5 Solutions to Helping the Housing Market: Methods to get the Housing Market on the Right Track.

Most Americans would probably agree that housing and the credit crisis is the number one issue.  Even though many are seeing fuel as the major story of the day, ultimately the most expensive line item for most Americans is housing.  Not only does it create the largest monthly outflow, it is also the single biggest asset for the majority of families.  Most view their home as a safety net and not necessarily as a speculative commodity.

Given that housing is so important to the health of our economy, what can be done to improve the housing market?  The recently signed housing bill does help in certain respects but also includes items that will only ensure a very large bill for the American taxpayer.  Some of the good items include:

-Forcing lenders to writedown mortgage balances by 10% of their current appraised value if they would like to participate in the FHA refinance program

-An additional 3% one-time payment for insurance

-Shared appreciation

Those are some of the good items in the bill.  The problem most people will see is what will occur with the bailout of Fannie Mae and Freddie Mac.  This is the area where most problems will occur.  It is important that Fannie Mae and Freddie Mac, which have practically become the only mortgage game in town, to ensure that what occurred in the past does not occur again in the future.  With $5.3 trillion in mortgage debt between the two government sponsored entities, it is vitally important that things are done right from the beginning.

With that said, what can we do currently to improve the housing market?  What are some viable solutions?  I will offer 5 options of things that can be done today to start creating some movement and also confidence back into the market:

Solution #1 – Ensure Stronger Regulation over Lending

The first important solution is to bring back confidence in the lending apparatus.  Wall Street firms no longer have a market to sell mortgage backed securities.  Lenders now have to own their own mortgages or follow guidelines that the GSEs require.  This has created liquidity problems.  Yet given the nature of leniency with the GSEs, much of the loan guidelines only put us back to the pre-bubble days.  It is simply the mindset of many has become dependent on credit being issued much too easily.

Regulation and enforcement of the rules is important.  The overall feeling now is that the lending industry was misguided and people just do not have the confidence to go back in.  Confidence takes time to earn and since we have yet to see any convictions of those who committed fraud be prosecuted, the public feels for the most part that many of these people got away with robbery.  Given that it is an election year, we may have to wait another year before we see any large public trials.

On a more micro level, it is vital that those who have the power to make loans actually have the fiduciary responsibility of protecting their clients.  Any fraud will be punished with legal consequences.  For those that follow the book it will be business as usual.  For those who don’t there will be stiff and swift consequences.  The laws need to be changed and certain states are now requiring licensing for brokers and in the case of Indiana, a large number had their licenses revoked.

This is important because it lays the foundation of a market that once again is taking the legal importance of home ownership seriously.

Solution #2 – Legal Cram-downs

Another item that was overlooked during the housing bill is legal cram-downs.  In a cram-down a court is allowed to look at secured debts and rework the actual payment amount based on the borrowers financial situaton.  This happens through the bankruptcy process.  Many homeowners that are severely underwater may have an incentive to walk away from their home.  Through the cram-down process, at least the court would have legal jurisdiction over the entire balance sheet of a household to get a realistic picture of what they can afford.

This works because it interjects a third party into the negotiations.  The current housing plan is voluntary and to think that the lenders will be unbiased is simply too hopeful.  Each party will try to do what is best for their bottom line.  Many lenders will have an incentive to unload the worst performing loans which brings into question the adverse selection process.  That is, lenders will off load the worst performing loans to the government while keeping the best loans.

With the cram-down process, you can also go after speculators and flippers.  Why should someone that purchased a $1 million home for flipping be able to walk away with no problems even though they may actually have the income to make the payment?  In the end, it will be the taxpayers that foot this bill.

The cram-down process can be simply another tool to be used to get the market going again and at least it will help with some of the foreclosures out in the market.

Solution #3 – Legal Trust Fund

There has been blatant fraud.  Some institutions up to the CEO level realized what was going on.  They still have assets and still have funds and there is no reason that their cushion should not be used to setup a fund to protect the borrowers that they defrauded.  Why ask the government for money when they have it right now?  It is time to create a legal trust fund that each company will setup that will go directly to offsetting some of the problems with their own borrowers.  Many can only support so much but we have yet to see anything happening even with the most blatant subprime operations.

The court needs to have the ability to go after bank statements of those that made hefty profits while pushing risky mortgages onto a public that is now ultimately going to fall on the U.S. taxpayer.  There will be some high fees associated with this housing bust yet I am surprised that no politicians are going after this item.
Solution #4 – Down payment requirements for government loans

If we want homeowners to stay in their home, a down payment for government loans should be a must.  We should require home owners to come up with a 10% down payment.  It is surprising to see that the new housing plan still has the ability for borrowers to come in with 3 to 5 percent down.  The reason for a down payment is that it creates a financial bond between the borrower and the home.  There is something to lose if they do walk away.

The nothing down mentality will take years to eliminate but the quicker that happens, the faster people will see homes as places to live and will start coming back into the market.  Government loans should be on the level of you lending your own money to someone.  Would you give someone a $400,000 loan without a reasonable down payment?  Of course not.

There is also something to be said about encouraging people to be savers.  We are in this problem because of deficit spending.  Having a down payment demonstrates that a person or family is able to save for a few years and has the discipline to be financially responsible.

Solution #5 – Eliminate Alt-A and Subprime Loans for Good

 

These loans clearly have no future in the market.  In fact, they caused far more damage than any benefits that they brought.  There is no need for these loans.  There should be explicit legislation stating that any of these loans will not have any implicit or explicit guarantee from the government ever.  If certain Wall Street firms want to back these loans, then it is their bottom line that will be on the hook, not the U.S. taxpayer.

The elimination of these products will ensure that once we work our way through the current mess, that future home buyers will be solvent and some balance will finally start to emerge into the market.  Otherwise, we are simply setting ourselves up for a repeat of this housing bubble bust.

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