As I understand it, a large part of the reason the housing bubble popped was when too many people could no longer make their mortgage payments when their fixed-interest terms ended. This then cascaded.
Now, a good debt - and therefore a valuable one - is one that gets paid. So, wouldn’t it make more sense for Obama to guarantee the excess interest on mortgagees’ loans? The mortgagee pays the interest rate for which they originally signed (and presumably were able to pay), and the government somehow funds the rest. This would stabilise the housing market, and make all the mortgages have real value that the lenders can put on their balance sheets, returning value and stability to the system.
Does anyone have figures that can be put to this? WAG: 10 M homes @ $100K mortgage @ +2% interest gives $20 B / year. Vastly cheaper than the current bailouts.
No. It is a lot worse than that. Tens of millions of people bought houses that they could only “afford” because they would make up for their negative cash flow by appreciation in the value of the property. It is running on a financial treadmill. Even if I can’t pay the 5.5% interest, I don’t care if the house goes up by 10% per year. I can keep cashing out to replenish my cash flow.
Then there is the moral hazard problem for people who can afford their homes. Why would you want to pay off a 240k loan secured by what is now a 150k property. You are better of not paying. 90k is a lot of money to pay to preserve your credit rating. Better to stop paying and try to pressure the bank into reduding the loan amount through a short sale.
Basically once you throw out the 3 our of the 4 Cs of credit (Character, Capacity and Capital) the last remaining one Collateral becomes victim of the anti-C of credit, Contagion. When everyone is trying to sell the collateral at the same time, it’s value goes down.
Why don’t they revalue the homes then? I understand this is a huge task and complicated by the fact no one really knows what they are worth because there are few buyers.
Nevertheless why not set some metrics by which the property asset can be revalued. So, say, a 300K house is now revalued at 185K then sign a mortgage based on that. The lost 125K is a write off. I know they do not like write-offs but that is what they are faced with now, en mass, anyway. The banks and investors take a bath and the government throws some money at them to mitigate the loss and keep them limping along.
At least this way the homeowners have less reason to walk away. They regain equity in their home (or at least get back to zero instead of being massively in the hole) and with stable housing prices the business of buying/selling homes can resume not to mention the banks will regain an income stream again in mortgage payments.
Granted it is a big job but what is the alternative? Just sit and flail our arms and hope it all goes away?
Seems sensible enough, which means that for sure and for certain someone is going to come along, pat us on the head and say something like this is all too complicated for your tiny little minds to understand, best leave this heavy lifting to the professionals…
But it sure sounds good to me. Yep, gonna be some baths taken, but some baths are gonna be taken anyway. Plus, we get to a point where houses actually have a value that is more than purely theoretical. And last but not least, the houses remain occupied. People have homes. People should have homes, even dumb bunnies who fail to understand the Miracle of Compounded Interest. We don’t have that many bridges to live under.
Hell, at this rate, there will be waiting lists for bridge-under spaces…
Most of the proposals that were being bruited about a few months ago had the banks or government getting a piece of the upside. If the loan on a $200K house gets reset to $150K due to falling house value, the bank gets some percentage of the profit if it goes back up to $200K or anything. Now that sounds reasonable to me.
Moral hazard is an issue, but no more so than the moral hazard of AIG being totally out of control and getting bailed out. About the only way to avoid any moral hazard in this situation is to let the economy crash even worse than it is now. However, I’d be fine with a lack of means test. FAFSA scholarship applications assume that parents are going to be able to pay a certain percentage of their assets and income for college. Doing the same thing for a mortgage recalculation is fine.
Sounds fine, so long as there is some proviso that if the value of the property is increased due to investment by the owner (home improvement, etc.), then some fair apportionment of the proceeds must be reached. After all, who is going to make a $50,000 improvement to their home if it’s going to be the banks money when/if it’s sold?
Sounds reasonable. Assessors know how to account for the value of an addition,say. Capital improvements, not maintenance costs, get added to the purchase price of a house when computing the cost basis anyway.
By my understanding also – although I must add a disclaimer that I’m out of my depths discussing this at anything more than the broadest of levels (more concisely, IANAE). The key (again, in my understanding) is that it was only the proximate cause of the current situation.
Right. And again, as far as I understand it, this is/was the idea underlying one half of the recently passed Obama housing plan.
And I think that that’s where your solution doesn’t work. The issues go beyond the proximate cause – fixing the current foreclosure issue alone won’t return stability to, nor will it “fix”, the system. Furthermore, though this might be wrong, I don’t think one can even make the claim that this solution would’ve averted the crisis if it were implemented at the time it became apparent. At that point, it was already too late.
The biggest problem with this is the fact that the loans are no longer held by a single entity. It would take a lot of time to unravel the CDOs to find out who owns a piece of each mortgage and then get them to agree. It could be done, but not quickly enough to stop a specific bank from going under. The Fed can cut a loan in less than a week, it would take months (at least) to do a review a few thousand loans.
The FDIC and the Obama administration are trying to address this issue, but it will not be simple or fast. Who gets bailed out? Anyone who has lost value in their house, anyone who owes more than their house is worth, anyone not able to make current payments? Each homeowner would need to be evaluated to see if lower interest rate and/or principle by a reasonable amount will be able to keep them in their home. Some home owners can no longer afford their payments, and some people bought homes they could never afford, even at current lower prices.
Not only that, it is often not clear who owns what. There appear to have been a few cases recently when the lender, trying to foreclose, has not been able to produce documentation on who owns the loan. Some judges are letting people stay in their homes when this happens, and I read of one case where the statute of limitations has run out and the homeowner is now free and clear.
It appears that the banks thought they could save money by not doing the paperwork, and are now paying for it. Kind of poetic justice. Anyhow, it illustrates the point of how chaotic things are.
No, Obama’s plan will only help those who have an agency backed mortgage (around 40% of homeowners) and only those who don’t have an LTV of +105%… This narrows the pool down greatly.
There are multiple problems with doing something (i.e., a grand homeowner bailout) like this:
Just getting a bailout like this through the government and funded… Let’s face it, it would be a huge fight, a big gamble and take lots of time. Whoever decides to push this through would need tons of political capital to burn…
Who qualifies? Everyone? Only those in trouble? Only those underwater? What about people with multiple homes (i.e., speculators)? When and where do we stop helping? People who buy homes now, last year, next year?
The logistics. It is a heck of a lot easier to give big chunks of money to a handful of players (the banks) rather than give tiny chunks to a huge number. Where would the manpower come from to do this? Who is going to field the calls, complete the apps, run the numbers, appraise the homes, disburse the funds, etc., etc.,? Running this thing in and of itself would be a massive (and expensive) operation.
Any successful homeowner bailout, on the scale proposed in this thread, would need to have been organized and in place 2 years ago to have any real and significant impact. At this point, a lot, if not most, of the damage has been done. People who are foreclosed on now get (in most cases) a year(±) rent free in their home and then they are back in the rental market (a market that is very soft as well) and with monthly payments that, in the biggest bubble states, are far below what they were forking out each month for ye ol’ house. In just two years post foreclosure they can qualify for an FHA mortgage and get back in the game…
I don’t think that changes the substance of what I said. That is, while you’re absolutely right in pointing out that it only helps certain borrowers, the point of the plan is to help reduce the foreclosure rate and stabilize the housing market.
And – for reasons including the ones you point out, with which I agree – IMHO, it’s a good plan that gets the most “bang for the buck”.
Somebody has to makeout. The home owner that took a loan they could not afford with too severe an adjustment might make out. The loan originators took their billions and folded up shop. They can not be touched. Blame is fruitless.
If we keep the people in their homes and they are paying the mortgage ,we all get something. The banks start getting payments again, helping them stabilize. Then if people stay in their home property values will stop dropping. That helps everybody in the area. Then an empty home quickly turns into an eyesore ,hurting everybody around it.
The foreclosures helped take the financial system down. They will do it over and over if we simply stand back and watch. We can try to stop it.
The money given to the banks did not work. They knew the purpose was to get them to start lending and free up the economy. They bought out stable banks, paid themselves well and kept cash in their coffers. They did not lend. These are supposed to be financial wizards. They are just thieves.
Obama knows how people object to a homeowner bailout. He will not allow investors to get in the program. But it is stupid to fight a program that could actually help. The banks just ate the bailout. They will do it again. AIG is up to 170 billion.
The problem is that shoving loan modifications down couldutterly destroy the entire economy and mash all capital markets.
You can’t “revalue” the house. It’s already been revalued by the market. That’s the problem. If you cramdown the loan, you can temporarily make homeowners feel good. But you’ll also basically destroy the national credit system at the same time, and probably kill half the banks in the country.
Why is that.? Many mortgages can have a lower % rate or have the loan extended to lower monthly payments. That would keep the home owner in the house. Where’s the harm there?
The banks are reluctant to use a new price for the house as a staring point. Perhaps they think the prices will go back up and they will not get the profits they believe they deserve. I had more than 100 K equity a couple years ago. I probably have zero now. I have continued to make payments throughout.
While I think it may be the right thing to do morally, I think several problems would arise as a result of doing this on a large scale. Most of them have already been mentioned, but I think we also need to accept that fact that housing prices need to come down a lot in many areas of the country. One way this will happen is allowing foreclosures to happen, and inventory to pile up.
It also doesn’t address the underlying issues of income inequality and stagnant wages. Both of which, IMO, played a large role in the economic situation we find ourselves in.
I was mainly talking about the OP’s plan. Obama’s plan will have little, if any impact on the foreclosure rate. It will certainly not help stabilize the housing market. It isn’t a bad plan, but it is way too small in scale (and way too late) to really do much. Not really his fault, but it is what it is.
The simple reason is that if you basically say, “Oh, the house is worth less, so the mortgage is now based on less.” You cause several really, really bad effects.
First, you will basically wipe out all the people who were lending money all at once. Do this, and be prepared for economic collapse. Nor a “Recession”. Not a “Depression”. Total economic collapse. The economy would literally fall apart. No one could afford. Virtually all large businesses will fail, because they need credit to cover day-to-day costs. That comes from lowering the rate.
Second, extending the loan will only increase the load on the homeowner, and make them more likely to default. If they need this, this is negotiable with their bank.
Third, both methods are interfering with private contracts, and will drastically raise the price for people getting new mortgages. Banks will want a lot more up-front and a lot more in interest in case the govrenment decides to keep improving the homeowners’ situation. So say goodbye to the new housing market for a decade, at least.
Fourth, it ignores that if homeowners don’t like the terms, they can walk away from the mortgage and the home. This may be unpleasant, and hit their credit rating, but if enough people do this, home prices (which are still inflated in some areas) will go right back down. The worst part is just that they get taxed, because they’re actually taking a huge net financial gain by walking from the contract.