A Step in the Right Direction

I don’t have a lot to add to Simon’s article about the housing plan in The New Republic – as you might imagine, we did talk about it – but I do want to take issue with the title, “Insufficient Boldness.” One quirk about writing for other publications is that you usually (not always) have complete control over the body of the article, but no control of the title (and often you don’t know what the title will be  until you see it printed).

I agree that the main concern is that the plan does not go far enough. This is because the main proposal for struggling homeowners is to provide cash incentives to lenders. It is impossible for the policy wonks in Washington to predict just how many mortgages will be modified with the bonuses offered. If they are acting rationally (I know, a big if), the lenders have already done a calculation on every delinquent mortgage they hold, and they have already decided not to modify the vast majority of them. So the question is, will a few thousand more dollars (note that this is more than was initially proposed by Sheila Bair) tip the equation toward modification? And in how many cases? (There is one scenario under which this could unblock the modification process: perhaps the lenders have been holding out on modifications so as not to lose out on the government bonuses, and now that they know what the bonuses are they will start making modifications. But there’s no good way to predict the size of this effect.)

So I think that the Obama team has to be ready to sweeten the pot later – or take other, more aggressive measures – if this plan does not have the desired effect. Of course, if they were going to do that, they wouldn’t announce it now (because you don’t want lenders just to hold out for the next round of larger bonuses). So maybe that is the plan.

But on balance I think most of what is in the plan is helpful. If only it had come, say, twelve months ago.

18 responses to “A Step in the Right Direction

  1. Sadly, I think the article will get burried in an avalanche of media backlash about Shrillness – and I think Glenn Greenwald is right.

  2. As I said in Simon’s blog post: why are we insistent on keeping housing above it’s long run sustainable price of approximately 3x incomes? Are we committed to doing so in perpetuity?

    Why would a renter buy a house now, with interest rates at historic lows and government incentives at historic highs, knowing full well that he or she will be selling into an environment where interest rates will almost certainly be higher and government programs almost certainly reduced, thereby reducing the (historically mediocre) appreciation of their house?

    Cheers,
    Carson

  3. Carson,
    Good point on the last comment. It is a god time to be a renter. I would answer that the housing market will eventually change and values will eventually increase.

  4. Karl Denninger is less impressed or hopeful:

    http://market-ticker.denninger.net/archives/806-Foreclosure-Prevention-BS!-More-Fraud-Coverup!.html
    Foreclosure Prevention? BS! More Fraud Coverup!

  5. No, I think the incentives are enough — given that the President has also said that he, and the Treasury Department, will condition receipt of any additional bank bailout money on enrollment in this “voluntary” program. That’s a pretty impressive definition of “voluntary.”

  6. Some of the concern that persons may have about the Obama housing proposal to assist mortgagees and banks is about social equity–we are paying someone else’s mortgage.
    So, how about this proposal to help pay for this program. Debtors who are assisted in this program do not receive capital gains treatment when they later sell the house. A gain would be taxed at ordinary income. This way, the debtor would be paying back to other taxpayers money those taxpayers, in effect, used to aid the debtor taxpayer. (This could be refined further by making the tax change be matched by the amount of the assistance–ie, if the aid was worth $10k, the gain later was $50k, then $10k (plus interest) taxed at ordinary income and the remainder taxed at capital gains rate).

  7. If syndication makes it impossible to write-down enough mortgages directly then why is it possible to provide cash incentives to creditors? If they can’t be found when you want to impose a reduction why can you suddenly find them when you want to give them money? The arguments consistently come back to giving money to banks. What is the argument against giving money to debtors? Feldstein suggests loaning distressed debtors 20% of the value of their mortgages saying that the ultimate impact on national debt would be 0 because the value of the property would secure the loans – but they wouldn’t be mortgages! Give the debtors 20%. Let them do with it as they wish – take a direct hit to the national debt. It’ll be less than giving the banks 200% of national debt and then facing a revolution.

  8. (I posted this on the New Republic site, but I’d also like to post it here. I really hope you address this issue, its addressed by Carson Gross in the comments, and Barry Ritholz has been banging this drum too.)

    I generally agree with Simon, but I have to take issue with this. Why is there this emphasis on the government stopping the decline in housing prices? They are still way to high relative to personal income, or rental value. Housing needs to decline at least another 15%, or spend the next 10 years going sideways for it to be considered affordable. Isn’t that the point of markets? To find the point where buyers and sellers can meet? All you are doing by trying to artificially install a price floor is insuring that you lock new buyers out and keep the market frozen.

    I’ll use myself as an example. I’m 32, I make about 1.5 median income for my area, where real estate prices have more than doubled in my working life time (since 1998) and have only declined 10%. Between student loans, and the high cost of living here I’ve never been able to save enough for a down payment. I never believed it made sense to buy a house on 100% credit with a payment that was 40% of my take home. Where is my bailout? Why am I being punished for not taking out a mortgage I couldn’t afford 3 years ago?

  9. I completely agree. Its not enough. From Simon’s TNR article.. <>. I think leaving this choice up to the lender is not wise–we’ve got some carrot…and we need some stick too. The mechanism by which this theoretically could increase liquidity and reduce mortgage rates is a stretch.

    I can see how it took Japan 10 years to get it ‘right’ (or sort of right). We need to be doing more.

  10. Attempts to support housing are a waste of money. We need the resources for fiscal stimulus. It is more important to keep people employed than to subsidize homeowners. The effects of stimulus spending on GDP are greater than the effect of the home subsidies.

  11. The sooner home prices get in line with income and rent, the better. The simplest way to actuate this would be to make a rule that grants mortgage borrowers a right to rent at fair market prices instead of staying underwater or being foreclosed and evicted. This simple rule might be enough to nudge banks to modify mortgage loans. And it requires no extra government money. Too simple?

  12. can see how it took Japan 10 years to get it ‘right’

    The only reason Japan got it sort of right is because we went on an insanely leveraged debt binge, buying their exports. Look at their GDP right now. Yes, they managed to stave off a Great Depression. Instead they got a lost decade and a half, and then a Great Depression.

    Some achievement.

    The Austrians deserve a lot more attention than they are getting from the DC/NY crowd. I can see why they aren’t, however, since they keep saying the DC/NY crowd *is* the problem.

    Cheers,
    Carson

  13. Forget banks. It’s a demand crisis now. Forget plugging holes in the dike. It’s gone way beyond that. The collapse is global and accelerating, not decelerating.

    Forget Japan’s 10 years and their banks. Like every general, you are fighting the last battle. There are no growing export markets. This is not some 20 billion dollar IMF intervention.

    These programs take time, take bargaining, take administrative capacity. They might have worked last year.

    The only solution now is print money and spend it fast. Stop buying T-bills on the open market. The Fed needs to buy them. And though I agree with almost all the programs in Obama’s bill, it’s too slow. Tax rebates are faster.

    There needs to be a massive global shock to the system, and that means a monetary expansion driven by the Fed, not by hoped-for US domestic bank lending to rapidly diminishing ranks of creditworty borrowers.

    Without monetary expansion, the crushing debt burden will destroy more and more homeowners, and then will destroy the US government and the US taxpayer.

    Whoever is advising Obama needs to get this through their heads. His programs have been too smart by half and too light by a pound. The daily wealth destruction is moving far faster than he can build government agencies and craft intricate plans.

    If Larry Summers and Tim Geithner and Austin Goolsbee would just try to be a little dumber, we might actually make some progress.

    KISS – Keep It Simple Stupid

  14. @ Statsguy:

    Funny, but you aren’t the only one who thinks this is a demand problem now . . . .

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  16. Bill Schneider

    I agree with what “Bill” posted on Feb 19th.
    “So, how about this proposal to help pay for this program. Debtors who are assisted in this program do not receive capital gains treatment when they later sell the house. A gain would be taxed at ordinary income. This way, the debtor would be paying back to other taxpayers money those taxpayers, in effect, used to aid the debtor taxpayer. (This could be refined further by making the tax change be matched by the amount of the assistance–ie, if the aid was worth $10k, the gain later was $50k, then $10k (plus interest) taxed at ordinary income and the remainder taxed at capital gains rate).”

    However, I proposed awhile ago that this plan NOT be voluntary for the affected banks. ALL mortgages on owner occupied homes that are over three payments delinquent should be bought by the government at PAR. The loans would be restructured so that homeowners could keep their homes and not become a blight to their neighbors.

    The government should take back warrants to purchase stock of the banks benefiting from removal of these “toxic” assets. That way, when the banks start to make SOUND loans once again and return to profitability the government could exercise the warrants and recoup any loss or expense suffered in the restructure of the loans to keep people in their homes (worked for Chrysler).

  17. Seconding StatsGuy @ 20 Feb 09 at 12:39 pm

    The Executive is running on hope, and it’s not likely that will cover the crash in the money supply that deleveraging of the derivitaves market is precipitating.

    The Executive appears to believe that deleveraging can be slowed or even stopped by fixing the mortgage and foreclosure crisis. Not likely even now, and when commercial real estate and jumbo loans hit the fan this fall there is not a snowball’s chance in Hades.

    Moving “hard to value assets” (toxic) derivitaves onto the federal balance sheet and relieving the institutions which created and marketed them responsibility free while the taxpayer holds the bill and responsibility for cleaning them up is a recipe for revolution – or at least social unrest and political disaster. Especially as it becomes more publicly understood how much of the problem with these instruments originates in the fraud which was involved in their creation (and their transfer to the taxpayers account?).

    The institutions holding these assets are either insolvent, or fear they will be found insolvent as these derivitaves melt down under the pressure of fraud prosecutions. To protect their stockholders and bond holders they will not lend much, nor at reasonable rates. The public will not borrow under the terms they offer.

    This system will not self correct. As StatsGuy says, “Forget banks. It’s a demand crisis now. Forget plugging holes in the dike. It’s gone way beyond that. ”

    and

    “The only solution now is print money and spend it fast. Stop buying T-bills on the open market. The Fed needs to buy them. . . .

    “There needs to be a massive global shock to the system, and that means a monetary expansion driven by the Fed, not by hoped-for US domestic bank lending to rapidly diminishing ranks of creditworty borrowers.

    “Without monetary expansion, the crushing debt burden will destroy more and more homeowners, and then will destroy the US government and the US taxpayer.”

    I think he’s nailed it.

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