CLARKONOMICS: Pres. Obama announced his housing rescue plan today and Clark wants to give you an overview of it.
• People with mortgages that have become unaffordable would be allowed to file a petition to have their monthly payments reduced to roughly one-third of their household income. Essentially, they could be allowed to stay in their homes at a big discount -- a very controversial move.
• People who are current on their mortgages but could not qualify for a refinance because they lacked equity may have the chance to refi going forward through Fannie Mae and Freddie Mac. Look for a forthcoming briefing from Clark once more details about this part of the plan become available.
• In the most controversial move of all, Congress could pass a statute to give bankruptcy court judges the right to do cramdowns. Cramdowns are common in commercial real estate. In this scenario, they would be used to reduce the mortgage of someone who is upside down in their home to reflect the property's current market value.
All of these points obviously raise strong questions of moral hazard. Yet on the other hand, many economists believe that the nation's financial institutions will not stabilize until the housing market stabilizes.
Maybe that's true…but Clark thinks the real problem in housing is that we have too much of it! Supply and demand still have yet to meet up through natural population growth. Simple demographics must do the job of eventually soaking up the excess supply of houses.
