Better Late Than Never

Senator John McCain finally acknowledged during the second presidential debate that some American home owners might just be victims of something more than “biting off more than they could chew” in a home mortgage. Take the example of a typical Florida family and their quest for the American dream:

Nancy and Billy bought a new home in Central Florida two years ago for $349,000, paying $35,000 down (their life savings) and financing the balance with an adjustable rate mortgage. Today, the home appraises for a mere $229,000—a 30 percent market drop in two years. These Florida homeowners are upside down and there is no relief sight—sadly, they are typical. Now, Nancy has been laid off from her job and this couple is trying (unsuccessfully) to make ends meet. Like many of their neighbors they have quit paying their mortgage, have been served with foreclosure papers and are preparing to walk away from their home. The rows of “for sale” signs are sad evidence that there are no prospective buyers on the horizon, and even if there were, how does one sell a home in this situation?

On this count, the Democrats seem to “get it”—supporting legislation that would allow Nancy and Billy to seek relief from a bankruptcy judge to “cram down” the mortgage debt to the true value of the property and modify the payment schedule accordingly. In the Democratic scenario Nancy and Billy obtain relief from bankruptcy court reducing the debt on their home to $229,000 and resetting their amortization schedule to reasonable market interest for 30 years fixed rate. Democrats say this will stem the tide of foreclosures and keep Americans in their homes. “Cram down” is a ham-handed remedy that some have labeled “socialist.” But at least it’s a solution.

The concept that the Republicans are against mortgage restructuring for the “little guy” verges on the “let them eat cake” mentality. That Senator McCain has finally seen the tragedy in this scenario in announcing the use of the bailout dollars to adjust the principal balances of such mortgages is hopefully an idea that is better late than never.

As President Bush said in his statement on the economy, “America’s economy is facing unprecedented challenges, and we are responding with unprecedented action.” McCain is right to start showing some unprecedented compassion for homeowners on Main Street before it’s too late.

McCain’s bold move may be too little too late—but it’s better late than never. Nancy and Billy will be watching.

McCain did acknowledge the homeowners caught up in the mortgage crisis, primarily those facing foreclosure, not the more responsible home owners hit by declining home values, and I do not believe he has yet grasped the enormity of the problem. That's OK though. Obama hasn't grasped it yet either, nor has the Bush Administration, Congress, or most Americans.

Speculation and greed drove the housing prices up. That same speculation also drove cities across the nation to build tracks of new homes well beyond the number of qualified buyers. As the inventory of houses grew, lending companies created new ways to “qualify” buyers in an effort to broaden the buyer base.

There is no question now that these creative mortgage financing techniques failed. There is ample blame to go around, including the lending institutions, the unqualified buyers, the federal government, both political parties that were filling their coffers from the many participants, but also developers and local governments across the nation that approved the new tracks of homes thinking they were going to reap tax windfalls from an increased population base.

If the federal government goes out now and buys every foreclosed home on the market it will not restore a healthy housing market. This is because there will still be a glut of available homes with no buyers to purchase them. All that will have happened is the inventory will have changed hands. The inventory glut could last 10 to 15 years, possibly longer.

So long as the inventory of available homes outstrips demand, that is qualified buyers, home prices will continue to decline. But, there is another long-term consequence no one is addressing. The excessive inventory will continue to crush the home construction industry for years to come.

I've reached the conclusion the only way to restore both a healthy housing market and the home building industry is to clear out the excess inventory. In the bluntest of terms, remove from the market a large percentage of homes the government takes possession of. I'm basing this premise on a Reagan Administration policy.

During the mid-eighties, President Reagan, in an effort to help the dairy industry restore financial health, had the federal government purchase and slaughter a sizable population of dairy cows. Fewer cows producing milk reduced the supply which in turn increased prices dairies could get for their products. A similar approach would restore home equities and the home building industry.

How the government removes the homes from the market can be debated, but it is necessary. The federal government could allow individual cities to coordinate some of the efforts by exchanging the vacant homes in exchange for comparable valued inner city properties in tracks needing revitalization, and then destroying the structure in the area needing to be revitalized.

That's just a suggestion, and I'm certain others might have other ways to reduce the excess inventory. The important fact remains that the excess inventory must be taken off the market if both home equities and the home building industries are to be restored to health.

I'm not a fan of government involvement, and I was upset when the Reagan Administration exercised such efforts for the dairy industry, but I can now see clearly how a similar effort in the housing market would go a long way to restoring the entire economy. This action PLUS learning from the mistakes that created the financial mess, and putting in place whatever legislation is necessary to prevent a repeat, will do more than all the money the government is lavishing on financial institutions.

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