Housing Crisis-Good Solution vs. Bad Solution

John McCain proposes a mortgage bailout solution which would have the Federal Government buy bad mortgages from banks, then refinance the homes at the current market value and reduced interest rates. 

Of the 75 million single family, owner occupied homes in the United States, 12.5 million homeowners owe more than what the home is worth. Homeowners in a negative equity position are upside down by between $350 billion and $1 trillion. Up to 10% of these homes are in a default or foreclosure situation. The costs of foreclosure and sales commissions to sell these homes would be an additional $41 billion.

In many metropolitan areas, home prices rose by 100% in the last 5 years. Homes that were selling for $300,000 in 2002 sold for $600,000 in 2007. Now homes are selling for $450,000. These home values are still falling. Many people bought the homes at $600,000. Many others refinanced their homes, or took out a second mortgage up to their new appraised value of $600,000.

With all of these homes upside down, how does the government think it would be appropriate to simply reward the homeowners who are defaulting on their mortgages? Is this really what we want to reward? How would it be fair for the US government to bail out certain homeowners, without bailing out all of them?

When the government allows a person defaulting on their $600,000 mortgage to rewrite the loan at the current value of $450,000, the government rewards the irresponsible. The poor schlep next door, who is in the exact same position, but is making his payments on time, is being told they should live with their current situation. This is so immoral. The government should never, ever, punish the law abider. The rule of law is being thrown out the window. When a person signs a contract, that contract must be enforced. 

So what can be done to fix the housing crisis? First, politicians must understand the problem. Demand was artificially propped up by wrong headed Democrat programs that encouraged home ownership and low interest rates from the Federal Government. Increased demand artificially increased prices.  As foreclosures increased, demand began to fall and now supply is larger than demand. Until supply equals demand, prices will continue to drop. 

Prices must come back to pre bubble prices. The following chart illustrates the average home price has fallen dramatically, from $275,000 to $215,000. In order to fit into the historical, inflation adjusted average of $165,000, home prices have to fall an additional $50,000.

How can we increase demand? First, housing prices must stabilize. Prices have to reach a point where buying is a better alternative to renting. Second, the people have to have a firm understanding of the short term outlook on the economy. Third,  banks have a difficult time making loans in a falling market. Requiring a 20% down payment will once again be standard banking procedure. 

To understand how long this problem will continue, you must understand the housing bubble.

1. This plan punishes those that pay their bills by allowing their neighbors who got themselves into a position of losing their homes. 

2. The Federal Government can't be in the business of bailing out private industry. Banks lent the money, they need to stomach the losses, or else they need to fail.

3. Politicians are incapable of doing the right thing. Imagine the Internal Revenue Service forgiving the debts of the people that owe the money. It would never happen. But when it comes to forgiving the debts of private citizens, politicians are more than willing to forgive the debts of people who could potentially vote for them. This has to be against the law. We can not allow politicians to buy votes.

AMERICAN HOMEOWNERSHIP RESURGENCE PLAN

John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis. 

America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.

The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.

The McCain resurgence plan would be available to mortgage holders that:

· Live in the home (primary residence only)
· Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).

The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of “negative equity” in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.

The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government's conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.