The competitive landscape that fuels cautious consumer behavior was absent just before the collapse of the housing market. Banks and finance houses manipulated screening, administrative and maintenance costs of mortgage loans. The net effective cost of underwriting loans became so small for banks as most maintenance and administrative costs of mortgage underwriting were defrayed to Fannie Mae and Freddie Mac, who in turn seeded the risk involved in most of these underwriting to government bonds. The less than stellar practice that allowed home-owners to borrow against equity in their homes may work well for high income and rich folks, but it has been a disaster for the low and middle income earners, majority of whom became first time home owner under a vastly deregulated finance and mortgage market. The challenge now is how to restore confidence in the mortgage and housing market.
The insolvency of many banks and insurance companies in the beginning of the recession may partly be blamed for government subsidies of home ownership. The fact that Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Association) under-wrote the lending risks involved in home loans carried by commercial banks and other mortgage finance houses, created an impression that government guarantees aggregate credit risks that is undertaken by the financial institutions. Further, the fact that the bond market financed to some extent, Fannie Mae and Freddie Mac, allowed some banks and a few finance houses to avoid due diligence, which in turn encouraged frivolous mortgage products, which some banks and finance houses probably knew were dubious and criminally culpable, since the end costs of the risk were eventually shifted to taxpayers, but which those banks and finance houses could hardly pass over in the heat of the mortgage debacle.
To deal with the current foreclosure crisis, it is time to evaluate the trend in the liquidation sales revenue of foreclosed homes in various market regions and compare them with market prices of repeat sales index across regional markets. This will allow the government, banks and financial institutions appreciate the average losses in various market and use this as an index for underwriting future loans on mortgage products. It is apparent that the realistic values of homes sold at the peak of the housing boom or mortgage debacle was hardly based on the realistic value of each home sold. It is known that many home owners avoid foreclosures by either selling their homes, refinancing them or paying off the arrears on the mortgage. This edging behavior is likely not to stop except there are incentives for home owners provided by the lenders. The volatility of the housing foreclosures depends on the speediness of either of the latter three actions in the various market regions. Areas with high unemployment has suffered tremendously from the speediness with which either of the three actions were undertaken by home owners. The removal of government subsidies of mortgage interest is to make carrying mortgages at higher loan to income threshold less attractive. Effective interest rates has the tendency to weed out those home-owners likely to default from entering into mortgage contracts that are excessive for their income threshold.
New data on employment has not been very promising. Though companies are recruiting and hiring, the employment rate is not keeping pace with the number of people seeking work.There is going to be a need to re-energize employment by investing in programs to encourage increased and stable employment in virtually all sectors of the American economy, including expansion of public employment. The argument that the private sector creates jobs is well taken; however, cities, counties and state governments have been shedding jobs in recent years at unprecedented rate. Employment programs must not only address increased private employment, there is need to create jobs for teachers, fire-fighters, police and other public employees, if we are to revert the trend of the vehement unemployment rate. Unfortunately, it is fiscally unlikely that the country can afford this choice; however, if Republicans are willing to play ball it is very possible to accomplish this end in the coming twelve months and more. The United States Congress must get on board now, if the unemployment problem is not going to end up being a political fiasco in the coming general elections.
The job creation strategies anticipated to be released by President Obama must include the following, if a dent is going to be made in the unemployment problem in the country: 1) Subsidies for increased private employment, including investments in schools and college buildings, waterways, airports and highways redevelopments and expansions; 2) ample public employment to be financed with increased government revenue base, including jobs at state, county, towns, cities, parishes, burroughs and similar local governments; 3) investments in social support programs for Afghanistan, Iraq and Libya veterans; 4) private and public reinvestment initiative in health support programs for infants, adults and vulnerable groups; and, 5) encourage the Federal Reserve Bank to increase the nominal interest rate to at least one percent to see what difference this will make in the market place. One thing to definitely avoid and to campaign against, if he so chooses, is an obligatory balanced budget initiative as advanced by the Republicans, as this will only stifle government's ability to react to emergencies as the recent floods, hurricanes and storms in the North East, funding of social safety net as the Social Security Benefits, Veteran's Benefits, Medicare and Medicaid. The aggregate welfare effect of obligatory balanced budget initiative is close to negative, no matter what Republicans may continue to espouse.
Finally, there is the question of whether government subsidies contribute to federal deficit? A very credible answer to this question is simply this: If the private sector continues to sit on tons of cash in the bank without investing in the economy, the federal government has the obligation to invest in the economy to prevent further deterioration of the economy. The essence of government spending is to force increased economic activities that can help expand the economy and create jobs. One way for the nation to succeed at this time is to ensure that economic growth and jobs creation are fore-front in the list of things to be done to help expand national income. For instance, Federal Government needs to be innovative in its approach to resolving the unemployment problem; and, in its effort at measuring economic performance variables or indicators, including how stimulus spending are invested in various sectors of the economy; else, we end up with similar result from previous effort.