The Joint is Jumpin' : Glenn Hubbard's Plan to Restore Credit, Secure Homes, and Boost Jobs
Posted: Thursday, October 09, 2008
by Walter Rhett
Charleston Perlo
The markets are falling-the Standard and Poor's Index hit its lowest close in five years. The Bush administration, responsible for oversight and management of the economy, responsible for forecasting trends and navigating the country through choppy economic waters has capsized. In less than six weeks, the country has lost five years of public captial growth. Five years wiped out. Rumblings are the trillion dollar rescue may fall short.
In the swell of the waves, working families are tossed to and fro. What to do?
Glenn Hubbard is an economist who has a common sense plan. Like all good plans, it is simple, understandable, workable, and cost effective. It is results oriented.
Hubbard served as Chair of the Council of Economic Advisors under Bush 1. He has taught at Harvard and is currently Dean of the School of Business at Columbia University in New York. He has proposed the most sensible, straight forward plan for restoring liquidity to the credit markets and solving the housing crisis by assisting home owners and at-risk mortgage holders. His plan reduces risk and adds oversight. It's presented in two parts; principles first, then the plan-what and how. Read this. Share it. Pass it on. Send it to Congress.
It is worth serious consideration.
This is what Hubbard has to say about the credit crisis (from the WSJ):
"Any solution should observe three guiding principles: It should:
(1) restore the stability of the financial system quickly and at the lowest possible cost to the taxpayer;
(2) punish those who are responsible for losses; and
(3) address the root cause of the crisis -- the price collapse in the residential real-estate market. In doing so, the solution should respect the rule of law by spelling out the proposal in sufficient detail for the Congress and the electorate to pass judgment. To the extent possible, it should follow proven precedents.
The administration's current proposal fails to meet these principles. The Treasury's plan has three significant problems:
First, there is the central issue of how to price the assets ...
A second issue is whether we are better served by buying assets or institutions ...
The final problem is potential cost ...
Efficient institutional design can reduce the share of costs borne by taxpayers, while repairing the financial system's ability to match borrowers and lenders and provide risk-sharing, liquidity and information services. Keeping costs down is important, as such a large increase in taxpayer support will constrain significantly, if not overwhelmingly, the fiscal initiatives of the next president."
"First, Let's Stabilize Home Prices"
We are in a vicious cycle: falling housing values cause losses on securities, which reduce bank capital, thereby tightening lending and causing house prices to fall further. The cycle has spread beyond housing, but housing is the place to fix it.
Housing starts are at their lowest level since the early 1980s, while there are more vacant houses than at any time since the Census Bureau started keeping such data in 1960. Millions of homeowners owe more on their mortgage than their house is worth. Foreclosures are accelerating. House prices continue to fall, weakening household balance sheets and the balance sheets of financial institutions.
But this can stop. The price of a home is partially dependent on the mortgage rate -- a lower mortgage rate raises house prices.
We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac. Investors and speculators should not be allowed to qualify.
The historical spread of the 30-year, fixed-rate conforming mortgage over 10-year Treasury bonds is about 160 basis points. So a rate of 5.25% would be close to where mortgage rates would be today with normally functioning mortgage markets. One of us (Chris Mayer) recently published a study showing that -- assuming normally functioning mortgage markets -- the cost of buying a house is now 10% to 15% below the cost of renting across most of the country. Rising mortgage spreads and down-payment requirements are what's still driving down housing prices. We need to stop this decline.
The direct cost of this plan would be modest for the 85% of mortgages where the homeowner owes less on the house than it is worth. Lower interest rates will mean higher overall house prices. The government now controls nearly 90% of the mortgage market and can (and should) act on this realization. Remove the refinancing option and you can have lower rates without substantial cost to the taxpayer. Homeowners would have to give up the right to refinance their mortgage if rates fall, although homeowners could pay off their mortgage by selling their home. For borrowers with lower credit scores, the mortgage rate would be greater than 5.25%, but it would be less than their current rate.
Now, what about mortgages on homes that are worth less than the total amount of the loan? These mortgages could be refinanced into a 30-year fixed-rate loan to be held by a new agency modeled on the 1930s-era Homeowners Loan Corporation. New mortgages would be made of up 95% of the current value of a home.
The government might use two approaches to mitigate its losses. It could offer owners and servicers the opportunity to split the losses on refinancing a mortgage with the new agency. Servicers would have to agree to accept these refinancings on all or none of their mortgages, to avoid cherry-picking. Or the government should take an equity position in return for the mortgage write-down so that the taxpayers profit when the housing market turns around.
Our calculations based on deeds and Census data suggest that the total amount of negative equity for all owner-occupied houses is $593 billion. However, capping an individual's write-down to $75,000 would reduce the government's total liability to $338 billion and cover 68% of individuals with negative equity. Even this loss will be reduced as the proposal spelled out here raises housing values and economic activity, and contemplates loss sharing with lenders, hopefully matching the experience of the old Homeowners Loan Corporation.
While the net cost is modest compared with many plans on the table, it would require that the government could assume trillions of dollars of additional mortgages on its balance sheet. But we have already crossed this bridge with the explicit "conservatorship" of Fannie Mae and Freddie Mac. In any event, these mortgages would be backed by houses and the verified ability to repay the debt by millions of Americans. In addition, by putting a floor under house prices, this proposal would raise the value to taxpayers of trillions of existing home mortgage assets already owned or guaranteed by the FDIC, the Fed, the Treasury, Fannie Mae and Freddie Mac, among others.
Improvements in household and financial institution balance sheets will increase investment and consumer spending, which will mitigate the extent of the current downturn. Americans, on average, spend about 5% of the equity of their homes on consumer goods and services. So if home prices increased 10% above where they would have been without government intervention, we estimate consumers will have an additional $100 billion annually to spend.
In addition to focusing on the very real problem in the housing market, the plan could be implemented immediately. As a result of the U.S. government's conservatorship of Fannie Mae and Freddie Mac, origination of new mortgages can be financed quickly. Congress would have to raise the overall borrowing limit and approve the new federal purchases of negative equity loans. But it will likely take the Treasury much longer to buy troubled assets than Fannie and Freddie, and it would have to seek the involvement of many additional private actors, as opposed to using vehicles already in place.
The decline in housing prices remains the elephant in the room in the discussion of the credit market deterioration. Let's start there.
One blogger commented: "Remember that 40% of our entire economy is driven by real estate, directly or indirectly. This would be an immediate, giant shot-in-the-arm. It would positively affect the entire economy, and the well-being of all."
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Top-level comments on this article: (3 total)Walter in my opinion based on their works it will never be, that is any plan not just yours. It seems that there are many good, sound, logical and reasonable idea's all about yet it neveer seems to happen. Are they not qualified, uneducated, ignorant or is it more then that? I suspect their deeds have nothing to do with avaerage Americans. The rhetoric yes, the deeds no and that is a proven fact for every single one of them. Hey I owe 200k on a house worth 130 k and when i took the nmortage I had 80 k in equity. Yes and I'm an "investor" because I borrowed on mine to keep a rtoof over my childs head. Yes so I should getv the shaft for keeping him off of the street and the dole. No complaints but how many more average Americans do it for their family and not money? Like I said many time, it is not and never will be about people. Great article.
Great article! And many people have been inspired by this proposal for the reasons you've identified. In fact, the American Association of Concerned Taxpayers started a petition they would like to present to the new president, congress, and governors promoting the proposal of Hubbard and Mayer. Please encourage all of your readers to go to ACTas1 com to sign the Save Our Homes petition. TOGETHER WE CAN MAKE A DIFFERENCE!
I loved the article, very inspiring. There is hope. I ready all previous comments, and visited the above comments actas1 com for the Save Our Homes petition. My home is about to be in foreclosure, I signed it and encourage all others to sign as well. This petition goes along with exactly what your speaking of sir. I am humbled to know there is hope. Thank you.
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