help for housing? (finally?)

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We've heard the same news for too long now: No recovery without jobs; no jobs without a recovery in consumer spending. How do we break out of this circular trap? By finally inducing banks to write down the principal on underwater mortgages. So says economist Martin S. Feldstein, who was chairman of the Council of Economic Advisors during the Reagan administration.

"Homes are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs.

But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America. The resistance is understandable. Voters don’t want their tax dollars used to help some homeowners who could afford to pay their mortgages but choose not to because they can default instead, and simply walk away. And voters don’t want to provide any more help to the banks that made loans that have gone sour.

But failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession."

Feldstein's plan--which he says should be voluntary--would reduce the value of an underwater mortgage to 110 percent of the home's current value, with the cost split between the bank and the government. In exchange for the break on principal (and, one presumes, the opportunity to refinance at current low rates), the borrower would accept a full-recourse mortgage--"in other words," Feldstein says, "the government could go after the borrower’s other assets if he defaulted on the home."

"This plan is fair because both borrowers and creditors would make sacrifices. The bank would accept the cost of the principal write-down because the resulting loan — with its lower loan-to-value ratio and its full recourse feature — would be much less likely to result in default. The borrowers would accept full recourse to get the mortgage reduction."

I don't know how likely we are to actually see such a plan put in place, but I believe that supporting home values is a key to getting the consumer economy back on track. --b.d.s.



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