Romney and Foreclosures: 'Let the Market Work'

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Let foreclosures hit bottom and let the housing market work, says Mitt Romney.

In an interview published Tuesday ahead of presidential debate, Romney told Las Vegas Review Journal's editorial board that solving the foreclosure crisis would require letting banks proceed against homeowners who have defaulted on their mortgages. New investors could then rent out the homes until markets adjusted.

"As to what to do for the housing industry specifically and are there things that you can do to encourage housing: One is, don't try to stop the foreclosure process. Let it run its course and hit the bottom," Romney said.

Romney elaborated during the presidential debate Tuesday night. "The idea of the federal government running around and saying, We're going to give you some money for trading in your old car...or we're going to keep banks from foreclosing if you can't make your payments...", Romney said, "The right course is to let markets work."

Glenn Hubbard, who is advising Romney, takes a different view. He tells the FT that the housing market is broken, and needs to be repaired.

[F]inancial frictions make it difficult for households and businesses to respond positively to fiscal stimulus or to low interest rates. Policy actions need to mitigate this broken link in the chain. In particular, frictions in the mortgage market and low equity levels have restricted the ability of tens of millions of borrowers to take advantage of very low interest rates by refinancing their mortgages.

This has blunted a key channel of monetary policy and led to large numbers of foreclosures. Household balance sheet repair would be accelerated if every homeowner with a mortgage through Fannie Mae and Freddie Mac who is current on payments were allowed to refinance their mortgage at the current very low rates. It would reduce debt-service burdens and offer the equivalent of a long-term tax cut (over the life of the mortgage) of up to $70bn annually. The credit risk of these mortgages has been borne by taxpayers since 2008 anyway, so the refinancing would not increase the Treasury's risk exposure. It should reduce it, as defaults diminish...

The positive effects of low interest rates on refinancing, household incomes and wealth have been cancelled out by mortgage market imperfections that can be straightforwardly fixed.

Good advice. Romney should pay closer attention.

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