Ritholtz:
It's important that the Fed/Treasury stop focusing on prices. If entry level homes remain elevated and unaffordable, the sales move up cycle won't happen. What is missing in the current housing crisis are that buying chain: entry level buyers purchase a "starter home (i.e., 2 bedroom 1 bath, 1/4 acre), from people who buy a larger house to accommodate a growing family (3 bedroom, 2 bath, more yard) from people who up to an even bigger home (4-5 bedrooms, 3 baths, 1 acre), etc.
If the entry level homes are not affordable, the entire chain of transactions won't occur. This is why it is a huge mistake to focus on prices -- they should be allowed to mean revert back to price levels on their own. The Fed and US should instead be working on making mortgage loans available to those who qualify, and reworking those that can feasibly prevent foreclosure in a reasonable manner (i.e., where they won't default again or walk away in 6 months).
Offhand, I can think of three groups which will NOT like that advice: homeowners, property-tax-takers, and realtors. I suspect that second-mortgage-holders won't, either, but then again, they shouldn't really give a rip if the payments roll in on schedule.
And it will be a friggin' nightmare for those who advocate "mark-to-market" accounting, as the collateral value will continue to deteriorate if this is implemented.
(It's also the reason that "mark-to-market" is not always a sensible methodology.)
On the other hand, this is where I think MtoM does come into play. If the asset is impaired because it's underlying value has really changed, the asset should be marked down.
ReplyDeleteThink of it as if the loans had been made on a depreciating car. If as lender, you believed that the car was depreciating faster than the loan balance and you had reason to believe defaults of some % were coming, it would be appropriate to MtoM some amount. The current MtoM issue, as you know, is that the MtoM in many cases has been way below even the reduced value of of the homes.
net, like many other accounting issues, MtoM is part art, part science. Unfortunately, some folks have tried to take all the art out and the science ain't working so well by itself.