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EconomicsHow much money is needed to turn the housing market around?
A billion dollars here, a billion there…pretty soon you’re talking about real money.– attributed to U.S. Sen. Everett Dirksen
When the federal Hope for Homeowners program was signed into law last July, Americans were told that as many as 400,000 distressed homeowners would be helped by stemming the tide of foreclosures throughout the country. The price tag? $300 billion.
It sounded large at the time.
U.S. Sen. Christopher Dodd, chairman of the Senate Banking Committee said, “This legislation won’t perform miracles. But as others have said, it’s a step – and I hope an important step – to putting our nation on the road to economic recovery.” Well, that was in July and things appear even shakier now.
The FHA, the agency that administers the Hope program, never expected $300 billion to be sufficient. Even at the time, estimates were that as many as 2 million households were headed for foreclosure. Now there are many more. Only a fraction of distressed borrowers would be able to be rescued, even in the best-case scenario. More is needed.
On Oct. 3, the controversial $700 billion bailout plan was approved. This widely heralded program included some $100 billion in pork projects to get a sufficient number of senators to come on board. Among other things, it provided a pool of funds to purchase mortgages from Fannie Mae and Freddie Mac but its primary focus was providing badly needed liquidity to seized-up credit markets.
Yet, even after $1 trillion, it seems more is needed.
Faced with additional criticism, the Bush Administration revealed a new program in the beginning of November to modify mortgages and stabilize the battered real estate market. While not providing direct payments to delinquent borrowers, the plan enables loan modifications if the mortgage is held by Fannie Mae or Freddie Mac, owners of 58 percent of the nation’s residential mortgages. But Fannie’s and Freddie’s portfolios contain only 20 percent of the seriously delinquent mortgages, the subprime ARMs. Most of the riskiest subprime mortgages have been sold when packaged into mortgage-backed securities. These mortgages have been purchased by institutional investors and financial institutions throughout the world. Thus, the administration’s plan may miss a majority of the problem loans.
Experts claim that it is still not enough. Sheila Bair, the widely respected FDIC chair and member of the current administration noted, “This is a step in the right direction but falls short of what is needed to achieve wide scale modifications of distressed mortgage.” She has split with President Bush in proposing a new bailout plan aiming directly at millions of troubled borrowers. CEO Robert Toll of Toll Brothers, a major luxury homebuilder, recently told CNN Money he wants the federal government to take additional action.
Congress has allocated hundreds of billions of dollars to reset mortgages, help people who are in foreclosure, and protect those who have been victims of rapacious lending practices. We believe all of these goals are very worthy. However, we believe that if home prices are not stabilized, these efforts will be for naught, more mortgages will go under, and the taxpayers’ money will have been wasted.
His prescription? Additional buyer tax credits to purchase homes.
Now Detroit automakers are making headlines – yes, GM, Ford, and Chrysler need billions. Rep. Nancy Pelosi agrees and a quick bill is in the works for a cool $25 billion. The mayors of three large cities — Atlanta, Philadelphia, and Phoenix – also want bailout money from the $700- billion fund. Philadelphia Mayor Nutter said he wants “to make sure that cities and metro areas are at the table, that their voices are being heard, that our challenges and problems are well understood, so that we can get relief.” Other cities rushed to the feeding trough too. The very next day, the mayor of San Jose, CA announced he needed $14 billion from the TARP fund.
New York City Mayor Michael Bloomberg has it right: “We would certainly love to have our share of it. Everybody’s lining up now. There is no industry that isn’t saying ‘We need a bailout.”
Expect more requests. There will never be enough money to meet unlimited demands and needs, for housing or anything else.
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Austin Jaffe, Ph.D. is PAR's Consulting Economist from the Smeal College of Business at Penn State University. |
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