Sunday, August 15, 2010

The Odd Shape of "Foreclosure Prevention"

So banks (and others) made a bunch of home loans that are going bad.

Congress wants to make it all better. And, of course, Congress is doing EXACTLY the wrong thing.

Housing experts expressed concern that banks, not homeowners, will be helped by the White House's $3 billion funding infusion -- $2 billion from the Treasury Department and another $1 billion from the Housing and Urban Development Department -- going to those states hit hardest by the housing market crash and unemployment.


Baker [co-founder of the Center for Economic and Policy Research] suggested that if the government is going to provide up to $50,000 in loans over the course of two years to those struggling homeowners that the money should be used for any of their needs, not just to pay the mortgage.


David Abramovitz [senior fellow at the Center for American Progress] said that '[u]nder the program, lenders don't have to make principle [sic] reductions on loans or major modifications. Lenders should also be required to make concessions and possibly even match funding.

"Banks also should be required to share in the burden being faced by homeowners," he said.

So what's wrong with that picture?


What Congress wants to do is impossible. They are putting air into a balloon full of holes, trying to maintain property values in a rapidly-deflating market. And to make it worse, they're going to do it indirectly, by pumping bank earnings on bad paper. And to pile insult on top of injury, they're doing it with tax dollars. If not yours, your children's, and their children's.

They're trying to wallpaper over a nuclear dump site.

Better: let the properties foreclose. Let the banks take the losses, (as will the homeowners).

Let the properties deflate to market value. You'd be surprised how fast those properties will sell when they are realistically priced.


Deekaman said...

From a puely self-interest standpoint, my property values will not return until the market is left to reach it's own level. Continually propping it up only keeps prices artificially low for the long-term. Allowing the foreclosures will drop prices short term and allow them to rebound over the long-term. Further, it will allow the purchase of these foreclosed homes by individuals who may not have been able to otherwise afford them. For example, someone who wants to live in say, New Berlin, but can't find low-income housing might be able to buy a foreclosed property they can OWN there instead. Amazing, huh?

Dad29 said...

Given the "new normal" of ~20% unemployment, families with only ONE income will be able to purchase houses priced realistically...

Tim Morrissey said...

Couldn't agree more, Dad.

J. Strupp said...

Or even better:

Begin the process of principle writedowns (fannie, freddie and everyone else) so that current homeowners can keep their homes, minimizing the explosion in residential foreclosures and vacant housing stock on one hand, and allowing for the banks to write off the difference while eliminating the need for liquidation of the entire asset which will no doubt cause residential real estate prices to miss badly to the down side creating more writeoffs, more liquidation and further financial problems in the banking sector down the road.

The sudden collapse in real estate prices will not deflate to "market prices". They deflate to depressed market prices because no bank will lend to "those people who can afford it" because they'll be taking massive writeoffs and hoarding cash out of fear of further downward pressure in prices (which becomes a reality as credit dries up.)

Basically, everybody gets the shaft because you're pissed that your neighbor bought a house he or she couldn't afford.

Dad29 said...

Great plan, Struppster.

That way, only banks and taxpayers actually lose.

And YOU, (I assume) will call exactly the correct amount of property-value depletion?

Or should it be Congress? The President?

How about a Caliph?

neomom said...

And why exactly should I subsidize some idiot who over-bought his McMansion when I bought the house we could afford on one salary.
Why exactly should the responsible bail out the irresponsible?

J. Strupp said...

Wake up.

You and I on the hook anyway. These folks are five or six figures upside down on their mortgages. They can stop paying their mortgages today, live in their house for 18 months, stash the money and wait for the bank to foreclose. But crap rolls uphill in this case because this paper is mostly owned by Fannie, Freddie (us) and a handful of the big banks. Sure these folks lose their credit rating for a few years. Big deal. It's a small price to pay for eliminating a nonperforming asset. Businesses do it all the time. Welcome to capitalism.

In the end, you're going to pay for it anyways because your property value goes to hell and you have to pony up more tax dollars to cover the losses on Uncle Sam's books.

We'd be better off swallowing our anger, attempt to sort through this garbage, write down the principle of millions of underwater mortgages and try to salvage some sort of a return on these assets over the long run.

Dad29 said...


Writing down the principal is exactly what foreclosure is--except for "who's living in the house."

And the vast majority of upside downs are NOT in the six-figure range; they are usually in the low-to-mid five figures.

Yah, prop values decline. That's called "deflation," which is apparently the case in the US, no matter Helicopter Ben's attempts to inflate.

Given a choice between a Gummint trying to manage the decline from Washington, DC and private industry trying to manage it in the local area, I'll take private industry any day, thanks.

J. Strupp said...

Foreclosure on a nonperforming mortgage takes years these days. Not to mention the costs associated with the foreclosure process....oh and costs associated with finding a new buyer. Its a waste. Write down the principle and take your lumps now.

Deekaman said...

"Foreclosure on a nonperforming mortgage takes years these days. Not to mention the costs associated with the foreclosure process...."

Maybe we should fix THIS problem, instead of rewarding those who f'd up. As an aside, I read yesterday that banks are clamoring for the feds to guarantee all mortgages. "Privatize the profit, socialize the loss". I don't think that works for me.