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No quick fix for housing market
A foreclosure sign in front of a house in Miami, Fla.
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KAI RYSSDAL: Even though Congress has reached a deal on the stimulus package, there's one big part of the economy that's still struggling. Housing, of course. For those who say, "Hey, why not throw a big chunk of stimulus that way?" Marketplace's Dan Grech reports that's easier said than done.
DAN GRECH: The housing bubble came with its own lingo: There were terms for risky borrowers, like "subprime" and "Alt A."
And then there were the risky loans: neg am, interest-only, option ARMs.
Mahmoud El-Gamal is economics chair at Rice University.
Mahmoud El-Gamal: What the exotic mortgages did was to put a lot more risk on the banks' balance sheets without those banks realizing how much risk they were taking.
Those exotic mortgages were then chopped up and sold to investors who, just like banks, had no clue about the risks. The mortgages mature at different rates, or are pegged to different indices, or are split between multiple lenders.
No one knows what these mortgages with funny names are actually worth.
Real estate expert Ilyce Glink.
Ilyce Glink: There's no one central database where you can click on 10,000 loans at a time, modify all of the terms, click okay, and, Voila! It's all modified.
Glink says we now need to create jobs, so people can pay their mortgage. Loosen up credit, so people can buy again. Work through the millions of foreclosures, and set a price floor. To restore confidence in a system that's clearly broken.
GLINK: I think it's silly to talk about a single stimulus as solving everything, because last year we had a whole bunch of different kinds of stimuli, with trillions of dollars being spent, and all of that is just starting to work.
So what's the quick fix, then? On this point, at least, experts agree: There isn't one.
I'm Dan Grech for Marketplace.
The solution is to let housing prices fall to a level where the prevailing incomes can support the buying activity.
Put a floor on prices? How do you determine the floor. Only free markets based on income levels can determine the right prices.
I dont want FED/govt intervention, so that another bubble can be created to support the prices.
Quick or slow, the fix involves removing the downward pressure on prices by foreclosures being dumped on the market. Job creation and earning are necessary, but not sufficient till a floor is established--even those with money and credit would rather wait till declines stop.
How to stop dumping foreclosures on the market? And disentangle MBSs and the zoo of exotic instruments refering to them? And make it possible for banks to issue credit to sound customers? Without spending trillions of public money?
In a nutshell, government takeover of mortgage securities issued post-deregulation (there is a legal way), after which it CAN adjust rates and make other adjustments, unilaterally, reduce defaults, hold any foreclosures long term and convert them to rentals. Shares in the government holding corporation issued to mortgage holders (esp. banks/lenders) can then serve as capitalization on which they can lend. Credit default swaps refering to taken mortgage securities are no longer a problem and could be nullified.
Why does this work? (1) All the risk is in one place, so it only gets counted once. (2) Long term appreciation let even residential real estate bought in 1928 recover its price by 1948--it's only a matter of being able to hold long enough if the property isn't destroyed; renting it maintains it.
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