It's become increasingly clear the U.S. housing market is rolling over again, as indicated by these recent statistics:
- New home sales fell 12.6% in January.
- Mortgage applications are near a 15-year low.
- The Case-Shiller Index has fallen five straight months.
- Foreclosed homes were 26% of total sales in 2010.
- 27% of mortgage holders are under water on their mortgages.
Against that grim backdrop, and with its HAMP program widely viewed as a failure, the Obama Administration is floating a proposal for its latest plan to fix the housing market, The WSJ reports: Force banks to pay for reductions in loan principal for struggling homeowners.
"The administration is looking at the right problem, but in a pretty ham-fisted way," says Glenn Hubbard, Dean of Columbia Business School and the top economic adviser to President George W. Bush during his first term. "The issue with principal forgiveness is that it's very hard to do."
Because of the securitization of mortgages, multiple parties would have to agree to the principal write-downs at the core of the plan -- or risk having contracts and bond covenants wiped out. "This [plan] would really run roughshod over the rule of law," Hubbard says.
According to The WSJ, the cost of the principal write-downs "won't be borne by investors who purchased mortgage-backed securities." In other words, bondholders would get 100 cents on the dollar (yet again).
Barring (yet another) government bailout, the only way to do that would be for the banks to have to cover payments on those securities, Hubbard says. "The problem is the government is also telling banks they need to keep raising equity capital; those two statements are in direct opposition to one another."
How to Build a Better Mousetrap
Hubbard has long argued that the most efficient way for the government to "fix" the housing problem is through "mass refinancings" funded by Fannie Mae and Freddie Mac. (See: Refi Madness: Use Fannie and Freddie to Solve the Housing Crisis, Hubbard Says)
Because the government has given those reviled institutions an unlimited backstop through 2012, "we're already on the hook for the credit risk," he says. "We've already guaranteed Freddie and Fannie so there's no incremental cost to taxpayers of doing this."
In the accompanying video, Hubbard mentions other potential ways to resolve the housing crisis, including a modern version of the Depression-era Homeowners Loan Corp. or the covered bond model used in Europe.
"It's not that we have to reinvent the wheel ... but we really need to take action now," he says. "Unfortunately I don't see that action coming now. The president would have to lead on a broader set of reforms then he has," at least to date.
By Aaron Task, host of Yahoo Tech Ticker