Okay, I'm obviously no economist but I'm going to go out on a limb and state what seems to me to be a couple of obvious fixes that seem to be necessary to get things going in the right direction again.
When you break down the problem into its simplest form (something I always try to do when problem solving) it seems that there are two large "issues" with the current economy.
- 1) The mortgage crisis (foreclosures etc.)
- 2) Lack of Consumer Confidence, which causes economies to become stagnate and in turn creates wide spread problems.
I'm sure that there are other contributing factors to the entire problem such as oil prices etc. However, I think it's fair to say that the mortgage crisis is a HUGE contributing factor, which has caused many of the recent collapses in the banking industry. These collapses have shaken the foundation of the economy and have thus affected consumer confidence causing consumers to retract and change spending habits. That said, I'm going to speak to the mortgage crisis as I see it.
By enlarge; it's pretty safe to say that the mortgage crisis has basically been caused by the fact that many home owners have for various reasons lost their home to foreclosure. It's also pretty safe to say that the vast majority of these foreclosures have been due to an overwhelming majority of these defaults coming from ARM's (Adjustable Rate Mortgage) and the fact that many ARM's came due for adjustment at a time when the market began to cool and housing prices began to decline. This created a situation that did not allow for people to re-finance out of these ARM's as was part of the "original plan" by many who purchased these products. Consequently, when these adjustments came due, people were in a position to not be able to afford the newly adjusted payments pushing them into defaults and ultimately losing the home to the bank. As a REALTOR, I see this problem over and over and over again. I work with banks on behalf of sellers/borrowers to create what they call "work outs" which almost always result in delaying the inevitable and typically still lead to foreclosure. From what I've seen this is largely due to the fact that what most banks call a "work out" is to simply delay the adjustment term of the ARM for typically a year. Guess what? A year is NOT long enough! The housing market is going through a correction and it's going to take longer than a year. It's not rocket science people. Would it not make sense to simply develop a federally regulated set of criteria that borrowers must meet and for those who do, put a freeze to these adjustment periods enabling people to keep the payments they were originally able to afford FIXED and thus maintain the mortgage? I do not suggest that this be done across the board. I'm serious about saying that this is something that people must qualify for i.e. show a financial reason. Does it not make sense that if the majority of the foreclosure crisis is due to ARM's and their adjustments coming due that we curb these adjustments? This would enable the flow of foreclosures to drastically slow down. It would greatly reduce the amount of homes coming on the market, which would reduce inventory and allow the market to more quickly absorb the inventory while DRASTICALLY reducing the bloodshed the mortgage industry is suffering from. Obviously banks would not make the same profits they were planning to make with these ARM's over the long term. However, would this not be a great way to allow banks to stay fluid while seriously addressing the underlying problem AND not making the general public pay for this with $700,000,000,000 BILLION dollars (man that's a lot of zeros!)? This would allow the problem to be addressed by the industry that has helped to create it. Placing accountability squarely on the shoulders of the source. I also feel that a basic penalty should be paid for anyone who qualifies for such a program in the form of a fee, which could be tacked on to the end of the loan typically by extending the term of the loan (2 to 5 years?). After all, there are borrowers and lenders who created this problem. It's not fair to put it all on one side. The main thing is to not change the monthly payment the borrower was able to pay.
The second part of this problem I spoke of in the beginning was related to consumer confidence and how a lack of such can adversely affect the economy both locally and nationally. If my thought process regarding the mortgage industry is correct and something like that was implemented with success, would this not help to shore up consumer confidence? Would this not make people realize that if we work together we can fix things? Would this not allow people to relax some knowing that things are okay and everything will get better resulting in a feeling of greater security? If the answer to this is yes, it's widely known that when this is true, people are quicker to spend money. When that happens the economy grows and chugs along with forward motion. When that happens, businesses continue to grow and move forward. When that happens, the stock market moves forward and even the housing market moves forward. It's like opening up a bottleneck, which allows progress to flow again.
I do understand that this may not be the ultimate fix. But I have to believe that this could be a LARGE contribution to an overall fix. Am I so simple that I cannot see some type of complexity that exists that would prevent this solution from being a HUGE help to the economy? Hopefully I did not make myself look foolish voicing my opinion here. It's just an idea that seems so logical. What do you think?
*this blog is in no way affiliated with Economics for Dummies or any of the "For Dummies" series of books and is my opinion alone
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