So I have been watching Charlie Rose on PBS last few nights (btw, Warren Buffett will be on tonight) and he had Martin Feldstein on. MF was an economic advisor to Reagan and he is an economic expert.
He brought up a very good point and something that unfortuntetly the government will not be thinking about.
The main issue for the next 2-3 years will be the fact that the housing market and house prices will OVERSHOOT on the bottom. And instead of (for argument's sake) having 10 million homes be upside down today, we might end up with 20-25 million homes.
Now his main point is that the fundemental problem of today is that house prices are continuing to decline which will trigger more problems for the financial markets. The main reason for that is that mortgages are non-recoverable loans, meaning a bank can take your house, but they cannot force you to sell your car (or other assets) to pay them back. Now, if some houses end up being 20, 30 or 40% upside down there will be a bigger incentive for people to simply walk away from their house leaving the bank holding the mortgage.
What Feldstein proposes (and I agree with this) is that the government needs to offer some kind of relief for all mortages or at least make the option available. His personal take on this, is that up to 80k or 20% of your total house value or mortgage could be 'swapped' with the government at a much lower interest rate.
Now, the government loan will be a recoverable loan (much like student loans that you can never get rid of) and would be given at a very nice interest rate.
What this does is 3 things
1) It would significantly lower monthly payments for a lot of families
2) People would have less of an incentive to 'walk away' from their house since they are on the hook forever for the 20% of it
3) Hopefully the overshooting of the housing market on the bottom will be a lot smaller
I wonder what people think of this, I think its a very sound plan.
He brought up a very good point and something that unfortuntetly the government will not be thinking about.
The main issue for the next 2-3 years will be the fact that the housing market and house prices will OVERSHOOT on the bottom. And instead of (for argument's sake) having 10 million homes be upside down today, we might end up with 20-25 million homes.
Now his main point is that the fundemental problem of today is that house prices are continuing to decline which will trigger more problems for the financial markets. The main reason for that is that mortgages are non-recoverable loans, meaning a bank can take your house, but they cannot force you to sell your car (or other assets) to pay them back. Now, if some houses end up being 20, 30 or 40% upside down there will be a bigger incentive for people to simply walk away from their house leaving the bank holding the mortgage.
What Feldstein proposes (and I agree with this) is that the government needs to offer some kind of relief for all mortages or at least make the option available. His personal take on this, is that up to 80k or 20% of your total house value or mortgage could be 'swapped' with the government at a much lower interest rate.
Now, the government loan will be a recoverable loan (much like student loans that you can never get rid of) and would be given at a very nice interest rate.
What this does is 3 things
1) It would significantly lower monthly payments for a lot of families
2) People would have less of an incentive to 'walk away' from their house since they are on the hook forever for the 20% of it
3) Hopefully the overshooting of the housing market on the bottom will be a lot smaller
I wonder what people think of this, I think its a very sound plan.
Facebook
Twitter