Stabilize House Prices, Part 6

Over the past several months, economists have been coming up with one proposal after another in an attempt to stabilize falling home prices. This blog has reviewed several of them starting here.

It is clear that, despite the various proposals, the previous administration did very little to alleviate the problem. It’s also clear that it is now a matter of some urgency for the new Obama administration.

The February 19th New York Times article, $275 Billion Plan Seeks to Address Housing Crisis leads with this, “President Obama announced a plan on Wednesday to help as many as nine million American homeowners refinance their mortgages or avert foreclosure, saying that it would shore up housing prices, stabilize neighborhoods and slow a downward spiral released his proposal…” and summarizes it as follows:

The plan has three components. The first would help homeowners who are still current on their payments, but who are paying high interest rates and cannot refinance because they do not have enough equity in their homes, a problem afflicting growing numbers of people as housing values tumble.

A second component would assist about four million people who are at risk of losing their homes. It would provide incentives to lenders who alter the terms of loans to make them affordable for the troubled borrowers. A third component would try to increase the credit available for mortgages in general by giving $200 billion of additional financial backing to Fannie Mae and Freddie Mac.

Beyond luring lenders with government money, the plan also calls on Congress to give bankruptcy judges the power to change the terms of mortgages and reduce the monthly payments.

Questions of fairness and efficacy were immediately raised. While some have criticized the plan as not doing enough, Edward L. Glaeser, a Harvard University economist, believes that one virtue is that it does not try to solve every problem.

For his assessment of the advantages and shortcomings of the Obama initiative, read Housing Plan: The Virtues of Moderation which was published online.

Conclusion

In my opinion, most of the issues facing the Obama administration (and therefore all U.S. citizens) are more complicated than it first appears. Given the depth and breadth of our financial problems, we need reasoned arguments and a nuanced assessment of any new plan. We do not need knee-jerk responses, either pro or con.

Whatever the proposal on the table, there is always room for improvement, and certainly, more initiatives will be needed. We desperately need constructive criticism and cooperation. Professor Glaeser’s analysis delivers a useful starting point.