Fichamento - Policy Note

8/20/2019 Fichamento - Policy Note

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Fichamento

Texto: POLICY NOTE – HOW TO SOLVE THE U.S HOUSING PROLE! "N# "VOI#

RECESSION: " REVIVE# HOLC "N# RTC $% Pa&' #a(i)*on

• Within the last few months, the so-called “subprime mortgage crisis” has developed from a

small blip on the economic radar screen to a situation that has threatened financial markets andfinancial institutions worldwide.

• This financial instability induced the Federal eserve to announce a historically large !" basis

point decline in the federal funds rate on #anuary $$, $%%&. Financial e'perts and economists are

suddenly talking of a (.). recession in $%%&, and the only *uestion is how deep the depressing

effects will be.• ecession+ ould be global possibility

• This recessionary threat has led the White ouse and ongress to announce a fiscal stimulus

package consisting primarily of a one-time ta' rebate of between /0%% to /1$%% for families

within defined income limits, plus a temporary ta' reduction for business making certain

investments in $%%&. This stimulus plan is surely too little and too late. #ust a little over a month

ago, many of the “best and the brightest” economic e'perts were not in favor of any fiscal

stimulus package.

• The Wall )treet #ournal reported that former Federal eserve hair 2lan 3reenspan

recommended that politicians do nothing to prevent a possible recession as a result of the

subprime mortgage lending mess.

• 3reenspan preferred to let the market solve the problem by “letting housing prices 4and security pegged to mortgages5 fall until investors see them as bargains and start buying, stabili6ing the

economy.” 7ut if ongress does nothing, then a year from today we may be mired in the

3reatest ecession since the 3reat 8epression.

• The proposed stimulus package will bring forth some additional household and business

spending. 9evertheless, perhaps as much as $% percent of each dollar of household ta' rebate

will go to buy cheap foreign imported goods, and therefore will not stimulate demand for

2merican produced goods. 2nother $% to 0% percent of household rebates may go into reducing

household credit card or other debts, or directly into savings accounts. 2ccordingly, perhaps aslittle as fifty cents on the dollar will stimulate the economy. 9ot much stimulus bang for the

buck:

• ;nce 3lass-)teagall was repealed, there were no legal constraints between loan origination and

underwriting activities. 2ccordingly, there is a great profit incentive for a mortgage originator to

search out any potential home buyers 4including sub prime ones5 and provide them with a

mortgage. The originator can then profitably sell these mortgages, usually within 0% days, to an

underwriter, or act as an underwriter to sell to the public e'otic mortgage-backed securities. The



originator therefore has no fear of default if the borrower can at least make his first monthly

mortgage payment.

• <n a 8ecember 1=, $%%! article, 9ew >ork Times op-ed writer ?aul @rugman defined the

resulting housing bubble as where the price of housing e'ceeded a “normal ratio” relative torents or incomes.0 Aike 3reenspan, @rugman does not suggest anything that politicians can do

to relieve the distress caused by the deflating housing bubble. @rugman believes the market will

solve the problem by deflating house prices. e estimates that housing prices will have to fall

by 0% percent to restore a “normal ratio.” This implies that home values in the (.). will decline

by some si' trillion dollars.

The result will be that many borrowers “will find themselves with negative e*uity” as their

outstanding mortgage e'ceeds this “normal” market price of the borrowerBs houseCan

insolvency problem. @rugman indicates that no one can provide a *uick fi' for this problemD he

suggests that it will “take years” for the market to clean up the insolvency housing mess.<n many states mortgages are non-recourse loans 4i.e., after default and foreclosure the borrower

is not responsible for the difference between the outstanding mortgage bal-ance and the lower

sale price at foreclosure5. <f @rugmanBs 0% percent house value decline is accurate, as many as

1% mil-lion households will end up with negative e*uity and will have a strong incentive to

default. Eillions of homeown-ers will lose their homes in foreclosure proceedings and in-

vestors in mortgage-backed securities will incur large losses.

• 7ut a study of history can give us clues as to how to solve the problem. The oosevelt

2dministrationBs handling of the housing insolvency crisis of the 10%s suggests a precedent for dealing with the (.). housing bubble distress. <n 100, the ome ;wners efinancing 2ct

created the ome ;wnersB Aoan orporation 4;A5 to refinance homes to prevent

foreclosures, and also to bail out mortgage holding banks. The ;A was a tremendous

success, making one million low-interest loans which often e'tended the pay-off period of the

original loan, thereby significantly reducing the monthly payments to amounts that homeowners

could afford. <n its years of operation, the ;A not only paid all its bills, but it also made a

small profit.

• ;ther measures might include setting up a government agency to take non-performing mortgage

loans off the books of private balance sheets and therefore remove the threat of insolvency for

those who took positions in the mortgage-backed securities after being misled by rating

agencies. The result will prevent further sell-offs causing financial distress in all financial

markets. The esolution Trust orporation, set up by the government, did remove non-

performing mortgage loans from 7uilding )ocietiesB balance sheets after the 1&%s )avings and

Aoan bank crisis, thereby preventing further financial damage to others. 2lso, ongress might

consider a $1st entury version of the 10%s government-sponsored econstruction Finance



orporation to help finance investments and operations in the private sector housing and related

industries during this insolvency crisis.

• While we wait for ongress to act on this proposed pro-gram, it may be desirable for the

Federal government to start up an infrastructure rebuilding program to help stimulate the

economy out of a potential forthcoming recession and in-crease productivity in the longer run.

There is sufficient evidence that more than "% percent of (.). bridges and other public

structures are in a weakened or failing condition. What better way to offset a possible recession

in the construction industry and at the same time contribute to improvements in our nationBs

transportation productivity+ Gvery dollar spent on rebuilding and improving infrastructure will

create Hobs for (.). workers and profits for domestic enterprises.

• The ;A financed all of its operations through either earnings or borrowing. ongress never

appropriated any funds for the ;A. I9otice this made the operations of ;A an off-balance

sheet operation.J The original act called for the ;A to issue its own bonds with the interestguaranteed by the (.). Treasury and with a maturity not to e'ceed 1& years. 2 year later the

guarantee by the Treasury was e'tended to the principal as well. 2lthough ;A initially

issued its bonds to the public, eventually the ;A received its funds by borrowing directly

from the Treasury rather than from the money markets. From 10K to 1=%, ;A borrowed

/&!" million directly from the (.). Treasury.

• The T was a corporation formed by ongress in 1& to replace the Federal )avings and

Aoan <nsurance orporation and to respond to the insolvency of about !"% savings and loan

associations. 2s receiver, it sold assets of failed )LAs and paid insured depositors. <n 1" itsduties, including insurance of deposit in thrift institutions, were transferred to the )avings

2ssociation <nsurance Fund.

• The )LA crisis in 1& occurred under a epublican 2dministration that had pledged “no new

ta'es.” 9evertheless, the 2dministration recogni6ed the difficulty of the problem involving the

large number of )LA insolvencies, and it supported the formation of the T. The first 7ush

administration recogni6ed, apparently, that the T would not re*uire new ta'es to burden the

(.). ta'payer with the cost of the program.

• 2fter much wrangling by ongress, the initial funding of the T included /1&.& billion from

the Treasury and /01.$ billion from bonds issued by the T 4and therefore an-off budget

liability5. <n 1", the T was folded into another larger government agency, and there has

been no public accounting records provided to show whether the T operations ultimately

made a profit or not.

• <n sum, although there are some accounting costs of setting up any institution similar to the

;A and the T, these bookkeeping entries are unlikely to hurt (.). ta'payers. The benefits



from having such institutions alleviating economic distress far outweigh the costs of allowing

deflationary market forces solve the problem of our bursting housing and financial bubble.

Fichamento - Policy Note

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