In recent months, we have seen wave after wave of attempted solutions and bailouts to put a floor under collapsing housing prices with the only result so far being credit contraction and consumer strikes. In every case, the approaches have been focused on providing help (benefits) to those whose actions have contributed to the mess, whether through ignorance, greed or just plain going zig when they should have gone zag.
The problem with this focus is that it rewards bad economic decisions and in some cases even actively encourages those who are on the cusp of financial difficulty but who might be able to tough it out to actually realize that it is in their narrow personal interest to go ahead and stop paying the mortgage since that is what will qualify them for the reward of a mortgage bailout. Following this path will vastly increase government deficits, and at best just slow down house price deflation, while further decreasing the value of already horribly distressed financial assets at the banks, further eroding credit availability...resulting in the liquidity trap that everyone everywhere is trying to stop.
What is everyone missing?
What about supporting and even growing the economy, personal consumption, AND put a floor under housing prices?
How? Reward the 93% of the US population who have been prudent and still have (rapidly disappearing) equity in their houses, have good jobs, have low debts and savings.
Why reward them? Because it is in everyone's interest to do so because they are the smart and prudent workhorses of our society and they will stay smart and do the right things if we encourage it.
How? Use the full faith and credit of the United States to allow such persons *before the end of this year* to refinance their mortgage rate to the same rate as the 30 year treasury - ie 4.17%.
On a 500,000 mortgage, this would save each household $7,200 annually in house payments compared to current mortgage rates. No tax credit needed, no hocus pocus, no bailouts, no rebates. This kind of thing has been done before, notably during the return of soldiers from WWII.
In that time, you could get a below market loan from the govt and it generated a sustainable housing boom, brought the US out of a major post war recession, and started perhaps the longest boom in the history of the world and made the middle class the most solid group of taxpayers and producers the world has ever seen...and it was seen as a justifiable REWARD to the greatest generation. Now, let's save ourselves by rewarding THIS generations best and brightest families and breadwinners.
Ominously, some of these prudent financial actors took out 5 or 7 year ARMS, and by resetting the mortgages to 30 year mortgages, we can avoid the onrushing domino of truly horrifically massive mortgage resets that will happen in 2009 thru 2013 which if not prevented will doom the whole world to financial and other forms of darkness.
How would it work? The Treasury would instruct both Fannie (FNM) and Freddie (FRE) to make available to solvent, verifiably job holding, credit worthy (min 725 FICO score) current and potential new homeowners for only their principal residence a 30 year mortgage at the 30 year treasury rate plus 1/4 point. This would take off the table the ARM mortgage resets disaster waiting in 2009 -13, it would meaningfully reduce house payments for literally millions of financially savvy households, making such money available to purchase new consumer items such as automobiles, which such individuals would be more inclined to spend because their breakeven nut has been reduced, and their cash flow has been improved. An improvement in the idea might be to actually allow citizens to further buy down their interest rate to even as low as 2 or 3% so that these economically mature and wise households could provide even further tax producing and gdp growing economic activity resulting in JOBS.
But what about the banks? Isn't it the business of banks to lend money to this market? Yes. Are they doing it? No. They've just been scared within an inch of their lives, and instead of serving the economy by making prudent loans, they are stockpiling cash in truly obscene amounts or buying other banks. What are they doing with the new capital they've received? The are BUYING TREASURY BILLS rather than making loans with the money as intended. This is the monetary equivalent of a dog chasing its tail. So, if the banks won't provide the loans, someone must...and RIGHT NOW. Policymakers are pushing on a string - and the string is glued to the table - so that logjam must be broken up. And after all, the banks will make good money servicing these loans, and will realize pdq that they had better start using that bailout money because their mortgage market has temporarily gone missing, and they therefore MUST aggressively look to make loans for good risks in other markets such as supporting small businesses, new ventures and other loans.
So, let's reward the prudent homeowner, and let them reward us and everyone else at the same time, instead of potentially throwing good money after bad bailouts and embedding eternal moral hazard into the system where smart people decide that the only way to protect themselves financially is to become deadbeats too.
We have about three months left to do this...otherwise even the prudent will not have enough equity left in their houses... it will be too late.
