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Housing Crisis Grows Along with Need for a New Approach

July 22, 2009 By Lee Egerstrom, Economic Development Fellow

Reports of recent days from the Federal Reserve and Congressional Budget Office show that federal assistance to the financial markets has now reached $4.7 trillion while federal commitments to the financial crisis could reach a worst-case near $24 trillion. That's trillion, with a "T."

None of this infusion of dollars or pledges appears to be reaching down to the elm, ash and pine-lined residential streets of Minnesota. In fact, recent Fed data show foreclosure activity spreading to all Minnesota counties, rural and urban, even though economists and financial analysts still point at the collapsing housing market as the prime source of the expanded financial collapse.

At the start of the year, Minnesota 2020 proposed an idea for a ground-up, low-cost pilot program to get the Minnesota housing market moving again with hopes it would spill over and become federal policy.

Despite significant support from key legislative leaders, a state Home Values Guarantee Program died without action on the final weekend of the past Minnesota Legislative session. Meanwhile, federal officials keep using nip, tuck and tweak techniques, along with potential billions and trillions of dollars, to fight the battle from the top down.  
Consider this a mid-year addendum to the Minnesota 2020 report. The concept still looks good and is growing more urgent.

What Minnesota 2020 proposed was a Home Values Guarantee Program that would have the state guarantee home buyers that they could recover lost equity from down payments if home values continue to fall for the next five years. The intent was to get the housing market in selected counties moving again, thus restoring home values and keeping more homes from falling "under water" and into foreclosure.

The concept was gleaned from Larry Buegler, former president of the Farm Credit Bank of St. Paul, who instituted a similar land values program in 1987 that effectively "turned" the land market and brought an end to the 1982-1987 farm financial crisis. That program effectively set the floor under Midwest land prices and let lenders work with farm families to restructure troubled farm mortgages and loans.

While the St. Paul bank set aside $25 million in an account to pay equity losses if land prices continued to fall, not one cent was ever paid. Land values recovered. That brought up the farm economy with it.

The Housing Market
At the end of the first quarter of this year, the Fed shows there is $14.6 trillion tied up in U.S. property mortgages. Eliminate the farm and the non-farm, non-residential property mortgages, and various lenders and borrowers have something under $12 trillion tied up in single-family and multiple-family housing property.

Unfortunately, Associated Press real estate writer Alan Zibel reported on July 16 that research firm Realty Trac Inc. found the number of people at risk of losing their homes grew by 15 percent in the first half of the year. This comes after 1.5 million families lost their homes in the first six months. Foreclosure filings in June this year were up 33 percent from the same month a year ago.

"If you assume an interest rate of 5.5 percent on $11 trillion, the cost would be $2.85 trillion, or rounded to $2.9 trillion, if the government simply paid everyone's interest for five years," said retired banker Buegler. "The government could have solved the problem that was caused by toxic mortgages at something under $3 trillion."

Such a market intervention could have had government costs added to the back end of the mortgages for those who wanted to take advantage of the deal, Buegler said, "Assuming 50 percent of all mortgages are under water (where mortgage exceeds current market value of the home), which is a high figure, the problem could have been solved for $1.45 trillion," he said.
At the same time, Congressional Budget Office special inspector general Neil Barofsky warned Congress this past week that already appropriated and agency committed support for financial institutions have reached $23.7 trillion to cope with the financial crisis triggered by the housing crisis. 
While only the most pessimistic among us think this could happen, federal commitments to financial institutions would buy up every mortgage in America, twice over. "Of course, we couldn't do that for fairness reasons," said Buegler. "But end of story. End of problem. The crisis would be over."

It would be politically impossible to have the government step in and pay interest rates for five years or pay off existing mortgages, even though that would cure the problem overnight. Rather, a more logical approach would be to take steps to turn the market, restore property values, and get the housing market working for both borrowers and lenders again. 

Here at Home
The collapsing Minnesota home market began its downward slide in 2006, primarily in urban counties where homeowners are aligned with manufacturing, retailing, service industry and finance employment. Fourth quarter data on mortgage delinquency rates of 90 days or more tallied by the Federal Reserve Board show the problem has now spread.

At the end of the year, the highest mortgage delinquency rates of at least 90 days were in rural Mille Lacs County, 5.10 percent; Isanti County, 4.44 percent; Pine County, 3.97 percent; Todd County, 3.71 percent; and Mahnomen County. 3.51 percent.

In contrast, the 90 days or more delinquency rate for the Twin Cities metropolitan area's seven counties ranged from 3.08 percent in Anoka, 2.98 percent in Ramsey, 2.77 percent in Hennepin, 2.75 percent in Scott, 2.35 percent in Dakota, 2.18 percent in Washington, and a still-low 1.68 percent in Carver.

Regardless how you look at these numbers, it should be clear that Minnesota has a statewide problem with the housing market, just as the national crisis spares no state or region. It should also be clear that Minnesota homeowners and potential homebuyers face a long wait before federal aid to Wall Street trickles down to home values on their streets.

There has to be a better way, at less cost, and with a lot less risk. A Home Values Guarantee Program offers an opportunity for both.

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