Matt Yglesias

31 Responses to “Ways to Help”

1. steve duncan Says:
   December 5th, 2008 at 9:47 am

   A snippet from an AP release this morning:

   “The new figures, released by the Labor Department Friday, showed the crucial employment market deteriorating at an alarmingly rapid clip, and handed Americans some more grim news right before the holidays.”
   “Job losses in September and October also turned out to be much worse. Employers cut 403,000 jobs in September, versus 284,000 previously estimated. Another 320,000 were chopped in October, compared with an initial estimate of 240,000.”

   ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
   So, the Labor Department revised upward unemployment numbers from September and October. 119,000 more in September than previously reported, 80,000 more in October. The two most critical months at the end of a hotly contested election and the Labor Department is off their estimates by nearly 200,000 unemployed workers. How odd……………..

2. Benny Lava Says:
   December 5th, 2008 at 10:03 am

   This is a perfect time for me to reiterate my foreclosure plan:

   Have HUD take some of that bailout money and use it to buy foreclosed properties. Its easy, they are listed publicly. HUD agents will go to the auctions and buy them up. This will do 2 things for the borrower:
   1. the borrower will not keep their house. They still lose on their bad investment.
   2. the borrower will keep their credit in tact. Since their mortgage will be considered paid in full, they won’t make any money on this but they also will keep their credit from having a foreclosure. They can then either rent someplace or buy a more affordable home.

   In this scenario, the lender takes a haircut because giving them 90 or 95 percent of the value of the lien is more than they would get in an REO sale and they know this and would take it. They will lose money, and the security package that this was a part of will lose money too. But still, it is then possible to price these securities (5-10% haircut) and therefore restore the market.

   What will HUD do with these houses? Keep them off the market, thereby stabilizing the neighborhood and stop responsible people’s mortgages from going underwater. They can either turn the properties over to the municipality for demolition and redevelopment, or create some sort of rent to own program.

   This seems better at solving the problem than any other suggestion I’ve seen. The housing market was overinflated and needs to come down. If housing values stay flat for 5 years, we will come back to equalibrium without the massive destruction in equity.

3. El Cid Says:
   December 5th, 2008 at 10:15 am

   From the super-ancient history of March of this year ago:

   The Home Owners’ Loan Act of 1933 created the HOLC. The agency eventually grew to about 20,000 employees but was designed as a temporary program “to relieve the mortgage strain and then liquidate,” as one early description put it.

   The Treasury was authorized to invest $200 million in HOLC stock. In current terms, based on the consumer price index, that’s about $3 billion, but if adjusted based on the change in gross domestic product per capita since 1933, it would be about $20 billion. The act initially authorized the HOLC to issue $2 billion in bonds, or 10 times its capital, which relative to GDP per capita would be about $200 billion today.

   The idea was that for three years the agency would acquire defaulted residential mortgages from lenders and investors, give its bonds in exchange, and then refinance the mortgages on more favorable and more sustainable terms. Lenders would have a marketable bond earning interest, although with a lower interest rate than the original mortgage, in place of a frozen, non-earning asset.

   Lenders would often take a loss on the principal of the original mortgage, receiving less than the mortgage’s par value in bonds. This realization of loss of principal by the lender was an essential element of the reliquification program — just as it will be in today’s mortgage bust.

   The HOLC’s investment in any mortgage was limited to 80 percent of the appraised value of the property, with a maximum of $14,000. That means the maximum house price to be refinanced was $17,500, equivalent to a $270,000 house today adjusting by the consumer price index but about $1 million based on the change in median house prices.

   The act set a maximum interest rate of 5 percent on the mortgages the HOLC made to refinance the old ones it acquired. The spread between this mortgage yield and the cost of HOLC bonds was about 2.5 percent. With today’s long-term Treasury rates around 3.5 percent, an equivalent spread would suggest a lending rate of 6 percent.

   While it existed, the HOLC made more than 1 million loans to refinance troubled mortgages; that was about a fifth of all mortgage loans nationwide. By 1937, it owned almost 14 percent of the dollar value of outstanding mortgage loans. Today, a fifth of all mortgages would be about 10 million loans, and 14 percent of outstanding mortgage values is about $1.4 trillion — approximately the total of all subprime mortgage loans.

   The HOLC tried to be as accommodating as possible with borrowers but did end up foreclosing on about 200,000, or one-fifth, of its own loans. Given that all of its loans started out in default and close to foreclosure, another perspective on the HOLC foreclosures is that the agency’s loans had an 80 percent success rate.

   A key provision of the Home Owners’ Loan Act was that the directors “shall proceed to liquidate the Corporation when its purposes have been accomplished, and shall pay any surplus or accumulated funds into the Treasury.” In 1951, they did, returning to the Treasury an accumulated surplus of $14 million.

4. Benny Lava Says:
   December 5th, 2008 at 10:18 am

   Dear El Cid,

   Fascinating! Thank you for the link.

5. Matt B Says:
   December 5th, 2008 at 10:21 am

   Shorter Bernanke: Screw prospective home buyers.

6. bobbo Says:
   December 5th, 2008 at 12:11 pm

   I can haz 4.5% refi?

7. BarryG Says:
   December 5th, 2008 at 1:31 pm

   What Benny Lava said — with the proviso that the former residents/owners can live in the houses for a limited number of years while paying market rents (subsidized if absolutely necessary). That would keep the houses off the market for while, keep the neighborhoods intact, give the foreclosed owners some time to get better options, without rewarding anyone who made lousy decisions.

8. Francisco The Man Says:
   December 5th, 2008 at 1:33 pm

   Oof. I worry about this. I don’t see why prices falling far enough won’t lead to other buyers scooping up these homes as opposed to massive vacancies. Surely, we’re a ways off from that. The housing market is still overinflated and that still seems like the bigger problem.

9. alan Says:
   December 5th, 2008 at 2:38 pm

   I am no economist, BUT_
   we got into this problem in large part from too much credit with the decrease in interest payments NOT leading to lowering housing costs, but trather simply artificially inflating housing prices so that homeowners paid the same monthly bill, but since the interest portion was lower, the principal (ie. home price) became larger. So now the plan is to make housing cheap again to raise home values, ie re inflate the bubble. For what ends? So that home builders will start (once again) building more homes even though this nation clearly already has more than they can afford?! Note that the NY Times article about this proposal is adorned by a photo of Toll Brothers, A NEW HOME BUILDER!!!
   Home prices must be allowed to fall, and people who owe more than their houses are worth must either pay off the amount of loan, or work out a deal with the lender to essentially repurchase a foreclosed property from them at a more appropriate price (the net effect of reworking mortgage terms). There are no easy ways out of the bubble, houses were overvalued, and prices must fall to what the market will bear, NO MATTER WHAT ANYONE TRIES! It is only a question of how much time and manipulation occurs before prices reach non-bubble levels. Federal money is better spent providing support programs, purchasing foreclosed houses (at real value) and renting them back to people who lost them, and purchasing infrastructure programs that will leave something of value for future taxpayers when the bills come due.
   and yes, I am a homeowner, and I realize that my home is losing value, but that is only because we all assumed it was worth more than it actually is.

10. The Other Steve Says:
    December 5th, 2008 at 4:58 pm

    I’m ok with 4.5% financing, as long as I can refinance my home.

11. StJoe Says:
    December 6th, 2008 at 3:00 pm

    You are all ignoring that mortgage credit in the troubled sectors of the housing market is used mostly for refinances, not for home purchases.

    Mortgage originations are way down, and credit is expensive. Yes, to get homeowners out of bad loans, you need holders of mortgages to take haircuts.

    But it would also help if distressed homeowners with predatory 11% APR loans could refinance out into 4.5% mortgages that they could afford. Creating cheap credit for mortgages enables that to happen.

    Illustration: Suppose that a homeowner has a $300k mortgage at 9% (pretty typical rate for a subprime after rate reset). They can’t afford it now, but based on the homeowners income, the loan will perform given a write down in principal to $250k and an interest rate reduction to 4.5%. Suppose the lender will take a $50k haircut and write down interest rate to 6% if it can get cash right now, but won’t right down to 4.5% because the risk of default after loan modification is too high to justify it. With no subsidization of credit, the deal doesn’t go through and the house goes to a foreclosure auction. But the problem is solved if the government provides a subsidy of 1.5% of the interest to the lender to enable the refinance to go through.

12. J. R. in WV Says:
    December 6th, 2008 at 4:58 pm

    Hi:

    There is a basic falsehood embedded in the assumptions here. It is this: a 4.5% fixed rate mortgage is not a rare bird that hasn’t existed since our childhood.

    I know this because I have had one for several years with Chase. When we refinanced our home we received a check for $2,000 for the original mortgage’s escrow account, skipped at least one monthly payment (perhaps two, it was several years ago) and paid no fees, as because they held the existing mortgage they were willing to accept the concept that a reappraisel was a waste of time.

    We met with a notary for the closing, and he was paid by the bank for his time.

    Now, I don’t mean to suggest that the bank hasn’t been interested in changing the terms of that mortgage ever since, offering a new loan with a checking account connected to the equity now built up, but we’ve declined, and the building will be paid off in the next 6 or 8 years.

    I don’t know that this has a huge bearing on what should be done to fix the credit/real estate situation, but to whine about how 4.5% fixed mortgages haven’t been seen in this country for 50 years is plain old wrong, we refinanced some 8 or 9 years ago and opted for a 15 year plan, but the bank was happy to accept a longer term if we have asked for it.

    Hard to believe, but true.

    JR

13. Bruce Hughes Says:
    December 7th, 2008 at 11:13 pm

    I remember paying a mortgage in the 1980s the interest for which was 11.25 per cent. I made my payments on time, and sold the house to someone who, as far as I know, continued to pay after they assumed the loan.

    What if the problem is not that interest rates are too high, but that houses just cost too much?

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