One in Ten
The latest numbers are out: One in ten homeowners has no equity in the family home. The data show that about 15% will be below water if prices continue to slide, owing more than their homes are worth.
So what's the plan here? One in ten homeowners could just walk away right now. Indeed, most of them, if they were the rational maximizers so prominently featured in classical economic analysis, would stop paying now, put the money in a savings account, and wait the 90 days or two years or whatever until the lender could force them out by foreclosure. In non-recourse states, they could just pocket the money and walk away free and clear. In other states, they might need bankruptcy or a last-ditch deal with the lender for a short sale. The economics shift when the homeowner has no equity to protect.
If they walk, the national--and world--economy will seize up. Think about it: If millions of homeowners suddenly quit paying their mortgage, many investment funds would be bust. Corporations that bought those assets (and borrowed against them) would also go belly up. Sure, the investors would own the homes--eventually--but If millions of homes suddenly came on the market all at once, the price declines would be huge. Most wouldn't be able to survive long enough to pick up the pieces.
The investors who hold those mortgages can avoid that if they are willing to share the pain and acknowledge that their loans are only partially secured. Like practical lenders have done for thousands of years, they could decide that getting a steady, partial payment is better than no payment at all. So far, however, the investors are holding tight, even as Fed Chairman Bernake asks them please please please renegotiate these crazy mortgages.
The only proposal on the table that would make the investors renegotiate their mortgages and either get people into mortgages they can afford or get them out of the houses is the amendment to the bankruptcy laws. Last week, the Republicans filibustered the bill, and a cloture vote failed, but no one is giving up yet. Professor Lynn LoPucki had a terrific op-ed in the Atlanta papers this morning, and USA Today had one yesterday.
The industry has tried a scare tactic, claiming that the bankruptcy bill would cause all mortgages to increase by 2 percentage points. The press dutifully reports the number, although some have begun to cite Professor Adam Levitin's work that shows the industry numbers are bogus. Chairman Bernake was asked about the industry numbers and, after some fumbling, he admitted that he didn't know of any data to support the industry claim.
The mortgage industry has blocked the bankruptcy amendment, but the question that puzzles me is why anyone is listening to the mortgage industry's herd of lobbyists. These are the people who said the industry didn't need regulation, that high-risk mortgages could be turned into low-risk bonds, and that everything was perfectly safe--right up until it all came crashing down.
How bad will the mortgage numbers have to be before Chairman Bernake says it is time to stop asking and start acting? Bankruptcy is not the only answer, or even the best one. But asking the investors pretty-please to renegotiate these loans isn't working. And if we don't start getting some action soon, more families, more neighborhoods, more jobs, more retirment funds will go down. Like it or not, we're all in this boat together.
Thanks for your blogging, and for your advocacy.
I agree that the bankruptcy bill is a good first step. What's your take on calls for a "Reconstruction Mortgage Corporation" or, by whatever other name, a governmental entity to buy up home loans that are in default and systematically restructure them along the lines you detail above?
Here's the advantage it offers over a bankruptcy approach. The bankruptcy bill won't work if many of these cases actually go to court; not only would they overwhelm the legal system, they'd take years to resolve and waste a fortune in legal fees. It relies, as I understand it, on the presumption that faced with the threat of judicial intervention, the note holders would finally take the necessary steps to restructure the loans themselves. The problem with that assumption is that the note holders, for a variety of reasons, haven't been performing as rational economic actors thus far. Part of the problem is that many of these notes are pooled, and the trustees have comparatively little incentive (and in many cases, insufficient infrastructure) to properly administer the loans. It's already in their interest to do so, and they haven't, so why would this change matters?
As best I can tell, this may be one of the instances in which the private sector is actually less efficient than the government. There's such a confusing array of interests bound up in the mortgage industry, often with contrary incentives, that inertia would seem to be the greatest force - even if it's bound to produce catastrophe for all involved. Taking these loans out of the private sector, putting them into a single governmentally-administered pool, and restructuring them using clear and consistent guidelines really does seem to me to be the best solution. But then, I'm not an expert - what am I missing?
March 6, 2008 9:03 PM | Reply | Permalink
Seriously, how do you propose "Taking" -- nice Bill of Rights terminology, eh? -- "out of the private sector"?
March 6, 2008 9:15 PM | Reply | Permalink
Ellen points to one of the problems of Fly's suggestion. The government is either going to have to force the investment companies to sell to the government at a loss (a taking) or it's going to have to buy the mortgages at a loss, thereby transferring some or all of the loss from the investment companies to the taxpayers. The first approach would face the same opposition from the investment corporations as the current legislation. The second approach might be embraced by the investment companies, but it's terrible for everyone who pays taxes. On top of these problems, we'd also be creating a whole new government bureaucracy that would be expensive for the taxpayers to fund.
Personally, I prefer some solution that allows the investors and debtors to work out their own problems. Unfortunately, a lot of people did a lot of dumb things. Homebuyers bought absurdly expensive homes on ridiculously risky terms. Borrowers gave loans that could only be repaid under the most optimistic of scenarios. The consequences of these bad decisions are severe for those who made them, but I'm not sure bailing out everyone who made a mistake at the taxpayer's expense makes much sense.
March 7, 2008 7:34 AM | Reply | Permalink
I'm not as certain as Ellen and Purple State that we're facing a zero-sum situation here.
Look at it this way. Almost none of these mortgages are still held by the lenders that wrote them. For the most part, they're held by people like you and me - through our investment portfolios, our pension funds, and other asset pools. (Also, of course, banks and hedge funds - but don't underestimate the extent of the average American's exposure to CDOs. For the most part, stock in the banks that own these assets is also held by average Americans, through mutual funds and the like.) Here's the problem. You and I might be more than willing to restructure a mortgage. But we don't have that authority as stakeholders in, say, a pension fund. The pension fund administrators don't have the authority either - they're just investors in a broader pool. The pool itself is run by a trustee (Deutsche Bank, for example) who likely didn't make the loans and doesn't hold the notes. The trustee also claims to be powerless to amend the agreements without the consent of the investors. Besides which, they're not set up for the task. They've hired third parties to actually administer the mortgages - they don't have the capacity to do it in-house. And they're not properly incentivized - even if the pool collapses, their own exposure is likely minimal. And restructuring is complicated and expensive for the administrator, even if it'll save huge amounts for the investors.
Here's the astounding part: these tangled lines of authority and responsibility are producing a situation in which defaults are being handled contrary to the financial interests of note holders. That's right - throw out your Econ101 textbooks. Note holders almost invariably do worse financially by foreclosing than by restructuring the loan - nationwide, foreclosed homes sell for just 76% of market value. And that doesn't include the thousands of dollars in transaction costs involved in foreclosing a house, tending to the property, and reselling it. Nor does it include the opportunity costs of holding the obligation without a return on the investment. And it's not just the note-holders who lose out in this scenario. Foreclosed properties are almost invariably neglected. They're eyesores. They drive up crime rates wherever they cluster. They drag down the value of adjacent properties, sometimes triggering a cascade of further foreclosures. And when they resell for a fraction of what they could bring in a normal sale, they bring prices even further down.
So even without Professor Warren's doomsday scenario, we're already witnessing a crisis in which all parties lose - yet the people in a position to prevent the crisis seem unwilling or unable to act. There seem to be two reasons for this failure. One is the tangled lines of responsibility referenced above; the institutions positioned to restructure loans don't really have an interest in doing so. But the second is equally problematic and troubling. Restructuring loans involves a public admission of the real underlying value of assets held by financial institutions. It may be stupid beyond all belief, but most banks are still desperately trying to deny reality. It's in the interests of shareholders to know what these assets are really worth; it's in the interest of executives not to admit it.
Almost all of the bailout plans floated to date rely upon financial institutions to finally start fulfilling their legal obligation to act in the best interests of their shareholders, or of the pools that they administer. I wouldn't hold your breath. Even the bankruptcy plan relies on the same sort of rational action - it just heightens the incentives, by raising the potential costs of further stalling. But I don't think it's going to be all that much more effective.
What we have here is a broken market. There are two ways to fix a broken market. One is to give it time and space to fix itself. The difficulty with this approach is that the process may prove somewhat painful - involving, say, a prolonged recession and economic stagnation. Whether or not millions of homeowners walk away from their obligations, it's not improbable that we're going to witness an unprecedented collapse of the credit markets. The trouble is already spilling from mortgages into many other sectors, from auto loans to commercial paper. Clearly, it's necessary to allow some correction, to prevent a repeat of the crisis down the road. But the problem is that CDOs have altered the reward/punishment dynamic. The folks left holding the bag aren't the lenders who made the overly aggressive loans, they're not the managers who naively bought up the CDOs in search of higher returns, and they're not the bankers who got rich packaging and selling them. It's people like you and me.
The other solution to a market failure is government intervention. So far, we've been nibbling around the edges. The government is convening an endless series of meetings, each of which results in a new plan that promises to do, well, pretty much what the last one was supposed to. But this time, say the banks, we really mean it. Only remarkably few people are actually having their loans restructured - and for the most part, the restructuring is insufficiently radical. It's just a way for the banks to squeeze another few months of payments out of borrowers before they foreclose. Banks still refuse to reduce balances that now exceed the value of homes, creating a perverse set of incentives for homeowners in risk of default. They still refuse to reduce payments far enough that borrowers can actually make them, even if the borrowers ought never have been given subprime rates in the first place. All the cajoling, threatening, and promising in the world doesn't seem able to make these institutions behave responsibly.
So yeah, I think it's time for more aggressive intervention.
March 7, 2008 8:41 AM | Reply | Permalink
I'm not qualified to offer analysis on this problem, so I won't. But here's what a layman sees.
1- I wonder what percentage of people in these homes
could afford to stay in them even if the mortgage is restructured.
2- Is it possible to find terms that could restructure a high percentage of the loans so that a high percentage of the people can stay in them?
I think when Detroit found they couldn't sell their high profit cars to the public due to cost, (people couldn't afford them) they found a way to get the cars in the public's hands; Lease them.
So I think we have a large number of the public driving around in cars they can't afford and this will show when they get hit with the bill when the lease is up.
If I'm right about Detroit, didn't the same thing happen in the sub prime market? People buying houses they couldn't afford, which brings me back to my second question above.
To anyone qualified; Is there at least a kernel of reality in my post? (I'm always open to learning)
March 7, 2008 9:32 AM | Reply | Permalink
John:
The car-leasing analogy works fairly well at describing how we got into this mess. Many Americans were offered tempting terms - low up-front payments that would allow them to purchase more than they'd dreamed they could afford, disguising the true costs down the road. (Except that people know cars will depreciate, but they'd assumed that appreciation would enable them to sell the house if they couldn't afford the later payments.)
But it doesn't, I think, apply to a bailout scheme. The key problem is that "restructure" is an amorphous term. When it means, say, reducing the rate at which a loan is paid off, then yeah - it keeps people in their homes a little while longer, but perhaps only prolongs the pain. If it means reducing interest rates to more reasonable levels by refinancing, then it can have a positive impact. (Remember that many borrowers, particularly minorities, were offered subprime rates by greedy brokers and lenders even though they should have qualified for better terms. Giving them the interest rates they deserved in the first place is an easy fix for their problems.)
But the simplest solution is to reduce the balance of loans to something approaching the current value of the house. That's painful for lenders, who are hoping the market will turn around, or that a solution will miraculously appear and bail them out. Reducing loan balances is pretty much an irrevocable loss. But consider the following scenario. A borrower buys a home with 10% down for $400,000, so he's got a loan for $360,000. The house has since declined in value to about $320,000 - down 20%. But the borrower had a loan that featured interest only payments, so he hasn't accrued any additional equity. Now he's two years in, facing ballooning payments, and owes more than his home is worth. As Elizabeth Warren points out, just about the only thing that's keeping him from walking away from the mess is his sense of integrity. But under sufficient economic pressure, that's not going to matter.
So the lender has two choices. It can foreclose on the home, and resell it. But the home's only worth $320k on the current market, and the lender's likely to recoup little more than three-quarters of that in a resale. It may also lose 5% or more of the value in transaction costs. So, optimistically, it can pull out around $240,000 by foreclosing - perhaps a little less. That means a foreclosure results in a loss of $120,000 for the lender.
The other option is to work with the borrower. Start by writing down the value of the home and the loan - reduce the outstanding balance to $320,000. Then, change the payment terms, reducing the interest rates being charged to the borrower. So it's an upfront loss of $40,000, and a loss of tens of thousands more in potential interest over the life of the loan. But that still pales before the $120k hit involved in an immediate foreclosure.
Or, we can go a third route. The bank can sanction a short sale - allowing the property owner to sell the property for, say, $300k - and then eliminating his debt. The owner loses his 10% equity, but walks away debt free. The bank takes an upfront loss, but it stops the bleeding, and it's not as big a hit as a foreclosure. It's not a solution for millions of homes - these sales are already flooding the market and creating a downward price spiral - but it's a start.
So why don't more banks do this sort of thing? As I said, it's complicated. Part of it is tangled lines of authority and responsibility. Part of it is hopeful, willful blindness - banks are praying they can avoid unpleasant choices, that something will change before they have to decide. And part of it is that the people who make the call stand to lose by telling the truth - they lose their bonuses, their options lose value, and they may lose their jobs. All that will happen anyway within a few years, if things keep on, and they're only making the eventual reckoning even worse. But most corporate executives are tied to short-term incentives, and would rather get a bonus this year then worry about the future.
March 7, 2008 10:32 AM | Reply | Permalink
Fly, some of the structural obstacles to renegotiating loans you mention are real. However, I think you overestimate the financial advantages to the mortgage holders of renegotiation. Certainly, in some situations, renegotiation makes sense for the lender (and lenders sometimes do it). But in many of these situations, the borrower in default is going to have nearly as much trouble paying the renegotiated loan as he or she had paying the original loan. In these situations, lenders prefer to take a bigger loss (along with the related tax deduction) and get as much cash as quickly as possible to reinvest. Renegotiation may provide the lender with a lower initial loss, but it also gives the lender a smaller tax deduction, it leaves the lender with a still-risky investment that is now returning an even lower interest payment, and it produces no significant cash flow to reinvest. Plus the whole process is administratively expensive and, even worse, may need to be repeated if the first agreement doesn't actually solve the problem (which it may not in many situations). For all these reasons, the lenders would rather just foreclose, get the cash, and move on to something more promising. In some ways this solution may be the best for the borrower too. While losing one's home sounds like a disaster, if you can barely afford your home, you probably are best to get out of the deal and look for substantially cheaper housing alternatives. If a borrower has no equity in his/her home and can't pay current mortgage payments, then even a fairly generous renegotiation is probably not going to provide enough relief to really get the borrower onto a sound financial footing. While not pretty, foreclosure may actually be a better solution for the borrower in such a situation, since it frees him or her to find a significantly cheaper housing alternative--which is really what the borrower needs to do to get back on a sound financial footing.
March 7, 2008 3:41 PM | Reply | Permalink
Fly,
excellent, informative post. I saved it for future reference. Thank you.
I fear a number of the homeowners will never get a re-refinancing package they can afford because anything affordable to them will be anathema to the banks or whoever is holding the mortgage.
Ironically, the drop in value of the home may now make the home affordable, which you suggested: "But the simplest solution is to reduce the balance of loans to something approaching the current value of the house." :-)
You said:
"But most corporate executives are tied to short-term incentives, and would rather get a bonus this year then worry about the future."
Doesn't that about sum up the problems with today's version of capitalism?
March 7, 2008 4:13 PM | Reply | Permalink
What we have here is a broken market. . . The folks left holding the bag [are] . . . people like you and me.
So, what else's new!
The last "broken market" lasted 16 years -- December 1966 to August 1982. The government tried one solution after another, but it wasn't until Volcker pushed the economy into the worst recession since the Great Depression that the pain ended. And ever since, Volcker has been called a hero.
Enough with "solutions"! I for one don't want to wait another 16 years to fix this "broken market." Get it over with. Now!
March 7, 2008 10:19 AM | Reply | Permalink
What kind of government intervention do you propose? Shall we break out our moth-balled jackboots?
Sorry, but at this point - barring unexpected, brilliant proposals not yet offered - the only solution is more pain, lots and lots of it.
March 7, 2008 12:31 PM | Reply | Permalink
I agree there needs to be a program to compete with the private sector to offer home loans to people at affordable rates with the goal of promoting home ownership and economically healthy families and communities. That will help keep the financial industry honest and provide other choices to consumers.
The financial industry has become too predatory and has fallen to practicing usury, colluding to bleed working Americans. They're dragging down the country with predatory practices and rent seeking activity.
March 6, 2008 9:53 PM | Reply | Permalink
And if we don't start getting some action soon, more families, more neighborhoods, more jobs, more retirement funds will go down.
So, keep blowing air into that balloon and we'll all be living in the Big Rock Candy Mountain!
March 6, 2008 9:12 PM | Reply | Permalink
What's your problem Ellen?
Your silly picture and inane comments are totally obnoxious and trollish.
March 6, 2008 9:47 PM | Reply | Permalink
I keep that "silly picture" solely for your benefit, kozmik, in order that you be able to immediately identify the source of the comment and by passing it by, not suffer any untoward discomfiture.
March 7, 2008 1:01 AM | Reply | Permalink
The data show that about 15% will be below water if prices continue to slide, owing more than their homes are worth.
Here, "data" equals Wild Ass Guess as brought to you by Moody's, whose proven incompetence and earlier inability to analyze the housing/mortgage market brought you the "credit crisis."
Believe this "Bail us out; bail us out" panic-mongering at your peril.
March 6, 2008 9:27 PM | Reply | Permalink
Ellen,
I love your photo. Just as I always pictured you, as the "evil eye". ;-)
Jim Anderson
www.thejimanderson.com
March 8, 2008 12:53 PM | Reply | Permalink
The data show that about 15% will be below water if prices continue to slide, owing more than their homes are worth.
Here, "data" equals Wild Ass Guess as brought to you by Moody's, whose proven incompetence and earlier inability to analyze the housing/mortgage market brought you the "credit crisis."
Believe this "Bail us out; bail us out" panic-mongering at your peril.
March 6, 2008 9:28 PM | Reply | Permalink
read the atlanta piece and must say that don't agree with some points, this is a generational issue that must be met with some bitter medicine, unless of course we can agree that the money people preyed and will continue to do so in the future on our populace without consequence.
March 7, 2008 12:30 AM | Reply | Permalink
I think the financial should be pretty grateful for the deal.
Another solution could be to allow massive class action suits, without compensation caps, against the finance industry for colluding to inflate a bubble, in addition to revoking thier privledge to incorporate, and hold thier executives personally liable for the financial havok and predatory practices they've enjoyed.
March 7, 2008 8:05 AM | Reply | Permalink
If the banks are going to drag their feet so hard about writing down the mortgage values, how about a different approach that might have the same effect?
Rather than write down the actual mortgage total, what if the lender were to lower the interest rate to something crazy like 3%, 2%, even 1%, in return for the homeowner's agreement to pay some amount--$200, $300, $500, whatever, per month, ON THE PRINCIPAL? They could work it out so that the total payment per month would be 60-75% of the current payment, which would give the homeowner a bit of a break, and the banks would be getting cash flow one way or another, which they desperately need. In five years, the homeowner and the banks could take another look at the deal and see where they are.
A big advantage of this approach is that it would lower the total cost of the property by a lot, without changing the "value" which in neighborhoods hit hard by foreclosure is anybody's guess anyway.
I think it would also have the effect of shoring up consumer confidence about themselves and their home purchases. Right now one of the reasons people are walking away is that they are upside down on value, have no equity, and feel their purchase was a huge mistake. In other words, there may be a bit of a shame spiral fueling this thing.
The combination low-interest/principal payment plan could be seen not as a handout or bailout, just a legitimate renegotiation by which banks could give honest people a chance to legitimately hack away at the principal on their loan. (And it could happen without banks ever having to actually say they are sorry for selling these crappy loans in the first place.) People would love to watch the loan amount drop each month, and if their statement also included information about how much lower the total cost of their property would be than with a conventional 7% loan, it would cheer them up as well.
It's possble that when the fuss dies down and the market turns around, the people who lined up in the early years of the century to buy homes they secretly knew they couldn't afford but desperately wanted anyway may actually find themselves with some equity. A lot of discussion on this issue has centered on poor people and people of color who used these subprime mortgages and will be worse off than ever after foreclosure. Maybe this plan could actually effect a teeny little wealth transfer to a group of people who need it.
You could think of this plan as the opposise of the "interest only" losnd thst got us to where we are today. You could call it the "Pride in America" payment plan, or the "Pride of Ownership" plan, or something.
Could the numbers be worked out so that this idea would be more than just rearranging the deck chairs on the Titanic? It seems to me that in neighborhoods where foreclosures are clustered, it could be of help.
March 7, 2008 12:52 PM | Reply | Permalink
The people who are using "bailout" as a dirty word and talking about the "pain" that must be endured (sounds a little like the old religious ideas about "mortification of the flesh") seem to be ignoring the crucial question of who is going to suffer that pain.
Sure, some former homeowners will suffer to a limited extent, but most of them don't have a lot of equity to lose anyway, and they'll be better off without huge payments on an underperforming investment. And many of them already took out hundreds of thousands of dollars in cash against the equity they supposedly had. CDO organizers will lose some, but when have you known any but the middle and bottom ranks of the financial industry to lose their jobs and their bank accounts?
The people who will really get socked are the people who aren't foreclosed on, who have plenty of equity in their houses but can't sell in neighborhoods full of vacant shells. The people looking for new loans on decent terms who can't get same because of a liquidity crunch. The people in all the jobs that surrounded the houses that savvy former homeowners just walked away from.
The trick is to prevent the rest of us from getting turned into collateral damage, and if that requires reducing the morally-satisfying pain suffered by some of the folks who made the mess, that might just be a reasonable deal.
March 7, 2008 1:55 PM | Reply | Permalink
Negative equity is no justification for walking away so long as you can make the payment you agreed to (so long as you were not defrauded by the lender). No matter who "takes the hit" we all pay for it in the long run, so just let it sort itself out. Any bailout (of banks or homeowners) will only allow prices to begin rising again or hold steady at an inflated level until real value catches up very slowly given the increased threshhold for entering the market for new homebuyers. This will, in turn, push up the overall cost of living, which will force more jobs to be automated or sent overseas, and the price of goods will increase to cover market-driven wage increases for jobs that are not in the traded sector.
In the end, all equity gains will be cancelled out by inflation on consumer goods. So, let prices bottom out and eliminate home-price based inflation. The homeowners will come out even over the long run--except for the fact that they will find it hard to relocate for jobs, etc., but that ain't the end of the world. More importantly you'll make it easier for future homebuyers with good credit to shore up the market over time with a lower price barrier to entry. Due to flimsiness (new), deterioration (old), and skyrocketing costs for retirement (longer life), homes are no longer a useful store of value for retirement anyway. In most metro areas you're better to rent and put the monthly difference into real investments, rather than liabilities.
March 7, 2008 2:39 PM | Reply | Permalink
Tenaciousd: I don't think that Ms. Warren is describing negative equity as a justification for walking away.
It's more of a business reason.
March 7, 2008 5:27 PM | Reply | Permalink
Why isn't negative equity a justification for walking away? If you can get a better deal monetarily by letting the bank take over the collateral they asked for the loan, why not do it? You don't see a lot of businesses saying "well, we could get this work done for half as much by outsourcing, but that doesn't justify laying off our current workers as long as we can still pay them."
As for the rest, as a bunch of people have pointed out, transaction costs do matter.
March 7, 2008 5:28 PM | Reply | Permalink
The simple truth of the matter is that the lenders are in control. If they choose to be irreponsible in their lending, they will pay the price. However, since the industry is so powerful in their partnership with the Federal government through the Federal Reserve Bank, they will do everything in their power to pass the costs of their mistakes to the general public and continue to line their own pockets. What about that line of wisdom, "The rich rule over the poor, and the borrower is the lender's slave."? And the other is "the wicked refuse to pay their debts." It all seems to hold true here.
March 7, 2008 7:32 PM | Reply | Permalink
Much of the current Mortgage problem, I believe, was caused by the now prevailing economic theory and a gradual change in our legal system. We now have a "let the buyer beware" and "let the free market work" mentality that came, primarily, from the Chicago school of economics (Milton Friedman). This econmic view was coupled with a push to have only strict constructionist judges. I can remember when the current language in most credit card agreements would have been laughed out of court. The judges back them would have said something like "I find this contract unconscionable and its terms will not be enforced by this court." About 30 ago, we started electing a lot of Republicans, and Democrats for that matter, who take a so called "conservative" view of economics, and they pushed for like-minded judges. The University of Chicago School of Economics has triumphed over Harvard.
March 7, 2008 8:43 PM | Reply | Permalink
I'm sorry. I have little to no sypathy for these pathetic borrowers. When does personal responsibility come into the equation? I understand that there are some who have unforseen circumstances that put them in a bad place financially. That is unfortunate. However, most of these people facing forclosure bought more house than they could afford, further contributing to the ridiculous price increases OR they have lived beyond their means.
The simple solution for these people would have been to RENT!!! For christs sakes, i would love to buy a home but here in Suffolk County, Long Island starter homes are over 400k and avg. salaries are about 33k!!!!!!! Do the goddamn math before you buy!
I would love to buy a home and some of my coworkers have spent over 400k on their first homes. They have monthly expenses approaching 4k! (our real estate taxes are second highest nationwide)
They are choking on mortgages to pay for a depreciating asset. BUT NO ONE TWISTED THEIR ARMS TO DO IT!
Im on the sidelines waiting for prices to come down... renting and living responsibly. Why should I as a taxpayer bail out these ass-hats?
Why should anyone be ALLOWED to renegotiate terms of their loans? You agreed to pay it... end of story.
If people would admit their mistakes and be foreclosed on, housing prices would lower to an affordable level where peoples salaries can actually pay for them. Homeowners "losing equity" means that their house was never worth the inflated prices to begin with.
Why should we be striving to protect home equity at ALL costs to society. All that does is keep prices artifically higher.
March 8, 2008 11:16 AM | Reply | Permalink
The conservative in me agrees that buyers were irresponsible.
On the other hand I have seen how home prices in neighborhoods served by good schools have surged. I have seen that builders only build expensive "upscale" homes. I have seen that buyers are entirely outclassed by sellers with exceptionally seductive sales pitches.
One would have to have iron discipline to resist the temptations offered by these smooth talkers. Furthermore, there has been a largely successful attempt to deregulate the language and terms of these mortgages designed expressly to suck the maximum profit out of as many people as possible.
Finally, these mortgages have been pooled and sold to others as if they were safe investments with a relatively high ROI.
I find it fascinating that you express zero sympathy for "pathetic borrowers", while making absolutely no mention of the very very highly paid *experts* in the financial industry who made out, literally like bandits, but are now running for cover, demanding bailouts.
Why the emphasis on the pathetic decisionmaking by people who are probably pretty good at their life's work (but are not financial geniuses), while failing to recognize the responsibility of those whose entire "profession" should be responsible management and have received substantial training and education in finance?
March 8, 2008 4:50 PM | Reply | Permalink
Smudge,
Why should anyone be ALLOWED to renegotiate terms of their loans?
Because lenders decided to take more risk by being more generous with lending than in the past. Now they are facing the consequences, and are facing the fact that whatever they decide to do as a group with defaulting loans could have a significant effect on the strength of the economy. Borrowers should repay their loans, but at the same time, lenders should be willing to forgive debt. Debt forgiveness could do a lot to shore up our economy these days. Our economy is held up by consumer spending. That is why our government encourages us to spend and use credit cards, to prop up a failing system built on debt. This is a serious problem, our whole economy is built on debt.
Faroff's comment is insightful. Our legal system has become corrupted by very slow movement away from constitutional principles and serves the interests of lawyers and judges more than ever. It tips the scales in favor of the rich and powerful. The middle class and poor are needed to feed their insatiable appetites for more.
March 8, 2008 12:43 PM | Reply | Permalink
Walking away is an amoral decision. There are costs and there are benefits.
There will be pain, but any governmental intervention will only serve to delay the inevitable (falling housing prices).
Intervention bails out the speculators. It will cause people to stay in homes that still may be overpriced and pay mortgages they still probably can't afford in a time when jobs are more uncertain than ever.
Bad idea. Just let it go.
March 8, 2008 2:50 PM | Reply | Permalink
How can walking away from your commitment to pay a debt be an amoral decision? You are essentially saying that your word is worth nothing. You lied when you made your promise to pay the loan back. At the same time, is it amoral for a lender to deceive borrowers about the terms of their promise? Is it amoral for lenders to take advantage of borrower's lack of sophistication in these matters? Doesn't that hurt society as a whole? You can't compartmentalize morality. That denies reality.
Jim
www.thejimanderson.com
March 8, 2008 8:12 PM | Reply | Permalink
These bankruptcy reforms would be a great way to bring some immediate relief. Unfortunately it seems unlikely that the current President, for whom the 2005 Bankruptcy bill was the first great triumph of his second term and for whom there have been precious few triumphs, will sign off. It is great to hear both the potential Democratic candidates talking about bankruptcy reform these days. The mere mention of loosening—rather than tightening—bankruptcy requirements was extremely rare just a couple of years ago, but the real estate driven downturn has changed the rules. In the current environment, it is quite likely that either Democratic candidate (one is even a Harvard Law alum!) would agree with EW’s assessment and sign reform bankruptcy legislation. But, by then, how many will have lost their homes?
Of course, in the long term, we still need mortgage lending reform. There has been much talk about moral hazard associated with a relief package for homeowners, but I am much more concerned with moral hazard in the other direction. If lenders get off without any new restrictions on the kinds of opaque, irresponsibly structured products they have been peddling, they will feel free to peddle them again when the market comes back up. Some analysts say the market is supremely wise and will correct any prior mistakes, and certainly the failure of many subprime lenders sends a strong signal. But the bundling of mortgages creates an imbalance of risk. The homeowners’ risks are huge and carried by one family at a time. In contrast, the investors’ risks are broken up into a million little pieces and shared with other investors. This is not an arrangement that lends itself to self-correction.
March 8, 2008 11:23 PM | Reply | Permalink
Stuart, though I'm not excited about bailing out people who bought overly expensive homes, I do think we need stronger regulations to ensure better disclosure of the terms of mortgages, to prevent excessive mortgage fees and interest charges, and to limit the amount of variability in mortgage interest rates once a loan is agreed to.
March 9, 2008 8:07 AM | Reply | Permalink
"in the long term, we still need mortgage lending reform"
In the long run, I believe the only reform that will be effective is finding a way to start saving young to buy a home and paying cash for it instead of taking out a mortgage. Today we are taught that borrowing to buy a home with a mortgage is a "good investment" and we are given a tax deduction for doing it. No wonder we have this problem. Most of us believed we were doing the right thing buying the biggest house we could qualify for, even when the lenders started bending the qualification rules to sell more loans.
March 13, 2008 12:48 PM | Reply | Permalink
"...While losing one's home sounds like a disaster, if you can barely afford your home, you probably are best to get out of the deal and look for substantially cheaper housing alternatives...."
Purple, why can't the mortgage holders "help" the bankrupting homeowner directly into that cheaper housing by doing a direct trade-down to that cheaper house, one that's also in foreclosure? Too much administration?
March 9, 2008 2:24 PM | Reply | Permalink