Skip to comments.How to really Fix the Housing Crisis
Posted on 03/06/2012 7:12:06 AM PST by SeekAndFind
The foreclosure crisis has crawled on for going on four years now with no end in sight.
"Continued house price declines could lead to even more defaults, foreclosures and distress sales, undermining wealth, confidence and spending," William Dudley, president of the Federal Reserve Bank of New York said. "Breaking this vicious cycle is one of the most pressing issues facing policy makers."
Every one of the Republican presidential candidates is being asked how they would handle the slow-motion housing wreck. Long shot Newt Gingrich says he would rewrite the rules to make it profitable for banks to renegotiate loan principal amounts.
"He disagrees with his Republican colleagues that the free market will find a fair way to let the banks and homeowners work things out," writes Karoun Demirjian for the Las Vegas Sun.
President Obama has jumped in to adjust Fannie Mae and Freddie Mac rules to allow refinances for loans exceeding 125 percent loan to value.
The president says this will save underwater homeowners thousands of dollars a year.
Princeton professor Alan Blinder penned an op-ed for the Wall Street Journal proposing forced principal reductions with the cost to be shared by banks and taxpayers with the proviso that government be given an equity kicker when housing prices go back up.
Blinder also thinks the Federal Reserve and Treasury should provide cheap financing to developers who will use the money to buy up properties with the intention of renting the properties out.
Harvard's Martin Feldstein put in his two cents' worth on the issue for the New York Times. Feldstein points out that home values have dropped 40 percent. The result, he writes, is "less consumer spending, leading to less business production and fewer jobs."
Feldstein claims the government can stop the fall in house prices by slicing off any mortgage principal amount owed exceeding 110 percent loan to value. He says this policy would cost $350 billion or less and would modify 11 million of the 15 million "underwater" homes in America. The banks and the government would split the cost, and in the case of mortgages held by Fannie and Freddie, "the government would just be paying itself," he writes, presumably with a straight face.
In exchange for having their lender take a haircut over 110 percent, borrowers would accept full recourse on the modified loan.
"I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves," writes Feldstein. "Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods."
"Recovering the 31 percent plunge in home prices from their 2006 peak will probably be years in the making as foreclosures throw more properties on the market and sales flag," writes Shobhana Chandra for Bloomberg.
Despite the obvious, policymakers and wonks think trimming mortgage principal down to just 10 percent underwater or that lowering borrowers' financing costs for those 25 percent (or more) underwater will somehow halt the slide in home values and spur consumer spending.
The belief is that if homeowners are just kinda, sorta underwater then they will keep on faithfully paying Fannie, Freddie, BoA, Wells, Morgan, and the rest. Never mind that it will still take years of steady payments to ever see the faintest ray of equity light shine through the crack between what's owed and the home's value.
We can see how this works out for a hypothetical couple created by Brent T. White in his Arizona Legal Studies discussion paper. The young couple buys a 1,380-square-foot home in Salinas, California, for $585,000 in January 2006. The couple purchased the home with no money down with a 30-year, fully amortizing loan at 6.5 percent interest. The payment including insurance and taxes is $4,300 a month.
Now the home is only worth $187,000. An Obama refinance of the $560,000 that they still owe on the note will lower their payment by $900. But the couple will never really own any of the home.
Under the Martin Feldstein plan, the note holder and taxpayers would eat $354,300, leaving the young couple with a mortgage of $205,700. Given the ultralow current mortgage rates of 4.5 percent, a 30-year fully amortizing deal including taxes and insurance would be a payment in the neighborhood of $1,250.
If we closed the deal this month, assuming home prices don't fall any further in Salinas, our young couple will see some equity in December 2016.
Meanwhile the same home can be rented for $1,000 a month. Instead of paying $1,250 a month to have equity of $168 in 61 months, saving the extra $250 a month and earning no interest on it equals $15,250 in the same amount of time.
Of course home prices in central California might rise 2 percent a year, so after five years the home would be worth $206,500, but then half of any equity belongs to Uncle Sam under the Blinder plan.
All of these ideas to save the housing market and supposedly to increase consumer spending do exactly the opposite. These plans keep people chained to underwater mortgages, keeping them from moving to where there are more and better job opportunities.
Unemployed heavy-equipment operator Charles Mills wanted to leave North Las Vegas for Oklahoma and a job, but he is $200,000 underwater on a home he bought at the peak of the housing market in 2006. The plans mentioned by Blinder and Feldstein would relieve Mills of roughly $190,000 of the debt, but the principal reduction won't put him back to work. Plus, the odds of a quick turnaround in North Las Vegas home values are about the same as for the Kansas City Royals to win the 2012 World Series.
The idea that the too-big-to-fail banks will cover half the cost of these plans is laughable. The hit to their capital would be considerable, sending the banks right back to Washington's door with a tin cup.
And how much bureaucracy would be required to manage the implementation of these plans and determination of equity splits when homes are sold?
All of these plans are not really aid to underwater homeowners as much as another bailout for the banks not to mention Fannie and Freddie.
Any business dominated by entities only in business because of the good graces of the government cannot be considered part of the free market. The reason the housing market is not clearing is that the government stands in the way by propping up the large mortgage holders.
No reasonable person sees Fannie Mae and sister entity Freddie Mac, which were seized by the government in September 2008, as the product of spontaneous order. To stay in business, the two firms together have needed about $169 billion in taxpayer bailout funds, with no end in sight.
Changes to FASB rules 157, 115, and 124, which allowed banks greater discretion in determining at what price to carry certain types of securities on their balance sheets and recognition of other-than-temporary impairments have made the big banks wards of the state as well.
The real help for underwater homeowners will only arrive when Fannie, Freddie, and the rest are allowed to fail. The equivalent of a chapter 7 bankruptcy filing (liquidation) would put these underwater loans out for bid in the market place. Would our mythical mortgage in Salinas, secured by a house worth $187,000, trade for $205,700? Not hardly.
No one can get a loan for a 110 percent of value in this market, let alone 125 percent, or 100 percent for that matter. Those looking for mortgages should expect to put 20 percent down. Values in a bankruptcy sale would reflect this reality and then some. Based on the liquidation prices received by the FDIC and other distressed debt sellers, this mortgage paper would likely be scooped up for half or a third of the home's value.
Buyers of the paper would immediately negotiate with borrowers to create loans that are conforming (80 percent LTV) and performing.
For instance, Selene Residential Mortgage Opportunity Fund purchased the mortgage secured by the home of Anna and Charlie Reynolds in St. George, Utah, for a deep discount, the Wall Street Journal reported in a front-page story. The Reynolds were struggling with a $3,464 monthly payment and the value of their home had plummeted.
Selene, run by Wall Street legend Lewis Ranieri,
buys loans to make a profit on them, not as a public service, but company officials say it is often more profitable to keep the borrower in the home than to foreclose. If a delinquent loan can be turned into a "performing" loan, with the borrower making regular payments, the value of that loan rises, and Selene can turn around and either refinance it or sell it at a profit.
Home values in St. George had plummeted in similar fashion to that of Las Vegas, only a two-hour drive away. Selene slashed the principle balance of the loan due from $421,731 to $243,182 and lowered the interest rate, reducing the Reynolds' monthly payment to $1,573.
"Around 90% of Selene's loan modifications involve reducing the principal," James R. Hagerty wrote in the WSJ, "compared to less than 2% of the modifications done by federally regulated banks in the first quarter."
And while many upside-down borrowers can't even find a human to talk to about their loan, let alone sit down and renegotiate terms that will benefit both parties, Selene immediately tries to contact the borrowers on the notes they have purchased, "sometimes sending a FedEx package with a gift card that can be activated only if the borrower calls a Selene debt-workout specialist."
Ludwig von Mises explained that one government intervention leads to an endless succession of interventions to deal with the effects of the first and subsequent interventions. Ultimately, it comes down to two choices. "Either capitalism or socialism: there exists no middle way," Mises wrote.
Likewise, there is no middle way to solve the housing crisis. For capitalism to work its magic and set underwater homeowners free, mortgage holders must be allowed to fail.
The too big to fail banks, which have a financial umbilical cord tied to Washington, should be allowed to go under. Their assets will be auctioned, and we’ll all move on.
Fannie and Freddie need to disappear.
Washington needs to get out of the mortgage business.
Loans to people who can’t prove that they can pay should be stopped. There is an affordable home ownership option for them; it’s called a mobile home.
—In exchange for having their lender take a haircut over 110 percent, borrowers would accept full recourse on the modified loan.—
If I was underwater $200k like some of my friends in Seattle are, there is NO way I would take that deal. My sister is going on three years without making a payment on her Seattle home. There is talk the foreclosure may actually start going forward soon. When the Sheriff shows up, she’ll simply hand over the keys and leave.
Heckuva a better deal than this.
No, this is about screwing the taxpayers over.
Why should I be helping pay for someones mortgage?
Looks good on paper anyway
If the wise and all-powerful idiots in Congress, Fannie, Freddie and the White house had just kept their greedy mitts out of the housing “crisis”, and let the market take it’s natural course, housing prices would have bottomed out by now. The loss in equity - false and real - would have been far less that the dollar amount that has been poured into the housing market in an attempt to save it.
Who ever thought that making a 100% loan on a $300,000 property to someone whose net income was $1500 a month was a good business model?
The same people that thought giving tens of millions of dollars to the clowns running the program was a good idea
When I was buying a home, our lender said that I qualified for a really expensive house. I bought one for much less knowing that things could change and a smaller mortgage payment would be easier to deal with. I know plenty of people who bought way more house than they needed. It makes them look and feel important. Now, because I was diligent and rational, I’m supposed to pay for arrogant, greedy stupid shits who overbought? Rewarding people who don’t play by the rules and punishing the people who do play by the rules always works out so well.
Forgive every mortgage. Every bank and mortgage lender take the hit. No taxpayer bailout, wipe it all off the books.
Now people can buy second homes. New market opens up.
My landlord wasn’t paying his mortgage for four years on the place I was renting before it hit the courthouse steps.
Course he was still taking my rent check. A great deal for him.
—My landlord wasnt paying his mortgage for four years on the place I was renting before it hit the courthouse steps.—
Heh. My daughter was renting a condo in downtown Seattle. When she found out the owner was being foreclosed on she stopped paying rent. Over a year...
Not Really. What people don’t understand is that the banks are providing the IRS with a 1099 for the full mortgage amount due. This person better have saved it for Uncle Sam becuase he is in for a rude awakening.
I believe the true reason that the banks have not followed through with the foreclosures is because they want the home owner to suffer. Come December 31st 2012 the moritorium on your primary residency that George Bush signed into law in 2007 expires. All bets are off and everyone who forecloses will now be slaves to Uncle Sam. Can’t just go out and file chapter 7 on the IRS.
The Federal government becomes the master of all whow sign the dotted line. I now tell my son that 30 years is too long a time. No one knows what will hwppen to them in that far in the future. Unless he can pay cash for a home he will be renter for life. I am not alone. I believe his generation is seeing what home ownership has done to their parents and will not be rushing out to purchase homes or atleast approach it with eyes wide open. This housing crises is going to be with us for a very, very longtime.
I concur completely. I’m trying to short sale my house this year to get out from under the debt and get out of a neighborhood where trashy people are buying up houses for 30-40K. If the bank doesn’t accept the short sale, I’m hoping they foreclose before the end of the year so I don’t get screwed on taxes. And for the bank suck-ups out there, no I didn’t do a cash out refi, or buy more than I could afford. I bought almost 12 years ago for 175K with 10% down, and paid a little extra on the mortgage each month since a refinance in 2002, but the value has fallen to under 70K, so I’m still 50K underwater at least. It’s amazing how little principal gets paid off in the first 10 years of a 30 year mortgage. Never doing that again.
Well your daughter is fortunate. The owner is leaving money on the table.
He could evict and find a paying tenant. His being delinquent does not reduce his ability to evict.
—His being delinquent does not reduce his ability to evict.—
I agree. But the guy basically was walking away. It’s complicated, but there is a psychological dynamic going on with single unit foreclosures. My daughter took advantage of it.