Wampum

Sometimes the best posts from the bestest bloggers show up in their comments. This, from Tanta at Calculated Risk, sums up my feelings exactly:

My question, is it possible for you to do a write-up as to what the solutions to end the housing mess.

Tanta writes:

I am not especially convinced there are any "solutions."

There are possible interventions. Most of them fail to impress me because they don't get nearly enough purchase on the problem for the price tag they present. Not the dollars--in most cases the dollars are not that big an issue in the grand scheme of things. It's the maintenance of moral hazard for lenders and builders that they represent. I am less concerned with the moral hazard to homeowners than many other people are because I don't happen to be convinced that borrowers really understood that they were taking excessive risk in the first place. It isn't moral hazard if your speedometer is broken and you think you're driving the speed limit. It's a problem, yes, but it's a different problem.

So the interventions I have been most interested in are 1) cram-downs for principal residences and, to a lesser extent, 2) tax exemption for debt forgiveness, although I would prefer to see that limited to FC/short sale, with deferral only (not outright exemption) for modifications. I think these balance the moral hazard problems and, in the case of BK law changes, help prevent a recurrence of this nightmare (if lenders know they can be crammed down, they should behave rather more rationally when they make the loan). These interventions ease the stress on financially floundering borrowers without attempting to prop up home prices in bubble markets.

But I do not present that as a "solution," because it isn't. We are just going to have to live through it. People need income that can keep up with housing prices (or housing prices that limit themselves to available income) and lenders need to make some kind of profitable capital investments for some purpose other than exclusively residential mortgages. Until that macro-economic problem gets addressed, nothing is going to stop a long RE bust/credit crunch.

I hope that doesn't sound like a cop-out, but the reason I have been jumping up and down over this for the last several years is because bubbles like this create unsolvable problems. I wouldn't have been so frightened if I thought there had always been a way to put this genie back into the bottle.

I can think of a number of long-term regulatory changes that would in my view improve the state of mortgage lending/selling/servicing, keep the industry much healthier in the long haul, and make it less prone to future bubbles. I'm not even sure it's worth trying to talk about that right now. Everyone is focussed on "solving" this particular "mess" to think in terms of the long horizon. I come from the "kick them while they're down" school of regulatory politics that says you'll never have a better chance of pushing through responsible regulation than when they're collapsed at your feet begging for mercy. If you focus simply on shoring them up, without demanding a regulatory regime in exchange for it, you'll never get your regulatory changes, because if it works, they become strong and healthy again and will defeat any attempt to add "burdens" to their business. In that regard, anything you do to juice up the players, absent tougher regulation with teeth, is just going to come back to haunt you.

It is however an election year, so I might as well talk to my credenza.
Tanta | Homepage | 02.15.08 - 9:28 am | #