Shiela C. Bair – chairman of the US Federal Deposit Insurance Corporation wrote an OpEd entitled “How the State can Stabilise Housing Market” in which she is suggesting to the White House a plan involving loaning $50 billion to home owners with unaffordable mortgages as a way to stop the decline in housing prices, which is pushing some home owners with prime mortgages to jump into foreclosure as a way to shed their negative equity holdings.
It seems that the real problems, with the housing price declines we’re seeing across the country, have little to do with just the few (1 million) Subprime investors that her plan will effect. Currently there are 4 million borrowers holding adjustable rate loans that have either already jumped to higher interests or will soon.
It would cost the Federal Housing Authority approximately $200 billion to pay-down 20% of their loans and add a partner to their profit taking if they were to sell their house before any FHA loan could be fully paid.
Former economic adviser to President Reagan and current Harvard professor Martin Feldstein, in his own Editorial has offered a similar plan that will make $300 billion available to the FHA to loan to home owners, but has more stringent rules then the plan offered by the FDIC. It extends the duration of the loan to 15 years instead of the 5, Shiela is suggesting, but in the end its just another loan with more complicated strings than a simple foreclosure.
The Fed has thus far loaned several hundred billions directly to the banks that have used it not to turn around and loosen up on the tight reins of liquidity we’re seeing, but rather they have continued their momentum of tightening.
It would have made more sense to have given the funds they made available to the home owners who have been caught in this trap instead of the lenders who created the problem in the first place through extremely poor lending practices. It may have even stopped the collapse in house prices if it had been done in the timing of the bank bail-outs.
The real losers in this fiasco are the families that have refinanced their homes in the last 5 years, when home values were high, and are now sitting on negative equity, and none of them qualify for any kind of relief.
Neither plan seems to be a shoe-in for Congress or the White House, which believes that any bailout should be done privately. The essential question of the day seems to be timing. If action on this matter waits then what some people are calling an adjustment may over shoot the bottom, either that or the momentum will be too much to stop at all. A lesson we should have learned from Japan in the 90’s.
