Analyst Advocates Focus on Repairing U.S. Housing Market

Contributing Editor Shah Gilani tells Money Morning that the first priority for U.S. economic recovery should be fixing the housing market, and there is a simple way to …

Contributing Editor Shah Gilani tells Money Morning that the first priority for U.S. economic recovery should be fixing the housing market, and there is a simple way to do it. He advocates unwinding large federal mortgage entities like Fannie Mae and Freddie Mac, asking for more money up front from borrowers, forcing bailed-out banks to contribute to a pool of emergency mortgage capital and taxing the interest. The advice sparked praise and criticism, and Mr. Gilani responds to both. For more on this continue reading the following article from Money Morning.

Money Morning Contributing Editor Shah Gilani told us last week that if something isn’t done now to fix the U.S. housing market it’ll "drag the rest of the economy down into a hellish bottom that will take years, if not decades, to crawl out of."

"The housing market is our single-most important generator of gross domestic product (GDP) and, ultimately, national wealth," said Gilani. "And we can almost immediately execute a simple plan to fix mortgage financing and stabilize U.S. housing prices."

Gilani outlined steps the U.S. government needs to take to resuscitate the U.S. housing market, including unwinding Fannie Mae (OTC: FNMA) and Freddie Mac, making bailed-out banks contribute to a private national pool of mortgage capital, and creating a new ratings agency to assess the creditworthiness of mortgage pools – with a tax on the pools’ interest.

He also called for more up-front money from borrowers, and for a tax-incentive program to stimulate buyer demand and stabilize the housing market.
"Without these actions, the financial ugliness we’re experiencing right now could literally last for decades," said Gilani.

Readers responded with a wide range of praise and criticism of Gilani’s plan to fix the U.S. housing market. He addressed the following comments to further explain why his plan could salvage the housing market and the U.S. economic recovery.

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Mr. Gilani, reading through your plan, it gave me a headache. If it’s too complex for the average American, it’s too complex. After all didn’t complexity get us into the housing mess in the first place? How will complexity get us out? We’ve been tinkering with the housing market ever since the collapse and nothing has worked.

— Phil S.

Shah Gilani: There are a few "moving parts" to my plan, but I don’t believe it’s too complex. It essentially supports a financing component and a price-stabilization mechanism based on tax credits.

As for your insight that too much manipulation and stimulation caused the problem in the first place, I agree. It’s just that sometimes it takes a bit of counter-manipulation to swing the pendulum more to its center.

After decades of trying to increase home ownership and artificially lower mortgage interest rates, it’s time to let the free market mark homes down to their actual value. Prices will fall. The homebuilding industry will suffer, possibly for decades. That’s the end result of decades of government manipulation. Perhaps we need to rethink the idea of what a home should be and what portion of the economy should be dedicated to homebuilding. Where has stimulation gotten us?

— Patrick

Gilani: I am all for the free market. However, markets are never free. They can’t be in a complex econometric model like the one we’ve set up and live in. In theory, I’d like to see "freer" markets, just not so free that they become a "free-for-all." And with good reason: The truth is that by freeing up banks through deregulation, we fostered the greed factor, which ran unchecked and helped drive us over the cliff. Can we really afford to see a wholesale collapse of housing?

Mr. Gilani, you propose important and necessary steps. But unless the root cause, inflated mark-to-market values for illiquid assets – mortgages, MBSs, Home Equity Line of Credit (HELOC) loans – is addressed, the problem will simply crop up anew. The solution is to make illiquid assets liquid – create a market and require banks, pension funds, and GSEs to use it. Requiring them to sell even 1% of their illiquid assets each year in a supervised market – with capital requirement adjusted up or down based on ratio of balance sheet value to actual sale proceeds – will very quickly solve the current corrupt balance sheet problem and restore confidence in our economy.

— Charles S.

Gilani: I do get where you’re coming from, Charles. You think we should trust the free market to determine the "mark-to-free-market" (my phrase, not yours… but, hope you like it) value of homes and mortgage-backed securities (MBS) by making banks sell some portion of their inventory into the real world to engender true price discovery. But your plan does have a not-so-free component to your free market. You inherently saw the need for banks to be forced to sell (that’s not a free market) and have a "supervised" (by government) valuation methodology and process. Even in the hope that free markets are the answer, less-than-free-market oversight is almost always contemplated. It is either free, or it isn’t.

The bottom line: As many readers said, it’s about jobs. You are right, of course. But that said, and agreed with: Maybe by fixing the U.S. housing market we can actually save and create some jobs. Is that so crazy?

This article was republished with permission from Money Morning.


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