Stopping the Freefall: Stabilizing Minnesota's Housing Market
Larry Buegler Retired President, Farm Credit Bank of St. Paul
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Key Findings & Recommendations
Credit markets have dried up. Federal recovery dollars are not reaching homeowners and potential homebuyers on the ground. Consumers and lenders are afraid to invest in homeownership when the market's bottom is still a blur.
This is the base level of the current financial crisis facing both the United States and Minnesota economies. It ripples outward, waves sweeping over Minnesota's financial and industrial economic sectors, even threatening agriculture-Minnesota's strongest sector for the past two years.
At the same time, prominent economists and finance analysts believe that the underlying problem is the housing market itself even though the collapse has spread far beyond foreclosures, bankruptcies and mortgage lending.
But a new program, if implemented, could turn things around here in Minnesota, and eventually, in the rest of the country.
Stopping the Crash, Stabilizing Prices
The Minnesota Home Values Guarantee Program will stop the housing market free fall and stabilize prices.
This "front porch" approach to the housing and finance crisis will get credit markets flowing again for housing, household expenditures, and business retention and expansion.
It will serve as an insurance policy for new homebuyers worried about whether their new home will lose value or appreciate. It will quickly stabilize the state's housing market and, as a result, the state's shaky economy.
How the Minnesota Home Values Guarantee Program Works
This program will begin as a homeowner's equity insurance program for new buyers. It will ensure that a new buyer's down payment is protected after five years, regardless of future housing market conditions. This means that people interested in buying a home can once again feel safe investing in a property. The Minnesota Home Values Guarantee Program promises buyers that they can get those down payments back even if the market continues to decline.
But since this program jump starts home purchasing again, it's much more likely to stabilize prices and return the housing market to a normal rate of appreciation. This will create a floor under home values to protect down payments and home equity. In turn, that will allow lenders and borrowers to restructure existing but troubled loans knowing that equity in the property is protected.
The plan is similar to the earlier Land Values Guarantee Program developed by the Farm Credit Bank of St. Paul, but it will work in reverse: home values will be stabilized first making it easier for lenders to restructure troubled loans once property values start to rebound.
A pilot program using Ramsey County as an urban example and several counties in Greater Minnesota as rural examples will provide sufficient critical mass and differing demographics to demonstrate effectiveness and iron out complications before implementing a statewide or national values guarantee program.
Minnesota needs a state program to put a "floor," under home values to stop prices from falling farther, under the downward trend in home values. Federal efforts to make funds available for lenders and borrowers to rework troubled mortgages are not likely to succeed if home property values continue to fall. What could work, however, is a Minnesota Home Values Guarantee Pilot Program similar to what the Farm Credit Bank of St. Paul developed in 1987 to end erosion of farmland values in the Midwest.
We propose the following two-phase program to stabilize home values and encourage restructuring delinquent and stressed mortgages:
- Phase I - Stabilize home values. Anyone qualifying for a conventional mortgage for a home in good condition in one of the pilot program counties, and for investment as a primary residence, would be eligible for a five-year guarantee of the home's value. This means a homebuyer's down payment would be protected for five years regardless of the home's value at the end of that time period. (See section on Minnesota Can Stop the Bleeding.) . The home ownership market operates city and countywide, in some parts of the state, and within specific neighborhoods in larger cities. Both Ramsey County and counties in Greater Minnesota have diverse neighborhoods and micro-markets. As a result, the pilot program would not be restricted to depressed, targeted areas where the housing market has failed.
- Phase II - Restructure delinquent mortgages. Once home values start to stabilize, the Home Values Guarantee Pilot Program will accelerate restructuring of delinquent mortgages. In some cases a shared-appreciation mortgage could help both borrower and lender. (See section cited above.)
The Housing Meltdown - Key Findings
- The typical Twin Cities single-family home lost about $80,000 in equity in the past two years. The Minneapolis Area Association of Realtors traced the fall of median home sale prices from a peak of $236,850 in June 2006 to a low of $167,000 in December 2008. The trend continues in 2009, with the median home sale price falling to $155,000 in January.
- Home values vary greatly across local markets. Despite these micro-markets, all 87 Minnesota counties show problems with foreclosures, bankruptcies involving mortgages, sheriff's sales of homes and pre-foreclosure actions.
- More problems are on the way. In October, the St. Paul Pioneer Press (Snowbeck) found 52,000 Minnesota mortgages were deemed to be in negative equity status, and 71,616 more mortgages were within five percent of negative equity-equity most likely lost in the final quarter of last year. What's more Serres (Star Tribune) reported in January that 50 state banks are now on a regulators' "watch" list.
- An estimated 22 federal programs have now committed more than $7.7 trillion to halt the financial meltdown and restore lenders and credit markets (Bloomberg News, Nov. 24, 2008). Little of this has trickled down to help borrowers and lenders restructure troubled mortgages.
- According to HousingLink, in 2008 Minnesota saw a 33 percent increase in foreclosures over 2007.