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Realism About the Housing Mess

Most public debates over the mortgage and housing mess have been running aground on the false-dilemma problem, framing the a problem with several possible solutions as a choice between only two options. At least one of the options in false dilemmas is always completely moonbat crazy, and frequently they both are. The false dilemma I've been hearing these days goes like this:

"We either have to give mortgage lenders a free hand, and forget about the legal details, or just let borrowers keep their houses for free without paying anything!"

Obviously, this is not the actual set of choices. It's the two most extreme choices within that set. The point of this either/or formulation is to make one unreasonable course of action seem sane and necessary by pairing it with an even crazier course of action. Letting banks foreclose on people's homes with forged documents is so clearly insane (and such an attack on basic property rights) that it can only be justified by pretending that there are no other options except giving away six-bedroom homes as gifts to deadbeats.

Of course there are other options. How could there not be?

I tend not to trust people who tell me there are only two ways to go, especially when both ways are extreme. The world really is not a set of choices between Galt Gulch and Soviet Communism, between repealing the Fourth Amendment and accepting Sharia law, between life in a religious commune and life in a Vegas brothel. And generally when somebody tells me that I have to make a choice like that, I presume that person is trying to hustle me. The choice between "never foreclose on any home for any reason" and "foreclose on people whether you actually have title to their home or not" is obviously a hustler's presentation of the choice. And of course, you can't take a time out to think, because we have to foreclose now! Right away! There's no time to think over the actual rights and wrongs! (This is why it's called hustling.)

Ezra Klein has a characteristically excellent post running down four practical solutions to help homeowners in realistic ways that help homeowners without simply ripping off the lenders. The whole piece is worth a read, and the options are basically sensible. They include simple things like requiring mediation before a foreclosure and changing HAMP so that banks have to opt out instead of opting in, bigger things like allowing bankruptcy judges to modify the principal on mortgages for primary residences, and practical fixes like the "right to rent," in which borrowers lose the house and their equity but can remain as tenants paying market rents for a set period.

All of those sound reasonable to me. I'm personally a big fan of cramdown, the modification of principal by bankruptcy judges. That could allow banks and borrowers to split the difference between the inflated house prices on which the original loan was based and the current market price, so that both the lender and the borrower take a haircut on their mutual bad investment. That would also help separate the borrowers who can actually pay from the ones who never could, and the borrowers who genuinely bought much more than they could afford from the homebuyers who, because of the bubble, had to spend a million dollars for what would usually be four hundred thousand dollars of house.

In other news, here's Digby recommending serious jail time for the people who actually turned fraud into something routine. I have to admit that sounds pretty reasonable, too.

Whoa, Dr. C.  You aren't going to crest 100 comments by eliminating touchstone logical fallacies from the discussion as a matter of topic!

Seriously, another great post on a very important issue.

If I could recommend a post, this is one I would definitely recommend.  All in all, and with all of that, this is how this particular situation should be approached.  If we can collectively approach it in this manner we will have made a major leap forward.

Excellent arguments here, Dr. C!

There is a reality at play here: The housing bubble has burst.

I know that sounds pedantic, but only when that fact is truly considered can we begin to focus upon the solution.

Your support of a cramdown is a sign that you get it. The homeowner who owes, for example, $300k on a house that is now worth only $200k is a fool to maintain that mortgage. Likewise, the bank holding the mortgage is a fool to foreclose without first seeking a negotiated settlement.

If the bank forecloses in the above instance, they receive title to a property worth $200k, not $250k. They then have to maintain that property, pay brokerage fees to re-sell it, and pay whatever property taxes and insurance costs are required in the interim. Would it not be better to renegotiate with the present mortgage-holder and refinance the mortgage at the $200k level? This precludes the bank taking on all the additional expense and headaches of foreclosure and management of these properties, and it keeps the "owner" in the house with a mortgage that at least gets his feet onto more reasonable footing. If they are going to be re-selling the house at $200k anyway, would it not make more sense to see if perhaps the present "owner" would be available to "purchase" it at that price?

This is the only sensible solution that I can see given the realities of today's post-bubble housing market. Indeed, I thought this was the purpose for the TARP funds we were giving to the bank - to help dilute their "toxic assets." 

The banks have instead chosen to take these funds and pay their bonuses and play the carry buying Treasury Bonds and otherwise make profit out of our loss of tax dollars. Meanwhile, they remain predacious upon homeowners as though nothing has changed fundamentally in the housing market. A lot of time has been lost. A lot of taxpayer dollars have been squandered. And we still haven't come close to addressing the overall mortgage crisis that precipitated the failure in the financial markets. Something needs to give, here. I suggest it starts by making the banks do what is required to actually cooperate in the market's recovery, rather than allowing them to game the system for ever-greater profits received at such unsustainable costs to the rest of us.  

What Sleepin said, so eloquently. The right thing to do, in this instance, isn't a struggle between a moral and amoral choice; the right thing to do -- for everyone -- is that which is a pragmatic lessening of overall damage, for everyone.

Why cram down the principle, when they could have lowered the interest rates, or made a 40-year mortgage?

Allowing more time for the financial crisis to abate, or until we end the war and then we applied the trillion dollars towards the social side of the ledger. The peace dividend. 

It took decades to get in his mess, why couldn’t we have backtracked our way out of this crisis, taking the time, to allow a sound and reasonable remedy, instead of panic. Avoiding the blood in the streets.

It appears the banker class after the bailout could give a crap about the homeowners.

The Haliburton philosophy. “We got ours now get yours”

Or Smith Barney “We made money the old fashioned way, we  got ours from a government bailout”  

Had the tables been reversed I could imagine the bankers asking "where’s our help" and legislation would have been forthcoming.  

CRAMMING DOWN THE VALUES

doesn't that lead to devaluation? Haven't the other 80 to 90 percent of homeowners, suffered enough; as it appears there is a further attempt to  destroy the housing asset?

You think the Fed benefits as money retreats form the housing asset and purchases treasuries and bonds? Was that the scheme all along, destroy one asset in order to force the purchase of another? Another that benefitted a particular class of investors?  

Either we have to decide we need higher wages to be able to afford housing, or we devalue housing so that the peasant can live on slave wages.

I suspect the latter was the plan all along, in order to compete against cheap labor and cheap imports. 

The Chamber of Commerce might have gotten upset, if wages were to have gone up, so that leaves one objective. Housing values need to go down, because wages are not going up,  if they can help it.   In fact wouldn't they like to repeal the minimum wage?  

Because hell No, the capitalists would never reconsider NAFTA or any of the other unfair trade practices that have contributed to a decline in real wages. a causal effect in homes being foreclosed upon.

Need a scapegoat for the housing bubble scheme, a crisis to be exploited for gain?

They had to have known, the American worker would never have accepted rolling back wages voluntarily in order to compete with cheap labor and imports. 

SCAPEGOAT: Blame the homeowners for buying a home where there was no assurance, wages would keep up. Where the Fed decided to raise interest rates and the gas and oil industry jacked up prices. Forcing people to default on they’re homes.  

SOLUTION: Seeing as how the insurance company, has paid off on the houses, tear them down, create a shortage and as demand increases for housing, prices will go up, on existing homes.

Except that doesn’t fit into the long-range plan, lower wages, slave labor is the plan.   

Remember “Either we have to decide we need higher wages to be able to afford housing, or we devalue housing so that the peasant class can live on slave wages.”

Is that what the working class signed onto as the solution; lower wages?

"Why cram down the principle, when they could have lowered the interest rates, or made a 40-year mortgage?"

I think this question ignores the point I was trying to make when I wrote "The housing bubble has burst." What I meant to accentuate in stating the obvious is that the lower valuations are what they are. Lowering the interest rate or extending the payment schedule does nothing to change the reality of the lower valuation of the asset.

When the mortgage was issued, the lender and buyer BOTH assumed the valuation would remain at a certain level or, in fact, would continue to appreciate in value as had been commonly experienced while the bubble grew. The housing bubble burst, catching both the buyer AND THE LENDER unawares.

People are now upside down in their mortgage contracts. What this means is that they are under contractual obligation to pay more for their asset than it is worth - in some cases much, much more.

The bankers would, of course, try to maintain a morality argument that the "homeowners" are morally obligated to "honor their contract." Yet, even they (perhaps more than anyone) understand that a contract is a legally binding document wherein the terms of enforcement are specifically detailed. In the case of a home mortgage, the consequence of failing to meet the terms stipulated is the impact such a decision will have on the borrower's credit rating and ability to borrow money in the future. Any attempt by the banker to enforce a "morality argument" would be met with scorn in a court of law. "But, your Honor! The borrower PROMISED he would pay!" would be met with an insistence that the court be shown the contractual provisions outlining additional penalties (debtor's prisons? Loss of a first-born male child?) to be enforced in event of non-payment beyond foreclosure on the property and the commonly assumed impact on the credit rating.

In a strictly business sense, it makes absolutely no sense at all for the "homeowner" to continue this contractual obligation to pay more for the asset than it is presently worth. It can be a far better business choice in most of these instances to take a hit on the credit rating as the consequence of voiding the contract.

I would also argue the borrower has no moral obligation to honor the mortgage contract, although this is tangential to the real issue. The borrower AND the lender both entered into the contract based upon faulty assumptions. They should both, therefore, take a haircut in realigning the terms of that contract to better reflect today's realities. What is required is an essential "do-over," wherein the lender and borrower agree to a new valuation of the asset and re-work the contract to reflect this new market reality. Both sides should be required to take a haircut in a cramdown. I see no other real alternative.

If we weren't so locked in to a top-down solution to this crisis, we would long ago have insisted that the TARP funds be used to mitigate the pain of that cramdown for BOTH sides. Instead, we have allowed the bankers to essentially transfer these TARP funds into their bottom line profits whilst doing NOTHING to dilute these highly "toxic assets."

Your other suggestions would seem to essentially manipulate wages in effort to inflate the valuations to a higher number. This would seem to be impossible to accomplish without encouraging inflation to occur across the board. The housing bubble has burst. The valuations are what they are. With inflation, we can perhaps move upwards that specific number for the price of a home but it will remain in relative balance to the price of everything else, which would need to be moved upwards as well. Such "hyper-inflation" is untenable, and claims as its greatest victims the poor and those on fixed incomes. Not hardly the solution we would hope to realize.

I definitely share your concern about the assault on both the wages and the wealth of the "peasants" and working class that has been systematically visited upon us, at least since the time of Reagan. Like it or not, we ARE engaged in Class Warfare, and we are losing every step of the way. But that fight must be conducted outside the specific arena in which we address this problem. All the wage increases in the world aren't going to re-inflate the housing bubble. It has burst. For now, we must make certain that our resources are applied toward fixing the problem itself, not in using it as an excuse to aggregate more wealth into the hands of the few at the top while leaving everyone else to fend for themselves in these desperate circumstances. 



“It is what it is” because it was designed to be that way.

The design is to lower the cost of living, designed to weaken labors demand on higher wages.

The American worker a commodity to be exploited, Unless the American worker is forced to accept lower wages, we the American labor will not be able to compete in the global market.

Now I respect your opinion sleepin , tell me how if you had the power, what scheme or machination would you employ, to bring about the reality, we need to force the American workforce to accept less pay and less benefits.

Raising wages  so Americans could afford higher priced homes doesn’t work if your objective is lower wages.

House prices were becoming to high.

It wasn’t that  house prices were the problem, it was the affordability.

A 300k house at 8 percent vs. a 300k house at 3,5 % would have made the difference on the ability to AFFORD.

AFFORD being the operative word.

Lowering the interest rates, would have kept the homeowners in the house. A house with a higher appraised value brought in more needed tax revenue. With affordabiltiy there would have been no defaults.

Instead of the house sitting empty, it would have been occupied by someone receiving a subsidized stipend, to make up the deficiency of the original (Interest) contract.

Why would there have been a default if it didn’t matter who paid the mortgage? Homeowner alone (100%)  or homeowner with government assistance 95/5 = 100% mortgage paid

Call it assisted living, call it stimulus,  call it HELP, Call it saving us from financial ruin.

1trillion dollars spent, to save us from terrorist wanting to bomb our homes.

How about 1 trillion dollars to keep the bankers from taking our homes?

Or is it either way we’re going to lose our homes?

Sure the folks who bought into the ARMS, found out they could no longer afford the teaser rates offered in the beginning.

They found out the 3 or 4% in additional interest rate rise, broke the camels back. The home was no longer AFFORDABLE, not because the house had gone up in value, but because the interest rate went up.

Why didn't the government FACILITATE the selling of a bond, much like the war bond of WW!! ? A bond  to defend against foreclosures.

A bond to finance the difference from the original 3 % teaser and the now 8 %  

The government would have provided 5% towards stabilizing the market, maybe even less depending upon the individual recipients needs.

Like a student loan, the borrower is never relived of they're obligation to pay back the loan.

If housing could have been stabilized, there would not have been this dramatic devaluation

Were getting screwed by the Global money changers

A homeowner who had borrowed money for assistance, would have sold they’re homes and with a possible rise in equity, the Homeowner assisted interest payment loan could have been repaid back.

I think that kind of reasoning still went counter to the master plan.

Housing had to come down, it had to be destroyed because the powers to be know they have to force the American worker to accept  slave wages.

With no jobs and unemployment high, how much longer before we’ll be begging for low wage jobs?

 

 

I enjoed reading your blog.

I heard a "discussion" on Bloomberg radio this morning--four bank stock anaysts--will mortgage moratoria hurt banks?,etc  Some of the points were: a. there will be no national moratorium, hats off to Geithner. b. the backlog in foreclosures more relates to 10 million or so second homes, not so much primary homes--most of those having been "cleared"(don't know the accuracy of that, sounds like someone might be "selling their book", as these analysts typically do). c. Banks could possibly be hurt by put-backs, but it's not an immediate threat. d. The 50 states' attorneys will reach a settlement, not to worry.

Dr. C Is there precedent for a quick settlement re the states' attorneys investigations, in time to actually affect the workout process?

Also,  I'm curious to know the origins of the law that principle for primary residences cannot be adjusted by bankruptcy judges. In any event, if it is in fact true that the major backlog of non performing loans is for second homes, the cramdown option might be the quickest solution to breaking the log jam.   

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