Enough extend-and-pretend. Enough trying to cling to the past. It's time to admit that nothing we've done so far has worked. It's time to actually deal with our problems instead of kicking the can down the road.
I'm not in academia and I'm not an economist -which means my ideas might actually work.
Obama, listen up. In the name of stabilizing home prices, your advisers have confused the disease with the cure.
Here is my 6-point plan to fix the housing market:
- Immediately stop blacklisting strategic-defaulters and short-sellers. Fannie Mae, Freddie Mac, and The FHA (the GSE's) currently blacklist these potential buyers for three years or more, primarily to discourage them from walking away in the first place. Wrong! Letting them buy right away and with no extra penalties increases liquidity in the housing markets and helps home prices find their natural value and healthy bottom more quickly.
- Allow bankruptcy cramdowns for mortgage debt. Firsts, seconds, investment properties, everything. We don't need any national principal reduction program - it would be too big, too complex, and influenced too much by bank lobbyists. Having to file bankruptcy removes moral hazard issue. And instead of a national, one-size fits all solution, bankruptcy judges would review each case on an individual basis. Who better to determine the outcome than an actual, impartial judge?
- No more foreclosure delays. In fact, do what you can to speed the process up. If a homeowner wants to keep the house, let them either modify the terms through HAMP (or something similar) or else file bankruptcy. If they don't want to keep it, then they need to do a short sale, deed-in-lieu, or be foreclosed on as soon as possible. These bad loans MUST get undone before we can recover. The quicker the better, for everyone. Foreclosures aren't the problem, they are the cure to the disease of loans that never should have been made.
- Change the number of GSE loans an investor can have from 4, back to 10. Make them put 30% down and scrutinize the heck out of them, but don't limit them to 4. We've got a huge supply of foreclosures and short sales for the market to absorb and we've got a willing contingent of buyers to buy them. This one change would let them.
- Phase out the mortgage interest income tax deduction. All this does is make our homes that much more expensive, putting us that much more in debt to banks. Consumers lose. Governments lose. Banks win. Even sacred cows must sometimes get slaughtered.
- Allow student loan debt to be discharged in bankruptcy courts. Predatory banks will happily lend tend of thousands of dollars to 18-year-old kids because they know those kids will have to pay it back - even if it takes their whole lives. In the name of making college affordable, we've saddled an entire generation of young adults with insane amounts of debt. And, of course, college has only become more expensive.This is absolutely disgusting and outrageous. If bankruptcy courts could discharge the debt, then banks wouldn't make the loans in the first place. Demand drops, and the price of a college education falls with it. I include this in my ways to fix housing because the twenty-somethings are going to need to be buying homes soon and these unnecessary debts are standing in the way.
IF all of these policies were enacted now, we would probably still see home prices continue to fall for another couple of years before finding a real, organic bottom. Had we done this two years ago, we would be there already.
These policies would instantly:
- Provide massive debt-relief to consumers.
- More quickly achieve a housing bottom (a good thing!).
- Provide housing liquidity where people can move to take new jobs or downsize to smaller homes or whatever else they need.
- Prove to both consumers and the markets that we are looking forward and building a legitimate foundation for our economy moving forwards.
Confidence. Liquidity. Less debt. We can either get there right now with bold policy, or in a decade with more of the same.
But what about the banks?
Nationalize them. Wipe out the bond-holders and shareholders. Bank of America, Citigroup, Wells Fargo...the only reason that any of them still exist is that we are choosing to live in accounting fantasyland. Bring back mark-to-market accounting.
An economy needs banks, but not necessarily these banks. Instead of spending billions propping them up, let's let them burn and spend our taxpayer money on rebuilding better banks from their ashes.
The losses must be realized before our economy can move forward. No more accounting gimmicks. No more extend-and-pretend.
We've already lost a decade and I don't want to lose another one.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.