Effective Economic Stimulus for Housing

Now that the majority of elected officials serving in Congress and the White House have publicly stated their resolute intent to spend United States Treasury funds to attempt to stimulate the nation’s economy, the ideological debate as to whether it is proper to use taxpayer dollars in support of this effort should now be set aside as moot. It is more appropriate for our nation’s leaders to focus on the most effective, timely and relatively frugal means of achieving the desired end. Although federal stimulus plans that thinly spread billions of dollars out to various individuals, corporate entities and state governments may appease many of these politicians’ constituents, these quick fixes only serve to temporarily satisfy the immediate monetary needs of the recipients and fall well short of halting the downward spiral in which our economy is imprisoned. The bandage approach to fiscal inducement will only lead to further and larger federal expenditures in the future, all the while increasing the likelihood that rampant inflation will be added to the mix of economic problems with which we must grapple.

Instead, a more significant and concentrated infusion of these precious funds into the core cause of the crisis should be instituted as quickly as possible to prevent this seemingly endless domino effect from further contaminating our public and private sectors. Remember, the majority opinion is dictating that the money will be spent, so now we must ensure that it is used effectively. Also recall that this dilemma started in the housing market and the vast majority of economists and analysts agree that a turning point will not surface until housing prices stabilize and the financial institutions that make loans secured by housing can recover. Recent piecemeal attempts to stimulate both the housing and financial industries through interest rate reductions, tax deductions, foreclosure leniency, and purchasing troubled bank assets will not prevent future defaults and foreclosures from further deteriorating housing values and bank balance sheets. Unfortunately, this reality is becoming clearer with the release of each housing and bank earnings report.

Without healthy banks, businesses will be unable to obtain adequate financing to continue existing operations, which will lead to more job losses and ultimately more foreclosures. Increased foreclosures leads to more bank owned properties for sale on the market, thereby increasing the inventory of houses for sale and decreasing home values. Real estate is the security for most bank loans, and when property values decline, so do the values of the banks themselves. Sound familiar? It should, as this pattern is now likely to repeat until forcibly halted.

The infusion of money into banks is actually the correct course of action, it just needs to be done in a more specified manner and in greater initial amounts to prevent needing to infuse much more in the future. Under the Troubled Assets Relief Program (TARP) often referred to as a bank bailout, the government purchased troubled loans and securities from lending and investment institutions. But, the hundreds of billions of dollars spent were used up far too quickly as entire loans were purchased, not just the “troubled” portions of the loans. For example, a homeowner may owe $300,000 against a home now worth only $200,000, leaving only the difference of $100,000 as the troubled portion of the bank’s asset. In this hypothetical instance, if the government were to just relieve the bank of the $100,000 portion, the government’s allotted funds for economic stimulus could go three times further by not having to purchase the entire $300,000 loan. Plus, the TARP program does not prevent foreclosures since the government’s purchase of these loans merely relieves banks of having to foreclose and take the loss. Instead, eliminating only the troubled portion of the assets allows homeowners to stay in there homes since their principal loan balance is reduced and ultimately prevents more foreclosures from saturating the market.

The mechanics of this proposal are amazingly simple. The government simply guarantees to reimburse banks for reducing the loan balances owed by borrowers to market value. Once the new loan documents are formally executed reflecting a reduction of the amount owed, the documents are submitted by the bank to the government for reimbursement. Both Wall Street and Main Street then collectively rejoice. Bank balance sheets immediately shore up due to their once toxic assets being converted to adequate security. Homeowners once faced with foreclosure are now comfortably making lower fixed monthly payments due to reduced loan balances. No more government funds being used to pay executive bonuses, for employee retreats, or to simply keep bank operations going until it comes time to drink from the government trough again.

Again, for better or for worse, the ideological debate over whether to use treasury funds to stimulate the economy has ended. Now is the time to institute the most effective plan with the least amount of waste. To escape this destructive vortex we must first put concentrated stimuli into the housing and financial industries.

Brian S. Icenhower, Esq., BS, JD, CRB, CRS, ABR, a California Association of Realtors Director, practicing real estate attorney, a real estate expert witness and litigation consultant, a prosecution consultant of Tulare County District Attorney Real Estate Fraud. He may be contacted at bicenhower@icenhowerrealestate.com, or www.icenhowerrealestate.com