Benjamin Lockwood
Benjamin Lockwood is a researcher at Columbia University Business School.
Recently by Benjamin Lockwood
Jun 11 2009, 2:27PM
Want $15K? Swap Homes With Your Neighbor!
Back in January, the Senate briefly entertained the idea of giving a $15,000 tax credit to all new homebuyers, before reducing the credit to $8,000 and restricting eligibility to first-time homebuyers earning less than $75,000 per year. Now Senator Johnny Isakson (R-GA) has reintroduced the $15,000 proposal, without the first-time-buyer and income restrictions.
Now don't get me wrong, I'm all for helping the housing market, but I have to wonder whether such a subsidy is the most effective use of taxpayer funds. Even if the plan didn't spur home sales, so that they continue at the current annual rate of 4.5 to 5 million, then the plan would cost something like $70 billion. That's nearly equal to the entire projected cost of Obama's housing plan. And since in reality the number of sales would almost increase under this proposal, the cost could be substantially higher.
Now don't get me wrong, I'm all for helping the housing market, but I have to wonder whether such a subsidy is the most effective use of taxpayer funds. Even if the plan didn't spur home sales, so that they continue at the current annual rate of 4.5 to 5 million, then the plan would cost something like $70 billion. That's nearly equal to the entire projected cost of Obama's housing plan. And since in reality the number of sales would almost increase under this proposal, the cost could be substantially higher.
Mar 26 2009, 8:04AM
How we can let banks cheat Geithner's plan
Amid discussions about whether it would be possible for banks to cheat Timothy Geithner's bank plan (by bidding on their own toxic assets with government-subsidized non-recourse loans) it's worth thinking a bit more about why that would be such a bad thing. After all, the banks that own these securities arguably have better access to the (admittedly scarce) supply of information about the assets, so given an appropriate auction structure, the assets should be more accurately priced if the banks are allowed to bid in some way.
The problem under the current proposal is that banks would have an incentive to bid the price up to exorbitant levels. As I understand the plan, bidders only have to post $0.08 or so for every dollar bid on the assets -- the rest is supplied by the government in the form of a non-recourse loan. So for every dollar a bank were to bid on its own asset, it would essentially receive a $0.92 low-interest loan from the government, and if the value of the asset itself ever fell below the value of the government's loan, the bank could walk away from the asset without repaying the loan at all. Sounds like a sweet deal -- and indeed it would be, for the banks (though not for taxpayers).
Feb 18 2009, 2:42PM
The good and bad in Obama's foreclosure plan
Obama announced his proposal
to prop up the collapsing housing market today in Phoenix (one of the
country's foreclosure capitals). Having obviously learned from the
debacle of Geithner's banking plan roll-out,
today's proposal was both larger ($75 billion rather than $50 billion)
and more detailed than many expected. The proposal has its faults -- it
is more costly than necessary and includes cram down provisions -- but I
expect it to be effective, and I'm glad to see the focus on servicer
and homeowner incentives. The White House has published an executive summary of the plan (PDF) and an online Q&A. Here are a few of the plan's strengths and weaknesses:
Feb 18 2009, 10:07AM
A terrible housing idea
Today Obama is expected to announce his proposal to prop up the beleaguered housing market later today. An article
in the Washington Post this morning discusses several potential
components of the plan, some of which (interest rate reductions,
workout incentives) are good ideas. One piece that should not be
included, however, is a provision for bankruptcy cram downs.
Cram downs would allow bankruptcy judges to reduce the outstanding principal on mortgages for homeowners filing for bankruptcy. This is what judges already do for many types of debt (loans to buy cars, yachts, vacation ski lodges) during bankruptcy proceedings. But primary residence mortgages have historically been outside the purview of bankruptcy debt reductions in order to keep mortgage rates low. The reason for that is simple: if lenders knew bankruptcy judges might reduce the principal owed, they would charge higher mortgage spreads to compensate for that risk. But some Democrats like the idea of cram-down provisions and have been frustrated by Obama's reluctance to embrace them.
Cram downs would allow bankruptcy judges to reduce the outstanding principal on mortgages for homeowners filing for bankruptcy. This is what judges already do for many types of debt (loans to buy cars, yachts, vacation ski lodges) during bankruptcy proceedings. But primary residence mortgages have historically been outside the purview of bankruptcy debt reductions in order to keep mortgage rates low. The reason for that is simple: if lenders knew bankruptcy judges might reduce the principal owed, they would charge higher mortgage spreads to compensate for that risk. But some Democrats like the idea of cram-down provisions and have been frustrated by Obama's reluctance to embrace them.
Feb 5 2009, 3:35PM
A not so dumb idea
In a WSJ op-ed, Ed Glaeser takes aim at the Republican proposal to reduce mortgage rates to 4 percent, which I advocate. He writes:
... it is particularly disappointing to see Senate Minority Leader Mitch McConnell embrace "providing government-backed, 4% fixed mortgages to any credit-worthy borrower" as his alternative to the Barack Obama/Nancy Pelosi stimulus package.
...
This massive lending program is justified as a means of boosting housing prices. But over the past 28 years, a 100 basis point reduction in the interest rate has been associated with a 4.6% increase in housing prices. Today's mortgage rates stand at 5.35%. If Mr. McConnell's proposal dropped rates by 135 basis points, history suggests that prices would rise by 6.2%. This bump would be barely noticeable in markets like Phoenix, Ariz., where prices have fallen by more than 40%, and it would do little to stem the wave of foreclosures.
Feb 4 2009, 2:57PM
How to save the housing market
As the Senate turns to crafting its own version of the stimulus package, many are calling for amendments that directly target the plummeting housing market. To be sure, house prices have been inflated in recent years, so a measured decline in house prices is warranted. The problem is that house prices have already fallen to their pre-bubble levels, and economic forecasters and financial futures markets suggest that, without action, house prices will continue falling into 2010.
These declines have a real impact on the economic climate. About two thirds of Americans own houses, and for most of them their houses constitute a substantial portion of their net wealth. As house prices decline, homeowners reduce consumption and save more to compensate. Stabilizing house prices is therefore a critical component of an economic recovery plan. Several Columbia University professors have recently released a policy proposal to address the collapsing housing market. The plan has two components, one or both of which are likely to be included in some form in proposed amendments to the Senate fiscal stimulus.
These declines have a real impact on the economic climate. About two thirds of Americans own houses, and for most of them their houses constitute a substantial portion of their net wealth. As house prices decline, homeowners reduce consumption and save more to compensate. Stabilizing house prices is therefore a critical component of an economic recovery plan. Several Columbia University professors have recently released a policy proposal to address the collapsing housing market. The plan has two components, one or both of which are likely to be included in some form in proposed amendments to the Senate fiscal stimulus.
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