The Milken Institute has been parading around their idea of debt relief for over-encumbered homeowners, in an attempt to keep them from walking away.
From the L.A. Times:
http://www.latimes.com/business/la-fi-petruno27-2009jun27,0,2308676.column
Say an owner’s mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans. Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.
The Treasury loan would be interest-only and would provide the vesting part of the program. For each year that the homeowner keeps up payments on both loans, one-fifth of the Treasury loan would be forgiven.
“This gives homeowners the incentive of returning to a positive net-equity position before their hair turns grey — maybe even in time to pay for their children’s college education,” Klowden and DeVol wrote in a summary.
They estimate that the cost to Treasury (and thus to taxpayers) of saving 1.5 million homes from foreclosure or abandonment with this plan would be between $75 billion and $100 billion. That assumes the government wouldn’t jeopardize the original lenders’ balance sheets by forcing them to share in the cost via haircuts on their loans.
DeVol concedes that the Milken proposal would be a handout to the usual suspects in the housing crash — mainly, California, Florida, Nevada and Arizona — because those are the places where the negative-equity problem is dire.
So Nebraska doesn’t need the program, but would have to help foot the bill.
This is another crazy proposal in a series of nutty ideas to prop up the housing market, and will probably fall by the wayside, like the rest.
But here’s the best quote in the article:
Richard Green, director of the USC Lusk Center for Real Estate, also favors the debt-for-equity swap concept to permanently reduce mortgage balances for struggling homeowners. The need is chronic, he says, in places like Riverside County, “where prices aren’t coming back to where they were, maybe in our lifetimes.”
Yesterday chart showed that in 2005 the SD median-priced home was 9.7x the median income!
It’s not just Riverside County. Let’s get used to the idea that we won’t be seeing the bubble-era prices for a very, very long time.
Why dont they just send all these poor homeowners another stimulous check so they can make thier payments?Oh thats right they might run to the nearest indian casino and piss it away on dollar slots.
If the goal is to reestablish positive net equity, the overencumbered homeowners need to be encouraged to walk away right now so the houses can be sold at their real market value to people who put 20% down and can afford to make their payments.
I’ll be 56 next month. I saw four real estate bubbles during the 30 years I lived up north in Silicon Valley, and I expect that there will probably be another one up there sometime during my lifetime, because the tech sector has a naturally cyclic boom/bust employment engine. But I don’t expect to ever see bubble-era home prices in SD County again, because there is no such employment engine here unless some fool in DC is deliberately propping one up.
Do these people not understand the concept of moral hazard? Friggin morons.
Richard Green is an arrogant moron.
What if the social stigma of foreclosure or bankruptcy is removed? What if you’re seen as more of a fool for keeping an over-leveraged property rather than sticking it to the banks who got the taxpayer bailout money??
Here’s what they’re trying to avoid…
http://www.calculatedriskblog.com/2009/06/new-research-on-walking-away.html
The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default — even if they could pay the mortgage — when the equity shortfall hits 50% of the house’s value, they found.
…
“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”
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I think one of the keys points in the research are changing social norms – the more people a homeowner knows that he believes “walked away” the more open the homeowner will be to mailing in their keys. This is what I wrote in 2007:
One of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes.
This research suggests that this is happening in significant numbers.
****
While only few states have mandatory non-recourse mortgages (i.e., do not allow creditors to pursue borrowers who walk away from their mortgages for the difference between the amount of the mortgage and the resale value of the house), the cost of legal procedures is sufficiently high that most lenders are unwilling to sue a defaulted borrower unless he has significant wealth besides the home.
Without getting into the usual philosophical arguments when it comes to market interference, I would say, this is not a good idea.
If there are buyers for these, now lower priced homes, and people can’t or won’t pay their mortgages, then out you go. I think those draconian government polices/subsidies would only ‘make sense’, if there are no buyers, and those homes would just be abandoned en masse; which seems unlikely now, in most communities. A chicken in every pot. As much as I despise real estate investors, they do have a use.
The thing that gets me is how almost all of the so called financial and housing experts “missed” this epic, criminal, housing Ponzi scheme.
Of course we know, they didn’t miss it. Half of them caused it, while the other half, with full knowledge, set by and watched it happen.
I’m not a bear. I’m a realist.
I really don’t want a child molester babysitting kids, I don’t want an idiot to teach a physics class, and I really don’t want people who wrecked the world economy to be in charge of fixing it. But that’s what we’ve got.
Jail, yes. Out of work, yes. Disgraced, yes. Fixing the world economy-hell no!
This is why more hurt is to come. If you’ve got a house, hopefully it’s paid for. Job security folks, that will have the greatest impact on home sales going forward.
“Not in our lifetime?” It’s not out of the the realm of possibility.
Was this housing bubble as big as the tech bubble? If the answer is yes, one look at a Nasdaq chart gives reason to believe we may not see peak pricing for a long, long time.
Blur – I think the housing bubble was much larger than the tech bubble. The recession following the tech bubble didn’t cause me to lose my job, this recession did. It was more widespread and more money was involved. As such, I agree with your comparison to the Nasdaq chart, especially in nominal terms.
“Was this housing bubble as big as the tech bubble?”
Which “tech bubble” do you mean? The transistor bubble of the 1950’s/60’s, the IC bubble of the 70’s, the PC/software bubble of the 80’s or the dotcom bubble of the 90’s?
All of these tech bubbles followed the same pattern. A new technology causes investors to jump in, companies and jobs are created to exploit every possible opportunity it appears to present, the good ideas and well-managed companies survive and prosper and the bad ones eventually fall. Yes, this includes the dotcom; there are companies and jobs around today that survived the bust and didn’t exist before the boom, and that net increase equals the real growth.
The housing boom, by comparison, had no core of new technology or real opportunity. It was 100% the creation of cheap loans subsidized by government, and once those loans were gone, so was 100% of the growth and jobs. And on top of that, we are now stuck with all the excess inventory, which unlike transistors, ICs, PCs and all the stuff people buy online is not going to wear out and need replacing anytime soon. So the net result of the housing bubble will eventually be NEGATIVE growth in home values relative to inflation until/unless someone comes up with another “next big thing” to fuel a genuine round of growth in the region that is big enough to replace every lost job and then some. If that does not happpen, it will not be “a long, long time” before you see peak pricing again here; you will never see it again.
Let’s get used to the idea that we won’t be seeing the bubble-era prices for a very, very long time.
Who’s the perma-bear??? 🙂
The comment “in our lifetime” begs the question as to how long after the GD was it before another bubble occurred. Japan’s still waiting, of course.
Cramdown? Anyone? Bueller?
Seriously, if we could cramdown the Chrysler paper holders,
lets cramdown everyone in a bad mortgage.
Now you blow their credit scores, but you push the paper to what
the market value is now
Even better than cramdowns:
Let people reap the consequences of their own actions — reward those who acted responsibly, and let the fools suffer the consequences they brought upon themselves (foreclosure/bankruptcy).
The over-encumbered speculators should rejoice in the gift that is called “foreclosure” because it frees them from the debt that they committed themselves to in the first place.
There is no need — nor should their be any desire — to “save” them at taxpayers’ expense.
I have a very simplistic view.
Before the bubble, poor people with bad credit rented.
For a brief period during the bubble, they sort of owned.
Now they are in the process of going back to being poor people with bad credit who rent again.
Nothing lost. Nothing gained. Zero sum.
Why anyone without an agenda thinks any bailout is required is beyond me.
So what if Nebraska has to help foot the bill? This country is full of examples where some states benefit and the expense of others. Nebraska gets subsidized phone service, extensive farm subsidies and other things that we urbanites do not. But as soon as we ask them to give back, they claim its Communism.
What a “GREAT” idea! Let’s continue throwing more and more fiat paper and all the fools and failures of the housing/debt bubble. Then, one day in the not-too-distant future, we can look forward to our fiat paper becoming worthless.
Note to self: continue accumulating tangible assets with fiat trash currency (i.e. US Dollar)
I thought GeneK’s point was a good one. The housing bubble was to some degree like a make-work project where no one particularly wanted the product. “Hey you guys, go out to the desert and build a mansion. Then we’ll abandon it and start over.” The dot com bust, I am told, at least had the benefit that unwanted networking equipment from bankrupt corporations was sold off to India, resulting in a very fast and relatively cheap leap in that country’s ability to do business remotely. Been on a HP tech support call lately?
Has anybody here heard that crazy radio show on AM100 kceo that has some scumbags claiming to wipe out all your debt, pay off your home, and pay off your cars.
How could this be legal?
The problem, as I see it, is that the banks have a greater share of the equity in these homes than the home ‘owners’ do. It’s like here have stated, the ‘owners’ go back to being renters. The banks and all the investors in their MBS papers will take the major hit. If that happens, we’re back where we were last year. Will the government create a new TARP program to then bail out the banks? Will the government let the banks fail? At what point wouldn’t it just spiral downward out of control?
The only solution that might work, aside from these being proposed, would probably be inflation. If we have some serious inflation, then those peak bubble prices won’t seem that high.
“We’re in a free fall into future. We don’t know where we’re going. Things are changing so fast. And always when you’re going through a long tunnel, anxiety comes along. But all you have to do to transform your hell into a paradise is to turn your fall into a voluntary act. It’s a very interesting shift of perspective . . . Joyfully participate in the sorrows of the world and everything changes.” —Joseph Campbell
http://en.wikipedia.org/wiki/Joseph_Campbell
“Has anybody here heard that crazy radio show on AM100 kceo that has some scumbags claiming to wipe out all your debt, pay off your home, and pay off your cars.
How could this be legal?”
These dirtbags are all over trying to take advantage of people as usual.They went from giving loans to people who could never afford them to fixing your credit.They are scum!!!!!!
California is by far the largest state in the nation. A LOT of people went to the housing party with no money down/adj. rate mortgages.
There ain’t enough tea in China to fix this thing with out doing significant damage (inflation, etc.) elsewhere.
Stay tune. More damage to come.
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Overview of Homeownership in CA
Profile of California Homebuyers, 2006
First-Time Buyers Repeat Buyers
% of all Buyers 27% 73%
Median Age (years) 35 45
Percent Married 50% 60%
Median Household Income $80,000 $120,000
Median Purchase Price $450,000 $618,000
Median Loan Amount $372,000 $433,000
Median Down Payment $10,000 $100,000
% with Zero Downpayment 41% 11%
% with Adj. Rate Mortgage 40% 33%
Source: State of the California Housing Market 2007, California
Association of Realtors, 2007; BAE, 2008.
“Yesterday chart showed that in 2005 the SD median-priced home was 9.7x the median income!”
But, you can’t really value living in a beach home! San Diego homes will always command a premium! San Diego is different!
And so it goes…
Why make it so complicated? Because they want to help banks, not homeowners.
Reduce principle to market value, lower the interest rate. Make the banks and investors take the loss. No cost to taxpayers and a lesson learned for banks not to write bad loans and for investors to do their due diligence before making investments.
This is a more sensible approach. What’s wrong with these Milken folks?
Exactly right, Maggie.
If the banks are so concerned about the borrower’s negative equity, they are free to reduce principal balances themselves, with zero involvement from the taxpayers.
They desperately need to learn a lesson about what happens when prudent underwriting standards (20%+ down, 28/33 max DTI ratios on well-documented income, 3-6 months reserves, and conservative appraisals on collateral) are thrown out the window.
The American government is creating vast quantities of “money” (paper dollars) out of thin air as we speak.
This WILL cause inflation (see previous U.S. / Foreign wars like Korea/ Vietnam and the Breton Woods agreement allowing this to take place)
At this point in time it REALLY MAKES SENSE to invest in hard assets that can generate inflation linked (in real terms) income like property.
Buy now, fix your mortgage rates and pay your mortgages off with HIGHLY INLATED FIAT CURRENCY DOLLARS in later years while earning rents tied to the present price of eggs milk and petrol etc.
Ask your parents “how many dollars did your house cost 20 years ago and how much is it worth now?”
“Those who will not learn from history are doomed to repeat it……….ask JTR if you dont believe me, he’s old enough (like me) to have lived through this sh!t before”
They’re definitely printing money, but will that come through in wages? Nobody really knows, but this inflation may mostly affect currencies and commodities, as well as foreign assets (also U.S. stocks, possibly). It will be interesting to see how this inflation manifests itself.
Also, are we going to see the wholesale sell-off of U.S. assets? It could be ugly for most Americans.
“The dot com bust, I am told, at least had the benefit that unwanted networking equipment from bankrupt corporations was sold off to India, resulting in a very fast and relatively cheap leap in that country’s ability to do business remotely.”
It was actually better than that. If you were a techie and had been through the boom/bust cycle before, you didn’t upgrade your lifestyle during the boom and socked that inflated salary and stock value away in CDs so you’d have it to tide you over during the bust you knew was coming sooner or later.
And not all the auctioned hardware went overseas. Quad processor network servers with 8 cpu cores make great CAD workstations. I have three of them running at home, and they were so overdesigned for their time that seven years later they’re still nowhere near obsolescence. 🙂
Principal reductions are the most morally repugnant “solution” there is. A truly AWFUL idea, meant to reward the minority of idiots at the cost of the majority of responsible people.
You really want to remove the incentive from walking away? Make it so that they still OWE every red cent of their house, plus interest. You can’t walk away from student loans, so make it like that. I don’t care how unfair that sounds. If people walking away because they are underwater is so horrific (and I don’t think it is, it merely provides and affordable house to a responsible family out there), then FORCE them to actually be accountable for their debt. I know, what a ridiculous concept.