Cash for Keys: Could It Solve the Housing Crisis?
The U.S. housing market remains awful, whether measured by sales of existing homes, new construction, home prices, or foreclosures. This creates worries for the rest of the economy, notes Mark Zandi, chief economist of Moody's Analytics, reacting to yesterday's report of record-low February new home sales, in the Financial Times:
"I expected the numbers to be bad, but it becomes a little nerve racking," said Zandi..."You begin to think 'Maybe this will be worse than you thought', and it becomes a self-reinforcing cycle."Having already offered tax credits without much result, the federal government now wants to drain the foreclosure swamp, and is pushing banks to pay delinquent borrowers up to $21,000 to leave their homes. The feds have not commented on the idea, but it seems meant to shortcut the legal battles of foreclosure, get the troubled properties on the market, and to allow homeowners in trouble to get on with their lives.
According to the FT, banks would pay homeowners who are more than 90 days delinquent up to $1,000 to get financial advice, and up to $20,000 as a "fresh start" payment towards a new residence. Nearly five million homeowners are more than 90 days past due on their mortgages.
The fresh start program would presumably supplant another proposal that has been stalled, to get banks to cough up $20 billion for shoddy recordkeeping and foreclosure practices -- the "robo-signers" who pushed through foreclosures without following proper procedure -- and write down the principal on delinquent loans.
Last week The New York Times ran a comprehensive story on foreclosures, observing:
Overall, there have been three distinct waves in foreclosures. The initial spike involved speculators who gave up property because of plunging real estate prices, and the secondary shock centered on borrowers whose introductory interest rates expired and were reset higher. The third wave represents standard mortgages, known as prime, written to people who had decent credit ratings, but who have lost their jobs in the economic downturn and are facing the loss of homes they had considered safe.The Times also pointed out that benefit to the housing market of unleashing all those properties onto the market at once was not entirely clear:
Some analysts said that could conceivably help the housing market get back on its feet, by ending the undermining effect of a steady stream of foreclose houses going up for sale. Others, however, worried that blocking sales in an already weak market would drive prices down even further, continuing a spiral that has been deeply destructive to banks and communities.With respect to housing sales prices, I'm in the latter camp -- a greater supply wouldn't be helpful to the values of existing homes, nor a shot in the arm for new construction. It would, however, give buyers and sellers, agents and builders, a better view of just what the market landscape is. And it could boost sales volumes, following the maxim that the cure for low prices is low prices.
The Times' showcase columnist Paul Krugman hasn't commented on a government-inspired "keys for cash" yet, as far as I know, but he's all for punishing the banks, which he contends are holding back the economy by stalling:
[T]he biggest obstacle to recovery isn't the financial condition of major banks, which were bailed out once and are now profiting from the widespread perception that they'll be bailed out again if anything goes wrong. It is, instead, the overhang of household debt combined with paralysis in the housing market. Getting banks to clear up mortgage debts -- instead of stringing families along to extract a few more dollars -- would help, not hurt, the economy.The absence of a recovering housing sector has probably held back growth in GDP by somewhere between a quarter and half of a percentage point, relying on the last few recoveries as a guide. In 2010, investment in residential structures was a wash in the year's GDP growth of 2.9 percent -- a subtraction of 0.07 percent.
"Cash for keys" is a drastic solution, and would force a lot of people to pull up stakes at a difficult time. The main alternative set out so far, however, is forcing banks to reduce principal values on mortgages, which sounds like a legal nightmare that would take forever, and might not be sufficient to help people who are out of work. For the past-due borrowers in the second and third waves of foreclosures, such a fresh start might be the best solution.