"A Problem That Has Defied Solutions"

The following is actually a quickly spun letter to David Streitfeld of the New York Times, who was reporting on the Obama Administration's new direction of forcing banks to sell 'short' millions of homes.  The title of my post is a quote from his report and the subject of the email to him.  He is a regular reporter on the troubles in the housing market, whose articles I have quoted in other postings.

Mr. Streitfeld,
Just read your latest article, 'Program to Pay Homeowners To Sell at Loss'.  A quick upfront note: I'm neither a conservative or liberal, so bear with me if it seems my take on something leans one way, because the next moment it will go the other.   Thus, when I say that I find it amusing that the current White House is so willing to spend hundreds of billions of borrowed dollars and yet is so bereft of solutions for our troubling economic dilemma, I also could add the previous administration was far worse, in being very willing to spend the lives of other peoples' children towards its own personal ends.

You just wrote on the President's latest move to force the banks holding mortgages on distressed properties into short sales, giving the bank $1,000 and the soon to be ex-homeowner $1,500.  Then the bank is suppose to write down a, let's say, $150,000 loan to what ever a real estate agent says they can get for the house, let's say they believe $100,000, less the cost of selling.  We'll leave alone that the agent has an incentive to lower the amount to get a quick sale and commission.

It's difficult to see in what way this is a solution, if one is looking at a larger picture.  But I haven't seen anyone in Washington look more than two feet in front of themselves.   The bank then must write off its books (which they haven't likely done already) about $60,000; multiply that by thousands and the bank's financial predicament looks bleak, creating another problem.  I suppose the administration will then just have the Fed loan money to the bank at 0%, whereupon they then loan it back to the government at treasury bond rates.  Basically just gift money to the banks who brought about all of this misery.

Meanwhile, the low priced home sale adds to the downward trend in home values, adding more stress to the market, and creating more homeowners who are gravely underwater with their mortgages, about which you have also written.        

At least a year ago, I emailed Senator Isakson (GA) a solution worth consideration.  I happen to still reside in Georgia (much to my dismay), but I sent it to Sen. Isakson because he was proposing a tax credit for home purchases.  It was a step I felt addressed the very core problem of our whole economic catastrophe more than anything else proposed.

I thought his proposal erred in the amount of the tax credit, too low (only $8,000), and I thought it should not be limited only to first time home buyers (which they have since corrected).  And very importantly, the funds should be made available at closing instead of as a tax credit, and the program should not be abruptly discontinued, lest you jolt the housing market again.  Yet it should have a definite end date, so people will not speculate on an extension.

My proposal was to provide vouchers, or some means by which a home buyer could immediately apply the funds, of $20,000 towards the purchase of a home, not restricted to first time home buyers, but likely restricted to owner occupied.    The program would be gradually phased out, with the amount of the subsidy reduced every six months by $2,500.  Thus, it would run for four years, with the final subsidy amount being $2,500 in the last six months.

This does many things, gets the market moving again, which is needed to restore some lost equity and get more homeowners out of the 'underwater' position.  For many of those who are now struggling to make payments, it would improve their chances of being able to sell their homes, and at a higher price where the bank would take a short sale position; yes, it means some short sales, but not as many and for not as much.  It also is a long term gradually diminishing stimuli, enough to give a solid kick to restart the market, but to let it settle slowly into the readjusted circumstances while maintaining normal market activity.  

Restoration of home sales to normal levels will make it possible for homeowners who have been sidelined by the inability to sell their current home, to then make a move they've desired.  Once the market has turned around, all home owners will feel some relief as their equity, even if only very slowly, will begin to increase once again; whereupon personal financial situations will calm and begin to contribute more to the economic recovery.

Most important to all of this, is that the residential construction industry is able to slowly recover.  That was the leg that was kicked out from underneath the national economy.   The sudden unemployment of many millions of workers in that industry sent a wave through the economy, virtually ignored by the media during 2008.   And the $787 billion 'stimulus' bill did nothing to address restoring that leg. 

If 3,000,000 parties took advantage of the program in the first six month period, that would be $60 billion, at that same rate of home sales, over the 4 year program, it would total to $270 billion, plus a small sum for administration.  That infusion of money would be WELL spent.  Every penny of it goes to the heart of the problem.   Americans' homes are the anchors of their financial well being.   And the housing sector has traditionally been the very sector which has led us out of economic recessions.   Reemploying the millions of people involved in the home construction industry is VITAL to restoring this economy.

I believe the national median home price has come down to roughly $168,000 (Jan.'10).  The national median household income is now, likely, just below $50,000, but has suffered greatly due to the wide spread unemployment, and should be at about $52,000.   At 52k, that puts the home price to income ratio at 3.2, a far cry from the 4 to 5 it achieved in 2006.  It would be better to see this rate closer to 2.7, a long term average, but first, we must get things moving.   This will be putting financial equity in the people and not on the other end in the financial industry.  It will start the wave of employment where the wave of unemployment began, in the residential construction industry.  That will then trickle up through the consumer spending market to restore other sectors. 

Other measures should be taken to insure that banks no longer can lend so irresponsibly, and with such short sighted profits in mind.  And those banks who participated in a big way in the securitizing of poorly underwritten mortgages, and those banks who issued those same mortgages and then sold them off, need to be taxed in a big way to recoup some of the losses we've incurred in this recovery effort.  The likes of the Goldman Sachs and Washington Mutuals (or whoever bought them) need to pay up in a BIG way. 

A close look at the 2009 'stimulus' bill will show that at least 70% of the funds appropriated have truly been a waste (in terms of new employment or retention), as a solution to the recession.  There was money for extending unemployment benefits, some targeted tax cuts for lower income earners, perhaps a little of the money towards job training, and a little bit here and there (very little) which managed to fund projects employing those who'd been hit hardest by the storm.

By and large the bulk of it went as a windfall to government contractors who would have been good just with sustained spending levels, and to education, whose had a five or six year run of windfall property tax revenues from the mortgage bubble, but instead of saving it they raised their outlays by 30%, or more, and now want a handout to sustain that increased level.  Atlanta Public Schools' budget went up 31% from fy 2005 to fy 2009 while the enrollment went down 6%, yet they've been awarded $54 million.

They need to immediately reverse that bill, put a halt to funds not distributed, and look to where the economy was kicked in the gut.   A $270 billion put in the right place, would do the job that $787 billion in the wrong place couldn't.

Sincerely,
Robert Lee

An added note:  An immediate $20,000 subsidy applied to the existing average home price of $168,000, gives a net of $148,000 to finance, which represents an income to price ratio of 2.8.   That is a very healthy place to start.  That subsidy gradually fades but it gets the economy moving again, reemploying millions, and softening the blow of this monster equity adjustment.   WE MUST HOLD THE FINANCIAL SECTOR ACCOUNTABLE FOR TRAGEDY.   It was the equivalent of being attacked by another country, who we would have held to some accountability.

Of course, we must first disconnect the financial power players from those we entrust with the welfare of our families.

-RLee