A Solution to the Mortgage Mess?

Ben Bernanke spoke Tuesday before a group of community bankers in Orlando, Fla. He encouraged bankers to find creative ways to address the problems in the mortgage market. Preventing foreclosures, he implied, should be a priority as it would "help not only stressed borrowers but also their communities and, indeed, the broader economy."

Mr. Bernanke, here is my suggestion. Instead of banks reducing principal or instituting artificially low interest rates, why not have borrowers move into homes they can actually afford. If done in a coordinated manner, the process could cascade down from the most expensive homes to the least expensive. Essentially, everyone moves down a notch to a more reasonably sized home with a more affordable mortgage.

Those at the lowest end of the spectrum who, based on their financial condition, should never have become homeowners in the first place would be expected to return to the rental market.

This would keep the majority of troubled homeowners in a home of their own. It would keep the majority of homes occupied. It would protect most communities from a wave of foreclosure signs. The only downside would be those over-sized McMansions at the high end that may not be able to find purchasers as their over-extended owners trade down to an affordable house.

Instead of the government giving $150 billion away and hoping we all go to the mall, perhaps the money could better be spent to set up a program to help borrowers and banks make the arrangements necessary to carry out this process.

In the end, these homeowners would not end up with more house than they should ever have had by being bailed out by the government. I think this would make those of us who were prudent in buying our homes feel a little better about the fairness of the process.

Comments

[Jimbob:]

The problem is- who are all these people going to sell their unaffordible homes to?

2008 Mar 05 12:12 PM

[Pent up demand:]

We have a process to make this happen. It's called a real estate market.

What the author proposes will happen if the govt. will just let nature take its course. Yes, there will be financial hardship for the imprudent, and chances are in a few years when real estate is repriced at a level that can be supported by incomes, people with savings who didn't bankrupt themselves buying a McMansion get to move up to nicer digs at an affordable price.

The truth is, there is little that can be done to help the imprudent who bought over the last few years. Many of the so-called solutions proposed or implemented over the last few months (making forgiven principal in a short sale non-taxable, freezing rates) do no good when the borrower has little to no skin in the game. In fact, many will have an opposite affect: they are practically daring these people to default and walk away.

2008 Mar 05 01:37 PM

[brokerbila:]

How to Fix the Housing Dilema:

The problem continues growing because home values are going down. If we can stop values from continuing to decline we can stop this costly spiral meltdown.

Lets create an FDIC sticker for a home like the one on the window at the bank. It basically insures that if you put money in youll get money back later. Lenders currently protect themselves with PMI (Private mortgage insurance). We should make this available to home buyers, that if they agree to hold the home for a least X number of years that the value will be insured if they have to sell after that time. The owners could make a small payment per month to pay for the insurance. Buyers would not wait any longer to start buying again and this would put a floor of confidence under the market.

At some point in the future a smart insurance company who is already recognizing a bottom in the market anyway could step and make a lot of money at low risk. Government could encourage the insurance industry to create an FDIC like insurance that would stop this spiral down dead in its tracks.

2008 Mar 05 03:06 PM

[Just Say Whoa!:]

In 2006, only 51.6% of national income went to wages and salaries.

This is the lowest percentage since 1929.

Perhaps wages could rise so people could once again afford to buy a home?

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2008 Mar 05 04:46 PM

[capitalist54:]

In California many houses more than doubled in a four to five year span. Now that the market is "correcting" the populace in general is up in arms. The 10%, (depending on where you live) is actually a very mild correction as market corrections go. The real worry of the Fed ad nauseum is that as a country we got used to the cash flow from the house piggy bank. If you read Bernanke's comments from the past, he seems to think this is good. It is not, it's living on credit. Now the tab is due and no one wants to pay it.

The real correction needs to come in people's thinking, which is, live within your means. This is the real "New Economy"

2008 Mar 05 06:13 PM

[Pent up demand:]

You make a good point special1person. My view is that when the Fed talks about "fighting inflation" they really just mean wage inflation. In that they have been spectacularly successful. They were quite content to have asset prices inflate as long as wages for the rank and file remained in check. The result was a huge cut in real wages.

2008 Mar 06 07:48 AM