On Saturday, New York Times Op-Ed columnist Joe Nocera added his voice to the growing chorus of those who believe that reducing the principal of underwater mortgages is the key to any rebound in real estate. Nocera acknowledges that this approach seems unfair to those who were more restrained in their borrowing, and would tend to reward those who made risky decisions. For those reasons, it's an intellectual challenge to acknowledge the benefits of this approach.
In the several years since the real estate bubble burst, many approaches to stabilizing real estate have been tried, but strategies that simply restructuring mortgages that are underwater or reducing their interest rates have repeatedly proven to be completely ineffective. With so much of our economy so closely tied to housing, its unlikely that any broad recovery can occur until real estate begins to rebound. Without some drastic measures, that will take many years.
Monday, November 07, 2011
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4 comments:
Why???
Would all those greedy people give the bank a percentage of their profit if they made a killing when selling....I think not!!!!
Bad.....Bad....Bad
So what do you propose? Just allow the real estate market to stagnate for the next decade? Reducing principal is a poor choice, but it's less bad than the alternatives.
Here's an idea. Rather than just give money away to homeowners/ banks to reduce principal how about taking that money and creating a program akin to PMI only it will not cost the homeowner anything. The government guarantees the bank on the amount that the homeowner is under water plus 20%. The homeowner refiances at todays low rate but with a longer term say 35-40 years. The bank that has the current mortgage gets paid off. The homeowner gets relief in the form of a lower interest rate/monthly payment although at a longer term, but a least they get to keep their house. Of course a certain percentage of these loans will fail and the government will cover the difference from the fund created so the new bank will not take a loss. Its better than just giving the money away.
Perhaps the correction would have run its course now if the government didn't keep impeding it with efforts to "help". Don't you think prices would have fallen faster and at least be closer to their correct level by now if we didn't have that homebuyer tax credit bribe that kept growing bigger and bigger each year it was renewed? (Thankfully it is gone now.) Don't you think we might be closer to sustainable lending practices if we didn't have the government via The FHA still handing out loans for trivial amounts down? Don't you think prices would have reached their correct level much, must faster if the government didn't keep bailing out Fannie and Freddie and stopped socializing losses on all lenders' privated profits? The government efforts do help alright, it's just that they only help lenders. If you think we need to try something drastic, how about giving the market a chance to work for a change rather than throwing more good money after bad? How about getting the governemnt entirely out of the mortgage market? How about ditching the mortgage interest tax deduction (which is mainly welfare for the rich anyway)? If they rented, people would have better job mobility and they would have less financial risk than leveraging up in an expensive area like Boston - the government subsidies for owning do them a disservice, do taxpayers a disservice, and drag out the correction that you're looking for.
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