freakonomics.blogs.nytimes.com/2008/10/07/martin-feldstein-on-the-financial-crisis
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proposes that the government provide low-interest loans to consumers in return for mortgage debt. These government loans would not be secured by the borrower's home. The loan would need to be paid back even if the home goes into foreclosure and would not be eligible for relief in bankruptcy. The idea behind Feldstein's plan is that falling housing prices are at the root of the financial crisis. As home prices fall, homeowners end up with mortgages that are larger than the values of their homes, making it financially beneficial for the homeowner to simply walk away. These foreclosures put even more downward pressure on housing prices, exacerbating the problem. Feldstein's plan would help to reduce the loan-to-value ratio of existing mortgages, and thus lessen the incentive to default. I have to say, though, that there is one thing about it which really troubles me. The goal of the Feldstein plan is to keep housing prices high. In general, economists are strongly against government interventions in markets designed to affect prices -- whether it's central banks trying to defend currencies, or wage and price controls like those Nixon instituted. An important question to ask is: if there was a house-price bubble (which it sure seems like there was), would it just be better to quickly get house prices back into equilibrium and take our lumps, or should we try to forestall prices getting back to where they should be? My instinct is that it is best to take our lumps as quickly as possible. People who own houses are a lot poorer than they thought they were at the peak of the housing bubble. My gut feeling is that the sooner folks accept this and make decisions going forward that recognize this, the better. If the mortgage-backed securities are worthless, then they are worthless. the people who sold them to the people who now own them made a lot of money. We sort out who is bankrupt and who isn't, deal with those who are bankrupt, and then get on with things. Feldstein's response, no doubt, would be that we are going to get caught in a reverse price bubble -- where buyers stay out of the market in anticipation of future house-price depreciation -- which would make falling housing prices a self-fulfilling prophecy.
idea being, the govt loan adjusts the price of the home to market. The current Market amount is brought into a 30 year fixed. This allows the consumer to do what ever is necessary with the property in question. But the owner is able to enjoy appreciation on the home, (based on new market value) any appreciation goes to the got loan first. it doesn't add money to the economy, but it stabilizes those with ludicrous amounts of home debt. and the Govt, if administered correctly) could turn a nice profit as well. I am sure there need to be some type of capital gain/loss, amendment too..
I also find it difficult to believe that an extra $250 a month - at most, according to Feldstein - would be the difference defaulting and not defaulting, except at the margins.
That will help stabalize the bottom at 20% decline from the peak, allow people to stay in their houses, and spread the "hurt" around to the primary players in this mess. Since this would be a refinance, the currently "bad" first mortgage would be made "good" as the bank would get all of their money back to spread out among the MBS owners.
Even if the house is worth less than they owe on it, the owner will keep the house. The key metric for walking away is not how much you owe on the house, but whether or not you can afford the payments. Most people routinely owe more on their car loan than the vehicle is worth.
In my conversations with homeowners, they're reluctant to even list their homes, because they're afraid they won't get much for them... while on the other side, myself and many of my friends who rent, refuse to buy, because we feel the price of homes are still too high, and thus, stay on the sidelines. Well I'm especially opposed to trying to do so in the largest purchase of my life.
I'm 24 and if I could buy a house in eastern MA for $100,000 I would but things aren't going to fall far enough for me to get in the market. I know a fair number of people with somewhat higher incomes who will get into the market once things fall to historic norms because that is actually how much people can afford to pay. So please let house prices keep falling, my generation is waiting!
If price controls are ever a good idea, they have to be implemented in relation to the asset's intrinsic value. Maybe in the future we can have a commission that roughly assesses the "real" value of homes, and tries to remove some of the punch when things start to race above that level. This would be easier in the stock market, where real values are easier to calculate. We know businesses are worth what we can reasonably estimate their future cash flows to be, so if the broad indices trade for 150% that amount, we can make margin trading more expensive.
He has provided much of the academic underpinnings of this crisis and also served as a board member of AIG through accounting restatements and its eventual failure, even serving as Chairman of AIG Financial Products, the division that brought down the company.
My instinct is that it is best to take our lumps as quickly as possible." It is amazing how many people are arguing the opposite and want the powers that be to do everything to keep those home prices high. What this economy needs is a housing correction - and fast! I hope Feldman's plan includes low-rate loans for the middle class - the group of people who are stuck in the middle of all this.
Why would a homeowner who's underwater on his non-recourse mortgage want to make part of that mortgage collectible after the fact? If, as the article claims, there is a financial incentive to just walk away and let the bank foreclose, providing cheap money from the government (that *has* to be repaid) shouldn't change that incentive much. I guess the ones who are dumb enough to agree to it in the first place will have an incentive to stay in their homes afterward, but that doesn't seem like a great economic strategy to me.
When I bought my first home in the UK in the 1990s, the annual rental return for a similar property was about 12%. When I left Australia last year, it was impossible to buy a home in any state capital there with a rental yield in excess of the cost of borrowing money - in some cases the rental return net of property taxes, maintenance costs etc. was close to zero, not even considering the cost of finance. Addressing the broader point & agreeing with the author, clearly the price of property throughout the western world is vastly above any intrinsic value - why should governments intervene to prop up an over-inflated market (in anything)? Anybody who didn't use their house as an ATM for the last few years, or didn't buy a whole bunch of houses to flip based on the "greater fool" theory, shouldn't be too badly affected by reducing house prices (apart from the few who had to buy at the top of the market, including myself). History suggests that government intervention to prop up over-inflated prices is unlikely to succeed.
Housing prices should be market driven and if the capital isn't there to purchase a home on credit home owners will have to lower their prices to attract buyers. There should be some way to determine what the "ideal" amount of residential capital should be in the market place on a per capita basis. The fed can then add or subtract to keep this number at its expected level, which may stabilize price fluctuations over the long run.
They will be swapping part of their mortgage for the same level debt - which contains full recourse and exclusion from bankruptcy. Someone that still ends up in foreclosure could be in debt to the government for decades afterwards. This plan would probably be most appealing to homeowners who would still have postive equity after another 15% -...
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