Looking To The Government For Help With Real Estate Prices

Joe Nocera writes:

Now that the government has “saved” Wall Street — at least for the moment — hasn’t the time finally come to save Main Street too?
I’ve seen estimates suggesting as many as one out of every six homeowners has a troubled mortgage. In the year since the crisis began, the world’s financial institutions have written down around $500 billion worth of mortgage-backed securities. The government is not going to let another big institution fail. Why should homeowners have to pay more for their sins than Wall Street is paying for its sins? If housing prices keep falling, many millions of additional homeowners will find themselves, through no fault of their own, with underwater mortgages. Besides, foreclosures damage property values for everyone, not just those losing their homes.
Finally, and perhaps most important, the housing bubble and its aftermath form the core problem from which all other problems flow. Banks will still be afraid to write mortgages because they won’t trust the value of the collateral. Giant financial institutions will continue to post multibillion-dollar write-downs. The new $700 billion bailout bill contains some toothless pleas to help homeowners. Efforts to jawbone the mortgage industry have largely failed.
For instance, both presidential candidates have homeowner assistance plans, but they are poorly conceived and would cost the government billions of additional dollars. A Yale economist named John D. Geanakoplos suggests a new system to “modify mortgage loans to keep homeowners in their homes,” as he put it in a recent paper. He also says the government should give financial incentives to renters to buy homes — and thus create a floor for housing prices. Here’s his idea: Pass a law that encourages homeowners with impaired mortgages to forfeit the deed to their lenders but allows them to stay in the homes for five years, paying prevailing market rent. After five years, the homeowner-turned-renter would have the right to buy the home back, at fair market value, from the lender.
The homeowner loses the deed to his home, which will be painful. (Rents are considerably lower than mortgage payments right now.) Otherwise we face further economic calamity.
Why did Mr. Alpert choose five years? First, he feels confident that housing prices will have stabilized by then. Those two factors alone will cause housing to stabilize.”
(Many of the homeowners affected by this plan would be eligible for F.H.A. loans, Mr. Alpert believes.)
Does the plan have stumbling blocks? Mr. Alpert calls his plan “The Freedom Recovery Plan.” That goes for you, too, government policy makers.

About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (Alexander90210.com), he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Alexander90210.com. Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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