Actually, Homeowner Relief Should Be About Fairness
In today's New York Times story about plans under discussion in Washington to help homeowners avoid foreclosure, and the problems associated with helping some underwater homeowners but not others, a special adviser for policy at the FDIC was quoted as saying, "This is not about trying to create fairness. The goal is to keep people in their houses." But that conception of government's mission in this crisis is exactly backwards. The more appropriate mission, which would be modestly more costly to pursue but also far more likely to lead to outcomes that would be widely recognized as reasonable, would be to assure that every family whose mortgage exceeds the value of their home ends up with decent housing in a place they want to be.
The plan summarized below by my Century Foundation colleague, economist Bernard Wasow, builds on a proposal made by fellow TPMCafe denizen and genuine wise man Dean Baker. The basic thrust is to minimize perverse incentives while reaching fair resolutions by having the government provide support that would be available to anyone with a mortgage that exceeds the value of their property:
A sensible resolution of the current mortgage-lending crisis should include the renegotiation of some mortgages to reflect lower housing prices and interest rates. But some borrowers still will default, and those homes should be taken over by lending institutions. Of those homeowners who default and become renters, some will want to stay in the areas in which they bought their homes and some will want to move to new locations. This plan aims to facilitate each of these possible resolutions by offering distressed homeowners subsidized loans together with a new right to rent the home they once owned. These measures then will leave it up to the lenders and the households to resolve their credit problems in a mutually acceptable way.
All distressed homeowners will face substantial "transaction costs." Even those families
who are able to renegotiate the terms of their mortgages, obtaining a complete or a partial "cram down" of their debt toward the market value of their homes, will face substantial legal and refinancing costs. Owners-turned-renters also may need legal help, and they all will need to put up rental deposits. Those who move to new places will face additional moving costs. Public measures should support these distressed homeowners, introducing ways to reduce the transaction costs of renegotiating mortgages or becoming renters and providing help to meet those costs. The three elements of the plan:
1. The law governing foreclosure should be rewritten to allow a distressed homeowner to surrender ownership rights to the house and become a renter in it for a period of, say, six years. This suggestion follows the ideas first presented by Dean Baker and by Daniel Alpert. In these plans, the former owner is guaranteed the right to shift from owner to renter in the house that faces foreclosure. Rent would be determined by closely regulated professional property appraisers to match going market rental rates.
2. Every homeowner with a mortgage worth more than the assessed value of the home would be eligible for a subsidized adjustment loan of up to 2 percent of the assessed value of the home (with a loan ceiling of $10,000). These loans would have an interest-free grace period of three years and would then become repayable over ten years with an interest rate of 3 percent.
3. Every homeowner who faces foreclosure and wants to move to a different residence would be eligible for an additional adjustment loan of up to, say, $2,000 to cover moving costs (on the same terms as above).
This "right to rent" combined with access to subsidized credit provides incentives and means for lenders and borrowers to move toward resolution of the problem of widespread negative equity in the housing market.
* Overextended borrowers would gain the right to rent for a period of time at market rates. This right in itself would provide an incentive for the new owner (the bank) to agree to renegotiate the mortgage instead of facing the guaranteed rental. The distressed owners also would have access to low cost loans that would permit them to purchase legal advice, to pay rental deposits if they become renters, or to cover other transaction fees if they renegotiate the mortgage. Finally, the distressed owners would have financial support if they prefer to move, living elsewhere in the same area or seeking a fresh start in another location.
* The new owner (the bank) also would benefit from this proposal. The plan includes, and provides loans to finance substantial rental deposits and clear eviction rights. Banks also would benefit through the federal government's loans to those distressed homeowners who renegotiate the terms of their mortgages they would be able to meet bank transaction fees.
* For the broader society, this plan would provide new options to all their fellow citizens who are stuck with mortgages worth more than the homes they live in. It does not favor those who do or do not default on their mortgages. Instead, it pushes both lenders and borrowers toward one of three resolutions: either renegotiate the mortgages on more favorable terms, or shift the resident families and properties into the rental from the ownership market in the same residence, or help the families move into other rental units they can afford in a place they want to be.
This plan obviously carries costs, but these are relatively small in the context of the overall bailout. For example, lending $10,000 each to 19 million households (extremely high numbers, since it assumes that 19 million families, each in a house with assessed value of at least half a million dollars, will borrow the maximum permitted) would cost $190 billion. Considering that these adjustment loans will be repaid over thirteen 13 years, the cost of the subsidy element of the loans, using an interest rate of 5 percent, is only 22 percent of this total, or about $41 billion.
It is time that the government acted to provide targeted support for the millions of distressed homeowners whose mortgages exceed the value of their homes. The aim of this support should be neither to bail out the mortgage lenders, nor to keep as many families as possible in the homes they ill-advisedly purchased. The aim should be to minimize the costs of resolving millions of bad home purchases and bad loans, while enabling families to live in decent homes in places they want to live.
Why go through all that BS rather than just dictate maximum mortgage rates allowed and shrink the payments? The more usurious the rate the more pain extracted and vice versa. Or are you just trying to erect new bureaucracies for fun?
October 31, 2008 3:32 PM | Reply | Permalink
A friend of mine wrote to a Mr. Steve Walsh, apparently he’s a mortgage broker or he knows the business.
Well anyway, he evidently has written some opinions on the housing crisis and below is a conversation, that I believe makes a lot of sense
Q. How much will it cost the Government, to allow ALL American Homeowners
to rewrite the interest rate on the homes? (It should be all homeowners to remove the appearance that some were given special treatment
1. The Cost of the Plan?
Zero (potentially). Huge spillover benefits
The Government is currently borrowing with Treasury rates between .02%
and 4% (30 year fixed). The Government then lends that money at 5%
(i/o). Assuming 90% of homeowners make their payments, the Feds
would/could actually make money. Plus the fees up front, increased home
sales, decreased foreclosures, the Fed could actually make money,
Similar, in that respect, to the AIG bailout. Also, homeowners will
SPEND the additional $600 they have every month on paying down debt,
buying cars, SAVING, etc.
There is a better chance of making money on this deal than any other
bailout. People have to live somewhere. The main cost to homeowners
will be "decreased equity over time" since they may be encouraged by the
interest only option to make the minimum payment. Hopefully, with
stabilization in the housing market, many homeowners that are in over
their heads will sell their house.
October 31, 2008 4:11 PM | Reply | Permalink
As a follow up
Mr. Walsh has a site that has more information,
http://www.scoutmortgage.com/blog/
In answer to my friend
What do you need?
We have an administration that is playing checkers, not chess. I can't
believe how many articles there are online discussing "unintended
consequences" with the $850Bailout, HopeNow, Modifications, etc...NOBODY
thinks ahead.
ALL the bailout plans ENCOURAGE homeowners to SKIP a couple of payments
so that they can get a loan modification. NOBODY is looking at demand
for housing as an important component in the solution...shocking.
By the way, 5% isn't "giving it away" in this market. IF you are buying
a depreciation asset, 6.50% is a high rate. IF property values drop by
5% and you pay 6.50% for the money, your total cost a year from now is a
leveraged 12.5% (on a $200k house, $10k in depreciation, $13k in
payments). IF mortgage rates come down and stimulate demand YOU WILL
SEE AN END to the depreciation over the next year. This will cut the
cost of ownership in half.
I really appreciate your help in getting the plan out there. I know it
is the only solution to the current situation (Economics 101). I hope it
isn't too late.
Steve
One last point...
When I originally thought about doing a mortgage "superfund", my thought
was to create an investment vehicle for Americans to help their fellow
Americans. Kind of like a War Bond during WWII. George Clooney could
invest a couple million bucks, guaranteed by the feds, paying 4.5% to
him knowing that he would be helping someone buy a house. The bonds
could be sold at banks, through funds, etc. People WANT to help, they
don't know how.
(Brad Pitt would probably throw a couple Million into the pot too)
October 31, 2008 8:07 PM | Reply | Permalink
Using appraised value for any purpose is filled with problems. Remember, all of those loans were made based on appraisals by licensed appraisers. An appraisal is little more than an educated guess about what the market will bear, heavily influenced by the needs of the person paying for the appraisal, even though we have long been taught that it is a number based on a rigorous analysis of the property, including its condition, amenities, location, etc. I don't see a better alternative than an appraisal, but let's not hang too much on appraisals.
Perhaps more regulations on real estate appraisers is a pre-condition for a program such as this. Right now real estate appraising is close to being a sham, if it isn't one.
October 31, 2008 5:33 PM | Reply | Permalink
I guess I really don't understand the $10,000/$2,000 loan provisions.
Wasow seems to think these upside down homeowners are a bunch of jobless squatters.
For those who rent-in-place, the security deposit (a month and a half's rent) can be saved out of a couple of months of mortgage defaults, borrowed from family members, or paid to the landlord in installments out of higher rent.
As for moving costs everyone's always responsible for their own moving costs. For local moves friends, family and UHaul should suffice. For longer distances where the employer isn't paying, moving costs are simply one factor in the decision of whether or not to move.
$190 billion is insane! How many schools could be refurbished for that price.
October 31, 2008 6:01 PM | Reply | Permalink
I think you are creating a "one size fits all" approach here -- and I doubt if it will work.
Why not start out putting down a list of stakeholders in a workable solution -- and then see what variations on a theme will work.
First -- in most cases banks and S&L's no longer own the mortgage -- they have been sold and blended into mortgage backed securities, and thus an individual property may have hundreds of owners of the loan. You can't do a deal till these are sorted out and consolidated so you have a borrower and lender of record.
This is somewhat parallel to the situation in 1933 when FDR created HOLC. Too many mortgages were held by banks being liquidated or restructured. What HOLC did was refinance as 20 year straight interest government insured loans, using RFC funds (Reconstruction Finance Corp,) manage these for a few years, and then sold them as performing assets to restructured banks and S&L's. HOLC eventually refinanced about 20% of existing home mortgages that were reasonably current as of the point of the Homeowner's application. These came due in the first half of the 1950's, and the default rate was less than 2% over 20 years. No one lost money -- Homeowners got the benefit of inflation after the wartime recovery, Banks and S&L's made money servicing the loans, and in many cases eventually made whole the original lender. (remember some lenders were liquidated).
Second: Attention needs to be given to local government's stake in the solution. If a mortgage is not performing, taxes are not being paid, and real estate tax finances schools, police, fire, local streets, garbage collection, public health, and much more. Unoccupied houses probably are not paying local taxes -- How does this get addressed without raising taxes on those who are not distressed mortgage holders?
Third: Foreclosed and unoccupied houses tend to be grouped in several different kinds of neighborhoods. Some are in newly developed exurbs (mcmansions), others are new developments in modest income older parts of the city. Others are housing owned by the elderly who got taken in by predatory lenders. Yet others are scattered sites in first ring suburbs, housing that is reaching the end of its lifespan without extensive renovation and repair -- your typical early 50's ranch or cape cod. Recognizing this diversity is important -- preservation of long term property values (asset values) is clearly more critical in some areas, less in others.
One needs to fit into this a number of non-housing non-mortgage concerns. Consideration of need for public transit, walkable shopping, paid up community investment in sewers, water, schools, recreation and all the rest need to be considered in policy development. This disruption in the Real Estate business model may well be an opportunity to enhance the long term value of neighborhoods if emphasis is placed on rational community planning. As an example of this in the wake of the Great Depression, I would point to some of the Green Belt developments of that era. In this era I would point to the need for a variety of housing for the elderly, given that the bulge of baby boomers will be reaching retirement, and may not be able to afford fancy retirement communities on golf courses, given pension losses, etc.
A lot more is involved than just the finance matters.
October 31, 2008 7:28 PM | Reply | Permalink
HOLC experience -- No one lost money.
There's a big difference between a loan-to-value ratio of 50% and one of 125%.
Do you know what the median or average LTV was on those 1930s HOLC mortgages -- before and after refinances?
October 31, 2008 8:50 PM | Reply | Permalink
I've spent some time trying to learn about HOLC -- what it did, how helpful it was, how successful.
The best review seems to be Columbia Professor C. Lowell Harriss' History and Policies of the Home Owners' Loan Corporation published by the NBER in 1951.
I keep reading that HOLC made a little money for the taxpayers, but I don't read that it helped homeowners (clearly, it helped recapitalize thrifts -- the old building assns., etc.).
For example, Table B1 of Harriss' study shows that over a three year period (6/13/1933 - 6/12/1936) HOLC made 126,735 loans in the New York state region (CN, NY, NJ).
As of 12/31/1947 26% of those loans had been paid off, 34% remained active, and 40% had been foreclosed.
So, how helpful to the homeowners was this program?
October 31, 2008 10:01 PM | Reply | Permalink
. . . the default rate was less than 2% over 20 years. Sara
Does that mean 2% times 20 years equals 40%?
N.B. I've seen that 2% figure on blogs and in news stories but have been unable to come up with any supporting data. Perhaps, it's an urban legend.
October 31, 2008 10:15 PM | Reply | Permalink
HOLC was extremely helpful to both borrowers and to the lending industry. Let's go back to an aspect of the problem as it existed in 1933 when FDR established the program about a month after taking office.
First off -- what was a Mortgage before 1933. In most cases it was a 5 year Bank Note with a balloon payment at the end of the note, and the idea was that if you could not meet the Balloon, you negotiated with your banker for another 5 year note, with perhaps an altered interest rate. By 1933 the depression was into its 4th year, the Banks were unwilling to lend, and thus were calling notes where any payment was overdue, or when the borrower did not have cash for the balloon. The banks could not lend, as they had speculated with depositer's funds in the stock market, and could not cover losses. Thus Banks were being closed, going bankrupt due to runs, etc, etc., and they owned miles of unoccupied property. I strongly recommend starting to understand this by getting any Real Estate Want-ad section of the Sunday Paper circa late 1932, and reading the want-ads for a residential street you are familiar with. You need to understand the dimensions of the problem.
Yes, certainly some of the HOLC properties eventually went into default again -- but when they did they were serviced by an insured bank or saving and Loan and by 1937-38 had appreciated to some extent in value. There was a market for them as some business and industry was recovering from the depression -- others were not, and workers lost jobs, and defaulted in the second wave of the depression in 1937-38.
HOLC's Loan Window was only open between 1933 and late 1935. It applied only to existing housing on an as-is basis. It was replaced in 1935-36 by the FHA program, created under the Wagner Legislation, which favored new construction, and only wrote loans on housing that met FHA and local codes. By 1935-36 FDR wanted programs crafted to "prime the pump" -- not only to serve housing needs, but to kick start the lumber/timber business, the brick business, create private sector jobs for electricians, plumbers (yea Joe Too) and carpenters. FHA loans were similar to HOLC loans, Fixed Rate, 20 years, insured to the lender, but they were also capped, meaning if you go look at the line in any town where 1920's construction ended, and then picked up again in the second half of the 30's, you will note that the houses are much smaller, and at least as initially constructed, had very few frills. HOLC was an emergency program appropriate to the problem (crisis)as it existed in 1933, but by 1935-36, comprehension of the problems in the whole industry fashioned the design of FHA which was the standard middle class mortgage up till the late 1970's. The GI Bill was very similar to FHA -- serviced through the same S&L's and Banks. Of course post WWII FHA gradually raised the caps to accomodate inflation and the need on the part of the Boomer's generation for a few extra bedrooms. Most Commercial Banks followed the FHA rules fairly closely for Conventional Mortgages well into the 1980's.
What strikes me as ironic is that the fancy new forms of Mortgages, invented in recent years, are nearly always some sort of variable rate mortgage, which, as I see it, returns us to the days of the 5 year note and the need to either pay a large balloon, or negotiate at a higher interest rate, as a new note. We are back to putting new clothes on the pre-depression era form of variable interest rate home mortgage, which got us into trouble back in the early 30's.
Best current book on the economic analysis of the New Deal Programs...I recommend "Roosevelt, The Great Depression, and the Economics of Recovery" by Elliot A. Rosen, U of Virginia Press, 2005. Rosen a Professor Emeritus, Economic History, Rutgers. Very elaborate scholarly apparatus leading to the major publications and research.
(I've taken most of my quantitative analysis from Rosen's sources. In other words, 2% of the HOLC loans went bad, and could not be recovered considered from 20 years after the last HOLC loans were made -- which would be late 1935, or closed out in 1955-56.) In addition to HOLC, in 1934 the Federal Farm Home Loan Board was created, and did much the same thing for rural residential property. It was administered by the Department of Agriculture. Farm Home Loans also worked closely with Rural Electrification (REA) as in vast parts of the US in the 30's less than 10-20% of housing had electric service. Farm Home Loans frequently included adding indoor plumbing and electricity for older housing, with grants and low interest subsidies built into the loans.
I should add I do not necessarily believe any of these specific Roosevelt Era programs should be revived. What is important is to understand them, because they generally worked well, sometimes after being tweeked several times. At the second inaugural, FDR famously said..."I see one third of a nation ill housed, ill clothed, and ill fed..." (actually it was a little worse than that), but what all these ABC programs are about is figuring out what to do, and then doing it. I think too many of us have lost sight of the fact that we have done these things in the past, and one way or another, can do them again. You come to understand that by seeing the programs in context. Now we need to figure out our own context -- and probably do much of it over again in a different form. It might not have been so bad had not so many people invested in trashing FDR ever since the 1980's, and had so many not slept through American History Class.
November 1, 2008 5:53 AM | Reply | Permalink
Sara,
excellent lookback, thanks.
November 2, 2008 7:23 AM | Reply | Permalink
I'm not against helping homeowners but I am against helping them to the exclusion of other people. Why are homeowners special? What if a renter has trouble making the rent? Shouldn't the government help them too? The government isn't supposed to privilege one class of people over another. Helping homeowners without offering something similar to renters is simply unfair.
October 31, 2008 10:51 PM | Reply | Permalink
What the Fed needs to do is look at why homeowneers (and renters) are having trouble, food, disel fuel, heathcare costs, and subsidize those things. It would help everyone, even the insufferable "responsible" people would have more disposable income to but goods and services which would also help the economy
So simple, a chicken can figger it out.
economists can kiss my vent.
October 31, 2008 11:31 PM | Reply | Permalink
This is exactly why a freshman course in economics should be required at all colleges. Neither wishful thinking nor complete lack of regulation is the answer.
As for being "responsible" f*ck me for living within my means. This is why I never mortgaged my place for an Escalade or a 42" plasma TV.
November 2, 2008 1:46 AM | Reply | Permalink
NO WORK, NO RENT MONEY.
We have to start.
As I posted above, when we address the housing demand issue, we begin the stabilization process.
The demand for shelter is great but the problem is affordability. Lowering the interest rate reduces the monthly payment.
The same for Apartment Complexes and Multiple family units. With lower rates, rent could be reduced.
Starting with Homeowners with a reduced mortgage rate, they will have more disposable income.
This in turn creates a stimulus that affects the economy.
An economy on the rebound will also affect the renter’s pocket book.
Think of the adverse: If this economy continues to go into the tank, and unemployment due to lack of consumer confidence, and lack of consumer spending what then?
Someone Snidely Whiplash’s will own the properties and then we'll be at the mercy of those, controlling the rent?
Some housing in Phoenix, that sold for 100k are now selling for 50K, someone is buying them up, and if not they’ll go cheaper. Forcing more people who have lost they’re homes, their credit now bad, to become renters. The demand for affordable housing all ready great, will reach a critical condition.
Great for landlords, bad for others.
Because of demand for affordable housing (rent), we will find many homeless vying for the available space, with excessive requirements to be met.
Landlords removing trouble-making tenants who might want the heater fixed. Why not when you have a captive market. Oh yeah they'll fix it, but when the lease is up they'll recover the expense.
But consider, with NO WORK, NO RENT MONEY.
Many landowners are not in the business of charity.
There are some who always benefit at the misfortunes of others. It is usually those who have the money to capitalize in those situations.
We can either have a cycle of prosperity for many, or a cycle of despair, where only a few benefit.
November 1, 2008 12:27 AM | Reply | Permalink
I am going to pretend that yours is not a rhetorical question.
These homeowners are special because they purchased a dangerous mortgage product that blew up and spawned an epidemic, and, just like any epidemic, the problem is racing through neighborhoods.
You guys are missing the point by focusing on the financial aspects of this rescue and not the fact that the social fabric is in danger. Strange as it seems, neighborhood stability depends on home ownership--the idea (or delusion if you prefer) that people truly own their houses, that they have value, and fixing them up is a good idea.
Sure, we should help everybody, but let's try to be specific here. Renters did not purchase this product, so the same fix does not apply to them.
The "not about fairness" line refers to the need to stabilize neighborhoods, even if it involves essentially paying some people who made poor decisions to stay in their houses instead of hitting the streets.
Yes, the possiblility for misuse is there, but like it or not, stable neighborhoods need homeowners living in them, not miles of foreclosed empty shells and marginal rental properties. (For this reason, holding foreclosed properties off the market or using them as rental will not solve the problem on the ground. Try keeping vagrants out of 600 empty houses in a questionable neighborhood where 90% of the remaining, non-empty properties are rentals.)
Despite all, I still believe that the payment-share plan would be a great way to resolve this problem in hard-hit neighborhoods. And (gasp) maybe it shouldn't even be based on ability to pay but on a calculus of the amount of depression of housing values in the neighborhood. (For example, if you purchased a home between 2001 and 2006 and the average value of similar houses is now 50% of your mortgage, you pay what you'd be paying on the new value and the govt will kick in the rest for awhile.
If not that, then the fha hope for homeowners plan is something useful that at least exists. We need to get going on this specific issue, not continue to complain about fairness or talk about how lots of other people need help too.`
November 1, 2008 3:40 PM | Reply | Permalink
What with the current large inventory of vacant housing it's hard to see how landlords can control market rent or how it can be said that tenants are captive.
Indeed, we wouldn't be in quite so desperate a situation if we hadn't overbuilt so grossly over the last few years.
November 1, 2008 2:26 AM | Reply | Permalink
Ellen, I am not convinced we have actually overbuilt, what we have done is built the wrong things in the wrong places in many instances. We had communities competing with each other for the favor of developers interested in high end property -- the Suburban towns wanted the extra tax revenue so as to control taxes for necessary services, (schools, fire, police, etc.). We should have known since the first oil shock in the early 1970's, that time would come when people would want access to public transport. But we didn't elect county commissioners or planning boards on those considerations. Instead we assumed the large lot in an unwalkable suburb where everyone needed their own car so as to buy a Qt of milk and loaf of bread, would go on forever. Not So. The Mantra of the Market "Maximize immediate profits" controlled every decision, and those who thought differently had no seat at the table. I think this may be about to change.
Right now, if I were suggesting policy, I would hold a good deal of foreclosed property off the market for a few years, use existing State Housing Authorities to establish non-profit management groups, responsible to local government, and socialize the costs of diminishing the inventory of vacant houses, by renting them at market rate -- paying the taxes and insurance on them, paying a small management fee, paying for normal upkeep, fix plumbing, furnaces, electricity -- and rent with an option to buy built in by putting a small amount of the rent in escrow each month, that after a few years would be nearly equal to a downpayment of that or another property. The remainder of the rent would go to the existing lender (if we can identify the lender -- hard when loans are chopped up into securities traded like stocks), and in the years such property is rented, do the necessary planning to keep inventory roughly equal to the market. This should prevent housing values falling too deeply, and if inventory is controlled, values will rise. A house is an asset not only to the owner but to the community commons, and our values ought to be about keeping it is a performing asset -- in financial terms, and as a home -- a machine for living.
In the meantime, State Government needs to take a good long reforming look at how we tax for services such as schools, parks, police, fire, public health, sewer and water lines, garbage collection, etc., and see if we can get the incentives right. How many local governments are carrying huge debts in the form of bonds issued to build schools, community buildings, fire stations and all -- which will go bad if taxes cannot be collected? How many have huge pension overhang, or perhaps have lost pension funds in recent weeks for long term professional and semi-professional employees? We haven't begun to even ask the questions yet. And yes, during the 1930's depression we had the same problem. Some cities paid teachers and police in script.
November 1, 2008 6:40 AM | Reply | Permalink
I have a problem with the government bailing out "anyone with a mortgage that exceeds the value of their property". I do not know how it worked out East, but In Nevada and California, far too many "homeowners" were gaming the ability to acquire loans at 125% of the real estate's appraised value. A few years ago, as the bubble was heading for its peak, I had several discussions with persons from both the lender and borrower sides of the fence, who explained how the racket was played. Mortgages could be secured at 125% of appraised value. The borrower then rented the house at the mortgage+. S/HE was allowed to extract any extra appraised equity every two months at the same 125% premium. This arrangement immediately became a substantial liquid holdings bump, and a small asset increase on the borrowers monthly cash flow. They spring boarded this into acquisitions of more mortgages for real estate figured at 125% of appraised values. The front-line lenders' employees knew this was headed for a massive failure, but were getting points, and following the corporate guidebook. The borrowers knew, or should have known that this was not an endless supply of free money, and there would come a time when the piper had to be paid. To bail-out these players is to reward bad gamblers and pyramid schemers, just as the government did with the $700bil bail-out of corporate financial institutions.
Yeah, it would be a very good thing if the government attempted to help out people who got caught holding a busted balloon on their primary residence, but there need be methods in place to assure that the high-wire speculators don't get rewarded for their perverse games, because they were a major contributory factor in the housing market balloon to begin with.
There is another valid concern, and one that is personal too. I sold a few acres of prime LV Valley desert about 3 1/2 years ago, purchased with cash over two decades ago, because I believed that the real estate market in the Vegas metro was going to tank hard. It was a nice piece of change on my investment. I sold a home I've owned for almost as long, but hadn't resided in for over 14 years, on very sweet terms to an ex-girlfriend who has lived at the house and paid the mortgage since an amicable break-up, that I chased with a several year stint of nomadic free-lancing employment. She had covered the mortgage, as well as enough extra per month to pay for the home's maintenance, when it needed to be done. About a decade ago, I started accounting for the property as a lease option, without her knowledge, and applying equity for the property in her name. (her sons were in on it though-she would never had agreed to it-wasn't fiscally responsible enough to handle it all by herself) After the house was paid off in full, I surprised her on her 50th birthday, with a change of title to her name, but still hold a small mortgage, which effectively cut her housing expense in half, yet still puts cash into my bank account monthly. We both made out. The equities hit over the last several months didn't pulverize me, because I was not overloaded in the market, had invested the bulk of personal savings a couple of years ago in low secure CDs and a few bonds.
I've been honest, not avaricious, always living well within my means, have never purchased an automobile or consumer fluff goods on credit, and fiscally responsible with my savings. So why should I be faced with increased taxes to bail-out lousy gamblers, who were so clueless, they didn't see the bubble when it was about to burst? This isn't about public schools, the county hospital, indigent health care, public libraries. All these and more, I support, and am willing to pony up a bit more to support them, even though I've never had children. It is for the good of society, helping to secure the Nation's tranquility, if masses are not forced into upheaval during these unsteady economic times. The Bush Administration and The GOP Gone Wild In D.C. 2002-2006, plundered the public treasury, have left us swimming in unfathomable debt. Don't go all mandated out with grandiose scheming about long pent up dreams. Work on what has been spoiled, and effectuate as much of this as possible through direct investments to rebuild the Nation's public infrastructure. This provides local employment across the Nation, and gets cash flowing up and circulating from underneath the mired economy. Help out the honest workers, or those willing to give it a go, but do not bail-out the equities flim-flammers, softening their well deserved blow from the free-market's downside. These entities amassed great fortune from skimming off of other people's work product, adding little real value to the GDP.
November 1, 2008 9:01 AM | Reply | Permalink
. . . why should I be faced with increased taxes to bail-out lousy gamblers . . . .
If you were to plead "Why should I approve the trashing of my values" I could agree whole heartedly. But when you make the issue turn upon questions of finance the central claim (taxpayer costs) requires a sophisticated proof because it's not self-evident.
How can we know what the effects of a mortgagors' bailout will be. There's a deleveraging going on throughout the world. Debt obligations are being destroyed -- Poof. New debt obligations created by Treasury (USTs) or the Federal Reserve (keystrokes on a computer terminal) to bailout homeowners and recapitalize financial institutions replace that destroyed debt.
Everyone, the whole system is simply back where it started from, and net-net, taxpayers aren't in any worse shape than they were before.
November 1, 2008 12:45 PM | Reply | Permalink
Ellen, the "average" taxpayer may not be in worse shape than they were before, but there are a lot of individual taxpayers who are.
For example, if you were a single mother living in Baltimore, there's a good chance you snapped at the opportunity to use one of those crazy loans to purchase a home for which you previously would not have qualified. (The American Dream, etc. etc.) I'm using a statistic that some 40% of bubble, sub-prime mortgages in Baltimore were taken out by single mothers.
When the whole thing comes crashing down, you and all the other marginal players are theoretically back where you were before, except that now you've completely trashed your credit rating and are are looking at living in a shelter instead of in the rental housing you were living in before. (You don't qualify for the place you used to live because of your crappy credit.)
So regardless of how it's done--and I'm in favor of making it as cheap for the government as possible--there are a number of good reasons for doing some social engineering here and making it possible/desirable for marginal folks to continue living in their houses.
Maybe the need isn't as clear in some neighborhoods as it is in the one I see when I look out the window.
I'm not in favor of rewarding folks who made huge bucks gaming the market either, but I'll tell you what: if I had to bail out 10 gamers to save a hundred of the poor schlubs who figured they'd use the system as best they could to own the roof over their head, I'd happily do it. Because those poor schlubs have families and neighborhoods that need stability, and maybe for once, for once, we ought to set things up in a way that fills their needs and gives them a chance to succeed after all.
It's not like it's going to be easy for them--they are living in neighborhoods even more dangerous than they were before because of the huge number of empty houses and even higher crime rates rising from the market downturn and increased homelessness.
They would, in fact, be starting over from a worse position than they were before. I say, if they're willing to give it a shot, let's make it happen for them.
November 1, 2008 5:05 PM | Reply | Permalink
Re: now you've completely trashed your credit rating and are are looking at living in a shelter instead of in the rental housing you were living in before.
It's a total myth that you can't rent an apartment (or even a whole house) with bad credit. I know a number of people who have done so, including someone who rented a house just six months into a Chapter 13 bankruptcy. Most landlords are concerned that a prospective tenant has a steady job with enough income to pay the rent. They don't care so much about bankruptcies, defaulted credit cards and the like. Moreover, it's a renter's market in many places today (glut of unsold homes means lots of rentals). Landlords can't afford to be too picky.
November 1, 2008 6:04 PM | Reply | Permalink
Ok, I'll bite. Who were those people, how much income are we talking about, what kind of housing, did they have kids, what level of education, and what color were they?
I'm using the example of the Baltimore single mother to illustrate a population--the example of several people you know may not be all that useful in the big scheme of things.
November 1, 2008 7:13 PM | Reply | Permalink
Wrote by JonF311 “most landlords are concerned that a prospective tenant has a steady job with enough income to pay the rent.”
Who’s guaranteeing a steady job these days, with enough income to pay the mortgage?
Who do you think will be the new landlords?
I had purchased a book many years ago about how to win at the board game Monopoly.
There was a reason there was a finite number of houses. A player could manipulate the game, by controlling the available houses. Sometimes owning 4 houses is better than one large Hotel. Your opponent can not develop his holdings if there's no available houses.
Look around the Phoenix market; huge Apartment complexes could easily be large blocks of homes. Owned by whom?
Banks would love the relationship, not having to deal with the problems associated with individual owners, with personal problems. Instead dealing with corporate business interests instead.
To assure this grip, banks tighten requirements for individuals but Corporate Companies would be able to secure favorable financing.
No need for further construction of large Complexes. Depending on how cheap housing rental units could be purchased for. A unit is a unit.
November 1, 2008 8:23 PM | Reply | Permalink
I hope my math is correct
$200,000.00 Mrtg x I =10 % = $20,000.00 Y / 12 months = 1666.66 per month (I nterest only)
$200,000.00 Mrtg x I = 7% = $14,000.00 Y /12 months = $1166.66 per month (I nterest only)
$200,000.00 Mrtg x I = 5% = $10,000.00 Y /12 months = $833.33 per month (I nterest only)
$200,000.00 Mrtg x I = 4% = $8,000.00 Y /12 months = $666.66 per month (I nterest only)
Homeowners paying 5% (Interest only) to the government, on a $200,000.00 dollar mortgage cost, $ 833.33 dollars a month, would have an extra $833.33 per month (if original @10%), to pay other bills and expenses, or purchase American products to stimulate the economy.
$333.34 extra money available @ 7%
Imagine if the Government rate was @4%
Now wouldn’t that be a nice stimulus every month until this financial downturn recovered.
Doing this without lowering the value of the house. Until such time that is needed for stabilization, through immigration or birth rate or demographic increases, such as teens becoming homeowners.
November 1, 2008 6:28 PM | Reply | Permalink
Resistance, a 4% rate would be great. Problem is that every loan would have to be renegotiated. (Not impossible but certainly challenging.)
It would also be great if the govt could say: OK, if you purchased a home between 2001 and 2006, you're upside down and you live in neighborhood X, your new loan rate is 4%. But I'm told there is the small matter of the banks, who seem to feel that they have pre-existing contracts for more.
You might also want to consider a required principal payment--interest-only is one of the things that got us into this mess. So, 4% plus $50, or $100, or $200 principal each month.
November 1, 2008 8:13 PM | Reply | Permalink
All of this may work OK for first mortgages. Are we going to do the same for seconds, thirds and the endless array of HELOCs?
November 2, 2008 8:04 PM | Reply | Permalink
Seconds and thirds aren't attached to the property in the same way firsts are. They can be negotiated down. But, for the sake of argument, why not?
November 2, 2008 9:19 PM | Reply | Permalink
After some thought.
With the extra money being available because of the I/O (interest only)
The people having stimulated the economy, or paying down credit cards or other financed items, could then focus on paying down the principle on their homes, further reducing the the payment, and gaining equity.
November 3, 2008 8:34 PM | Reply | Permalink
From a recent Email sent to my friend,
From Steve Walsh
The only way to stabilize housing is to reduce supply and increase demand(Econ 101).
Decrease Supply - Allow homeowners to refi into an i/o loan at 5%
REGARDLESS of loan to value.
Increase Demand - 5% interest only for purchases (reduce the "new" Fan/Fred fees).
Problem solved.
With respect to 2nds and HELOCs, that is going to be an issue that needs consideration. If it was up to me, I would combine the mortgages into a
single loan. MOST HELOC's were originally 90% loan to value (only a small percentage went above 90%). Those banks would benefit from being
paid off, the borrower would benefit from the lower payment.
We have to get away from thinking "5% is a low rate". The Fed Funds Rate is 1%, we are in deflation, 5% is probably still too high, but it
is a decent starting point.
I KNOW, my plan will immediately reduce forclosures, stimulate demand for housing, provide jobs, increase revenue to the states, etc. It will solve a lot of the major issues facing the Country. I am absolutely shocked that we are in this position, going on 4 years of price
declines. Absurd.
Can you blame the Toll Brothers executive for asking for some help AFTER a 4 years industry slump?? Lets see how the stock market professionals will feel if the stock market goes south for another 3 years(they needed $1T after 11 months of declining stock prices...try having your savings go down for 4 years and economists expecting a continuation of the trend).
I know Greenspan would not have allowed this to happen. He would have eased sooner and prevented the crunch from occurring. It is very unfortunate for us to be stuck with Bernanke (academic with little real world experience). I backed Bernanke for years, until April 2007 when
he refused to see the flashing red lights from housing crisis...2 years later, he has done NOTHING to help housing.
Housing prices will be affordable when rates move lower...prices have dropped far enough, they need to be met at their current levels with considerably lower rates.
November 4, 2008 2:44 PM | Reply | Permalink