Dean Baker's proposal for dealing with the mortgage market crisis

Center for Economic and Policy Research economist Dean Baker, one of the few macro forecasters to accurately predict the mortgage/housing crisis in the US in terms of its timing and scope, testified to the Senate Committee on Banking, Housing and Urban Affairs last week on the topic of "Examining Proposals to Mitigate Foreclosures and
Restore Liquidity to the Mortgage Markets."

This might be one transcript* you'll want to read - if the future of the US economy's stability is of at least some passing interest to you.

But for a quick and dirty briefing, here are some of the takeaways from Baker's testimony:

¶ There are large differences in the state of the housing market across the nation. Policies that may be appropriate for some parts of the country may not be appropriate for other parts of the country.

¶ The Congressional effort [under the proposed Hope for Homeowners Act of 2008 ] to stabilize prices in bubble-inflated areas is counter-productive. Insofar as it succeeds, it makes homeownership less affordable for young people and families moving into the area.

¶ For geographic regions already hard hit by the crisis (where in the last 18 months house prices are down by 16.5 percent in real terms from their peak, for example) such Atlanta, Cleveland and Detroit, the mortgage guarantee program in the Hope Act may be a useful mechanism for keeping homeowners in their homes and stabilizing prices. This is possible because prices are not out of line with the fundamentals in the housing market. In this context, the government can help to play a stabilizing role in the market as it did during the Depression with the Home Owners’ Loan Corporation.

¶ But for regions where the housing bubble was concentrated (cities such as Los Angeles, San Diego, and Miami) house prices are still way out of line with fundamentals. In the cities with bubble-inflated housing markets, sale prices are still more than 20 times annual rents.1 The loan guarantee program in the Hope Act is far less suited for these cities. (It would be easy to distinguish between these markets by not allowing a price guarantee to exceed a multiple of 15 times
the appraised annual rent for a unit.)

* For the full transcript, see here.