By Lesley Wroughton (Reuters):
A working paper by economists at the International Monetary Fund on Wednesday backed U.S. government intervention to slow the flood of home foreclosures dogging the recession-hit U.S. economy.
The paper lays out a $115 billion plan to resolve the problem in the U.S. housing market and comes as President Barack Obama unveiled a $275 billion rescue plan to slow home foreclosures and falling house prices.
"Market failures and spillovers provide a rationale for government intervention," IMF economists John Kiff and Vladimir Klyuev wrote in the paper, which has not been endorsed by the IMF board.
"We are of the opinion that a major breakthrough cannot be achieved without fiscal support or some forced modifications, and favor the former," they added.
The paper argues that private sector efforts to address the foreclosure problem had been unhelpful and too slow.
Government actions had also fallen short of the mark, they said. The previous Bush Administration focused too much on ensuring only those who "deserved" help could get it to avoid appearing it was bailing out reckless lenders or borrowers.
It said government intervention should have three aims: to prevent home prices from falling too far below their fair value; avoid "the deadweight loss" of preventable foreclosures; and ease the impact of foreclosures that do occur.
Under their plan Kiff and Klyuev recommend adjustments to the existing government housing rescue plan, Hope for Homeowners, approved by Congress last year. At a cost of $40 billion, the plan could be made more attractive to lenders and investors by subsidizing write-downs and lowering insurance premia, they said.
This could reach about 1.5 million homeowners, a substantial part of borrowers about to lose their homes, the economists added.
The plan also proposes another $20 billion in aid to states to take foreclosed properties off the market and rent them.
It also proposes another $50 billion to temporarily subsidize home purchases, which would help stabilize home prices by providing a temporary stimulus to housing demand.
Given the size of the U.S. mortgage market and the extent of the problem, Kiff and Klyuev said the intervention could cost several percent of gross domestic product.
They also warned of the moral hazard effect -- when borrowers who can afford loan payments default on purpose to qualify for government aid.
The U.S. housing crisis has been at the heart of financial and credit turmoil that has spread across the globe, pushing advanced economies into recession and significantly slowing growth in emerging market economies.