28.1.08

GETTING THE INCENTIVES RIGHT. The unwinding of the speculative bubble in housing prices, where many of the houses were financed with adjustable-rate, sub-prime mortages (no money down, interest only, years to pay) includes some borrowers who are better off defaulting on their mortgages rather than paying more interest against negative equity. At Tech Central Station, Rex DuPont and Andrew Hamilton note that there is money on the table.
The problem is further complicated in some areas because the mortgages in question may be clumped into groups that could cause a serious decline in local housing prices. Then the owners who can meet the existing payments in those areas may come to doubt the benefits of meeting the payments on a mortgage that is now larger than the current market value of their homes.
Where there is money on the table, somebody ought to pick it up.
The current oversupply of housing on the market provides a unique opportunity to expand the supply of affordable houses nationwide.
That somebody might be a government.

Our approach would be for the federal government to finance the acquisition of defaulted mortgages. The properties so acquired could be used to provide affordable housing where needed, or resold, with proceeds to be used for low and moderate income housing programs. The federal government could create a Fund for Affordable Real Estate through an entity analogous to the RTC. It would make funds available to those regions most affected by non-performing mortgages and foreclosures. These funds would be used by the states involved, or by the appropriate non-profit entities, to purchase distressed properties with a view towards recycling them as "affordable" housing, which is in short supply in many of the same regions.

A simple example of the need for affordable housing is a town that has applied its resources to provide a superior public educational system. Affluent parents will bid up the real estate in that town to gain access to the schools system. However, this will price the teachers in those schools out of the local market, forcing them to live away from their work.

Perhaps such a policy is more effective than a residence requirement for city employees, which can induce city employees to fort up in neighborhoods they subsequently defend against The Other.

There's a bit more to this subprime-foreclosure phenomenon than I am able to comprehend. What's the point of the initial lender (with all the repackaging of mortgages, maybe of a subsequent holder of a portfolio) repossessing houses that may not sell for any price at all? Is that really more profitable than carrying those mortgages at the initial rate and getting something of the capital back?

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