Romney's bad business idea

With all due respect to my friend SC Treasury Curtis Loftis who is the state chairman of the Mitt Romney campaign, the GOP Presidential candidate has the wrong business approach to the housing and foreclosure crisis.

In a recent interview with the Las Vegas Review Journal, Romney said that the solution to both the housing and foreclosure problems is the same—let home foreclosures “hit the bottom”.  Government should just get out of the way and let the banks foreclose as fast as they can.  According to Romney, investors would then buy up the highly devalued properties and turn them into rental units.  With all the foreclosures out of the way then the housing construction industry would get back on track.

Besides Romney being viewed as cold and uncaring toward all the families he quickly wants to put on the street and the current small investors in rental property he wants to throw under the bus, his approach is a pretty lousy business plan.  

Romney and I both agree that the current supply of housing needs to be stabilized with owners that can pay the mortgages.  Only then will new houses start being built creating the construction jobs we really need to lift the economy.

But Romney’s approach requires that all property values continue to decrease (even for people who continue to live in their homes).   Generations of middle class Americans and those trying to break into that category will never recover the little wealth they’ve accumulated.   As the middle class goes down so will our vibrant small business economy both from a lack of customers and their own foreclosure problems.

Here is a better way to stabilize the housing market.

According to a recent McClatchy Newspapers analysis:

-2.2 million homes whose owners have received initial foreclosure notices or notices of default but haven't yet been foreclosed on.

-1.9 million properties whose owners are 90 days or more behind on their payments but haven't yet been served with foreclosure notices.

That’s 4.1 million homes that are soon to be put into the foreclosure bucket.  To put that into perspective the official number of all houses for sale in the nation is only 3.5 million.

Romney wants the economy to wait until all these houses are foreclosed on and resold, a process that will take years and a terrible toll on most Americans and even the banks holding the mortgages.

But here is a better business proposal for our country and the banks, one that I’ve blogged about before.

Let’s muscle the private banks and Fannie and Freddie to do everything in their power to keep the current home owners in their homes by letting them refinance at today’s rock bottom rates (no questions asked) and, if necessary, reducing the principle they owe. 

The banks know that the value of their housing portfolios isn’t worth anything near what they claim on their balance sheet.  So let’s stop the charade and force the banks to write down the losses right now.  If they all do it together, it will be alright for all of them. 

We’ll keep 4.1 million families in their homes, stop the slide in real estate values and immediately create demand for new housing.  And it can be done a lot faster than Romney’s prescription. 

The Obama Administration is expected to roll out a plan in the next few days to help homeowners refinance at today’s interest rates.  We’ll see what the plan is but I suspect that it won’t take on the banks and force them to do what really needs to be done. 

The Administration and Congress to start kicking butt.