The Case for Mortgage Rewrites
A few people in comments were pushing back on my repeated insistence that a bailout ought to include some provisions to try to stem the tide of foreclosures and let people stay in their homes. I think to understand why this is a good idea, you need to step back and look at the logic of the foreclosure process. Banks are willing to lend people relatively large sums of money at relatively low interest rates for the purpose of buying a house precisely because if you don’t make your payments they can foreclose on you and take the house. Since a bank is a bank and not a real estate management company, their first choice is for you to pay your mortgage. But as a fallback, taking the house and auctioning it is fine, since under normal circumstances the amount of money a foreclosed house can secure at mortgage will, on average, have a close relationship to the size of the loan used to buy it.
Which is fine if only a few people are foreclosing. But check out this block in Miami that I originally found in December 20087 working on this piece for The Atlantic. You have six foreclosed houses on a single cul-de-sac plus two more on the little blocks immediately to the south. And if you go on Trulia here and scroll around, you’ll see that this particular cul-de-sac isn’t actually unusual in that part of Miami. When that starts happening, the properties have extremely little value at auction. Nobody’s going to pay much money for a house when several identical houses on the same block are also up for sale.
So the homeowners loses their homes, which is bad for them. And the banks, rather than being able to recoup the losses by taking over the properties, are left with a bunch of worthless houses, which is bad for them. And then this situation adversely affects the value of everyone else’s house in the area. And many of the foreclosed houses wind up left standing vacant, which is bad for the whole neighborhood in a whole bunch of other ways.
Now if this was just one city, you’d say, well, things will adjust — people will move in from the rest of the country to take advantage of the good deals. But it’s not just one city. It’s happening all across the economically depressed portions of the rust belt. But it’s also happening on the exurban fringe of essentially every growing metro area in the country. And it’s happening all across the sunbelt. Miami and Las Vegas are especially bad, but there are substantial foreclosure pockets all over the place. There’s no quick rebalancing.
In the long run, it’ll still all work out. You have X number of people and Y number of houses. We’re not all going to go live in tents while the houses all stand vacant. Instead, a bunch of people will lose homes they couldn’t afford and a bunch of homes will lose a lot of value, and then people will buy cheaper houses. But this is one of these situations where the adage that in the long run we’re all dead becomes relevant. That’s a lot of inconvenient dislocation. And since we know the end state will involve more-or-less the same set of people living, in the aggregate, in more-or-less the same set of houses and making, in the aggregate, lower monthly mortgage payments we ought to be able to short-circuit some of the dislocation. Have people stay in the houses they’re in right now. Adjust their monthly payments down to something they can afford, but that constitutes a better deal from the bank than what they’d be able to get by auctioning the property.
That’s win-win for the homeowner and the bank, and provides stability to the neighbors. It would also serve, if done on a mass scale, the “price discovery” function that we need to tell which of our banks are insolvent and which are solvent, and thereby get the ones that turn out to be solvent to be liquid again. In the days of yore (ah, yore) this sort of negotiation could be done between a bank and a homeowner, but the complexities of modern-day finance have made it harder to do in a consensual basis. What’s more, there’s a collective action problem, as bank would rather have the other banks do the renegotiating and then reap the rewards without paying the price. What’s needed is the heavy hand of the state, either in the form of a new agency or else in the form of bankruptcy judges to work this out.
59 Responses to “The Case for Mortgage Rewrites”
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September 25th, 2008 at 12:40 pm
though prices may drop, cities and towns, being clever, will continue using the higher price for the property tax assessment.
September 25th, 2008 at 12:41 pm
I like all the thinking in this post. I guess this is why they pay you the big bucks.
September 25th, 2008 at 12:43 pm
When you were covering the emperor’s negotiations with the Spacers’ Guild?
.
September 25th, 2008 at 12:49 pm
Excellent post! And, a wonderful explanation of the major problem of the proposed bailout plan. Treasury is targeting this problem from the top down, assuming that financial markets are the most important indicator of economic health (if we can just keep the stock market climbing we all win!). They are important, but the underlying problem is precisely the one you lay out above, and that requires the flexibility to arrange a good settlement in cases of foreclosure and bankruptcy.
It’s ironic, because some of the lobbyists pushing for the reformed bankruptcy bill were doing so because they were salivating over the prospects of forcing people from their homes and reaping a big reward from the auction, since housing prices were so high, but unlikely to go much higher. Now, there’s some evidence that the old bankruptcy laws would have reduced the effect of this crisis, or at least prolonged it to the point where we wouldn’t be having short-term liquidity issues.
September 25th, 2008 at 12:54 pm
Nobody’s going to pay much money for a house when several identical houses on the same block are also up for sale.
Do developers have this problem when they build an entire new subdivision?
September 25th, 2008 at 12:54 pm
“So the homeowners loses their homes, which is bad for them.”
HaHaHaHaHaHaHaHa…..
Your “upside down” on your mortage = you bought the house during the bubble years = recently = you have little or no equity in the house. Oh, and no chance current market value will bounce back to bubble value.
Take this problem to a financial advisor, and ask them what’s in your self interest.
September 25th, 2008 at 1:01 pm
Very good Matt.
It’s almost as if Delong has been personally tutoring you.
September 25th, 2008 at 1:02 pm
Having somebody paying something is infinitely better than bulldozing houses. It won’t stop the steep decline in housing prices still to come but it is “collectively” better. I’ve said it before and I’ll say it again: There is no painless way to devalue assets. The question is only who suffers the pain.
September 25th, 2008 at 1:03 pm
Matt Y. can be a little erratic on economics, but this post is spot-on (and eloquently written, too.) Maybe the next book will be Heads in the Crabgrass?
September 25th, 2008 at 1:07 pm
Good post. Thanks.
September 25th, 2008 at 1:07 pm
… When that starts happening, the properties have extremely little value at auction. Nobody’s going to pay much money for a house when several identical houses on the same block are also up for sale.
This is not true. There is a floor on the price determined by the house’s value as a rental income investment property. This floor may be half or less of the bubble price but it exists.
And you are assuming foreclosures consist of struggling people in just a little over their heads. Many are not. A lot of foreclosures are of busted speculators. They may have abandoned the property or they may still be collecting rent while blowing off the mortgage. Others are fraud cases where someone has in effect sold a property to themselves at an inflated price with 100% financing, taken the money and run. Delaying foreclosures in these cases just increases the losses on the loan.
September 25th, 2008 at 1:11 pm
Sorry, it’s hard for me to feel sympathetic for people being foreclosed on. They bought a house with little money down for payments they couldn’t afford. Why should the people, like myself, that were responsible enough not to buy a house I couldn’t afford have to pay for the people too irresponsible to live within their means?
Dickens said it best, “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
September 25th, 2008 at 1:14 pm
I don’t see why we have to bail people out for bad investments. I didn’t see people clamoring to bail out the holders of WebVan or Pets.com (even the highly levered owners). This is the same thing. Just because homes have more emotional pull than stocks doesn’t mean we should see them any differently.
September 25th, 2008 at 1:25 pm
This got me thinking:
I live in the Twin Cities, Minnesota. I attended a real estate law CLE several months ago where they showed a map of foreclosures, and they were heavily concentrated in the poorer urban areas, especially North Minneapolis.
I also noticed in your national map of foreclosures in your article, Matt, that the Twin Cities looks relatively unscathed.
And I just went on Trulia and looked up Eagan, the outer suburb where I live and which has around 63,000 residents, and it says Eagan currently has 4 homes in any stage of foreclosure. Four.
I really wonder, why is this different?
September 25th, 2008 at 1:27 pm
Matthew,
I agree, there does need to be something done about foreclosures, but the key thing is to ensure market stability first–that will prevent additional foreclosures that would have occurred from a significant economic slowdown.
With respect to these neighborhoods, I agree, this is a problem…but there are people that can still afford to pay their mortgages despite their neighborhood collapsing. Unfortunately, those folks are going to need to keep doing what they’re doing–they’re not going to be able to sell their homes until prices are stabilized. It’s certainly an inconvenience and a economically risky time, but the inconvenience pales in comparison to the significant problems that exist in the financial sector.
September 25th, 2008 at 1:32 pm
It seems all bail outs do is lead to bigger bail outs, because those bailed out are still making money at our expense.
September 25th, 2008 at 1:32 pm
I agree with your larger point, but one thing that you’re incorrect about is that in normal times foreclosed homes sell for about the same amount of money that they would sell for had they beens old by the homeowner. While it seems like this would be the case, it’s surprisingly untrue. i believe on avaerage, a foreclosed home sells for about 30-40% of its market value; this might be because the condition of a foreclosed home will probably be far worse (since the person living in it has no incentive to keep it up and might in fact be angry and decide to damage it/rip out all the saleable things inside), because the auction system is inherently inefficient, or be because the ability to plan a purchase is probably less, but foreclosing on homes destroys value for both parties, which is why banks will often give you a discount on the mortgage or refinance your mortgage to allow you to keep paying. Otherwise they lose money.
September 25th, 2008 at 1:35 pm
Wait a minute. So my neighbor, who pulled $200,000 in equity out of his house to pay for vacations, cars, home theater equipment, etc., gets a bailout, but my family, who made sacrifices to live within our means, get nothing. Bullshit. This kind of crap is what turned ‘liberal’ into an epithet to begin with. If the dems start pulling this shit again, god help me, I’ll vote republican.
September 25th, 2008 at 1:36 pm
The defining reporting on this issue, Matt, was the Charlotte Observer’s remarkable and prescient “Sold a Nightmare” series – which, among other things, was a runner-up for the Public Service Pulitzer this spring.
The series stands out for a couple of reasons that make it incredibly relevant for your post. The first is the sophistication with which it teases apart the multi-causal origins of the crisis: naive buyers, captive brokers, corrupt appraisers, and in this case, a flawed federal program. But the second, and more consequential, is that the neighborhood in question was in Charlotte, North Carolina! That’s the city which has proven more resilient than perhaps any other in the nation during the current housing downturn. Miami and Vegas were bubble towns, in which the supply of housing rapidly came to exceed the demand, and many of the sales were to speculators in a flipping frenzy. Not so, Charlotte. None of the homes in the development profiled in the series were bought by speculators – just by ordinary, hard-working folks.
I encourage everyone to read the series. It highlights the danger of an entire built-from-scratch neighborhood in the same income-bracket, typical of modern exurban development. The homes were poorly constructed, and are now falling apart. The developer arranged the loans, using inflated values and often falsifying the documentation, without the knowledge of the borrowers. The buyers took loans on terms they should have known better than to accept. And once the wave of foreclosures began, it became impossible to stop – the neighborhood deteriorated, and even buyers who had been fiscally prudent and keeping up with their payments found themselves with property worth far less than they had paid, unable to resell it for enough to cover their debts. The whole thing is deeply tragic, and it spawned numerous legislate changes and ongoing criminal investigations.
September 25th, 2008 at 1:37 pm
I agree with several of the above commenters that this is an unusually cogent economics post from Matt.
However, I think your general point is pretty uncontroversial, and the key difficulties lie one level deeper than this analysis. You say:
But this is no solution at all! We need a new agency to magically fix the problem? The complexities of modern-day finance are genuinely complex, with mortgage securities sliced and diced in dozens of different ways. How could you possibly renegotiate loans without knowing who is holding them? If you think banks are having trouble valuing MBS today, what happens if a government agency or judge arbitrarily redefines the terms? All it would be is a monetary transfer to homeowners from the very banks and other investors who are starved for money these days. There are many thorny issues here that require much more than a demand for “the heavy hand of the state.”
September 25th, 2008 at 1:40 pm
Sorry, it’s hard for me to feel sympathetic for people being foreclosed on.
Don’t, then. Just recognize that if a bunch of your neighbors get foreclosed on, the value of your home ends up in the crapper. If your job disappears and you need to relocate, and Uncle Sam has bailed out your neighbors, you’ll benefit too. If Uncle Sam hasn’t done so, you’ll be in a fix.
And a lot of jobs are disappearing these days.
September 25th, 2008 at 1:42 pm
There are tradeoffs. I mean, a surplus in vacant houses might be bad for the people who used to live there, but it might be cool for the bored teenagers in the neighborhood.
September 25th, 2008 at 1:43 pm
chris,
I sympathize with your anger. But imagine what happens if that (hypothetical?) neighbor gets forced into foreclosure. The house is likely to sit, unoccupied and untended, for months or years – the grass growing long, the pool breeding bugs. Neighborhoods with multiple foreclosures generally experience spikes in crime. Then, when it does sell, it will go for a fraction of its value – in part because it was untended, in part because families facing financial pressures rarely invest in maintenance, but mostly because foreclosure auctions are inherently inefficient – buyers lack information or time to make considered purchases, and banks are motivated to sell quickly even at reduced prices. That will, in turn, force down real estate values throughout the neighborhood. Lower values may mean that you or your neighbors will see your own home-equity-lines-of-credit (HELOCs) reduced or closed, reducing financial flexibility. It may also mean that some others of your neighbors who are struggling to make their own payments suddenly can’t sell their homes for as much as they paid when they purchased them, meaning that they’re “underwater” even if they haven’t borrowed against its value. If they can’t make their payments, they too will face foreclosure.
This sort of thing spirals out of control very rapidly. And it leaves us with two unpleasant choices – act to intervene, thereby assisting some people who behaved recklessly but also limiting the damage; or stand idly by, and watch those who acted recklessly inflict incalculable harm on their more responsible neighbors. I don’t find it all that hard a choice.
September 25th, 2008 at 1:50 pm
My recommendation —
– foreclose the non-performing mortgages
– let the residents stay in the homes, paying market rental rates (subsidized in some cases)for a few years
– bring the houses back onto the market gradually
This way, the neighborhoods are not decimated, the residents are given time to relocate, those who overbought are not rewarded, those who over-lent are not held harmless, and there’s money coming in on the bad mortgages (and some clarity on how much they’re worth — i.e., they’re worth what the houses can be rented for)
September 25th, 2008 at 2:03 pm
right,
Your post contradicts itself.
What’s happening here is that a clever means of supplying greater liquidity to the mortgage marketplace – MBSs and CDOs – had an unintended consequence. Since the same pool of securities got sliced multiple ways, and then handed off to different groups of investors, it became all-but-impossible to renegotiate the terms of those mortgages, even when it’s in the best interests of everyone involved to do so.
It’s that last point which is so crucial here. The math is actually fairly straightforward. Foreclosures are tremendously expensive to banks that hold mortgages. They require hiring a number of subcontractors (management companies to tend to the property, lawyers to handle the filings, realtors or auction houses to sell it). It may linger on the books for an extended period, tying up capital without generating any return, since payments have stopped. And then, it tends to be sold for a fraction of its value – almost never enough to cover the outstanding principal, let alone the associated costs, and we won’t even mention the lost potential interest.
So why aren’t banks renegotiating the terms of these loans, by lowering the monthly payments substantially or reducing the outstanding principal, or at the very least allowing short-sales of these properties? There are three answers to that question. The first is the one at which Matt hints – they’re all hoping someone else will act, and the value of their assets will recover. The second is more troubling. They simply don’t have the infrastructure to do it. Most of the pools are run by trustees, generally big financial firms like DeutscheBank. They get a small fee to cover their costs. They don’t get additional payments for restructuring loans, managing foreclosed property, or anything like that – every additional bit of work they invest in running the pools amounts to an unreimbursed cost. And since they don’t own the underlying assets, they have no incentive to maximize the pools’ returns. So you’ve got an agency problem – the people empowered to fix the problem lose money if they protect the value of the assets, but lose nothing if they allow that value to deteriorate. And the third problem is the one we mentioned above – that the pools are sometimes sliced in so many different ways that obtaining the consent of all parties to the deal is effectively impossible, even when it serves everyone’s interests.
That’s a classic market failure. The solution is government intervention to authorize (indeed, to mandate) restructuring of the loans. Everyone wins. There’s no transfer of wealth, because if it’s done properly, restructuring will increase the value of the MBSs held by investors and banks. It really is a win-win situation, it’s just that the market can’t take advantage of it due to structural deficiencies.
September 25th, 2008 at 2:04 pm
Wait a minute. So my neighbor, who pulled $200,000 in equity out of his house to pay for vacations, cars, home theater equipment, etc., gets a bailout, but my family, who made sacrifices to live within our means, get nothing.
OK. We won’t bail them out, and the bank will forclose, and they’ll stop paying homeowners dues, and stop maintaining the landscape, and the pool will fill up with mosquitoes, and vandals will strip it for scrap, and bored teenagers will start partying there, and leave a bunch of broken bottles and food scraps, which will attract rats, and finally the thing will catch on fire and it will be a total loss because nobody was there to call the fire department.
And then you will put your home on the market, and all the buyers will take one look at the rotting, weed-filled, infested lot next door and decide they’d rather live somewhere where neighbors look out for one another. Canada, perhaps.
September 25th, 2008 at 2:05 pm
They certainly do if those houses are in foreclosure. Banks make very lousy landlords (one part of the solution I have not addressed is a better means of managing these properties).
If you go over to Manassas (those of us in the DC area) you can see whole areas where the prices are in freefall – I have heard of houses going for under $ 100,000, which around here is roughly 15 year old prices. And in my area, nothing much is selling.
I would dread to be a home developer right now – building houses on a 15% construction loan that most likely no one is going to buy at any price you can make a profit on. Watch them start failing around Spring.
September 25th, 2008 at 2:15 pm
Cynic,
You did not say how my comment contradicted itself.
I agree with most of your post, but you are doing the same thing as Matt, at one level deeper detail. You are just describing the problem and declaring that government intervention will help. To evaluate this there are many questions that need to be answered:
1) Under what terms will the restructuring of the loans be authorized (indeed, mandated)?
2) Who should be eligible for loan restructuring?
3) How does the ability of the homeowner to pay relate to the current marks taken against MBS?
4) What is the “true” underlying non-bubble, non-post-bubble price of housing properties?
5) If the answer to 3 and 4 is “lower than currently assumed”, won’t it require banks (or the government post-Paulson plan) to take massive write-downs they cannot afford to take?
5) How will such a restructuring affect ability to obtain housing finance in the future, if the precedent is set that the government can change the terms?
I’m not saying there’s no solution along these lines. But this is similar to the Paulson plan in the way it assumes because there is a problem, we have to do something without fully considering the ramifications and effects.
September 25th, 2008 at 2:16 pm
You’re ignoring the possibility of those who happen to have a lot of cash on hand buying up all these properties at rock bottom prices and renting them out. On behalf of Slumlords for a Better Tommorrow, I condemn your plan.
September 25th, 2008 at 2:18 pm
It’s a good post, but one slight oversight. Presupposing that consumers who lose their houses will simply (eventually) find other more affordable houses that would be available in a depressed market also assumes that those consumers would have access to credit. Defaulting on a house almost certainly disqualifies an individual from just about any form of reasonable credit for years.
So they won’t be living in tents? You sure about that?
A.J.
September 25th, 2008 at 2:19 pm
Instead of the gov’t buying up mortgage-backed instruments, use some of the bailout money to buy the houses and then rent them back to the former homeowners at a rate close to what they were paying under their pre-adjustment ARMs. Don’t bother with trying to value the securities, go straight to the real underlying asset.
Real estate professionals who lost their jobs during the housing crash could re-employ themselves as rental agents for these properties.
When housing prices rise again, the gov’t auctions the homes, or organizes a buy-back program for the renters to reward those who stuck with their ARM-bought homes, and not the flippers.
September 25th, 2008 at 2:28 pm
If the prices get low enough all the renters who couldn’t afford a house without taking out a ridiculous mortgage can move into these lovely neighbors and the current residents can rent their small apartments. It is a win-win.
September 25th, 2008 at 2:38 pm
The whole thing pisses me off. I bought a home I could afford, made my payments for a few months, and then my home loses ~150K in value. Now you suggest that the dipshits who bought homes they couldn’t afford should get lower mortgage payments (while mine stay the same) after the banks take my tax money. What the eff? It may be a viable solution to the larger problem, but it definitely screws me out of a lot of capital I worked hard to earn while rewarding goof-offs who couldn’t be bothered to read their loan’s fine print.
September 25th, 2008 at 2:59 pm
#25 is almost entirely wrong. The servicer of the mortgage – not the trustee of the securitization – is the party responsible for handling a modification of a mortgage loan that has been included in a securitization. The servicer is paid a non-negligible fee (generally 50 bps annually on the balance of the mortgage) and is entitled to recover any expenses it incurs in connection with managing and liquidating a foreclosed property. Moreover, for mortgage loans that are in default or for which default is reasonably foreseeable, the servicer generally has fairly broad authority to modify the terms of the mortgage and generally does not need to obtain the consent of the holders the securities entitled to the payments on the mortgage.
Additionally, there are quite a few reasons why servicers want to work out a mortgage for a delinquent borrower. For one, they are contractually obligated to service the loans to a certain standard – they can’t just let the loans deteriorate. Secondly, if they don’t work loans out, they will stop receiving their fee on that loan. Finally, statistics are kept on the ability of a servicer to work out their loans and servicers are evaluated by the rating agencies based on the quality of their servicing. Servicing can be a lucrative business and if the stats or rating of a servicer suffers, they will lose servicing business.
So why aren’t more modifications happening? It’s not because servicers are waiting for the servicers of the other houses on the block to act and for the value of the property to recover – by the time that happens, the loans will have been in default for years. There are a couple reasons I see why more modifications aren’t happening:
1) Servicers are overwhelmed. They just don’t have the capacity to work out the current volume of defaulted loans.
2) Mortgagors are often uncooperative. Often times mortgagors who are in in default will often dodge calls of the servicer because they think the servicer is merely harassing them to pay up, or because they don’t even have the money to keep the mortgage current at a lower monthly payment.
Now, the contractual obligations of a securitization on a servicer can have a chilling effect, so that servicers may not want to test the limits of the document, but they should have all of the authority they need to make the appropriate modifications. But modifications and work outs can be a time consuming practice and it will take time for the current volume in the system to be fixed in a reasonable manner.
September 25th, 2008 at 3:10 pm
Ah jeez.
Mo, chris, Jordan, et al…why you have to be such jerks about it? So your irresponsible neighbor doesn’t get tossed out on the street for his short-sightedness. What’s it to you?
At least you’ll still have your smug self-satisfaction to lord over him…the bleeding hearts can never take that away from you.
September 25th, 2008 at 3:38 pm
“…the contractual obligations of a securitization on a servicer can have a chilling effect, so that servicers may not want to test the limits of the document, but they should have all of the authority they need to make the appropriate modifications. ”
So some preemptive legislation that indemnifies loan servicers from suits by shareholders about borderline adjustments might be useful.
Small tax incentives for servicers to renegotiate mortgages, or hire more people to do so, might be useful. They don’t need to be big. Just enough to make the borderline cases more profitable to adjust than forclose.
September 25th, 2008 at 3:48 pm
Look, there will obviously be a need to determine whether homeowners can pay on a restructured mortgage. The government or Fannie/Freddie or whoever can easily come up with an income/asset-based formula for that.
You know, sort of like what mortgage lenders used to do, before they started handing out loans without income verification and defrauding people into deceptive no-interest loans.
So if you can afford payments on the 30-year fixed rate for your home at the current value and interest rate, you can stay. If you can’t, then your house probably goes on the market.
It’s a nice middle ground.
September 25th, 2008 at 3:50 pm
So some preemptive legislation that indemnifies loan servicers from suits by shareholders about borderline adjustments might be useful.
I agree with this. Even better would be legislation that eliminates any liability.
September 25th, 2008 at 4:11 pm
Good post, but I would go further.
During the S&L scandal of 1988 the government bought bad loans, not their derivatives, credit default swaps, or any other such nonsense.
Why not do the same today? Have a moratorium for a year or two on all foreclosures. Any legitimate ones have the mortgage bought by the government, which can dispose of them in the most equitable fashion.
This way any bad liquidity due to bad mortgages are taken care of, and bad debt resulting from over-leveraged positions, or bad faith derivatives would not be protected.
This has the advantage that people aren’t thrown out on the street, and it would be easier to understand so we don’t feel we are being ripped off by this shell game.
Thus, homeowners are saved as well as those who lent them money. How much would this cost?
September 25th, 2008 at 4:12 pm
Wouldn’t it be a suit by the securitization trustee? The shareholders want the work-out as it keeps the loan servicer profitable.
(As bill said in #34, para. 2)
September 25th, 2008 at 4:25 pm
Well, whoever’s ox gets gored when the servicer cuts too leniant a deal with the borrower.
If you go that far, you might get corrupt servicers accepting bribes to make ridiculous deals. While I suppose that would be criminal, the crime is harder to prove than the negligence.
You could set some limit beyond which the servicer is untouchable – some % of the last assessed value of the home at a rate that is x% over prime with a provision that if the house is sold for more in y years, the lender gets a cut of the excess profits based on a sliding scale of when and how much.
September 25th, 2008 at 4:27 pm
It would seem like the compassionate goal for all of society would be a policy to convert homes where the “owners” aren’t paying their mortgage into rented properties as soon as possible. They could be rented to the current occupants or to anybody else willing to pay the rent.
Don’t let the homes sit vacant, wasting money and space and inviting vandalism. Rent them. That would drive down rents in general, which would be good for the less well-off.
September 25th, 2008 at 4:30 pm
before you judge the subprime borrowers too harshly, remember a lot of these folks were happy renters until bush cut the balls off the section 8 rental assistance program. converting low income renters into low income homeowners was a stated purpose of the “ownership society” mindset and, in his first term, bush took a lot of credit for it.
September 25th, 2008 at 11:03 pm
It’s actually quite simple.
Identify homeowners who have at least 20% equity in their house as of Jan ‘08, are having trouble paying their mortgage amounts and LIVE in their house.
The Federal Reserve sends their mortgage company the 20% equity share as a ‘balance on account’
The homeowner continues to pay the mortgage, if they are short, they use funds in the balance on hand.
The mortgage company rewrites the mortgage to a reasonable rate dictated by federal guidelines AND records a first mortgage for the FEDS 20% and a second mortgage for their money owed.
The people can stay in the home longer and doesn’t further dilute the price of what’s in the inventory.
Anyone who wants the FEDs to be a landlord has never lived in a Federal Housing Project. If you have tons of homeless families, at some point the FEDS are going to have to act to help them (unless you are a heartless bastard). Now you have seriously reversed all the gains in welfare.
September 26th, 2008 at 6:20 am
I guess reestablishing faith in the banks—that showed particularly poor judgment in advocating for lax lending standards, and pushing full speed ahead into the consumer mortgage market—is a necessary evil, given the recent turns in the financial markets. But at some point, house prices need to fall back to where buyers can afford them without resorting to gimmick loans. Propping up prices now just gives the next RE bubble a higher starting point, which only feeds into a vicious cycle.
And will any bailout proposal sincerely allow for a distinction between houseowners who simply cannot make the monthly payments because of interest fluctuations, and those who have tapped “equity” in their houses for other expenses. I would expect that the latter group accounts for very nearly half of the endangered loans, at least from what I know of my town in the Northeast US.
They’re called bagholders for a reason.
September 26th, 2008 at 11:34 am
I agree with mo, chris jordan et al. You make bad choices, you suffer. My friend drives a nice Audi, i drive a used Toyota. He bought a hugh house with an ARM, we live in a smaller one with a 30 year. He now whines about the payments – nice guy but screw him. Let it go down.
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