The Case for Mortgage Intervention
With John McCain apparently endorsing the sort of intervention into the housing market that a lot of progressives, myself included, have been calling for he’s predictably enough getting slammed from the right by Mark Steyn and others. I’ll rise to McCain’s defense. Steyn writes:
Will massive government intervention restore the health of the American property market? It’s not clear to me why the government needs to buy up all these mortgages. We talk of “keeping people in their homes”, but in what sense are they “their homes”? Many of these home “owners” obtained such ridiculous mortgages that they have minimal equity in them: Losing “their homes” is, in that sense, little more in cash terms than losing the security deposit on your rental apartment. Listening to all these proposed government interventions designed to stave off reality, I’d rather leave it to the market.
I think “restore the health” of the property market would be too strong. But as I’ve argued before it’s a mistake to think of a mass foreclosures situation as just an endless reiteration of what happens when one family gets foreclosed on and loses their home. If one house gets foreclosed on, the bank seizes the house and sells it off. Maybe they wind up losing something on the loan gone bad, but they don’t lose all that much and nobody else really notices that anything of interest has changed. But when you have a whole bunch of foreclosures in your area, you run the risk of a catastrophic drop in home values unless there’s for some reason a large net inflow of people into the area. If only one area was suffering mass foreclosures, then the very fact of the falling prices might be enough to induce a net inflow of people. But if a whole bunch of areas have a whole bunch of foreclosures, then you wind up with a lot of people losing their homes and a lot of empty, basically worthless homes.
This situation is bad for all homeowners. You don’t want to be in the position of looking to sell your home in Miami order to take that new job in San Jose at a time when Miami is littered with foreclosed-on homes that nobody wants to buy because, hey, only so many people want to move to Miami.
Meanwhile, in the long run the situation rebalances. A bunch of people who bought homes they can’t afford lose their homes. And a bunch of homes whose occupants have been kicked out plummet in value. Suddenly the homes that people previously couldn’t afford are affordable, and everyone who was previously without a home winds up back in one, with houses having re-adjusted downward in value. There are so many people in the country and so many homes to occupy, so one way or another the great wheel of history will turn and people will wind up living in the houses. Mass rewriting of problematic mortgages will produce the same outcome as simply letting history run its course, but if done right it ought to get us to that outcome more smoothly (without, for example, producing a reverse-bubble in which housing prices fall too low) and with less inconvenience. By now, economic problems have become so multifaceted that one doubts that anything in particular will “fix” the problem, though perhaps if the Bush administration had embraced this idea nine months ago we could have averted the situation. Still, McCain is quite right to support something along these lines, and since Obama has made similar noises, in an ideal world both candidates could push congress to move toward a fair and effective solution to the housing crisis.
43 Responses to “The Case for Mortgage Intervention”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
October 8th, 2008 at 10:12 am
Well, as someone who stayed out of the housing market b/c I knew it was overpriced, it’s a little annoying if the government takes measure that will attempt to prop up housing prices (which may need to still fall further). But if it’s good for the economy, I can’t complain all that much.
October 8th, 2008 at 10:15 am
I stayed out of the bubble too. Sounds like under Matt’s idea, my family of four is stuck in our 1-bedroom apartment for 10 years at least. Thanks alot. Leave everything alone, and I’ll be able to buy a house in 1 year with a safe and affordable 30-year mortgage. Prices have to come down to match incomes.
October 8th, 2008 at 10:30 am
I really don’t care if a bunch of $30,000 millionaires have to downsize. If we prop them up we create an artificial market that prevents young people from entering at an equal level. Why does my salary buy less than someone with a lower salary and worse credit, but who wasn’t in school three years ago?
If they all fail I’ll have better choices. Why should those under 30 suffer? We’re already paying for everything else Bush is charging on the national credit card. At least let us buy a house…
October 8th, 2008 at 10:31 am
We are in a dangerous position & there are no risk free ways out. Inflation can reduce the nominal value of current debt, & the Federal Government can structure the process so that working & middle classes come out ahead (the dreaded wage inflation that the conventional wisdom of the last 28 years has kept from happening), while reducing the percentage of the national income going to the wealthy. Massive governmental spending on rebuilding the strength of the country (which the private investment system has avoided funding) will be inflationary- but will be better for the average American than the depression that is the alternate.
October 8th, 2008 at 10:35 am
Many people, including myself and progressives like Krugman, are against reinflating the bubble for economic reasons not moral ones.
Let us work through your reasoning. One family forecloses bringing down housing prices in their area and starting a cycle. This might cause a “catastrophic” reduction in home prices. So far so good. But then you claim this will cause a bunch of worthless empty houses. Unless everyone with a stable cash flow already has a house there should never be a bunch of empty worthless houses. Either investors will buy these cheap houses and make a profit off the rent or those who lost their homes will buy them at a reduced price. There is no economic reason why a foreclosure crisis will mean greater homelessness. Not being able to own/rent has to do with your job (or lack thereof) not a cheap housing market.
But the biggest problem with a bailout is it allocates even more capital to an industry that is already consuming too much. And since the US economy can only do so much, more capital in the housing market means less capital for other progressive ideas like green jobs and universal health care.
October 8th, 2008 at 10:36 am
The fact here, though, is that having homes plummet in value isn’t particularly bad in the short term- a low-value home isn’t any worse to live in than a high value home. The majority of situations where homeowners need to sell their homes and pull the value out is when they’re moving. But if home prices are depressed around the country, then the lower value pulled out of a current home should be enough to buy a depressed-price home somewhere else. Granted it would make it more difficult for people to use the equity on their homes as a credit card to buy other things, but in a macro sense that’s fine because using home equity as a line of credit is part of what got us into this problem in the first place. In the meantime, folks whose home prices are depressed will get a break in their property taxes too- and for many retired folks who’ve been responsible and paid off their mortgages, their biggest fear is that they can’t pay property taxes which had risen because of the spike in home values.
October 8th, 2008 at 10:52 am
Since there will be a large number of forclosures even with the measures prescribed, there is justification for offering purchase assistance to low income home buyers. This should not take the form of ridiculous loans that become unpayable later, but rather as grants for downpayments and fees. It would put a lot of cash in the hands of lenders, easing the credit crunch and it would prop up home values without barring from the market those who wisely refrained from purchasing during the bubble.
October 8th, 2008 at 11:02 am
The potential problem with the current situation, as with a rapid decline in any sector or economy, is that the drop in home values can *cause* further drops. That’s the difference between normal times–when I lose my job and my house but it really doesn’t affect you–and collapses. That’s why doing something to halt the slide makes sense.
October 8th, 2008 at 11:17 am
I generally agree with Yglesias on politics and enjoy reading this blog for his take on lots of things I don’t know much about.
But virtually every time I read an Yglesias post on anything to do with business or economics it is very clear that he is totally out of his depth, and I find myself wondering if he is similarly simplistic when he writes about all those things that I don’t know much about and enjoy reading his column.
About 20 years ago I foreswore watching TV politics and news talk shows when I almost went deaf and blind listening/watching Fred Barnes and Eleanor Clift discuss fiscal and monetary policy on the old McLaughlin Report. It was worse than watching sausage being made. Yglesias hasn’t reached that point yet, but when I read this blog on business or economics what I see is a pre-ordained conclusion determined by the writer’s political viewpoints, followed by a thin and simplistic analysis in support of that conclusion. It’s not Jonah Goldberg level stupid, but it’s pretty clear that the author’s opinions determine the analysis, and not the other way around.
October 8th, 2008 at 11:23 am
Since we’re making policy prescriptions in the Land of the Imagination, can I propose that no one (Matt, njorl) be permitted to propose spending without some indication of where the money will come from? We’re about to replace the past 7 bubbles with a Treasuries bubble (huge supply due to huge government spending, huge demand due to flight to quality). What happens when the demand fades? Of course the USG is never going to default, but they are eventually going to have to inflate their way out of this and pay higher rates on new debt so that they don’t have to raise taxes to pay the interest. That inflation might as well be a tax on savers and fixed-income investors.
As to Matt’s proposal: balderdash! If housing prices are low in Florida they’ll be low in California too. Find the price that clears your FL house off the market and find a bargain in CA. Or rent your FL house to someone else and rent a CA house until you can figure out a way to get out of the situation. Whether a bunch of houses get foreclosed on has no impact on how many houses exist (too many) or how many people would like to live in a house (not enough, at inflated prices).
We can’t reasonably go on reinforcing the biases that created the bubble: money is free, housing prices only go up, and buying a house means no commitment because you can sell it easily for more than you paid whenever you want. If you buy a house that you can afford to live in and plan to stay there for many years, you don’t care what the economy does. If you buy a house that you can’t afford to live in and feel the need to move every year, you get the stick. If you don’t like this choice, you can always rent.
Like a few other posters, I consciously chose not to buy a house two years ago because prices were high, I didn’t want to be in that much debt, and I wasn’t sure whether I wanted to stay in my current state for more than a few years. People who chose to buy an expensive house took a risk, but the worst-case scenario is that they have to keep living in the house they bought and keep paying the mortgage payments that they agreed to pay. This is not excessively onerous.
The banks are much worse off than the homeowners, because they didn’t charge enough interest to cover their risk of default/collateral value decline and now can’t walk away from the deal after they put in 80-100% of the capital. They have no recourse to the homeowners’ other assets, no way to force homeowners to post more collateral. The banks that did this should fail, and then maybe we’ll get a better banking system (yeah, right).
Matt’s plan of rewriting mortgages does nothing but save irresponsible people from well-deserved punishment. The only thing that makes a house belong to a person is that they agreed to pay back the money they borrowed to buy it. If they’re not going to pay, it’s not their house. Foreclose and sell it to someone who can afford it.
October 8th, 2008 at 11:27 am
Gene: You’re exactly right.
William: Please explain to me how your neighbor getting foreclosed on or selling his house for a tiny amount is going to cause you to decide that you don’t want to live in your house any more. Are you going to suddenly conclude: “Houses are for suckers; I’m getting a box!”? Houses are for living in; they’re not paper assets like stocks. Furthermore, even in stock crashes the only people who get hurt are those who bought in the bubble and sold in the crash (AKA idiots). The US stock market survived ‘29 and ‘87, and the housing market will survive this, because at the end of the day there aren’t really a lot of good shelter alternatives to houses.
October 8th, 2008 at 11:28 am
I think the idea that foreclosures necessarily drive down all property values in an area is false. My fiancé and I have been looking for a house for the past five months. We are in Chicago, and although this area was not as badly hit as some, there are still numerous foreclosures in every part of the city.
There are big differences between buying a foreclosure property and a normal property. The foreclosure properties are commonly in terrible condition (no appliances, frequently without kitchen cabinets or plumbing fixtures), they are often poorly maintained, it generally takes much longer to clear the purchase with the bank, and the banks will not cover as many expenses (such as the buyers agent) so the closing costs are higher.
Because of these problems, normal properties are still extremely desirable. These homes generate intense interest, always getting multiple offers and frequently seeing bidding wars. They commonly close ten to twenty percent higher than their asking price. As first time homebuyers, with a limited budget, it’s been very difficult for us to compete in this market.
I know that real-estate markets are very local, but I think it’s an overgeneralization to assume that foreclosures necessarily drive down the prices of normal homes. Anyone who doesn’t have to sell their house is not putting it on the market, so for now properties for sale by homeowners are rare. The demand for these homes is extremely high and although they may look like they have lost value on paper, the competition for these homes is elevating their value.
October 8th, 2008 at 11:40 am
Republicans are WAY too obsessed with people suffering (not just inccuring, but suffering) the consequences for their actions, way too obsessed with punishment. Yes, a lot of people did not make good decisions–many perhaps committing outright fraud.
But we’ll all incur (are incuring) the consequences of these actions on a macro-economic scale. Should all of us suffer even more due to a desire to punish those who inflicted this uypon us?!? Talk about cutting off your nose…
Personally, I think it stinks to high heaven that we are now virtually compelled to help out some people – individual homeowners and massive corporate entities alike – in an effort to protect ourselves (and our heirs) from further fallout.
But the republicans position on homeowners is like like watching a rising flood, and complaining that those who didn’t build their floodwall the right way should be left alone. Well, that breach in the wall will flood all of us. A rising tide sinks all homeowners…
October 8th, 2008 at 11:44 am
There are so many people in the country and so many homes to occupy, so one way or another the great wheel of history will turn and people will wind up living in the houses.
That may be true — unless you are in Buffalo, New York. There, the city has to demolish vast numbers of livable houses because people can’t come and occupy them without some kind of job in the area. And the jobs aren’t there. And this has been going on for a generation.
October 8th, 2008 at 12:09 pm
Republicans are WAY too obsessed with people suffering (not just inccuring, but suffering) the consequences for their actions, way too obsessed with punishment.
I agree, but I think a lot of people who comment on this post and Matt’s other foreclosure-assistance post aren’t Republicans, but Democrats and liberals with a particular blind spot. Many of them have no problem with Social Security even though it won’t help them for decades, or social programs that they don’t directly benefit from, or affirmative action even if it may work against them–after all, those are based on fairness, even aside from the practical benefits. But helping people who may have made bad decisions, even if that help will make the rest of us suffer less, strikes them as unfair, and they abandon all the sensible liberal principles that they hold in regards to programs like welfare and SCHIP. They turn into Michelle Malkin et al picking on the Frosts for not having the foresight to get health insurance.
You’ve heard that a conservative is a liberal who’s been mugged? This is that on a macro scale.
October 8th, 2008 at 12:10 pm
if done right it ought to get us to that outcome more smoothly (without, for example, producing a reverse-bubble in which housing prices fall too low) and with less inconvenience.
As others have mentioned, it’s sure as heck inconvenient to *me* and all my peers who made the sensible decision to save and rent.
And how can housing prices ‘fall too low’? That would ipso facto create ‘affordable housing’ right?
October 8th, 2008 at 12:14 pm
“And how can housing prices ‘fall too low’? That would ipso facto create ‘affordable housing’ right?”
Do people genuinely not know about mortgage refinancing? I understand that these are people who did the Responsible Thing and Rented™, but you should at least know the rudimentary reasons why people need the value of their home to increase. Do you talk about how the recent crash has led to “affordable stocks”?
October 8th, 2008 at 12:20 pm
cgaros (11)
Houses are for more than shelter, and their economic role goes beyond the sale transaction. Home equity loans are affected by falling housing prices.
More broadly, the decline of the mortgage market affects the rest of the economy through the credit market.
Even if we just focus on the sales, however, the fact that the market is falling affects everyone selling a house, whether or not s/he overextended in purchasing it.
lutton (13)
I think you’re quite right about conservatives wanting the poor to suffer the consequences of their actions. The initial reaction to the mortgage problem was that these people (presumed to be poor; after all, it was a “subprime” crisis) shouldn’t have borrowed the money, so screw ‘em. Interestingly, the thinking on this board seems similar, albeit aimed at a different class.
I don’t have a strong opinion on the bailout, because I don’t understand the details, but doesn’t this kind of situation (multiple financial institutions going under) always lead to some kind of bailout (some of which include fixes for the problem and some of which don’t) for the reasons I’m raising? You can’t just let it all work itself out, can you?
October 8th, 2008 at 12:25 pm
Do you talk about how the recent crash has led to “affordable stocks”?
Actually, yes.
October 8th, 2008 at 12:28 pm
cgaros: See this Martin Feldstein op-ed: http://www.washingtonpost.com/wp-dyn/content/article/2008/06/18/AR2008061802634.html
Briefly, in most states obligations to the bank are erased after the house is foreclosed upon. Then if the value of the house is low relative to the mortgage, it may make sense to walk out. Sure, there are adjustment costs, loss of credit, and so forth, but if the difference is large enough, people will leave their current houses.
October 8th, 2008 at 12:29 pm
Do people genuinely not know about mortgage refinancing?
Even if you bought, if you did The Responsible Thing (TM) and got a 15 or 30 year fixed, you would have got it at post WW2 interest rate lows. So why would you need to re-finance?
Answer: Only if you bought more house than you could afford, and were banking (so to speak) on the appreciation.
October 8th, 2008 at 12:34 pm
“Do you talk about how the recent crash has led to “affordable stocks”?
Actually, yes.
Okay, well, I’m sure that’s quite a comfort to the people whose retirement funds are now worthless. Of course, they were engaging in risky financial voodoo like IRAs and 401(k)s, so they deserve what they get.
October 8th, 2008 at 12:37 pm
You can propose it, but nobody with any sense will listen to you. Have you not caught the gist of what people mean by “Hooverism”?
October 8th, 2008 at 12:44 pm
You can’t sell your house with an upside down mortgage in Florida to buy one with an upside down mortgage in California. Even if you find someone with identical circumstances, you can’t switch places.
October 8th, 2008 at 2:28 pm
Okay, well, I’m sure that’s quite a comfort to the people whose retirement funds are now worthless. Of course, they were engaging in risky financial voodoo like IRAs and 401(k)s, so they deserve what they get.
If you had *all* your stuff in stocks and were set to retire this year (or anytime in the next five years), well yes, you deserve what you get.
And a drop of 33% in value does not make something “worthless” It makes something worth about 1/3 less.
October 9th, 2008 at 1:08 am
What one truly wonders is why, if the likely result is mass dumping of homes on the market, mortgageholders see it as in their interest to foreclose into a crashed market to start with. They took the chance on a risky mortgage application; let them make the hard call and choose to offer rewrites on their own. If they’re rational they should do jut that.
If not, I’m with those above who say, tough. I looked around at 23, 24 year olds I went to high school with buying homes, and thought they have no clue what they’re getting into. I wouldn’t mind buying in at the (real) bottom myself, though I doubt I’ll have a down payment by then.
October 9th, 2008 at 1:16 am
Not sure if the conservative remark was aimed at me, but I am an independent voter who has never found a Republican he could vote for. McCain in 2000 was the closest I’ve come, but he’s changed since then. The ineffectuality of the current Congress has me thinking about it, especially when my Republican options are fairly reasonable New England Republicans.
As to the IRA/401k comparison, yes, I too see stocks as on sale/affordable right now. I don’t know about others, but I managed to avoid investing my IRA 100% in bankrupt companies. It’s called “diversification” or “risk management”. Look into it. Of course the stock market has risks, but you should never put more capital at risk than you can afford to lose and there are many things you can do to reduce risk. I don’t need the IRA money for 40 years and I’m pretty confident that buy then it will either be more money than it is now or the world will be so messed up that I won’t care about the loss of money.
Furthermore, there’s no reason for a house to be as risky as stocks. When you look at a house, you calculate a few things:
1. How much house do I need?
2. How much does that much house cost to rent or to buy?
3. How much income do I have to devote to housing?
4. What are the risks to my income?
5. What is the structure of the lease/loan I’m considering, and how much can the payment rise over time?
6. Given all of the above, what is a safe place for me to rent or buy that I would like to live in for the forseeable future?
If you’re even remotely close to accurate in these calculations, there’s minimal risk in housing. You buy a place you like and can afford, and then you make the monthly payments. The price that someone else would pay you to take the house doesn’t really matter, because you shouldn’t buy a house that you might want to sell in short order. The amount the bank will give you against the house doesn’t really matter, because a house is not an ATM or credit card. Of course a few people will get jammed up on their mortgage due to events (natural disasters, health problems, unemployment), but that’s why our society has things like insurance, disability pay, and unemployment/Medicare/Medicaid/SS programs.
Today’s crisis doesn’t come from totally random unforseeable economic events; it comes from the business cycle, misuse of home equity, fraudulent loans, overleverage, poor lending standards, overbuilding, overconsumption, etc. I don’t know anyone who’s in financial trouble who didn’t do several stupid things. If you know someone who didn’t, they probably are eligible for a more specific and effective government program than the “Free Money For Morons/Knock some Principal off the Loan” program. If anyone should negotiate this sort of plan, its the banks, many of which are still profitable and are engaging in this sort of work-out very selectively.
October 9th, 2008 at 1:23 am
njorl: You just don’t get it. I didn’t say “government must cut spending in a depression” (Hooverism). I said “Tell me where the money comes from”: raise taxes, cut other spending, borrow more, or run the printing presses. You can’t get the money from unicorn-fairy arbitrage.
On the upside-down issue, you can in fact sell your upside-down house – you just have to pay the bank the difference between the mortgage and the sale price. If you don’t have it, you’d better get really good at negotiating, because banks do allow short sales when pressed. But why should people have the nonnegotiable right not to pay back what they borrowed just because the value of the item has decreased? If I borrow money to buy a car and then drive it into a tree, I still pay. I can’t buy a $20k car, drive it around for a year while missing payments, then take it back to the dealer and sell it to him for $10k and have my loan forgiven because “it’s not fair that my car decreased in value!!!”
January 13th, 2009 at 9:16 am
laptop battery
laptop batteries
February 8th, 2009 at 8:34 pm
laptop battery
February 9th, 2009 at 3:02 am
laptop battery
March 1st, 2009 at 5:56 am
viagra
It is the coolest site,keep so!
March 11th, 2009 at 4:49 am
If you have to do it, you might as well do it right
March 22nd, 2009 at 6:22 am
tramadol
If you have to do it, you might as well do it right
April 2nd, 2009 at 5:28 am
Very interesting site. Hope it will always be alive!
buy cheap viagra
April 3rd, 2009 at 4:18 am
Excellent site. It was pleasant to me.
cheap brand pfizer viagra
April 9th, 2009 at 6:40 am
I want to say – thank you for this! viagra