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A Small Idea for the Current Crisis:

An idea that emerged from random conversations: pick the neighborhoods in the U.S. with the highest foreclosure rates, and give buyers a substantial tax credit--say 20-30%--on the purchase price after a fixed period--say five years--in which they hold and maintain the property. You can add features to prevent damaging speculation, like requiring a substantial down payment.

The basic idea is that property in a lot of these neighborhoods is already cheap, but people are afraid to buy for fear that prices will decline another 20% to 30%, and even that the neighborhoods will become dangerous ghost towns as foreclosed residents move out and aren't replaced. Provide a cushion against further decline, buyers will swoop in, prices will stabilize, foreclosures will diminish (and short sales will increase), and pressure on the banking system will be reduced. If politically necessary, you can also add features to prevent windfall profits, like taxing any future profits on these properties as ordinary income.

I understand that the crisis now goes well beyond U.S. domestic mortgages, but surely stabilizing that market couldn't hurt.

RPT (mail):
Where's Bill Ayers? What is the position of the former federal prosecutor on this issue?
10.10.2008 10:24am
Aultimer:
I understand that the highest foreclosure rate neighborhoods are in non-recourse mortgage states. The non-recourse mortgages would seem to be as good a cushion as a tax credit against declining values, no?

Perhaps changing the law of those states for future purchases to permit recourse to the lender would be even better.
10.10.2008 10:33am
Kate S (mail):
Housing prices should only be stabilized when on average they are no more than three times the annual income of the prospective residents. In areas where the prices were driven primarly by speculation, we are no where near that point yet. To stabilize prices at an artificially high level that was only affordable through gimmicky short term mortages helps no one. It will only fuel inflation or another round of failed speculation. Isabel.
10.10.2008 10:48am
davidbernstein (mail):
Kate S., we are certainly there is some of the outer DC suburbs in Virginia. I suspect in some other parts of the country, too.
10.10.2008 10:55am
Passing By:
Who says it's a [i]bad thing[/i] when house prices decline to their actual market value? Who says that it's a [i]good thing[/i] to subsidize overpriced houses, when people would otherwise buy housing that is already fairly valued? Why should we believe that this won't shift the glut of empty houses into markets were housing is appropriately priced, due to increased sales of subsidized housing?
10.10.2008 10:55am
davidbernstein (mail):
The non-recourse mortgages would seem to be as good a cushion as a tax credit against declining values, no?
Non-recourse, I think, only applies if you're living in the house. Part of the idea here is lure investors (who can rent the houses), not just buyers. Plus, even buyers do lose closing costs and their credit record in non-recourse stats.
10.10.2008 10:57am
JB:
What Passing By said.

The first lesson of policy economics is that when prices are not at their natural levels, things are bad, and the longer they are kept thus the worse things get (the more expensive to keep them and the worse the dislocation when they revert).

This is already pretty bad reversion-related dislocation. Why set us up for worse?
10.10.2008 11:29am
Glenn W. Bowen (mail):

we are certainly there is some of the outer DC suburbs in Virginia


Parse.
10.10.2008 11:34am
Happyshooter:
Nice theory, will not work in real life. Michigan tried something similar, and what happens is that the homes are partly fixed up enough to pass a rent inspection and then rented to lower class people who sit around all afternoon and night drinking and smashing and stealing.

The places that try to block rentals have the same pattern, only fly by night mortgage cos let a fake mortage where the same lower class people enjoy 8 months of rent free living and stealing from their working neighbors.

That makes all the good people flee and take a foreclosure when they can't sell.

Lower class people want to move up just enough to get new, better victims and stuff to steal-- so long as it involves minimal effort. Your plan leads directly to that end.
10.10.2008 11:34am
Kate S (mail):
"Kate S., we are certainly there is some of the outer DC suburbs in Virginia. I suspect in some other parts of the country, too."

Maybe, but there are other issues to consider in the outer suburbs of nothern VA. Commuting costs are tremendous unless the property is within easy walking distance of the metro. In a situation like that, the income to mortgage ratio should be probably more like 2/1. Let me give you an example. My husband and I live in a very low cost area in the Rocky mountains. We make about 130k a year between us. We aggressively contribute to our retirement plans (which are dropping in value as we speak) , buy insurance and generally do the responsible thing. We have one vehicle payment of around 400 bucks a month. Our house has no mortgage. The most debt I think we could handle easily would be an additional 800 bucks a month. If we did have a mortgage for that amount we still would not clear the standard deduction and would get no tax benefit from paying the interest.
My point is that I think a mortgage of around 150K is all we could possibly deal with confortably. If we had the same income and had the commuting costs amd living costs of the outer VA suburbs the payment we could afford might be a good deal less and our quality of life would be in the toilet. It might be barely equal if we made 300k a year and had a condo that sat across the street from the metro and right over a Whole Foods. Most of my friends in nothern VA making well over 200k + would trade their lifestyle for mine in a heartbeat.
When people start valuing their homes only as comfortable place to live, rather than an "investment" their "nest egg" or an "ATM" and don't want to take out a 30 year loan for granite countertops and stainless steel appliances (and they have 20 percent or more to put down) we will be getting close to a normal real estate market.
10.10.2008 11:38am
Hadur:
Flooding these areas with absentee owners will not stymie neighborhood decline. It would just promote a decline in the desirability of the area and therefore in the property values.
10.10.2008 11:48am
r.friedman (mail):
How about the government contributing 25% of the value of all mutual funds in 401(k)s belonging to people older than 60? These people shouldn't be required to work until the top of the next market cycle before they can retire, especially given the immense inflation we are about to experience.
10.10.2008 12:17pm
Jon Rowe (mail) (www):
My idea was automatic citizenship to anyone who buys a foreclosed mortgage owned by a bag (after a simple security check). The immigrants would have to buy it outright, thus attracting wealthier and more educated folks. Or companies could buy on behalf of immigrants (perhaps with tax incentives) and award it was compensation which which "vest" after so many years of employment.
10.10.2008 12:18pm
ArtEclectic (mail):
That won't work in places like Southern California where the "ghost towns" were built up in geographically undesirable areas. The Inland Empire and other similar areas are not ever going to recover because the transportation costs and time to get to where the jobs are is too high. Anyplace with expensive and/or long commutes is not coming back.
10.10.2008 12:26pm
Ben P (mail):

When people start valuing their homes only as comfortable place to live, rather than an "investment" their "nest egg" or an "ATM" and don't want to take out a 30 year loan for granite countertops and stainless steel appliances (and they have 20 percent or more to put down) we will be getting close to a normal real estate market.


That's a good point, but I can't really agree for one reason. The nature of our society has just changed.

The average person in the US changes careers several times. The average person in the US also moves 11 times over the course of their lifetime. Nearly 7 million people in the US every year move to a different state.

I may see this as bigger than it usually is because I moved a great number of times all through my childhood and high school years. But the point still stands.

A great many people would love to be able to buy a house knowing that they're going to live in it for 30 years, pay off the mortgage entirely, and be able to pass it on free and clear. But the reality is that almost never happens anymore, people just don't stay in one place long enough.


If you're buying a house knowing that you may well have to sell it in 5 or 10 years, you'd be foolish not to consider the "investment aspect" of buying a house. How much equity you have, how much equity you will have 3,5,10 years down the road, what you can do to keep the sale price up or increase the sale price while you're living in it.



Putting it quite simply that
10.10.2008 12:49pm
LM (mail):
Semi OT, but will there be any consequences to Moody's and S&P for giving AAA ratings to toxic waste?
10.10.2008 1:07pm
Charlie (Colorado) (mail):
The best idea for this current crisis is to remember that it took us a while to get here, and it'll take a while to get out. What I'd like is to have a moratorium (1) on plans to get us out of the crisis until we see what happens with the current plan --- none of the money for buying securities and such has even been spent yet, and (2) a complete moratorium on discussing the crisis by anyone who can't explain fractional-reserve banking and the commercial paper market.
10.10.2008 1:14pm
Ben P (mail):

(2) a complete moratorium on discussing the crisis by anyone who can't explain fractional-reserve banking and the commercial paper market.


But but but.... that would invalidate the ENTIRE main stream media.

oh wait...
10.10.2008 1:19pm
guy in the veal calf office (mail) (www):
Its my impression that the 30s and 70s recessions were particularly bad because of that type of price intervention. The 97, 2002 recessions were sharp, but we bounced back much more quickly because of less intervention.
10.10.2008 1:23pm
Kate S (mail):
"If you're buying a house knowing that you may well have to sell it in 5 or 10 years, you'd be foolish not to consider the "investment aspect" of buying a house. How much equity you have, how much equity you will have 3,5,10 years down the road, what you can do to keep the sale price up or increase the sale price while you're living in it."
Most people who are moving that frequently in my opinion should be renting. I would be. Qiz question: if you bought in 2004 and are trying to sell in 2009 how much equity would you have predicted you would have, had you run the numbers five years ago? There have been a few times in the history of our country where housing prices did more than barely keep up with inflation. Most of these were bubble markets. There have been other longer periods where the price of houses declined in real dollars. We are in one of them now. Another period where this happened was in the mid to late 1980's. When you calculate the cost of ownership, i.e. real estate taxes, brokers fees, holding costs, if you don't sell right away, etc. you will find on average the best you can do is use home ownership as a place holder in the market. If you own less than five years in a non bubble market you will lose money, 5-10 you will lose less. More than 10 years of ownership and you might hold even with inflation. Also you will be starting to pay down the principle a bit more in a 20 year loan. If you were smart enough to go with a 15 year fixed even better. The only way to do better than that is to be able to build yourself and add value to the house with your labor rather than with money. (Adding granite counter tops for 3K and expecting some fool to give you 15K more for your house because of them does not count. That is bubble market psychology where people are paying with funny money.i.e. the bank owns the house, the appraisal process is corrupt, and all they have bought with their 0 down, interest only loan is actually an option to sell at a profit down the road to a greater fool, or to walk away and leave the bank holding the bag)
In the 80's as I recall, income taxes were very high and there was no standard deduction. Mortgage interest was one of the few ways to reduce your tax liability so the cost of ownership as opposed to renting for the same price in terms of real dollars was a somewhat better deal. The market since about 1995 has not be normal and it is now correcting. Anyone expecting to see this tulip frenzy in real estate come back again any time soon is kidding themselves because banks cannot afford to lend anymore to people who can't do the math, and most of the people that can do math don't need the money, or are not buying.
10.10.2008 1:35pm
Casper the Friendly Guest (mail):
Most of my friends in nothern VA making well over 200k + would trade their lifestyle for mine in a heartbeat.


Just curious - if they would trade in a heartbeat, then why haven't they made the trade? Maybe the jobs aren't there, or maybe by the time your friends came to regret their choice, they were already stuck in overpriced houses with underwater mortgages.

But I'd bet that the prestige factor that drives so many lawyers is standing in the way, and that's exactly why real estate in NoVa is so much more expensive than real estate in the rockies. There will always be plenty of high paying jobs and plenty of prestige-seekers looking to fill them, paying huge housing costs in the process.
10.10.2008 2:37pm
armchairpunter:
Government picking winners and losers has brought the economy noting but trouble. Even the "winners" lost eventually b/c they adjusted their models and lifestyles to take into account gov't intervention in markets. Let's sell this crap and get back to business. Let what money remains in this economy flow where investors see the most future value.
10.10.2008 2:58pm
tvk:
Putting aside the rent-seeking and moral hazard problems, you idea has the "doughnut hole" problem. That is, you have neighborhood A, which has housing prices declining 20%, and neighborhood B, which has prices declining 19%. If you subsidize neighbourhood A but not B, with a subsidy in the 20-30% range, then (1) people in neighborhood B will cry foul; and (2) the prices in neighbourhood B will plunge because of the diverson effects (i.e. people who would have brough in neighborhood B will flock to neighborhood A), and neighborhood B will become the ghost-town. If you subsidize both on a sliding scale (the normal solution to doughnut holes), your proposal just got a whole lot more expensive.
10.10.2008 3:05pm
Kate S (mail):
Just curious - if they would trade in a heartbeat, then why haven't they made the trade? Maybe the jobs aren't there, or maybe by the time your friends came to regret their choice, they were already stuck in overpriced houses with underwater mortgages.

Peoples behavior is rarely completely rational. My friends have jobs tied to the defense industry and they have family considerations that keep them there. At least two will be gone as soon as the kids finish school. One of my friends bought in 95 and they are not underwater. They will be gone as soon as the last kid is out of high school. Aother one bought in 2004. They are not underwater only because they put 60 percent down on the house. All agree that in regards to the bottom line, my husband and I are better off. People fear the unknown and they love those pretigious big bucks jobs even when it does not translate into a better lifestyle. I have friends in Jersey who are lawyers who commute every day into NYC. Developing a high overhead, high hassle life style is kind of like being imersed in a pot of water and lighing a fire under it. You don't realize how bad it is until you are in so deep that you can't get out. Before you know it, that 30 minute commute in light traffic ten years ago has turned in to an hour and a half each way or your 1M house in Jersey is the same size as a 350k house in Colorado and your taxes are four times as high. It creeps up on you. Most people don't have the math skills to see that they are no better off. They are also lulled by the fact that everyone around them is in the same boat. I live in a state with no personal income taxes and very low property and sales taxes. Most people unless they are bean counters are unable to calculate the after tax value of those breaks or it does not occur to them to do so.
10.10.2008 3:16pm
Dr. T (mail) (www):
I understand that the crisis now goes well beyond U.S. domestic mortgages, but surely stabilizing that market couldn't hurt.
I've got an idea. Let's take two trillion dollars of taxpayer money to the west coast, toss it out of airplanes, and let the prevailing winds decide who gets money and who doesn't. It's just as logical as the other ways being proposed to spend our way out of the economic pseudo-disaster.

House prices are down because they rose too high over the past ten years.

Stock prices are falling not because businesses are failing (except for financial firms that made very bad decisions), but because everyone is frightened. Secretary Paulson almost ensured that outcome by the way he framed the problem. A big part of the credit crunch also is due to fear: banks are afraid that businesses will fail.

Most of this crisis is psychological. Our houses are keeping us just as cozy and secure as before. Businesses still have buildings, inventories, and personnel. If this problem hadn't been magnified by bad government actions, we'd have seen a few banks and investment firms in bankruptcy, a small percentage of homes in foreclosure, and only a minor drop in stock values. Now, the mess is ten times worse and will take five times longer to recover from.
10.10.2008 7:57pm
devil's advocate (mail):
It may seem counterintuitive, but I think the time is ripe to eliminate tax subsidies, not increase them.

I propose a phase out of the dedutibility of mortgage interest. So if you buy this year it is deductible for the life of the loan -- maybe for the life of the tenancy haven't figured that out. If you buy next year 80% is deductible. the following year 60% so in 5 years mortgage interest is not deductible. Good time to take this dislocation out of the market, but doing it in a phased way allows its final dislocations to favor market entry where the prices are so discounted that the tax benefit is effectively wrung out so eliminating the benefit is actually an incentive for those with the ability to get mortgages in this environment to buy now rather than wait for prices to drop another 20%.

This is still managerial in nature and attempts to pit my intellect and ego against the markets, and thus is surely fallible in the extreme -- but at least the result is phasing out, rather than phasing in, tax subsidies.

brian
10.10.2008 8:29pm
devil's advocate (mail):
PS,

This idea wasn't meant to have the same narrow geographic focus as David's original. I think this kind of 'enterprise zone' approach tends to ignore, or even acknowledge, what poor policies have brought about, but that tends to militate for a macro change in policy.

This targeted stuff is essentially affirmative action.

Neighborhoods with high foreclosure rates do face problems other than property values, or to which property values are incident, that may have a public dimension, the most obvious being crime. Might be a propitious moment to consider reducing black market incentives by ending the drug war. Not a big priority of mine that I'm trying to fit under the rubric of economic recovery, but the kind of thing that occurs to me when I think about government actions in aid of neighborhoods stressed by foreclosure that hue to libertarian principles.

brian
10.11.2008 8:32am
devil's advocate (mail):
Best of Thread Award to Charlie colorado:


What I'd like is to have a moratorium (1) on plans to get us out of the crisis ...


Albeit the real sorry part of this realignment is that there aren't a plethora of plans on the private side. The ironic corollary of Charlie's proposed moratorium is that the floodgates ought to be opened to private initiatives.

For the life of me, I can't understand (other than the public choice complication of waiting to see how big a government check is going to get written and spending time making sure that your name is amongst the payees) why you don't see banks (and ultimately mortgage holding institutions or compelled self organization of smaller mortgage holders) that have decent cash flow but face equity questions based on the instant value of the paper they hold offering mortgage restructuring on a prophylactic rather than reactionary basis.

My guestimate, conceding that ones ideas about a solution are driven by the prejudice of their own formulation of the problem, is that the two most serious factors here are lending to high percentages of purported value and rate resets associated with low introductory/negative amortization payments.

Given the moral hazard of jingle mail as real estate prices fall, it can't possibly be in the private interest of banks to proceed with rate resets -- it doesn't take a government agency to rewrite the terms of a mortgage, only willing participants to the contract. (Yes this is complicated by the fact that these mortgages have been broken into securities with multiple owners, but self organization of interested holders of this paper especially in the wake of a few successful maneuvers by large private players to renegotiate mortgages outside the public choice playing field could offer the vehicle for paper holders endorsement of such changes -- in their own interest).

On the other hand, the high rates were meant to reflect the risk in such high loan to value ratios. It seems to me that the private market deal is for banks to offer to write down mortgages to 80% of value in return for an equity share in the property equal to the percentage they wrote off (or pick a number that works in terms of likely mitigating moral hazard, 60%, 70%, etc. -- probably working off appraised value when the mortgage was made as I think it would be too complicated to try to establish present value). This makes renegotiated interest terms legitimate as well by reducing moral hazard and risk.

You can make a case for FIFO interest, i.e. the bank only recovers principle to the extent that a home sells in excess of the mortgagee's outstanding principle or simply equal shares such that the bank receives a balloon either at sale or at mortgage payoff. Since it is a private matter, different banks might try different terms regarding the equivalent nature of their interests vis-a-vis the mortgageholder and whether the balloon is triggered by sale or remortgaging.

IMNSHO this is betting long on the American economy and is the kind of self interested action that could portend eventually securing the value of mortgage paper, rather than having the government buy it. This kind of scenario cuts the government out -- albeit they would no doubt try to jump in, think Wachovia /Wells and the indignent reaction of the public choice suitors of Wachovia.

The main thing the government could/should do is consider more allowance for cash flow accounting such that the ability to meet regulatory standards for equity reserves does not force companies to shed mortgage securities at deep discounts, and at least allows parallel reported including these alternative measures of fiscal health in SEC regulated disclosures that might defend their stock value and ability to raise capital would not be negatively impacted by the immediate lack of liquidity of mortgage securities.

Brian
10.11.2008 9:31am