Monday, October 6, 2008

The 4% Solution, A Fine Plan

$700 Billion later, there is no clear way out of our current economic crisis. $700 Billion is but a band-aid. The root of our current crisis revolves around falling housing prices. Normally I would never advocate that the government act to prop up house prices, but these are far from normal times. If nothing is done on this front, $700 Billion will be but a spit in the bucket. So, since nobody seems to be offering a solution, I'll give it a shot.
The single fastest way to firm up housing is to make it more affordable on a monthly basis. The fastest way to do that is to influence or subsidize low interest rates.
The current rate on a 30 year fixed rate mortgage is 6.375%. This number is far too high to encourage anyone to take a risk. The spread between the 30 year mortgage and the 10 year Treasury is extraordinarily high. Good thing that the taxpayers own Fannie and Freddie now. The first phase of my solution is simple. Fannie and Freddie should be ordered to reduce the spread and offer mortgages at 5.25%. Fannie and Freddie conventional limits should be expanded to 800k for the foreseeable future. All loans should require 20% down to qualify.
Further, the Federal government should further subsidize the purchase of homes by offering a 4% cash credit towards buying down rates for new homeowners willing to put the 20% down. On average, this buy down would lower the effective interest rate to 4% for new buyers. The 4% cash credit can be phased out over time as the housing market stabilizes and improves. Fannie and Freddie would fare very well under the plan as 20% down would provide a strong cushion and the low monthly payments would greatly reduce the risk of default.
Such a program would have nearly instantaneous benefit to housing demand and prices and as importantly, stop the massive hemorrhaging from highly leveraged securities which are causing the international credit and financial crisis. Such a plan would be costly, but it would be much less costly than a recession that compounds the current issues and quickly devolves into a death spiral.
This is an idea in progress and it is certain to be amended. The markets need to be reformed and actions must be undertaken to make sure that large banks and brokers are never, ever, given the chance to run up 40-1 leverage ratios again. Reviewing and regulating these markets will be a massive time consuming task. We need action now.
Feel free to sound off and throw in your two cents.


  1. not the craziest idea I've ever heard of

  2. Interesting idea. I think as long as you've got 20% down the conventional limits of 800K are reasonable in areas like NYC where a new 2 bedroom apartment can cost upwards of a million dollars.

    If the feds were to offer a buy down credit to bring the rates in the 4% area, I guarantee you people would start buying immediately. I know because I would be one of them. It's a great time to buy right now because housing prices are going down, but the economy is in such bad shape, nobody wants to risk investing in such a market that could be worth less a month after you buy it.

    People say as long as you live in it for a long time, it won't matter because real estate always appreciates. But when you're dealing with a mortgage as high as 600-700K you want the best deal possible at the lowest monthly payment.

    There is lots of inventory out there and until the market shows sings of stabilization people are going to be very hesitant to make such a purchase. If we can infuse the housing market with consumer purchasing power, that is a great idea.

  3. what are you seeing from developers of new contruction? last time i bought i had to be responsible for getting a mtge, in these uncertain times, i wouldnever do that. are developers conceding that now? thanks.

  4. #3. There are a few developers offering owner financing, but not many.
    Your best bet is to call a bank, like Chase or Wells Fargo and pre-qualify.
    #2, Carlos- Thanks for your comments. Perhaps today's 1/2 point cut will get us on our way!

  5. thanks, but would you let any client sign a contract whereas if they couldn't obtain financing they could lose their deposit?

  6. #5- That's the way people have been doing it for some time (especially in the bull market). In slower markets you can get a "mortgage contingency" written in, so if you can't get a mortgage, you get your money back.

  7. I've had very positive feedback on my plan. One critique has been the 20% down that alot of people think is too high. Perhaps with the 4% credit to bring mortgage payments down a lower number down should be considered.

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