Posts filed under “Really, really bad calls”
One of the most disappointing policy initiatives of the Administration to date has been the expensive and ineffective attempts to fight foreclosures at all costs.
The net impact of this is to artificially prop up home prices and reduce the number of real estate transactions. In the high foreclosures regions (California, South Florida, Arizona, Las Vegas), the foreclosure process have driven prices down to the point where buyers have materialized and sales numbers are improving significantly. The uptick in real estate transactions benefits durable good sales, increases mortgage volume, and positively impacts other real estate related activities.
As wrenching and unpleasant a process as foreclosures may be, the net impact of artificially high real estate prices is even more problematic. It punishes savers and first time home buyers (think Newlyweds).
This is what makes the latest proposal out of Treasury — found here: Supplemental Directive: Foreclosure & Bankruptcy Changes — so disappointing. It seeks to mandate Foreclosure Abatements and Mortgage mods. These (and other related) policies that have shown themselves to be ineffective, and ultimately, counter-productive.
Some of the highlights of the proposal:
• Mandate a 30 day freeze on foreclosures until a delinquent borrower is evaluated and found ineligible for HAMP;
• Once a borrower is in a mortgage mod program, “servicers must stop all foreclosure action” during the trial period;
• Banks must produce “written certification that a borrower is not HAMP eligible” prior to proceeding to foreclosure;
• Requires servicers to consider borrowers in bankruptcy for HAMP’ (!?!)
• Removes other bankruptcy barriers for mortgage mods;
In this proposal, all 60+ delinquent borrowers (who meet eligibility) must be solicited for HAMP. Even newly bankrupt mortgagees should be considered for mortgage mods.
The problem we have in housing is that over the past decade, 5-10 million people bought homes they cannot afford. Many of these homes are now worth less than their underlying mortgages.
The best options in these cases are: 1) A negotiated capital cost reduction (i.e,, “cramdown”) with their lenders; 2) A short sale; 3) Walkaways.
The Treasury Department proposal accomplishes nothing more than keeping people in homes they cannot afford with payments that are onerous. The mortgage mods are failing in huge numbers because lowering the interest rate and or/extending the terms does not address the basic issue . . .
Coming Soon: 5 Million More Foreclosures (February 16th, 2010)
Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010)
All prior foreclosure posts can be found here
One of the oddest things to come out of the entire credit crisis, recession and muddling recovery has been the sudden re-emergence of deficit hawks. While a few honest deficit hawks are out there — the Peterson Institute is a good example of a group looking at long term structural issues, not immediate fiscal concerns…Read More
I love this: The Dynamite Prize in Economics is to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC), or more figuratively, to the three economists who contributed most to blowing up the global economy. Here’s the short list: Fischer Black and Myron Scholes Eugene Fama Milton Friedman…Read More
The usual crowd of ne’er-do-wells are seeking to divert attention from their own roles in the crisis, and shift blame elsewhere. These people make up a big chunk of the Its All Fannie’s Fault! crew. By muddying the waters, they hope to avoid retribution for their own roles in what occurred. As the mid-term election approaches, we should expect to hear more from this crowd.
The reality of crisis causation is far more complex and nuanced. Looking at the many factors that independently contributed to the collapse, and prioritizing them by degree of causation is not easy. A sophisticated approach is required to separate the prime and secondary factors.
Rather, than just repeat my list of factors what were the causal factors, today I want to try a different approach. Let’s do a “Causation Analysis” of the biggest factors to see if we can determine not just the various elements that contributed to the credit collapse, but which factors actually caused it to occur and what merely exacerbated the collapse, making it worse.
Understand that this is a theoretical discussion based on counter-factuals — what is likely to have occurred if various elements leading up to the crisis were different. We are trying to discern the differences between primary and secondary factors, separating the causes from the exacerbators.
Whenever someone asserts as a cause an event or force relative to a particular outcome, you should always ask: “Is this a “BUT FOR cause of that outcome?” In terms of a specific result or outcome, “But for” this factor, how would the outcome have changed? Would the result have been the same or different?
My top 3 list of crisis “BUT FORs” are:
1) Ultra low rates;
2) Unregulated, non bank, subprime lenders;
3) Ratings agencies slapping AAA on junk paper.
Why are these “But Fors?” But for these things occurring, the crisis would not have happened:
-If it wasn’t for ultra low rates, the housing boom would likely have been much more modest; further, bond managers would not have been scrambling for yield, and searching for alternative products to low yielding Treasuries;
-If it wasn’t for the sub-prime lenders, the credit bubble would not have inflated; further, millions of unqualified borrowers would not have been able to purchase homes they could not afford;
-If it wasn’t for the ratings agency fraud, the enormous market for this high yielding junk paper — mislabeled as AAA — would not have existed; further, the primary purchasers were firms that were only permitted to buy investment grade bonds. No A+ or better rating, no sale.
Hence, these factors are huge causative elements — BUT FOR them, there is no boom and bust, no crisis and collapse. Bond managers could not have owned all of these securitized sub-prime mortgages; the credit default swap market would have been much smaller, perhaps 1/10 its size; Sovereign wealth funds around the world could not have purchased all this bad paper; Iceland does not collapse. That is these are the big 3 — why I label them the prime cause of the crisis.
Great piece in Friday’s Times by Floyd Norris on an earlier boom and bust in securitized mortgages: The 1920s and 30s! “Real estate securitization was one of the great innovations in finance in the last quarter-century. In an unprecedented way, it allowed vast sums of money to go into the real estate market from people…Read More
The politicalization of the WSJ has moved to a new and more risky phase. The paper is now in danger of being a money loser — not for its investors (tho that has already happened), but for those traders who read its content. It used to be that articles on the Market or specific companies…Read More
Our story so far: Back on December 9th, my young niece informed me (via Facebook) that she had discovered her name publicly posted on a DeepCapture website. That was the first discovery of the “Facebook Friends scraping” operation. My assumption was that the asshats at DeepCapture had exploited a Facebook security lapse, and grabbed all…Read More
“The debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.” -Greg Mankiw, chairman of George W. Bush’s Council of Economic Advisers from 2001-2003 > I’ve been meaning to get to the absurd argument put forth last week by Michael J. Boskin in the WSJ, titled…Read More
Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve. His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock…Read More