Finally, I have a few suggestions regarding dealing with the current crisis associated with the decline of the housing bubble and the distress this is causing to individuals, especially those facing foreclosures or difficulties in paying their mortgages. I would support two proposals that have been floating around.
The first is that of foreclosure vouchers, a proposal due to David Colander. The idea is to have the government (Treasury? HUD?) distribute to taxpayers mortgage foreclosure vouchers, based on income, with lower income persons receiving larger vouchers. These can either be used to pay off a mortgage for those facing foreclosure or to buy a house that has been foreclosed. Otherwise, they can be sold in a secondary market. This will help those in most danger and may help to stabilize the housing market as well, although there will probably need to be some further declines in housing prices as they continue to remain some 10-30% above historical norms, if the Case-Shiller index is to be believed. While falling housing prices are creating many problems, ultimately lower housing prices will make it easier for younger and poorer people to buy houses without relying on exotic mortgages, which should be sharply limited.
Another idea is that of a shared appreciation mortgage (SAM), which have been used in the past as well as in the UK. In this case, a borrower gets a lower mortgage rate, but must share any appreciation of the value of their house with the lender. This may provide a way for renegotiating mortgages to make them easier to pay, while preserving the stability of the lending institutions as well. Apparently this sort of mortgage is technically available for use right now, but has been not used in recent years due to an IRS ruling against them because of problems keeping debt and equity separate for tax purposes. As has been noted by proponents, this rule could be changed "by the stroke of a pen" used by the Treasury Secretary.
As a final note, I point out that Canadian banks are currently rated the safest in the world and have been relatively unharmed during this current crisis. Their regulations are clear and straightforward, with the Canadians having a nationwide, branch banking system. So, it is possible to improve how the financial system works through appropriate rules and regulations.
Barkley, the housing voucher idea is the best I've heard of for funneling money into that market, but the larger question is whether that makes sense. Any such voucher system would have to be renewed regularly, as individuals try to keep up with payments and as houses go back on the market. If the prices are still inflated as much as Dean Baker, among others, thinks they are, this is an expensive, futile struggle.
I prefer Dean's approach, as modified by the hedge fund guy cited in Joe Nocera's column. Keep folks from getting turned out, but let the prices continue to drop.
I agree with Dean that the market needs to go down more, so I guess I would limit the amount of this money. For me the goal is more for helping those in dire straits, helping the would-be foreclosed to stay in their homes rather than to actually halt the fall in prices. Clearly a balancing act there.
Someone needs to explain to me why a mortgage being underwater matters?
The moment you drive your new car out of the showroom it declines in value, and if you use the typical type of loan financing it is also underwater.
However, it still has the same utility value to you as it did originally, as does your home. The price you paid factored all this in when you bought it and this came out in favor of purchase rather than some other course of action.
On the other hand having monthly carrying charges greater than what you can afford is a serious problem. Conflating the two only muddies the waters and makes dealing with the real issue, cash flow, more difficult to address.
Am I missing something here?
You would have the same problem with a car if car rental rates were below the loan payments.
The reason underwater mortgages are a problem is that mortgages are offered as non recourse loans in many states. Low/No down payment loans mean that the buyer loses nothing. If you turn in your automobile the day after you buy it, the finance company will come after you for the balance. If you mail back the keys to your home, that's the end of it. In non recourse states, mailing in the keys is widespread. These types of loans are not offered in most other nations because they make the banking system unstable. Low down payment loans are also not offered in most other nations for the same reason.
We need our mortgage standards to get in step with the rest of the world. This means 20% down, and elimination of non recourse loans.
"...ultimately lower housing prices will make it easier for younger and poorer people to buy houses without relying on exotic mortgages..."
This is a good thing, a very good thing. The bottom half has a right to safe, affordable housing. Driving prices up to levels that effectively excludes the bottom half is barbaric.
Whether you can walkaway from a mortgage is different than from whether you would want to.
That's why I don't understand the focus on underwater mortgages. If you can keep up the payments then the paper value of your home has no relevance. You still have the same utility as when you bought it.
Why should homes be any different than any other purchase. I mentioned cars, but any tangible item bought via a credit card has the same issue, from your new TV to your computer.
That many can't keep up with the payments is the real issue and dividing them into classes is the only way to address this problem.
The moralists (usually libertarians) want to punish borrowers from being imprudent. They minimize the number of people who were duped. Even these are at fault for allowing themselves to be taken in apparently.
Those who thought they could live beyond their means for a few years and then sell out were unwise, but were following the advice of everyone from Greenspan down. Should they have been smarter than all the professional economists and pundits?
Where is the criticism of the banks who set up variable rates based upon a) usurious top rates, b) unknowable future rates based upon some external index like LIBOR?
How could even a prudent buyer protect themselves when what their future rate would be was unknowable? In an earlier time only fixed rate, fixed term loans were available and people only lost their homes when they fell into economic distress - usually caused by illness or divorce or loss of employment.
The moral failure of government to provide an adequate safety net for such calamities is also never discussed.
"Where is the criticism of the banks who set up variable rates based upon a) usurious top rates, b) unknowable future rates based upon some external index like LIBOR? (Robert Feinman)
Precisely! The problems of unknowable future interest rates on mortgages combined with less secure employment makes mortgage products for housing unviable.
It shouldn't be a surprise that many Australians opted to build their own house (often with recycled materials) and minimise debt on their houses as much as they could.
This habit has been nipped in the bud by new government regulation that (i) requires owner-builders to obtain a license after formal (costly) training; (ii) new planning laws that attempt to evict owners from housing built in the days before approvals for buildings were necessary; (iii) governments passing the cost of curbing, electricity grid extensions into suburbs and other infrastructure directly onto the new home owner/builder; (iv) severe restrictions on building in rural areas and so on; (v) increased complexity and rigidity in housing construction design with (vi) a complete dearth of assistance for owner-builders from local government and other sources; (vii) selctive enforcement of legislation designed to discourage owner-builders.
One point that I haven't heard discussed is that borrowers who have less than 20% equity have to pay for private mortgage insurance (a not-insignificant chunk of their monthly payment), which has proven to be worthless. Do these various plans eliminate the PMI payments or even compensate the borrowers for those premium payments ? Although the borrowers were not the beneficiary of the PMI policies, they bore the financial cost of the insurers' failures.
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