Many people both here and in the traditional media like to point to foreclosures as the root of the housing crisis and fixate on bailing out those at risk of foreclosure. I believe this is the wrong solution to the wrong problem and we are missing the real problem with housing.
Mortgage modifications to prevent foreclosures not working anyways.
The housing bubble was created out of essentially three factors:
- Historically low rates (China is to blame as much as Greenspan here)
- Easy availability of credit (not just Arm's and subprime, but also no/low down payment loans and higher debt to income ratios)
- Speculation (both by house flippers and by "normal" buyers entering into "can't miss" new neighborhoods in high demand areas)
These factors created a housing boom that dramatically increased prices across the country, but especially in certain "hot spot" areas like CA, FL, NV, and AZ where supply couldn't keep up with a seemingly never ending demand. All of the normal checks and balances that should be in the system simply failed to further exacerbate the bubble (mortgage brokers/wall street giving loans to anyone with a pulse, real estate agents convincing buyers that prices are/will go up by 25% a year, appraisers being lackeys of the realtors/banks/brokers, to say nothing of government oversight). The bubble persisted as new market entrants bid up the price of the lower end homes, which allowed those former low-end homeowners to move up a notch and so on up the ladder of prices. This ended, however, when the low-end home got priced out of any new buyers range no matter what fancy mortgage device or credit accounting was used and then the whole house of cards collapsed. Now onto why foreclosures aren't the problem.
Foreclosures are a terrible situation that far too many homeowners now live in fear of today, but the vast majority of these homeowners simply do not belong in the homes they are in. Any fix to stave off foreclosure will essentially attempt to put a floor on the market that may still be out of the price range of new entrants (the key to housing as a whole) and will definitely fail to create demand (that is now gone due to deflation, tightening credit, and fear about the economy). On top of that, any bailout of "distressed homeowners" will create a giant backlash from the vast majority of the fiscally prudent home buyers, who stayed within their means or had to overpay for housing due to the people now in trouble bidding up prices. And in this economy, nobody is going to like the idea of their neighbor getting a bailout when they are likely not in the best of financial circumstances themselves. Finally, staving off foreclosures may be an exercise in futility considering the deteriorating economic conditions and the magnitude of the housing problem in some parts of the country.
My fix to the problem is a demand based one that will attempt to bring buyers back into the market, which will help to soften the price drop and will hopefully enable some of those facing a potential foreclosure to sell, an option they really do not have now. My solution essentially involves X key elements:
- a home buyer tax credit of 10% of the purchase price up to some maximum value (say $15,000) and income threshold (say $250,000). This credit would be spread over 3 years, be refundable, and be applied even under the AMT. Only primary residences would qualify. I would date this back to January of 2008 to help stimulate the economy as much as possible.
- a government effort (similar to the Paulson/Geithner plan) to get 30 year rates down to 4.5-5% and hold them there for at least a year if at all possible (with a gradual rise back to a non-intervention rate after that)
- a clean slate for anyone foreclosed upon within the last 4 years (I would only have the foreclosure stick on credit for 1 year to prevent walk-aways and then be wiped off). This should bring a lot of buyers back into the market.
- allow the 10% credit on a home purchase to be immediately applied as a down payment instead of a tax credit and make any bank that receives TARP funds to give mortgages (provided appropriate credit scores) to people with that down payment
- force any bank receiving TARP funds to make allow a short sale on any home provided the sale is within 20% of the outstanding loan balance
- allow homeowners to deduct the cost of refinancing on their taxes so that everyone can benefit from the government induced low rates and increase homeowners cash flow
I believe that these demand based fixes will have a bigger impact on the housing market and economy than any foreclosure mitigation program can and at a much lower risk level. Also, things like the low rates (which should apply to refi's too) and the tax credit (which should be retroactive and be able to be claimed immediately (the first third through a separate IRS form) will have a stimulating effect on the economy as whole as well.