http://www.nytimes.com/2008/10/18/business/18nocera.html
The New York Times
October 18, 2008
Talking Business
Shouldnt We Rescue Housing?
By JOE NOCERA
<snip>
But recently a proposal came across my desk that I believe is so smart,
and so sensible, that I hope our nation's policy makers will give it a
serious look. It comes from Daniel Alpert, a founding partner of
Westwood Capital, a small investment bank. I have quoted Mr. Alpert
frequently in recent columns, because he has been both thoughtful and
prescient on the subject of the financial crisis.
Here's his idea: Pass a law that encourages homeowners with impaired
mortgages to forfeit the deed to their lenders but allows them to stay
in the homes for five years, paying prevailing market rent. Under the
law Mr. Alpert envisions, the lender would be forced to accept the
deed, and the rent. After five years, the homeowner-turned-renter would
have the right to buy the home back, at fair market value, from the
lender.
There are so many things I like about this idea that I hardly know
where to begin. Let's start with the fact that it doesn't require a
large infusion of taxpayers' money. Indeed, it doesn't require any
government money at all. It also doesn't let either homeowners or
lenders off the hook, as many other plans would. The homeowner loses
the deed to his home, which will be painful. The lending institution,
in accepting prevailing market rent, will get maybe 60 or 70 percent of
what it would have gotten from a healthy mortgage-payer. (Rents are
considerably lower than mortgage payments right now.) That will be
painful too. Moral hazard will not be an issue.
As Mr. Alpert told me the other day, his proposal "admits the truth:
the homeowner doesn't have equity, and the lender has taken a loss.
They should exchange interest, but not in a way that throws the
homeowner out in the street."
Which is the other key part of his plan. It has the best chance of
preventing, as he puts it, "the massive disruption of the economy and
the social dislocation" that will come from large numbers of
foreclosures. And it is the continuing foreclosures that are likely to
cause housing prices to fall so hard that they will drop below the real
value of the shelter.
That, of course, is exactly what happened during the bubble, albeit in
reverse -- prices wildly overshot the true value of the home -- and it
has to be prevented on the way down. Otherwise we face further economic
calamity.
Why did Mr. Alpert choose five years? Two reasons. First, he feels
confident that housing prices will have stabilized by then. "We
continue to have a growing population," he said. "And there is zero
chance there will be a material increase in housing stock over the next
five years that will exceed demand. Those two factors alone will cause
housing to stabilize."
Second, he says five years will give the renters enough time to get
their financial affairs in order -- to pay down their various debts and
save enough to make the 10 percent down payment an F.H.A. loan
requires. (Many of the homeowners affected by this plan would be
eligible for F.H.A. loans, Mr. Alpert believes.)
If they don't have enough for a down payment, they would have to leave,
of course, but it would be far less disruptive to the economy than it
would be right now, in the middle of the crisis.
Does the plan have stumbling blocks? Sure it does. One obvious one is
that ideologues will view its being mandatory as an improper "taking"
of homeowners' property rights and a violation of the mortgage
contract. But, as Mr. Alpert puts it, "the homes involved are
economically without value to the existing homeowners." He adds, "What
the plan buys is time to heal for both sides in a fairly equitable and
controlled manner."
Mr. Alpert calls his plan "The Freedom Recovery Plan." On my blog
(www.nytimes.com/executivesuite), I have linked to Mr. Alpert's
detailed description of how it would work, which runs eight pages:
http://www.westwoodcapital.com/opinion/images/stories/articles_oct/the_freedom_recovery_plan.pdf
I have also posted a series of short "comments" that he sent me
recently, which outline the severity of the problem. I encourage you to
read both documents, and weigh in on the plan's merits.
That goes for you, too, government policy makers. I acknowledge that
this may not be the perfect solution. It may have some fatal flaw that
neither Mr. Alpert nor I can see. But if you don't like this idea, it
is incumbent upon you to come up with something better.
Actually, it's long overdue.