President Barack Obama recently unveiled a housing bill to aid honest, hardworking homeowners who nonetheless are falling behind on their mortgage payments.
The President (and others) have implicitly set out a personality typology of two types of homeowners: honest, hardworking home-buyers, on the one hand, and irresponsible home-buyers, on the other. (President Obama refers to unscruplous loan officers and real-estate speculators as well).
The President remarked that his plan would help the honest, hardworking homeowners but not reward the irresponsible ones. In the President's own words (from a speech on February 18th):
...I also want to be very clear about what this plan will not do: It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans. It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell...And it will not reward folks who bought homes they knew from the beginning they would never be able to afford...
The President's words struck me as something of a simplification, for we can never sort out the honest and hard working from the irresponsible home buyer with perfect accuracy.
Personality psychologists (and others) often use a two-by-two chart to make this clear.
In the chart immediately below, the two right-most columns (vertical) represent the true character of homeowners (unknown to us): some are truly irresponsible, some truly honest.
The two bottom rows (horizontal) represent our best information about a homeowner's character based on economic tests: hardworking and honest-seeming versus irresponsible-seeming. Homeowners may be so classified by examining such criteria as the size of their mortgage relative to their income, whether they lived in the home, and so on. (Psychological tests could be used in principle, but I doubt the stimulus package allows for that).
Classification based on economic tests (or psychological, or medical ones), however, are nearly never perfect. They may be far superior to using no test, but mistakes will be made.
The table illustrates how some homeowners who appear honest according to economic tests will be that way (the "True Positive" cell), and some irresponsible-seeming homeowners really are irresponsible as well (the "True Negative" cell).
Sometimes, however, the classification will be wrong: honest homebuyers will look bad, irresponsible homebuyers will appear better than they are.
I wish a housing bill could sort out home-owners with the kind of perfect accuracy implied in the President's speech, but no special training is necessary to recognize how implausible such a claim to perfect justice is.
Here is what we can say: with the right economic tests in place, the chances of aiding the honest homeowner in preference to the irresponsible one will improve over the random case. This revised claim doesn't sound as good, but it is closer to what can be determined in reality.
Addendum: What does this mean for the future? Some honest homeowners will be identified by government criteria and will be helped. Because no selection criteria are perfect, however, expect news reports both of honest homeowners cut off from help and of irresponsible homeowners (and speculators) who receive windfalls from the government.
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(c) Copyright 2009 John D. Mayer
