Equivalencies

Had a tiling project delay me. Back to normal tomorrow, with no scolding. This first, though.

Dean Baker has a great post up stating the obvious.

Just as an example, suppose the Fed had, instead of recapitalizing banks directly, established a fund called the Negative Equity Removal Fund (NERF). The Fed can do this type of thing. Under this program, homeowners with negative equity could apply for negative equity removal. The application fee would be approximately $400 and would cover an appraisal of the home along with processing costs. Once the homeowner was approved, the NERF would conduct an appraisal of the house and compare its market value to the total mortgage debt and associated liens. The Fed would then purchase or cancel all liens on the home, with the homeowner receiving a new mortgage at current interest rates in the amount equal to the appraised value.

As an Assuming the house was appraised at $400,000 and had three mortgages totaling $600,000. After being accepted, the Fed would purchase all three mortgages from the respective lenders. The first mortgage holder would then have the option to issue a $400,000 mortgage to the homeowner guaranteed by the Fed. The fed would charge a fee to the lending institution of 1/4 percent or so to cover any default risk.

Note this policy would a) eliminate all negative equity for homeowners, lower their monthly payment significantly (smaller loan at lower interest rate), yet not give them any advantage over homeowners with equity; b) reduce the default rate for banks by replacing troubled loans with guaranteed loans; c) not require Federal funding a la TARP, since it would generate cash in the banking system exactly where needed; and d) accomplish the same recapitalization of the banks as a bailout.

The $8 trillion lost in the housing bubble is going to be with us for a generation, because an entire generation had their first or second source of wealth completely wiped out. Ten million homeowners are underwater, but all homeowners lost wealth. Most lifetime spending hypotheses would indicate that unless home prices return to their previous peaks (unlikely), that spending will be depressed until people grow up entirely unaffected by it. In addition, an entire generation is facing a much less financially secure retirement, and Social Security diminishing by the day.