01:39 pm
Of Homes, Hazard, and Economic Disaster
I spent some time over the weekend trying to get my head around Obama’s anti-foreclosure plan, and frankly, I’m struggling. I think is is in part because a) I’m not an economist; and b) Molly and I were somehow smart enough not to buy a house in the past ten years. In fact, I a) sucked at economics back in college and b) have never bothered to try to understand mortgages, figuring I’d do it when I needed to. So take all of what I’m about to say with a grain of salt.
As far as I can tell, Obama’s plan doesn’t seem to address a big part of the picture: the gap between what homeowners “paid” for their houses and what they’re worth now. Reducing interest rates and providing rebates isn’t going to do much to help a homeowner who bought her home at $450,000 only to see it decline in value to $300,000. Obama’s plan does nothing to help her and others like her to get out of that hole.
Wouldn’t a write-down of what is now non-existent wealth make more sense? It’s monopoly money now, anyway — it’s gone and not coming back anytime soon. And it’s not like the bank can hope to recover it. Even if the bank forecloses, they’re not going to get more than the present valuation — and probably will get less. So why not just write it down and renegotiate the mortgage at the home’s actual valuation?
Here’s what the Administration’s Q&A on whitehouse.gov has to say about this:
[Q:] I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?
[A:] Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.
That’s a start, but it’s also disingenuous. It avoids the question of what to do with this toxic, worthless debt — which, if I understand what everyone is telling us, is doing more to drag down the economy than anything else out there (and please correct me if I’m wrong.)
Here’s one answer, according to Norm Scheiber over at TNR’s the Plank:
[Helping families who] owe up to 150 or 200 percent of the value of their home. . .would cease to be costless. In fact, it would be very costly. The more interesting question is why. As I understand it, the reason is as follows: When Fannie or Freddie refinance a mortgage, they have to issue new bonds to support that mortgage. The way the bond market is structured, Fannie and Freddie can issue these new bonds fairly cheaply (i.e., at a low interest rate) if the LTV is at or below 105 percent. But the interest rate on any bonds they issue for a mortgage with an LTV above 105 shoots up dramatically. So the government would have to eat a pretty big cost if they expanded the program to include people whose mortgages are deeper underwater.
Okay, I understand his point. But since when has the expense of this project been a question? Just how much more money are we talking about?
I think the real answer has little to do with money and everything to do with perception. The Administration does not want to be seen as refinancing people who gamed the system. As I put it last Friday,
[Americans] want to believe that moral hazard still means something. Nothing gets people more angry than the idea of something for nothing. They need to believe that they won’t get stuck bailing out a neighbor who took out a home equity loan to buy a Hummer and go to Tahiti while they stayed at home, drove their used car, and paid their mortgage.
If Obama’s housing plan were to reward real estate speculators and home flippers, if it were to give money to those who took out interest-only mortgages in the expectation that rising valuation would ultimately give them the ability to sell the house before things got out of hand, if it were to look like it was benefiting those who took out second and third mortgages to fund profligate spending on consumer goods, a majority of Americans would rise up and start ranting like Chicago floor trader Rick Santelli.
Speaking as someone who has no consumer debt, has paid off his car, and who rents an apartment, I know I would be pretty furious if anyone like that were to gain relief. After all, why should I pay for their recklessness?
The answer is that I shouldn’t. And that I don’t have to. I emailed a friend who knows more about this than I do to ask what he thought, and here’s what he wrote back in response:
Home values are currently at 2002-2003 levels, and any relief plan that fails to reflect this — and which mostly starts and stops with lenders and their interests — will never get this critical part of our economy back on track. . . .
The Obama Mortgage Relief Plan is both misnamed and misdirected - what we need instead is a Homeowner Relief Plan which makes the distinctions discussed above, and which has enough administrative flexibility to look at each situation almost independently.
I couldn’t agree more. There’s another class of people out there, ones who fall between Obama’s plan and the speculators. They live in areas where housing prices have tanked by as much as 50 percent. They made the mistake of buying at the top of the market without knowing that it was going to collapse. They got perfectly reasonable mortgages on property whose value was hyperinflated and now they owe much more than the house is worth. They lost a job and now no longer can afford payments that otherwise they could have made.
These weren’t people trying to cash in — they were in fact, trying to live up to what they heard on television from private lenders, from Fannie and Freddie, and from President Bush and other politicians (including many Democrats): Buy a house! Owning your own home is the ultimate American dream! No matter what your credit history or what you may have heard, that dream is your reach! And now now now is the time to buy!
So they bought into the con, the pyramid, the Ponzi scheme — whatever you want to call the sad wretched excuse of an economic system we’ve allowed to develop over the past ten years. But they did so not because they thought they could make a buck (again, I’m not talking about the speculators here) but because they bought the message that was being drummed into them every single day — and because everyone else was doing it. It’s not like anyone other than Nouriel Roubini, Calculated Risk, and The Economist was warning them not to make the leap.
You might want to accuse these folks of being dupe or fools or even lemmings, but there’s a big difference between stupidity and moral hazard. These folks deserve help just as much as those who made smaller versions of the same mistakes.
The question then becomes how to bring relief to these folks without opening the door to profiteers and flippers. My answer is that you open the plan to anyone who owes up to 200 percent of the value of their home as long as the following conditions are met:
- The mortgage holder owns only a single property, which is their primary residence. The mortgage holder must maintain that property as his/her/their primary residence for the duration of the relief provided.
- The mortgage holder holds only a single mortgage that has not ben refinanced more than once. Those who took out multiple mortgages, including multiple lines of home equity credit, would not be eligible.
- Those who took out home equity loans greater than the value of their original mortgage would not be eligible.
- Those who took out interest-only loans would not be eligible.
- The mortgage holder cannot profit from the future sale of the home. If the home sells for a price greater than value of the reduced mortgage, any profit would go first to the federal government to defray costs incurred, and then to the original lender to cover part of the original loss.
- No second chances: you default again, you’re out of the program, and the default stays in your credit history for fourteen years.
- Those who participate in the plan cannot benefit from the mortgage interest rate deduction on their federal taxes.
These provisions should exclude speculators, flippers, and those who treated their homes like ATMs. They also would open up the plan to those who, for whatever reason, unwittingly got in over their heads.
Administering this plan would not be easy — it won’t permit one-size-fits-all solutions. As my friend noted, it will demand a level of administrative flexibility that requires those managing it to look at each case individually — and to do so in a manner that does not embarass or humiliate those seeking relief.
So what am I missing here? How does this differ, except in scale, from what consumer credit counseling and bankruptcies do? And isn’t keeping as many people in “their” homes the whole point?