What are we going to do about the housing market?
Just about everyone from the upper reaches of the White House to television and newspaper pun dents to top national economists have an opinion on how to cure the housing crisis. The problem is there is no empirical knowledge of exactly what to do, since the country has never been in this predicament before.
Let's start with the government. In November there was a program announced called Harp 2 which would help underwater homeowners refinance a property through a lending institution for lower fees and no appraisal process. The banks were not mandated to offer this program and were naturally very leery of providing new mortgages on properties with negative equity. The program was scheduled to start in December, but I haven't heard or read anything about it since the first announcement.
In the president's State of the Union address a few weeks ago, he announced another new plan to help "responsible homeowners." This plan would save underwater homeowners $3,000 a year on mortgage payments and charge banks a small fee to help fund the program. The plan, however, would need congressional approval which pretty much means it's never going to happen especially in an election year.
Basically neither one of these government sponsored programs looks like they're going to do anything for beleaguered homeowners. The only other rabbit in the government's hat is the possibility of converting some of the Fannie and Freddie foreclosures into rentals, which is being studied.
What about the economists? Do they have any viable suggestions? Economists are big on local investors; that is individuals buying up the foreclosures, converting them to rentals and holding long term. The only problem with this is that Fannie and Freddie, who fund mortgages will not provide approval for more than 10 loans to investors keeping the big boys with the real money out of the market.
Economists also want to see pending regulations for lending institutions clarified. The banks are working in a fog of regulations, forcing them to do business with only the lowest risk customers.
And surprisingly, economists agree in part with the government that banks should consider reducing debt for troubled homeowners in an effort to keep them in their homes and stop the flood of foreclosures. Naturally, lenders are concerned that this will encourage more borrowers to default.
But my all time favorite suggestion was written by James Wilcox, an economist at the University of California at Berkeley, in the New York Times in January. Wilcox suggested the federal government start a down payment protection program providing buyers protection against future loss of equity and thus bring buyers into the market. His suggestion is that homebuyers purchase protection from the government for a one-time fee and at the end of three years the government would automatically mail checks to protected homeowners if average house prices in their area declined.
OK, so tell me I'm crazy, but this sounds an awful lot like a derivative, which is essentially a promise about a future transaction. Remember those? That's what brought down the Wall Street banks and AIG requiring the American taxpayer to bail them out.
The unfortunate conclusion is that no one really knows what's going to work. It's all just a little knowledge sprinkled with a lot of speculation. Your guess is as good as mine and could possibly be even better than the folks who are supposed to get us out of this mess. Have any ideas?