Markets are governed by the laws of supply and demand. We have learned that in school, read it in the newspapers, and experienced it in real life. The problem with the housing market today, we know, is not a lack of supply. There are plenty of homes available. The problem is on the demand side.

In housing, the demand side has two components. First of all, there must be willing and able buyers. But, for there to be able buyers, there must also be financing available. So far, the primary focus of government efforts has been on the financing component. Billions of dollars have been and will be spent on shoring up banks and institutions such as Fannie Mae and Freddie Mac, all in an effort to get credit flowing into mortgage markets again. To date, the success of these efforts has been only marginal. Partly it is because of a continuing reluctance to lend, but also it is because potential buyers are still somewhat reluctant to buy.

Recently, Congressman Ken Calvert (R Calif.) addressed these issues when speaking to a group meeting under the auspices of the National Association of Realtors® (NAR). This 2009 NAR Issues Conference was held in San Diego, California. The attendees were self-professed Realtor® “political junkies”, all of whom understand how closely their business is tied to decisions made in Washington, D.C.

Congressman Calvert suggested that the government needs to do more to create demand in the housing market. It can do that by increasing the attention that is paid to consumers – the potential buyers of homes.

The administration has already put in place an $8,000 tax credit for home buyers, but it has restrictions. It is only available to individuals who make no more than $75,000 or couples earning no more than $150,000. The credit is for $8,000 or 10% of the purchase price, whichever is less. It can only be used by first-time homebuyers (defined as one who has not owned a home for at least three years.) Unlike an earlier tax credit plan, it does not have to be repaid.

But why, it was asked at the conference, should the tax credit be restricted to first-time homeowners, owner occupants, or even to a single purchase? And why should it only be available to those below a certain income level? If the aim is to stimulate the housing market, why not make it available to anyone who purchases a home? Moreover, why restrict the number of credits available to any one purchaser? If someone buys two homes, let them have double the tax credit.

The congressman noted that some would object to such a proposal because it could be used by investors who were buying rental housing. To which the proper response should be, SO WHAT? Would it be a bad thing to have more rental housing available (which, of course, would help to bring down rental rates)? Or would it be better to have these homes continue to languish on the market as bank-owned properties and short sales?

Suppose, just suppose, that a $15,000 tax credit were available to anyone who purchases a home, and for every home purchased. That incentive should increase demand. And suppose, just suppose, that it so increased demand that it resulted in 1 million more homes being sold in 2009 than in 2008. That would be significant (though still behind the 6.4 million units pace of 2006). It would cost the government in lost taxes or refunds about $15 billion. Is that excessive?

First of all, $15 billion is chump change in relation to the amount of money that has been and will be lavished on big banks and Wall Street financial firms. Secondly, unlike most of what we have seen, every dollar spent would be directly tied to accomplishing the aims of the program. None of them would go to bonuses. Tax credits would only be given if homes were purchased. Moreover, if the plan were not successful, if it didn’t stimulate sales at all, then it wouldn’t have cost anything. How is that for novelty among government programs?

Stimulate the market by increasing demand. Use a program that only spends money if it works. Make it available to everyone. Pretty radical ideas. Maybe that Congressman is on to something.

B. Hunt

WASHINGTON – Most congressional Democrats say the quickest way to save homeowners like Troy Butler of Saginaw, Mich., is to let them declare bankruptcy and allow judges to dictate new mortgage terms.

Easy, except the lenders that would absorb the pain — and lose control of any deals to ease the terms — do not want to get dragged into bankruptcy court by millions of overextended borrowers.

Butler, 40, is a laid-off General Motors worker who has filed for bankruptcy. But the bankruptcy court has no authority to change the terms of his $90,000-plus mortgage that is more than double the value of his home.
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A bill to give judges authority to alter loan terms for primary residences may be the quickest way to arrest the housing market’s collapse. Most Democrats in the House and Senate support that plan. President Barack Obama told Democratic leaders Friday he also backs it, according to a Senate aide who was not authorized to be quoted by name.

But 10 groups representing the lending industry and other businesses are fighting back fiercely. Several have engaged portions of their lobbying machines to stop the legislation. The groups spent $83 million in lobbying on multiple issues in 2008, a figure that shows the power of the banking and investing industry and their business supporters.

One Democratic backer of the bankruptcy proposal, Rep. Maxine Waters of California, said the banking industry “has owned this Congress far too long.”

Butler, the GM worker, and an industry lobbyist see things much differently.

“I’m living from day to day, hoping to make it through the day. I worry about my family, where we’re going to live, how we’ll survive,” said, Butler, who has a disabled wife and two children, ages 15 and 11.

‘Bad public policy’
The chief lobbyist for the Mortgage Bankers Association, Steve O’Connor, said new homebuyers would end up paying higher interest and bigger down payments if lenders are saddled with the risk that a judge could change mortgage terms.

“We’re going to defend the industry” against “bad public policy,” O’Connor said.

The association’s 23-member government affairs team is trying to persuade lawmakers to kill the bankruptcy legislation. The team includes six lobbyists and nine policy experts who double as lobbyists, said O’Connor, senior vice president of government affairs.

The bankruptcy solution would not cost taxpayers money, as would mortgage modification programs that could become part of the government’s huge economic bailout package. But it certainly would harm the bottom line for lenders and investors holding mortgages.

The lending industry has voluntary programs in place to change mortgage terms. But Butler’s lawyer, Peter Bagley, said it was a nightmare trying to contact his client’s lender.

First, he was told the application for a loan modification would take at least 30 days to process. Bagley then called someone with authority to stop any sale of the home, but only received voice messages that the mailbox was full. The application never arrived.

The key to passage of the bankruptcy bill is the Senate, where Democrats need 60 votes to stop a possible filibuster. Ten Democrats — all still in the Senate — would not back the plan in a vote a year ago.

Removed from stimulus bill
Sen. Dick Durbin, D-Ill., the chief Senate sponsor of the bill, said Obama persuaded him in a White House meeting Friday to remove the bankruptcy proposal from an economic recovery package — to ensure it doesn’t jeopardize the stimulus bill. But Obama pledged his support for the bankruptcy solution, Durbin said.

Obama said he would work with Durbin to attach the proposal to other “must pass” legislation — with the hope that supporters of the overall bill would not vote against it because of the bankruptcy provisions.

Of the 10 organizations that asked the House Judiciary Committee to oppose the bill, the largest is the U.S. Chamber of Commerce. It spent $57.9 million on lobbying in 2008, according to the Center For Responsive Politics, an organization that tracks lobbying expenditures and political donations.

The Mortgage Bankers Association, which represents 2,400 member companies in the real estate property industry, spent $3.8 million and the American Bankers Association totaled $6.8 million.