Nov 10 2011

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GOP Aspirants to Homeowners – Drop Dead

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It is Time to Bite the Bullet

The facts presented by CNBC in last night’s presidential debate were sobering.

– Four million American homeowners behind on their payments or in foreclosure.

– 25 percent of homeowners owe more on their mortgage than their homes are worth.

– A loss of $7 trillion in home values since 2006 – equal to half the GDP of the United States – a trend that continues unabated with a new report by the National Association of Realtors showing national median prices dropping, again, by 4.7 percent in the third quarter.

Yet, when asked how to deal with the massive housing problem last night, the Republican presidential candidates were shrill, vacuous or demagogic, offering tired rhetoric instead of constructive proposals to address the crisis.

All the candidates favored allowing foreclosures to continue as the market attempts to find a bottom, and believe that economic growth is the best way to address the housing crisis.

When pressed, the candidates dragged out their favorite bugaboos.

Newt Gingrich made the very suspect claim that the housing market would turn around tomorrow if Dodd-Frank were repealed.

Michele Bachmann chimed in with the equally dubious claim the Freddie and Fannie were destroying the housing market by providing extravagant bonus compensation to the GSE’s executives at the unfortunate time that organizations are seeking $8 billion more in bailout funds.

For his part, Mitt Romney cited federal policy prior to 2008 that officially support sub-prime lending as a chief reason why the government should do nothing now to help at risk homeowners.

Great applause line, but it could not be further from the truth.

Let us speak plainly.

As David Wessel wrote in today’s Wall Street Journal, “All sorts of attempts have been made [to fix the housing market by] reducing monthly mortgage payments for some, to refinance high-interest mortgages, to be sure foreclosures are done correctly, to recapitalize banks so they can absorb losses.”

The only action not taken is the only action left that will have any measurable impact on the housing sector – writing down mortgage balances to match property values.

This is immediately, and easily defined as yet another colossal taxpayer bailout.

But that’s simply wrong.

It would actually be the untaken, second step of TARP, after the banks were bailed out, to proactively fix the housing market they were so instrumental in destroying. If it is to be called a “bailout.” it would be an action to help Main Street, not Wall Street.

The salutary effects of a national program to write down mortgage principle would be numerous and reinforcing.

For instance, such action would attack market uncertainty from a number of different angles.

A principal write-down would allow financial institutions to begin lending – for real – as they would finally have cleared their books of unpriced (and mostly unrecoverable) debt. Investors would be more willing to invest in banks, as their financial condition would be clear.

Indeed, creating new, clean mortgages would delink financial institutions from the mess that was created in securitization, restoring clear title to property that would enhance confidence in the housing market in the future.

The write-down would also create a solid floor in the housing market nationally.  Foreclosures would slow as homeowners that are deep underwater would be able to pay fair market value for their homes.  That constancy would allow vacated properties to be rapidly resold into the market, and help Fannie and Freddie reduce their 180,000 home inventory of foreclosed properties.

This, in turn, would have a measurable impact on municipal and state budgets, which rely on property taxes to fund operations. With the erosion of property values effectively halted, government authorities would have the certainty and confidence in planning for schools and other local services.

A floor in the housing sector would set the stage for a come-back in the construction sector, which has lost 2 million jobs in the last four years. In 2007, construction and housing related activities accounted for 13 percent of the nation’s GDP. Regaining that ground would go a long way toward reducing unemployment.

Perhaps most importantly, the write down would significantly boost consumer confidence as real estate again became an appreciating investment.  And in some instances, the principle write down would create disposable income that could be injected to the economy at large.

For all the benefits however, let’s be clear.  A write down would not be painless or cheap. While features such as an “appreciation premium” could be included – a provision that would  provide a capped percentage of home value gains to the originating financial institution when a refinanced home was ultimately sold –  the losses will be big.

But four years into the crisis, with home values continuing to fall and more borrowers underwater or slipping into default, is it better to simply hide the toxic debt in the hopes that at some point in the distant future it will be worth its original value? Or that incrementally strangling homeowners will mitigate the overall damage?

That seven trillion dollars in lost home value represents the collateral the banks are holding on the loans. Do any of the institutions honestly believe that such an enormous loss will be corrected any time soon?  Within the next decade? The next generation?

If you have to take a beating, take it now. The banks have been restored to profitability.  The $245 billion in TARP monies have been paid back to the Treasury.  Now is the time to use a negative event – a write-down – to catalyze economic recovery.

A write down won’t save every borrower.  Some people recklessly borrowed well beyond their means and even a principle write down won’t help. But for the vast middle, it could be a game changing event that will have broad implications for the economy at large.

The pain of a hard hit now will be rewarded with a more rational, reliable and dependable banking sector, which in turn, will support a growing economy.

This is the path forward.  And it is not Republican or Democrat, conservative or liberal.

It is just common sense.

It is time for the GOP presidential candidates to leave dogma at the door and get with the program.





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