Reich and Zandi on how to fix housing
The Obama administration has tried a number of programs to slow the rate of foreclosure, but the housing market is still unstable. Commentators Robert Reich and Mark Zandi discuss other actions the government could take.
A couple walking with their dog towards a foreclosed townhouse in Centreville, Va. (Paul J. Richards/AFP/Getty Images)
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STEVE CHIOTAKIS: Ask any economist about an important key to our financial recovery and they'll point to housing. The Obama administration has tried a number of programs to stem the foreclosure rate. But right now the housing market remains unstable. So what's plan B? Time this morning for a little back and forth. We asked a couple of commentators, Robert Reich and Mark Zandi, about what other actions the government could take. Zandi says loan modifications. But Robert Reich says, he's not so keen on that.
ROBERT REICH: Are taxpayers going to bail out all of these underwater homeowners by reducing the principle?
MARK ZANDI: You know, I think taxpayers are going to have to ante up more. I think it's important for people to realize that if we don't solve this problem and bring an end to it, house prices will continue to evaporate and we will all be a lot less wealthy and tax revenues a lot lower. So I think it's a necessary investment. What do you think? I mean how can we address this?
REICH: I would be in favor of a national moratorium on foreclosures. Several states have tried it with some success. Why not a six month national moratorium on everybody?
ZANDI: When we have tried it -- a lot of states as you pointed have tried it -- and it didn't really help. In fact as soon as the moratoriums were off foreclosures started to surge again. And you know, you're not solving the underlying problem, and that's rising unemployment and falling housing values. And I'm not sure that you're going to solve any problems by just delaying the problem.
REICH: If you delay it long enough then housing prices begin to start turning up again.
Here's another idea: What about the cramdown provision? What about simply allowing people, as they're allowed with their second homes, to declare bankruptcy and to reorganize their finances? After all big corporations can do it. At the very least this would give homeowners more bargaining leverage to change the terms of their mortgages, right?
ZANDI: Probably will be other fallout from that. I mean for example when people file for bankruptcy, they will not only get their mortgage crammed down, but you'd reduce the amount of credit card debt they owe, health care bills, everything else that they have debts on. And it creates other problems for the rest of the financial system that I'm not sure we truly fully understand the consequences of.
But listening to you talk, it does highlight the complexity of this issue. I don't think there's any other issue that policymakers face that is as difficult as the current housing foreclosure crisis. There's no easy answer to this one.
REICH: Yeah. Well I'm still going to hold on to a national foreclosure moratorium until you absolutely convince me otherwise. Mark, it's great talking to you.
ZANDI: OK. It was great. Thank you Bob.
CHIOTAKIS:Mark Zandi is the chief economist at Moody's Economy.com. Robert Reich teaches public policy at the University of California at Berkeley.
Comments
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From St. Paul, MN, 07/04/2009
Perhaps we should look at other mechanisms to pool or share risk of housing prices. There are some who believe that housing prices will eventually recover, or there are persons who believe particular locations or debtors are worth the risk. They would be willing to loan to the homeowner, but on condition that they would share in the appreciation value later. Could we create some kind of investment or pooling mechanisms whereby individual investors--through a coop or credit union or some other intermediary--could invest or speculate in this fashion. Why should hedge funds be the only vehicle? Are there other vehicles--coop, city supported or sponsored invesment fund--etc. that could invest in real estate or mortgages, but not just as a creditor, but as a part owner of distressed properties or credit.
From HI, 07/04/2009
Why governmental lobbyists are so interested in people buying ever larger homes? Could it be the concept of declining inventory value during deflation, the glitch remedied by just-in-time-inventory?
With some internet based companies running on empty through the magic of zero inventory, there is for each of these magic companies a bot-net of computers throughout our cyber-cloud now conveniently replacing old style brick & mortar. Until it has a matching order from customer this bot-net orders nothing. During times of economic contraction the only existing inventory build fungates inside our over-sized homes. This scenario shifts the hit of falling prices to the lap of the consumer as value of his inventory and home spiral to the bottom.
Although our senators are now carefully tailored to our need by TV executives, will they soon be replaced by bot-net algorithms? Will Capitol Hill soon be the sarcophagus of our constitution, our ideals?
U B Judge
!
From Dallas, TX, 07/02/2009
I intended to come make my comments earlier today, but got side-tracked. Now I come to find that Mujo in CA has made every point I intended to make much better than I could have made them. Listen to him. He is correct.
Carrying forward this unsustainable debt and pulling forward demand is what got us into this mess. We will not be truly clear of it until all the bad debt in the system has been written off.
From Irvine, CA, 07/02/2009
Both Bob and Mark are wrong. The way for the economy to move on is for home foreclosures to take place. People should not live in homes that they cannot afford. If you lose your house, you should rent or share housing with family. For prospective, I am a perspective first time home-buyer and a reasonably well-paid financial professional. I have observed that home prices in my neighborhood have not adjusted down enough to be supported by my and my wife’s earnings. We have been looking to buy a home since 2005 (pre bubble). Since we have always been underwriting our mortgage SUSTAINABLY with 30-year, fixed rate of interest assumptions, we knew that we could not reasonably afford to pay for the homes that appealed to us. Why should my family now pay for mortgage modifications for those that bought homes that they cannot afford? Why should we artifically keep defering the inevitable by placing moratoriums on foreclosures? People who cannot afford their home today, probably cannot afford it 3 months from now.
Letting foreclosures proceed will not ruin the economy and there seems to be a lot of misplaced fear surrounding it. First of all, both the stock and bond markets (particularly CMBS/MBS) have generally priced in the impact of widespread forclosures. MBS investors have already priced in very low recovery rates. Valuations cannot get any direr and new bond issuances are a mere trickle of the prior. Foreclosures will help establish a new price point and eventually get the broader securitazation markets going again. Second, foreclosures require banks or MBS special servicers to staff-up which creates jobs in an evironment when we are losing them. People who get foreclosed can either move in with their inlaws which is more energy and resource effiecient; or rent which positively impacts the likes of pulbicly traded real estate investment trusts (Essex, UDR, Camden, Avalon, etc) by raising occupancy and net operating incomes. Third, most “expert” economists that provide an opinion on the housing crisis likely already own their home. Even if these economists are current on their house payments, they have an inherit bias toward propagating the prevention of foreclosures because they do not want to see the value of their own home go down. Finally, home prices must be supported by real wages and sustainably-underwritten mortgages. It makes absolutely no sense that home prices can increase when real wages are decreasing. Economists and politicians should be making sure there is enough consumer/lender protection and disclosure in mortgage products and that rating agencies never again systemically misguide the investors. Otherwise, let the markets proceeds as there are plenty of us first time home-buyers waiting for the right entry point.
From Wilmington, NC, 07/02/2009
It seems the me the simplest way to stop the tide of foreclosures is to force banks to offer fair interest rates but extend the life of the loans over longer periods--40 or 50 years. Longer repayment times would lower the monthly mortgages without reducing the homeowner debt. In this way the burdens of ill-conceived loans remain where they should--on the banks and the homeowners.
From DE, 07/02/2009
I listened to Robert Reich this morning - how foolish do you think we are. Have you thought it through! I agree things need to be done but your solution is foolish - you have drunk the OBOMA koolaide. Nothing is being done to stimulate BUSINESS which provides us a paycheck. We all should be paying less taxes.
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