(CONTINUED)
. . . . . glimpse into a practical solution to this whole mess.
Unfortunately, his solutions are predicated upon the faulty premise that the Obama Administration and the Republicans in Congress have resisted obvious solutions for political reasons. . . . . . .
While politics is always the first consideration for almost all of our elected officials, the real reason is that these people are just too darn dumb to come up with any viable solutions (See: The Ryan Plan). Unfortunately, I believe that in his conclusions, Mr. Feldstein errs.
Correctly, Mr. Feldstein understands the consequences of a continuing level of defaults and foreclosures and their devastating impact on the housing market, and just about every other economic situation. He seeks to halt the decline in real estate values, suggesting that lending institutions should reduce existing mortgages to the current market value, with the institution and the Federal Government splitting the difference. E.g.: If a mortgage has an existing balance of $200,000, at a 7% interest rate, 30 years, the monthly payment (P&I) is $1,331.00. Under the Feldstein plan, reduced to the market value of, oh, $130,000 at 6% interest for 30 years, the monthly payment (P & I) would be $779.00. Implied is that the federal government has already spent hundreds of billions already to bail banks, Freddie Mac and Fannie Mae out of bad mortgages, and likely will be on the hook for billions more in the future anyway. So Mr. Feldstein is correct in his analysis of the problem.
But cutting the balance on the mortgage will only decrease the book assets of the lending institution, needlessly reducing homeowners net worth AND per force, contributing to a further decline in the value of real estate. While I agree that this likely will bottom the market, may I respectfully demur?
In this age of historically-low interest rates, the government should guarantee a 100% refinancing of ALL existing mortgages, at the current balance on the mortgage loan, at an interest rate of 2%. The government guarantees the loan (which they do now anyway, one way or another); the bank charges an administration fee (say $1,000) and adds it to the new mortgage, E.g.:$201,000 at 2% interest for 30 years, the monthly payment would be $742.00 (enough savings - $37.00 - from the Feldstein plan for the Dept. of Energy to buy two bagels every month).You can’t rent for that. Foreclosures will end. Bankruptcy and foreclosure judges can go back to the golf course.
People can stay in their homes. The bank gets all of its money back; the American Taxpayers pay out nothing; the slide in the real estate market comes to a grinding halt at a much higher level of value; the moribund construction market (our second-highest employer) will get going again. Also, the specter of inflation and higher interest rates will be greatly reduced by the huge investment in long-term 2% interest rates.
It’s a shame we didn’t do something like this years ago.
