Solving the American Housing Crisis

Nov. 13, 2007 Special to ABCNEWS.com — -- As ongoing subprime fears send bank shares plummeting, ousted Merrill Lynch and Citigroup chiefs take responsibility for the firms' $8.4 billion and $14.9 to $17.9 billion write-downs, respectively, and Congress mulls overhauling the mortgage-lending industry, the question on many lips remains: Is there a way out of this mess?

Yes, say some industry experts.

Among their recommendations: returning nonagency loans to the mortgage landscape, increased faith in real estate as a long-term investment and immediately cutting inventory.

No doubt the housing market's troubled. But how to fix it? Forbes.com asked a range of housing experts to examine the largest lingering problems, the most misplaced assumptions and the best solutions.

Click here to see 10 ways to solve the housing problem at our partner site, Forbes.com.

To be clear, there isn't a magic solution. Whether government intervention, Bank of America no-fee loans or re-calibrated lending risk models at ratings agencies, there isn't anything which will instantly recapture the dollars that have been hemorrhaged.

We talked with congressmen, CEOs of real estate brokerages, research directors at analytics firms, finance professors, real estate brokers, demographers and chief economists from lending institutions, trade organizations and rating agencies. Everyone had a different angle based on their corner of expertise. Brokers made sure to differentiate market segments and talked about inventory issues; politicians spoke to immediate mends; research directors pointed to what got us into this mess; and demographers looked to who got slammed.

There's a lot on the table right now.

One solution put forth by Congressman Lincoln Davis (D-Tenn.) involves expanding GSE (government-sponsored enterprises) securitization to rejuvenate lending, but to regulate it so that money doesn't flow to speculators and luxury developers.

"I feel that if we expand latitude through GSEs for the developers to sell luxury homes, it's the wrong thing," he says. "Our local banks and community banks have done a great job providing funding. GSEs should be there as a supplemental for people who have good credit."

Investors cheered late last month when Bernanke announced a 25-basis-point cut in the federal funds rate, to 4.5%. But some say cutting rates is the wrong answer.

"Artificially stimulating demand," says Glenn Kelman, CEO and president of Redfin, a Seattle-based Internet brokerage, "is what got us into trouble in the first place."

Instead, other factors such as job growth and restoring investor confidence may have a more significant affect on recovery, say others.

But Congress' step today is one in the right direction, says Jonathan Miller, director of research at Radar Logic, a New York-based real estate analytics and research firm.

"Federal regulatory oversight [is needed] to make sure the quality [underwriting] function of the lending industry is kept completely separate from the sales function," he says. "During the housing boom, the sales function had more political power and very little underwriting was performed."