The challenges facing this economy are diverse, complicated and enduring. Over the last several years and two administrations, the bleeding has continued unabated. Despite billions of dollars tossed at the problem, schemes to increase employment and opinions from economic expertsÂ on how to dig out, the country remains mired in the economic mud. A critical component integral to any recovery: HOUSING. It seems that if the housing dilemma can be solved or at least demonstrated to be under control, then the economy may gain the foothold it desperately seeks. The question remains; how to stop the drop in home values?
Critical to any housing stabilization is addressing the foreclosure inventory. This is a two step process; liquidate standing inventory and stop the existing inventory from building. A Harvard economics professor and a member of President Reaganâ€™s administration has proposed an interesting ideaâ€¦
Homes are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.
But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters donâ€™t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters donâ€™t want to provide any more help to the banks that made loans that have gone sour.
â€¦To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are â€œunderwaterâ€ are in this category. If everyone eligible participated, the one-time cost would be under $350 billion. Hereâ€™s how such a policy might work:
If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half. For the millions of underwater mortgages that are held by Fannie Mae and Freddie Mac, the government would just be paying itself. And in exchange for this reduction in principal, the borrower would have to accept that the new mortgage had full recourse â€” in other words, the government could go after the borrowerâ€™s other assets if he defaulted on the home. This would all be voluntary.
This plan is fair because both borrowers and creditors would make sacrifices. The bank would accept the cost of the principal write-down because the resulting loan â€” with its lower loan-to-value ratio and its full recourse feature â€” would be much less likely to result in default. The borrowers would accept full recourse to get the mortgage reduction.
The idea of bailing out irresponsible and/or reckless owners is distasteful â€“ just as it was to bail out the banks and then watch them not use that money to help the very people that need it. The author makes a point however that nothing is improving and while this may not be perfect, itâ€™s time to think outside of the box or this economic funk is going to take us places no one wants to think about.
CLICK HERE for the NY Times article
Hank Miller is an Associate Broker & Certified Appraiser working full time in real estate since 1989. He specializes in the north Atlanta real estate market which includes Atlanta, Alpharetta, Marietta, Roswell, Duluth, Kennesaw, Sandy Springs and surrounding areas. Visit the main site atÂ Â www.hounddogrealestate.com and reach Hank anytime at 678-428-8276 or firstname.lastname@example.org