Vouchers Against Forclosures?

David Colander has a Trickle Up plan to reduce foreclosures:

Trickle-Up Plan Aims to Stem Foreclosures, Real-time Economics: Now that the easy part — temporarily propping up the banking system — is done, it’s time to start thinking about ... how to save millions of Americans from losing their homes in a way that will be politically acceptable but will also stop the economy from falling into a severe recession.

Sen. John McCain’s plan of a $300 billion dollar bailout is a non-starter. It subsidizes people who made lousy decisions about borrowing ...without giving anything to those who made the better decision to live within their means. Politically, it goes against what Americans are clamoring for — accountability... As was the case with the rescue of the banking system, however, some bailout for distressed homeowners will be needed to prevent continuing economic and social fallout from the housing debacle.

For the U.S. economy even to start to think about recovery, the housing market has to stabilize...

Rather than the McCain proposal ... we should combine a mortgage assistance package that will ease some of the foreclosure pain with the sort of fiscal stimulus package that will be needed to reduce the depth of the coming recession.

The Trickle-Up Plan would ... help keep people in their homes and create demand for housing currently in foreclosure. By doing so, it will help stop the fall in housing prices, and also increase the value of the lowest elements of the mortgage backed securities — precisely what government wants to do.

The Plan works as follows: Instead of giving people a tax cut or rebate as in a standard fiscal stimulus package, the government would distribute to taxpayers mortgage foreclosure vouchers. These vouchers can be used either by homeowners to pay mortgages on homes in severe danger of foreclosure, or to help homebuyers to purchase foreclosed homes.

As with other stimulus packages, these vouchers would be distributed to taxpayers based on their incomes with those with the lowest incomes receiving the largest vouchers and those with incomes of, say, over $200,000 receiving nothing at all. ... The vouchers, however, could only be fully used by homeowners facing foreclosure or interested in buying a house in foreclosure.

For the majority of taxpayers who cannot use them, the vouchers could be sold on a secondary market... [T]hese vouchers would likely sell at a discount, perhaps of about 25%. Since the plan will increase demand for foreclosed housing, it will stop the fall of housing prices, thereby helping to end the housing crises and starting the economy on the road to recovery. ...

Instead of a rescue scheme that relies on the benefits trickling down from Wall Street to Main Street, the benefits of this plan will trickle up from Main Street to Wall Street.

Whatever plan is ultimately implemented to stave off foreclosures, should taxpayers demand a share of any profit (equity) the bailed out homeowner makes if the house is sold later, much like the equity stakes taxpayers will have in banks that are bailed out? Everyone gets something from the voucher program, true, but if the vouchers are purchased at a 25% discount, then the benefits won't be equally distributed, i.e. some taxpayers will pay to bail out others.

So should the people who are subsidizing others in this or some other plan expect something in return if the bailed out homeowner profits later from selling the house? If we do demand a share, would that make some homeowners less likely to sell the house? (E.g. if they make $50,000 on the sale and had $25,000 in vouchers, they could be forced to sacrifice half of the equity, and that might make them less willing to sell, but perhaps this isn't much of a distortion, or not one we should worry about.) 

I'm not so sure we should demand anything, but what is the argument for not asking for a share of any profit? One is that this is a case where people made, for the most part, good ex-ante decisions, it was rational to buy the house given what they knew, what they were told by people they should have been able to trust, and what they believed about the future, but ex-post it was a horrible choice.

Here, homeowners in trouble are mostly victims of things outside their control, they didn't purposefully take a big risk knowing they could just walk away, or anything like that, they thought they were doing the right thing. If so, then I would argue that this is a case where social insurance is appropriate. When large disasters hit people and it is not their fault, we generally bail them out without asking for anything in return (e.g. we all pay unemployment insurance, then some people collect more than others when factors out of their control - a change in tastes, a business cycle downturn, technological change, etc. - causes their job to disappear. When there is a natural disaster that couldn't be predicted, we all pitch in and help.)

So I think whether we ask homeowners to pay something back if they ever do profit from the house depends upon whether we think homeowners as a group are victims of circumstances out of their control, victims of shady practices, etc. - they did nothing wrong in most cases except try to buy a house to live in - or we think that their behavior was a big part of the problem (and actually, even then, I find myself hesitant to say they should have to pay anything back).

What do you think? If a household is given, say, a $25,000 break on a loan to avoid foreclosure (and only paying a quarter of that amount to buy the vouchers), someone has to pay for it. Should we demand anything in return?

Comments

[Augustus:]

About as crazy a plan as I have read.
Someone is supposed to subsidize a borrower living in their McMansion until the value returns to what they paid for it at the peak of the bubble? How very nice to it is to allow them to "keep up appearances." What need to happen is that a whole lot of people get a real bad hickey. Bad enough so that their grandchildren will have enough memories of it to not repeat the same debt explosion.

2008 Oct 17 07:43 AM

[User 143167:]

Why not just print as much money as possible and throw them on the street? In that way, we are all millionares overnight and there will be no foreclosures anymore, because the mortgage you owed to the banks are becoming worthless.

2008 Oct 17 08:10 AM

[John Lounsbury:]

Mark, I think bottom up solutions can be a beneficial part of any recovery. I have a problem with your proposal, though. This problem is moral hazzard. The only way I could agree iis if I accept ignorance as an excuse.

You say: "Here, homeowners in trouble are mostly victims of things outside their control, they didn't purposefully take a big risk knowing they could just walk away, or anything like that, they thought they were doing the right thing."

The people you talk about apparently have their stupidity out of their control? Until one accepts that someone other than the individual is responsible for his own basic finances, I would maintain that all bad decisions should suffer the consequences, whether that individual be a Wall Street executive or a Main Street homeowner.

It is said "ignorance is no excuse in the law." When you propose that many got into house situations over their heads because they didn't know what they were doing is like going to court for a speeding ticket and pleading not guilty because you didn't see the speed limit signs.

If someone was lied to by preditory lending practices (lender deliberately misleading the home buyer), then the lender should be prosecuted and their assets seized and used to compensate the victims. Yes, some public money will be spent in such actions, but the government is not burdened with the entire cost of restitution.

If a borrower lied to get a loan, they should suffer the consequences including being allowed to go through foreclosure without any aid.

If a borrower and lender have operated in good faith and then the borrower loses his job or has an some other unexpected family economic burden (ill health, accident, etc.), a situation may then exist for an arranged work-out.

I'll repeat my belief that some bottom up plans may have a place in stabilizing the housing market. I don't think the plan you are discussing is appropriate.

2008 Oct 17 10:31 AM

[dblko:]

Time for the FORECLOSE NOW plan:

Those that can't pay their mortgage need to be kicked out immediately so that house prices come down to pre-bubble levels quickly.

Nobody needs to end up sleeping on the street, those who are too poor to afford market rents could be helped with a temporarily expanded section 8 program.

With house prices back to a normal level, buyers will come back to the market, problem solved!

2008 Oct 17 10:35 AM

[derryl:]

The mortgage-based tsunami is threatening to deluge not just the purchasers of bubble-priced McMansions but the US financial system itself. This is not the time to cast about looking for who to blame for the failed levees. This is about the survival of the US$ and its viability as a functioning national currency.

The levee that was supposed to prevent moral hazard has already failed. It is too late to "prevent" moral hazard. Moral hazard has been realized: lots of people made bad decisions and if we don't help them now we all go down. Sorry for mixing metaphors but we are up to our butts in alligators and now is not the time to moralize about who failed to drain the swamp. The alligators demand immediate attention and both McCain and the intrepid Mr. Thoma are offering solutions that might actually work.

Emotionally we feel that those who contributed to the problem should be made to pay for it. Rationally we recognize that by forcing them to pay we end up paying too. There are no rules in a knife fight or when you are battling alligators. The only rule is "whatever works".

The rational solution to this crisis is not ideological or moral. It is pragmatic. It is whatever works. It's not the time to be small minded and frantically cling to "normal" principles. Do you want to fix the problem and move forward? Or do you want to focus backward on blame and be crushed by the tsunami?

In addition to the mortgage-based financial troubles the US has serious consumer debt and foreign debt/balance of trade problems. There will be plenty of pain to go around as these problems are addressed and the American standard of living declines. There is no "us" and "them" in this scenario. There is only "us". If there ever was a time for American solidarity it is now.

2008 Oct 17 11:07 AM

[Fabien Hug:]

1) There is no possible way to bail out bad decision makers without penalizing those who stood within their means.
2) Why do you absolutely want to avoid a recession? What is the problem with that? Do all American have a birthright to an SUV, flat screen TV and what else? And all this at the expense of the public.
3) If there is another stimulus package why should only those irrational home buyers profit of it?
4) Do not bail out homeowners because there is another category that will soon come out of the woods; the savers. A lot of savers are currently losing cash above former FDIC limits, 401 Ks are down the drain with private taxed securities accounts. This a latent drama. These people are not losing something they never owned (like subprime borrowers) but something they worked hard for. Their decisions were also rational on a ex ante basis given the propaganda surrounding the stock markets. If these people withdraw from the markets they'll never come back.

2008 Oct 17 11:22 AM

[Matt Blackman:]

Why not just nationalize home ownership and become a socialist state? We seem to be heading that way anyway and ideas like Thoma's clearly take us further in that direction.

Sure, everyone who bought a home in a rapidly rising market, mortgaged themselves to the hilt and are now seeing home values fall bear no responsibility for making a bad decision. I call it victim economics. Let's blame someone else for our financial woes. We are idiots and unable to make wise financial decisions on our own or take responsibility for those decisions. This approach is a pathetic indictment of where we have come. It does not bode well for our financial future as a nation.

2008 Oct 17 12:22 PM

[sumosama:]

you are assuming that folks WANT to keep their houses. many are walking away even though they can afford the payments...they just don't want to be upside down or are hoping for their own bailout.

2008 Oct 17 12:54 PM

[OldLimey:]

Fabian: dead right. Applies equally to the UK.

2008 Oct 17 02:11 PM

[Tom Lindmark:]

Fabian, well said.

Like every other plan to bailout homeowners this one lapses into picking winners and losers. The winners are those that made bad decisions either knowingly or unknowingly and the losers are the vast majority of taxpayers. Another group of losers are the future homebuyers that would benefit from lower priced homes. Just let the foreclosures wash through and buyers will emerge to pick up the empty houses.

2008 Oct 17 04:08 PM

[xBkr:]

what if half the defaults are the results of fraud (income, occupancy, value, 3rd party deals etc) and rather than free money like the tech stox or an ATM to cash out every year, that we should teach Americans that home-ownership is a responsibility and a liability. BTW those are the facts. That when you're handed a 1/4 or 1/5 a million dollars, you may want to figure out how you can repay it, even if the lenders don't 'document' everything. Maybe if people who stole the banks money, pretending now to be victims, woud JUST REPAY WHAT YOU TOOK/STOLE! throw the bums out, let them live within their means!

2008 Oct 17 04:26 PM

[CLH:]

We are all victims of our stupidity at some time. However, only the poorest (laziest?) should be helped? Rediculous!! If a person makes a mistake, he and he alone must live with it. Rich or poor it doesnt matter.

2008 Oct 17 06:36 PM

[ariesl:]

Obviously none of you live in South Florida or other real estate markets that ran up so much and then collapsed.
I do! I personnal know many good people who moved here late in the cycle a had to buy a house. Now they are unpside down in their payments through no fault of their own.
They are not crooks!
They did not try to cheat any banks!
Home prices here are down 60% to 80%.
If you need to move to another state because of work, you're screwed because you must sell your home into a market flooded with foreclosed homes being dumped by the banks for huge discounts.
These people usually kept trying to make the payments until their finances were totally destroyed.
They are victims as much as the people who happened to have made the irresponsible decision to live in the path of a hurricane, a flood, a tornado or worked in the twin towers on 9/11/01.
They are victims of believing in the American Dream of home ownership as the most basic investment we all make and you that must hold onto your home at all costs.
I pray that you smug self-righteous %*#holes that want to throw these ordinary hard working ,tax paying people out on the street, will someday have the misfortune I've suffered. I worked for 32 years at poor pay teaching the children of people like you. Hell, I'm old enough that I may have taught you too, you ungrateful sobs.

The obvious solution is to set guide lines for distinguishing between the decent people and the deadbeats. Then help the decent people only.

If the foreclosures slow down, the real estate market could absorb the current glut over the next year or so. The reduction in cheap supply would allow home values to first, stop going down, then gradually recover. No one expects prices to recover to the boom days for another 15 0r 20 years (due to normal inflation and population growth).
I live in a house that we bought 3 years before the peak in prices. Because of the pendulum effect of price swings and the severity of this problem. We are upside down over $100,000. I'm retired and have no way to recover from this financial disaster. My IRA is destroyed. I live off credit cards and my wife's income. We are facing bankruptcy! I don't care if you have no sympathy for me and millions of others like me.
BUT I AM FURIOUS THAT YOU TRY TO LUMP ALL OF US THE MINORITY OF PEOPLE WHO TRIED TO "WORK" THE SYSTEM.

The CROOKS are at JP MORGAN AND THE LIKE!
They invented the CDOs (consolidated credit obligations) and CDFs (credit default swaps) that have become illiquid BECAUSE NO ONE KNOWS WHAT MORTGAGES ARE IN THEM OR WHAT THEY ARE WORTH!
This financial problem we are in is the fault of the greedy bas#%@ds on Wall Street in the monstrous investment banks.
The amounts of money that all the individual little fools and some crooks who took out mortgages base the absurd hope that prices and their incomes wolud go up forever, could hardly have made a dent in an economy as large as ours, let alone the world's.
Moreover, since real estate values are the underlying assets backing the CDOs, rising real estate values would make the banks holding the CDOs more solvent . Also, since our government will be buying these CDOs on the cheap, all tax payers would eventually come out ahead.
It's called an investment. So even you unsympathetic, self-righteous right wing conservatives should be able to see that.
It will be interesting to read your responses!

PS You can't call me any worse names than I called you, or you really are those names.

2008 Oct 20 09:25 AM

[PokerDonkey:]

ariesl,

If it's too expensive to buy a place to live, RENT! No one had to buy a house. That's the advice I gave to a friend who moved there in 2006. Sure he still paid through the nose for a couple years, but he's not hung with underwater mortgage now.

2008 Oct 28 05:41 PM