Every week someone sends me an idea on how to fix various housing problems.
Many want home prices to stop falling and many others want to bail out homeowners because banks were bailed out (as if two wrongs make a right). Others want to stop foreclosures even though the very best thing for most of the people in trouble would be to shed the albatross by walking away.
The one thing they all have in common is a misguided proposal to bailout someone at the expense of someone else (typically the government but few figure out the government means taxpayers).
I have long-stated the best thing to do is nothing. Indeed if nothing is done, home prices will drop low enough that investors will want to buy them. Delays in foreclosures only serve to delay the housing recovery.
Fixing the "Un-Real Estate Mess"
Last week I received a different kind of proposal that merits a much closer look than all of the various bailout proposals I have seen to date.
My friend "BC" writes ...
The only long-term durable solution to the unreal estate mess is to cease further securitization by agencies and shut them down.
It's time to concede that "homeownership" is a fraud.
When there is $16 trillion in mortgage and consumer debt outstanding and an estimated $16 trillion in residential unreal estate value, with the risk of another 20% decline in prices, there is no "ownership".
Rather, virtually everyone with a mortgage is renting debt-money from a lender and leasing the land from a local taxing authority. The mortgagees have a "dead pledge" in the value of the debt owed, not an "asset". The lenders and taxing authorities are the "owners" of a lien (a bond or constraint on the real property), which entitles them to income in the form of compounding interest and tax receipts in perpetuity.
Unreal estate is the best investment for lenders and taxing authorities, not dead-pledgers.
The value of an unreal estate loan should not exceed the householder's income and should be 100% collateralized by an asset or funds other than the property.
If someone wants to mortgage a house, and his household income is $50,000 (around the current US median household income), he should not be lent more than $50,000, and he should have at least that much in collateral in order to qualify for a "dead pledge".
That way, the debt is self-liquidating. Terms should be no more than 10 years.
By the way, this system was generally the norm for centuries before the period after WW II. We assume that what has been the norm in our lifetimes is the only way it should be or can be. We have the colossal mess because we have allowed ourselves to be taken over by the rentier mentality, which always leads in the extreme to unserviceable debts, extreme wealth and income concentration, and economic and social crises and collapse.
A further decline of 15-20% in residential unreal estate values will mean a complete wipeout of all US household net wealth/equity of the bottom 90% in terms of mortgage debt and consumer credit outstanding. In effect, 270 million or more Americans are already renters or neo-feudal peasants "bound to the land" by mortgage and consumer debt and the tax code.
It is appalling and obscene that we assume as a normative condition spending 5-6 times the perceived market value (debt-based value) of a house over a lifetime when costs of principal, interest, taxes, and maintenance/improvements are included, whereas the rentiers have little or no accompanying social obligations to support public infrastructure required for productive enterprise.
Worse yet, in the process of favoring and enabling the rentier domination, we punitively tax labor, production, productive capital investment, savings, and productive capital accumulation while encouraging rentier speculation, waste, ecological degradation, and resource depletion.
Increasing non-productive rentier gains to the top 0.1-0.4% of US households have resulted in deindustrialization, militarization, financialization, hopeless indebtedness, obscene wealth and income concentration, and the gutting of the productive capacity of the US economy.
Banks should not be permitted to take a $1 deposit, set aside $0.03 in reserve, and then lend $1 at a 7-10%/yr. growth rate and then go broke and have to be recapitalized by the central bank and government borrowing every 9-11 years when compounding interest burden exceeds labor product growth.
Banks should be required to collateralize all loans at 100%; that is, only be allowed to lend their own money, not depositors' money. However, banks should be allowed to charge whatever they like for custodial services.
Banking should not be permitted to make money from making money and thus encourage wider use of increasing leverage to capture eventually all net after-tax real labor product for a generation, leaving labor incapable of sustaining itself after taxes and debt service.
Of course, all of this would mean effectively returning to something like a Victorian-era banking standard, which no rentier, politician, or most of the public will accept.
My friend "HB" replied to "BC" ...
I absolutely agree, except I would also allow banks to be middlemen between savers and borrowers, i.e., allow them to lend out savings that have a fixed term for a corresponding fixed term. That way no new deposit money would be created.
Under the conditions outlined above, home prices would be very stable.
Some might question how that would fit in with a libertarian approach. I have an answer: In a free market there would not be a Fannie Mae, a Freddie Mac, a HUD, or an FHA. More importantly, fractional reserve lending would be outlawed as fraud, and there would be no Fed.
Perhaps some lenders would be willing to make loans longer than 10 years, but not many. I would not stop those who did. Rather than a set of rules that "BC" proposed, a free market left on its own accord would gravitate to a set of workable procedures, probably very close to what "BC" suggested.
In light of the above, the required solution is to
- Get rid of the Fed
- Get rid of fractional reserve lending
- Get rid of Fannie Mae, Freddie, Mac, HUD, and the FHA
Mike "Mish" Shedlock