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Tuesday, May 15, 2012

Fixing The Housing Market, At No Cost To Taxpayers

While the federal government and every commentator across academia, the think tank community and financial press push for government bailouts to "fix" the housing market, I have come up with a plan to fix the housing market and offer homeowners the chance at mortgage principal reduction that does not cost the taxpayer one penny in subsidies.  (To see the plan, click the link to the website of the financial think tank Financial Policy Council.)

My plan accomplishes all of the following:
  • All homeowners are treated equally
  • Participating homeowners get an immediate and substantial profit
  • The cost to taxpayers: ZERO
  • Homeowners keep all their future price appreciation, so they are encouraged to stay put
  • Strategic defaults are discouraged as homeowners get incentivized not to default, thus reducing defaults and foreclosures and price erosion (wealth destruction)
  • Unlike other profit-sharing proposals, the government gets no share of future price appreciation, removing the government's temptation to create another real estate  bubble for its benefit
  • Banks, or the investors holding the mortgages, get a benefit of receiving liquidity -- real cash -- in exchange for writing down principal, so banks and investors can participate voluntarily and see this as an opportunity, instead of a mandate forced upon them by the government
  • By keeping good risk homeowners in their homes instead of choosing economically rational strategic defaults, the servicing banks keep getting fees for their servicing work and avoid having to pick up the cost of property taxes and property insurance on abandoned homes.
  • We avoid the error of a huge waste of taxpayer money (or forcing banks to eat losses) to subsidize interest rate and principal reductions aimed only at defaulting homeowners who likely cannot stay in those any price.
  • By not hammering the banks, we foster an environment in which banks are willing to lend and issue new mortgages, essential to a robust real estate market dependent on credit
  • We avoid the risks of moral hazards which incentivize the worst behavior and discourage the best behavior
  • Finally, we use natural incentives to depress supply, helping us get back to a healthy real estate market where supply and demand are in equilibrium.
Compare this with anything you've seen in the last five years.

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