How to Fix Housing

Over Abundance of Homes on the Market By Mike Colpitts

When a surgeon goes in with a scalpel to cut he goes directly to the problem area to take out the cancer. The doctor cuts out the bad area and stitches the skin back up to heal. With all of its debate, it’s no different in real estate. The poison loans we hear so much about as toxic assets need to be cleaned up in order to fix housing markets.

The cancer in this case may be as many as 5-million home mortgages that need to be salvaged before the whole economy enters its next failing phase. It isn’t necessarily anything anyone wants to do but it’s what America needs to fix the economy, and perhaps keep the country out of an economic depression.

Injecting capital into financial markets such as what’s being done with the TARP is also key to making the wheels of commerce work. Businesses borrow money to buy products, make pay-rolls, pay expenses and taxes. When there isn’t money or enough to borrow, the whole system halts. Businesses fail and bankruptcies increase. And as a result, more mortgages don’t get paid.

The housing market has turned into a disaster as a result of the credit crisis, the epidemic of foreclosures and a litany of other reasons. However, time is of the essence if we are to improve markets for the better. Housing deflation is sending values down in most areas of the country, some at record rates.

Treasury Secretary Tim Geithner, testifying before Congress, said this crisis is not comparable to the U.S. Savings and Loan Crisis of the late 1980’s. “The (financial) system is much more complicated and fragile (these days),” he said. “The S&L crisis was easier to solveĀ…It’s enormously more complicated.”

From all indications, the current crisis is 4 to 6 times larger in scale than the S&L Crisis. More properties have been foreclosed already than during the S&L Crisis and it may be less than half over.

The government has designated $50-billion of the new rescue plan to mitigate troubled mortgages. There are at least an estimated 5-million mortgages that need to be modified in order to help resolve the housing crisis. Most will default if bankers don’t work out deals with homeowners on mortgages. The amount is far too little to help resolve the crisis. If the average troubled mortgage is reduced $100,000, it would take $500-billion to make the mortgages affordable for homeowners.

If the government agrees to take part of the loss and the banks share in the losses, modifications would act to limit foreclosures and begin to stabilize housing markets, which is at the root of the economic crisis.

The way government responds to financial catastrophes is much more important than what caused the collapse, which is why Geithner is so careful addressing the financial problems. The treasury secretary is still working on the government’s plan to aid those threatened with foreclosure.

Testifying before a Congressional panel in Washington, the biggest bank CEOs said they would more actively modify mortgages. Seizing and breaking up insolvent banks works. It has in Chile and Finland. But injecting capital and nursing weak banks turn into economic depressions. Geithner seems steadfast in avoiding nationalization of the banking system. In economic disasters like these governments make two chief errors, hiding problems and responding too aggressively.

As Japan demonstrated in its 18 year long real estate depression, during which home prices kept deflating the option of denying that banks are insolvent doesn’t work. The loans that are going bad now need to be modified in order to protect the rest of the system from larger future losses. There are many meltdown similarities between Japan and the U.S.

Time is of the essence. Each day that goes by another 10,000 homes are foreclosed damaging the entire economy.

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