>> If Fannie and Freddie no longer supported the purchases
>> of homes at bubble-inflated prices, there would be a quick
>> price decline of 20 to 30 percent in the most over-valued
>> markets.
Leaving aside for a moment that Fannie and Freddie have strict loan standards already that didn't have much to do with this whole mess[*] (they had other problems, which we can talk about), this would *increase* foreclosures in those markets, in effect concentrating the "cost" of fixing this broken market on a fairly random subset of people: those who must sell today. As a counter-example, I'm comfortable with my mortgage and don't want/need to move: I frankly couldn't care less what my house is "worth" in the short-term, and even if someone said it was worth "half" of what it was last year, I'm not going to move and I'm not going to refinance.
The biggest source of foreclosures-who-need-help are those people who have a *present need* to move because of:
- Job change - Job loss (!) / health problems - ARM adjustment subsuming income ...
This also includes people whose situation is worse than it "should be" due to the shenanigans we've heard about like bait-and-switch loans: you qualify for a better loan than you were sold, because some asshole had you over a barrel at closing.
This plan does nothing to help them, and in fact makes their situation (much) worse.
Oh, that's because he ALSO says this:
>> For those faced with foreclosure due in part to falling home
>> prices, the best solution is one that amends the rules on foreclose
>> to give homeowners the right to rent their home at the market rate.
Oh, right; like that'll ever work? That's way too complex. I know: there's this zip code database. But wtf, how long does this go on, and how long are people supposed to wait to have this worked out? How often does the database get updated? Who is going to keep track?
What he's proposing is called a "knock-out option" and it cuts the most vulnerable off at the knees. Merry Fucking Christmas.
---
I think that what Fannie and Freddie should do is take over the entire mortgage business (i.e., the less-than-half they don't already have), and change the terms of existing mortgage-holders to match their standards: if you got a $300k 3/1 or 2/1 mortgage based on BS and trickery, Fannie buys it and refinances you into a 50yr/fixed loan that brings your payments down to where you can afford it, even if your house isn't "worth" $300k anymore. In the case where you can't extend the term far enough for this to work, Freddie "buys your down payment"[**] ... you'll just have to hang on, but you aren't getting kicked to the curb. And if you do sell your house while the Freddie loan is under-water, you pay something on the gain (and/or pay back the "bought down payment"). Simple, and mostly cheap: the ex-GSEs can now borrow so short that this thing might actually cost nothing.
This would do at least two things:
- It would let the banks off the hook, which is sort of the idea of the bailout in the first place; but the ultimate price must be paid: banks will no longer be allowed to "make money" from (simple, individual homeowner) mortgages.
- It would stop the flood of foreclosures that's in no one's interest to have happen
It also might have a counter-intuitive impact of having fewer CDSs trigger, which I think everyone thinks would be a good idea. Unclear, but it might.
>> This would have the dual effect of keeping families in their
>> houses and give bankers an incentive to renegotiate terms by
>> making foreclosure an even less attractive option.
That's just dreaming; bankers aren't looking for an incentive, they are looking for a way to exit the market. Fine: if the government thinks that "home-ownership" is important, let it take the risk directly and put the actual costs on the budget.
This offer void for properties that aren't Principal Residences or those purchased after, say, Sep 15th, 20080.
/jordan
[*] In fact, the implication is that they bought mortgages that were based on something other than the modelled ability to pay; except for cases of outright fraud (a broker marking-up income, for instance), this just simply isn't true.
[**] Example, using the above $300k above: say you can afford a $220k mortgage, but not a $300k one. Ok, Freddie buys your $80k down payment and you settle up when you move, maybe factoring in some imputed interest, details TBD, but wtf.