Housing and Tax Incentives and Cram Down and Foreclosures

By February 19, 2009Economy

The NAM’s John Engler issued a statement before the President’s announcement yesterday of new housing and mortage programs designed to prevent further foreclosures.

The collapse of the housing market lies at the heart of the nation’s serious economic troubles, and the President is right to focus now on housing and home buying. A healthy housing sector is critical if the country is to return to economic growth, and even with passage of the stimulus bill, more needs to be done.

The National Association of Manufacturers believes the inclusion of the tax credit for first-time home buyers in the stimulus legislation represented a good start on stabilizing the housing industry. The next, necessary step is to increase the tax credit and extend it to all home buyers. The Senate version of the stimulus bill included provisions to accomplish this goal, backed with strong bipartisan support, and it would be an effective tool for revitalizing the housing market.

Another positive proposal would give qualified borrowers the opportunity to obtain low, fixed rate 30-year mortgages to buy a home or refinance existing loans. Along with the tax credit, these mortgages would encourage people to buy now, retaining and creating job opportunities in numerous industry sectors and energizing the broader economy.

As for the President’s proposal on housing finance, we operate under the theory that whatever Peter Wallison says is probably going to be right. The AEI scholar and former Treasury counsel had Fannie Mae and Freddie Mac pegged years and years ago. Here’s what he says now:

The Obama loan-modification package is well-designed, and it makes sense to use Fannie Mae and Freddie Mac as the central players. They both have the expertise and staffing to handle a lot of the details, and they already own a large proportion of the mortgages and MBS that have to be refinanced. This principally includes the 10 million subprime and alt-A mortgages they hold or have guaranteed.

However, the program is ill-conceived if it is intended to renegotiate the 6 million mortgages the administration has suggested it will be necessary to address. There is very little chance that this can be done in the time required to prevent the gradual deteroration of both bank assets and the economy generally. What was necessary was a program that treated the problem on a wholesale rather than a retail basis. This could have been done by acquiring the loans at a discount from the banks (relieving the banks of the cost of foreclosure) and passing the discount (together with a lower interest rate) along to homeowners in the form of a reduction in mortgage principal. No time-consuming negotiation would have been required, and the homeowners would have had much lower monthly payments. In short, it’s a well-intended plan, but will fall short of a solution.

And the “cram down” language is troubling. From Alan Reynolds of Cato:

The president’s new mortgage-relief plan contains clever elements that might indeed help homeowners. However, the superfluous threat of inviting judges to rewrite contracts must dilute the collateral behind troubled mortgage-backed securities. That, in turn, would jeopardize the endangered capital of banks, pension funds and other holders of such securities, including the Federal Reserve, Fannie Mae and Freddie Mac.


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