Monday, March 17, 2008

WILL UNCLE SAM COME TO THE RESCUE OF THE BATTERED HOUSING INDUSTRY?

Falling home resale values, soaring unemployment, rampant home foreclosures, mortgage companies swimming in red ink and home-building firms filing for bankruptcy.

These are the headlines of 2008, but if we didn’t know better veteran housing analysts would say is more like we are reading about the Great Depression of the 1930s.

With the real estate market in the second year of a downward slide and the economy on the edge of recession, the big shots in Washington, D.C. are finally waking up to the scope of the nation’s housing crisis.

The Federal Reserve Board estimates that 1.5 million adjustable-rate subprime home loans are scheduled to reset this year, and the interest rate likely will be 9.25 percent or higher.

Since 2006, the nation’s home-building industry has lost more than 400,000 jobs. And, the housing construction downturn is affecting lumber mills and a wide range of manufacturers dealing in home related products such as kitchen appliances and furniture.

Housing is hurting so bad that Uncle Sam needs to come to the rescue fast, experts say. A good start was the Fed’s unprecedented offer in mid-March to make $200 billion available to the nation’s biggest banks and investment houses to help jump-start investment growth.

In addition, the National Association of Home Builders, is urging Congress to pass emergency legislation that would give a $10,000 tax credit to new-home buyers. A similar $1,000 tax credit was used in 1975 and 1976 by President Gerald Ford to help the country out of a recession.

With resale values of thousands of homes falling below mortgage balances, Fed Chairman Ben Bernanke is urging lenders to reduce portions of mortgage principal balances to help homeowners on the verge of foreclosure keep a roof over their heads.

Reducing loan principal may be an innovative concept, but don’t expect the idea to be popular with lenders who have to protect the interests of pools of world-wide investors, experts say.

Most importantly, let’s not forget some strong governmental regulation for those greedy mortgage lenders who urged borrowers to take out those predatory subprime loans that sparked the foreclosures.

Now also might be the time to rediscover zero-percent financing that was used in 1982 by innovative Chicago-area home-builder Maurice Sanderman, president of Sundance Homes, when housing was in deep recession and mortgage rates were 15 percent.

No gimmicks in this zero-interest plan. Home buyers simply were required to make a down payment of at least 33 percent of the purchase price and had five years of fixed monthly payments to pay off the rest of the loan.

The benefit: buyers saved tens of thousands of dollars in interest and owned the home free and clear in five years. Uncle Sam could make this work, but lenders are not interested in this form of zero financing because there is no profit.

Looking back to the Great Depression, in 1933 President Franklin D. Roosevelt and Congress created the Home Owners’ Loan Corporation to help distressed families by replacing mortgages that were in default with new affordable loans.

Essentially, Uncle Sam purchased more than one million old mortgages from banks, which took safe government bonds as payment. The HOLC was financed through borrowing from the capital markets and the U.S. Treasury, noted Alan S. Blinder, former vice chairman of the Federal Reserve.

By the late 1930s, nearly one of every five home loans in America was owned by Uncle Sam, as the HOLC lent homeowners a whopping $3.5 billion, noted Blinder, who currently is a professor of economics and public affairs at Princeton University.

However, times were tough in the 1930s, and nearly 20 percent of the borrowers defaulted anyway. So Uncle Sam eventually became the owner of 200,000 houses.

Luckily World War II came along, and soon after a housing shortage. By 1944, nearly all of the 200,000 homes were resold. Then, the H