How to Fix the U.S. Housing Market

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If this week's economic reports showed us anything, it's the fact that two years into what's supposed to be an economic recovery, the U.S. housing market remains on life support.

But here's what those reports didn't tell you: If the housing market isn't fixed soon, it's going to drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of.

The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth.

It's time we fixed what's broken and implemented new financing and tax strategies to stabilize prices.

Contrary to the naysayers – and in spite of political pandering and procrastination – we can almost immediately execute a simple two-pronged plan to fix mortgage financing and stabilize U.S. housing prices.

I call it a not-so-modest proposal.

The Worst Since the Great Depression

The facts are frightening: We are in a bad place. The plunge in housing prices we've seen during the current downturn is on par with the horrific freefall the U.S. housing market experienced during the Great Depression.

And without an effective plan to arrest the double-dip in housing, there's no bottom in sight.

Hope Now, an alliance of lenders, investors and non-profits formed at the behest of the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development, counts 3.45 million homes being foreclosed from 2007 through 2010. Current estimates of pending and potential foreclosures range from another 4 million to as many as 14 million.

According to RealtyTrac, a real-estate data provider, the country's biggest banks and mortgage lenders are sitting on 872,000 repossessed homes. If you add in the rest of the nation's banks, lenders and mortgage-servicers, the true number of these REO (real-estate owned) homes is closer to 1.9 million.

These shocking statistics illustrate just how large the current overhang of bank-owned properties actually is (at current sales levels, REO properties would take three years to unload). And they help us to understand how the staggering number of yet to-be-foreclosed, repossessed, and sold homes will depress U.S. housing market prices for years to come.


Follow the Money

So how do we attack this twin-tiered challenge of mounting inventories and falling prices?

First and foremost, we have to address the biggest thing that matters – money. Without the ability to finance home purchases, we're only going to sink deeper and deeper into the black hole.

There's no arguing the fact that bad financing – securitization – got us into this mess.

Forget all the arguments about how loan factories spun out no-doc "liar loans," or how buyers were equally complicit in perpetrating mass fraud. Forget about the argument that the Community Reinvestment Act (CRA) forced banks to make bad loans to subprime borrowers (the academically derived statistics don't support this assertion). Forget about how low interest rates were to blame (that's partially true). And forget about the fact that deregulation greased the whole slippery slope (that's definitely true).

At the end of the day, the truth that matters is that securitization financed the whole scheme.

Without the ability to offload the risks being packaged into mortgage-backed securities (MBS), very few of the millions of suspect mortgages made would have been originated in the first place.

And without such government-sponsored enterprises (GSEs) as Fannie Mae (OTC: FNMA) and Freddie Mac ultimately competing against private MBS syndicators, the doomed housing-market train would never have left the station – let alone achieved the long length and high velocity that exacerbated the crash damage.

That's where we start. Unless the government is providing direct-and-transparent tax incentives to bolster homeownership (more on that later), it has no business being in the mortgage business – especially when that "business" ultimately puts taxpayers at risk.

Fannie Mae was a Depression-era program, as was the Federal Housing Administration (FHA). Fannie was nothing more than a "bad bank" that U.S. President Franklin D. Roosevelt established to take on the defaulting mortgages that were building up on the balance sheets of U.S. banks. The idea was to free up bank capital so that the banks could make loans elsewhere.

It worked so well that Fannie eventually grew to behemoth proportions and President Lyndon B. Johnson, in order to get Fannie's debt portfolio off the government's balance sheet, privatized it in 1968. In fact, Fannie was such a success as a monopoly that the U.S. government, in its infinite wisdom, decided to create a duopoly by forming Freddie Mac and privatizing it in 1970.

Because of the widespread belief that these institutions were backed by the federal government (technically they are not), Fannie and Freddie were cheaply and easily able to raise the money they would use to purchase mortgages. When the securitization business began in the 1980s – and especially after that business soared – those two GSEs were at the forefront of packaging and selling MBS instruments, as well as buying back many of them for their own bloated accounts.

Fannie and Freddie are both now under government conservatorship, which is another way of saying they became insolvent and taxpayers bailed them out. When they collapsed so did the private securitization market.

Here's how to fix that market – and revive the U.S. housing market in the process.

Three Ways to Revive U.S. Housing Market Financing

To fix the securitization market, and resuscitate the American housing market in the bargain, the federal government must do three things.

First, the government must guarantee all of Fannie and Freddie's existing notes and mortgages (they're essentially doing that already), to make sure the market isn't panicked. Once that's done, announce a cutoff date – after which Fannie and Freddie will no longer be given a Treasury credit line and will be unwound.

Second, Washington must mandate that all the banks that got government help – on a pro-rata basis proportionate to their bailouts and their profits (calculate in bonuses and dividend increases) – will have to contribute to a private national pool of mortgage capital. That pool will replace Fannie and Freddie and will finance mortgage lending in competition with all banks and mortgage lenders. But it will have a single, 10-year lifespan. The government must decree that earnings and profits from this pooled capital are tax-free and must unwind the pool over the allotted 10 years. After all, Fannie and Freddie don't pay state or local taxes, and never did.

Third, Washington must reinvigorate the private-securitization market by making a new federal ratings agency responsible for assessing creditworthiness and assigning ratings on mortgage pools. It should tax interest and profits on the pools (those not created out of the national mortgage pool outlined above) at a flat 10% for 10 years.

These moves will bring the securitization market back to life and new investor cash will flow into the mortgage business.

To establish a guarantee on individual mortgages the government should follow the FHA business model by having mortgage borrowers pay an up-front guarantee fee equal to 1% of the borrowed amount (the fee can be rolled into the loan, if desired). The borrowers can then pay an additional ½ of 1% of outstanding principal each year into the guarantee pool – and those payments can be spread out over the 12 months of each year.

Mortgage pool s yndicators should have a 10% retention requirement (5% is being proposed and banks are already balking at that), meaning that MBS bankers should have to keep 10% of what they originate on their books. But new regulations can give bankers a break on the set-aside haircut by reducing the reserves they are required to hold against these balance-sheet assets.

A Defibrillating Shock

If we're to simultaneously arrest the U.S. housing market's mounting inventories and falling prices, we need to create tax incentives for buyers to stimulate demand.

Banks have supposedly set aside loan-loss reserves against bad mortgages (in fact, they are already reversing a lot of those reserves as they see credit metrics improve). So these institutions are technically carrying inventory and MBS assets that have been marked-to-market, meaning they should be valued at today's depressed prices.

Against that backdrop, any improvement in sales and prices from here would be good news.

To stimulate sales, and generate at least some tax revenue, Washington needs to start a tax credit program that begins on Jan. 1, 2012 and runs for the next five years. For the first full year the property is owned, the rules should allow 100% of capital appreciation on purchased residential property to be credited back to reduce the home's cost basis. That cost- basis- reduction program should be permitted to run for five years, with a 20% annual diminishment in each subsequent year from the first full year of the program.

After this coming Jan. 1, in addition to a credit against appreciation that reduces the cost basis and increases the home's potential profitability, the government should also allow homebuyers a tax credit equal to 50% of any depreciation in the value of their home for the next five years.

In addition to increasing homebuyer demand, these tax incentives will also stabilize the market. And that will help drive investor interest in mortgage-backed instruments, increasing available financing and lowering its cost.

These are not-so-modest proposals, but if we are going to do something about the depressed state of the U.S. housing market, there's no time to waste being modest. Without these actions, the financial ugliness we're experiencing right now could literally last for decades.

[Editor's Note: In the shadowy world of Wall Street, Money Morning Contributing Editor Shah Gilani is a rare commodity.

As a retired hedge fund manager who's willing to share the secrets of what goes on behind Wall Street's "velvet rope," Gilani is able to spot the stock market's hottest profit opportunities.

And since he's no longer part of the Wall Street power structure, Gilani is also willing to show you how to capitalize.

Gilani recently helped develop a strategy for individual investors to bring in the big money Wall Street tries to keep for itself.

And we're willing to share that secret strategy with you.

To find out more about this strategy - and more about our worldwide team of global-investing experts - please just click here for a report from our monthly affiliate, The Money Map Report. You'll never regret it.]

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Phil Steinschneider | June 3, 2011

    Mr. Gilani,

    Although I have immense respect for you, and fully backed your solution to the financial crisis several years ago (forwarding the link to my senators and representative), I have to disagree with the antidote you've outlined here.

    Reading through your plan, it gave me a headache. If it's too complex for the average American, it's too complex. After all, didn't complexity get us into the housing mess in the first place? How will complexity get us out? What are the perverse incentives? I can't see them at first blush, but they'll inevitably surface later if your solutions were to be adopted.

    We've been tinkering with the housing market ever since the collapse and nothing has worked. That's in part because the average price of a home is still slightly above the historical mean of three times family income.

    Additionally, for about a generation, home buying, home owning, and the commensurate spending that goes along with this economic behavior has become a huge-yet-questionable component of our economy. Supported by government incentives, TV shows dedicated to it, and the social assumption that owning a house is proof of success, we've made real estate a national obsession. Is this wise?

    When one looks at the extraordinary economic history of the United States, and the benefits we derived from stealing the industrial revolution away from the British, one of the main strengths of our economy was our workforce's unparalleled mobility. The nation's labor and its capital flows shifted and adapted geographically based on economic need.

    Additionally, individuals used to be judged by their productive wealth rather than their consumptive wealth (how many successful businesses they owned rather than how many mansions they maintained).

    Nowadays, with a record number of people upside down in their homes, the last thing we need is to subsidize a questionable activity further. Why don't we allow nature to find a floor to this debacle?

    Maybe the free market is trying to tell us something, And maybe, just maybe, we should take the medicine the market is attempting to push down our throats instead of trying to perpetuate what could very well be a completely fallacious economic paradigm—home ownership.

    Or, why don't we simply eat our homes like Jonathan Swift suggested the Irish do with their babies…

  2. Barry Fitzgerald | June 3, 2011

    So how do we get this done?

  3. Eric Waite- Real Estate Broker | June 3, 2011

    Mr. Gilani, several years ago when the housing market peaked in 2006 I drafted a "Bailout Plan" which I believe could, and,would have saved millions of jobs, homes and investments. This is a Realtors issue not bankers, not Wall Street or politicians. When the RTC orchestrated the recovery from the bank debaucle of the 80's it made the same mistakes as today, which is, non-Realtors trying to solve real estate problems. Please provide and email address where I may share a copy of the plan with you. Thank you, Eric Waite, Broker

  4. juan | June 3, 2011

    Dear Mr. Gilani,

    I find a much easier and better solution to get rid of the housing inventory: the US should launch a program whereby foreign alieans previously screened and appoved by the US Immigration office under a special program implemented to this effect, can get a work visa by investing not less than US$250,000 in real estate. That would attract potential buyers by millions worldwide, and that would revive that market. Actually, I would buy myself a house even though I would not move to live in the US. It is a sort of insurance protection for foreign investors to have a chance to move and live in the US, a few weeks or months for some years of their lives. Besides, after three months those investors would become US taxpayers for the benfit of Uncle Sam!

    Sincerely,

    Juan

  5. Clay Bates | June 3, 2011

    What is going on with these large Note Pools being established. They are buying these non performing assets from the banks that are totally underwater and upside down for pennies.

    That then take it off Bank books as non performing asset and becomes a receivable. Is that legal???

    You are definitly right about RTC if we go with these people to to untangle this web they better be gurus of the legal, title, and morgatage money rules.

    Please advise ASAP
    Regards,
    Clay Bates

  6. Clay Bates | June 3, 2011

    Here we go again with the RTC bail outs.

  7. DaveR | June 3, 2011

    An interesting and thoughtful proposal indeed, but where are we going to get the honest, objective and candid politicians and bankers to implement it? Our nation is currently administered by morally bankrupt people who exert their greatest efforts to help ensure that others join them. Morally bankrupt leads to fiscally bankrupt which leads to collapse. The politicians will merely kick this can down the road so as to win re-election.

  8. Patrick | June 3, 2011

    The last thing that the housing market needs is more manipulation and stimulation from the government. The last thing that taxpayers need is to pay for more stimulus. After decades of trying to increase home ownership and artifically lower mortgage interest rates, its time to let the free market mark homes DOWN to their actual value. Prices will fall. The homebuilding industry WILL suffer, possibly for decades. Thats the end-result of decades of government manipulation. Perhaps we need to rethink the idea of what a home should be and what portion of the economy should be dedicated to homebuilding. Look where stimulation has gotten us.

  9. Geoffrey Hoffman | June 3, 2011

    Mr. Gilani –

    As an Architect who admittedly fed at my clients' trough of easy money, loosened-capital gain tax benefits, & other suspect vehicles for enabling my high-end residential practice to flourish in the '90s, this first 10 years of the 2000s feels like a "Lost Decade." The Government has allowed prosaic components of the economy that serviced our basic needs to metastasize into "industries" that never have an exit strategy in their charters when they grow "too big to fail. " This must be ratcheted-down, like sticking graphite rods into a reactor core's containment pool to prevent a runaway event.

    One group is the real estate i"ndustry" – these tax breaks for home ownership had a use at one time, but other components of the market should evolve to supplant the shoddy results they hath wrought when real estate was presented as the road to unbelievable wealth. As it was put to me in a real estate course, a house sale is nothing more than usually the result of bad ciircumstances or, in less-inflammatory language, "an unplanned event:" death, divorce, job loss/transferral, etc. In the market I was in (Charlotte & the area north, Lake Norman), an insidious form of enabler existed: appraisers, who were in cahoots with the Realtors to inflate values, ignore obvious neighborhood dynamics, & provide the necessary paperwork to underpin the entire transaction. I sought to enhance my portfolio in other ways, so I participated in substandard neighborhood re-development in the form of a "non-profit" CDC close to where I lived, & offered design assistance down in Charlotte's most crime-infested areas, working with a Community Development Department. However, at every instance, whenever there was a flow of money (usually by gov't fiat, like the CRA), executives either embezzled, or got sweetheart deals for their cronies in the building/construction industry. Charlotte got much better results than most, but I shudder to think of what it's like where it's part of the culture, like Philly, Chicago, New York, etc.

    Therefore, I would open-up the financing & marketing of properties to others to supplant the real estate "industry"……..

    1) Let the banks create their own real estate agencies, to identify properties, bundle loans together, market/sell real estate, etc. So that they don't think this is just another opportunity to shut-out a vital sector of the economy, put some kind of clawback mechanism in place, or reduce their presence in other areas, i.e. bring back the Glass-Steagal Act restrictions or some such solution like that.

    2) Let the Big Box home improvement retailers also get in on the sales/marketing of properties. After all, they have a stake in rehabbing existing housing stock, getting new homes built, & integrating product lines with tax breaks, gov't incentives, local initiatives, etc. Surely they can tap into the almost-Trillion dollars in cash that's sitting inert in the private sector to finance transactions. They don't have to be collosal financing vehicles, but creative & innovative ways to help a first-time buyer or a homeowner living paycheck-to-paycheck get to that rung on the ladder that's needed to boost their market further.

    3) Let other financial institutions in on the financing on this market, one "elephant in the room" I see in particular. I have proposed a very lucrative alternative agency/entity that I'd like to collaborate with a Duke professor friend of mine on who teaches & consults in the arcane worlds of Law, CDOs, & Business. Maybe it's a proposal like the previous poster offered, that holds promise for unleashing the shackles imposed on this sector by ALLOWING MORE PLAYERS into the private fiefdoms of Fannie & Freddie, Realtors, etc.

    Well, I love your insights, so thanks for stimulating my thinking in so many ways. With my "5-cent MBA" I may have a few solutions that may create vast new areas of growth in the future. We also have changing demographics hitting us at this juncture, so I'm prepared to offer solutions in that area……

  10. Dan | June 3, 2011

    How about 40k credit for every homeowner. Would cost less than the bailout has already. (4.5 trillion divided by 110 million homeowners). This will not only get millions of homeowners out from underwater, it will stimulate the economy in the most efficient way, Trickle Up!

  11. Charles Scouten | June 3, 2011

    Mr. Gilani, you propose important and necessary steps. But unless the root cause, inflated mark-to-market values for illiquid assets – mortgages, MBSs, Home Equity Line of Credit (HELOC) loans – is addressed, the problem will simply crop up anew. Listing assets at inflated value corrupts the balance sheet (remember Enron), and this destroys confidence in the soundness of our economic system. Without confidence, bankers will not lend, businessmen will not hire, and potential home buyers will not be able to buy homes,. Japan suffered a similar problem, and it cost them the "lost decade." I don't think the US is ready for a "lost decade." The solution is to make illquid assets liquid – create a market and require banks, pension funds, and GSEs to use it. We talk a lot about "free market" – now trust the market. Having the banker value illiquid assets is – as we have so painfully seen – is license to steal. At best, having a regulator or an economic model value illiquid assets is merely a surrogate for a real market. Why settle for a surrogate? Trust the market. A requirement to sell even 1% of their illiquid assets each year in a supervised market – with capital requirement addjusted up or down based on ratio of balance sheet value to actual sale proceeds – will very quickly solve the current corrupt balance sheet problem and restore confidence in our economy.

  12. Wayne Harper | June 3, 2011

    Mr Gilani: I think you are right on about fixing the housing market SOON … however, as usual, it is my understanding that the banks are not working with people that are losing their homes. I had a mortgage broker tell me that the banks will sell the properties for 50% below mortgage value .. because the tarp funds are used to make up the difference. i.e. a home mortgage was issued on value of $600,000 … after 10 years the morgage was down to $500,000, the home was sold for $300k,000 and the bank received $600,000 from tarp funds, the face value of the original mortgage. This is one more shell game used by the greedy bankers and wall street. To further illustrate this, Stansberry reported that 4th qtr a small bank made $400,000,000 that is millions in 4th qtr borrowing from the Feds at almost no interest and loaning back to the feds (I assume buying treasury bonds) at 3/8% … another great shell game. America is losing to Greed .. Selfishness, and lies from politicians, bankers, wall steet, the White House, and anyone else trying to get their share before we all go broke.
    I wonder how to start a bank …

  13. Verland Talbia Gilliam | June 3, 2011

    I have submitted a proposal to Herman Cain and to Newt Gingrich that I think will not only SAVE a lot of homes presently in the throes of foreclosure but also give all future home buyers a piece of the pie and reestablish the 'American Dream'. Very simply, rather than charging 81/82 % of a mortgage payment being applied to the interest, the amortization charts should be changed so as to allow a maximum of 50% of a monthly payment going toward the interest. No one would need a down payment to buy a home, but on the contrary need only to prove income sufficient to make his/her monthly payment. For example: All loans would be based on a thirty year note, and we'll say that a person buys a $193,000.00 home and makes no down payment, and includes the points, closing costs, attorney fees, etc. just happens to bring the amount to be financed to an even $200,000.00 (for simple calculation and illustration purposes only) while the buyer pays out of pocket a full year of insurance and taxes. A loan at 6% over a period of 30 years we'll say is $1200.00 per month, principal and interest. $600.00 per month goes toward the interest and $600.00 goes toward the principal. The buyer is gaining $600.00 a month in equity and at the end of 5 years the buyer will have 36,000 dollars in equity. This equity could be used toward the purchase of an automobile, student loan or whatever. The money would merely be drawn from the mortgage holder, and the mortgage holder would take away that much of the buyers equity without ever increasing his mortgage loan payment. After a person establishes enough equity in his property, he can actually live within his means, and never have to worry about going into debt any more than the value of his property. Likewise he could never purchase and finance anything that would exceed his equity less a certain amount that would be held in reserve by the bank for one of those 'just-in-case moments'. Each home or property buyer would be qualified strictly on his/her ability to repay the loan at a certain percentage rate. IF, a person does NOT take or use his equity built up in his property, and the buyer continues to pay his $1200.00 a month, the total amount that he borrowed ($200,000.00) would be paid off in 333 equal payments with the 334th being the remainder of $200.00. He is rewarded an early payoff by not taking out any equity and the bank has made 100 % interest on the loan over that 334 months as opposed to carrying the note for the full 360 months. Everybody profits and the REAL American Dream is re-born and the economy is forever thriving.

  14. Verland Talbia Gilliam | June 3, 2011

    It is a foregone conclusion that my above comment would quite naturally extend a 360 month mortgage according to the amount of the equity that is withdrawn toward the finance of an auto or whatever. And of course when I speak of 81/82 % of the payment on loans is now going toward the interest, that is to say the loans are front end loaded and for the first 5 to 10 years of the mortgage the interest rate is extremely high and giving no one a chance to build equity duri9ng those crucial years of getting themselves established.

  15. Antony | June 3, 2011

    As a renter I do not see why my tax dollars should be used to make home ownership unaffordable for me. Several more years of depressed house prices and I might be able to buy. I would benefit much more by tax dollars being spent on fixing the potholes in the streets and improvements in infrastructure.
    If home owners want to help each other out – thats fine – but do not expect the considerable proportion who rent to give that group a hand-out.

  16. Ron Martin | June 3, 2011

    You are still missing a hidden "Time Bomb" for Real Estate. That is the amount of people who are "Underwater" with their Home Loans exceeding the market values. At the leaset if these people can hang on they cannot sell their homes or Refinance without coming up with large amounts of cash to close. Yes, banks are participating in Short Sales, but these are very tough to negotiate with the banks. Many deals fall through because the bank will not commit to the amount of monies that they would have to write off. Plus there are No guidlines that everyone could follow. Therefore this large (est 25% or greater) amount of homeowners are out of the market. They cannot be a seller and a buyer. These people are "Not in the Market"

  17. Chuck Rymal | June 3, 2011

    I think these 3 steps fall a few steps short at least in the suburbs of Detroit. I'm a REALTOR® at the #1 company in the Northville area and we're short on inventory! Move in ready homes are at a premium and sell in a matter of days for over list price after receiving multiple offers. The story is the same for just about anything under $300K. The key point is "Move in Ready". There are many people who would like to move but are too far upside down in their mortgage to be able to sell and short sales still take 3++ months and then the seller can't buy another property for a few years. I'm not sure how this would work but if current underwater homeowners could refinance for the current value of their property OR if short sale sellers weren't dinged on their credit rating and were able to buy another home right away I think the whole market would equilibrate itself.

  18. Chuck Rymal | June 3, 2011

    If short sale sellers weren't dinged on their credit rating and were able to buy another home right away I think the whole market would equilibrate itself.

    I can't think of a reason this wouldn't work, sometimes the easiest solutions are the best and vice versa

  19. Pancho Uy | June 3, 2011

    Mr. Gilani, I have thought of a similar tax credit that you have mentioned. Am wondering if all these ideas ever got read by people in Washington.

    My thought is that all existing homeowners who are still keeping up with paying their mortgages despite being "underwater" should be rewarded. These same people could easily use strategic default to add more properties into the whole mess.

    This being said, I believe all homeowners should be able to earn tax credits for the drop in their market values starting from the 2006 peak for as long as they keep the property for the next five maybe ten years. Your 50% credit is reasonable, but I would take it to 100% to further encourage more homeowners to keep their homes and maybe encourage some investors to come back to real estate investing and not speculating.

    I think we need to take drastic measures while we can still salvage whatever is left.
    I only hope the people who have contributed to this thread will continue to voice out their opinions to their congressmen, senators, etc. Bottom line is spread the word and hopefully this will lead to more active participation of home owners who have decided to ride this out.

    Maybe, and just maybe we will all break even in another 10 years but we need to act now.

  20. John O'Connell | June 3, 2011

    Mr. Gilani,

    Your plan doesn't address the basic problem that there are more houses for sale than people willing and able to buy them. Many of those houses were built for and sold to people who were not able to afford them. The only legitimate way to make those houses affordable to those same people is to raise their incomes (economic growth), or lower the price of the house. Stealing money from other people to give to them, or to their bankers, does not solve the problem, and will not reduce the oversupply that exists at the current price levels.

    Granting immigration preferences to people willing to invest in residential real estate, as Juan suggested above, is something that will increase demand, and help stabilize prices and absorb the oversupply.

    The house of cards that is the MBS mess needs to be allowed to collapse on the people who foisted it upon us, including Fannie and Freddie, Goldman Sachs, and the rest of the crooks and banksters and their co-conspirators in Congress. Replacing it with yet another scheme to fleece taxpayers is simply yet another round of criminality.

  21. Jonathan | June 3, 2011

    Yeah, I agree the comment that they should just increase immigration. Even if immigrants rented, it would indirectly support the housing market. Unlike financing schemes, actually increasing the number of people to match all the houses that were built during the bubble would solve the root cause of the problem. They should also protect more green space so they don't keep building more homes that aren't needed.

  22. jj | June 3, 2011

    Seems to me that the problem is that America is in decline and therefore it's citizens can't afford these homes.The only long term solution is a turn around in the country's economy or lower housing prices.

  23. Joe Ball | June 3, 2011

    Why are all these proposals still using banks and/or the government (taxes/regulations) to solve this problem?
    I like Juan's proposal above to use foreign investor capital. What I would add to that is the reversal of the trend of the 80's to today of concentrating the manipulation of housing and the economy in general.
    Use the KISS factor and remove both from the equation. Make ALL loans on property solely based on the property itself, and fully assumable, non-qualifying, so anyone willing to can purchase any type of property with the assumption of the debt and settlement with the current owner on equity. This was the basic mode before 1986-1991, when all this was dropped in favor of the banks controlling credit-we can see how that worked out!
    A group of bankrupt banking corporations determining the credit worthiness of the people who enabled them to exist only allows for further manipulation of power and greed into a market that resembles a "free" market less every day.
    We need LESS manipulation, not more. enabling foreign and domestic private investors to compete on a more level playing field would help tremendously without costing the taxpayer a dime. These are the kinds of things we should be looking at to solve problems as a society-taking power and manipulation out of the equation as much as possible.

  24. Ron | June 3, 2011

    This may be a situation in which doing nothing might be preferable to yet another construct run amok. If we let things take their natural course—let things continue their path to hell—eventually the real value of homes will establish themselves, stability will occur and real market values will manifest themselves.
    The largest part of the problem begins with the assumption by government that it has an obligation to make cheap housing affordable to the masses, then throwing money at the problem.
    There is no actual reason to believe that government, nor anyone else, can solve problems which, left alone, will solve themselves.

  25. Roger Wickes | June 3, 2011

    Having lost my home to foreclosure due to loss of job and inability to find one in my area, I would submit to you that the root causes of the problem is confidence that you will have a job in your geographic area that you have to attend physically, or be able to land a stable cyber job that you can telecommute to, or be able to string together a line of temp jobs that will support a mortgage payment, that all outweighs the risk of using your life's savings in a liquid account you can get to and plunking it into an asset that may take years to liquidate. Very few people have that confidence, and, when taking a mortgage, YOU are taking ALL the risk.

    That reveals the second root cause, the fact that home prices are so high that most people feel they have to take out a mortgage (death gauge) to buy a home they want. I sold a home to a Jewish couple; they paid cash. No debt, no slavery. Smart. We need to get out of this mindset that we want to leverage our future by taking on debt to buy the things we want now. This philosophy exists at a personal and governmental level, and it has to stop. We should only take on debt when it is a virtual slam dunk that getting those dollars now will result in a profit later on. That dunk does not exist for homes, or even small businesses for that matter.

  26. Scott | June 3, 2011

    Great ideas here everybody; how can we get them before the decision makers? I'm going to forward this article and comments to my favorite senator (Patty Murray, WA), and would encourage all readers to do the same in their states.

    And my comment: please don't eliminate the mortgage interest tax deduction for homeowners! It's about all we have left, if one can't take business deductions, and it's a good incentive for home ownership vs. renting.

    Also, kudos to Charles Scouten, above. I think his comments are right on target.

  27. Sandy | June 3, 2011

    All interesting comments.

    I belong to a very large group of homeowners. Current on our mortgages & bills for the moment, but one very small step away from going over the cliff. I was forced to retire, can't get another job, have racked up credit card debt because I can't get work. I am stuggling every single day to do the right thing & try to hang on, but no one will help. I'm current on every payment, but just barely & because I'm not on anyone's radar, I'm denied help. CC companies will not drop my interest rates, my mortgage company will not do a loan mod (I have to default first & then MAYBE they will consider it).

    The nation is not factoring in people like me & there are more of us then you can imagine. All I can say is when these folks go under, take cover. It's going to be a much uglier picture.

  28. MikeB | June 3, 2011

    I believe Mr. Galani has a plan that could be the foundation for a solution. Unfortunately November 2012 is around the corner and the politicians are already posturing for votes. Getting an annual budget in place took half the budget year and two congresses. I wish the current group of hand-shakers would get the nerve to use some logical thinking, like this proposal, but a majority have been so intrenched and blinded by their positions' power that their priorities are to get re-elected and the heck with the economy/housing.
    CRA plus Wall Street greed plus Politicians looking out for their own re-elections are only some of the main ingredients of what started the housing problem. If this plan or any similar one could get off the ground dispite the DC quagmire, there would be great hope!

    Thanks!

  29. Dave | June 3, 2011

    Milton Friedman said the closest thing to perpetual live is a temporary government program. Who will guarantee that the program will end after 10 years?
    Much better to shut down Fannie Mae and Freddie Mac (and prosecute the officials, past and present to the fullest extent of the law). Let bankers go back to qualifying borrowers according to standard bank practices. Get the governments meddling fingers out of banking.

  30. Ian davies | June 3, 2011

    Take the dollar back from the private bank "Federal Reserve" and let the government print debtfree money, cure all ills but nobody talks about this!!

  31. Ian davies | June 3, 2011

    It,s meddling bankers playing government.Central banking cartels,look 4 the truth on the money changers.

  32. Max | June 3, 2011

    Does it make any sense for your second way to be administered by one of the better business schools?

  33. Steve | June 3, 2011

    Easy to say forget about the fraud when your not homeless and didn't lose your saving and possessions.

    Easy to say when every state and fed agency you turned to elected to label you as a liar and ignored you without the slightest investigation.

    Easy to say when the ones that perpetrated the crimes are moving along quite wealthy while the your not the one spending every free moment on the Internet pleading your side with a comment.

  34. albert | June 3, 2011

    There are no buyers and there are no jobs they are all leaving the country and investing abroard. Just tak

  35. salvatore | June 3, 2011

    I tend to agree with Mr. Steinscheider. The problem with the housing market is houses are over priced. When people stop investing in realestate, other people may be able to afford homes.

  36. Fred | June 4, 2011

    High property taxes are also to blame. The burden to the homeowner in some states is oppressive. Without some meaningful change in the way towns raise revenue housing is
    going to suffer. The towns fed at the trough when housing boomed and have given nothing back
    when it went bad.

  37. andre | June 4, 2011

    stretch the term of the mortgage to 35, 50, 75 or 100 years after all you have to live some where and either pay the mortgage or a rent so make that monthly payment within the budget of the owner specially after having fraudulently declared false revenues on the part of the mortgage brokers, the bankers and the buyer in order to qualify or reigster a first and second mortgage on the property.

    the first mortgage would be what the owner can afford to pay monthly, and the second mortgage would be accounted in a company registered in the name of the mortgage owner that would be written off every year just as the banks do with 3rd world countries or any other consumer bad loan. however, every 5 years take part of the 2nd mortgage and add it on the first mortgage up to the amount of equity earned in those 5 years. the banks would recover their money and apply it to their reserve for bad debt loans. eventually the banks would get all of their money backl, the situation would clear itseld and every body would feel secured, the economy would restart again, hopefully on a different basis and morale.

    best regards

    andre

  38. Lee Caldwell | June 4, 2011

    WHAT?????

  39. Clive | June 4, 2011

    Mr. Gilani, I read your solution to the housing market crisis with an open mind and interest, but I was intrigued by the comments to your solution. There are some good ideas presented, but there are also some ludicrous plans presented. Case in point, the comment above by Ian Davies that suggests that the government just print money to solve the problem. The government printing money is a major contributor to the reduced value of the dollar today.

    I agree with Roger Wickes that the loss or reduction in income is one of the major causes of default on mortgages. People have had such a reduction in what their income will purchase today, even it they have not experienced a loss of job or reduction in income in recent years, that they are unable to put food on their tables and gasoline in their cars and also continue to pay their mortgages. Due to the number of properties that have been dumped on the market at considerably below replacement costs by banks and mortgage companies that have reposessed homes, people are not able to sell their homes which would allow them to purchase a lower cost home that they could pay the mortgage on. They are left with no choice but to have their homes forclosed on.

    We need the government out of the mortgage business, the bailouts need to stop, those that have recieved bailouts need to be held accountable, and more jobs need to be created.

    It is only through productive work that value is generated. It has been truly stated that "you can't borrow your way out of debt". That applies to the individual as well as government, and no Ian, printing more money will not create more value.

  40. Tim | June 4, 2011

    All I read is government, government, government. You must be a Democrat. Don't you know the Republicans can fix anything with privatization!

  41. Billy | June 4, 2011

    Zimbabwe has lots of dollars that could be bought very cheaply. Also toilet paper could be used as currency. People could just write in the denomination themselves! This type of money could reflate the real estate market very quickly. Also, healthcare and pensions for all.

  42. mike | June 4, 2011

    Great article and comments! There are some excellant ideas here and YES this should be forwarded to all members of congress as additional options! I will list a few of the obstacles that I have run into attempting to refi my home below to add to the possible options that may be considered for modification.
    1. When my HELOC grew to 5 years old, the bank (ba) decided to execute it's option not to renew my heloc and automatically determined my loan must now be amortized with level principal payments of $1200.00 per month plus monthly interest payment. So the result was a mandatory increase in my heloc payment from $600 per month to $1800 per month.
    Perhaps upcoming policy and legislation could examine this bank option and modify it for those of us that have been sacrificing our lifestyles to make all of our payments on time!

    2. Some banks and mortgage lenders allow a refi of the first Mortgage, with a new low cost first mortgage over 30 years with no appraisal required. But you have to wait at least a year to be considered for another refi that will also modify the Heloc to a 30 year amortized loan. So in my example above my current $3000.00 per month would be reduced only $300.00 per mo, (by amortizing the 1st over thirty years as apposed to my 15 year remaining term). So Even though I did get an appraisal and I am at 80% of value my payment would be $2700.00 per month under this program. Now if I could qualify for a new conventional loan my payment would be approx $1800 per month ( the same payment I minimally paid the first 5 years under my OLD Heloc terms. Oh I forgot, I also have the pleasure of paying the lender $5- $10,000.00 for this option.

    3. I was wondering if all of you are aware that under all new FHA and some conventional mortgages that the only cosigner allowed on the mortgage is your spouse, and that spouse must have at least a 620 fico. So too bad if your spouse dose not use credit. Zero is not 620!!

    4. I also found out that different lenders have different policies on how long an appraisal is good for. Mine varied from 0 days to 90 days. So multiple appraisals may be required ave. cost $400.00 each. By the way the appraisal you paid for can't just be transferred to another lender, the appraiser and the agency that selected him must provide written letters of authorization of transfer. There are no provisions to encourage or speed up the appraisal transfer papers by unhappy former lenders.

    I HOPE OUR CONGRESSIONAL REPRESENTATIVES CONSIDER ALL OF OUR COMMENTS AND SUGGESTIONS IN THEIR FUTURE LEGISLATION!

  43. darren harder | June 4, 2011

    @Phil Stein… you are absolutley correct. Let the market floor be found and investors and first time buyers will revive the market. I am in Maine and 1st time buyers are still priced out of the market, and there is nothing up here !!

  44. Ian Fletcher | June 5, 2011

    hi Shah!
    a few weeks ago you recommendad selling € at 1,42$/€. I almost did. I'm happy I didn't though now that it hit 1,46$/€. I don't blame you for this, but tell what's "up" with the €? How come a currency that is so obviously overvalued doesn't deflate? Or is it that the $ is even worse?
    cheers!
    ianfletcherif@hotmail.com Barcelona

  45. D | June 5, 2011

    Adding immigrants, is not the answer! 4 million people (legal and illegal) a year are flocking to America. Most of these people do not have high priority skills and are getting jobs that are subsidized by the very people that they are replacing! The low wage jobs become high wage jobs to immigrants since they qualify for a variety of benefits such as subsidized housing, medical coverage, food, utilities, education, transportation etc….
    Aside from the above, our way of life is being taken from us, by the people that we are supposedly trying to help! This housing mess will not be fixed in the future. Large swaths of America will become 3rd world like and this will show up in the prices of housing as millions more homes will become uninhabitable because of drug and gang infested communities!
    Welcome to the new America.

  46. John, Illinois | June 5, 2011

    I credit the US Government program FHA 235 with the distruction of our major cities.
    I worked for a block buster back in the late 60s in Detroit. He'd start at one end of the block, knock on the door and tell the home owner "The N_ _ _ _ _ _ s are coming, sell out NOW before the prices go down!!! " He'd start out at an above market price. By the time he reached the end of the block, the owner would be in a panic, and sell for less than half what the first one sold for. These were pretty much going FHA 235, $99 down, which my boss was not above advancing, and $99 a month. The government picked up the rest of it. He would find a propsect with a "regular income", meaning a welfare check, and he and his ace sales team, Johnny Walker Red, and his cousin, Johnny Walker Black, would close the deal. Few of these people were competent to be out on their own as renters, let alone acutally be responsible for the ownership and upkeep of a property. My job was to repair obvious things like plumbing leaks, broken windows, replace lightbulbs, do a fast paint job, and not unusually, tear down the garage, as opposed to actually repairing it. I also had to meet the FHA Appraiser, with the "appropriate inspection fee", (we knew them, so we knew what they drank, and it was part of my job to stop by the liquor store, and have a case of it in my trunk, and transfer it to his trunk before we ever went into the house; you didn't want him to strain himself, or put himself out). The turnover was fast enough that our first sale had an effect on the "Comps", and since we were a little "slow" on reporting the next sales, that were significantly lower, the first one showed up when the appraiser looked at recent sales, but the later ones didn't. Basically, he got real estate commission on the first few, then made a killing on the rest of them. I repaired probably 30 houses for him, and saw the first one that he bought for $8,000 (1970), sell for $12,000, and by the time I left, less than 6 months later, he actually sold the last one he bought for less than $3,000, for $10,000.
    I used to go work for other guys when he was between jobs. Back then, I still looked pretty good in a tux, so I could make a buck or two attending "events". You know, the ones on TV or in the papers, where they show a room full of people getting awards. When the awards are presented, you don't really believe that the stars, or the lesser stars who didn't get the award in that catagory stuck around, do you? That was when they called on the room full of "extras" who would run out, and fill those empty seats. We stuck around until they turned the lights out.
    I left because I got a real job with a regular paycheck, company car, and benefits, not because I got any attack of concience. Actually, had the FHA 235 program worked, it would have been a benefit. Since it was aimed at people who had no idea of ownership, or responsibility, it was designed for failure, and that failure destroyed out cities.
    I know a guy who's first job out of college was to actually present the papers to forclose on FHA 235 owners in default. He told me that a number of the people he presented the papers to actually had the cash to pay the "rent", in some cases, several thousand dollars, but the landlord never came by to collect it. They were totally ignorant of the idea that they owned the place, and they were supposed to send in the "rent" themselves. The government and the lenders were too stupid or arrogant to take their money, and educate them as to how to pay the mortgage. As az result, we have cities like Detroit, which bit off whole chunks of the Government programs, planning to abandon half the area in order to save money.

  47. danny salmonosky | June 5, 2011

    Something that no one has mentioned as a problem which further exacerbates the housing
    dilemma is the fact that demographics are against a recovery of any kind. The run up was
    chiefly fueled by baby boomers participation in the market, guess what, that 1/3 of the
    economy is going away, their desire and ability to purchase homes is on the decline and will
    be as such for the next 20 yrs. I am one, and the advice that Im giving to my two 20 some
    thing kids is, you want to buy real estate for 50 cents on the dollar, wait, simply wait hold out
    for the next leg(s) down.

  48. IPINLive | June 6, 2011

    Whether your solution is the right one or not – decision is the key. The UK property market is in a horrendous state, the problem is though that the decisions that need to be made aren't because it will cost votes. Without decision and implementation nothing will change.

  49. Owen K. , Nebraska | June 6, 2011

    Mr. Gilani,
    I must respectfully disagree with your proposed fixes. The bottom line is this: no jobs=no money, no money=no qualifying for a mortagage, no mortgage=no home purchase, no home purchase=no recovery in the housing market.

  50. Carlos Comesana | June 6, 2011

    Too many ideas where the only one that can work is NATIONALIZATION!!!

  51. cschaefer3 | June 7, 2011

    Dear Money Morning readers:

    Thanks for the terrific response you've provided for Shah Gilani’s “fix-the-housing-market” story. And it’s not just the huge number of responses that makes this so gratifying, either; it's the time and though that each of you very clearly devoted to your comments that mean so much to us here at Money Morning.

    I know that Shah was both moved – and impressed.

    Knowing Shah as I do, having had the honor of working with him for several years now, I know that he likes to propose solutions to big national problems. But he also (and perhaps even more so) likes to spark debate – and by "debate," I don't mean disagreement – I mean debate in the true "discussion" sense of the word.

    And Shah's just as happy seeing folks disagree with his assessment, so long as that disagreement is well-thought-out, or well-reasoned.

    It looks like that's exactly what we have going here.

    Anyway, since you all took so much of your time to comment, we believe that we have the duty to respond, as well. I spoke to Shah at length late today (Monday). He’s reading every single comment, and he's promised me that he's going to provide a general response by late Tuesday, meaning it will be posted sometime Wednesday. I believe he will respond to some of the individual comments, as well.

    What’s more, Shah is planning a follow-up column on this topic for the near future (late this week or early next week). So please make sure to stop back here Wednesday morning, and check out what Shah has to say about your ideas for a U.S. housing market fix.

    And thank you again for your time, insights and comments. Folks like you make this the very best editing billet anywhere in America.

    And I mean that.

    Respectfully yours;

    William (Bill) Patalon III
    Executive Editor
    Money Morning

  52. chanc | June 8, 2011

    Everybody is complaining or commenting on the present status of USA and there is no solution to it.It is not one individual can fix all the downtrodden that USA had for so many years but people along with politicians are not finding any solutions or not talking about how to attack the problems or talking about to come over the problems the USA is facing and more over to that the government is spending the money like a spend thrift and the government is borrowing too much money from IMF and they cannot repay.This happened like this from Regan Era and keep on continuing without end in sight and in fact we can call "Americans are biggest defaulters" and the government / general citizens are not caring about it which has run in to trillions of dollars and it is too late fix.They have to change their habits.There will not be any fix.The only fix is people has to change their attitude I mean each and every American.

  53. James | June 8, 2011

    I look at it the other way. If our unemployment rate is 9.1%, it means our U.S. employment rate is 89.9%. It is a big pool of potential home buyers. The employed and other potential real estate investors are the target groups to fix our housing market. They must be stimulated for the housing market to recover.

    Mortgage interest rates now are low less than 5 percent for a 30 year mortgage. That is still not enough. How come the real estate market is wallowing and people still are not purchasing homes or investing in real estate even at those low rates?

    What's holding back buyers? …. Credit requirement. Home buyers must come up with a 20% cash down payment. This requirement is a bottleneck. It limits the number of qualified home buyers. A local building contractor cited this reason for lack of new home construction.

    Remove this bottleneck and require a 10% cash down payment. Just one little tweak in borrowing requirement will open up the housing market and boost home sales.

    And …. more important, a recovery in the U.S. housing market will lead to a recovery in the U. S. economy.

    One more comment, Mr. Gilani. I just read your article this early a.m. in the May issue of The Money Map Report, "Prepare for an Explosive Upside Rally in the Dollar". It is an excellent read and provided me with good insight to what's going on in our domestic and global economy. In the article, you stated, "… low rates promote speculation. Savy investors – mostly big hedge funds, major banks, and finiancial institutions – can borrow cheaply in the U.S. With the cheap money they borrow, traders have a low-cost means of financing (or "carrying") their speculative investments, which are usually overseas bets or commodiites plays."

    So is this what's happening? The very low interest rates are encouraging big banks to speculate overseas and in commodity plays like the recent speculative run-up in oil prices? It means money is not going to our domestic economy. No wonder we are experiencing a sluggish recovery.

    I think you are right: "The 64-trillion-dollar question is: "When will rates start to rise?"" Interest rates are too low now. Higher rates may mean a better chance for sustaining our economic recovery because money will be flowing back to the U.S.

  54. Donna | June 9, 2011

    Please mention the fact that FHA and VA loans have had a 3% foreclosure rate. Much lower than those in other categories. Which I believe tells us something.

  55. Ed | June 10, 2011

    Just a few years ago we were watching TV shows about flipping houses — a license to print money as prices would go up forever, right? Now you want the government to do what the market couldn't? Why on earth should taxpayers pay for the risk of that game? I'm not buying a house in this uncertainty until I have some reason to think stability and sanity have returned. That means for one thing, that the government has sworn off trying to keep prices artificially high.

  56. diane Johnson | June 11, 2011

    there is no hope to fix americas economic and housing problems as long as the majority in the house and senate especially republicans are being paid by wall st lobbyists to kill all reforms. best to leave the us as I did for good as their treason is bringing on total collapse and chaos.
    d. the expat

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