Thursday, November 13, 2008

It still doesn't add up

There have been indications that the number of mortgages in delinquency and in threat of foreclosure is 4 million. That is a staggering figure .The repercussions of foreclosures even approaching that number is mind boggling.

It is critical that steps be taken to assure this does not happen. The suggestion that these defaulting loans be reworked to keep people in their homes is a mandate, not an option. There is talk of massive mortgage modifications, tying the payments into the capacity of the borrowers, by extending the years of the loan (and reducing monthly payments accordingly), or reducing the monthly principal repayments , or some other similar methods. The laudatory goal is to stop the bleeding, give the banks some infusion of money, and provide much needed relief to those in the most economic distress.

That being said, the reality is that most of these people are in distress because their income has either dwindled or been shut off completely. When giving these people affordable monthly obligations ( a necessity) the monies generated to the lenders will in many cases be very little. While this stabilizes the situation, and potentially takes millions of home off the foreclosure roles, it would provide little real money to the lenders. The government funding ( the bailout money) would still have to be the real source for liquidity for these lenders.

The further effect would be that this would certainly not stimulate activity on these homes saved from foreclosure. It would be hard to imagine that those with limited resources, given a life line by way of a reduced mortgage payment, would in any way be willing to sell the home and take away the benefit granted.

Thus, while we have stabilized, how do we stimulate? If half of the equation is getting the pressure off, isn't the other half nudging the rest of the community into economic action.?

We have all seen our savings dwindle. We have all seen jobs disappear. We are all being very cautious before putting even one toe in the water. What is going to make the rest of our society venture back in? What help are you offering to make it attractive for us to load up on new mortgages?

I have some very simple suggestions, which may have already been considered and discarded as impractical or inappropriate. First, reduce the capital gains rates on sales of homes for the next 12 months. This will provide an incentive to those who may actually have a gain on a sale to move forward now. Second, provide that for anyone who purchases within the next 12 months, 50% of the mortgage interest paid is not deemed a tax deduction ,but a tax offset (ie a dollar for dollar reduction in taxes) for a 2 year period after purchase. This would make borrowing money more attractive and give the hesitant public a push

I know there has been discussion of tax cuts for those earning up to $200,000 (or maybe $250,000). The tax cuts discussed above, directed at buyers and sellers of homes is a specified incentive, meant to take us out of the economic paralysis in the housing market.

If we are learning anything, it is that we need a full frontal assault on all problems in the financial sector. If the mortgage crisis was ground zero in this global collapse, let us look for all solutions to reverse the housing disaster and get the economy moving in the right direction as soon as possible.


Jared Alessandroni said...

The people who are being foreclosed on aren't worrying about their tax burden - the biggest issue for stability (and this sounds awful) isn't the schmoes who bought houses - it's the neighborhoods and small cities where hundreds of schmoes who did are losing or have lost them. Restructuring mortgages and offering bridge loans could slow this spiraling pattern, but creating economic stability through public works projects, especially in these high-desertion areas, should also be a priority. Methinks.

Robert said...

My son had a very similar take. I was not intending to limit the scope of the responsibility of the government to get to the root causes of the problem, but only trying to think of ways to stimulate the movement of $.

The tax incentives were being directed at those with the economic ability to move forward, but a hesitancy to get into the middle of a very untidy mess. There seem to be not enough fingers and toes to stick into all the holes that are gushing water all around us.