The Great Housing Bailout of 2009 is coming. The recent announcement by Fannie Mae, Freddie Mac, and Citigroup that they plan to reduce mortgage payments for hundreds of thousands of borrowers facing foreclosures may well be just the beginning of help for homeowners. More and more economists now agree that falling prices and rising foreclosures are at the heart of the economic and credit crises—neither of which will end until housing stabilizes. If the new Obama administration is looking for ideas on what to do, here are some possibilities:
1) The Bair Plan. Sheila Bair, chairman of the Federal Deposit Insurance Corp., wants the government to help as many as 3 million struggling homeowners by having Uncle Sam use some of the $700 billion Troubled Asset Relief Program (TARP) money to guarantee mortgages backed by private lenders. That could encourage them to restructure loans to troubled homeowners. Since the FDIC took over mortgage lender IndyMac this summer, it has modified loans held by IndyMac that were 60 days or more past due. This was the policy inspiration for the Fannie-Freddie-Citigroup plan.
2) The Blinder Plan. Alan Blinder, a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve, wants to kick it old school. He supports the creation of a 21st-century version of the New Deal-era Home Owners' Loan Corp. The HOLC basically bought mortgages from banks and then issued more affordable new loans to struggling homeowners. This plan might cost $400 billion, or about half the cost of the Paulson plan to bail out Wall Street, although in the end the HOLC made a small profit on its investment. Blinder would limit the plan to owner-occupied homes and to honestly obtained mortgages. And owners of homes the size of Wayne Manor need not apply.
3) The Hubbard Plan. R. Glenn Hubbard, dean of the Columbia Business School, says it's time to go big or go home. Help everyone. He suggests that the White House and Congress allow all mortgages on primary residences to be refinanced into 30-year, fixed-rate mortgages at 5.25 percent, the lowest mortgage rate in the past 30 years. Those mortgages would then be placed with Fannie Mae and Freddie Mac. As for underwater mortgages, Hubbard, like Alan Blinder, would refinance them into 30-year, fixed-rate loans to be held by a HOLC-like agency. Hubbard thinks this could cost about $300 billion, but the subsequent economic rebound might essential pay for the whole thing.
4) The Lindsey Plan. Lawrence Lindsey, former director of the National Economic Council under President George W. Bush, says one way to boost housing demand is by creating more potential buyers. He advocates an immigration program that would give a provisional green card to anyone who invested at least $10 million in residential property and held it for five years. Each property could be worth no more than $1 million. Another option would be for the Fed to let inflation rise to encourage investment in housing, traditionally a financial safe haven from rising prices. Or, again, the government could start buying large amounts of distressed or foreclosed homes.
5) The Meltzer Plan. Allan Meltzer, professor of political economy at Carnegie Mellon University, says it's all about supply and demand. He thinks Washington should focus on helping existing homeowners by increasing the demand for housing. That would boost prices and reduce the number of defaults. Potential buyers would be allowed to use some percentage of the value of their down payment as a tax deduction. Another option would be to reduce the tax rate for buyers, even if they are buying a second or third home.
6) The Yardeni-Goldsmith Plan. Investment strategist Ed Yardeni and Carl Goldsmith of Delta Asset Management propose nationalizing Fannie Mae and Freddie Mac. Once that is done, the two entities could borrow at the same low rates as the U.S. Treasury. Then, Fannie and Freddie could offer 30-year, fixed-rate mortgages at 4 percent to all qualified borrowers to buy a new or existing home.
7) The Zingales Plan. Luigi Zingales, a business professor at the University of Chicago, says that Congress should pass a law making it super easy to renegotiate your mortgage if you live in an area where prices have plunged. Here is how it would work: First, you would have to live in a ZIP code where house prices dropped by more than 20 percent, as measured by the Case-Shiller index, since the time you bought your property. The homeowner could then have the face value of the mortgage (and thus his or her interest payments) reduced by the same percentage that house prices have declined since the homeowner bought the property. In exchange, however, the mortgage holder would get some of the equity value of the house when it eventually is sold.