Home Bailout

The root cause of the troubles in the financial system is the severe decline in housing prices. Financial companies bet that this would not happen. So how about, instead of bailing out the financial companies by buying their bad mortgages, we bail out the homeowners by buying their houses? The government would buy houses for the list value of the mortgage, thus paying off the mortgage holders. The government would then sell the house back to the owner at a significantly reduced price, retaining an interest in the house. If the house were later sold, the government would take, say, 75% of the profit up to the amount which the government lost buying the house. If this did not pay the government back, the remainder would be carried over until the next sale.

Giving the mortgages their book value should let the financial companies price their assets and get the credit system going again. Getting distressed homeowners out of their current bind would let them continue to enjoy the benefits of home ownership. Holding a delayed lien on the house would mean that the government would eventually get paid back for most of its outlay, though admittedly this could take quite some time.

This is more complicated than the proposed bailout, but it seems fairer to me. It’s still a bailout, no question, but at least it directly helps the people who are hurt, rather than piping the money directly to the financial services companies.

7 Comments »

  1. Dan Villiom Podlaski Christiansen said,

    September 25, 2008 @ 9:08 am

    Intervening with the market is tricky business, and can have all sorts of unintentional side effects. When are people sufficiently distraught to qualify for aid? When is “book value” reasonably set? How will you ensure fairness, limit scope and prevent or discourage abuse?

    The US doesn’t have the means it to be done fairly, in my opinion. Here in Denmark, for instance, rent is tightly controlled, resulting in many peculiarities in the market. When liberalisations caused the cost of borrowing money to decrease, house prices increased so that new home owners ended up paying the same, but at greater risk.

    I’m just saying these are complex issues. Why not fix the root problem; that some people cannot afford reasonable housing? It was wrong to let people to buy something they couldn’t afford. The Danish solution to this is to offer cheap housing or monetary aid to those unable to provide for themselves.

    Unfortunately, we too have major problems caused by financial institutions behaving irresponsibly, but luckily, the other institutions appear to be living up to their responsibilities. The State shouldn’t carry the full burden; the financial community should carry its fairly large share of the burden too. If they won’t voluntarily pay up, force them.

  2. Ian Lance Taylor said,

    September 26, 2008 @ 6:02 am

    There are certainly some areas in the U.S. where housing is too expensive, and it would be appropriate, even necessary, to support poorer people buying houses. However, I don’t think that was the core of the current problem. In the U.S. people by and large always want more. The problem here was not, in large part, people buying reasonable housing, it was people. buying houses larger than they could afford, and doing it using adjustable rate mortgages in the expectation that they would refinance before the interest rates increased.

    For example, one of the places hit worst by the housing bubble was Florida, a land notorious for real estate speculation, but also one where the average family actually can afford a reasonable house–or at least could before the prices skyrocketed.

    Since you mention rent, it’s worth noting that during the worst of the housing bubble rents barely budged–in some areas they actually decreased–which was one of the surest signs that it was indeed a bubble, not an increase in real value. I think people wanted to buy rather than rent because we’ve been taught that it’s better to own and because the mortgage interest tax deduction makes the money cheaper when you buy.

  3. etbe said,

    September 29, 2008 @ 4:06 am

    If the government pays out the full value of the mortgage then the banks get rewarded for their stupidity.

    The banks should be allowed to go under, once they fail the government can take over and then try to fix things. Freezing forclosures in the mean time would be a good idea (it’s not as if a house that is forclosed will be sold for any significant amount of money right now).

    Then we need to have some class action lawsuits against the people responsible. Make some of the bank employees return the bonus payments they received while destroying their employers.

  4. avjo said,

    September 29, 2008 @ 2:34 pm

    So the bail out program is out and Wall street is free falling.
    What do you guys expect now to happen in the US ?

  5. Ian Lance Taylor said,

    September 29, 2008 @ 8:23 pm

    etbe: In any bailout, the banks get rewarded for stupidity; that’s the nature of a bailout. So I assume you are questioning whether we should have a bailout at all. That seems fair, but I think it has real consequences.

    avjo: I’ll write a full blog entry with my uninformed speculations.

  6. etbe said,

    September 30, 2008 @ 1:35 am

    Ian: If the bank stock price goes to zero and the government takes over the assets and liabilities then the bank doesn’t get rewarded for stupidity.

    It’s only if the government gives taxpayer money to the banks and allows them to keep running their unprofitable business that they get rewarded for stupidity.

  7. Ian Lance Taylor said,

    September 30, 2008 @ 5:30 am

    etbe: OK, fair point, but I would qualify it further: if the executive bonuses get clawed back then the back doesn’t get rewarded for stupidity. Despite the words on paper, banks aren’t run for the benefit of their shareholders, they are run for the benefit of the executive management. And even being reset to zero is better than going into bankruptcy court and facing the shareholder lawsuits. But, still, fair point.

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