How Should We Help Underwater Home Owers ?
Martin Feldstein has another plan to fix housing. It is a variation of the 30/20/10 plan I proposed earlier in the year, in that it pulls a portion of the original mortgage aside from the corpus of the existing loan.
Feldstein’s solution? Replace part of the non-recourse mortgages with a new, immediately due, recourse loan:
“More than 12 million homeowners now have mortgage debt that exceeds the value of their homes. These negative-equity homeowners have an incentive to default because mortgages are generally “no recourse” loans. That means creditors can take the property if the individual defaults, but cannot take other assets or income to make up the difference between the unpaid loan balance and the lower value of the house. As a result, mortgage default rates are now rising rapidly and are expected to go much higher.
The no-recourse mortgage is virtually unique to the United States. That’s why falling house prices in Europe do not trigger defaults. The creditors’ ability to go beyond the house to other assets or even future salary is a deterrent.”
This is a partial solution, one that fails to address several key issues — mostly price.
But as currently described, it is doomed to failure.
First, because most home owners — even the ones that signed on for really bad mortgages — are simply not that stupid. I cannot imagine many attorneys saying: “Sure, replace your non-recourse mortgage that you can easily walk away from with this one that will follow you for years and years, garnish your paycheck, and be non-dischargeable in bankruptcy! Sign here, here and here, and initial here and here. Congratulations! You are a moron!”
Aside from that one fatal flaw, there are several other issues with Feldstein’s proposal.
The big one is it preventing houses from dropping to their natural price level. It fails to write down enough of the overpriced housing market. Current prices, as measured by price to income ratios, or rent/buy costs, are still significantly elevated relative to their historic means.From a 40,000 foot view, defaults and foreclosures leading to distressed sales are what allows prices to normalize again. Until entry level homes are affordable to young families, the entire Housing chain will remain partially frozen.
Note: This isn’t a call for affordable housing projects — rather, it is a demand to allow market prices to revert to their historic means. Anything DC does to thwart that mean reversion is ultimately destined to failure. The sooner the powers that be figure out that, the sooner Housing will normalize.
The third issue with these mortgages is that many have been sold and resold, securitized and tranched. Even if a few million people are foolish enough to accept this bad deal offered by Feldstein, how are you going to get the locate the mortgages’ owners to revamp the deal? *
The Feldstein proposal doesn’t resolve the issue, is unworkable for many securitized mortgages, but mostly and is against the interests of the homeowners. It is, in short, a non-starter.
My alternative suggestion is to develop a plan that recognizes this simple truism: People paid too much for houses, and banks lent too much against value that simply isn’t there. The LTV needs to be adjusted to reflect this simple reality.
That’s why carving out a new realistic mortgage relative to home values, plus a 10 year balloon payment for some of the balance, can work.
•It shares the pain of bad decision making of both the buyer and the lender;
• It create an incentive for home owers (not a typo) to stay in their homes;
• It gives the banks an immediate write down of the balloon, and a possible recovery down the road;• It drops the price of homes back towards something realistic
Consider a $500k mortgage on a home purchased for $550k that is now worth $400k. I would have the parties negotiate something like the following: A new mortgage for $350k plus a $50k 10 year balloon. The $350k mortgage is affordable, the $50k balloon is interest free, tax free and can be folded into the main mortgage 10 years hence.
You can play with the numbers, for example, doing a $375k and a $50k balloon. The bottom line is both parties have to have an incentive to take some o the hit, and prevent an even worse outcome.
>
*Further, as detailed in our proposal, we can enact notice provisions to turn securitized mortgages into an opt out plan, one where the owner of the mortgages must actively refuse to participate int he new plan.
>
Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 22nd, 2008)
http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/
Source:
How to Help People Whose Home Values Are Underwater
MARTIN FELDSTEIN
WSJ, NOVEMBER 18, 2008
http://online.wsj.com/article/SB122697004441035727.html
November 18th, 2008 at 8:06 am
What happens if no counterparty shows up to negotiate?
Why not have the Fed Gov’t condemn all mortgage-backed securities at “fair market value” and pass the savings directly to the homeowner?
November 18th, 2008 at 8:16 am
Gov’t gives cash to banks, that cash amount is written off the homeowner’s mortgages (based on formula for regional losses sq footage, date acquired etc…)
Banks have more cash to lend and mortgages become affordable (no longer “underwater”)
November 18th, 2008 at 8:22 am
Where does that set the comps? Under this plan, will I be able to buy a house that sold for 550k in 2005 for 350k. I could live with that!
November 18th, 2008 at 8:25 am
So long as the borrowers and lenders believe that they can get the Feds to rob the other party or someone else on their behalf, there will be no solution. Neither the monkeys who borrowed, the monkeys who lent, nor the bystander monkeys who are screeching and flinging feces are going to let the only solution that will work actually take place. Liquidate, you simian butt-scratchers!
So which version of a non-solution will we get? I think it will be delay and a slow drip of foreclosures and bankruptcies and a good measure of capital consumption through deferred maintenance on the subject properties. Come one, come all to Youngstown, Ohio and see what that looks like. (Hey, you don’t *really* need siding on a house after all.)
Every time government has gone to war on prices, government has gone down to ignominious defeat… too bad it takes so blasted long.
November 18th, 2008 at 8:31 am
I think, the question really should be:
Why Should We Help Underwater Home Owers ? For Humanity Sake?
I know someone who bought a $1.8 million dollar home at a salary of $120K. I don’t believe I should be paying for his inability to keep up with the payments.
November 18th, 2008 at 8:55 am
We should do nothing. The entire problem with our economic model is that we even think about doing something. Two months ago I said and continue to say the best plan is NO PLAN. Leave the markets alone. If they crash they crash. From this hobgoblin pile we rebuild as we have from every previous crash.
I say hobgoblin because that is exactly what it is. I’m continually amazed that the folks who didn’t know there was a problem now claim clairvoyance on outcomes they perceive, in total clarity, what will happen if we don’t follow certain policy scripts. It’s all a bunch of BS coming from people who spew free market principles but who in reality don’t believe them and never have.
If you believe in a free market you also must embrace its resolutions to emerging/ongoing problems. Leave the market alone. If you want to resolve the housing problem and foreclosures etc, stand back and let it collapse. The people will move out and become renters. Empty houses, in whatever state of disrepair will be bought pennies on the dollar and valuable lessons will be learned by all involved. Losses will be taken by all participants delegated by the market.
All this current BS is rationalizing why these lessons should not be learned. Furthermore all these bailouts are and will continue to make everything worse and more prolonged. You want a depression–keep f’king with the markets.
If we are to continue this BS why no just say the dow is at 15000 and make everyone whole!
November 18th, 2008 at 9:04 am
They should set the interest rates at a “fair” percentage. The people should have to qualify and show proof they can make payments at the “fair” and normal rate. If they can refinance them If they can’t they should have never had the house in the first place.
I personally think unemployment and under employment are the biggest contributors to foreclosures. Refinancing won’t help those people.
November 18th, 2008 at 9:04 am
Amen Patrick Neid. “How should WE HELP…” should never be the question.
November 18th, 2008 at 9:07 am
And there’s nothing wrong with trying to help. But the question should be about how YOU yourself can help, not how WE collectively can help.
November 18th, 2008 at 9:21 am
I guess we are just old fashioned down here in Louisiana. The idea of non-recourse mortgages seems completely foreign and makes no sense. I suppose the old-timers had some wisdom. Not that some banks just decide it ain’t worth pursuing some people, but the long term consequences to borrowers of defaulting should provide a disincentive.
I stayed up way too late to be lucid at the moment, or probably even to type well, but whatever plan gets adopted regarding haircuts to lenders and the consequences to borrowers, needs to be put into the bankruptcy law for the judges to administer. All this voluntary crap is just that. We don’t need to pay lenders a lot of money to recognize their losses. Unless they have someone’s boot up their butt, banks will do nothing because they don’t want to recognize their losses. Bankruptcy judges are already used to playing referree.
Not that there can’t be mediation programs to settle things ahead of court, but the prospect of a judge imminently giving the parties a worse ruling than they can get in a voluntarily gives their lawyers a lot more levergae in making people do what they should.
November 18th, 2008 at 9:23 am
No arguments here. It is not possible to support prices at artificial levels. Things are not as bad as they seem. As Peter Schiff pointed out, we are not seeing real wealth destoyed, this is all paper wealth. When we have a society where people produce useful products but consume less, and where houses are affordable for those with steady employment, we will be wealthier than we were in 2006.
November 18th, 2008 at 9:23 am
Patrick Neid:
To your point, the borrowers don’t necessarily even need to move out. The sale-leaseback can be a good deal that will keep the people in the home… just as renters instead of owners. Then they could conceivably work up a deal to buy back the home from the landlord later on. Unfortunately, both the Federal miscreants and local courts have made these transactions damn-near illegal. Ostensibly, this is to prevent ‘equity skimming’ where a crooked landlord gets a deed and some rent from the distressed owners but never actually goes and buys the house out of the foreclosure. Of course, this only works on dumb homeowners… but there is no shortage of those as we can see. Still, it would work in a utopian pipedream world where the government would just prosecute the frauds that occur instead of trying to prevent them. (In other words, if homeowners were grown-ups…but if that were the case we wouldn’t be having this conversation in the first place.)
November 18th, 2008 at 9:25 am
I’m a renter waiting patiently for prices to revert to something worth paying. After so many people outbid me for homes they couldn’t afford, now I must help keep them there?? No. Not fair. But, here’s what I would support:
(a) Give EVERYONE more stimulus checks equally until home prices stabilize. That helps everyone equally.
(b) For homeowners who qualified for prime rates but were sold higher-rate products by the likes of Countrywide, reset the loan. Sue the lenders for fraud and reset the loan. Require the lender to take the loss.
As for (a), the stimulus must be monetized. We know we can’t service all these debts. Instead of literally defaulting on Fannie/Freddie, we guaranteed it. So, next we must technically default by monetizing. That’s the only way to “beat” deflation. We have to “start monetizing” all the writeoffs. Otherwise, price levels chug lower and business activity spirals down.
November 18th, 2008 at 9:25 am
Coincidentally, Macro Man offers a solution this morning:
In conjunction with consumer advocacy groups, Macro Man has designed a program that seeks to aid troubled homeowners. Congress can expect to see lobbyists agitating for its passage in the new year:
* A Single Home Owners With Mortgages Extended Treasury Home Equity loan Modification with Offsetting New, Equilibrium Yields program. A bit of a mouthful, to be sure, but its acronym is sure to resonate with an irate electorate: SHOWMETHEMONEY.
http://macro-man.blogspot.com/
November 18th, 2008 at 9:26 am
Why is it the question is always about saving the homeowners - but the solutions are always about saving the home prices?
November 18th, 2008 at 9:34 am
Foreclosed homeowners don’t end up homeless. They’ll end up in apartments. I don’t understand why we have to keep them in the buildings they currently occupy. Instead, stimulus checks for all helps them pay their future rent.
November 18th, 2008 at 9:35 am
Winston, because “saving home prices” stops the “reverse MEW” that’s hurting the velocity of money for the past year. Basically, we need to stop the psychology that “everything will be cheaper next year, so don’t buy anything now”.
November 18th, 2008 at 9:37 am
wunsacon:
http://www.amazon.com/When-money-dies-nightmare-collapse/dp/0718302141
Be careful what you wish for. Deflation is infinitely superior to a ‘technical default through monetization’, commonly known as hyperinflation. I hate the government and its central bank with all my heart and soul, but I really don’t want to see it commit suicide in this fashion. Neither does anyone who thinks about it for very long.
November 18th, 2008 at 9:39 am
Well, we don’t “need” to. But, I think we probably “want” to, rather than not do anything.
November 18th, 2008 at 9:42 am
Thanks, Archipage.
November 18th, 2008 at 9:42 am
Oops. (Wrong spelling.) Thanks, Archiphage.
November 18th, 2008 at 9:57 am
I wokr a lot of short sales as an investor and I can tell you that recourse loans aren’t the solution they are cracked up to be. I live in Indiana where the mortgages are all of the recourse type. However, first mortgage holders here typically never exercise their right of recourse because the recovery rates are so low. Usually they just take the house back and write their losses off.
The only ones who routinely use their right of recourse are the aggressive second mortgage finance companies. These folks commonly do come after the folks who default, but it typically does not affect the homeowner’s decision of whether or not they walk away though. If they can’t afford the house they leave due to the first mortgage foreclosing and then they are stuck with the consequences. There isn’t much “choice” involved in my experience. I have seen some “moral hazard” here with folks just walking away, but this is the exception rather than the rule.
November 18th, 2008 at 10:11 am
I know there are a lot of European readers here. Even though Europe is recourse, I thought it was more difficult to get garnishments, etc., to satisfy bad debts. I would imagine that a significant number of walk aways here would be able to declare bankruptcy if their mortgages were recourse.
I’m not quite sure where I stand on this. As a wise man said, this is why you don’t get into these kind of situations.
November 18th, 2008 at 10:12 am
Doesn’t solve the excess supply issue. We have had a investor driven SFR tax driven real eastate market for 25 years. The oversupply of houses is not going away and certainly is not going to be solved by first time buyers! Our housing inventory is based on a booming consumer driven economy with lots of vacation properties plus 2nd and 3rd properties along with rental investment that has been and will be negative cash flow forever not to mention the highly popular house flipping industry generated by real estate professionals ( agents to some). The demand side can’t absorb what has been built nor can it afford to pay the mortgage payments or due normal maintenance.
The recession will drive more and more properties to market as the shrinking economy creates it’s own margin call on the overbuilt housing sector.
November 18th, 2008 at 10:12 am
I like BR’s proposal. It makes the most sense out of all I’ve read so far. There is a consequence for both parties actions from the original note. The banks need to face the fact they assumed the risk of default when lending on razor thin equity and the homeowner also took on substantial risk for the debt service on razor thin equity. I just wonder what will actually happen to market prices under the BR plan.
November 18th, 2008 at 10:17 am
None of this will matter until we get new people steering the boat. The Bush crowd have an instinctive phobia of doing anything that benefits the “little people” in any manner, preferring to let them all go bust while showering billions onto the lenders. Sheila Bair is the only one who even talks about restructuring mortgages to deal with the housing crisis, and she is a lone voice in the administration. Hopefully Obama keeps her on.
But until Bush actually leaves office, nothing will be done to fix the ongoing mortgage mess.
And don’t count of the Congress to fix it either — they have had it within their purview to pass legislation rewriting the rules of bankruptcy, and have had (up until Hank’s “bank job” just-gimme-the-money legislation was passed) the opportunity to bundle foreclosure rules into bail-out legislation. They too, only listen the the voices in their heads (those would be banking lobbyists), and not to their constituents or to anything resembling the voice of Logic and Reason.
And as BAC and others have demonstrated, it doesn’t take an act of Congress — the banks themselves can de-fuse the ticking time bombs in their possession, and restructure them en masse — it’s just a lot more difficult for the banks to do it, due to the slicing and dicing and bundling of mortgages into CDOs and other bundles and dispersing them to the four winds across states and nations. But as they have demonstrated, it CAN be done.
It has been so EASY to fix this (well, easy for Congress), for the past several years, it boggles the mind that here we are, approaching 2009 and ARM resets are still chewing up the housing industry (and by extension the banking industry, the manufacturing industry, etc, etc).
November 18th, 2008 at 10:25 am
Around here most owners in foreclosure are already in bankruptcy or close to it, so the bank holding a ‘deficiency judgment’ from the foreclosure proceedings becomes just another unsecured creditor. Worse, if the bank takes the property back (very common), they often won’t get it sold for several months if not over a year, so they don’t even know how big the loss is for some time. It can take 2-3 years from default to final disposition if the owner simply ignores everything and then files bankruptcy on the day of the sheriff’s sale. Free rent for all that time… and no worries about leaky roofs or any of that crap. That’s all the bank’s problem! Oh, and in Ohio there’s no reason to pay the water bill either. That becomes just another lien on the property, so you just pay them a little here and there so they don’t shut it off. Oh yeah… and if your deadbeat self is still living it up after the bank gets the deed to the house, you’re still in the clear for a few weeks, because now you’re a tenant and the bank has to evict you! Mortgage lending is no end of fun and excitement, no?
November 18th, 2008 at 10:29 am
Archiphage, that’s out of print…
To your point, we’re not going to monetize every year to, say, pay our war debts to France. The writeoffs in bad debt/credit are hugely deflationary. We must monetize an amount equal to all the writeoffs to stabilize prices. Stabilizing prices will fight a deflationary psychology.
Now, I know some people are thinking “it’s not government’s job to stabilize prices”. But, think about the context in which that statement is used. We use it in situations where a government tries controlling the prices of particular items. (E.g., food prices.) And then it causes shortages in those items. On a tide of liquidity, that’s like trying to control the relative level of some boats over others. That’s not what we’re talking about here. Here, we’re talking about the absolute level of all boats.
Also, the US is different than all other countries, like Weimar Germany or Zimbabwe. Those countries had to convert their currency into another currency to pay off debts. So, when they monetize and suffer an immediate depreciation, they’ve running in place to pay off their debt. But, the US issues the world reserve currency. We issue our own debt in our own currency.
I think we’ll have to sit with our major creditors and convince them to support a move by the US to monetize certain amounts. Or face a continued, multi-year world-wide recession or depression as deflationary psychology convinces everyone to not spend and not invest.
November 18th, 2008 at 10:32 am
By the time the government gets around to “fixing” the housing problem it will be over. We need to stimulate the economy with massive spending on infrastructure, R&D, and energy investments. The DC area where I live the housing inventory is down, sales are up, and prices are falling less rapidly. As long as folks have income (jobs) they will have a place to live whether they get kicked out and foreclosed on or not. As inventory contracts sentiment will change and the housing market will stabilize reducing foreclosures. We are likely 75% through with the price correction in nominal terms so there is no need to try and prop up prices from here.
There are a lot of anti-government folks that think the free-market will take care of everything. That way of thinking has been proven wrong time and time again. Every revolutionary technological advance over the past century was made possible as a result of government. Government research invented satellite communications, the first computer, the internet, jet airplanes, RF technology that was the precurser to the cell phone, and the majority of the basic research for pharmaceuticals. These technologies enabled the US economy to dominate over the last century. It is well past time for the US to start ponying up the $ for the next revolutionary breakthroughs instead of squandering treasure on war and corporate welfare.
November 18th, 2008 at 10:34 am
I don’t like monetization. But, I didn’t vote for unfunded spending the past 20 years. And I signed 2 online petitions against Fannie/Freddie bailouts. Looking at the immense debts ahead that we won’t be able to service, I consider monetization a necessary next step.
November 18th, 2008 at 10:39 am
“Or face a continued, multi-year world-wide recession or depression as deflationary psychology convinces everyone to not spend and not invest.”
big problem isn’t it. The vaulted consumer information driven economy lacks demand! who would have thought!!! The multi-national industrial highly efficient machine has been overproducing for years but credit creation and gov’t tax policy has keep the ship afoat until now. The demand side labor force disappears like smoke on a windy day!
November 18th, 2008 at 10:41 am
R. Timm, another example: the Google founders were working on a government research grant which got them thinking about how to index work.
November 18th, 2008 at 10:42 am
Why not introduce legislation on the House floor that requires all financially responsible Americans to give at least 35% of their take-home pay to financially irresponsible people who are burdened with way-to-much debt and can’t pay their mortgage. This is only fair. People who put no money down when purchasing their home, or those who lied on their mortgage applications, should not be foreclosed upon just because they can’t make their payments … for gosh sakes, this America for crying out loud!!
If it was really “just” mortgage debt it would be upsetting enough, but how many people out there have decided to roll their “bills” (read dinners, vacations, big screen tvs, groceries, etc.) into their 30 year note? The person in the following article obviously overspent her income by $10,000 - $15,000 per year for “more than a decade”, didn’t pay income taxes on it (it was home equity withdrawals), received a deduction (on the “mortgage” interest being paid to finance her “bills”), and now we’re going to bail her ilk out!??!
In closing, Bair’s and Barney’s obsession with this spend-only bailout rewards the reckless and punishes the prudent. Ms. Bair dismissive tone toward the taxpayers who have lived within their means for years is outrageous. Consider the lesson it imparts to promote bailouts to the reckless. City by city, neighborhood by neighborhood, people who live beneath their means and manage money carefully will see more careless neighbors supported by federal decree. And what about the 30 percent of this nation who were smart enough to rent? Or how about the large percentage of us who gave plenty of warnings to these same people the government now wants to redistribute my taxes to so they can stay in a house twice the size the home I live in. The backlash to the 700 B bailout package was not only because of the bailout of wall street but also the bailout of the reckless homeowners and their relentless ATM / HELOC spending. As it is now these people can live in their home for over a year rent free while they find a home they should have been living in from the start.
We are becoming a nation of people who feel it is not only okay but justified to cheat, lie, and swindle each other and the rest of the population. Personal responsibility is discouraged by the government and the mainstream media. Our nation is eating ourselves from within just to keep a facade of prosperity. Hope is being replaced by anger and desperation. Welcome to the new dawn.
November 18th, 2008 at 10:45 am
@wunsacon
My question was intended as tongue-in-cheek, pointing out the irony of the bailout issue. Had the same bailout crew been in charge, they would have suggested saving the passengers by pumping air into the Titanic.
I agree with this sentiment:
leftback Says:
“It is not possible to support prices at artificial levels… When we have a society where people produce useful products but consume less, and where houses are affordable for those with steady employment, we will be wealthier than we were in 2006.”
Attempting to protect housing prices is defending the status quo. Status quo is the problem, not the solution.
November 18th, 2008 at 10:49 am
triplec: The big problem is that the consumer is the economy so everything will be thrown on the debt pile to somehow spike GDP at least to keep the Democrats or whoever in power another couple years.
They have no choice really, we don’t have a pick and shovel economy so without excess consumer spending via debt creation the whole economic structure doesn’t generate enough income to service the debt.
November 18th, 2008 at 10:53 am
“When we have a society where people produce useful products but consume less, and where houses are affordable for those with steady employment, we will be wealthier than we were in 2006.”
We have machines that do the work these days, direct labor is so 19th century.
November 18th, 2008 at 11:01 am
wunsacon:
Yes, I know it’s out of print, but it can be found from 3rd party sellers.
‘Also, the US is different than all other countries, like Weimar Germany or Zimbabwe.’
Yes, the US is certainly different from these places. This is a different time than 1920s Germany. It is also certain that the present crisis will play out differently than any other has or will. Fundamentally, however, currency manipulations of any kind cannot ever produce what people need. People do not need money, people need food, shelter, water, clothing, etc. Money is not wealth. Conning or coercing other people into accepting paper or digital claims on non-existent real values will simply never grow one bushel of corn, never purify one drop of water, never weave a single yard of fabric, etc. There is no way that a recession/depression/whatever -sion you want to call it will be avoided in real terms. Yes, it can be made worse for some people at the expense of other people by deception or by outright violence. I am quite confident that every such awful thing will be tried, because I am also certain that Man is a deeply flawed being who, in spite of all evidence before him, a) believes in something for nothing, and b) will bear or inflict nearly unlimited pain in order to keep believing in it.
November 18th, 2008 at 11:01 am
Why Should We Help Underwater Home Owers ?
Not until u cashed in your 401k. Yes, temporarily change the tax laws regarding your 401k so you don’t have to pay a penalty for paying your housing debt.
Why use the taxpayers assets rather than your own? Why reward stupidity. No reward without risk.
November 18th, 2008 at 11:06 am
BR,
I like your plan, but I would make it a little more punitive on the bank. If the bank forecloses, the best
it can do is recover 250K on that house. Take the mortgage down to the expected recovery amount (250k). Plus the 50K balloon. This is basically a short sale with some juice for the bank in the future.
This would also give the homeowner some equity in the house. This is important because it would give the homeowner the ability to sell the house if they want to (prior to 10 yrs)and immediatly pay off the balloon. My point is we don’t want millions of homeowners stuck for 10 years.
Not only do housing prices need to correct to hist. norms but we need to get the velocity going again.
Activity = Jobs
Before your plan could be implemented congress would have to pass a law allowing banks to modify mortgages held in CDO tranches.
Also
Something that has not been discussed much is the fraud taking place with these foreclosures. For instance, realtors are hiding foreclosures so that the only bids coming in are low ballers from their
friends. The workouts would put an end to alot of that kind of fraud.
November 18th, 2008 at 11:30 am
How should we help underwater homeowners? We shouldn’t. Not if it costs the U.S. taxpayer a single penny.
It appears that Paulson and Bush, in their remaining days, are finally beginning to place some priority on reducing the rate of increase in the national debt.
At this point, one important question is, who much money will Obama (not Bush) throw down the drain in a futile effort to prevent house prices from declining?
November 18th, 2008 at 12:29 pm
Before we worry about saving the cows, maybe we should first hang the rustlers.
Eliot Spitzer’s editorial in Washington Post:
“excerpt: When my office, along with the Department of Justice, warned that some of American International Group’s reinsurance transactions were little more than efforts to create the false impression of extra capital on the company’s balance sheet, we were jeered at for attacking one of the nation’s great insurance companies, which surely knew how to balance risk and reward.
And when the attorneys general of all 50 states sought to investigate subprime lending, believing that some lending practices might be toxic, we were blocked by a coalition of the major banks and the Bush administration, which invoked a rarely used statute to preempt the states’ ability to probe. The administration claimed that it had the situation under control and that our inquiry was unnecessary.”
Of course, it is harder to see justice served when the rustlers wear the badges.
November 18th, 2008 at 12:58 pm
@R. Timm has it right about housing fixing itself before the government can. The better fix is just to make sure employment does not drop any more and keep mortgage rates low.
It looks to me like the forclosure market is working just fine. The assests are moving from weak hands to strong hands (assuming the new buyers are well qualified). For every forclosure sale that is one less item in the inventory. Just keep it going.
November 18th, 2008 at 1:07 pm
I was wondering why it wouldn’t be a good idea to convert all mortgages to a negotiated fixed rate above the market value of the property. Just like the credit card companies charge x% above LIBOR, or Fed Funds Rate? Maybe only assess every quarter, or year.
November 18th, 2008 at 1:15 pm
I thought problems like these were why bankruptcy laws were created in the first place?
If that is the case then I have to sit back and ask myself why the fed and the banking system are in such a panic to give money to people so they can give it to the bankers. Thus from that point the whole ‘cycle’ starts all over again. I think I now see why they don’t want to go the bankruptcy route:
1. It lowers the ability for banks to lend
Once the sucker cattle is in bankruptcy shackles they can no longer borrow to their heart’s content. This greatly reduces revenue and cash flow to the banking institution. When you do this on a state and nation wide level banks become much smaller, less powerful and have fewer ’subscriptions’ to sell
2. It trains people to live without debt(and all the extra stress)
This is probably the more threatening of the two. Once people are trained in a lifestyle of living within their means and learning to live without a credit card saving the day, they start to feel a little freer. This type of feeling not only can last a lifetime for many but it also is often passed down to the young. I’ll bet they’ve even done studies on this
If the bankers don’t get their bailout they may not only lose one but two generations of cows to be milked.
I can understand their horror and panic.
Was that the real lesson that Bernanke took out of the Depression was to not let the borrowers off the balance sheets because what was gained will take another three generations to win back? I think it is starting to make sense now
November 18th, 2008 at 1:30 pm
The recourse/non-recourse bit is a straw man. Any refinanced mortgage in California is recourse. There must be tens of thousands of them in default. In how many cases have banks gone after other assets? I’ll bet it’s zero.
I have to agree with Patrick Neid, and I say that as a life-long Democrat.
People think that there will be a neat fix in the same way creating Fannie Mae and a slew of other programs helped stabilize home prices in the 1930s. But what those programs provided (access to reasonably priced 30-year mortgages), we already have. No one then was trying to prop up unsustainable price levels.
Say you get the lender to take a haircut to 95% of current value. Home prices may well fall another 20% over three years. Then what? And the 50k no-interest balloon loan in Barry’s example is really $30k loan at going rates.
There is no secret formula to fix things.
November 18th, 2008 at 1:32 pm
How Should We Help Underwater Home Owners?
We shouldn’t.
I am beginning to think that we are turning what would have been a very severe, but short, recession into a prolonged recession that as Winston Munn stated last night, may last long enough that people change their habits entirely about spending…
November 18th, 2008 at 1:42 pm
Of course the National Association of Home Builders can apply to become a bank and be eligible for funds under TARP.
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B49EA09D7%2DA841%2D4126%2DB496%2D46A8ADAD9815%7D
Home builders’ index falls to record-low 9 in November
November 18th, 2008 at 1:54 pm
Bruce —
Perhaps you should consider applying to become a bank yourself? When you need depositors, I’ll be glad to make a deposit into your FDIC-insured, federally-subsidized institution, to collect the 15%returns (plus a toaster!) you will promise on all new savings accounts and CD sales.
Just don’t back those CDs with mortgages, OK?
November 18th, 2008 at 2:06 pm
One can only hope that this whole mess teaches voters and consumers the perils of too much debt… not just from the perspective of the individual, but from the perspective of the nation.
The politicians would do us a great service if they would pass laws that would discourage debt creation on the part of individuals (mortgage debt, credit card debt, etc.).
It’s probably too much to hope for, however.
November 18th, 2008 at 2:08 pm
@ Winston: “Doh”. Got it…
@ Archiphage:
>> Yes, the US is certainly different from these places. This is a different time than 1920s Germany. It is also certain that the present crisis will play out differently than any other has or will.
My point was that we won’t hopelessly screw ourselves by monetizing, like they did.
>> Fundamentally, however, currency manipulations of any kind cannot ever produce what people need. People do not need money, people need food, shelter, water, clothing, etc. Money is not wealth. Conning or coercing other people into accepting paper or digital claims on non-existent real values will simply never grow one bushel of corn, never purify one drop of water, never weave a single yard of fabric, etc.
I’m not sure about that, because there’s psychology at work. People are more enthused by seeing their IRA’s go “up” instead of “down” and behave differently. (This observation can be “exploited” by a central bank for good or ill.)
For me, the bottom line is: I don’t think we can service the debts from these bailouts. We’re going to default. It’s just a question of “how”.
November 18th, 2008 at 2:09 pm
@ wunsacon - Thanks, I didn’t know about the Google guys working for the Feds.
November 18th, 2008 at 2:12 pm
Homeowner bankruptcy is good for business!
http://www.bloomberg.com/apps/news?pid=20601109&sid=aI99ZTfd5KEo&refer=home
November 18th, 2008 at 2:21 pm
constantnormal:
Actually I am already a bank. The ITSE BITSE bank. I Take Sucker’s Earnings and Bruce In Tennessee Stays Employed….I have patterned it after my hero, Hank.
Donations are welcome, however we are having a little trouble getting FDIC coverage for now, but I don’t see any problems ahead…should just be a short term thing, and our bank is sound…(Hank said I should say this…)
November 18th, 2008 at 2:33 pm
@ R. Timm: Here was the extent of the help:
http://www.nsf.gov/discoveries/disc_summ.jsp?cntn_id=100660&org=NSF
November 18th, 2008 at 2:40 pm
The scammers had this great circle going, feed by predatory real-estate agents who convinced the victims to purchase a house they could not afford (and who then harvested a % of the value as their part of the loot). Then predatory lenders gave them a loan, regardless, and harvested their own up front % (the bigger and worse the loan the better their piece of the loot), before shipping the risk off to predatory investors (the worse the loan the bigger their loot).
A year later the victims were hopelessly behind on their payments and they went back to the same predatory lender explaining that they just could not afford the payments. The predatory lender (having waited patiently for a year to get another big juicy bite) explained that since the house had increased 20% in value, all they had to do was to refinance and take extra money out to cover the slack - and the lenders juicy fees - and the investors juicy prepayment penalty fees. If the victims protested that the monthly payments were about the same as what they had not been able to handle the first time around, then the predatory lender would convince them that this time they could do it (you have learned; a salary raise is coming; interest rates are going down so we can refinance you later; etc. etc.). If that did not work there was always the “you have no other choice” argument with dour talk about destroyed credit rating and living on the street because nobody would loan or rent to you. And so the circle continued year after year with the victims handing over a huge chunk of their salaries and all of the appreciation of their homes to predatory lenders and investors.
When finally the scam collapsed because even with all the self-reinforcing mechanisms, the 20% per year appreciation in house values could not continue, it turned out that it was mostly the predatory investors (with their never ending demand for higher yields regardless of how much, or who’s, sweet and tears it was sucked from) were left holding the bag.
In the best of worlds the scammers would all be punished and the victims compensated – however, this is not the best of worlds. First of all, although the scams were very bad and hurt a lot of people, they were not illegal (there is nothing like having enough money to “purchase” the lawmakers). So many of the scammers were only “punished” with the disapperence of their scam and its income. The predatory investors were punished both with a loss of their scam-income and with a severe loss in their investment. Some would say that the victims were also punished (with the loss of their homes), although some would view it as that they got out of an enslaving trap.
I say we do nothing except for helping the victims get into a home they actually can afford. Lets set up an entity (we could call it F&F) that will provide people with home loans according to conservative old-fashioned standards of income to loan payments. F&F would own direct costumer offices (lets call them failed S&Ls) in every town. F&F should, off course, be government owned non-for-profit to ensure that it never got trapped in the sins of trying to suck profit out of people who just want to own a home. Since the victims cannot afford a downpayment we would, at this time, allow a loan of 100% of the purchase cost (including closing cost). However, we would demand that the monthly payment came as automatic direct deposit from their employers. This would only be reasonable since the victims had shown some lacking ability in handling their personal finances. With that program in place prices would quickly fall to where they should be, and some of the victims may even end up able to purchase their naboers house.
November 18th, 2008 at 2:47 pm
@wunsacon:
‘I’m not sure about that, because there’s psychology at work. People are more enthused by seeing their IRA’s go “up” instead of “down” and behave differently. (This observation can be “exploited” by a central bank for good or ill.)’
Where I come from, a person who gets nothing for something still got screwed, regardless of how they *feel* about it. At the end of the day, claims on value must be exchangeable for actual value. Anything other than that is plain theft, no matter how sophisticated. Clearly, you can trick great masses of people into *believing* that you can multiply actual wealth by multiplying the number of claims on that same wealth, but that doesn’t mean you can actually *do* it. If you can make people prosperous by tricking them into real production with false credit, why hasn’t eternal prosperity already emerged? It’s not like it’s a new idea. If it’s really as simple as inflating a little, but not too much, what explains these continual ‘panics’? Could the FOMC just be replaced with a computer model?
November 18th, 2008 at 4:38 pm
@ Archipage:
>> Clearly, you can trick great masses of people into *believing* that you can multiply actual wealth by multiplying the number of claims on that same wealth, but that doesn’t mean you can actually *do* it.
I think you can, to a small extent.
>> If you can make people prosperous by tricking them into real production with false credit, why hasn’t eternal prosperity already emerged?
I’m not trying to suggest it’s that “powerful” a tool to wink eternal prosperity into existence.
>> If it’s really as simple as inflating a little, but not too much, what explains these continual ‘panics’?
A changing mix of often poor policies on an unstable system, plus variance?
Okay, eliminate central banks, fractional reserve banking, government interference in housing markets, and more. But, I don’t know how to get there from here, either politically or in practical terms.
>> Could the FOMC just be replaced with a computer model?
We will all be replaced in 30 years by computers. I hope I’m around to see it. It’s a moment to both fear and look forward to, as it will be an incredible moment of crisis and opportunity. Talk about living in interesting times!
November 18th, 2008 at 5:12 pm
I increasingly doubt that you can get there from here politically or practically for the same reasons we are here already… the lethal cocktail of ignorance, arrogance, and greed. The people with the magic printing press are unlikely to give it up without a fight, and most people don’t even seem to know or care what game we’re playing. A good deal of that is the ‘ostrich syndrome’. Tying in the Singularity idea, I think it’s more likely that as individuals become more empowered that they will take steps to protect themselves. (It is certainly what I plan to do when I get *my* desktop assembler!)
November 18th, 2008 at 6:16 pm
Barry said “Consider a $500k mortgage on a home purchased for $550k that is now worth $400k. I would have the parties negotiate something like the following: A new mortgage for $350k plus a $50k 10 year balloon. The $350k mortgage is affordable, the $50k balloon is interest free, tax free and can be folded into the main mortgage 10 years hence.
You can play with the numbers, for example, doing a $375k and a $50k balloon. The bottom line is both parties have to have an incentive to take some o the hit, and prevent an even worse outcome.”
NO. What this does is penalize those homeowners that aren’t behind in payments, that didn’t buy too much house for their income!
If you want to reduce the original loan amount to current market value for the laggards, then you should reduce the amount owed by a similar amount for ALL mortgage holders. If someone still owes 200k on their house and the neighborhood average reduction is 100k, then they would now owe only 100k.
Also, any apartment owners who get a reduction in their loan amounts, should have to reduce their rents by 1/3.
I’m sure that based on fairness, the banks, security holders and landlords would be more than happy to agree to this solution. [chuckle]
November 18th, 2008 at 6:28 pm
The federal gov’t condemns all MBS for fair value and reduces all mortgages proportionately. The losses are contained to the financial system. We bail out pensions, healthcare institutions, etc
November 18th, 2008 at 10:19 pm
“How Should” we help homeowners ?!?! Why should we help homeowners ?
IMB - More than 50% of Workouts are Delinquent Again
http://www.marketwatch.com/news/story/CORRECT-Modified-mortgages-often-default/story.aspx?guid=%7BD8172601%2DFCE0%2D4F1B%2DA67E%2D1F5820FE5721%7D
Lender Processing Services told analysts at Keefe, Bruyette & Woods that the results of such modification are often uninspiring.
“Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don’t prevent them from taking place,” Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday.
For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments, Lender Processing Services told the analysts.
November 19th, 2008 at 12:48 pm
Barry: I agree that Feldstein’s proposal won’t fly. But, alas, neither will your proposal, nor Sheila Bair’s FDIC -loss-sharing plan. Sorry, but the money is … gone. More than 60% of these underwater borrowers trying to stay in the underwater properties that they could not afford in the first place … will re-default.
November 19th, 2008 at 12:48 pm
Barry: I agree that Feldstein’s proposal won’t fly. But, alas, neither will your proposal, nor Sheila Bair’s FDIC -loss-sharing plan. Sorry, but the money is … gone. More than 60% of these underwater borrowers trying to stay in the underwater properties that they could not afford in the first place … will re-default.