Is Nationalized Housing the next step? Probably not.
However, if you would have told me a year ago that there would be discussion about nationalizing private banks; I would have looked at you as if you had two heads! However, recent economic events has many people talking about nationalizing this country’s private banks, including former Federal Reserve Chairman Alan Greenspan (who was reported by the media to say that nationalizing banks temporarily may be necessary).
Given that bank capitalization has been at risk due to devalued and toxic assets, some favor the Government taking over failing private banks to recapitalize and restructure them. The idea of vested Government control and ownership has many pros and cons, and there is no “map” to tell us where nationalizing banks would lead.
How bad is the problem? A recent Financial Times article (Insight: Time to expose those CDOs; February 26 2009) reported that $305B of the $405B Collateralized Debt Obligations of Asset Backed Securities issued between 2005 and 2007 went into default. One third of those CDO’s were from mortgage backed bonds, also called mezzanine CDOs. Although recovery rates for defaulted CDO’s in general are low, it is estimated that the recovery rate for mezzanine CDOs is 5%. In other words, $5,000 is recovered from every $100,000.
Although there is heavy debate of nationalizing banks, some argue that Government stock ownership (as in last week’s 40% purchase of Citigroup) is a form of nationalization such that the Government can apply pressure to accomplish its goals; while others talk of bank nationalization as a socialist inroad. Other critics have argued that the Federal Deposit Insurance Corporation (FDIC) has been essentially nationalizing failing banks for years. Although deposits at failing banks are insured by the FDIC, the FDIC manages the receiverships to liquidate the failing banks’ assets. Not quite the total control of and ownership that nationalization inspires, but the model has been effective in the past by tying up the loose ends of a private bank failure.
A further extension of the bank nationalization would be to nationalize housing. As foreclosures and mortgage delinquencies contribute to the sliding housing market, Government bank ownership could be used to nationalize housing to stabilize home values. Well, not the entire housing market, only the non-performing segment which contributes to the toxic assets losses. By assisting home owners in foreclosure or at risk of foreclosure through direct Government control and ownership might lower foreclosure rates, possibly reduce further real estate market loses and assist those losing their homes.
Rather than the Government entering the mortgage servicing arena, the ideal nationalized housing program (through Government controlled lenders) would allow struggling home owners to pay what they can afford. In return the home owner would give up some (if not all) of the future equity stake in their home when they eventually sell.
Would nationalizing segments of the housing market be the answer to rising foreclosures? Of course not. Nationalizing any industry is a precedent that puts the Government on a slippery slope. Unless the questions of responsibility, ownership, control and intention are clearly defined, the unintended consequences of nationalization can swallow any industry- not to mention home ownership.
Original published at https://dankrell.com/blog/2009/03/03/nationalize-housing/
By Dan Krell
This column is not intended to provide nor should it be relied upon for legal and financial advice. Copyright (c) 2009 Dan Krell.
