Solutions for the Housing Crisis

Currently we have a huge husing crisis in the US which involves significant political corruption including the federal government preventing state governments from stopping predatory banking practices [1].

The corrupt plan to solve this is to simply give the banks a lot of taxpayer money, so the banking business model then becomes to do whatever it takes to make a short-term profit and then rely on federal funds for long-term viability. The bank employees who caused the problem by aggressively selling mortgages to people who could never repay them if the housing prices stabilised – let alone if the prices fell.

If the aim is to protect families, then the first requirement is that they not be evicted from their homes. The solution to this is to void the mortgage of anyone resident home owner who purchased a house on the basis of false advice from the bank or who unknowingly entered into a mortgage that any reasonable person who is good at maths can recognise as being impossible for them to repay. The bank would end up with clear title to the property and the ex-homeowner would end up with no debt. Then such properties could be set for a controlled rent for a reasonable period of time (say 5 years). The bank (or it’s creditors) would have the option of renting the property to the ex-mortgagee for a minimum of five years or selling the property to someone else who was willing to do so. Of course the ex-mortgagee (who would not be bankrupt) would have the option of seeking out a new mortgage at reasonable rates and then buying thier home again.

Also to benefit families the rent control period could be extended for as long as they have dependent children.

The losers in this would be the banks and the people who purchased multiple investment properties (the ones who caused all the problems).

Finally what is needed is a cultural shift towards austerity (as described by Juan Enriquez and Jorge Dominguez) [2].

Glen makes an interesting point about the irony of typical homeowners in the US demonstrating more financial literacy than the people who run banks [3].

5 comments to Solutions for the Housing Crisis

  • This is what we did in Sweden 1993 (NYT), in the end the taxpayers made money from the deal and we didn’t have to live with a bank going bankrupt. Now I’m not sure it was a good deal (how can you ever know), but it was proportionally of the same size as the US bail out.

    The problem is if the US let banks go bankrupt they are affecting the whole world meaning you are going to have less to eat in South America, and banks might go bankrupt all over.

    If these families you are talking about did lent money from the bank, constantly keeping the loans 1% under the market value. Should they be refunded when the market crashes? Lending money on market value increase is very common.

  • etbe

    Erik: You seem to assume that the banks have some magical powers. The banks in question are not making loans at the moment. What they do is not overly special, the most important functions (in terms of economics) can easily be done by others. If some banks fail then others take over.

    It’s only if the deposits are taken that the economy would really have problems – but that would be local to the US.

    The US isn’t going to be able to continue it’s trade imbalance with China forever no matter what happens.

  • etbe

    The above web page explains how the housing crisis was engineered to transfer wealth from the middle classes to the rich.

  • Anonymous

    Why, exactly, does nobody seem to consider the possibility of making people responsible for their own bad decisions? If you enter into a mortgage with ridiculous terms, you nevertheless signed a contract, and you ought to have to live up to it or live with the consequences of not doing so. In other news, don’t use your new electronic appliances in the shower.

  • etbe

    Anon: I think that the bankers should be held responsible for their own bad decisions. If you lend someone money with a 40 year repayment plan that will stretch their budget every month (as some banks have been doing in Australia) then unless they get a significant pay rise there is no possibility of repayment (in the modern work environment the chance of doing 40 years of work for the same company is close to zero – so there will be some temporary career setback along the way).

    Bankers who have a lot of knowledge about how the financial system works as well as statistical data concerning the ability of people to repay debts should be able to work this out. They also should know that prices of any asset will not consistently go up forever. The only way the 40 year mortgages that companies such as GE Money have offered in Australia can be profitable is for homeowners to on average pay a reasonable portion of the value of the property before they go bankrupt such that the forclosure sales can on average result in profit for the bank.

    The people who took out the large mortgages had much less knowledge and really weren’t in an equal bargaining position.

    In the US I believe that you can take out a mortgage at age 18 but can’t legally drink (in many places) until the age of 21. How can it be that someone can be simultaneously responsible enough to make a reasonable decision concerning a 40 year debt repayment plan but not responsible enough to decide whether to consume a glass of beer?