As I spend a lot of time pointing out how various government proposals are either useless or outright harmful, some of my friends get the impression that I am against ever doing anything.  Keeping in mind that I do firmly believe nothing should always be an option (ever hear of “first do no harm”), here’s what we should do to help correct the housing market:

1.   Speed up the foreclosure process.  The massive shadow inventory of homes yet to hit the market, numbering in the millions, is keeping potential buyers on the sidelines.  Why buy now when a future massive increase in supply will likely depress prices more?  It is best to get that supply to the market now.  We also, by my estimate, have about 500,000 borrowers still in their homes that have not made a single payment in over 2 years.  These borrowers will likely never get current. 

2.   State Attorneys General need to either put-up or shut-up.  Holding back lending by depressing bank equity values, and not to mention dragging out the foreclosure process, is a massive 50 state targeting of bank foreclosure practices.  If the state AGs have some real evidence, then why aren’t we in court?  Either the AGs should go to court, where we can all see the facts, or they should drop what only looks like a shakedown.

3.   The Fed should start raising rates.  First, what bank wants to make a mortgage at 4% when their cost of funds in a few years will easily be above that?  Just like any price ceiling, artificially low rates cause shortages.  In this case current Fed policies are reducing the supply of credit, making it harder for potential borrowers to get mortgages (yes, if you can get a mortgage, the price is great).  When rates do go up, which they will, such will put downward pressure on prices, better to take that hit now.

4.  Subsidize moving on, not staying put.  While I am against spending any more tax dollars trying to delay the adjustment of the housing market, if we are going to spend billions, we’d be better off helping to pay households’ rents in a new unit, preferably in a new city where they might have a better chance at finding a job.  We should be helping families adjust, not remain stuck in limbo.

5.   Exercise recourse when possible.  Many federal loans, like FHA, have a recourse option.  In the case where borrowers can pay, but simply don’t want to (due to price declines or otherwise), they should be held to account.  When FDR did mass re-fis and modifications in 1930s, he also demanded strong recourse, which was regularly exercised.  If its harmful for a bank to start a foreclosure, then it’s also harmful for a borrower, who can avoid it, to also do so.

For the sake of brevity, I will continue this list in the future.  I suspect I’ve given interested parties plenty here already to debate.