Tuesday, May 11, 2010

A simple solution to the housing crisis

Like many of you out there, I am continually amazed that the housing crisis seems to be getting much worse, despite all of the government programs supposedly designed to solve the problem. Obviously whomever the government has been listening to is providing lousy solutions... at least for the majority of Americans whose houses are currently worth less than their mortgages (thankfully, my house is not one of them).

If we look at all of the solutions currently in place by the government, it's clear that there are indeed a few "winners" in this current situation:
  • Many of the banks, who are receiving lots of money and loan guarantees from the government to cover the bad mortgages on their books;
  • Many homeowners, who, after refinancing and squeezing all the equity out of their homes that they could (and that the banks would gladly let them have), are simply walking away from their homes, letting the banks keep them.
I watched a segment of "60 Minutes" about people who are walking away from their mortgages, even though they could continue paying them, because it's the best business decision... this despite competing core values of guilt in not keeping their commitment to the mortgage contract. This is a classic example of "competing values" -- in Spiral Dynamics language, of Blue "moral obligation to keep a promise" and Orange "the best business decision is to walk away from a bad deal." These folks are "voting with their values" by choosing their Orange ones over their Blue ones.

Another article states that the U.S. is headed for a ten-year backlog in distressed (unsold) houses... that's the kind of thing that's going to provide an emergency brake on any kind of economic growth (almost always fueled by a thriving housing market of less than one year's worth of houses on the market at any given time).

So what's the current plan to manage this? The banks, rather than simply dealing with these houses which have lost sometimes up to half of their "value" (in terms of the mortgage on them), are keeping them on their books at their original inflated values, hoping either for a government bailout, or for prices to come back up closer to those inflated values. This is an example of the government enabling a very unhealthy behavior for everyone. People are walking away from their homes, leaving them empty, not taken care of, and turning them into neighborhood blights, bringing down all the other home values in the neighborhood in a reinforcing downward spiral of home values. This is not a healthy solution.

My solution is much simpler:
  • Create a neutral "arbitration panel" in each city, made up of average citizens, like a jury of some kind. 
  • A homeowner about to walk away from their "under-water" mortage gets a serious audit to find out how much money they and their family have. 
  • The bank shows up with a few appraisals of what the house is currently worth.
  • The arbitration panel's job is to determine the value of a new mortgage on the home that would allow the homeowner to remain in the home, at very favorable interest rates for the first 5 years.
  • The panel would take into consideration whether the homeowner has enough assets to pay a down payment or not.
  • The bank gets a write-off of the difference between the old and new mortgage, which can be used to offset its tax burden.
  • Voila! One less house on the market, one more family able to stay in their homes, and the banks "reset" their toxic assets. We'd probably be out of the woods in a year or two.
Note this is not unlike some of the current plans that I've seen... the difference is that the banks would be required to do this, not have it be an option for them. That's what the current problem is, as I see it... the banks refusing to deal with their toxic waste, albeit being nudged along by the government. It's time the government forces the banks to take their medicine, in order for the American economy to start its recovery.