There was an interesting article in Sunday's Boston Globe titled
6 Steps to Fix the Housing Market by Jenifer B. McKim. With the Treasury switching gears on the economic bailout plan, the article gives us 6 different ways to spend the money and reform the industry. The 6 ways are: 1) Cut/subsidize the interest rates; 2) Modify existing mortgage and pay loan servicers an "incentive" fee; 3) Government buyup/buyout of loans; 4) "shared appreciation mortgages" (ie. forgive a portion of debt...however, if the home appreciates, the lender will get a share of the profit); 5) Buy cooperation from loan servicers and second mortgage holders to modify loans (similar to #2); and 6) Reform the bankruptcy laws to allow bankruptcy judges to modify a debtor's mortgage.
The first one is my favorite....Cut the rates. There are a couple of different theories with this one alone. Columbia Business School dean R. Glenn Hubbard and Columbia Business School professor Chris Mayer propose to refinance "primary residences into 30-year fixed-rate mortgages at 5.25 percent placed under mortgage giants Fannie Mae and Freddie Mac." Another proposal, made by the National Association of Homebuilders, suggests using the economic stimulus package on subsidizing conforming, 30-year fixed interest rates down to 2.99% through June 30, 2009, and 3.99% through the end of 2009. In my opinion, either way you
cut it, this is the best idea. First, it's the most basic...people understand it. Second, not only will it push first-time buyers out to buy, but it will also push people currently in adjustable rate or high interest mortgages, who aren't yet in financial trouble, to refinance. Lastly, it will offer a solution that isn't necessarily a
band aid. It would put a solution in place
before homeowners get into trouble. With people losing jobs, especially in the financial sector, more and more individuals aren't going to be able to afford their current mortgages. Let's set up a framework to help them
before they get into trouble.
This brings me to my second point. I don't think cutting the rates alone will help. We also need a secondary solution for those already in trouble (ie. the individuals with low credit scores and/or those affected by the rapid depreciation of home values). Perhaps one of the other proposals, or a combination thereof, will provide a path towards recovery.
For full story see
The Boston Globe.
