Some time ago, I expressed sympathy for a particular plan by Zingales to manage the problem with the housing market, which was one of the major causes for the current economic crisis. Everybody seems to want to talk about fatcat culpability these days, be they AIG execs, the Obama team or the Congressional firm of Frank, Dodd, Pelosi and Horsebottom. (Horsebottom being the senior partner). Of course there are also those with some historical facility and they remind us that it was Greenspan and monetary policy in general which is to blame. But let's go back to Zingales shall we?
Zingales' idea is this. You look for all of the mortgage holders by zipcode whose housing price has declined 20% or greater. Instead of them defaulting, they work out an agreement with the originator that reprices the mortgage with the provision that 50% of the profit from the sale of the house goes to the originator. Simple.
It allows the mortgage to be recalculated therefore lowering monthly payments, keeps the individual in their house, keeps people with a lot of equity from taking advantage, and doesn't involve any taxpayer money. Of course there will be no politicians to champion it because there's no end in it for them. It doesn't allow them to take any credit, spend any government money, raise or lower taxes.
Let's keep in mind that there are terms of art that people in the business are throwing around relatively quickly that we in the public aren't quite clear about. But what makes the assets toxic? It's the probability that they are mortgage backed securities and that those mortgages might default. The chances of that are somewhat unpredictable, but it's clear that the people who hold those mortgages who are underwater are more likely to default. If we look at that 20% group and work out deals then we know they are less likely to default but it also means a writedown of the value of the assets and the amount of coverage on the mortgage backed securities. But it's certainly a lot more concrete than what we have now.
So the question is without a Zingales plan in place, what is the Administration doing to keep people in their homes? I'm not sure what the answer is, but what I'd like to do is warn against any action that results in re-inflating the house prices. In simple terms, we can raise housing prices through some mechanism or we can lower them through some mechanism similar to Zingales. The latter is more prudent even though the former might be more politically popular.
This is the downside of monetary policy which the Administration hopes will get banks to loan. Loan what? Mortgages of course. The magic number being passed around is 4.25% which is something of a blockbuster historical low for 30 fixed conforming mortgage rates. There could be a huge refinance market, and this works miracles for affordability. But then what do we do with that but hope it invites a new class of Americans to the trought of cheap credit for home ownership and that clears homes off the market and starts the ecnomy going again. How? By raising home prices again. Reinflating the bubble.
The hard fact must be, I think, that without Zingales, all that happens is that people with some extra money (remember it's damned hard to get credit these days) can snap up homes from foreclosures. That may be all that's going to happen and everybody who lost equity just lost it for good. To get back to where we were before the crash is to re-enter the bubble. It sounds good for people eager for recovery, but that froth was the original problem.
What's a reasonable outcome for the housing market and mortgage rates? I don't know. I just want to sound that cautionary note, because it makes perfect sense to me. I hope the rates will stay low and that credit eases for the consumer.
I hope that for my own sake, all of the speculation in California ceases and the rise in home prices stabilizes to something like the other states. I hope that renegotiated debt for equity swaps puts healthy assets onto bank balance sheets and that helps keep home prices low, and I hope people who were burned playing with the equity in their homes can stay put and sell their jet-skis, chastened but not broken.
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