An alternative to the bailout plan

One thing we need – fast – is a correction to the housing market, not the stock market. Consider:

  • Monday, October 20, 2008 1:52pm
  • Opinion

One thing we need – fast – is a correction to the housing market, not the stock market. Consider:

1. The banking industry is out of money;

2. The cause of the current economic disaster is the housing-market bubble;

3. With the government solution, banks (using funds from the $700 billion bailout) will resume giving loans and prevent further real estate market erosion while stemming home foreclosures.

The government’s solution, however, does not address the housing-market bubble. Let me explain.

Until recently, based on the false notion that housing prices would keep going up, buyers were highly motivated to risk buying homes they hoped to be able to afford or sell in the relatively near future. Also, until recently, the banks provided these risky loans, even if they were beyond the likely means of the “motivated” borrower.

Despite the bailout and its trickle-down theory of market restoration, housing prices (and defaulting mortgage values) will continue to be insupportably high for an unknown period of time, cutting out an essential player in regained economic health – the potential middle-class homebuyer.

Because “bubbled home prices” remain out of reach, foreclosures must continue for an indefinite, painful period of time until relatively slow, natural tendencies toward supply and demand finally stabilize – likely well after our current crisis becomes an all-out global disaster with the associated unpredictable collateral destruction, perhaps lasting decades.

I propose an “expedited correction plan” that will more directly address the core problem than the recently legislated $700 billion bailout plan. This plan is aimed at the essential participants in a properly functioning housing market, and will affect each to the degree that they have been caught in the present fiasco. It will also minimize the impact on those taxpaying “bystanders” who are not directly caught in this mess (unlike the current bailout plan).

The primary feature of this plan is a legislated, coordinated roll-back of all home prices and mortgages immediately and simultaneously. The exact percentage can be determined by economists – let’s say 30 percent for the sake of argument. The result of this decisive action would be as follows:

The (perhaps defaulting) homeowner who is already facing a decline in home prices would have a 30 percent lower mortgage payment that more accurately reflects the value of his asset, and is more affordable.

The foreclosure rate would drop because more people would stay in their homes, with the additional indirect advantage of drastically reducing the need for and cost of bankruptcy proceedings attendant on the current/predicted rate of foreclosures.

The lending institutions would lose 30 percent of the so-called “value” of the mortgages, keeping a more viable 70 percent value (real value) of mortgages that have a much better chance of being repaid. However, lender collection of 70 percent outstanding debt would be better than total bankruptcy over an inability to collect the false 100 percent “value” of the original note.

And the prospective homebuyer could enter a market where homes are affordable again.

The government’s bailout is a wrong-headed application of taxpayer dollars to the nationalization (and forgiveness) of lending institutions complicit in creating the present crisis, and it does little to reinstate middle America’s ability to pursue the American Dream – home ownership.

My plan would directly attack this problem, sharing the sacrifice with of all those previously involved – homeowners, lending institutions and the middle class homebuyer. And these same people will reap the natural and appropriate earned benefit of reinstated, responsible housing-market practices.

Dan Lavry is president of Lavry Engineering, a Bainbridge Island-Seattle electronics company that specializes in digital audio products.

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