Bitter Medicine Prescribed As Cure for Housing Market

Everyone agrees that the housing market has been a pretty sick patient for a long time now. But not all agree on a cure.

Go to certain economic doctors and they will tell you that the cure for ailing home sales is job creation. Their prescription is that when enough people are employed again, the housing market will recover. But job growth has been practically non-existent with unemployment still near 10%, underemployment much higher and some forecasting a jobless recovery. Foreclosures continue glut the market with more than ever expected in 2010.

Since information is power in both health and economic matters, it's always a good idea to seek a second opinion.

Edward Pinto, a consultant to the mortgage-finance industry and former chief credit officer at Fannie Mae, isn't shy about offering some alternative medicine. He says very bluntly that the hole that's been dug by bad loans is too deep to be offset by a modest rise in future employment.
And Pinto strongly disagrees with the government response to the housing bust: to provide medicines (loan modifications) that prevent the market-clearing process and delay the inevitable purging of buyers who can't pay off even modified loans. I've never been much for purging myself but according to Pinto, the market needs to painfully cleanse (that's better) its system so that traditional housing forces can return to the scene.

What are traditional housing forces, Doctor?

Buyers with something at stake in their homes, in other words, a substantial down payment, along with the documented ability to cover all the monthly expenses associated with home ownership. "All we are doing is kicking the can down the street," Pinto said. "The loan modification programs that were designed to help people stay in their homes have been abject failures", depressing prices while foreclosures continue to flood the market.
So what should be done? Pinto would halt all housing stimulus funds and take some basic steps to curtail foreclosures. The initial steps would be tougher on at risk homeowners, but he believes they are critical to restore balance:

1. Separating borrowers who can qualify to pay a lesser mortgage amount from those who cannot.

2. Allowing lenders to accept deeds in lieu of foreclosure whereby the borrower deeds the property back to the lender and avoids the foreclosure process.

3. Banks lowering the loan amount and reducing mortgage principal amount to no less than 90 percent of loan-to-value and negotiating affordable terms and rates.

4. Make loans "judicial" enabling the bank to seek the borrowers' other assets in the event of default.

With all that in place, Pinto believes the result would be that only qualified borrowers would remain in homes, homes would cost less and many more genuine buyers would surface because the "bottom" has been reached. This sounds like tough and bitter medicine for those who lose their homes but Edward Pinto thinks it's the only way to finally cure what's ailing the housing market.