows and setting cars on fire. The prospect of eliminating the mortgage interest deduction has me reaching for my lighter.