How to Solve the Housing Credit Crisis

OK, this is going to sound more like a political candidate's answer than an honest attempt to solve the problem. You know, short on specifics and long on rhetoric.

The housing industry, which includes lenders and developers, has long marketed home ownership as a "great investment." Home ownership has tax advantages and, thanks to creative lending, millions of people have found a ready source of cash in their equity.

When the housing market is expanding, homeowners in primary markets often see appreciation gains that outshine the stock market. Huge equity buildups create a sense of wealth.

The problem (or one of the problems) is that when the government setup mechanisims (Fannie Mae and Freddie Mac, for example) to encourage home ownership, its goal was to create stable neighborhoods of families with a reason to be involved in their communities.

The social benefits of a country with a large percentage of homeowners are significant. These social benefits (stable communities, involved citizens, and so on) ultimately create economic benefits (a growing local tax base, workers with an incentive to stay employed, and so on).

However, when homes become “investments” first and places to raise a family second, it defeats the primary benefit the government wants to achieve. Speculating, at taxpayer expense, is encouraged.

When you add in the exotic financial instruments that have been created to market home loans to investors, it is little wonder that housing has gone from encouraging stability to fostering speculation.

What we need is a housing policy that rewards the benefits of home ownership and discourages speculation. The housing status quo defenders point out that the market is the best regulator. That would be true is everyone involved completely understood the risks. That’s not the way it worked, however.

While the investment banks and other players in the financial services industry have suffered huge losses (and will to do so for some time), virtually none have lost everything. This is the fate of the millions of homeowners who took out risky loans without adequate information or warning - they lost everything.

Sometimes, what is important for society is more important than blindly following free market folly, wherever it goes.