There has been much impassioned public agonizing over the crisis in
the housing market, much of it strongly expressed but not deeply
thought. It is clear that something must be done to reverse the
declines in housing. No domestic sector is as crucial to US economic
health. But there is a hue and cry over “moral hazard” – the apparent
aim being to paralyze public action so as to leave outcomes to the
private markets that have (in the view of objectors, it seems) managed
economic affairs so masterfully in the last months. We must let nature
take its course, it is affirmed.
There are two problems with this
approach. First, it renders policy moot. There is little point in
electing or appointing a President or Fed chief if their main role is
simply to stand aside and let things happen. Second, the damage to the
economy is too dire. In any emergency, remediative action is the moral
responsibility of all involved, even if there is a good chance of
disaster remaining unaverted. And in this case, there is a good chance
corrective action can be effective – if it is correct.
Objectors
decry the rescue of the guilty at the expense of the innocent. They
declare there is no way to halt the collapse of the housing market
except to reward the bad behavior of irresponsible borrowers. But must
we punish every property holder to ensure that the market punishes the
guilty? Because that is the effect of the “let nature take its course”
option. Leaving aside questions of culpability on the part of lenders
who invented such ingenious instrumentalities as the “option ARM” and
the CDO, perhaps we should investigate the issue of saving the economy
instead of chastising the wicked. The matter is simple: how do we
intervene to halt the freefall of housing at least cost to the body
politic?
I think the matter is fairly straightforward. Create a government lending facility that buys up troubled loans. The Treasury owns these debts and thus allows the banking sector to rectify its balance sheets. Next, all bad loans are reevaluated and restructured in such a way as to render them viable and performing. As a condition of receiving writedowns on principal and reduced payments, the borrowers agree to forgo an appreciation or realized net gain on the future sale of the home, until and unless the proceeds of a future sale exceed the government’s costs in guaranteeing the loan at the reduced principal and payment. That is, a home originally mortgaged at $300,000 written down to $200,000 would yield the borrower no net gain at a sales amount less than $300,001. A further condition would require that the government mortgage holder sign off on any transfer of the property. This would ensure against collusion and abusive sales below prevailing market prices.
How would this fix the problem? First, it would provide the much needed “floor” to the housing market. Affordability would again be a significant factor in house-buying activity. Those who could afford the reduced principal and payment would stay in the houses to maintain them and service the debt. Those who cannot would provide an opportunity of an affordable entry point for buyers otherwise unwilling to venture to purchase in an unstable market. Second, it would indemnify the body politic against the predations of unscrupulous opportunists (as distinct from scrupulous opportunists, such as hedge fund managers) willing to profit from the government funds expended to shore up failing mortgages. In short, it would prevent “losers” becoming “winners” at public expense. And in the process, it would prevent whole neighborhoods, towns, cities, even the nation, from falling down the endless black hole of a continuing housing market collapse.
The key is to create a bracket, a “zone of no gain,” in which mortgage debtors can keep their homes without cashing in unwarrantedly on the largesse of a government rescue plan. I doubt that any such plan could be put into action, however. There are too many injured parties for that. Injuries on this order of magnitude always seem to require the spectacle of public blood-letting -on a large scale, and repeatedly.
This article appears in Feb 26 – Mar 4, 2009.
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There are some who have a secure income and home who assume every homeowner that is on the verge of losing their home is irresponsible, that spent beyond their means. I know of several people who have worked hard, saved for their down payments, did not buy expensive “toys”, that are on the brink of losing their homes because of job or business loss.
Unemployment does not pay a mortgage, it barely covers food and utilities, for those who have lost their business they don’t even have that. I am weary of hearing the self-righteous, who are fortunate enough not to be facing financial difficulty, complain how they are going to be the one to foot the bill.
If these homes continue to be foreclosed on, our property values will continue to go down more than they already have. The City of Bend has 10 foreclosures a day !!! There certainly needs to be guidelines set in place to weed out those who over spent and did not use wisdom obtaining credit, on the other hand we need provision for the people who were responsible.
The government is bailing out the banks/investors, why not hold them accountable for offering programs to work with these home owners ? I realize that any plan of action that is taken will be complex and difficult, but keeping people in their homes would benefit all concerned in the end.
If we are going to pay out 18 Billion dollars in corporate bonuses which was by the way paid for with OUR TAX DOLLARS and bail out the extremely greedy banks in order for them to serve their clients, the now extremely needy , which is all of us, then the government should go in and demand that all mortgages be automatically converted to 20 year fixed loans at no higher than 2% fixed rate on a 30 year fixed.
The VA has a loan called a “Streamline” loan where NO APPRAISAL is done, no verification of income is required, and one can lower ones interest rate and is a loan backed again by our tax dollars. If the government can allow Vets to do this, then why not the rest of us?
The banks should all become nationalized in this country, kick out the stock holders and make them government owned and run entities as the Bush Era proved that Greed and the American way of life was for 8 years based on the all mighty dollar.
We are not near the bottom of this market yet. What have the builders and developers done to promote PAYING JOBS into this area? NOTHING.
The Stimulus package just came into our area, but it went only to the big developers as now their interest rates are no higher than 3.75% on the huge mountains of debt that they owe for empty homes.
We need to step up as a community and push the politicians as if we all sit and throw sand in eachothers faces about who gets what and argue over trivial details, then we are going to all get shafted while they all take their money in Wash DC.
” why does congress say one thing and do nothing?” ” Mostly out of tradition” a long standing tradition of sitting and doing nothing, being paid our tax dollars to sit and argue like small children and accomplish nothing.
While the republicans and democrats sat and argued for the last two years of the Bush era, the republicans spent more goverment pork on a fake war and subsidising big oil and robbing our nation for bogus contracts. The Bush era explains why Halliburton moved their HQ to Dubai. Namely to avoid being on US soil for when the truth comes out and we need their records.
This all hooks together. Bush exported over 10 million jobs in this country to sweat shop nations where they make their employees wear diapers on the assembly lines and pay them 50 cents an hour. Economic theory explains that for every job lost in a country it affects 7 other jobs. We are all wondering now what happened as we allowed the scum of all scum rob us blind. I say yes to prosecuting them all and stripping them of all of their assets, putting the money back into our country.
Dollar to dollar according to the inflation rate and consumer price index we as a nation in 1945 had to pump the todays equivalent of 81 TRILLION dollars back into America. Bush spent 25 Trillion to make a few greedy rich and now Obama has some 65 Trillion to pump into America.
The housing market here is going to drop below anyones wildest imagination as there are NO PAYING JOBS here. We only need so many public and private jobs which are all taken now. Rumors are that the City of Bend just turned away one of the biggest green companies in the nation as ” they did not want any more blue collar jobs in Bend” as if this would lower the standard of living for people in this area, mostly people from Orange County who came up here a decade ago to create the ultimate ” whitey town”
Let me guess, you are a realtor.
No, it isn’t “clear that something must be done to reverse the declines in housing.” We just had the most destructive bubble in history. We cannot get back to normal until it deflates totally. Why call for an extension of an unsustainable bubble that is destroying the economy?
Housing is still above what it was before the bubble, adjusting for inflation. Housing traditionally grows only slightly higher than the rate of inflation. We need to get back down to where we would have been had there been no bubble. We aren’t there yet.
Housing is still at too high a multiple of incomes by historical standards. It is still too high as a multiple of rent (price/earnings ratio or P/E) by historical standards. Affordability is still worse than it was for hundreds of years before the bubble.
Once the bubble is fully deflated, the economy can start growing again. The faster it happens, the better. Let’s say our final goodbye to the horribly destructive bubble once and for all by getting prices to pre-bubble levels, plus inflation.
The attitude that the bubble has to be sustained or re-inflated is horribly misguided. It ruined everything. Let’s get rid of it!
Thanks.
When the government, or some corporate entity packing the government around in its back pocket, owns all the houses… where will you live?
I played by the rules – though I was in a position to do so, I didn’t go out and get a shitpile loan to buy an overpriced shitpile house. What’s in it for me?
EYup: on one hand extolling the virtues of and all to be done to re-ignite – stimulate – the failed credit economy, while on the other hand admonishing we can no longer afford to live beyond our means, that’s the solution.
Re-starting the “housing” bubble, the “credit” bubble, is just stupid. The model has failed, time to find a new one.