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The Housing Problem and the Economic Crisis: A Review and Evaluation of Policy Prescriptions

Abstract

The US economy is in the throes of the worst financial and economic crisis since the Great Depression. What commenced as a crisis in the US housing and mortgage markets has contaminated other sectors and spread globally. Hitherto, most policy efforts and resources have been devoted to propping up the banking and financial sector. It is clear that in order to restore economic growth and confidence internationally, policies must be designed and implemented to stabilize the housing market. With this objective in mind, our paper analyzes and evaluates a wide and comprehensive spectrum of policy proposals that have been put forward to deal with the critical issue of housing foreclosures and the need to stabilize the housing and housing finance sector. We also describe the genesis and evolution of the crisis, as well as present our own cross-state analysis of the determinants of subprime mortgages and foreclosures.

We examine initial responses of various Government agencies and public-private partnerships, the recent Obama administration programs and proposals, as well as wide-ranging and diverse proposals from prominent academics, policy think-tanks and housing experts. Proposed plans include solutions involving auxiliary loans, shared appreciation mortgages, standards for renegotiated principal, across-the-board rate adjustments, creation of new Government institutions and legal reform. We analyze the potential effectiveness of these proposals applying our benchmark criteria of i) non-recurrence and future mitigation of moral hazard, ii) bang for the buck, iii) fairness and distributive aspects, iv) judicious mix of short-term and long term solutions, and v) regulatory implications. In conclusion, we propose some essential elements of a fair, effective and viable plan to fix the residential finance system and the housing market.

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