A Simple Plan

[PTWizard]

It seems to me that neither the "Stimulus" plan or any of the government bailouts that are destined to cost U.S taxpayers (and their children and their children's children) trillions of dollars deal effectively with one of the central problems in our economy, the dramatic decline in housing prices. It seems to me that unless something is done to stabilize housing prices consumer confidence and spending will never return to "normal" levels and the alarming acceleration in the level of foreclosures will continue to decimate our economy. I believe that our government needs to take dramatic action to ensure that this problem is not allowed to plunge us deeper into recession and ever higher unemployment. Therefore, I offer this simple plan to address this problem.

My plan is that the government should buy down 30 year fixed mortgages with a 10 point subsidy (which would currently result in an interest rate of about 3.5%) for the FIRST 20,000,000 homebuyers who have a credit score of 700+, can put 20% down and can qualify under current FHA guidelines over the next 5 years. This would reward people who have built good credit and savings while possibly encouraging others to do so over the next few years. In my opinion this incentive would create several million new homebuyer prospects nearly overnight which would stabilize prices almost immediately. In addition, since only one such loan would be available to any borrower and once acquired, such a borrower would be reluctant to give up this below market loan, 20,000,000 homes would be off the market for an extended period of time which would further stabilize the housing market. I estimate that with an average mortgage for the plan of $250,000 (FHA maximum in most areas is $417,000 although average home prices in most areas of the country are below $200,000) and a cost to the government of $25,000 (10 points) to buy down each loan the total cost of the program over 5 years (maybe less depending on how fast 20,000,000 borrowers qualify) would be $500 billion. A lot of money, yes, but I'd rather see it spent to incent people to behave in a manner that would qualify them for this program rather transferring our tax dollars directly to those who borrowed irresponsibly in the past even if they were egged on by the conducive government policies of the past and the greed driven complicity of wall street. All homeowners would benefit from a stabilization of prices. Even those who did borrow irresponsibly would be helped indirectly by this program if it allows them to sell their home at a better price and, possibly, avoid foreclosure.

What do you think? What is right or wrong with my plan?

 

[30ashopper]

Bail out responsible home buyers? Surely you jest.

One of the things you're not calculating into your total cost is the interest on the bonds the government would have to sell to finance something like this - at a 3% long term bond rate, the cost would about double from 500 billion to a trillion.

Personally I'd prefer government not do anything. Let the market correct naturally, let those that took on too much risk pay the price.

 

[gmarc]

We live in a capitialistic society were you reward the strong and punish the weak. people who overstretched and bought more than they could afford need to be punished and the strong who were responsible will buy the real estate at rock bottom prices and thrive. THE GOV'T IS TRYING TO PLAY GOD WITH EVERYTHING FROM BANKS TO INSURANCE CO'S TO CAR CO'S INTERFERRING IN WHO MAKES IT AND WHO DOESN'T. the gov't is throwing around trillion of $'s of money which is not theres and they don't have.They're in the process of destroying the long term future of our country . They've created a massive moral hazard were all think the gov't will always be there to save them such engouraging continued risky behavior with no consequences.

 

[PTWizard]

Bail out responsible home buyers? Surely you jest.

One of the things you're not calculating into your total cost is the interest on the bonds the government would have to sell to finance something like this - at a 3% long term bond rate, the cost would about double from 500 billion to a trillion.

Personally I'd prefer government not do anything. Let the market correct naturally, let those that took on too much risk pay the price.

The same applies to the $800 billion "stimulus" plan passed by Congress. And unfortunately, we are all paying the price (in taxes and declining home prices), not just those who took on too much risk.

 

[30ashopper]

I guess I just think that letting the market heal, letting it correct naturally is the best solution. We have no idea what normal housing prices are because the market has been artificially inflating now for over 20 years. We need to let things correct to the new norm. There's no way we can predict what prices that norm represent. Propping up prices (assuming markets do work, and I believe they do) will just waste money over the long run because the market will correct no matter what. Government can't keep prices artificially high because they can't pump money in forever.

 

[steyou]

It seems to me that neither the "Stimulus" plan or any of the government bailouts that are destined to cost U.S taxpayers (and their children and their children's children) trillions of dollars deal effectively with one of the central problems in our economy, the dramatic decline in housing prices. It seems to me that unless something is done to stabilize housing prices consumer confidence and spending will never return to "normal" levels and the alarming acceleration in the level of foreclosures will continue to decimate our economy. I believe that our government needs to take dramatic action to ensure that this problem is not allowed to plunge us deeper into recession and ever higher unemployment. Therefore, I offer this simple plan to address this problem.

My plan is that the government should buy down 30 year fixed mortgages with a 10 point subsidy (which would currently result in an interest rate of about 3.5%) for the FIRST 20,000,000 homebuyers who have a credit score of 700+, can put 20% down and can qualify under current FHA guidelines over the next 5 years. This would reward people who have built good credit and savings while possibly encouraging others to do so over the next few years. In my opinion this incentive would create several million new homebuyer prospects nearly overnight which would stabilize prices almost immediately. In addition, since only one such loan would be available to any borrower and once acquired, such a borrower would be reluctant to give up this below market loan, 20,000,000 homes would be off the market for an extended period of time which would further stabilize the housing market. I estimate that with an average mortgage for the plan of $250,000 (FHA maximum in most areas is $417,000 although average home prices in most areas of the country are below $200,000) and a cost to the government of $25,000 (10 points) to buy down each loan the total cost of the program over 5 years (maybe less depending on how fast 20,000,000 borrowers qualify) would be $500 billion. A lot of money, yes, but I'd rather see it spent to incent people to behave in a manner that would qualify them for this program rather transferring our tax dollars directly to those who borrowed irresponsibly in the past even if they were egged on by the conducive government policies of the past and the greed driven complicity of wall street. All homeowners would benefit from a stabilization of prices. Even those who did borrow irresponsibly would be helped indirectly by this program if it allows them to sell their home at a better price and, possibly, avoid foreclosure.

What do you think? What is right or wrong with my plan?

The government is the problem.

 

[PTWizard]

I guess I just think that letting the market heal, letting it correct naturally is the best solution. We have no idea what normal housing prices are because the market has been artificially inflating now for over 20 years. We need to let things correct to the new norm. There's no way we can predict what prices that norm represent. Propping up prices (assuming markets do work, and I believe they do) will just waste money over the long run because the market will correct no matter what. Government can't keep prices artificially high because they can't pump money in forever.

I actually agree with you. Government meddling in the markets that got us into this mess in the first place and we would be much better off if the government would just stop interferring. Unfortunately, I doubt that government will ever just leave the markets alone to "correct naturally".

I'm just thinking that if government insists on continuing to manipulate interest rates (keeping them abnormally low in an effort to stave off disaster), why not do so in a way that rewards the "right" kind of behaviours and minimizes the collateral damage.

By collateral damage I mean people like my best friend's parents who planned to sell their home, move to a smaller condo and subsidize their retirement with the left over cash. That can't happen now even though they never speculated in real estate and dutifully paid their mortgage for 30 years until they owned their home free and clear. Their home never soared in price, being located in a suburb of Detroit, but it would be impossible to sell now for anywhere near replacement value due to the recession which, in my opinion, was triggered by the collapse in housing prices, which was caused by the sub-prime debacle, which was caused by government enabling Fannie Mae and Freddie Mac to create a market for such loans and encouraging (actually mandating via the Community Reinvestment Act) that the banks originate such loans.

 

[PTWizard]

The government is the problem.

I agree. The only long term solution is to vote the bums out. ALL OF THEM! Unfortunately, I seem to be in the minority on this approach. I've voted against all Republicans and Democrats starting with the 2004 elections but they just keep getting re-elected. I guess most people think our government is doing just fine. My plan was just an attempt to suggest something I thought might actually work vs. the non-sense of wealth re-distribution our government seems hell bent implementing now.

 

[Babyblue]

I say put Bush back into office. He could have fix things if he had more time. Unfortunately things blew up at the end of his term. We should be "Water boarding" the chiefs on Wall Street to find out just what they knew. :funn:

 

[traderx]

I agree. The only long term solution is to vote the bums out. ALL OF THEM! Unfortunately, I seem to be in the minority on this approach. I've voted against all Republicans and Democrats starting with the 2004 elections but they just keep getting re-elected. I guess most people think our government is doing just fine. My plan was just an attempt to suggest something I thought might actually work vs. the non-sense of wealth re-distribution our government seems hell bent implementing now.

I go back farther that that: I begin voting third parties in 1992. I think most folks believe their members in the Congress are doing fine. Not sure why. Both my Senators voted for the TARP program. I have put them on notice that I will do anything and everything to bring about their reelection defeat. Their reactions? Put me on a form letter mail list. My Congressional rep is okay. Maybe too enthralled with the government-should-ensure-the santity-of-family platform but he is fiscally conservative at least.