- HAMP has not really produced much in the way of results to date
- Does America need economic shock therapy now?
- What about the citizens who will get hurt?
I was chatting the other days with a business economics professor at a leading New York Business School. The subject was foreclosures, and how best to manage them. These were his thoughts:
When American house prices plummeted in July the American President was put on the back foot as he sought ways to understand the market forces driving this, and how best to counter them. This time he faced the dilemma of either assisting new homeowners, or current ones. Both groups are voters – not an enviable choice.
Eighteen months have passed since Obama launched his HAMP. During this time, he has introduced several anti-foreclosure strategies in an attempt to stabilize the economy until the markets turned. These include:
- Tax credits
- Mortgage modification programs
- Low interest rates
- Government-backed loans
- Other programs aimed at propping prices up and keeping families in their homes
Now that Washington has tried all these good ideas, only to see the American economy splutter on, some thinkers are beginning to propose a form of shock therapy, which would crash the market and bring billions of buyer dollars in. This would re-energize the market and create a new generation of American homeowners, they say. This will help kick-start the economy and help shift a great deal of real estate. The downside, of course, is that millions of American homeowners, their families and their friends would vote with their feet next time – something that a virtually hung government can hardly afford.
I am still having some difficulty getting my mind around this, and seem to have more questions than answers:
- Why do we need to crash house prices to re-establish equilibrium in the first place? The housing sector is not the only depressed one. In fact, house prices are approaching historic ratios in terms of cost-to-income and cost-to-rent. While some regions are still overheated and need to come down a little more, a forced crash simply does not make good economic sense.
- Why is Obama getting credit for low interest rates when this is a Treasury prerogative? The bald truth is that an American President is not that much in charge. If Obama were, then why are we upping the ante in the Middle East?
- It is simply not true that America has fully exhausted all the options. Washington has hardly begun to explore the possibilities of mortgage principal reductions and own-to-rent scenarios. Why hurt more people when this is not necessary?
The problem lies not on the demand side. We need to balance outstanding balances with property values and this will not happen automatically. Political intervention is required.
Published by www.foreclosuredatabank.com – they also list foreclosed homes for sale.
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Written by Alex Rolim.
