Back in the mid-1980’s ag economy depression, when farmland prices were plunging as soaring interest rates crushed farmers with debt, if the politicians would have all said that they were not going to help with any government programs, opting rather to let it all just wash out, a lot of farmers who are doing very well financially today would not have made it.
Chapter 12, guaranteeing farm loans to lenders and creating the farm commodity safety net, saved many thousands of farm operations that are now healthy successful businesses today. Letting the ag economy collapse would not have taken the U.S. economy down, so they did not have to step up support to the ag economy for that reason.
Yes, farmers had gone into debt attempting to ride inflation. But let’s see how good a manager you are if the U.S. dollar doubled in value collapsing exports and you were told you had to pay 18 percent interest.
Rural America and U.S. agriculture are far better off today having had the federal government bail us out in the 1980s.
Certainly home owners bought more house than they could afford, borrowing more money than they could reasonably handle, but many are making the payments despite being upside down on mortgage equity.
I think overleveraged home mortgage borrowers learned their lessons. Like the government did aiding the farm economy in the mid-1980s, stressed home buyers could use some help too nor does it serve anyone’s purpose if home values continue to plunge and mortgage failures gorge the bear.
That may well serve a few wealthy investors with cash waiting to buy distressed foreclosures for next to nothing, but it is not in the interest of the country. Housing is a much bigger sector of the economy than agriculture and until we can get it healthy again, economic growth is not going to reduce the deficits.
There is no moral hazard here other than it would be immoral not to help.
The Fed sees the problem as big enough to hamstring the entire economic recovery, so is looking for ways to support credit. The Fed can’t do it alone, recognizing the need for congressional partnership on programs that would help relieve the mortgage stress. Instead of partnership and cooperation we get partisanship from Congress.
There are things that can be done that are just the right thing to do. Banks own 440,000 homes. Another 1.9 million are in foreclosure. They need to let investors buy more homes to rent. Fannie/Freddie will only back 10 loans per investor. Banks have even lower limits.
I think they need to increase the limits to 50 depending on the size of down payment. If investors put down 30 to 35 percent, they should be financed. Millions of homeowners owe more on their homes than they are worth. The worse the debt-to-equity ratio gets, the more homes are turned over to foreclosure, and the worse the spiral becomes.
Upside down homeowners need to be rewarded to stick with making payments. If they continue to make payments, they should have earned an equity bonus at the end. If they make all the payments, the last 5 to 10 percent of the principle owed should be forgiven.
It’s less costly than foreclosing. Taking a 5 to 10 percent write down 25 years from now is a lot better than a 40 percent loss next month.
When homeowners stay out of foreclosure, it takes pressure off the market.
President Obama offered a plan for the Federal Housing Administration to underwrite home mortgages where the borrower is current on payments so that they could refinance to lower rates. Mortgage rates have fallen far below where many mortgages were taken and many who financially qualify have refinanced to lower rates. The homeowner who really needs the benefit of lower interest rates can’t get them because they owe too much on their home.
It is one of those catch-22’s where bankers will loan you the money if you don’t need it, but if you do you can’t get the loan. Nothing would help underwrite home mortgages more than being able to refinance. If they are making the payments now, they should be able to make a lower one.
Denying those stressed homeowners access to lower interest rates is like kicking them when they are down. What do people have against giving them a hand up?
I know I sure appreciated it in the ag depression when someone cared enough to help the ag economy. Republicans did not stand in front of helping farmers – they helped shape the programs that generated the economic recovery in our sector. What in the world changed?
Reuters noted that Mitt Romney’s 59-point economic program makes no mention of housing. Frankly, a lot that was done in the mid-1980s to help the farm economy was done to help the farm banks, which were failing in alarming numbers. The government stabilized the ailing farm banks by guaranteeing farm loans and helping farmers service them by shoring up farm revenue through farm subsidies.
Thirty years after, I would say that what the government did worked. Farmers are out of debt, farms subsidies are being phased out and the farm banks are very healthy. Government helped that by creating conditions and implementing programs that allowed that to happen.
The only reason to oppose those housing programs would be for reasons of crazy partisanship that fortunately the ag economy did not face in the 1980s. Thank goodness.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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