END THE HOUSING MARKET CRISIS TODAY . . . . HERE'S HOW
Yet again the New YorkTimes writes a lengthy treatise about what needs to be done to revive the economy, citing yet another Harvard Professor or two about this or that. Concluding (accurately) that the economy will not go forward without an attending recovery in the housing sector, the Times offers few solutions.
New York Reserve boss, William C. Dudley’s agenda calls for a plan to make it easier for people to qualify for a home mortgage loan and suggests that the inevitable solution will be “reducing the amount that many borrowers owe while letting them keep their homes.” This same solution was suggested recently by Martin Feldstein on these pages and in the Wall Street Journal. As if our political movers and shakers really cared about our feelings, Floyd Norris points out that this approach would infuriate responsible homeowners who didn’t encumber themselves with mortgages they could not pay.
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 political decisions, the real reason is that these people, including William Dudley (with a “C”) just can’t see the forest for the trees to come up with any viable solutions (See e.g.: The Ryan Plan). If they don’t teach it at Harvard, then other solutions don’t exist.
Well, I didn’t attend Harvard (although my twin did), but let me presume to elucidate thus:
Certainly, Mssrs. Dudley, Obama, Norris, and even Republicans, understand 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. If the housing market isn’t fixed, the U.S. also won’t be fixed. They aspire 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 their 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 their analyses appear correct.
But reducing the balance on the mortgage will only decrease the book assets of the lending institution, needlessly reducing homeowners net worth and, per force, and contribute 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 of the mortgage loan, at an interest rate of 2%. The government would guarantee the loan (which they do now anyway, one way or another); the bank would charge an administration fee (say $1,000) and add it to the new mortgage, E.g.: $201,000 at 2% interest for 30 years, the monthly payment would be $742.00. You can’t rent for that. With no practical incentive to default, foreclosures would end. The Real Estate market immediately would bottom out at current values, and bankruptcy and foreclosure judges can go back to the golf course. Presumably even my obstinate fellow Republicans would go along.
People can stay in their homes. The bank will get all of their money back; the American Taxpayers will pay out nothing. With equal access to refinancing, current “responsible homeowners” also will benefit; the slide in the real estate market would come to a grinding halt at a much higher level of value; the moribund construction market (our second-highest employer) will get going again. Finally, the specter of inflation and higher interest rates (now creeping to around 4%) will be greatly reduced by the huge investment in long-term 2% home mortgage interest rates.
It’s time, as they say, for us to start thinking outside the box - even those at Harvard.
Finally. Have you noticed how so many old, even historic, homes have stayed on the market? No one is buying the. Some are really nice, but need updating and remodeling. Before 2006, these were hot tickets. Yuppies and Others were buying, fixing, and gentrifying older neighborhoods. Now they're no, and the prices have dropped like a stone.
Last week the price on a 6 bedroom 110 year old home iIhave been eying near downtown Martensburg W VA, dropped from $82,000 to $45,000 !!! Yet it sits. When home prices were high, these older homes were a bargain. You could purchase a well-constructed house for about $130,000, that was twice as big as a new home in the 'burbs that costs around $300,000. With, say, another $100,000 and some sweat equity, the older home could be fixed up nicely. Closer to downtown, the house then would be selling for about $300,000 - $400,000 to the highest bidder.
Now that home in the burbs is worth about $150,000, and President Obama implements his newest failure of a program that would persuade banks, with government support, to drop the balance owed on that suburban home mortgage down to its market value of $150,000. Now the value of all the other homes around that lowered mortgage place also will drop. And who wants to buy and fix up an older home, even for $45,000 and work his butt off and borrow another $100,000 to fix it up, when the market value likely be less than what they have into it? No One.
Watch for a serious increase in the decline of the inner city.
A 2% refinancing of all existing mortgages at the ir current balances will stop that decay in its tracks. It’s a shame we didn’t do something like this years ago.
