My Three Point Plan to Improve Housing: Modification Is Not Enough

In 1968, Paul Ehrlich wrote "The Population Bomb," a narrative predicting dire consequences to the world from uncontrolled population growth.

I had the opportunity to hear him speak in 1971 at the University of Wisconsin. In his stock speech, he hid humor and wisdom in the phrase, "Never use a condom alone." Most of the audience chuckled at the obvious duality of the comment. Beyond chuckles, the point was that "multiple options" worked better than a single course of action.

So, what has this to do with the current mortgage and housing crisis? Well, if Mr. Ehrlich were an expert economist on housing, working today, he would say, "Never modify alone."

Many pre-eminent economists, and others, have proffered their solutions to the current problem. We have heard about: short term, lower rates; shared appreciated; bankruptcy cram-downs; and, others. We have the FDIC's "Mod-in-a-Box." All focused on the modification concept.

However, after the lofty modification efforts were implemented, then came the inevitable early returns, and they were not pretty: too little modification work completed; too many re-defaults; and, housing and the economy are still in a state of disarray.

Nothing has worked thus far because there never was a complete "Plan." Modification, by itself, was never enough. Perhaps I am somewhat to blame. My sin was that I did not divulge my complete vision at once. I held back the "genetic key"...the magic ingredient... YOU CANNOT USE MODIFICATION ALONE!

My "Plan to Repair Housing" was never a simple modification plan. It was always a three-part, coordinated effort to resuscitate housing and the broader economy. Anything less is juvenile and inadequate.

1. Modification. A fixed rate, graduated payment plan. Interest rate set above the current market to reduce "moral hazard". Offered to all homeowners with mortgages, delinquent or not, to reduce "moral hazard."
2. Responsible REO disposition. Banks and servicers, many who have received taxpayer support for their balance sheets must allow housing prices to be determined by individual sellers and buyers. This special class of sellers should be required to price their REO inventory at, or above, the mid-point of the market. No "moral hazard" allowed here … these sellers must be forced to maximize price and to minimize their losses.
3. Lenders return to their basic business...they must lend. The GSE's must return to the market with financing more applicable the general population. Economic redlining must not be the norm. It was not the loan programs that caused the problem … it was the excessive leveraging of income that created the current mess. There are ways to effectively and prudently return to better lending practices and to provide the necessary support for the marketplace to function.

Why have so many with so much (ability) missed the real solution? Truly, they are too far removed from Main Street, from the problem, and they lack the proper sensibility.

To be successful, and this is key, any plan needs universal acceptance (by all lender/servicers), all aspects need to be implemented simultaneously, the relief needs to available to all homeowners who want help, and it must be completed quickly.

Now, I have spilled the all the beans, so to speak (or, did I?). It's time to get serious and to get it right.

And, as Paul Ehrlch would have said, "Never modify alone."

Disclosure: no positions.

Comments

[Smalltownba...:]

I think you and Ehrich enjoyed the 70's a little too much.

Jan 07 08:25 AM

[D. McHattie:]

Here's my 1 point plan to improve housing:

1) Let prices fall

House and condo prices remain high, relative to their historic relationships to incomes and rents. Prices are unaffordable to the poor and middle class and most would still be better off renting and saving their money.

The more people spend on housing, the less they have to spend on everything else. In this context, 'everything else' is the US economy. Anyone smart will default on their mortgage and move into a less expensive (and equivalent quality) rental house or condo (of which there are plenty) and enjoy a higher standard of living on day 1. Moving to a rental and saving a portion of their income will also place these people into a more stable financial condition than continuing to throw their money away on interest, taxes, insurance, maintenance on a house whose fundamental value is continuing to decline.

Jan 07 08:39 AM

[nobull:]

I vote for that.
Enough of this nonsense. Let prices correct. Plenty of buyers will step in.


On Jan 07 08:39 AM D. McHattie wrote:

> Here's my 1 point plan to improve housing:
>
> 1) Let prices fall
>
> House and condo prices remain high, relative to their historic relationships
> to incomes and rents. Prices are unaffordable to the poor and middle
> class and most would still be better off renting and saving their
> money.
>
> The more people spend on housing, the less they have to spend on
> everything else. In this context, 'everything else' is the US economy.
> Anyone smart will default on their mortgage and move into a less
> expensive (and equivalent quality) rental house or condo (of which
> there are plenty) and enjoy a higher standard of living on day 1.
> Moving to a rental and saving a portion of their income will also
> place these people into a more stable financial condition than continuing
> to throw their money away on interest, taxes, insurance, maintenance
> on a house whose fundamental value is continuing to decline.

Jan 07 09:52 AM

[John Lounsbury:]

It is fundamental that housing prices match income levels. My analysis (article coming) is that housing has anywhere from 15% to possibly 30% further to fall to match hisorical relationships between incomes and house prices.

This fundamental fact will not keep government from trying to cushion the adjustment and millions of overextended and under water mortgagess from defaulting. At best, government action will have a marginal benefit. At the worst, government action will keep a bubble partially inflated and sucker in more victims.

Government stimulus should be directed toward creating broader economic activity. In this way, average income levels should rise. A 10% rise in average income would translate to an increase of about the same amount in the affordable house price. In my opinion, this is a better way to stabilize house prices than trying to support unaffordable levels.

nobull, D. McHattie - - -

I feel you have the basic idea, but couldn't resist adding my views.

Jan 07 01:35 PM

[John Preston:]

As the economy burns to the ground...and it is burning, we should be wary of wanting to push housing down.

Everyone seems to think that housing is somehow an independent segment of the economy....

Wealth effect studies, one by Robert Shiller and one by Raphael Bostic, Stuart Gabriel and Gary Painter, link housing optimism more directly to consumption in the general economy......

They correlate consumer spending to the "feel good" effect of housing optimism....roughly, a 10% change in housing wealth equates to a 1% change in spending....

Figures are bearing this out....If you believe in the Case-Shiller Index (I do not), then the 30-35% total decline in housing values correlates to the 3.25% (I forget the exact number) decline in consumer spending....and I am sure that this will correlate to jobs....

So, when housing gets beat down, ultimately, spending declines, jobs go away....and this cycle can spiral out of control....continuing to repeat the process.....

Radical trends....up or down....are never good.......




On Jan 07 09:52 AM nobull wrote:

> I vote for that.
> Enough of this nonsense. Let prices correct. Plenty of buyers will
> step in.

Jan 08 08:35 AM

[John Preston:]

Setting aside the NO DOC and STATED INCME LOANS, which were perhaps 15%-20% of lending the past 6-8 years, housing prices reflected "income"....granted, income leveraging in the FNMA underwriting system went too far .... but prices were reflective of income....

I contend that income has eroded....and that the over-leveraging of income by FNMA took away the safety net....the was no error factor....

Any homeowner in trouble that I have met with in the past 18 months has experienced a decline in household income of 25-75%..... if your income is stable....you're fortunate...

I also contend that the income decline is affecting 2-3 times the number of households thatare affected by unemployment....

Ultimately, incomes have to go up to stabilize and grow the economy....good or bad, for jobs to improve, and income to grow, and spending to re-ignite the economy, housing must be stabilized....


On Jan 07 01:35 PM John Lounsbury wrote:

> It is fundamental that housing prices match income levels. My analysis
> (article coming) is that housing has anywhere from 15% to possibly
> 30% further to fall to match hisorical relationships between incomes
> and house prices.
>
> This fundamental fact will not keep government from trying to cushion
> the adjustment and millions of overextended and under water mortgagess
> from defaulting. At best, government action will have a marginal
> benefit. At the worst, government action will keep a bubble partially
> inflated and sucker in more victims.
>
> Government stimulus should be directed toward creating broader economic
> activity. In this way, average income levels should rise. A 10% rise
> in average income would translate to an increase of about the same
> amount in the affordable house price. In my opinion, this is a better
> way to stabilize house prices than trying to support unaffordable
> levels.
>
> nobull, D. McHattie - - -
>
> I feel you have the basic idea, but couldn't resist adding my views.
>
>

Jan 08 08:46 AM