DUVALL: Cracks in the economic foundation

By Eric DuVall<br><a href="mailto:duvalle@gnnewspaper.com">E-mail Eric</a>
The Tonawanda News

Fri, May 16 2008

— How much is your house really worth?
No, I’m not writing another column about having to move (and no, I haven’t yet decided where I’ll be moving to, despite some tough lobbying for it to be in this paper’s circulation area).
This Wednesday, I’d like to take another stab at this most tricky situation in the nation’s housing market.
The mortgage crisis has a dire sounding name, and I’m still suspicious about whether most people understand just how bad this really is. We’re calling it a crisis, after all — and for once, the media hasn’t blown something out of proportion.
A brief recitation of the facts that have launched us into this mess, before some common sense solutions — sensitive to those facing losing their homes — that might help:
Lenders large and small seeking to capitalize on a sharp increase in the cost of homes in many of this country’s boomtowns began offering loans to people who didn’t have a credit rating that would normally grant them access to the money necessary to get “movin’ on up to the East Side, to a deluxe apartment in the sky.” (You had to figure by the third time I’ve written about this I’d include a reference to “The Jeffersons”).
Anyway, when all those sky-high prices started to drop as demand eased, homeowners found themselves owing far more than their homes were worth. When you owe more than you can afford to pay, and hold no hope of getting out from under the problem by selling at a reasonable price, something’s got to give. In the case of more than a million Americans this year, that came in the form of defaulting on their debt.
When enough people start to do this, it begins to have a much larger impact than an individual’s personal finances. The foundation of the American economy — the single largest investment most people make — begins to crumble.
The cracks are visible. The repairman has been called and offered an estimate. It isn’t good news.
Of course, slapping a coat of paint on the foundation walls will cover up the cracks for a while — and to date, that’s all we’ve really done. But when something so basic as home ownership is at stake, more than a paint job is necessary.
Lenders are hurting and, as a result, they’re tightening the belts on those now seeking credit. When lenders aren’t getting the money they’ve lent, they become more reluctant to offer it the next time.
The result has been a severe tightening of available credit. The Federal Reserve has tried to combat this by cutting interest rates more aggressively than it has in a generation, but whether their tactics will work remains to be seen.
And lost in this whole mess are the decent people getting the shaft. Those who work hard and can’t make ends meet. Whose personal finances are approaching critical mass — who have been getting by on a paycheck and a prayer.
So we need to play some three-dimensional chess. There are the obligations we have to our free market system of economics. The lines we can’t, or at least shouldn’t cross. And there are the obligations we have to keep hardworking Americans in the homes they own while still being able to put food on the table.
Proposal number one, being floated by some economists: Allow mortgage companies to retroactively reduce the amount of money a person owes, thereby allowing them to lower payments amounts and help ease the monthly struggle to pay the mortgage. If the alternative is reclaiming 75 percent of the debt or none of it, lenders will know which one to choose.
And the vast majority of those in this mess aren’t looking to shirk an obligation (or become homeless). They want to pay, but can’t. It should be our government’s policy that those who make a good-faith effort to get out from under this mammoth load are met half-way.
Proposal number two, which comes not from some economist, but from me: Put together a program that gives those on the brink of foreclosure a three-month grace period to bank some cash and get back on track. We kick tax breaks around like pocket change. Heck, now we’re even cutting checks for what amounts to free money for everybody.
If everybody gets $600, why can’t those actively trying to avoid home foreclosure get a little more?
Rather then throwing money blindly at the problem of an economy in recession, we should be targeting people who need it most — and whose failings if averted could stabilize an economy far more than a million new TVs bought ever would.
Managing Editor Eric DuVall’s column appears every Wednesday and Sunday. Contact him at 693-1000, ext. 112 or by e-mail to duvalle@gnnewspaper.com.

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