Better Give Up Trying to Fix Housing Crisis Before Principal Reductions Hit
I’m fairly amused by this story, presented by the NYT as “reporting.” It claims the Obama Administration has tried “just about every program it could think of to prop up the ailing housing market,” and faced with the failure of “just about every program,” economists and analysts are contemplating just letting the housing market crash.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
The story goes on to quote from:
That is, no one speaking as a homeowner and not even any advocates for homeowners. Which may be why all these experts fail to consider the sheer scope of what an addition 10% drop in home values will do to the economy. Sure, the article raises the specter of massive walk-aways.
The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.
The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.
Yet it doesn’t connect the degree to which the already-stinky housing market contributes to long term unemployment. And it doesn’t get that the decline in home values has done far more than just stifle consumer spending, but has bankrupted real people.
Now, to be fair, all this “reporting” article serves to do is give credibility to the stupidity of “extend and pretend.” I’m all in favor of ending the “pretend” part.
But one assertion in the article is simply false: that the Administration has tried everything. Heck, the article itself even quotes Bill Gross calling for refinancing US-backed loans (here’s a HuffPo article describing Gross’ plan).
And even that ignores the really basic things the Administration hasn’t tried: like cramdown.
Nevertheless, the NYT considers it news that the housing industry would like a reset that will likely doom millions of Americans.
I’d be interested in seeing who has performed (however quietly) for the Admin the actuarial analysis for letting the housing market crash. Demographics? Geography? Amount of principals lost? And then, compare it to remaining 401K balances and promised pensions. Is this throwing over the boomers for (eventually) their kids? Could be. Is it a give-away to the new-age REIT? Or, is it a strategy to get boomers to federalize their retirement funds?
http://news.coinupdate.com/us-departments-of-labor-and-treasury-schedule-hearing-on-confiscation-of-private-retirement-accounts-0431/
This is not a snarky question: Did you mean principle ironically (as in the diminution of non-political considerations) or principal.
Oh, man, thanks.
My solution:
1) Some people are going to find it makes financial sense to walk away. Let them do so.
2) Let the market adjust to the new reality.
3) Some more people are going to find it makes financial to walk away. Let them do so.
4) banks foreclose on the walkaways. And try to sell the houses into the depressed market.
5) Some more people are going to find it makes financial to walk away. Let them do so.
If the government wants to keep more people in their homes, they can force principal reduction on the banks. The banks might be a little more open to the idea, since if we do the above they’re going to be stuck with a LOT of unprofitable homes.
Boxturtle (Alternately, we can sure the snot out of the walkaways and keep them in collections for the rest of their lives)
Argh!
Boxturtle (Alternately, we can
suresue the snot out of the walkaways and keep them in collections for the rest of their lives)Boxturtle (By the time I saw it, the edit option was gone)
The only way letting the housing market crash right now–particularly with so many people starting OUT underwater–would make sense is if you knew that the vast majority of rich people sitting on piles of cash both wanted to be landlords and wouldn’t gouge people.
Neither of those are true. So there will be no buyers until you create more households and make sure people can stay in their jobs.
Yeah, I know. I assumed no buyers, or at least so few that it made no difference.
Trying to make the sarcastic point that the banks are hurting themselves with their current plans. Taking the principal writedown and passing it on to the borrowers is the only way they can maintain enough occupancy to keep the glut of walkaways from making their forclosed properties effectively worthless.
So instead, the banks are attacking the walkaways, trying to get blood from a stone.
Boxturtle (Waiting for the GOP to suggest property tax reductions as the solution to this)
What a way to nationalize the housing industry from the tail end.
Look at Fannie and Freddie. In effect, the housing loan market HAS been nationalized, with the Government assuming almost all the risk and the banks getting almost all the profit.
Boxturtle (Heckuva job, Brownie…er, Larry)
EW,
I think you’re ignoring the speculative market by people who are buying distressed properties at below market value, and either flipping them, or renting them out temporarily while waiting for the market to recover. There’s a lot of that happening, but I don’t know how to measure the extent of it.
Bob in AZ
OT…
Did I hear correctly: Brady given $19.3M per year in a three-year deal?
Haircuts for all.
Randy Moss needs some loving… still negotiating his contract…
A good companion piece to this would be to walk people through what happens to their home as homes around them go under.
What does one do when their $$$ run out for improvements to maintain their home value? What does one do when your value drops too low?
Many people avoid thinking about these questions and hope they pace their home improvements to boost their home value to ride the wave out.
Unfortunately, there is the property tax vortex that happens in a market adjustment. Tax needs go up as property values drop due to a loss of tax dollars on lower property values. This downward cycle kills school districts which further erodes property values which makes it difficult to attract business for economic development, which means, no job creation to help reduce the housing crash.
That quote could be the focus of a post all on its’ own.
After a decade or more of frenzied home buying/selling and refinancing, the real estate industry, wants to create a new kind of bubble so that they can continue their feeding frenzy.
With no regard for the outcome for the families who live in those homes.
I guess 300,000 foreclosures every month is not enough for their predatory souls.
Meanwhile, the banks are still sitting on those nearly worthless mortgage-backed securities, and are expecting the (probably promised) long slow period of making up that money on the backs of consumers via increased fees, etc. I would think they wouldn’t be happy about letting the bottom fall out of the housing market quite yet. But who knows what they’ve got the things valued at anyway, or what the real value of them is, or how far along they’ve gotten in making up the difference.
What I can’t figure out is why they felt the need to lie about the Obama administration’s attempts to help homeowners. Is this piece coming strictly from the real estate industry feeders or is it another f’ing admin. trial balloon with a side order of revisionism?
Either way, it looks like we’re headed for an era of predatory landlords. Maybe, if you lose your home, and your credit rating is low, you can pay a premium on rent. That would be lovely. Where are the foreclosed going to live? That’s something I think about every day.
Nice to get a quote from Sanders of the Mercatus Center, er, the Koch Mouthpiece. Ugh. http://mercatus.org/anthony-sanders
His position at George Mason is simply a way to legitimize the propaganda–he is in effect only pushing Koch market fundamentalism/libertarianism (read as “Kochism”) to us and his students–seeding the world with people who love to be used and abused by billionaires and “fight” for that right.
http://world.std.com/~mhuben/mason.html
The banks will continue to use “funny math” to maintain solvency until the CEOs, CFOs, and insider classes have traded their stock interests to 401Ks, pensions and mutual funds. Meanwhile these barons invest in as much gold, minerals, agricultural lands, and water rights as they can. While this may seem ‘irrational’, too often an observer gets confused by business decisions that bleed a company of market capitalization, instead of focusing on whether the people running the company were trying to benefit themselves while marginalizing their fiduciary responsibilities. So until the banks start reporting real numbers on their balance sheets, and the federal government stops providing money a 0% interest, housing prices will not signal anything except the general level of anxiety felt by most people, differentiated by geographies.
B-b-but you can’t even think about those things! That would be irresponsible! Ack! Take those things off the table! Quick! Don’t let anyone see!
(Do I have to include the snark tag?)
Bob in AZ
not to mention lost income for local government and services
Off Topic
I just tried to contribute ten dollars to each of 5 on ActBlue. When I tried to send it the last number became $105,000. I suspect foul play. I reported it to Citi credit card customer service.
A second housing crash is inevitable now. Con Man Obamarahma’s pyramid scheme is nearing the end and its victims are becoming aware that it is nothing more than extend-and-pretend, designed to squeeze every last cent out of them before they are inevitably foreclosed upon. And so you can expect to see many more strategic defaults in coming months. Good, let the bastards foreclose during a glut.
Cramdowns.
Cramdowms.
Cramdowns.
Obama’s given the banks that caused this crisis $15 trillion dollars:
http://www.ritholtz.com/blog/2009/06/bailout-costs-vs-big-historical-events/
But support to people? Almost nothing, given that HAMP didn’t really reduce loan principal, just dump more Federal money to banks via mortgage payments.
GlenJo… I disagree about reducing principal. They should reduce the interest rate and extend the loan repayment. Nobody has ever forced anyone to buy a house or buy a house that they never planned that they could not afford. By reducing the interest rate on the loan both the loan owner and loan payer benefit, in the short term and the long term.
Almost without exception, if the 0bama White House tries to explain or justify something, they lie.
Wow, really? “Some economists and analysts” are “now” saying that we should let the housing market crash instead of intervening?
I wonder if they are in any way related to the various tough-luck economists and analysts who said we should let the housing market crash in 2007, or 2008, or 2009, instead of intervening.
Further reporting on this stunning new development would allow us to understand whether there is any connection between the group of people who expressed an opinion last year for one reason and the group of people who expressed the exact same opinion this year for a slightly different reason. The world is full of mysteries!
Certainly after the September 2008 meltdown we discussed cramdowns a lot as a necessary step in restructuring and recapitalizing the banking system. That is before you could fix the banks you needed a realistic assessment of how insolvent they were. This is, of course, precisely why cramdowns have been shoved off the table by Obama et al from the start. They don’t want to admit how underwater the banks are. They even went so far as to change the FASB standards and allow banks to cook their books. None of this is rocket science. But when you know that a fix needs certain components to work and all of these are vetoed by the PTB, it doesn’t take a genius to know that the problem is not going to get fixed. The Bush and Obama Administrations have been very consistent in putting forward everything they knew wouldn’t work: small poorly aimed efforts whose main purpose was PR and to lend a certain credence to the lie that bank balance sheets are worth even remotely what they say they are.
The crime spree responsible for our dire straits was, and is bad enough, and BushCo’s reluctance to face the music was understandable.
But Obama has made the choice to continue the cover-up, and that is unforgivable.
The Administration doesn’t give a fuck about homeowners. It has to try to prop up home values to save the banks. Indeed, it has made an heroic attempt (and committed an ocean of public money) to that end. It didn’t work. The market will crash anyway. The banks will fail anyway. The homeowners will be hurt anyway. All the Kings horses and all the Kings men, couldn’t put Humpty together again.
Yes the banks are and will fail anyway and the FDIC is in the red so guess who bails out the banksters again.
I don’t see how anyone can stop the fall in home prices. The cost to do so is unknown and could be astronomical. Do you really think people want to own homes anymore or would they rather rent? The problem is double edged: unemployment and lower wages. Who wants to be tied down when the next job could be hundreds of miles away? I think the rental value of smaller apartments will fix a floor for housing and until that happens we are in foreclosure land. If high unemployment has four or five years to run, housing has even longer.
Dead right. At some point fair value for a house is where you can get a decent rental return, probably in the 5-10% ROI range. So whatever yearly net rent is times 10-15 is where people with money will jump in and buy that house.
At that level banks might get into the landlord game too.
Let the floor be established, bailing out isn’t possible. It is about salvage now.
If you had a foreclosure to your name and 8 months of unempoloyment in 2004, you were pretty much branded a loser…but if that is the case in 2010, you got a lot of people in your club.
Um … “Freddie Mac Announces 95LTV loans, Re-bubble – With This Option You Too Can Join the Underwater Club In As Little As Three Months!!!,” 09/07/2010 16:53 -0500
Good theory by DeadLast @ 15 given my current reading …
I guess the home owners are not to big to fail.
EW, you’ve hit the nail on the head. Basically, the press is only regurgitating what the Administration wants. It’s sickening. And a sign of how poorly the NYTs is these days when it comes to economics and what is happening in the country.
OH they tried “just about everything” PLEASE. Did they try changing bankruptcy law to allow judges to reduce the Mortgage total? Did they try forcing banks to write down the loans now and change the principal to a percentage based on the current market value? Did they demand banks charge in interest 1/2 point more than they are Paying! Did they insist that any foreclosure not begin until tittle to the mortgage was definitively proved. no no no and no.
Extend and pretend hope for the market to rebound. Rebound how–nothing has changed and fantasy land is just that a fantasy.
Back in the mid-1990’s some bankruptcy lawyers would put their clients into Chapter 11 as a way of preventing foreclosure on a first mortgage loan on a primary residence. Cram down was very definitely on the table in those cases. But as far as I recall the 1994 amendments to the Bankruptcy Code and some later court cases made them difficult to sustain.
Yup, NYTimes has become our establishments very own Pravda.
My questions are: What part of the housing mess isn’t entirely criminal? And when do we get to throw these crooks in jail?
Forcing foreclosure of all delinquent properties woudl have the same end game as a cram down. Banks woudl be forced to liquidate the homes, establishing a new baseline for their value. Many banks would fold. Whether the FDIC bails the normal customers out there to the upper limit of FDIC insurance, or whether they finance the cram down…the one has more limitation.
So all the homes come on the market,a dn people who have cash available now, be they individuals, hedge funds, or foreign entities can pick up all those houses at firesale prices…but that is the new norm. Now they aren’t all goign to sit on these piles of homes. They will want to generate income, be it rent or resale. So all these people who have had no meaningful equity in their house lose their house,a dn since there will be 6 million of them or whatever, the stigma is pretty much gone…are you not goign to rent or sell to anyone who had been foreclosed on? In an atmosphere where 1 in 100 are in that situation…then it is a customer you can avoid. In an environment where 1/5 or more people looking for a place to buy or rent have…well it becomes something you learn to factor in, or see in relative terms.
So maybe instead of extending your payment terms from 15 years with no current equity to 30 years with no current equity, you can see that there is no difference to renting. The differnece is 3% of the house you get to “own” every year….that is about what I get as cash back on my credit card each year….
Maybe you bought a house at the top of the market for 300k, now zillow says it is 240, so your underwater….flood the market with all the houses,a nd whoever buys them picks it up at 125…well that will be his baseline for a flip sale in 2 years, or his baseline for a rental return. If he wants a nice 8% ROI on that, that is 10k a year, so under $1000 a month, and you were paying $1250 a month on mortgage with a 30 year term….
The losers are the banks, exactly who should be the losers. The other losers are those who bought at the peak, but they’ve already lost,a dn no one can make them whole!
I would like to buy a home. I live in an (expensive, for me) apartment, have a 9 month old child, and would rather do it sooner than later.
But I’m not about to take a 20% or more haircut within six months of purchase. Unfortunately (for me) I live in Houston and would like to move to Austin – two places where prices have barely budged.
If I already had a home that was underwater, I wouldn’t sweat it a lot if I could pay for it. Gotta live somewhere.
But I have been effectively frozen out of this market for years – because I saw this coming.
There is plenty of pent-up demand out there to kick-start the beginnings of a housing recovery, and I am part of it – if only the assholes in Washington would let the market stabilize. They are trying to turn back the tide with a teaspoon, though, and only the truly desperate or an idiot would buy into this market.
I’m not familiar with the Houston or Austin markets, but if prices really haven’t budged, and there is not some policy delaying foreclosures, then it seems to be a pretty stable market, and your 20% downpayment wouldn’t seem like all that much of a toilet flush. I mean EVERY market, even the strong ones have seen some serious downward movement, it’s not like there is a TV and Newspaper blackout in Texas and no one told them. Maybe high oil prices have a special effect there…not sure.
There has been some downward movement, just not very much – yet. Our job situation is better here, so there is population inflow.
But the jobs picture here is only good by comparison and there is a large overhang of foreclosed homes here, waiting to be dumped by the big banks.
In other words, I believe that while the markets that have already collapsed may be near bottoms, (unless the banks dump their inventory of foreclosures) ours has yet to really fall. It is a fact that most real estate here was never subject to the speculative frenzy that occurred in Fl, Ca and Nevada, and some in more pricey markets sold and put whatever equity they salvaged into our cheaper market. That also had propped up prices a bit. So people here are pretty much convinced that we have dodged the bullet. But that overhang is out there and we are still infected with the “house prices always go up,” nonsense, and congratulating ourselves that we went through our shakeout during the S&L crisis of the ’80s.
But prices everywhere are highly dependent on what the banks do with all that inventory they are sitting on and all the pending foreclosures that they have been slow-walking.
So, yes, our market has been fairly stable – so far. Remember how pretty the Indonesian beaches looked right before the tidal wave hit?