OPINION: Markets, not bailouts, offer refinance incentives

We refinanced a home purchased in 2007 through a very respectable financial institution. We have a conventional mortgage, no debt and the remains of a once reasonable 401(K). My employment prospects are at least average. This should have been easy. It was not.

Unlike when I first received a mortgage on this house, the company now demanded an appraisal. I now had to prove my salary, something I didn't have to do when we bought the house. This was the most difficult of the five mortgage transactions I have done. Worst of all, the appraisal came back a whopping 10 percent higher than when I bought the house (though in all fairness we've added some land and significant repairs). Still, if anyone wants to buy my house at 10 percent more than I paid for it in August of 2007, please contact me immediately -- I will throw in furniture, a dog, goldfish, frog and child of your choice.

The problem with this is that my financial institution hasn't yet come to grips with reality. If I default on the current loan, they get my house. While bad for me, it is very bad for them. Just how low would the value of the house have to be before they are encouraged to refinance? The correct answer is $0 or lower. Refinancing makes it far more likely I will continue to make payments, regardless of the market value of my home. The whole exercise was silly and scary at the same time. But policies designed to fix the problem are more frightening.

The proposed housing bailout offers some unlikely remedies. First, it offers to increase the incentive for banks to refinance loans. But, the market incentive to do so has never, ever been higher (roughly $40,000 a house to go through foreclosure). If banks aren't now responding to the strongest refinancing incentives in history, no government plan will speed things along. Second, the plan seeks to ease the terms of existing loans, making them less complicated and easier to refinance. This begs the question: When has the government made a private transaction less complicated? The answer is precisely never. More than half the signatures I had to provide on that most recent mortgage transaction were on government mandated documents.

What the proposal does not do is find a way to allow banks to refinance mortgages that have been sold off into those now famous "toxic assets" or how to refinance homes with double mortgages. This is one area they could conceivably have an effect, but at apparently too great a cost (the stimulus spending would have covered this).

The real lesson here will be a familiar one. Markets -- no matter how imperfect -- not government programs, manage the economy.