What to do about housing?

Since I solved the automotive industry problem yesterday, this evening I think I’ll tackle housing. I’m on a roll. Watch out.

Last wek it emerged that Treasury Secretary Paulson is basically faking it. And this week the story is that the FDIC Chair Sheila Bair thinks we should be trying to solve the problem by, um, solving the problem. Of course Paulson has some concerns about such an approach. Specifially, the Los Angeles Times reports that he “voiced concern about a provision under which the government would absorb half of any losses from a future default.”

I might have missed it, but I don’t recall his voicing similar concerns when the money was flowing to his buddies on Wall Street. But I digress.

What I would really like to do tonight is suggest a model that might begin to address some of the concerns that people have that their neighbors are going to get bailed out and thereby rewarded for overly ambitious borrowing. I was being facetious earlier; this, like yesterday, is just a back of the napkin sketch that will hopefully inspire someone who really knows this stuff to take a look at how to apply models that are hidden in plain sight. So if anyone knows Sheila Bair, please tell her I say hello.

The main problem is that the financial system is unable to digest a large number of delinquent mortgages, which is complicated by how these mortgages have been scrambled together into an unholy debt omelet. If this is the case, why isn’t our focus on shoring up the mortgages that threaten the system in the first place? Isn’t there a fundamental flaw in giving money to Wall Street when everyone claims that their intention is to get the money to Main Street. Why not give the money straight to Main Street?

We are told that Main Street will suffer unless Wall Street gets help. However, if we were to help Main Street, suddenly all those toxic investments would be less toxic because investors could have confidence that the foreclosure epidemic was cured. This would get money back into the economy at the ground level, where it is needed the most. It would also address the crisis of confidence at the market level.

In any given month lately, there are around 300,000 homes in some sort of foreclosure. That means that the remaining $350 billion could also be used to cover, say, five months of foreclosures at more than $200,000 apiece. I’m just a peasant, but it seems like that ought to put a dent in the problem. Once this cash starts flowing, the rate of foreclosure is likely to drop rapidly.

My hunch is that this is worth a closer look before we throw the money at Wall Street and hope that it trickles down. Some may worry that if we bail out the little people, they might just squander the money and we’ll be in the same mess again in the near future. Of course, the same is true for the fat cats, but on a grander scale.

Fortunately, there is a model for how we might get this money to the consumers without simply bailing them out. In Canada, there are three cooperatives that help Muslims to buy houses without paying interest. (For example, the Qurtuba Co-operative) These cooperatives have a specific religious function, but they serve as a model for an orderly way of rescuing all homeowners in a way that could facilitate repayment when the crisis passes.

With some modifications, this could be just the thing needed to help homeowners (and bankers) in a fair and equitable way. The model cooperatives start with people who don’t own houses, but what I am suggesting is that government funds be used to set up cooperative organizations that take over troubled mortgages. The homeowners would legally surrender the title in exchange for a similar-valued bundle of shares (only one of which would be voting stock, as it usually the case with co-ops). They would remain in their homes, which would lessen the need for expensive and traumatic foreclosures and evictions. They would become members of a not-for-profit organization that is under their democratic control. Each member would have one vote, regardless of how many shares they have bought.

Over time, members would purchase more shares in the cooperative until they have invested enough that they could essentially trade their shares for ownership of their homes. As the crisis passes, these cooperatives will be able to repay the funds to the government. They might also be able to use the same framework to help others buy many of the dwellings that are glutting the market.

Time is of the essence, so rather than setting up entirely new organizations, it may make the most sense to channel this project through existing credit unions, which are already demonstrating their superior stability as the crisis unfolds. The long-term independence of such funds is a matter that can be addressed later.

More than 1/3 of Americans are already members of credit unions, and nearly everyone is eligible for membership in a nearby credit union. However, credit unions are smaller than banks (individually and collectively) and may need help in administering this effort. To supplement these efforts, we may also want to include other nonprofits (and maybe even religious groups) that pass muster for administering such a program for their own members.

If the government was going to set up something to oversee the Wall Street Bailout, certainly it can do the same for this effort, which is of a much more equitable nature. Because cooperatives are themselves democratic, and operate for the benefit of their members, there will be less need for regulation once the program is up and running.

This approach will probably be slower than just shoveling money at the debt market, but it is more likely to address the core issue, and less likely to simply disappear into the void like all the previous infusions to the credit market. Most important, it has a chance of passing the Congress without enraging the public, and will not reward those who created this problem.

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