They say, offer a 5.25% fixed 30-yr. mortgage to everybody, and they explain why it's justified and necessary to do so. (The article below proposed a slightly higher rate for bad credit, but even so, reasonable government-subsidized mortgage insurance could equalize that back down to 5.25% for all.)
I happened to catch the video below on CNBC this afternoon. The part of interest was the comment by former Federal Reserve governor, Susan Bies. Below is the video of the program, and beneath that is the Op-Ed in today's WSJ referred to in the video.
--------------------
"Fed's Next Move", CNBD Thurs. Oct. 2 2008 | 1:43 PM
Discussing what the Fed will do when the dust settles in Washington, with Scott Sperling, THL Partners;
Susan Bies, former Fed governor; Michael Farr, Farr, Miller & Washington; and CNBC's Erin Burnett.
http://www.cnbc.com/id/15840232?video=875698470---------------------
Wall Street Journal, Op-Ed
October 2, 2008
R. Glenn Hubbard and Chris Mayers
"First, Let's Stabilize Home Prices"We are in a vicious cycle: falling housing values cause losses on securities, which reduce bank capital, thereby tightening lending and causing house prices to fall further. The cycle has spread beyond housing, but housing is the place to fix it.
Housing starts are at their lowest level since the early 1980s, while there are more vacant houses than at any time since the Census Bureau started keeping such data in 1960. Millions of homeowners owe more on their mortgage than their house is worth. Foreclosures are accelerating. House prices continue to fall, weakening household balance sheets and the balance sheets of financial institutions.
But this can stop.
The price of a home is partially dependent on the mortgage rate -- a lower mortgage rate raises house prices.
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years),
and place those mortgages with Fannie Mae and Freddie Mac. Investors and speculators should not be allowed to qualify.
The historical spread of the 30-year, fixed-rate conforming mortgage over 10-year Treasury bonds is about 160 basis points. So a rate of
5.25% would be close to where mortgage rates would be today with normally functioning mortgage markets. One of us (Chris Mayer) recently published a study showing that -- assuming normally functioning mortgage markets -- the cost of buying a house is now 10% to 15% below the cost of renting across most of the country.
Rising mortgage spreads and down-payment requirements are what's still driving down housing prices. We need to stop this decline.
The direct cost of this plan would be modest for the
85% of mortgages where the homeowner owes less on the house than it is worth. Lower interest rates will mean higher overall house prices. The government now controls nearly 90% of the mortgage market and can (and should) act on this realization. Remove the refinancing option and you can have lower rates without substantial cost to the taxpayer. Homeowners would have to give up the right to refinance their mortgage if rates fall, although homeowners could pay off their mortgage by selling their home. For borrowers with lower credit scores, the mortgage rate would be greater than 5.25%, but it would be less than their current rate.
Now, what about mortgages on homes that are worth less than the total amount of the loan? These mortgages could be refinanced into a 30-year fixed-rate loan to be held by a new agency modeled on the 1930s-era Homeowners Loan Corporation. New mortgages would be made of up 95% of the current value of a home.
The government might use two approaches to mitigate its losses. It could offer owners and servicers the opportunity to split the losses on refinancing a mortgage with the new agency. Servicers would have to agree to accept these refinancings on all or none of their mortgages, to avoid cherry-picking. Or the government should take an equity position in return for the mortgage write-down so that the taxpayers profit when the housing market turns around.
Our calculations based on deeds and Census data suggest that
the total amount of negative equity for all owner-occupied houses is $593 billion. However, capping an individual's write-down to $75,000 would
reduce the government's total liability to $338 billion and cover 68% of individuals with negative equity. Even this loss will be reduced as the proposal spelled out here raises housing values and economic activity, and contemplates loss sharing with lenders, hopefully matching the experience of the old
Homeowners Loan Corporation.
While the net cost is modest compared with many plans on the table, it would require that the government could assume trillions of dollars of additional mortgages on its balance sheet. But
we have already crossed this bridge with the explicit "conservatorship" of Fannie Mae and Freddie Mac. In any event,
these mortgages would be backed by houses and the verified ability to repay the debt by millions of Americans. In addition,
by putting a floor under house prices, this proposal would raise the value to taxpayers of trillions of existing home mortgage assets already owned or guaranteed by the FDIC, the Fed, the Treasury, Fannie Mae and Freddie Mac, among others.
Improvements in household and financial institution balance sheets will increase investment and consumer spending, which will mitigate the extent of the current downturn.
Americans, on average, spend about 5% of the equity of their homes on consumer goods and services. So if home prices increased 10% above where they would have been without government intervention, we estimate
consumers will have an additional $100 billion annually to spend.
In addition to focusing on the very real problem in the housing market, the plan could be implemented immediately. As a result of the U.S. government's conservatorship of Fannie Mae and Freddie Mac, origination of new mortgages can be financed quickly. Congress would have to raise the overall borrowing limit and approve the new federal purchases of negative equity loans. But
it will likely take the Treasury much longer to buy troubled assets than Fannie and Freddie, and it would have to seek the involvement of many additional private actors, as opposed to using vehicles already in place.The decline in housing prices remains the elephant in the room in the discussion of the credit market deterioration. Let's start there.
Mr. Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush. Mr. Mayer is a professor of finance and economics and senior vice dean of Columbia Business School.http://online.wsj.com/article/SB122291076983796813.html_______________________________________________________________________
Bies, Hubbard, and Mayer are not nobodies, they are real experts in this area. And other experts agree with them. It's the way to do this, if we want it fixed.
And what I like is, it leaves no one out - it would be available to all, not just those in trouble, and would help those who have already lost homes. It would also give a first chance to those who are unlikely to ever be able to save up a big down payment, given what they earn - tightening requirements on that now, as the banks are doing, is the wrong way to go. With proper legitimate qualifying, lack of down payment does not have to be risky (example, VA loans). In any case, this would be "triaged" to take care of at-risk current loans first. I think it should be done with a temporary moratorium on foreclosures, to allow time for processing without panic.
There IS a way to fix this. All we have to do is insist on it to lawmakers, and do it. From there, we could proceed to overhaul other transactions in a sane way.
Remember that 40% of our entire economy is driven by real estate, directly or indirectly. This would be an immediate giant shot-in-the-arm, which we can not get any other way. And it would positively affect the entire economy, and the well-being of all. For those who choose not to buy a home, it would definitely lower the pressure on rental rates.
You might think that simply having the Treasury buy up mortgage-backed securities would be enough, but it isn't - Treasury isn't being given any direction on what to do with them. This idea would be a logical "part 2" to go with whatever other plan is implemented for the bailout. As it is, the Treasury isn't even being asked to report on how many mortgages it keeps from going into foreclosure. It will probably be very few, if not directed better.
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