7 Ways to (Finally) Fix Housing
Has there been some good news in housing lately? You betcha. New home sales jumped 11 percent in June, while the inventory of new unsold homes tumbled sharply. Better yet, May home prices were pretty much flat rather than plunging. “Recent housing reports have been promising,” opines Patrick Newport of IHS Global Insight.
But a housing bottom is not the same as a housing boom. The total number of new home sales was the lowest in a generation. And home prices are now off as much as 33 percent nationwide since their peak. What’s more, foreclosures remain a huge and growing problem, so much so that President Obama met with mortgage servicers to push them to modify more troubled mortgages under his administation’s plan announced last spring.
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In short, it was housing that started America’s economic crisis in 2007, and it’s housing that continues to prevent a strong recovery in 2009. So given that the White House loves to appoint “czars,” maybe American needs a Housing Czar who could push one of these big proposals to help struggling homeowners, reduce foreclosures and strengthen the housing market:
Forgive and forget. A $75 billion plan devised by Ross DeVol and Michael Klowden of the Milken Institute would use government loans to refinance underwater mortgages. If your mortgage is worth $500,000 but your home just $400,000, Fannie Mae would provide a new loan for $400,000. Then the Treasury Department would provide a second loan of $100,000 — the difference between your mortgage value and home value. For each year that the homeowner keeps making payments, one-fifth of the Treasury loan would be forgiven. After five years, you might again have some positive equity.
Give lenders a piece of the action. When companies restructure, such as troubled automakers, creditors often exchange debt for an equity stake in the company. So what’s good for GM is good for homeowners, says Luigi Zingales of the University of Chicago. Under his plan, homeowners who are more than 20 percent underwater on their mortgages could reset the value of the loan to the house’s current value. But in exchange, they would have to give half of any future upside in price to the bank.
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Turn owners into renters rather than defaulters. Renting your own house — rather than getting booted out of it — might be the new American Dream. Economist Dean Baker of the Center for Economic and Policy Research says Congress should temporarily change the law so homeowners facing foreclosure would have the right to stay in their home as long as they could pay the market rent for an extended period of time. This wouldn’t cost any taxpayer money, while also reducing the number of vacant homes blighting many neighborhoods. Plus it would give lenders incentive to substantially modify more mortgages so they don’t have to become landlords.
Tell it to the judge. Rep. Barney Frank, the powerful chairman of the House Financial Services Committee, says he’s so angry that lenders haven’t modified more mortgages that he is threatening to bring back the once-failed mortgage “cram-down” bill. This would allow homeowners to declare bankruptcy and turn to a judge who could then modify terms of primary mortgages, including reducing the principal. The reason a previous effort to change bankruptcy laws failed was over fears that this would create more risk for lenders who would then charge higher interest rates to compensate.
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Foreigners buy our bonds, let them buy our homes, too. Real estate developer Richard LeFrak and economist Gary Shilling think Uncle Sam should offer permanent residence status to foreigners if they buy a house here. Now they wouldn’t have to live in the house, but they couldn’t rent it out either. The goal, remember, is take the unit off the market and reduce supply. After five years, temporary status would turn permanent. LeFrak and Shilling think the mere announcement of the program would help beaten-down markets where foreigners love to go such as Miami, San Francisco and Las Vegas.
Make the “second stimulus” a homeowners stimulus. For $300 billion to $400 billion, the government could buy mortgages from banks and then issue more affordable new loans to struggling homeowners. Or rather than focusing on homeowners, the government could focus on buyer by nationalizing Fannie Mae and Freddie Mac and then offering 30-year, fixed-rate mortgages at four percent or so to buy a new or existing home.
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Help homeowners keep their jobs. America’s housing problem has changed over the past two years. The big problem isn’t so much people who bought too much house for their income, it’s people who have lost their income because of job loss. So right now jobs policy is housing policy. Former White House economist Lawrence Lindsey says that cutting the payroll tax in half could put $1,500 in the pockets of workers and perhaps create as many as four million jobs in a year. If you want more of something, the theory goes, tax it less. This plan would lower the taxation of labor, so America would get more of it.
Of course, the Obama mortgage modification might still work, given more time for lenders to ramp up staff and expertise. And doing nothing helps first-time buyers who can get homes on the cheap. But then again, they don’t hire Housing Czars to do nothing.