Could bold action be what the housing market needs?

Sudeep Reddy:

The IMF, in a section of its World Economic Outlook released Tuesday, called for “bold” policies around the world to cut household mortgage debt in the wake of falling home prices. Among the successes it highlighted: Iceland during the recent recession and the U.S. in the 1930s, when the Home Owners’ Loan Corporation instituted “a bold and broadly successful” government-backed debt-restructuring program designed to prevent foreclosures. The government’s HOLC was launched in 1933 “because a series of earlier initiatives designed to stop the rising number of foreclosures had achieved little,” the IMF said in the study. Still, the HOLC “got off to a rough start: it underestimated the size of the task and was poorly organized,” the IMF said. In addition, “the lack of precedent and the urgency of the situation posed challenges.”

Sound familiar? The Obama administration has tried since its earliest months in 2009 to fight a persistent housing decline. Its programs, designed to cut mortgage debt and ease the burden on households, have struggled to gain traction against political opposition. At the end of 2011, 2.4 million U.S. properties were in foreclosure with more on the horizon. About 951,000 mortgages had been modified permanently, less than 2% of all mortgages.

Some policymakers, and plenty of outside economists, have urged the U.S. to consider a more aggressive housing program on the scale of the 1930s effort. The Depression-era program, launched in 1933 eight years after home prices peaked, modified about 20% of mortgages.
The HOLC bought distressed mortgages from lenders, issued government-backed bonds in exchange, then restructured the mortgages by working with borrowers. It bought 1 million distressed mortgages — about a fifth of all of mortgages — and faced about 200,00 foreclosures after the renegotiation. But it helped the overall economy, the IMF concluded.

Although such an action would surely have a positive impact on the US economy, I highly doubt policymakers have the willpower to do anything bolder than what has already been done.  It could definitely mean a step in the right direction and could further strengthen the global recovery.