Food For Thought
There has been no shortage of opinions about what the U.S. needs to do to pull its economy out of the fire it’s in right now. And the government’s response to this crisis has been surprisingly—if often alarmingly—freewheeling, as if it is willing to try just about anything that might work. The following are ideas (some fanciful) that might actually benefit home builders and their customers.
Barry Zigas, director of housing policy for the Consumer Federation of America, thinks that giving judges the authority to modify loans—which was pulled from the federal bailout at the last minute—should be reinstated, in part because he believes that adjudicating modifications would remove two major obstacles: the threat that investors will sue if the terms of the mortgage are altered to their detriment, and the problem of trying to unravel a mortgage that’s been securitized and resold.
Bert Ely, a Virginia-based economist, thinks the premise of mortgage securitization itself “has it backwards.” He advocates a more efficient system that would move large amounts of capital directly to originators. Like several other sources, Ely also favors covered bonds as an investment instrument because their risk remains on lenders’ books and must be backed by a solid mortgage.
Scott Polakoff of the Office of Thrift Supervision (OTS) thinks a solution to keeping more homes out of foreclosure could be a negative equity certificate, which OTS proposed about a year ago. Loans that have been securitized would be modified to the point where the borrowers can actually pay them. But the lowered principal would not be forgiven, and a portion of a resale would go back to the lender. Polakoff says the problem with FHA’s version of this is that it splits the proceeds of a resale with the agency, not the servicers “that [consequently] need to be motivated to participate.”
The International Monetary Fund identifies real estate in Australia as being among the world’s priciest, and that country’s housing market is certainly bubbly. But homeowners there are a lot less likely to walk away from underwater mortgages because loans in that country are full recourse, meaning that if borrowers default and their property value doesn’t cover the debt, they are on the hook for the shortfall and the laws favor lenders that go after them. Consequently, Australians are more careful borrowers than Americans.
Peter Cramton and Larry Ausubel, two economics professors at the University of Maryland, have a solution to get toxic mortgages off of the books of financial institutions: a “reverse auction,” with one buyer (the federal government) and many sellers (the lenders). Each seller would offer a “bid” price that would generally reflect how badly they want to sell. The government would have to figure out which price to accept that protects taxpayers’ interests but isn’t so low that it breaks the banks. Plus, there are literally thousands of types of mortgage-based securities. But Cramton and Ausubel think such an auction could be an efficient way to set the prices for these troubled assets and transact their sale.
The federal government for decades has paid farmers not to grow crops to control supply, demand, and prices. Why not subsidize builders temporarily when the supply of unsold homes exceeds 10 months? Most experts, of course, would say such a plan would be impractical and wildly expensive: Even at November’s paltry annualized rate of 625,000 housing starts, if all those new homes sold at the median price of $218,000, the industry’s revenue would equal $136 billion. But if builders curtailed that production to, say, one-tenth of current levels for two or three years to flush out the overhang and foreclosures, how much would they need to stay in business and keep some employees working?