Solving the housing crisis
Three easy steps to restoring prosperityBy Dr. Grace Vuoto
July 21, 2011
The housing bust that has been at the heart of America’s recession and anemic recovery can be easily resolved with three simple steps that reverse the policies of the Obama administration. President Obama has recently begun to reexamine his $75 billion mortgage bailout policy—the Homeowner Affordability and Stability Plan (HASP)—which has failed. To solve the housing crisis, the president has to embrace capitalism. We must proceed with the basic principles of profit and loss, supply and demand, rewarding the competitive and punishing the uncompetitive—the values at the heart of the free market. In other words, Economics 101, but probably not at Columbia where Mr. Obama earned his graduate degree.
I. Reward those who are profitable
There are still 2.87 million homes in foreclosure—and the housing crisis is peaking with foreclosures at record levels this year. Millions of other homes are about to be put on sale as those waiting to sell are hoping for more favorable market conditions. Hence, the supply of homes is plentiful and this continues to keep home prices low. Yet, all those who can buy homes, especially many investors and also countless homeowners with good credit who want to upgrade to a larger home, cannot obtain the loan they need to make the next investment. Thus, the demand for homes remains a strong feature of the American economy, but it is hamstrung due to draconian restrictions on new loans.
The housing market has repeatedly corrected itself, through booms and busts, as the laws of supply and demand are permitted to make their gradual course. But in this crisis, the Obama administration has compounded the original problem by trying to help owners who made bad investments. Yet Humpty Dumpty cannot be put back together again. When a bad business decision has been made, the speediest remedy is to allow that investment to perish. The president’s handouts only served to reward failure, leading to more failure since the vast majority of those who were in over their heads could not be helped except to eventually foreclose after all.
In addition, those with good credit and in a position to buy homes cannot obtain loans because the Obama administration has meddled in the lending business: the president forced banks to rework their bad loans, thus they incurred greater losses and then tightened their lending standards to offset the mounting liabilities. Benchmarks for obtaining a loan are now so severe that even candidates with a history of making their payments, excellent credit scores and sound finances are not given loans. Good borrowers are being punished for those who became embroiled in bad loans. The worthy are restricted from taking further action, harming even those who could be instantly rescued by selling their home to these savvy investors.
Hence, the first step to solving the housing problem permanently is to restore the law of supply and demand: let those in over their heads go bust as soon as possible; allow those in a sound position to invest as soon as possible. In no time, the housing market will be in good health once again. This is the economics of common sense—tried and tested methods that have proven to work in the past.
II. Get the government out of the way
“That government is best which governs least,” said Thomas Paine. The government has to get out of the housing market. This means not only that Mr. Obama must stop trying to artificially engineer the housing market with his policies but also, and most importantly, Fannie Mae and Freddie Mac must be shut down permanently.
Fannie was created in 1938 during the Great Depression as part of the government’s Keynesian approach to revive the economy: the idea was that the more mortgages Fannie could buy from banks, the greater ability the banks would have to make more loans. In other words, the government was artificially trying to create more favorable lending conditions.
This approach was doomed to failure—and by 2008, compounded by other bad decisions, Fannie and Freddie were in such financial hot water that they went into conservatorship. Then, the American government, led by then-President George W. Bush, stepped in with a massive $200 billion bailout of preferred stock to keep its Frankenstein monsters afloat. Thus, a government-sponsored entity that was supposed to help the free market ultimately required a taxpayer bailout in order to prevent even greater damage to the free market. That is the usual merry-go-round of government interference.
Banks, running on the simple principle of seeking profit and avoiding loss, ought to make lending decisions based strictly according to the criteria they devise in pursuit of their own self-interest. Bad lending decisions ought to result in collapse and good lending decisions ought to result in large profits. Americans don’t need Uncle Sam to be their banker.
III. Restore face-time with your banker
Finally, in order for bankers to make sound decisions and for investors to be awarded the loans they deserve, people have to actually know one another. Today, mortgages are granted or denied based merely on abstract ratios and scores—(usually tabulated over the phone among two strangers) that fail to capture who is a worthy borrower and who is not. That is because regulation has taken over the simple process of individual judgments.
Traditionally, bankers built relationships with their borrowers; they knew them personally and could forge a mutually beneficial partnership. This is not some arcane method: in most nations around the world, banking is still conducted on a one-on-one basis. Many bank managers have a rough idea of the portfolios of their clients, know who they are personally, what state their finances are, what their families are like—and have a grasp of what the borrower is capable of. Usually, bankers and lenders have long-term relationships. These factors are essential to evaluating the risk level of a new loan.
When pondering how to solve a problem, a rule of thumb for most Americans is to follow the principles of their grandparents—that is, roughly the pre-1960s generation. Then, America was still a capitalist and Christian nation, and many daily decisions were based on precepts that were largely in harmony with natural moral laws. As we have abandoned the values of our grandparents, so too, we have lost all the core principles that underpin our personal happiness and prosperity.
-Dr. Grace Vuoto is the Executive Director of the Edmund Burke Institute for American Renewal.