Posted on 09/26/2010 8:59:04 AM PDT by blam
A Fair And Easy Way To Fix The US Mortgage Crisis
William Wheaton, MIT
Sep. 26, 2010, 11:06 AM
Recent estimates suggest as many as 23% of US mortgages are “underwater” –the value of the home collateralising the mortgage has fallen below the loan’s balance. This column from VoxEU.org outlines a proposal to remove the threat of strategic default in these cases – one that it argues is not only fair but also the most likely to allow the US housing market to recover.
The current pool of US mortgages is suffering from two serious problems that continue to delay a recovery in housing markets and in turn threaten the broader economy. First, estimates put as many as 23% of US mortgages “underwater”, meaning that the value of the home collateralising the mortgage has fallen below the loan’s balance (CoreLogic.com 2010). In most cases this was the result of ill-informed households purchasing homes at the peak of a housing bubble while reckless lenders allowed them to over-leverage.
Thus there is widespread worry about strategic default. Second, the deep recession and slow current job growth continue to generate additional mortgage delinquencies (and subsequent defaults) as households remain unemployed. This proposal is specifically designed to solve the first problem although it could help the second as well.
To fix the underwater loan problem, existing mortgages could be restructured into two parts: a) a standard new mortgage against the current (reduced) value of the home, and then b) a claim against some fraction of any capital gains (above that reduced value) when the home is sold. The two parts could even be packaged separately and securitised or traded in separate markets. When a household sells their home they would then have to pay off both claims
[snip]
(Excerpt) Read more at businessinsider.com ...
This is an interesting idea. Is it being looked at by anyone in the mortgage and finance community?
This is one of the better proposals I have seen. Good catch.
So they'd have to put money aside to pay that extra chunk? or pay a side-debt (sort of a junk-bond split?) There might be investors willing to take a flyer. But it doesn't seem like it would cure the homeowners' cash crunch.
It’s a dumb ass fix:
a) a standard new mortgage against the current (reduced) value of the home.
All this is doing is helping the idiots that bought the home.
b) a claim against some fraction of any capital gains (above that reduced value) when the home is sold.
Again, all this is doing is helping the idiots that bought the home.
To fix the problem you let the loans default and let the banks suffer for their stupidity as well and you eliminate two problems. I’ve made some bad investments and stupid mistakes in the past but I didn’t ask to be bailed out. It’s called life and shxt happens.
This shows the Rube Goldberg situation we are in.
>> I’ve made some bad investments and stupid mistakes in the past but I didn’t ask to be bailed out. It’s called life and shxt happens.<<
I guess I can quit beating on myself now that I know I’m not the only one who has mad the occasional dumb investment.
Well, if lender and borrower agree, I have no problem with any such contract.
However, WHY must we “fix” this problem?
What about people who paid CASH for their homes, and such people do exist? Do they get “bailed out” for making a bad investment?
Let the market work.
One thing people like to ignore is that some people only learn hard lessons through PAIN.
Foolish investors, foolish bankers, foolish borrowers, et al, need to feel the pain that the “Invisible Hand” of free markets employs to educate them.
For example, the feds bailed out the big banks where the same group of incompetents (or crooks) continue to play derivatives and put us all at risk.
We need to let the free market work. The Nanny State cannot soothe every hurt without making stupidity pay.
I do think that the more we can give click love to these types of discussions, wherever we find them, the more the ideas start to sink in and get taken seriously. At least it jumpstarts the discussion and turns the focus from bailing out the redefaulters to supporting those who have and can in the future restart the real economy.
This is hardly new. It has been been discussed endlessly at Treasury, HUD, banking conferences, FDIC, Fannie and Freddie, etc.
Wheaton is an out of touch academic.
How about this instead. If you bail on your mortgage because its underwater, you and any spouse you have or future spouse go permanently on a high risk list. Then if you want to try another mortgage, you pay high rates. If your an illegal, you just work for someone until you pay the dept off with no benefits or anchor baby and then get your butt deported.
Ummm, if you’ve noticed, everybody’s homes have lost value... calling everyone idiots make you, what, the smartest person on the planet? Surely, holding that title, you have a worthy solution on how to recoup losses in housing... we’re waiting...
It is an interesting idea. I think it could use a couple of tweaks:
1. If you are going to delay the payment of the under water part then no reason to cap the fraction of the capital gain a the same amount. In his $100,000 mortgage on a house that has fallen to $60,000 on the market why not make the cap on the capital gain something like $60,000 or 150% of what you are deferring. The time value of money does not stop with this. The problem is just an inability to pay and delayed payment should not be without interest. Of course rather than pick a number like I did with 150% it could be on a sliding scale depending on how long the person stays in the house.
2. I am not sure why the under water person should get half the capital gain. I agree the should get some of it to encourage them to behave as owners and to not lock them in. But why not give the harmed party, ie the lender, 60% or 75% of the capital gain? Maybe 50% would be ok if lost revenue could be taken as a tax credit by the lender.
Much of this goes back to the Community Reinvestment Act passed during the Carter administration. It's enforcement didn't happen until the Clinton years and Janet Reno's famous statement that she was going to start enforcing it. This force banks to make mortgages the buyer can't pay back. Fannie and Freddie carried the bulk of the bad paper, but recent financial reforms refused to look at those institutions. As a recent politician said (Shumer or Frank??): We can't change those institutions. Otherwise people who can't afford a house couldn't buy one. Gees...talk about stupid.
As to the current proposal of restructured financing, it's a house of cards that falls apart unless housing prices are bid up...exactly what happen in the first place. If there's no guarantee of rising prices, banks have no reason to make these new loans.
My solution, let the parties who made the stupid loans in the first place bite the bullet. Why should I subsidize stupid behavior with my money?
This claim would continue as a lien against the house even after the house is sold, so future owners would have to turn over a portion of their gains until the original loan is paid off. There is no way in the world I would touch one of these poisoned titles unless I could buy the house is at a huge discount compared to other houses without similar requirements.
The best way to avoid this is to stick the banks with the pain and let them learn that 0% down builds bubbles which will hurt them in the long run so they go back to 20% down. Unfortunately the government is sneaking back into the almost-0% (3% maybe?) down mortgage.
On its face, it is not a bad plan BUT how does a note holder count the value of the difference between the new and old mortgage? Don’t they have to show a loss for the value that is simply an option on some hypothetical future gain? Second, the reduction in the loan balance is a non cash TAXABLE income to the mortgagee IMO.
Lastly, the housing market is NOT going to recover till employment goes up along with income.
Just a few considerations.
Those who used poor judgement in getting in over their heads in debt should feel the pain. This applies equally to members of Congress as to your neighbor down the block. Mo bail-outs for McMansions. They are not too big to fail.
It seems to me that there could be a way for the private sector to come up with products that meet this need, for an appropriate fee, thus solving it the market way and creating jobs.
There are many people in this situation who, contrary to the “dumb idiots who should pay for their mistakes” meme on this thread, made a prudent home purchase and wise financial arrangements. They are “paying” for the deadbeats and fraudsters, yet many lump them in with this group. That is wrong.
It also is economic suicide. These are the people who can make the real economy work, if they can just find a way out from the burden of bailing out everyone else.
It sure is and it makes sense ----but...
In today's political climate "it wouldn't be fair."
We must all be equal, if not in ability and intellectual horsepower, certainly in results.
Why should some get large rewards from equity accumulation and others never see a dime? That will be the fatal argument to kill this or any other rational proposal.
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