Stabilize House Prices, Part 4

“Housing prices are continuing to decline. Until that decline is halted, bad things are going to continue to dominate this country’s — indeed, the world’s — economic life.” – Joe Nocera.

Shouldn’t We Rescue Housing?, Joe Nocera’s column in Saturday’s New York Times, focuses on the problem of house foreclosures and what must be done to stop a downward spiral.

So far, under the Rescue Plan, the Federal Reserve has added a tremendous amount of liquidity to the banking system. In addition, “the Treasury Department just pumped $125 billion into the country’s largest financial institutions, and it promises to use another $125 billion — more, if necessary — to recapitalize regional and community banks.”

They are vital steps. This week, at long last, the credit markets thawed, at least a little, and the global recapitalization of the banking system is the reason.

But the job isn’t done yet. The government now needs to tackle what R. Glenn Hubbard, the former chairman of the Council of Economic Advisers under President Bush, calls “the elephant in the room”: the continuing decline of housing prices.

I’ve seen estimates suggesting as many as one out of every six homeowners has a troubled mortgage. This is an enormous social problem. It is also a continuing economic problem. In the year since the crisis began, the world’s financial institutions have written down around $500 billion worth of mortgage-backed securities. Unless something is done to stem the rapid decline of housing values, these institutions are likely to write down an additional $1 trillion to $1.5 trillion. In other words, we ain’t seen nothin’ yet.

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.

Nocera mentions Sheila Bair, chair of the Federal Deposit Insurance Commission, and her efforts to do more for homeowners; the Hubbard and Mayer plan to allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25 percent; and Yale economist John D. Geanakoplos’ recommendations to “modify mortgage loans to keep homeowners in their homes.” Nocera is sent many plans to solve the foreclosure problem.  Here is one he really likes.

But recently a proposal came across my desk that I believe is so smart, and so sensible, that I hope our nation’s policy makers will give it a serious look. It comes from Daniel Alpert, a founding partner of Westwood Capital, a small investment bank. I have quoted Mr. Alpert frequently in recent columns, because he has been both thoughtful and prescient on the subject of the financial crisis.

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. Under the law Mr. Alpert envisions, the lender would be forced to accept the deed, and the rent. After five years, the homeowner-turned-renter would have the right to buy the home back, at fair market value, from the lender.

There are so many things I like about this idea that I hardly know where to begin. Let’s start with the fact that it doesn’t require a large infusion of taxpayers’ money. Indeed, it doesn’t require any government money at all. It also doesn’t let either homeowners or lenders off the hook, as many other plans would. The homeowner loses the deed to his home, which will be painful. The lending institution, in accepting prevailing market rent, will get maybe 60 or 70 percent of what it would have gotten from a healthy mortgage-payer. (Rents are considerably lower than mortgage payments right now.) That will be painful too. Moral hazard will not be an issue.

Nocera’s blog, has a link to Mr. Alpert’s detailed description of how his plan would work.

photo credit: Casey Serin