Most efforts to date have been muscle-bound versions of traditional
homeownership-preservation programs: borrower counseling, mortgage rate
reductions, and, when the loss of a home seems almost certain, a halt to
foreclosure to buy time.
It goes on to say that these haven't worked, and they haven't worked because the borrowers are well beyond any tradition form of help. These people are mostly way in over their heads and they simply owe much more than they can afford. I have said it before and I will say it again. The problem is not their interest rate, or terms of their loan, but rather that they owe more mortgage than they can afford. If they owe 250k, they should have a mortgage for only 200k and so on. That's why these so called traditional muscle bound preservation programs haven't worked. These people aren't going to be saved with any traditional program.
The reality is that not only shouldn't these people be saved, but frankly they can't anyway. Yet, if the article is right, then lawmakers will work double time to save borrowers that frankly need to be extricated from properties as quickly as possible.
There is an alarming set of hubris on the part of lawmakers. Here is the best example...
She said the next steps must cut through complicated investor contracts that prohibit lenders from easing loan terms and must also account for a serious drop in home values
(The She is Susan Wachter of the Wharton School of Business) First, I have said it before and I will say it again, there are all sorts of much more serious problems with the government changing the terms on a private contract than whatever changing those terms will actually solve. Second, what arrogance Wachter shows in assuming that anyone can control the market on home prices. The market is its own animal and no one can control it. Furthermore, this statement is totally without context or consistency. Back in 2000, investors lost three trillion dollars in the stock market mostly on the backs of falling internet stocks. No one was suggesting bailout for those investors. Yet, we now have many so called experts proclaiming that artificial forces prop up home prices.
This entire line of thinking totally disregards the elements that put us here. The main reason that home prices are falling is because they rose so fast. They rose so fast through a complicated set of factors that include the inclusion into the market place a whole new class of borrowers that no longer qualifies for loans. It is simple supply and demand. We had a much larger demand for mortgages and by extension homes two years ago because we had loose restrictions. (the loose restrictions brought into the market place the very borrowers that now need to be bailed out) Everyone is screaming about how loose restrictions put us here, and yet they can't recognize that by tightening them it also puts downward pressure on the housing market.
The article continues...
On Capitol Hill, lawmakers are mulling whether bankruptcy judges should be able to erase mortgage debt for insolvent borrowers, while others envision a government-backed entity that would vacuum up battered home loans.
I cannot say this enough. These loans are bad and these borrowers are irresponsible. By sweeping up these so called battered home loans all we do is transfer the risk from private banks to the tax payers. Of all the dumb ideas that have been proposed, this one is at the top of the list.
As to bankruptcy judges being allowed to simply wipe out mortgage debt, well talk about creating a huge moral hazard. Nothing creates a bigger moral hazard than allowing judges to forgive bad mortgage debt en masse. Furthermore, while that relieves the borrower, that puts the exact same pressure on the bank that is left holding the bag. While banks may not be all that sympathetic, wiping away their credits en masse does actually have all sorts of unintended consequences for everyone that no one seems to want to talk about. For every borrower whose distressed mortgage is wiped away, there is a bank that is left with a huge unpaid debt. Does that sound like that can happen with no consequence?
The article continues...
One idea being mulled by lawmakers and regulators would see mortgage servicers reduce the principal amount of a loan to the home's now lower market value.
This is of course what I said needs to happen if you want to save the borrower. If your concern is to merely save the borrrower, then this is an idea that might work, though it will be hard to put into practice. (Who determines the value of the home and when) Saving the borrower isn't my main concern though. Most of these loans were bought. If their principle is reduced en masse, the banks that bought them will face crisis. The problem from the bank's perspective is that whatever the crisis is, the problem loans still do and always will represent a minority of the loans. The fixes, on the other hand, will likely affect the majority of the loans. Thus, while lowering rates en masse will save five or ten percent of the borrowers, it will also represent major losses for the banks on the other ninety percent. (After all if the bank buys a 250k mortgage and the government forces you to reduce that mortgage to 200k, that isn't very good for the bank)
Finally, there is Chuck Schumer's idea...
Democratic Senator Charles Schumer of New York has called on Fannie Mae and
Freddie Mac, the two government-sponsored enterprises that aim to foster
mortgage market liquidity, to immediately state that "when appropriate,
servicers can and should make partial chargeoffs available to struggling
homeowners."
Fannie and Freddie are the only entities whose loans have stayed largely untouched by the mortgage crisis. Their default ratios have stayed relatively unchanged throughout the crisis. Thus, I don't know who Schumer is trying to save and more importantly "when appropriate" is another typically vague term that cannot be put into practice unless it is more clearly defined.
Finally, let me just point out how ignorant the pols are...
"I don't think the markets have shown a lot of foresight in dealing with the crisis to date," said Baker. He thinks insolvent borrowers should be allowed to stay in their homes as renters in a rent-to-own scheme.Actually, the market has shown plenty of foresight. All of the so called troubled loans have been removed by the market. Option ARMS, no down payment, stated, and pre payment penalty loans are all almost extinct. Whatever loose and irresponsible things were going on they are now nearly extinct. The market is frankly the only thing I do trust in response to the crisis. Baker seems to think that the market is supposed to care and feel sympathy for the borrower. Nothing could be further from the truth. The market recognized faults and inconsistencies and removes them, and the borrowers themselves were one of the major faults of the crisis, and the market has in effect removed them. (by tightening up the credit available and removing the irresponsible loans that were the only loans available to these folks)
Rent to own schemes are good and well, however if they are forced upon the buyer of distressed properties, as is the clear indication, it will only reduce the number of people available to buy up these distressed properties.
No comments:
Post a Comment