How President Obama Can Help Housing — Right Now!

The two biggest economic challenges are employment and housing.  Furthermore, they are related.  Weak employment increases foreclosures.  Weak housing decreases aggregate demand and reduces net employment.

There is a cycle here — an interaction between these two problems.

Obama Policies Miss the Target

Here at "A Dash" we try to remain objective about public poicy and the outcomes.  Not everything works as expected.  It is best not to be doctrinatire in your evaluation.

Briefly put, I am not a critic that will find error in anything and everything President Obama does — just as I was not such a critic of President Bush.  My concerns are specific and well-grounded.

Mistakes

As the President changes his economic team, here are some key points to keep in mind:

  1. There have been too many voices.  The original team lacked direction.  Even if Obama is expert at identifying and drawing out viewpoints (as Warren Buffett maintains), that was not the task here.  This was not a "single-issue" problem like the Cuban Missile Crisis.  There are many dimensions.
  2. It is not just a matter of political or economic philosophy.  Even if a Keyensian stimulation was correct, that is a temporary solution.
  3. There has been a disconnect between political types, trying to identify jobs saved or created on a website, and real economists.  The most important job effects can only be identified through macro-economic modeling.  This is not the way to win elections.
  4. The transition delay — the wrong people, questionable credentials, and a delay in everything that needed to be done.
  5. Excessive emphasis on "macro" solutions.

 

No one won a Nobel Prize for analyzing the 2008 economic problems.

The people opining on this topic supported various theories that were not on point for the specific problems of the day. (I am not interested in a vaguely political/philosophical position about overall debt).

What Now?

The President has — so far — missed an opportunity for cheap, non-political policies that would have a big effect.  Here are two key facts:

  • The role of government should be to facilitate the effective operation of private markets.
  • There is a huge current appetite for securities with a good yield and moderate risk.

 

What Could We Do?  Restore Mortgage Securitization

Securitizing mortgages is a great idea that was poorly implemented.  Investors are reaching for yield in the current low-rate environment.  Meanwhile, the CDO market in mortgages has evaporated because of the crisis.

If we wish to move away from government as the backer of all mortgage debt– and who doesn't — it is time to restore this market.

The steps are simple:

  • Make sure that CDO's meet specific criteria — no complexity of tranches.  They should be plain vanilla.  Risk is OK, if the product reflects this.  The market will determine the right price.
  • Mortgage originators need some "skin in the game."  This is the only way to keep the process honest.
  • Ratings agencies need to be strong and appropriate.  This cannot be a "rubber stamp" process.
  • Ideally, the securities would be traded on a public exchange.

Providing a regulatory environment that would facilitate securitization would unleash the private market to connect borrowers and lenders.  Unfortunately, none of the alphabet soup of temporary programs addresses these issues.

Meanwhile, should we be surprised at a decline in housing prices?  There is no market for jumbo mortgages.  The high end of the market has no liquidity.  People cannot move from job to job, from city to city.  The inability to borrow forces the market lower, generating more foreclosures.

Conclusion

Until we have a solid mortgage securitization process, we are stuck with government.  That means there will be no real solution.

It is ironic that the solutions I suggest cost very little.  There are no subsidies.  It is a role for government — providing the right environment for free markets to work — that has widespread philosophical support.

Apparently the solution is too "micro" or too "technical" for the big thinkers.  They are all engaged in a political debate, with an election at stake.

We have a moderate economic reobound that could be really exciting of we could address the housing problem effectively.

 

 

 

As I noted in my regular market preview, this week would see a focus on housing.  I regard building permits as important.

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3 comments

  • Robert September 24, 2010  

    Just have to say, Jeff, that I can always count on you to have an original point of view that I’ve not read anywhere else. They are typically much more interesting (and dare I say constructive) than anything else I read. The idea about re-launching a clean mortgage security market would seem to offer the liquidity the real estate market needs to generate more loans; would ultimately take the government back out of the equation, except for in an oversight capacity; and would quench the thirst for yield that exists out there. I hope your thought finds legs enough to at least be considered.
    From one of your regular readers who, admittedly, doesn’t click through to the references very often.

  • Tim September 24, 2010  

    We need none of this. Canada has none of this, including, no Fannie, Freddie, Ginnie, VA, FHLB, etc.
    Canada has higher home ownership than the USA has.
    The other country that had a major housing meltdown was Great Britain. They also have similar housing agencies, regulations, etc.

  • Mark T September 29, 2010  

    The UK should do the same. The problem we have is that all mortgage debt is effectively floating rate such that any change in base rates has an immediate knock on to consumer disposable income. In effect monetary policy acts like fiscal policy. Banks love it as consumers take all the volatility risk, but it is the underlying cause of boom bust in the economy. No co-incidence that Ireland, SPain etc also have floating rates