My Solution to the Mortgage Crisis

Great Debates
1

Or maybe not. It’s just a theoretical idea I’ve been kicking around, and I wanted to see if anyone has any insights. I’m primarily interested in the economics of this, but I suppose political analysis is fair.

So, we have a problem where home owners owe more than the house is worth. One way to solve this problem is to attach something of value to the home. It would be even better if the something we could attach is relatively cheap to create. So, what about green cards?

My proposal is to create a new type of green card, let’s call it a “Blue Card.” If you purchase $2 million dollars worth of residential property, then you are eligible for a Blue Card. Here are the rules:

  1. You can transfer your eligibility for a Blue Card to one person, but they cannot subsequently transfer it. This allows you to purchase property to get your family (or lover or whatever) into the country, but prevents a market in Blue Cards from springing up.

  2. Only residential property is eligible. I suppose this doesn’t really have to be the case from a theoretical perspective, but if the goal is to get consumers back on proper footing, than residential should be the priority.

  3. You can purchase multiple properties to achieve the $2M goal.

  4. You have to purchase the properties at 20% above fair-market-value. This is the key part to removing the underwater problem.

  5. You cannot encumber the property with a mortgage for a period of five years from the date of purchase. This is to prevent a re-inflation of the mortgage bubble.

  6. You cannot sell the property for five years from the date of purchase. I’m not sure about this one, but I think we want to clear the backlog of foreclosed properties without dumping a huge amount on the market all at once. Another way to approach this would be to have a lottery whereby X amount of Blue Card holders can sell their properties in a given month.

  7. As long as you hold your property or properties of FMV+20% equivalent to at least $2M, you get to keep your Blue Card.

Some other stuff:

  1. Your Blue Card has no residency requirements, so you can go and come as you please. This is to make it more attractive. But you would have to fulfill a residency requirement to become a citizen.

  2. You have to pass all the normal security/background checks, etc. in order to be eligible.

An additional thought: since you can’t finance purchase of the property (because of #5), the people who would be eligible would probably be rich, and thus unlikely to draw on social services.

2

First thought: isn’t the primary “problem where home owners owe more than the house is worth” with low to medium value housing? But this program would, I’d speculate, mostly attract the wealthy? IOW it would bump up the price of the top end of the property market without fixing the bit you want to fix?

But let’s say it works, and these people buy 5 x 400k houses or 10 x 200k houses each. What then? Don’t you still end up with a bunch of empty houses that are falling down?

As I see it the core problem is low demand at the bottom end of the economy, which in turn is due to insufficient income to buy houses they can afford to pay off (whether due to unemployment, being under-paid, excessive medical bills or whatever). My humble suggestion would be to do what worked under Clinton - bump the minimum wage up significantly.

3

That’s a good point. We could put in a rule that says that no individual property can be worth more than $1 M (or some such number).

Empty houses that can be rented out. Or torn down. So, let’s put in a rule that if you lose the property because of city condemnation, then you lose your Blue Card. But you’re free to tear the house down if you don’t want upkeep a house. That would either force people to maintain the property or remove housing stock from the market and help to drive prices up.

Without getting into the merits of this, I feel this is off topic. I’m interested in analyzing this proposal, and not other proposals.

4

Ah, I have another rule, which we should probably add: only housing stock for which construction was completed prior to the crash is eligible. My feeling here is that new housing should have properly priced in the crash and the subsequent credit crunch, and shouldn’t have the underwater problem.

5

I don’t think people with 2 million to spend on property are the ones having trouble getting legal citizenship. How many people do you think this would attract who otherwise couldn’t attain US citizenship?

6

It’s a good question. I do know people in India who could afford this program but are on the waiting list for a green card. Now, that’s just personal experience and not data, so if anyone has insight into green card eligibility, let us know.

There is also the added benefit here of being able to immediately gain status for your friends or loved ones who you may have eligibility by themselves (and a US citizen can also use this program to gain that). My understanding is that the family reunification quota is pretty difficult to get in under because of the waiting list. And, since it’s geared to family members, then you are SOL with non-family people you might want to bring over. So, this is a value add in that sense.

7

Ignore the previous post. This should read:

It’s a good question. I do know people in India who could afford this program but are on the waiting list for a green card. Now, that’s just personal experience and not data, so if anyone has insight into green card eligibility, let us know.

There is also the added benefit here of being able to immediately gain status for your friends or loved ones who you may not have eligibility by themselves (and a US citizen can also use this program to gain that). My understanding is that the family reunification quota is pretty difficult to get in under because of the waiting list. And, since it’s geared to family members, then you are SOL with non-family people you might want to bring over. So, this is a value add in that sense.

ADDITIONAL INFO: Another value add (I think) is the lack of a residency requirement.

8

Essentially, your plan in two parts:

  1. Sell access to the United States to foreign nationals for $333-400k (depending on where the 20% is calculated in the “worth” of the property, which is not very clear)
  2. Use that money to prop up the housing market.

As far as (1) goes, is this actually a good idea? Will it actually generate much money? I find it hard to believe that there a whole bunch of people out there with $300k+ who really want to live in the US for a while but can’t do so in other ways. $300k buys an awful lot of plane tickets and hotel rooms.

For (2), I think the main problems with this sort of plan are the moral hazard and inefficiencies of rewarding people who made poor choices and overspent on housing. But I think that any plan that involves further economic manipulation to artificially increase the price of housing has those problems, and they’re sort of pre-assumed by the idea that the best way to fix it is to raise the price of houses again to retroactively make those choices less poor.

You also mention destroying houses to drive prices up, which just seems backwards. Houses are consumption goods. We should want them to be cheaper, not more expensive.

Aside from those major philosophical differences, I see this as being a nightmare to implement.

9

As a 20-something who hasn’t buried himself in debt with a giant mortgage and might want to buy a house in the coming years, I think efforts towards increasing housing prices back towards their ridiculously inflated levels are quite dumb. Housing was in a bubble. Hopefully the view that a house is an investment that outpaces inflation by any meaningful degree will not come back for a very, very long time.

10

Being able to buy plane tickets or hotel rooms doesn’t mean that you are legally allowed to come to the US and work in it. Just because someone has money, that doesn’t mean they automatically get a green card.

I don’t really worry abut moral hazard arguments, since that’s a value judgment based on your personal preference. Our system has moral hazard all over the place, and yet you’ve only chosen to focus on the borrowers here in your argument and have completely ignored the lenders.

I don’t know what it means to say that the choice was poor. People bought property and borrowed money to do so. That happens all the time.

Hmm? I didn’t say that people should destroy housing in order to drive prices up. I said that rather than have blighted housing in disrepair which is not being used, we could allow the owner to tear it down. This would have the effect or reducing housing stock which would increase prices. It’s a side-effect of dealing with the blight problem.

I don’t see any huge barriers to implementation.

11

This doesn’t actually increase prices back to their previous level. After the five year period, the Blue Card owner is free to sell, and at that point, the price he could sell at would be set by the market. There’s nothing that says the owner has to sell for the price he purchased it for. So, before you start calling things “dumb,” you might want to do a proper analysis.:rolleyes:

12

I’m going to clarify my post #10 re: moral hazard. There are 3 situations here:

(1) a person is still making payments on their underwater house, in which case I think the assumption should be that the person intended in good-faith to pay their mortgage, but circumstances beyond their control (ie, crappy economy, deflating house prices) caught up with them. But aside from that, they’re probably not going to benefit personally in any significant way from this program, since the money they get is going to go the the lender to pay off the mortgage. The most likely scenario is that they come out of this even. If it really pains you that a homeowner might come out ahead, then you could adjust the 20% figure to some other figure that we can calculate based on the average % that a homeowner is underwater, so that on average homeowners break even.

(2) The house has already been foreclosed, in which case talking about the moral hazard problems around individuals is irrelevant. You can talk about moral hazard problems for lenders, but since the government already is back-stopping the lenders, the moral hazard problem (if you want to call it that) already exists. So, I don’t see the relevance here.

(3) The homeowner is not actually underwater. In which case, there’s no moral hazard problem here.

13

After doing some analysis, I still come to the conclusion that your plan would increase housing prices for the next 5 years and weed out “natural” buyers - to the chagrin of people such as myself.

Imagine a block of $100k houses, as determined by the market price before the Blue Card program. The Blue Card program goes into effect. Foreigner A buys House 1 for $120k. Foreigner B buys House 2 for $120k, Foreigner C buys House 3 for $120k, etc. I approach House Owner M and offer him $100k. I argue with him that the real market price for his house is $100k. Do you think he will agree? No. He will see that the “real” market for his house is 20% higher and wait for a rich foreigner. Or I, as a new home buyer, will have to pay up 20%. It seems you’d have to completely ignore human psychology and real world market dynamics for your plan to work without raising prices.

FWIW, I’d like to see a program something like what is explained at this site about halfway down under the “Foreclosure Abatement” section.

14

There’s alreadya green card program for anyone who has $1 million to invest in a business that creates U.S. jobs (less in economically depressed areas). There must be half a billion different creative ways to channel that investment into the real estate market.

15

I wasn’t suggesting that. I’m just doubtful that there are a whole bunch of people willing to spend $300k+ to buy a green card. What job in the US is worth that much money?

Moral hazard isn’t a value judgment. Changing the rules to retroactively reduce the risk of bad decisions means that in the future people will consider that when making decisions. Now, you can argue that it’s still worth it to help out the people who are really suffering from their bad decisions, and that’s where the value judgment comes in. It’s how to weight current suffering against future bad decisions. But the existence of moral hazard is not generally disputed. Obviously, you and I disagree on its importance, here, but you asked for economic insights. You shouldn’t just ignore one of the biggest downsides of any housing bailout plan.

I’m not sure why you think that I’m focusing on the borrowers and not the lenders. This plan will help both the borrowers and the lenders (by increasing housing prices and reducing the risk that they’ll have to write off defaults and accept short sales) at the expense of everyone who doesn’t own a house. All the people who wisely didn’t buy a house they couldn’t afford and wer saving up a downpayment waiting for prices to be more reasonable get screwed. And remember that homeowners (not to mention bank stockholders) tend to be older and more wealthy than non-homeowners in this country. So the net effect is that we’re providing a further subsidy to (on average) the upper middle class.

Really? You actually can’t think of any way to quantify whether buying property that’s now worth way less than you paid for it was a good or bad choice?

16

I find this argument odd. You are making an argument about human psychology and real-world dynamics by presenting a hypothetical model with a number of unstated simplifying assumptions. That’s not objectionable, since it’s a valid way to do analysis, but the model you’ve presented is not a real world analysis nor does it take into account human psychology.

For your analysis to work, you have to assume that housing supply more or less evenly matches Blue Card demand. I don’t know if that would be the case in the real world, but I suspect it wouldn’t be, given the financial requirements to get the Blue Card.

Additionally, you’ve completely ignored my point about restricting houses to pre-crash stock. This means that post-crash or new housing stock is still available without the Blue Card attached.

Finally, and I think this is a point that’s being missed in this thread, the additional 20% (or whatever figure) is a payment for the Blue Card. It’s not a payment for the house. It just so happens that the payment will go to the homeowner, who will then pass it on to the lender, but since it’s not a payment for the house, I don’t see why the market would incorporate that payment into all housing prices.

Oh, and can we cool it on stuff like “to the chagrin of people like myself?” It’s a theoretical idea, for pete’s sake, and I said so in the OP. I’m getting a bit tired of people acting like I just introduce a bill in Congress.

17

Eva, thanks for posting this. I know there are a lot of different ways for a really, really rich person to get into the country. But to get their friends or family or homosexual lovers in? That’s more complicated, isn’t it?

And most of these programs come with a lot of restrictions attached, don’t they? So, the program you listed has (I think) a requirement that you create ten jobs. With this Blue Card idea, you don’t have to worry about that, so that would be attractive to people who don’t want to worry about having on-going requirements to meet.

18

Why do you assume that people only come here for jobs? If you can get an in-and-out pass to the US with very few restrictions, that’s going to be valuable to people for a number of reasons. Look, I’ve already stated that I know people who would qualify for this, who would put the money down, and who would come here. All you’ve done is speculate, but your speculation doesn’t outweigh my anecdote. Unless you can bring data to this argument, you’re not going to convince me of anything.

What bad decision? Most of the major economists were running around saying there wasn’t a bubble. The credit rating agencies, the banks, the mortgage originators, hell, even the Fed were saying that houses were properly valued. Only a handful of economists correctly saw that there was a bubble going on. At the end of the day, lay people have to rely on experts to help them do an analysis, and the vast majority of experts were telling them that housing was a safe investment. It’s not there fault that mortgage brokers were lying about the loans or that lenders weren’t tracking loans properly. It’s not their fault that Lehman Brothers went belly up. All of this was unforseeable risk for your average homeowner. So, no, I don’t agree that they made bad decisions. They made reasonable decisions given the information available.

Help out the people? I don’t understand what you mean. This isn’t direct aid. It’s allowing something of value to attach to their property so they can clear the debt. It’s not as if they don’t have other options, such as walking away from their mortgage. And if enough people do walk away from their mortgages, then you and I will be providing direct aid to bail out the banks.

No, because this is what I mean when I say I find moral hazard arguments to be usually not insightful. Your posts read to me like homeowners should absorb the blame for the actions of companies and people who had far more expertise then them. There was a clear market failure during the housing bubble, and home owners aren’t the source of the failure. That’s what I mean by value judgment. You’ve a priori decided that home owners made bad decisions, so anything (even if it’s not a direct bailout) that helps them is a moral hazard.

Additionally, the whole premise behind moral hazard is that people behave differently than they otherwise would because of risk insulation. That’s not what happened during the bubble with regards to homeowners. Homeowners relied on expert advice, and so they behaved exactly as they should have behaved.

The people who didn’t buy housing are luckier, not wiser (unless they correctly were able to seek out information from one of the few people saying there was a bubble).

But aside from this, since I’ve already excluded new housing stock from the program, the prices for new housing stock shouldn’t rise. So, if you’re going to participate in this thread, you should analyze the proposal as it stands, not some other proposal.

How is it a subsidy when there is no government money involved? It is a private sector transfer of wealth.

Go take it up with Alan Greenspan. He thought it was a good decision.

19

Just for completeness, I’ll list a few other unstated simplifying assumptions in Trom’s post:

  1. He/she has assumed that individual homeowners have the ability to maximize sales price. While everyone probably has the desire to maximize sales price, in the real world, home owners are often forced to settle for less than ideal pricing because they have to sell immediately due to liquidity issues (such as a job move or sudden illness).

  2. Furthermore, he/she has neglected the downward incentive pressure that real-estate agents put on home prices in the real world (IIRC, Freakonomics has a section on this). So, the longer the home stays on the market, the more the real-estate agent tries to get the homeowner to drop the price. If there’s a glut of potential properties to Blue Card holders, then the house is going to stay on the market longer, causing this effect to kick in.

  3. He/she has neglected that blighted homes create negative externality problems which put downward pressure on recent property purchasers. Thus, even if some homeowners end up paying more in a particular neighborhood, it could be because that neighborhood was desirable to Blue Cards who (hopefully) have significantly lowered the negative externality risk of blighting.

But again, I don’t think it’s wrong to do an analysis with simplifying assumptions, but you can’t then turn around and criticize people for not accounting for real-world behavior.

20

This is a valid point. We have no way of knowing what the overlap would be.

OK. That still arbitrarily raises prices on a portion of houses. What about the new family who wants to buy a house being foreclosed on that is also attractive to the Blue Card community. Tough luck - build a new home?

My main objection to your plan is that it is unfair to people that played by the rules. Underwater homeowners and struggling lenders have demonstrated they are not good stewards of capital. You can make arguments all day about whether the blame belongs with homeowners or lenders. However, there is zero blame that can be attached to people who lived within their means, rented for awhile, and saved up for a down payment.

I still don’t like the idea of artificially inflating housing, but how about incorporating something like this into your plan: New home buyers are given Blue Cards which they can sell and use the proceeds to help buy a house. Or in the event they have to bid against a Blue Carder they are given some type of financial incentive, etc.

Chagrin? I wasn’t aware that I had heated up.