A friend sent me the following, hot off the press in D.C.:
I am in Washington D.C. with the National Association of Consumer Bankruptcy Attorneys. We are meeting with Members of Congress regarding mortgage mod legislation( Believe it or not about 46,000 people are being foreclosed on each week in the U.S).
Way to go, Terry – he paid for this trip as a citizen activist on his own.
However, I had NO idea that many foreclosures were happening, so I went to the National Assoc. of Consumer Bankruptcy Attorneys website which is:
THEY are predicting 8,000,000 foreclosures, and trying to get a law change so that bankruptcy courts can “write down” mortgage to value.
More importantly, the senate has its collective heads on backwards. TAX CREDITS won’t work. I am not going to buy a new house or a new car with ANY size tax credit. It is just not happening. First, I don’t buy new cars. I buy fully depreciated cars every five or seven years for about $3000 from my neighborhood mechanic at a gas station. I don’t have the money or the credit to take on another payment. NO size tax credit would cause me to buy a new car, period.
Similarly, my struggle is to keep the house I have. I have ZERO interest in buying a new, bigger or more expensive house.
The kind of clients I represent mostly struggle to have a first months rent. NO size credit would get these people into a house.
I did my own informal survey. Not even a $50,000 credit would cause a single person I know to buy a house OR a car.
Hello! Let’s go with the House version of the Stimulus and support state funding for education, special education and infrastructure repair.
CUTTING those out of the Senate bill reminds me of Herbert Hoover saying that men stood on street corners selling apples because they want to do that!
NO tax credit for buying a house will prevent a single foreclosure – but keeping those teachers and town employees in their jobs? That just might.
Because I am not that smart!
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p>Are not some of these foreclosures legitimate? Let’s face it in 2005 & 6 some people bought homes that should not have. Should they not be purged from the ownership market?
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p>If we right down the value of housing does that not push the holders of the mortages (banks) further into the abyss? Let’s face it a lot of folks out there that should not be owning a home.
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p>I have zero interst in buying another house as well and this stimulus is off the mark. For certain cars I suppose a tax break might be in order. We do want to keep UAW working don’t we?
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p>Give me a 50K credit and I promise you I WILL buy a car!!!
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p>I do agree we should preserve police, fire and school jobs on the local level. If we do not receive federal aid there will be layoffs!
It was great listening to an articulate President this evening. Even though I think we are spending too much on the stimulus package, I do believe we finally have a LEADER at the helm.
Well, yes, lots of people bought houses they shouldn’t have. We had a housing bubble. People were told that the value of their house would go up, up, up. For example, let’s look at Larry Kudlow, that wise economist of National Review Online. Why, he knew what was up. He was a conservative!
If the doomsayers in 2005 were stupid “bubbleheads” to use Mr. Kudlow’s colorful term, then clearly the real estate market was going to be a non-stop elevator to riches and more riches still. So borrowing lots of money against your house made a lot of sense. Today’s $400,000 house would be tomorrow’s $600,000 house. You could borrow $500,000 and make money flipping it. Even no equity mortgages would have made excellent sense if we had listened to this delightful conservative economist: the interest we’d pay would be outstripped by our home’s accumulation of value.
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p>P.S. the National Review Online Economics Editor was also good at predicting the current financial boom unlike that pesky Paul Krugman. We’ll sure be interested to hear what he has to say about the economic stimulus!
Well said.
Krugman predicted eight of the last one recessions; Kudlow predicted none of the last one. Hard to say who’s the more clairvoyent.
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p>2. “We have a sluggish economy, which is, for all practical purposes, in recession…” – Paul Krugman, May 2003
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p>3. “An oil-driven recession does not look at all far-fetched.” – Paul Krugman, May 2004
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p>4. “A mild form of stagflation – rising inflation in an economy still well short of full employment – has already arrived.” – Paul Krugman, April 2005
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p>5. “If housing prices actually started falling, we’d be looking at an economy pushed right back into recession. That’s why it’s so ominous to see signs that America’s housing market … is approaching the final, feverish stages of a speculative bubble.” – Paul Krugman, May 2005
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p>6. “In fact, a growing number of economists are using the “R” word [i.e., “recession”] for 2006.” – Paul Krugman, August 2005
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p>7. “But based on what we know now, there’s an economic slowdown coming.” – Paul Krugman, August 2006
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p>8. “This kind of confusion about what’s going on is what typically happens when the economy is at a turning point, when an economic expansion is about to turn into a recession” – Paul Krugman, December 2006
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p>9. “Right now, statistical models … give roughly even odds that we’re about to experience a formal recession. … The odds are very good – maybe 2 to 1 – that 2007 will be a very tough year.” – Paul Krugman, December 2006
I think it’s generally understood (by serious people) that the severity and depth of the current crisis is due, in large part, to the fact of Greenspan, et al, using bubbles (tech, then housing…) to fend off these ‘phantom’ recessions.
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p>Or, put another way, Krugman saw the one emperor naked, several times. And said so each time…
such as we had during the years in question resembles a recession for many people.
Our country has suffered through three periods of economic catastrophe of unimaginable magnitude:
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p>1: July 4, 1776 through August 19, 1870
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p>2: August 20, 1870 through January 19, 1981
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p>3: January 21, 1981 through the present
I don’t know of anybody who thinks we have never had a good economy.
Job growth during the Bush Administration was extremely slow. The phrase “does not look at all far-fetched” is not equivalent to “will absolutely occur”. #4, #5, #7, and #8 even look correct. Saying there’s a 67% chance of a recession in 2007 is still not like saying that there’s a 100% chance. Krugman has admitted he expected the housing bubble to collapse much sooner than it did.
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p>What I don’t understand is what caused the rise and fall in oil prices. Krugman made some assertions with regard to that that I don’t fully understand and that I’m not sure whether they were correct.
Someone who voluntarily chose to overhouse themselves is really the victim because a conservative said they should?
It was not just conservatives who argued that housing prices would go up, up, up with never a stop, never a let up. There were plenty of expert-like people who argued that. It’s the nature of bubbles, after all. No one looked at P/E ratios during the dotcom bubble; no one looked at rent to price ratios during the housing bubble.
when oil was $150 a barrel.
In a sense, all the foreclosures are ‘legitimate’: if the owner can’t pay then the bank gets to foreclose. However, if all the houses are foreclosing then the bank ends up holding assets that it can’t sell. Under these conditions, soon enough, the bank itself will go under.
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p>Now, some people, through straight-up stupidity and/or through moral lapses put themselves in this position and they ought not to be allowed to keep their homes, to be sure. Some bankers too. But the portion of people who can get in trouble all on their own is quite small…
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p>A significant portion (perhaps even a majority)were placed in this position by the straight up stupidity and moral lapses of others: specifically mortgage brokers, bankers and the now extinct firms of what was once called ‘high-finance’ (Most of the mortgage brokerage firms are likewise extinct). Further, the absence of anyone resembling a regulator, either of the banks or of the mortgage industry, has been (as I’ve made mention of before) the most damaging aspect of the entire mess. Yes, some people were allowed to do what they ought not to have done. Under sane regulatory processes they would not have been so allowed. End of story. Sane regulators would have kept the portion of defaults, deliquencies and deleterious malefactors to well below ‘significant.’
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p>The issue is the size of that significant portion… nobody knows. And nobody is going to know until the brainiacs at treasury (I’m looking at you Geithner…) make an effort to find out. As it is now, they’re looking into trying to get private money to take a flyer on the ‘financial weapons of mass destruction’ (to use Buffets connotation) whilst doing the weakest form of underwriting (guarantee of ‘floor’ price…) Even those life forms two steps removed from pond scum (real estate agents and lawyers…) can figure out that this isn’t going to work.
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p>
The games that banks played with all those mortgages are coming back to bite them, at least some of the time:
of what happened in the residential lending industry that I have read. As a “two steps above pond scum” lawyer who has represented hundreds of clients in bankruptcy AND a lawyer who represented lenders on dozens of “hold your nose” mortgage loans in 2004 and 2005, I couldn’t have said it better. I didn’t get rich off either endeavor but many did, both at the origination end (24 year old “loan executives” making six figures who didn’t know their arse from a hole in the ground) and in the processing, bundling and selling of these securities.
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p>One reason I am less than enthusiastic about financial industry bailouts is my belief that the many of the stockholders and executives of these institutions who reaped the profits are still around and should bear the losses. The fact that we may not be able to safely allow that to happen is, again, a failure of those tasked with the regulation of the financial industry.
is $7,500 for 2 years, $15,000 total. It hasn’t been finalized yet but the proposed version would apply only to first time home buyers who earn less than $75,000/year if single or a couple earning less than $150,000. The credit would be fully refundable.
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p>I meet those qualifications. If the credit were passed I would almost certainly buy a house. Without the credit I will not.
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p>That’s not to say that I think this is good policy. In fact I think it’s terrible policy and I would feel a certain degree of shame taking advantage of such a rediculous tax credit. But from a straight financial perspective it would work for me.
Under classic option pricing theory, the price of the house would increase.
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p>Assuming the Bill passed, you would in effect, as a qualified home buyer be possessed of a $15K option. That is, you have the option to buy the house as listed minus $15K. The market would account for the existence of this option by increasing the ‘value’ of appropriately priced houses by an amount approaching $15K.
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p>Seems the effect would be, to i) increase housing prices at least temporarily, leaving me to wonder what would happen to prices after the expiration of the support and ii) giving you a ‘down payment’ of $15K which by your admission, now makes the house affordable.
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p>Best case: the program works to ‘jump-start’ home buying.
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p>Worse case: 1st time homeowners buy, program expires, housing prices seek their equilibrium, aka the prices before the program went into effect, leaving the first time home buyers in the leaking boat with everyone else: underwater.
I’m going to assume that there aren’t enough people who meet the definition of a first time home buyer, meet the income levels, are in a borderline financial position where an additional $15,000 would push them over the edge, and could qualify for a mortgage to increase the value of every house by an amount close to $15,000. So I’m assuming that any temporary price increase will be minor and that the corresponding decrease to equilibirium will be small. You think those assumptions are off?
No doubt the housing market isn’t as efficient as the option/equity market, but if I owned a home that I considered a ‘starter home’, I’d sure market it to attract the first time home owner.
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p>Whether than means I’d adjust the price upward by $15K, it’s impossible for me to say, but it’s not much different from stores offering a coupon but raising their normal prices on Big Sale day.
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p>And I agree with your point that the price is minor and FMV of a house is quite variable so that $15K is more of an incentive to buy as opposed to an incentive for a seller to raise prices.
The purpose of the tax credit is to increase the pool of potential buyers.
Increased pool of buyers equals increase in demand.
Increase in demand with supply constant equals increase in price.
You were looking at it from the east, I from the west, but we see the same thing.
Supply is so far ahead of demand at this point that it could be that an increase in demand has negligible impact on price.
….if you are right about the level of supply, and you may be. As usual I’m looking at this from further away. You know the view from an ivory tower isn’t always as clear as when you’re feet are firmly planted on the ground.
I have a number of friends who are buying foreclosed property and hope to make some nice profits. I recently read an article that housing sales have increased due to the huge increase in purchased foreclosed properties. The net of this seems to be there is a market out there for under-priced homes so maybe the increased foreclosures is not a problem (for the buyers only).
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p>The other problem with the tax credit is why limit the income. Don’t they want people making over $150K to be encouraged to buy a newer, bigger or more modern home? Plus, does anyone else think we need this huge market correction to bring housing prices back down to Earth? It was getting so a “starter” home with 1 bedroom in a regular town was costing $300K when it should be at a “starter” price of $150K.
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p>I bought my Cape house in 97 and attended many house auctions. There were hundreds of them in the Boston Globe every Sunday. Wh am I not seeing these hundreds of foreclosed property auctions anymore?
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p>These upcoming 4, 6 or 8 million foreclosed properties will be bought by somebody, albeit at a low price. Wait and see…
There is an old saying that goes something like…
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p>”Attempting to get rich quick is an effective means of getting hanged even quicker.“
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p>Kinda sums up the whole mess we’re in, huh?
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p>
Even the Nazis saved gold teeth and melted them into ingots when gassing their victims.
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p>Your point is?
Some might say “anyone” who makes a profit is doing so at the “loss” of someone else. Your uplifting nazi metaphor is not accurate in my opinion.
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p>Your initial diary talks about people not investing/buying homes/cars now and I am saying that this is a great time to buy. I think, based on my own research that it’s a super market to make money. Always wanted that 3 bedroom condo in Florida, go buy one now for $30-60K… And while the numbers of foreclosures are up and some project will go higher, it doesn’t seem to be stopping the buyers from buying. From a purely investment/economic standpoint, this is good news. Bad news would be if these foreclosed properties were NOT being bought by anyone.
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p>Anyone who has done well financially and is sitting on some cash has a great chance to make some great investments which will no doubt come back.
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p>I know it sounds bad but I’m happy about the decrease in housing prices. We have been living in a country where housing prices have increased far greater than the country can support. Excessive lending due to greedy buyers and greedy lenders fueled this disproportionate spike in prices and now it has to correct itself. I own 2 hones and suffer like everyone else from the decrease in my house values but I still think the country needs this correction. How can average young couples making $50-80K buy a starter house for $350K… they can’t. We needed a bust to bring down the costs of housing and we finally got it.
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p>Profit is not bad, it just is.
I said, quite distinctly, that achieving riches quickly is often a criminal endeavor. Or did you think that the aphorism “Attempting to get rich quick is an effective means of getting hanged even quicker,” is a blanket condemnation of riches, period?
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p>After all, even bank robbers profit… no?
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p>One of the reasons I intensely dislike MicroSoft is not because they are rich, but rather because they broke nearly every rule in the book to get rich… and they sell a resoundingly mediocre product, to boot… The point is, riches are fine if you didn’t commit the crime to get them. Have all the riches you want, if you can get them legitimately.
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p>
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p>I don’t, per se, think it sounds at all bad. If prices were inflated in the bubble then a decrease in prices is to be expected. It is the ‘normal’ thing. Absent a sufficient amount of ‘vultures’ willing to buy up now, they’ll keep falling. Of course, if many more people think like you and want to swoop in and buy up the homes, prices will rise again.
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p>But the primary purpose of a home isn’t profit, it’s to be a home for a family. Tertiary concerns, for real estate brokers, mortgage writers and banks, is in profit. In a more normal market those two interests might align better. Right now, they are completely out-of-wack
Your intial some people are getting rich did not sound like honest profit from hard work, but like profiteering – you know like the scoundrels who sold spoiled meat to the Union Army in a time of crisis and made great piles of profit as profiteers – not honest businessmen at all.
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p>So you may want to go into detail as to who is “getting rich” by giving good value in hard times.
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p>Sorry – but your comment just made me think of Bernie Madoff, not hard working Main Street business folk.
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p>Shall we charge $100 for a loaf of bread when people are starving? Sorry, but that is not appealing to me at all.
Quick profits don’t have to be bad either Amber. I bought Bank of America last week at $4.50 and sold at $6.50 3 days later. Was that wrong? I buy textbooks in June/July when nobody wants them and sell them on Amazon in September for 3X what I bought them for… is that wrong? Are Lottery winners bad people?
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p>If the market for something changes and you timed it right and make a killing, then you are either lucky or smart and I wouldn’t condemn either quality.
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p>Bernie Madoff broke the law… selling bad meat is illegal… and charging $100 for a loaf of bread is price gouging which I believe it illegal as well.
“Inasmuch as most good things are produced by labor, it follows that all such things ought to belong to those whose labor has produced them. But it has happened in all ages of the world that some have labored, and others, without labor, have enjoyed a larger proportion of the fruits. This is wrong, and should not continue. To secure to each laborer the whole product of his labor as nearly as possible is a worthy object of any good government.”
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p>Abraham Lincoln (From First Annual Message to Congress, December 3, 1861)
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p>First Republican President or dirty un-patriotic, un-American subversive socialist?
Wonder if this upcoming foreclosure qualifies for a first time buyer credit.
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p>
back 10-15 years ago. He paid some outrageous amount of money ($750,000) and made a killing. Was he a bad peson for getting the building so inexpensively? I would enjoy my name being attached tot hat building 🙂
I think he is a “bad pe[r]son for getting the building so inexpensively”?
First on misspelling “person” and second on confusing you with others above who were trying to impune that making money (quickly) was somehow bad.
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p>“Attempting to get rich quick is an effective means of getting hanged even quicker.”
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p>My bad, sorry.
Well, some people who attempt to get rich quickly do so illegally. That and what’s not to like about a neat epigram?
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p>However, you may not have caught my inveighing against fellow liberals when they inveigh against greed. I think of greed as capitalism’s grease. Regulate it, yes. Complain about it, no.
I too like profits and I guess greed (but it sounds wrong). And believe it or not, I do believe we need regulations and gosh I wish the Democrats had been looking at Freddie and Fannie a little closer instead of their “shock” at anybody doubting it (Maxine and Barny…).
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p>I like epigrams too. Next time try one as a poem.
I thought I was playing nice by making you the hero of an imaginary story.
I am writing a novel and it’s not too late to include a character based on you. Let me think about this (as you know, thinking tires me sometimes). Sort of a tit-for-tat.
John Hancock building foreclosure. I hotlinked the pic, and they killed the link.
Which someone picked up for $500K – money they made back almost immediately by selling part of the parking lot to a movie chain. Now the towers are known as Cross Point, of course.
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p>If anybody’s putting together a buyout like that one, let me know.
… its great having that movie complex there. 😉
has stated that it would be better for the country if the banks were forced to roll back the interest of the mortgages to level where the homes were affordable, at the initial offering, than it is to bail out the banks.
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p>The upside: it’s simple and the taxpayer isn’t on the hook for decades. People get to stay in their homes, instead of communities being decimated by foreclosures. The downside: the banks and everybody else who stand to gain from the stimulus bill – won’t. Pity that, huh?
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p>I thought it made more sense than this convoluted, pork-infested, bank-bailing out stimulus bill.
… actually address the liquidity crunch. If all the banks lose, won’t they just tighten up their credit even more?
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p>Maybe remind the good professor that there are 2 sides to each contract. When you roll back the rate to an “affordable” level, that means you give the investors – not just banks – a haircut.
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p>Investors in these REITs, FNMA,… are typically investors seeking stable yield: pension funds that are using the mortgage obligations to fund current payouts; the elderly.
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p>Your professor seeks to bail out mortage holders on the back of the investor?
less? This godawful bailout…or stabilizing the market with a rollback? He said that people would insist on “the terms of the contract” – but he pointed out that the investors had to understand the risk they took when investing in these mortgage based securities. So you really think bailing out the investors on the backs of the taxpayer…who is not getting an investors return, a stable housing market or anything resembling transparency in terms of where the money is going…is a better idea?
So if I understand you, your professor’s advocating that the government undertake 2 steps: i) determine when a mortgage and promissory note is “affordable” to a particular homeowner, and ii) adjust the terms accordingly.
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p>BTW, I’d be interested to know with which institute for higher learning I’m engaging via proxy.
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p>My first question is, if your professor has such a great idea, why hasn’t it been done or proposed by either Administration. That’s a threshold question.
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p>Second, how does the good Professor propose to deal with the stampede of homeowners who will complain that their mortgage is also unaffordable. That’s the moral hazard argument.
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p>Third, the PhD laments that “…that the investors had to understand the risk they took when investing in these mortgage based securities.” And don’t you think the homeowners understood or should understand the risk of taking out large mortgages? Why favor their side of the contract more than the other? Christ, when you buy a house you sign your name two dozen times on Government approved documents claiming before God and your lawyer you understand the risks and responsibilities.
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p>And last, if the government crams the lower interest rate down the investor’s throat, don’t you figure that in the future the future investors will demand more return to buy a similar investment, just in case the government decides to do the same thing again. Greater risk demands higher return.
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p>I don’t dispute that those who bought the CDOs understood, or should have understood the risk, but if the penalty for the failure to manage properly is an insovency and bank closing with layoffs of employees, I don’t understand moral sympathy toward either side of the contract over the other.
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p>And, given there’s no apparent moral highground on either side of the contract, the burden of proof seems lies with the Professor who’s advocating that the Government invalidate the contract.
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p>That is, your professor has the burden to say that he can prove that i) the moral hazard risk is minimual and ii) the Government mechanism to determine affordability is possible and iii) that the benefit given by ‘bailing out’ the homeowner exceeds the risk of allowing the investors to lose return on investment and iv) the implicit cost on future home mortgage rates caused by Government intervention justifies the action.
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p>Big hurdles I’m sure your Professor has contemplated.
… its the insolvency. As soon as terms on a renegotiation were concluded, the loss would be on the books. They’d rather be in the dark about catastrophic value losses hidden in their books than actually know a devastating ones because transactions defined them clearly.
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p>OTH, not getting the banks to quantify the asset values presents a moral hazard to the banks.
I set out 3 problems; you’re focusing on one of them: i) the stampede of ‘distressed’ homeowers who may or not be distress ii) bank insolvency caused by the breaking of the contract and the subsequent investment write-down iii) impact on future contracts as result of government intervention.
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p>I’d seriously like the good Professor via proxy to address each of them to explain how he arrived at his conclusion to bail out homeowners at the banks’ expense. Absent that, he sounds more like a minister expressing his belief, not a Finance professor explaining his conclusion.
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p>Well, if it were as easy as simply ‘demanding higher return’ doncha think they’d have done it afore? They can ask, but they can’t demand…
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p>
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p>two points:
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p>A) I’m certain this goes a little be beyond ‘failure to manage properly’.
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p>and 2)even so, what other penalty would there be for ‘failure to manage properly’? A slap on the wrist? A bailout package? insolvency actually happens all the time, most often exactly because of a ‘failure to manage properly’…
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p>
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p>Honest and earnest citizens who wish to have a home, and can afford it, ought to be able to have a home at an affordable price. Stacked up against a cadre of (generally) rich investors, with phalanx upon phalanx of lawyers, brokers and other investment advisors at their elbow, and who ought to have known better, my ‘moral sympathies’ are with the homeowner. Break the contract in favor of the homeowner and the most likely outcome is that the investor is just a little poorer. Boo hoo. Break the contract against the homeowner and the most likely outcome is that the investor is richer and the homeowner is (likely) homeless. Unacceptable. Sit down in the chair and take your haircut like a man.
On one side we have the big, bad banks and on the other side the poor, oppressed homeowners yearing to breathe free. Life’s a Star Wars Movie for you isn’t it?
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p>Ha ha. That actually made me laugh aloud…
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p>I don’t particularly think the banks are bad (though they might be big). But if you gave me the choice (oh, look, you did!) of having the banks (and their investors) slightly poorer or making someone homeless… No brainer, dood.
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p>Well, it actually looks like there are more than 2 sides to some of these contracts. To wit, (as has been mentioned upstream) not everybody can figure out which one of the myriad sides of a particular mortgage they are on… At least the home buyer knew he was getting a house. Maybe those who invested in things they don’t understand (and couldn’t get that information from the banks they were investing in) need a haircut.
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p>
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p>How’d that work out for them? Hmm… notso gud, huh? Perhaps they’ll have standing to sue? I’m not sure the moral hazard argument stands up to the moral blindness argument.
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p>What’s certain is that somebody is going to get a haircut. From where I’m sitting, John Q. Taxpayer doesn’t look at all shaggy… Bartholemew J. Banker, however, does look kinda hairy and unkempt. Next chair is open!
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p>
…which one of the myriad sides of a particular mortgage they are on…”
“Maybe those who invested in things they don’t understand need a haircut.”
speculators have already taken several haircuts. They’re so bald you could very nearly see the inside of their skulls.
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p>I do believe it was stipulated (a long long time ago, in a post far far away… Hi Gary!) that any homeowners assistance would be paid only to primary residences and not to speculative properties.
Who cares if the mortgage adjustment is only to homeowners or to speculators. This has nothing to do with morality.
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p>For extra credit: Slime National Bank (Deval Patrick was a Director) targets poor people and lends them money at high rates to buy a home. Many default, and in the middle of winter, they stand a good chance of being cast out in the snow where they live the life of a Dickens novel.
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p>Should government readjust the rate so they can stay in their home, knowing that Slime National Bank will be rendered insolvent and will close laying off dozens of its employees.
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p>consider: (i) will readjustment motivate others to default (ii) will readjustment affect the willingness of banks to lend, and (iii) will readjustment render this and other banks insolvent.
but I invested my money in my home. So did everyone else who bought one. I just got a trim, not a haircut.
Further, consider the impact on the banks. Upon re-establishing the new and affordable rate, the existing mortgages would be worth less, and marked down accordingly, which mean less equity to the banks and would bring up a new round of insolvencies.
by foreclosures which destabilizes communities. This drives down housing prices further. It increases crime, drives down business investments, undercuts tax revenues to municipalities….it can take decades to come back from the brink.
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p>So we’re going to be worried about the banks taking in a little less money – their 4% teaser rate instead of a balloon of 12%?
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p>I am having a hard time understanding why you think we should consider only the impact on the banks (who got us into this mess) without considering some sort of assistance for these homeowners. When the housing market is stabilized, everybody wins.
Someone walks into my office. He says he has trouble meeting his mortgage and has a pile of debt on credit cards.
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p>My first question: how’s your credit? The second question: I’m about to ruin it. Do you mind?
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p>If the answer is no, then my advice is for him to miss his next 2 payments on the i) credit card and ii) the mortgage.
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p>Once, he’s delinquent, I contact the i) credit card companies and ii) the bank, and negotiate an extended payoff of about 30% – 50% on the credit cards and a reduction by the bank in rate or principal, or both.
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p>Now probably, the only people who walk into my office are people who are really in debt trouble. You know, large mortgages compounded with $50K or $100K of credit card debt. However, imagine what would happen if the government said, “ok folks, anyone with trouble meeting their obligations qualify for affordable payments”. That’s moral hazard; that’s one reason why the government should NOT set a price control on the interest rate for homeowners.
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p>Second, it’s not banks who own all this debt. Banks write the mortgage and sell it to investors who have bargained for a 5% or 6% fixed return. Has your professor reasoned that it’s ok to screw them- them being pension funds and people who’ve invested in stable investments – in order to keep people in homes who can’t afford to stay in homes?
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p>And third, a 4% teaser with a 12% ARM is pretty rare as a hypothetical in this market over the prior 10 years, and probably, if such animal exists at all, was written to someone who couldn’t qualify in the first place, for conventional debt.
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p>Why would you believe it’s good policy to keep that person in the house at all when the alternative is a foreclosure, a resale to someone who can afford it leaving the foreclosed individual to rent or buy something that actually is affordable.
or at least better policy, to protect the investors to the detriment of the homeowners, their communities, state and the nation? This is a crisis of tremendous proportion, and while you think my hypothetical teaser is rare, I can assure you that it’s not all that rare. Those ballooned up loans were easy to get in 2004-2006, with many homeowners being told that “it’s all good – you can always refi when the value of your home goes up again.” The sky was the limit…until it wasn’t.
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p>I’m having a hard time with viewing the investors as holy and sacrosant. Any savvy investor wanting a stable return should have been smart enough to stay the hell out of an overheated housing bubble. But we’ve got trillions to save their sorry asses…and barely a crumb for the people taken in by this collosal con? The overheated housing market has any number of villians we can blame, but you’re making the homeowner the sole culprit.
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p>And yeah – the teaser is real. It was one of the options put in front of me when I bought my house in 2007. And the gent who bought my house from me….bought it with 2 loans; one for the downpayment and one for the rest. I couldn’t imagine how he could buy a home fully leveraged, but he did. I was stunned while we were passing papers, recalling that I practically had to give blood in order to get my first mortgage. So who allowed that? It was the banks. At one point, all you needed was to take in oxygen and you could get a mortgage. So yeah – I blame the banks. And most of these banks weren’t bound by legislation; they were responding to the siren call of competition despite the fact that such loans weren’t going to be guaranteed. They assumed (and rightly, it would appear) that if bad things happen, there would be a bail out.
You are saying that government should breach the contract.
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p>I am saying that you have the burden, given the benefits and historical and legal precedence of honoring contract transactions, to prove that breaching the contract is the better alternative.
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p>I’ve offered 3 potential problems; you’ve addressed none of them.
The problem I see is that there is a lot of interplay between housing prices and the number of buyers in the market.
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p>We had a bubble because a lot of people were suddenly unleashed onto the housing market. This drove prices up so that they were not sustainable by people’s incomes.
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p>We are now faced with two bad choices: re-inflate the bubble so that people’s housing values don’t drop — which keeps housing out of reach for most incomes — or deflate the bubble causing prices to drop — which puts housing back within reach of people’s incomes.
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p>I think the solution is somewhere in the middle. I think a lot of houses will need to be foreclosed on. But a lot of people will need to be rescued from foreclosure.
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p>We will also need to increase demand — but not too much as to cause another bubble.
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p>Where is the ideal line? I don’t know. I’m not a genius.
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p>I think that people who bought houses as “investments” should probably lose those houses. Investments carry risk. Unfortunately the geographic distribution may cause problems with that theory — Springfield had a lot of Eastern MA investors scooping up properties and putting them out of reach of the average Springfield resident. If all those foreclose, we will be hammered.
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p>I think that people who bought houses in good faith should get some help trying to either preserve them, or with a plan that gives them a little time to unload them. Honestly, a lot of people bought houses that they can’t afford to maintain, they got swept up in the mania and didn’t realize that beyond the mortgage, it costs money to keep your house up so that it isn’t a neighborhood blight.
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p>I think that this “first time homebuyers” might be a good thing, because there probably aren’t enough of them to drive prices up substantially. It won’t just jack prices up, it will simply throw some people into the market who might not be there otherwise. It will oil up the gears a little.
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p>This is a very complex problem, and I think the solution will be arrived at slowly and incrementally. We need flexibility in the meantime so that rigid rules don’t cause everything to fall apart. That means giving people more time, more chances, leniency, etc. — things that Conservatives hate to hear, but things that are necessary to stop the implosion.
But, honestly, no one I asked in the 40-60 age range is interested in them. No one at all.