You've got to be kidding. Why not just turn it all over to Acorn.

Forecloseures - Homes going down in value - pending home sales, the homes are not selling.
Until we fix this the economy, financial market, home owners retirement are all going down hill. We are giving some banks money and let them survive and make huge profits long term. But home owners get not help. I don't want to continue to see foreclosures near me and have the value of my home continue to go down. I see many banks and investors taking write offs for fannie mae investments. Can't we somehow get lower mortgage rates by helping fannie mae and save more banks and investors all the write offs they have to take on fannie mae.

1st part: Free market solution. Have lenders and borrowers work it out. Just because your home loan is underwater does not give a homeowner any right or reason to walk away from their obligation. Your home is your home. Encourage borrowers by showing the other side of default as a slammed credit rating leading to no ability to buy again for many years. Encorage lenders by showing they will lose more money through foreclosing than than they will lose if they try to work it out.
2nd part: From early 2002 until late 2006 by my calculations there were about 45 million new and existing home sales. Disregard refinancing during that time to use your home as a cash ATM, as that was definately a personal decision by the home owner, the consequences to be born by the borrower.
At a default rate of 10% of all the mortgages during that time, we come up with 4.5 Million problem mortgages. I propose the Federal Government guarantees it will purchase at market value from the lender any foreclosed home. At an average of $200,000.00 per purchase the outlay would be $900 billion dollars, and the government owns the property to be sold as the market improves.
Results: Lenders get creative trying to salvage their loan portfolio. Borrowers try to salvage their credit. At least the effects of foreclosed properties being put on the market at fire sale prices by lenders bailed out by the current direction of government intervention would be diminished helping to establish a housing bottom. The government will have real property to sell as the market improves over time.
The last chapter: This would be a long term process, and would not be a solution aimed at stimulating the current economic mess by making more debt available to the consumer, and by bailing out the finincial institions that made bad loans. It is probably beyond the thought process of most government officials, which is the moniker used in communist countries for government representatives as we have gone from having elected represantatives to now having government officials, to be able to read an idea this long in length, let alone evaluate the content. It also uses basic math which is not easy to understand by many Americans and the Government officials. It is also a process, not a point, so you can count on these ideas not even being considered.
Man am I Glad its Friday.

I have a simpler idea that puts more private capital to work. I already own GNMA certificates at roughly 5% yield. Why not peg a rate, say 8%, which sets a benchmark for private investors to step in, negotiate with the homewoner for the upside and put a floor beneath the investors risk capital?

We had Section 8 housing for rental property from the 1960's going forward. Why not use this type model for single family homeowner who now find themselves trapped and needing a "subsidy."

I hate it when I forget an important part: Home mortgage backed bonds would probably find a bottom in this scenario. The derivatives of these types of bonds, like CDO's, SIV's, stinky BO's, and other passed gasses, would have to work themselves out without our help.
Joe, the plumer, John and Barrak sound like idiots who don"t understand the rudimentary tax code. Sales less expenses= profit.
If joe doesn't understand this, he should not buy the business. The purchase of the business, hiring new employees, buying new equipment are all expenses which are deductable from your sales.
It sounded like the three stooges thought his taxes would be higher based on his sales before expenses.

Andrew,

You seem to recognize one of the basic flaws in your proposed solution. Houses have NO intrinisic value. They are worth what someone is willing to pay. In this economy the 'value' of a house is extremely dynamic and is effected by every decision the government makes and, for the most part, not in a positive way.

Also, appraisals are done by humans, not objective, altruistic beings from another galaxy. A system based on appraisals is a prime candidate for rampant corruption given the huge dollar amounts we're discussing.

The final fundamental that needs to be discussed is that in a capitalist system, by definition, there has to be a lower class. The primary distinction between the middle class and the lower class in this country has always been home ownership. The laws of capitalism can't be rewritten just because it feels good...even in a crisis.

There are simply too many homes, at too high a price, for the number of people that are suppose to be able to own one in a capitalist system. The number of houses needs to be reduced AND the price has to come down for this piece of this economic catastrophe to be 'fixed'. It may be counter-intutitive for humans who are used to 'fixing' things but the best way for this to happen is to let the market take its course...that is, for the government to do nothing.

In the aftermath it would be necessary for the government to bulldoze a sizable number of houses but by this point in the 'cure' the houses could be obtained through condemnation.

I know it is a hard pill to swallow but 'the American Way of Life' as its been lived for the last three decades is a myth and can't be sustained. I for one though am not afraid to go back to living like we did in the 50s and 60s especially since it would mean that we could be competitive in the global economy again.

I too am "deeply skeptical that government can manage any program, large or small, with even the slightest degree of aptitude" but I do trust the market to get us through this mess if the government just gets out of the way. Yes, it will be painful but that is as it should be as a warning to future generations on the excesses of capitalism and their natural consequences.

There is a man at the door, playing a flute, and he wants to be paid...and not with more borrowed fiat currency!

The housing market does not need fixing. House prices are too high, even in places that did not boom. They need to come down.

Forgiving part of a mortgage is just equivalent to a price discount. Well where is my discount. Why do I have to pay full price! Are these folks special? I don't think so.

From my point of view a lot of prices need to come down. Why must it be viewed from the sellers eyes, why not a future buyer, like my son, or me. My old man made out good during the depression using what little cash he had buying discounted real estate (much at tax sales). It seems that such opportunities are rare but are part of the payback due the savers who seem to suffer nothing but perpetual inflation.

I little deflation is a good thing now and then.

Extend the $7500/yr tax credit on mortgage interest to all 52M mortgage holders until housing prices stabilizes. Net cost is less then $300B and provides an economic stimulus and provides an incentive to credit worthy individuals to buy rather then become renters.

We have had four relocations to my office the past 3 months. All make over $100K/yr and all chose to rent vs buy a house. Who could disagree with their choice, which is why a tax credit could help to turn around the housing market.

Far less complicated then the convoluted and complicated solutions proposed in this artice and by the politicians to deal with the increasing number of under water mortgage loans that are the core to our current financial crisis.

Not perfect, but good math. You are no Joe the plumber. Good Idea

Bulldoze the houses. We have too many, get rid of some. Less Houses, higher prices, nobody underwater, less walking away.

The Bible says that you should not place yourself in a situation where the only salvation is Gods intervention, and putting him on the spot to bail you out. Like stepping to the edge of a cliff and declaring that God will save you and then stepping off.

This situation smacks of the same situation. Banks made huge profits and paid huge paychecks to executives. People bought houses well beyond what they could afford, or used their home as an ATM to buy lavish vacations and such. Now that their pyramid scheme has hit the wall, I am told that if we don't bail them all out and let them keep their booty, it will be bad for everyone.

Well, God is not likely to intervene when you jump off a cliff and neither should we bailout cheating bankers. I bought a home I could afford. I pay my bills. Where is MY HANDOUT? Why punish those of us who did it right by forcing us to fund the buyout of those who lived the high life?

I'm so sick of stealing from my pocket to pay those who won't work.. and those who cheat.

That's also American.

Prof Andrew Jeffery,

I thought your ideas were well developed and extremely fair minded...you put all politics aside in coming to a very viable solution. The poster Kerry Mantrop should follow your lead and learn from your example.

Now if those in charge could broaden their scope, put community first and shelved ideology viable and successful solutions would quickly be realized.

I really enjoyed reading your thoughts,

Thanks,

Thanks Ron,

Yeah I manage the budget and funding for a very large project, and the key to being a successful project manager is choosing the best solution from an array of bad choices.

Just heard Obama's plan to suspend mortgage payments for 3 months. I think that was tried in the Great Depression with disastrous effects to banks. Could anyone imagine having their employer suspend their paycheck for 3 months, and still being expected to go to work.

Another benefit to my KISS proposal is that it encourages people who are under water to stay in their homes and pay their mortgages, so they get the tax credit. Mortgage holders also have the option to use the tax credit to pay down the mortgage principle and get above water or increase the equity in their homes.

jim the project manager

Agreed Russel.

Andrew,

Your argument and logic are sound, however, it is like discussing a humane execution for an innocent man.

The bailout and the golden parachutes are telling the average responsible American that they are fools for 1. Being responsible and 2. Investing in Wall Street and/or their Government.

I don't think the have's and the entitlement class understand how they have decimated the spirit of the responsible average person.

Plans that punish the responsible and delay true price discovery of ALL goods is like a blood letting to treat a symptom and not the disease.

You're a talented surgeon with a sharp sterile lancet; but it won't cure the patient, the disease and fever needs to run it's course.

If the patient dies there is a child or two that can take over the farm, and it will be the one that doesn't have the disease and is willing to do the work ethically and responsibly.

No one is pointing the blame finger at the homeowners who made dumb decisions!

I haven't bought a house in the past 4 years b/c I could/can tell that they are WAY overpriced. If a socialist program to put a floor under the housing market is implemented, it will suggest that our country would rather bail out risk takers, and stick it to frugal investors.

Housing prices are many multiples too high compared to family incomes.

I don't think there is a problem, many future homeowners are waiting on the sidelines, waiting for the hard-headed homeowners who can't pay their mortgage to give in and list their home for what it is really worth - which is what someone is willing to pay (someone who can really afford it).

MY PLAN: Tell homeowners to suck it up, or sell their house. Thats the American way.

We will all come out on the other side lean and mean, and having learned many lessons. It will be good for America, and for our children.

Home owners will walk away because they are going to lose it anyway. What good is credit if banks can't get credit and neither can the consumer. Credit terms are worse and worse; more points, higher interest. Foreclosures require time and a Sheriff to kick people out in order to sell.

900 Billion bailout of Government owning properties: Many of those will be in inner city areas or poor neighborhoods. The houses will be trashed when people leave, or as they sit empty, broken into by the homeless or crackheads and trashed. Again, huge burden on law enforcement and communities.

Your heart is in the right place, but I think we need to have the consequences be applied where the choices originated rather than slather all of us with rancid government butter.

Let the market hit a natural bottom, then provide long term tax credits for purchases of bad loans and foreclosed properties.

lol...best two sentence response I've seen in a while.

EXACTLY!

A friend of mine lives in California's Central Valley, perhaps the worst housing and foreclosure market in the country. He and his wife are in their mid fifties, they both have reliable jobs, retirement plans, etc. They bought a nicer house two years ago which is way underwater now.

They aren't happy about it. They could walk away (California has no lender recourse on single family homes). But, they plan to just keep paying their mortgage. They figure it will all work itself out one day and they feel they owe the money and they aren't interested in messing up their credit, etc.

Years ago I did a 16 unit development in Oakland, California. At the same time a federally funded community organization built 22 units of 'low income' housing. My units were significantly better, bigger, nicer, and they cost less than half of what the community organization paid. I have seen the politics of 'community organizations' up close, and the cure is worse than the disease.

About the same time (1985) I built 3 side by side fourplexes, in Oakland. The units all had 3 bedrooms. I rented all of them to low income families. I made sure that, while the tenants incomes were low, that they had a good employment history. The rents were all $660. The Oakland housing authority, desperate at the time for 3 bedroom apartments, offered to rent all the apartments for $1,100 apiece. Now the only difference between the tenants the housing authority would have provided and my tenants is that my tenants were employed. Their other circumstances were fairly similar. Single mothers, minorities, etc. The offer was tempting, but I felt it was less than fair for government to bid away, on behalf of welfare recipients, apartments from similarly situated working people. In fact, I thought it was just nuts.

We have had a 'war on poverty' and a 'war on drugs', both of which have had dubious records of success. A 'war on foreclosure' might actually depress housing prices further. If government decides to subsidize negative equity, I'm guessing there will be a lot more of it!

I'm a pragmatist, not an ideaologue. If there's a way to fix this, I don't care about the taxpayer subsidy. But, the problem (housing, not banking) is in the process of fixing itself. Foreclosures are at their peak right now. Over the next six months they will begin to subside. Don't believe me? Take a look at the interest reset numbers. It is already through the worst period. Do no harm.

Housing prices need to come down. I have three children and they can't afford to buy a house, here, in California. Overpriced housing benefits no one. Lower housing prices will be a net economic benefit. Part of the reason that housing is so expensive is government policies favoring home ownership. Let it happen so that we can move on.

There's another thing. Fear. Fear of what will happen if the wheels really come off. Suppose we have a complete meltdown. In the great depression, most people figured it was their own fault. Half of America lived on a farm. Today, many think, Americans will go off the reservation. Social acrimony, as you say. Well, if that's going to happen, it will. I don't think folks can be bribed into good behavior. I also have more confidence in my fellow Americans than that.

These may turn out to be really tough times, and they may not. I don't know, fear of urban riots, demagoguery, bad behavior is unavoidable. Suck it up.

900 bln? That little?

We have..
* 2.5 billion in exposure with Freddie/Fannie - a number that will be growing at $40bln/month as they deliberately acquire bad debt - not included in the buyout bill
* We have the Fed going around guaranteeing debt for everyone (2+billion in Senior Debt from the top 9 banks alone).
*God only knows how much crappy paper the Fed has already allowed to be parked on their books - crappy paper that the Fed will be stuck with if the bank folds.

I can't keep up with it all. If my guess is right, we're looking at a potential liability of $5-7 trillion when the derivative storm finally hits (and you know it will). And, of course, this exposure will just continue to grow because, after all, its someone else's money.

So, in the perfect-storm scenario, we could be looking at a national debt approaching $20 trillion by the time all the buyouts, stimulus, guarantees, and other corporate & individual welfare payments go out!

>* We have the Fed going around guaranteeing debt for everyone (2+billion in Senior Debt from the top 9 banks alone).

Opps.. that was supposed to be $2+ TRILLION

"... He and his wife are in their mid fifties, they both have reliable jobs, retirement plans, etc. They bought a nicer house two years ago which is way underwater now. " The root of much, but not all of the problem !

Why is someone in their mid fifties in this situation. Most everyone in my circle of friends/relatives of that age have paid off or are 2/3's or more of the way to paying off their mortgages!! When the few that moved up bought a new house they had more than 50% equity to start since they rolled over the equity from the old one and added some. If you do otherwise, at that age aren't you speculating? Hoping that perpetual increases in value will make everything alright when your retire? And sometimes speculators lose, like now. Why should they be made whole, at my expense?

Hi Frank,

I think you've got it right. I don't know what they did with the money. Maybe they bought stocks. But my point is they are not expecting any bailout. A lot of people got sucked into the debt bubble. As they did in the dot.com bubble. Just human nature, I guess. I'm sure they wish they could go back and do it over.

It was pretty seductive. Looked like a free lunch. What a hangover, though!

Given that one or all of the group buyers, lenders, and governmnet are going to suffer losses on these overpriced homes, and that we want to encourage ownership, I suggest that sales of underwater homes provide a transferrable tax credit to the lender, of 50% of the difference between the mortgage amount and the sale price, provided that the lender gives up all recourse against the former owner.
This would not require a bureaucracy and would provide all parties with a way out.

I am retired. My wife and I saved and worked and bought smart and lived within our means...We bought and OWN a smaller house......Now you recommend taking my tax money (in effect it will be my tax money lost on these things) taking my tax money and using it to pay somebody else's house down where they gambled and overbought and bought a bigger house than we did...and they were stupid enough to sign a bad fancy no money down loan

You and Nancy Pelosi and Barney Frank and Harry Reid and the rest of the socialists can all just go and **&%%^&^ off !!!! No Offense intended --- But You have GOT to be kidding. Whatever you spend to buy negative equity will be lost forever and I hope you are the one left paying the taxes for it long after I am gone...

Have no backup system other than each other. If someone's house burns down, the community gets together and builds a new one.
You don't build houses you don't need because, well, you don't need them.
The banks helped the builders create an 'industry' of building houses that weren't needed in places that mostly could have been useful land. Now the banks are burning down.

So what?

Look to what the people actually need to keep living, not what the banks and government wants to maintain the systems and fluff that is not part of actual needs.
If someone needs a house, build it. If they don't need a house, don't build them a Mansion. Just because there's money floating around doesn't mean it should be spent, and we shouldn't be making money just for the sake of floating it around. Money, like any tool, needs to be cared for and kept sharp to be valuable. Wearing it out for no reason is childish.

I like the idea of planning this bailout. If Katrina is any example, three/four years into it & nothing will be done. So let's fund the salaries of these planners, rent office space, get phones etc. but never fund the bailout. By the time we're ready to actually go forth on this boondoggle the chips will have fallen. No?

William,

You've found the perfect solution! I like it.

Exactly.

You've been punished for being responsible.

Now they want to punish and rob us and our children for doing the right thing.

I feel like I've been raped.

This too shall pass, but this house of cards will fall also.

This is the stuff that civil wars are made of.

I guess I'm not very concerned about fairness in this issue. Whatever works the best is what is the fairest.

Having said this, it feels like we're trying to put a splint on an arm that's been amputated. The damage has been done.

I think we have unwisely focused our attentions on the housing crisis. It's symptomatic of a larger problem that perhaps we need to focus on. Loose money, over supply of capital lies at the root of this. We can nitpick it and give it names like subprime, and risky mortgages, but the bigger picture is that capital was searching for consumption. It found it. Homeownership rates were rising from historical base lines. Some of it was created, some was simply aging populations. It was the last haven of growth before the overall bubble burst. We best be worried about how this plays out in other sectors. Throwing money at this problem has just as much chance at making the problem worse. Plus it weakens our ability to stop or soften the next dominoes.

In the end it will be a great economic case study. Why did hyper-inflation not follow debt financing the economy. How long have we been reading articles about the looming inflation. Mid nineties??We'll learn I think, that there are other ways to reduce excess investment capital than to wash it out with inflation.

Eric,

"The bailout and the golden parachutes are telling the average responsible American that they are fools for 1. Being responsible and 2. Investing in Wall Street and/or their Government.

I don't think the have's and the entitlement class understand how they have decimated the spirit of the responsible average person."

Thank you for getting to the heart of the matter. Why is their distrust? For the very reasons you articulate. The capable, prudent and responsible are being punished for the sins for the corrupt and incompetent. To continue on this road will eventually bring revolution as it always has.

Ron,

You're right this plan is probably well beyond the ability for our elected officials to grasp, let alone execute.

One point, I think banks would welcome selling the foreclosed properties they have on their books, but fair market value in many cases would be too much of a hit for them to take.

I think unfortunately some of the money needs to be earmarked to absorb bank losses, as loathe as I would be to give them more money than they are already getting!

Andrew

David,

Agreed that there is too much housing supply, which is one of the reasons an ideal solution would be too try to convert some of it to low-income rental housing. Bulldozing, is unfortunately in all likelihood, inevitable.

Regardless of how the pill is delivered, it will be bitter as hell. My primary point is that if we're going to dump money at this, may as well do it right!

Appreciate the comments here and on the previous article

Andrew

Jim,

Agreed, in the longer term I think what you propose makes a lot of sense. However, the goal of the ideas I put forward are to try and address the issue now with minimal further damage to the financial system.

Agreed, the system needs some spring cleaning, but I think that will happen even if somehow we managed to find some magic bullet for the housing market.

The folks who relocated to your office sound like they know what they are doing, good for them!

Andrew

Russell,

I don't think you're alone in wondering why those who made the mistakes are now getting the handouts from those who didn't.

The only reason I can in good faith suggest solutions that distribute money in this way is because we're well down the road already. Putting ideology aside, what are some practical measures we can take to try and insulate the entire economy from this problem? It pains me to say it, I sound like a politician, but we're all negative effected as this thing keeps spiraling out of control, so paying a bit now can hopefully save a lot in the future.

Appreciate the comments!

Andrew

Mark,

Glad you enjoyed the article -- if you have a direct line to Treasury, send it their way ;)

Andrew

Hi Phillip,

It's my tax money as well, but I just saw $125 billion get swallowed up into 9 banks from which I will not see it back. Sure, we get a piddly return, but that principal is gone.

I don't like watching almost a Trillion dollars (so far) being taken from the responsible many and given to the irresponsible few. My argument is that since this is already happening, why not funnel it away from the banks and other friends of Washington, and to families.

Not everyone who bought a home during the past 7 years was a reckless speculator. Some are regular families who just made mistakes. Should they be taught a lesson, absolutely, but I don't see why they should pay for the mistakes of banks, investors, mortgage brokers, realtors, etc.

Andrew