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House prices in America have now fallen further than they did in the Great Depression. An economic “double dip” led by housing is almost upon us, with economists unable to agree how much further house prices could fall. One million homeowners lost their properties to foreclosure last year and at least another million will suffer the same fate in 2011. Average home equity has fallen from 61% of house value to 38%, wiping out trillions of dollars of home owner wealth as well as consumer confidence. No one is immune from this housing disaster.
When you find yourself in a hole it is time to stop digging.
America’s housing policies are making a dreadful situation unbelievably scary. It is time to change course and the first thing we must do is stop the foreclosure madness.
What sort of society throws a million families a year onto the economic scrap heap? What kind of country creates financial cripples out of ordinary citizens who did nothing wrong? People who just tried to achieve the American Dream and were led into a mortgage nightmare.
The people pulling the plug on all these homeowners are our old friends the too-big-to-fail banks. The same bankrupt folks who held up the US Government and demanded a $700 billion bailout, or else. The people who came up with a cozy name for their ruse calling it TARP (Troubled Asset Relief Program) but made sure there was no relief for the people who owned those troubled assets. Of course, there was plenty of relief for the bankers’ own balance sheets, which allowed them to go on a buying spree of other banks.
Today the top four American banks own 48% of all of this country’s bank assets! The ten largest banks own 77% of all bank assets. The too-big-to-fail banks have become financial monsters and it is these institutions who are bringing this country to its knees. Financial giants that are being handed “free money” by Ben Bernanke and the Federal Reserve, giving them every reason to avoid making business loans while they live handsomely on safe investments in government securities. What a deal.
It is this multi-trillion-dollar government safety net that allows these banks to foreclose on homes by the millions and offload them at any price. As home prices sink, more home owners are dragged under and banks foreclose again. An unstoppable downward spiral with no end in sight. Unless we put a stop to it.
Instead of throwing home-owners out of their homes, let’s create policy that requires lenders to keep them in their homes. Instead of turning communities and cities and whole regions into economic wastelands, let’s put a floor under house prices. Instead of giving house appraisers hundreds of depressed re-sale comparisons to justify another drop in house prices, let’s give them zero foreclosed home values to use.
Loans should be renegotiated so that no family is thrown out on their ears. Lenders should write down principal to current appraised values or renegotiate to a payment level the buyer can pay. Extend mortgage maturities to 40 or 50 years, if necessary. Lower interest rates to the teaser rate the buyer was sold at purchase or take it even lower if need be. Turn home-owners into renters for several years with an option to “buy back” the home later. If all else fails and the owner has given up, then conduct a “short sale” of the property, but at all costs avoid foreclosure.
Before anyone complains that this policy does not allow the free market to work, let me say I agree. The free market stopped working when Wall Street, the rating agencies, mortgage lenders and banks cooked up their sub-prime scheme nearly a decade ago. A free market would have allowed the mighty banks and many other institutions to disappear overnight. It was a price our government decided we could not pay. Banks became sacrosanct but home owners did not. No free market there.
Home builders were not saved by our government, either. Today, almost too many home construction workers are out of work thanks to depressed home prices that make new home construction just about impossible. Last year America’s home building industry delivered a record low 322,000 single family homes whereas banks sold 837,000 deeply discounted foreclosed homes. Banks outselling builders nearly three to one. There’s something wrong with that picture.
Bankers argue that builders constructed too many homes during the boom, forgetting that the housing market peaked in 2005 and we have since endured over five years of record low delivers. Today America has a cumulative housing shortage of over three million homes which will be recognized as soon as our economy recovers and people go back to work.
Home building could do a lot to get our economy growing again just as it has done after nearly all of our past recessions. If foreclosed homes and human misery were replaced by brand new homes and jobs, this country would be back on the road to recovery before we knew it. That is the scenario that we can create and must achieve if we are to save ourselves from an economic double dip and mountains of government debt. It starts with a recovery in housing and that requires an end to the foreclosure madness.
Mick Pattinson is the Chairman at the Barratt Group. He lives in Solana Beach.