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...Whenever I read this kind of crap from an intelligent writer [MARTIN S. FELDSTEIN], the cynic in me wonders if the author is being paid off by powerful interests who endorse this policy…
My own theory is that Martin (and others like him) have succumbed to “Group Think”.
I used to believe that super smart people would not fall into such traps. After all, that’s why they are super smart, right?
But, in working for a very large corporation, I have witnessed many examples of incredibly stupid policy created by some very talented people.
Why? IMHO its all traceable to fear. Maybe Martin plays golf in a foursome who are all Wall Street bankers? Who knows.
Another very spot on IHB article.
So bankruptcy and foreclosure somehow doesn’t cost the taxpayers anything but principal forgiveness does?
Who guaranteed all those loans that will have to pay up when the bank foreclosures occur? Who guarantees all those deposits at the banks that will have to take these losses?
Somehow you seem to indicate that one method costs taxpayers money but the other does not. How is this so?
Also, your scenario of “new buyers” are less indebted so that is a good thing fine and dandy as long as the not important “prices are falling” factor doesn’t continue. If prices continue to fall (read deflationary), then who will buy at all?
If you think debt is the only reason that real estate bubbles form, see what happened in Asia where there was no formal mortgage market and see how their economies did when post bubble of “it is always great when the next buyer can pay less for something” continues on endlessly.
Fair points. If you’re a household making less than $250K, you’re not being attacked to help pay for all of these socialized losses (yet); but you are being attacked by higher banking fees.
Foreclosure isn’t a perfect solution to the problem (consumers with too much debt), but it is the best solution.
We could have avoided much of this if only the Fed would have cracked-down on the growing popularity of negative amortization loans from 2000-2007…
I’ll raise my hand.
I, and many other responsible renters, stepped off the merry-go-round when it became clear that housing was no longer a sensible investment.
Those of us who were at least smart enough to understand what was going on deserve to live in one of the homes currently occupied by over-indebted poseurs or outright squatters.
As more intelligent market actors than those who paid over a half million for 70s shacks in Rancho Del Stucco, we are better suited to raise families, vote, and live responsibly, than the current crop of greedy stupid degenerate losers who currently “own” much of our residential real estate.
The best thing the banks and government could do for society is step out of this situation the current debtors suffer the consequences of their stupidity and venality, so that sensible renters can buy those homes at reasonable prices.
I would also like to think, that if prices continued to fall, that creditors would become more proactive and try to incentivize prospective strategic defaulters from doing so. You don’t have to forgive any principal, but just mark-down the rate to market rates. I’ll even agree to allow it to adjust every quarter!
@ Hydrocabron
When I default (and I will) I’ll make sure and enjoy the freestay for as long as possible and remind you as much as possible.
In addition, I tell people all over the place to default and squat. DO NOT MOVE OUT. Stay until forced to move. Cabron…very apt name by the way for you.
The best thing is I’ll strip my house of every fxiture and upgrade I put sweat into. The house will be returned in “original” condition. LOL!!
My neighbor already has dibs on my nice $2500 AC unit, of course I’ll sell it for $500 and have the old useless one installed at my property to comply with the law. Same goes with the VERY nice Wilsonart flooring. Ceiling fans, fixtures, appliances, all will be replaced with sub-par crap….and it’s all perfectly legal. Enjoy.
I think it’s damn funny how there’s this phony indignation emerging from the morons who bought too much house. It seems there is an attempt to re-frame things so that these geeks look like victims who got cheated out of their houses by the bad bankers rather than the innumerate, hot-potato-holding d-bags they really are. The lenders were the evil of the lessers—sure—but guys like this commenter, who did their part to F-up our housing market deserve nothing short of a swift kick in their tacos.
You are honestly doing what you have to do, everyone else be damned.
Ditto… responsible renters or owners should recognize the value of their choices as the irresponsible should recognize. Otherwise this will continue to be a slow motion train wreck and we will be Japan. If this happens you will sell your house in 10 years at twice the interest rate and half the inflation adjusted value.
My .02
BD
> Rancho Del Stucco
My favorite descriptive phrase is “termite-infested stucco crapbox.”
@Swiller: White trash is as white trash does.
no more be said… “buy homes at reasonable prices” excellent Smileys
“Somehow you seem to indicate that one method costs taxpayers money but the other does not. How is this so?”
On the GSE loans, you’re right, it makes little difference. For loans not insured by the government, like those still held on bank balance sheets, it makes all the difference.
Further, even the GSE loans will not be a total loss. Many will continue to pay and wait for prices to rebound. If we forgave everyone’s principal, we are giving a windfall to those who would have paid anyway. I suspect the cost of this program is much higher in terms of taxpayer payouts than if nothing is done at all.
So, when the bank is not paid, and has to, as you say, write off the debt, do you think the money owed, the debt is extinguished?
Doesn’t the bank still have to pay back the money it borrowed or created via fractional reserve banking?
And when the bank can not pay, and they can not, who do you think will end up paying?
You are correct. The problem is DEBT, but what you fail to realize is that in a fiat currency, fractional reserve monetary system, MONEY is DEBT.
Foreclosure, principal forgiveness, short sale, mortgage payment? It matters little which you choose. The citizenry will pay more in all those choices in a fiat currency fractional reserve monetary system and those who control the currency will continue to steal from them.
“Give me control of a nation’s money and I care not who makes the laws.” - Mayer Amchel Rothschild
“As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.”
“for the millions of mortgages held by (gse’s) the gov is paying itself”
These two assertions are key…for the first, dual accelerants of leverage and counter party risk deserves the question, if left to itself, what scale the correction? And given the overcorrecting nature of a margin-call, what’s the probability of an end of days economic scenario?
Second, the Fed and pensions may likely be the largest GSE bondholders…so, the economist is not necessarily incorrect.
Subsidizing the financially irresponsible is as hard as it gets, ask the Germans…but moral justice at the expense of all else - massive unemployment and loss of savings’ purchasing power - could be opening a pandora’s box of financial & social suicide.
$402 a month in HOA fees? Almost as much as property taxes. Am I the only one who thinks this is ridiculous? What do you get for that? Access to a pool and hot tub? Wow, amazing!
Seems like plain robbery to me….
Yep, those HOA fees are outrageous. I don’t know about other areas in CA, but in Southern Cali we have another scam called “Mello Roos,” which is widespread down here. It basically is a special tax assessment to pay for schools, roads, etc. and it is NOT subject to Prop. 13.
Why Mello Roos? Because during the bubble period, taxes couldn’t keep up with the overdevelopment, and rubes agreed to pay these special assessments.
We looked at an overpriced place in 2005. The house was one thing. But then the HOA was $400 a month and the Mello Roos was a whopping $350 a month. Once I heard those numbers, I put my foot down and said no F-ing way are we committing to paying many thousands of dollars per year for the next two decades to pay for stuff that should already be included in the tax bill.
Most others didn’t see it this way, and they bought right into the teeth of the bubble. Bubble house prices, bubble Mello Roos, bubble HOA. All of this must have decimated families’ balance sheets. You can see the carnage today: street upon street of foreclosed and for-sale homes, abandoned by people who in no way could pay these outrageous fees.
So my advice to you if you are looking for a home: first thing you do is investigate any ancillary fees like HOA, Mello Roos, assessments, anything at all that has a monthly payment. If you even get an inkling the fees sound high, walk away. WALK AWAY. These monthly fees will be a massive millstone around your neck, impoverishing you when your capital could have been put to far more productive uses (like paying down debt, investing in solid dividend-paying companies, safe municipal bonds, anything that pays YOU a monthly income).
Fees are a lifestyle killer. Avoid at all costs.
Quite a few Mello Roos taxes are expiring over the next few years (we own in Aliso Viejo and about 50% of ours expire in 2013), but I would assume even most sellers might not be aware of that so you need to do your homework. I think our pre-expiration MR is ~$120 per month but the HOA is only $40. So not too bad. But I agree, goal is to keep these monthly payments low…
Also, some RE developers are now burying a new “transfer fee” in sales documents.
Every time the house is resold, a 1% fee goes to the original developer - forever.
Like I needed another reason to hate the big banks - JP Morgage Chase has been taking over our Irvine tower for the last year and now they want our space on our shared floor. Guess we’ll be moving soon…
Larry,
I agree with you that a blanket principal-reduction campaign isn’t the best strategy, but for different reasons. I’m less concerned with the fairness issue.
I would like to see bankruptcy cram downs legalized again. Obviously, only a portion of homeowners/homedebtors would qualify, but at least there would be an actual judge looking at their case and making a ruling, as opposed to a congressman or loss-mitigator.
And, with the threat of cram downs, banks would be less predatory in the future.
It’s not a complete answer, but I do think it is a more reasonable next step than whatever Uncle Sam is likely to propose.
Thoughts?
Un-huh, I know Greg, exactly…cause that whole ‘fairness issue’ is so passe’ and primal and stuff.
Hey, what is that OW movement all about again?...did fairness have something to do with it?
Greg,
I think fairness is at the root of the problem along with moral hazard. Principal forgiveness cannot be doled out equitably, and it will create moral hazard without other consequences.
Bankruptcy cram downs have the appeal of curbing predatory lending, but much depends on how the cram downs are structured. If it ends up keeping people in houses they could never afford, then it will be a problem. Imagine a Ponzi debtor who borrowed themselves into oblivion being given a big write-down in order to keep a house they can’t really afford. This would keep the house in the hands of an irresponsible borrower and out of the hands of a family who could afford it. Cram downs like that merely encourage more Ponzi borrowing and rewards those who least deserve it.
“Principal forgiveness cannot be doled out equitably”
Agreed - which is why having a judge review each case individually makes more sense.
“Imagine a Ponzi debtor who borrowed themselves into oblivion being given a big write-down in order to keep a house they can’t really afford. This would keep the house in the hands of an irresponsible borrower and out of the hands of a family who could afford it.”
That’s the rub - how much should these people be punished? I would be in favor of BK judges reviewing he merits and intents of the borrowers. I agree that the “ponziest” borrowers shouldn’t be saved.
“Cram downs like that merely encourage more Ponzi borrowing and rewards those who least deserve it.”
This is incorrect. With the possibility of cram downs, lenders would need to be more careful and less predatory - there would be much less ponzi lending in the future.
We have private contracts which already have all the necessary provisions for the parties to exit the contract. I’m not necessarily against moving future mortgage loans to a bankruptcy regime, but where they currently are not subject to bankruptcy, borrowers entered into these contracts with these provisions known, or at least, knowable. Crudely, they didn’t care so much when they thought their zero down loans were going to make them $100,000 or so in three years and now it is important? More generally as to principle foregiveness, I guess lenders don’t have the urgency that Feldstein thinks they should to make the best of such underwater loans. When bank equity is zero and creditors are taking 40% haircuts, then maybe the Treasury might think about this.
What if the scope of the problem is so large that once all the dominos have fallen, virtually no family can afford because there is no bank willing to loan, or cashflow to service the debt (no economy, no jobs).
IMHO, this conversation is getting lost on scale…leverage and counter party risk make this exponentially bigger than the *just* the $Trillions of outstanding mortgage debt.
The Harvard economist, Bernanke, Obama et all aren’t trying to screw the financially thrifty out of lower house prices, give “irresponsible” buyers a free lunch, nor are they trying to keep bankers bonuses high - these just happen to be (outrageous, unwanted) second/third order derivatives of their prime directive of attempting to keep the wheels on the global financial system.
If it comes down to principal forgiveness (taking a 25% loss) vs economic scorched earth (50-75% loss, leading to 35-50% unemployment plus loss of retirement accounts, pensions, savings and accelerated, if not hyper-currency inflation) theyre not going to hesitate squabbling over “what’s fair”.
Bitter as it is, they’re seems to be only bad, worse and truly horrific options for policy makers to choose from.
Why does anyone think that they have have a better idea of what to do with mortgage debt than those who have a direct financial stake in collecting it? If writing down debt by 25% gives a better result than a “scorced earth” 50-75% loss, then I would expect that we would be seeing a lot of 25% write-downs. But we are not seeing that. If superior results are likely to occur with prinicple foregiveness could someone explain two things to me please? First, why isn’t it happening naturally? Second, why does the taxpayer need to be involved at all?
“If superior results are likely to occur with prinicple foregiveness could someone explain two things to me please? First, why isn’t it happening naturally? Second, why does the taxpayer need to be involved at all?”
It isn’t happening naturally because the Fed/Treasury changed the accounting rules for how banks recognize losses. Before the Fall of 2008, banks had to write-down assets to their market value - meaning if a 600K loan was only worth 300K, they had to take the loss. Remember all of the write-downs in the news every day? Those don’t happen anymore because banks no longer need to recognize those losses. Where before, banks were quickly foreclosing on homes to minimize losses, now they are dragging out the process to avoid having to take those losses. I believe that if they had to mark their assets to market, then there would be an incentive for them to work with the borrower and make those principal reductions. Now, however, the are penalized for making reductions because they have to recognize that loss.
For more on this, read: http://bayarearealestatetrends.com/2011/08/12/why-the-markets-are-so-fragile-and-the-accounting-gimmick-that-is-holding-our-economy-together/
As far as why the taxpayer needs to be involved at all, they don’t. Washington is doing everything they can do to funnel taxpayer/civilian money to the banks, because, supposedly, it’s in all of our best interests. I call bullshit.
Check out: http://bayarearealestatetrends.com/2011/10/13/reconsidering-the-housing-crisis/
Yes, market price balance sheet accounting would likely stimulate lenders to look hard at principle reduction as a means to harvest the most value from shaky loans. But if lenders find it better to take their losses slowly as more loans pass irrecoverably past any pretense of performing, isn’t that their choice and don’t you think they have some reason for it? The reason I find most likely is that they hold hope that something like Feldstein’s idea will materialize and they will look like idiots (plus done their institutions and probably themselves harm) if 6 months after cutting deals to get the best value they can they find their competitors who waited got the Treasury to chip in $40K a loan. I can’t follow at all your reasoning on the taxpayer not needing to be involved. I agree with that statement, but every “plan” always has at its heart the idea that the taxpayer takes at least a good portion of the excess debt off the hands of the creditor. Without taxpayer participation, this article and the hundreds of similar ones and the thousands of comments to them would never be written. My attitude is if the equity holders of institutions prefer that it be managed in a way that risks a “scorched earth” 50%-75% cratering of their assets’ values, well that is odd but it is their choice.
It bugs me too when people claim that the problem is falling prices (or low prices). The problem was that home prices were too high. It should be evident that the solution to that is lower prices. Places where prices were not too high have seen modest price declines with prices stabilizing.
Where someone like Feldstein makes their error is that they completely missed the bubble, so they have to say that the status-quo circa 2007 was an appropriate situation. When you operate under that assumption you cannot come up with a reasonable policy response.