1. They will force the banks to write down the housing assets backing the mortgages to fair market value. Well, not quite. They will force the banks to write down the assets backing the mortgages to what a bankruptcy judge thinks is fair market value. Many of these assets are in illiquid markets where there is not currently enough turnover to assess the market value of the home. If you assume that we are in the acute phase of a crunch, and that liquidity will eventually return, you are giving bankruptcy judges a lot of leeway to write down the house to whatever the debtor can afford--with the debtor getting the upside if he sells at a better price.
2. But my car loan doesn't cost more than a housing loan! If you've got good credit, true dat--but your car loan is for 3-5 years. You pay extra for long fixed money.
3. The whole point of bankruptcy is to keep concerns going rather than shut them down! This is relevant to business law, but not so much to consumer bankruptcy, where we do not shoot consumers who cannot make their house payments and sell their estate to pay off the creditors. The point of consumer bankruptcy is to recognize the fact that people do not have the income to meet their current obligations, and have no reasonable hope of acquiring enough scratch to do so. Bankruptcy is an orderly wind-down of those obligations so as to fairly whatever the consumer can spare to the creditors.
Secured debt carries lower interest rates than credit cards precisely because it's, y'know, secured. Specifically, banks offered lower mortgage rates because they knew that their mortgages could not be written down in bankruptcy. (To be fair, they also didn't think that prices were going to fall much.) Now consumer advocates want to rewrite the rules in the middle of the game to benefit consumers who got in over their heads. They screamed bloody murder when the credit card companies got Congress to give them the same sort of gift in 2005, and with good reason. But this is a much, much larger unilateral gift than MBNA got during the bankruptcy reform, which didn't actually make bankruptcy all that difficult to get for individuals--a slightly more expensive pain in the ass, yes, but not this kind of massive transfer.
4. We're just returning to the pre-1978 standard! But pre-1978, consumer bankruptcy was harder to get, and therefore played a much smaller role in our credit markets. There have been a lot of changes to the bankruptcy code since then--you can't make one change and say we're just returning to the good old days of 1977. To note one enormous disparity, consumer bankruptcy was very rare in 1977, for a lot of reasons, including the fact that inflation had ensured that people didn't end up underwater on their mortgages, and of course that unsecured credit was relatively uncommon.
5. What we need is a slap in the face from reality: recognize all the losses at once and get it over with.
Three problems with this:
- The markets are, as noted above, often illiquid, meaning we don't know what the houses are worth. There's a substantial risk we'll overshoot on the downside--which means a lot of banks with unnecessarily impaired balance sheets.
- This is a better argument for marking to market than for arbitrarily writing down the mortgages of anyone who's willing to declare bankruptcy
- The administrative costs of this are very, very high. Houses are the farthest thing from a commodity; figuring out what each of them might be worth is time consuming. Doing it in the middle of a bankruptcy proceeding is even more expensive--you're negotiating with a judge, the bankrupt, and any other creditors.
6. As Tanta says, this will encourage lenders to be more careful in the future. Several issues with this:
- It's not clear to me how well this would have worked during the bubble--a cramdown is irrelevant if you don't think that prices are ever going to fall
- I don't think that we need to worry that lenders in the immediate future are going to ignore the possibility of house price depreciation. It's not like they enjoy foreclosing on underwater mortgages.
- How they worry matters a lot. If they require solid downpayments, great. If they decide not to lend in areas with house price volatility, it's much more problematic. And if they panic and overprice a risk that they haven't faced in forty or fifty years . . . well, that's going to push down prices further in a lot of areas, setting off a further cycle of cramdowns. Feedback effects matter.
8. Cramdowns give homeowners skin in the game (since their future payments build equity) and may help halt the cycle of foreclosure sales. At the same time, it does make irresponsible borrowing somewhat costly, rather than simply rewarding profligacy.
I think this is true, and the best argument in favor of them. I also think the costs outweigh the benefits: whacking already fragile banks, giving homeowners who won't give up their homes in foreclosure incentives to declare bankruptcy, and all the associated overhead of same. I think there are better ways to do this--have the government guarantee a stop loss on foreclosure prices, say. More fundamentally, I don't think this is why most people are supporting them--they view it as a "free" way to give a lot of money to homeowners. That means that whatever reform we get is likely to be bad.
9. Oh, it's just FINE when your rich banker friends get a giveaway from the bankruptcy reform, but when HOMEOWNERS are getting one, suddenly you think it was a bad idea!
Check your assumptions, friend--I opposed the bankruptcy reform both at The Economist and my own blog on the sensible grounds that, first, it was changing the rules on borrowers in the middle of the game, second, easy bankruptcy was good for the economy, and third, there was no evidence that credit was too expensive or difficult to get.
If you want to reverse some of the bankruptcy reforms, I can name a number of good places to start--but rewriting the terms under which every mortgage in the country was written is not one of them.
10. Why is it bad that marginal people aren't getting easy money? It's not, exactly--but again, the devil is in the details. We don't want banks to lend irresponsibly--but we want them to pay more attention to ability to pay and sound lending practices, not redlining.
11. If Tanta were here, she'd wipe the floor with you! Maybe--I can't tell. She was certainly a formidable intellect. But her factual claims about bankruptcy, for which she offered no evidence, were, as far as I can tell, simply incorrect. They go against both the available studies, and what I repeatedly heard from bankruptcy experts when I was working on the issue--though of course, mortgages simply weren't a major issue in 2005.
12. We only give debt special bankruptcy exemptions for good and just public policy reasons. Why should housing be among them?
Because housing is treated specially by bankruptcy law. Houses are among the items that cannot be seized and sold to satisfy creditors (in most cases), even if they are unencumbered. This is certainly more justifiable than the student loan exemption, which only exists because Uncle Sam refuses to stand in line with other creditors. Arguably, it makes student loans cheaper--but it seems at least as desireable to make housing loans cheaper, since more people use them.
13. It must be possible to have a mortgage market with cramdown risk, since we did for a long time. Yes, we did. But the housing market is already contracting rapidly. Making demand contract further and faster is not exactly helpful. I mean, it's good for me, because I have okay credit and don't own a home. But I'm a minority.
14. How high can the administrative costs of a cramdown really be? Well, you've got a very lengthy legal process that involves a lot of negotiation over an asset with no fixed market price. It will be shockingly high for the same reason that foreclosure costs are.
Megan states in #1
"you are giving bankruptcy judges a lot of leeway to write down the house to whatever the debtor can afford--with the debtor getting the upside if he sells at a better price."
What about a LIEN on future appreciation?! It takes away the incentive to cramdown just for the hell of it.
"They will force the banks to write down the assets backing the mortgages to what a bankruptcy judge thinks is fair market value."
Good point. This starts to look dangerously like ecoomics by fiat -- and we know how well that works.
I just can't think rationally about this idea. Why not? Because I bought a house I could afford, and paid off the mortgage (early). So now I'm going to be shown up as a fool, because I didn't get myself in a position where I could get forgiven for by large mortgage debt at (other) taxpayers' expense. Can you see why I'm not delighted?
Obviously what I should ahve done, what I am being shown is what I should have done, is bought a bigger house than I could afford, paid the minimum on the mortgage while spending my income on luxurious living, and now get the terms rewritten. Great incentive to give to everybody who might borrow money in the future. Forget the negative effects on the lenders. Think about the negative effects on the moral fiber of the borrowers.
Megan,
Regarding point 6:
I agree that how they worry is important, and I agree that the down-payment is a more appropriate method to manage risk. They will probably come to the same conclusion. However, it is also possible that their previous estimates for the required risk premium were too low. If that is the case, then we need to add that risk premium into the effective rate. That does mean future buyers will pay a higher rate, but again that is the whole point. It provides a buffer against failure. While some buyers will be pushed out, again, that is the point. It prevents this sort of tragedy from happening again.
To the extent that we can disagree about how much the proportion should be down-payment vs higher interest rate, the only remaining question is who will make the decisions and accept the possibility of being wrong: individuals in a free market, or Congress.
Regarding point #7:
You make a good point, there are some serious downsides to a cramdown, as more of the costs will fall on the banks and not the borrowers.
However, who pays for the irrational exuberance of this renaissance is exactly what we are talking about.
At this point, all possibilities have some downsides, and it would seem preferable to putting it all on the tax-payers, who are after all a 3rd party to these contracts.
I agree that it is still not clear a cramdown is the way to go, but I don't think it can't be dismissed just yet.
Obviously what I should ahve done, what I am being shown is what I should have done, is bought a bigger house than I could afford, paid the minimum on the mortgage while spending my income on luxurious living, and now get the terms rewritten.
Hahaha. You're thinking too small. A lot of people in my area got loans with a negative amortization, i.e. at the end of five years their principle has gone up. You have to wonder about any system that would write loans like that.
Would you expect the recipient of a cramdown to get to keep the lower mortgage/interest rate even if their financial situation changes in a year? 2 years? 10 years? What if borrower has a change in their financial situation (gets a new job, finishes paying for kids college, wins the lottery, etc...). Mortgages are long term loans and you'd expect that most of the folks in trouble aren't even a quarter of the way through their obligation.
This is a very worthwhile discussion but unfortuneately it shows the size of the problem. Our political system takes *years* to deal with problems like these. While people wrangle over what's fair and who's to blame most of these problems will linger.
For a long time the moral hazard was Alan Greenspan was going to keep things going with a small adjustment to interest rates, and we would never have to worry about a recession. The moral hazard now is the government is somehow going to fix things and it will be fair and nobody will have to suffer too much.
The truth is their is no fixing this. A lot of money is just gone, and can't be replaced. When people stop waiting for someone to save them and deal with things we will get back on track, but not before.
How are the analysts at banks with no local knowledge better situated to "mark to market" than a bankruptcy judge who lives in the community? These are the same analysts who used brilliant computer modeling to discover that money could be lent at high rates with no risk of default because of price appreciation models that were unsustainable. I trust the bankruptcy judges I know to do it better. The really stupid loans won't get cramdowns because BK judges don't want to see their reorg plan turn into liquidation later. If they see a completely irresponsible borrower, there will not be a cramdown. It's not like a BK judge is going to cramdown until the debtor can afford it.
I was against cramdowns for mortgages, but that was before we started throwing trillions of dollars into the black hole that our finance industry has become. If we're going to reward irresponsibility with taxpayer money, it should go to the people without the financial knowledge to have saved themselves rather than the irresponsible finance people who inflated the bubble while cashing in fat bonuses the whole time (and for some time after). If I had it my way, not a dime would have gone to buy bad assets or recapitalize insolvent banks. If that was the case, I wouldn't find myself supporting mortgage cramdowns...
Good points on all sides. I think this thread could go down the rabbit hole another million miles, and in the end we'd still be arguing about angels on the head of a pin. Megan, I appreciate and respect your thoughtful responses. We'll have to agree to disagree, but thank you for having this discussion.
Looks like mortgage cramdowns are one step closer to reality.
http://www.calculatedriskblog.com/2009/01/house-panel-approves-cram-downs.html
I like the 15-day notice to the lender requirement and sharing sale proceeds if the debtor sells the home the next 5 years. Sharing is smarter than just saying it all goes to the lender because otherwise the debtor would not have any incentive to aim for the highest price.
What about a LIEN on future appreciation?!
How can you place a lien on appeciation? If your house improves in value $50,000 you don't have $50,000 in cash to give to the bank. You'll only have that money when you SELL the house.
You could place a lien on all future profits to be gained from the sale of the house. But if you do that, the owner has no incentive to seek a good sale price. If I only get to keep $300,000 of my sale price whether I sell the house for $300,000 or $350,000, I'll be listing at $300,000.
WJ-
I can appreciate your response.
But there is a lot of angst ripping a HUGE hole through American families right now. We shouldn't assume b/c they may get some P&L benefit that they aren't paying for this.
2. I don't have to point out the illogic of your thinking, but I will. If we had all engaged in this type of risky behavior there would currently be no govt to come to the rescue. The same could be said for the banks.
k1
ryanculver.blogspot.com
If you do this, you really do need that lien on future profit on the sale above the cramdown amount but below the original principle. Share 50-50 on those profits. If you sell above the original principle, you keep everything above that amount (minus interest on 50% of the previous amount?). Just a thought.
As an alternative to a cramdown, I would be happy with any leniency that let me avoid homelessness. I will lose my home in about 12 months from now if I don't find a job. And I've been desperately looking for jobs for 4 months, including minimum-wage jobs. I don't want a cramdown; I'm happy to pay back all the principal on my home, which I've owned for 20 years. But I would appreciate some ability to not get thrown out onto the street, while I do my best to find work. I suspect MANY Americans are in the same position I'm in. We don't necessarily want "freebies", like reductions in the principal and interest rate. We just want to be able to hang on, and pay through the nose later, when we're able to find work.
So this is a bit of a rant, but frankly, people are facing being HOMELESS, while federal money goes to Mannattan office redecorations, and United-Auto-Worker golf course memberships.
"What about a LIEN on future appreciation?! It takes away the incentive to cramdown just for the hell of it."
Actually, I think what you are describing is something like section 1111(b) of the Bankruptcy Code, but I'm not sure. See 11 USC 1111(b)(1)(B) and 1111(b)(2).
The first thing to understand is how things work with ordinary secured debts. When the obligation exceeds the value of the collateral, the creditor is said to be undersecured. Typically, an undersecured creditor's claim is divided into two claims: a secured claim in the amount of the value of the collateral, and an unsecured claim for the balance of the obligation. This unsecured claim may be worth very little, and it will be discharged at the end of the case. Meanwhile, the secured claim is obviously smaller than the original obligation. The undersecured creditor will have been stripped down to the value of the collateral.
The issue right now is that mortgagees (lenders) on primary residences cannot be stripped down. If the mortgagor (borrower) wants to keep the house, he has to make the payments he bargained for, regardless of the value of the house. The proposal is to change this, to allow the mortgagor to strip down the mortgagee in some fashion.
The problem of the subsequently appreciating collateral has been on the radar since the Bankruptcy Code was drafted (it was enacted in 1978). 1111(b) was designed to ameliorate this problem. If a creditor makes the 1111(b) election, the creditor simply retains its secured claim in its entirety.
However, this is not as good as it sounds: a plan of reorganization need only provide a stream of payments to a secured creditor equal to the present value of the collateral (with the exception, as noted, of a mortgagee on a primary residence). The secured creditor is entitled to payments with a face amount equal to his claim, but the value of these payments can be reduced by pushing them out to the future. As a result, the debtor can effectively strip the secured creditor down by stretching him out, whether or not he makes an 1111(b) election. The exception would be if the debtor sold the collateral quickly. In that case, by retaining the full secured claim, the secured creditor can actually enjoy any appreciation that has occurred in the interim.
1111(b) is thus a check on lowball estimates of the collateral's value, but it's only really effective if the collateral is sold by the debtor shortly after the bankruptcy. Perhaps a better 1111(b) can be drafted, but right now it provides very limited protection to secured creditors.
I suspect that most of the people opining on this have no actual knowledge of how these things actually work. As a result, you're working yourselves into a froth over nothing and assuming ideas into evidence for which there is no basis in fact.
Parties to a BK may submit third-party appraisals to the court. In the case of individual Chapter 13 cases, it's likely that only the lender will submit an appraisal. Even though appraisers are technically neutral, they are in practice lender-friendly because it is lenders who pay for most of the appraisals.
In a rapidly falling market, appraisals are likely to overstate a home's real world market value, because they are based on comparables that may be out of date, at a point when prices were higher. Foreclosure sales should not be used in an appraisal for comparables because they are distressed transactions, thus disqualifying them, so only the high priced sales will be used.
So if anything, an appraisal will serve the lender more than it would the borrower. The
situation is the opposite of what you describe.
Now consumer advocates want to rewrite the rules in the middle of the game to benefit consumers who got in over their heads
Again, those who understand finance want to see institutions with accurate balance sheets. The US banking system is essentially built on a momentary lie, and the equity markets are getting nailed because investors know that the balance sheets are inaccurate. The markets have probably overcorrected because it is easier to assume the worst, even if it may not prove to be so bad, so your stock in Starbucks and Toyota is being compromised in part by what the banks are hiding.
It's ironic that the conservatives complain now about the false net worth statements made on "liar loan" applications, when we have liar banks openly dominating the S&P 500. A well-managed TARP program would put these loans into a "bad bank", but the sticking point will be that the market price that the Federal Bad Bank should pay will be less than the banks will want to accept.
Houses are the farthest thing from a commodity; figuring out what each of them might be worth is time consuming.
A home appraisal can be completed within a week or two. There is plenty of time between customary BK hearings to appraise the real estate.
Again, there are a lot of opinions expressed here that are not in line with reality. This particular point could have been easily fact checked by calling a couple of appraisers and asking them what timeframes are commonplace in their business. A motivated one could hustle and get one done in a couple of days if s/he really wanted to.
"If you do this, you really do need that lien on future profit on the sale above the cramdown amount but below the original principle. Share 50-50 on those profits. If you sell above the original principle, you keep everything above that amount (minus interest on 50% of the previous amount?). Just a thought."
For the sake of precision, a lien is an interest in property securing an obligation. The mortgagee will have the house or a lien on the house no matter what, so we're not talking about granting a lien on future profits. We're talking about retaining (or imposing) an obligation, secured by the house, that is contingent on an increase in the value of the collateral. I really don't see how you could do this unless the house is sold, but maybe you could have a hearing 5 years down the line and make a judicial determination whether or not the house has appreciated.
RW - should we really amend the Bankruptcy Code as a means to more accurate financial disclosures from banks?
Bank: My mortgages are worth $x.
US Gov't: Your numbers don't sound accurate to me - I think those mortgages aren't worth $x, and I'm going to do something to force you to tell the truth.
[US Gov't amends law in a way that decreases the value of mortgages]
Bank: Well, my mortgages are worth less than $x.
US Gov't: QED.
Also, I forgot: Randy Picker points out that depriving mortgagees of their bargained-for property rights might, um, violate the Constitution.
US Gov't: Your numbers don't sound accurate to me - I think those mortgages aren't worth $x, and I'm going to do something to force you to tell the truth.
That's exactly what regulators are already supposed to do, so you shouldn't be surprised by them doing something that has long been mandatory. Regulators are supposed to review for loan quality, and banks with poor loan quality are supposed to shed some of those loans and otherwise maintain adequate levels of capital.
In addition, a publicly traded company is obliged to maintain an accurate set of financial statements. The SEC's job is to ensure the operation of a transparent market with financial reporting that investors can depend upon. The large institutional banks are obviously public companies, so they are obliged to provide some degree of honest reporting.
Most of you don't understand the concept of bad mortgages. Most of the bad mortgages in today's marketplace are being paid by their borrowers. If you bought a house in the last couple of years, odds are pretty good that your loan is not a good one from the standpoint of the party that owns it.
A loan that lacks sufficient collateral has a compromised market value. No one is going to pay par for a $500,000 loan secured by a $300,000 house, even if the payments are being made on time without fail. It's not just a matter of collecting the payments, but also whether there is sufficient security to secure the balance. It's the collateral that makes it a mortgage, and right now, it's the collateral that is usually lacking, not the payments.
RW - the question is whether bankruptcy policy is to be subordinated to our desire for accurate financial reporting. Anytime an asset is overvalued, are we to change its treatment in bankruptcy to tease out its fundamental worth?
the question is whether bankruptcy policy is to be subordinated to our desire for accurate financial reporting.
In the context of individuals filing Chapter 13, the question here is whether a secured creditor will no longer receive the relief from stay that has been customary.
But there is a broader question that most of the politicos ignore, namely that of market stability. These assets need to be dealt with, and the banks have chosen to largely avoid the purging process, presumably because executive heads would roll and the banks' need for federal help would be more clearly understood.
The individual homeowner is fairly irrelevant in the scheme of things. We have a forest-trees problem here when some fixate on a few small-time individuals who get some negligible benefit while ignoring the broader systemic issues that created these problems in the first place. The little guy is really inconsequential in comparison to this much bigger beast lurking nearby.
"They will force the banks to write down the assets backing the mortgages to what a bankruptcy judge thinks is fair market value."
Well, it would still be a far higher % than the mark to market on most RMBS. Could we use this to put a floor under some of the RMBS crap? I know that the SEC doesn't want to abandon mark to market (even though TARP gives them the ability) since any new method will rightly be viewed with suspicion, but if they could come up with a new methodology actually tied to the recoverable/workout value of the underlying assets (the mortgages, not the houses) then it might have some oomph to it.
Wow- great, great response. You consider the objections and give counter-arguments, and also refer to facts as backup..
Since u clearly know more than I do at about this, and hav considered thiughtfully opposing views, atcthis point, I quit the field. If I were king, I'd have to say "do what megan says in this issue".
The only hesitation I would have is that other economic/housing type figures that I trust, seem to think that cramdowns are a good idea. I'd like to see/read a knowledgable, respectful debate between u and one of these guys. Maybe a bloggingheads or something.
Thanks for the type of knowledgeble teaching+dialogue that I enjoy.
Houses are the farthest thing from a commodity; figuring out what each of them might be worth is time consuming.
Not True. As noted in the comments,
"A home appraisal can be completed within a week or two. There is plenty of time between customary BK hearings to appraise the real estate."
Not only is the appraisal quick, but in most housing markets -- including all of the West Coast and Florida -- sales activity is brisk, the market is liquid, and therefore the appraisal is accurate. (Don't forget about all of that investor cash currently in short-term Treasuries).
Are there sections of cities -- in the rust belt e.g. -- that are saturated with foreclosed properties and crime, and therefore where an accurate appraisal is impossible? Of course. But let's be careful not to generalize.
The DC market is about as liquid as a housing market gets--people here are unusually insulated from job/income problems. And I can tell you from doing a house search here that it's not. The market is increasingly dominated by short sales, which take months, and the non-short sale prices are all over the market--I'm talking estimates for similar units $100K or more apart.
Sure, an appraisal takes a week or two. What does that have to do with anything? The point about an appraisal is twofold: a) that it's part of an administrative process that costs the bank quite a bit of money, and b) that it's going to rely a lot on guesswork right now. Finally, claiming that only the bank is going to submit an appraisal is . . . interesting. You don't think the homeowner is going to find a friendly opinon as to how much his home is worth?
The point about institutions having accurate balance sheets is also not right. If you want banks to markdown their mortgage assets, make them write down all of their mortgage assets. The correct way to take care of the problem is not to have them write down the mortgage assets of only the consumers who happen to go through bankruptcy.
Sure, an appraisal takes a week or two. What does that have to do with anything?
Because that reality directly contradicts your earlier speculation that "Houses are the farthest thing from a commodity; figuring out what each of them might be worth is time consuming."
As it turns out, it isn't time consuming at all. It's perfectly within your right to oppose the cramdown concept, but that reason for doing so is frankly completely bogus.
The point about an appraisal is twofold: a) that it's part of an administrative process that costs the bank quite a bit of money, and b) that it's going to rely a lot on guesswork right now.
Once again -- an appraisal is literally a few hundred bucks ($350 isn't at unusual), and what you describe as "guesswork" is an established methodology that favors the lender who paid for the appraisal, particularly when the historical prices that are used as comps are necessarily going to be higher than the current real-world market price. At times like this, historical prices exceed current ones, which helps the party who benefits from higher numbers, who in this case is the bank.
The bank's problem is simple: when a loan is upside down, its relative market value falls more quickly than does the market value of the house that supports it. Investors know this and they don't like it, because it creates clouds of doubt about the financial integrity of the bank's balance sheet.
Japan's lost decade was facilitated by the Japanese government's failure to deal with their banks, which were very much in the same position after Japanese real estate prices had collapsed. Naturally, their banks did not care to recognize their losses.
While their individual reluctance was understandable -- hell, I'd do the same if in their position -- their failure to act spooked investors and prevented the system from achieving closure and repairing itself. Cutting rates to zero (sound familiar?) and government spending (sound familiar?) weren't enough to overcome this barrier. The banks must be fixed, but like a kid being dragged to the doctor, we cannot expect them to cooperate. They will kick and scream to avoid the doctor's visit, but a good guardian will know when to ignore them.
RW, I don't think you've grasped what Megan is saying. Her point is that under today's market conditions, appraisals are less accurate than they would otherwise be. I assume the idea is that when prices are fairly stable, an appraiser looks at what comparable properties are selling for, but when there are few sales and when prices are falling rapidly, it is much harder to come up with an accurate price. As she pointed out, "estimates for similar units [are] $100K or more apart."
I concede I don't know as much as you people about these matters, but I can figure out who is winning an argument.
Her point is that under today's market conditions, appraisals are less accurate than they would otherwise be.
That is inaccurate. Her fundamental point is that appraisal inaccuracy will go against the bank.
In reality, it's going to go against the borrower and in favor of the bank. The banks should want as high of a value as possible because a higher value is better for their side of the table. Given the use of historical comparables in valuation, that is precisely what they're going to get.
She should be thrilled to pieces about any possible inaccuracies, because they help the party who she favors. The situation is exactly the opposite of what she believes it to be.
As she pointed out, "estimates for similar units [are] $100K or more apart.
You can't look at list prices and call those estimates. Many times sellers go against the judgment of their realtor and price way too high for the market. Some sellers are delusional in their pricing and some must sell their place for a certain amount to cover the loan. This means some sellers are going to list their place for way too much, but they don't sell so it wouldn't be used as a comp for appraisals. If a realtor is using list prices, instead of comps to tell you the "value" of the house they are incompetent or cheating you. The reason why REO's are the market right now is because banks don't have these hangups or the emotional attachment to what they thought the house was worth 4 years ago.
RW: "Her fundamental point is that appraisal inaccuracy will go against the bank."
Her fundamental point is that appraisals will be inaccurate, unless a lot of time is spent figuring out which appraisal is right. Her secondary point is that they will go against the bank.
Your fundamental point is that appraisals are speedy and accurate. As you say, they only take a week and there is an established methodology used for them. Your secondary point is that they favor the bank.
Regarding the fundamental point, I still say Megan wins. You might be right on the secondary point, though.
Byrk: I leave it to Megan to say whether these estimates were list prices or actual appraisals.
JFP, how you come to this conclusion, I don't know. Would you spell it out for me? It seems that Megan is saying that while the appraisal might be accurate(she has conceded this point) at the time it is made, it will not be when the sale is consummated many months later. While this might true, why wouldn't it also be true for appraisals in the longer time frame as well?
Myself, it looks as if she just said the first thing that came into her head without do the slightest bit of research, or indeed to be sure that her points were consistent.
For example:
First of all, no on has said what Megan has claimed; in response to her litany of unworkability, it was simply pointed out that this was not true in earlier times when cramdowns applied, and she has to show that what has changed supports her point (she hasn't.)
More fundamentally, we see a few points later that:
Hold on here! First it's that bankruptcies are easier to get, now it's that 'reform' has made them harder. Which is it?
And - as usual - the complete lack of cites or data does little to help her case; apparently we are supposed to believe it because Megan Says So.
Well, no. If it comes down to believing Tanta or believing Megan, I think I'm going to stick with Tanta. A very knowledgeable lady who actually works in the profession, and who actually uses facts and figures.
I'm not often this crude, but this is exactly the time to trot out this chestnut I first read in a piece by James Petras:
Central Banks in the US, Japan and the European Union have poured (and keep pouring) over $250 billion to the private banks hoping to create liquidity but the banks won't lend — because, as one prominent banker in Palm Springs told me "Nobody knows who's got a turd (worthless investments) in his brief case."
Right now, there are a bunch of guys(banks) standing around with briefcases handcuffed to their wrists that supposedly contain 'securities'. The problem is, while they are happy to take your money, you don't get to see what's inside the briefcase. And there's an excellent - or at least nontrivial - chance that does not contain worthwhile investments. Who in their right mind is going to give money to these institutions? Other than politicians who are beholden to them for campaign contributions?
I'd disagree with this assessment. Banks are not little kids, and they know well what has to happen. I honestly cannot understand their rationale for this behaviour. I suspect no one else can either, or their reluctance to somehow, someway, establish some sort of rapprochement with the original buyers.
ScentOf Violets: "JFP, how you come to this conclusion, I don't know. Would you spell it out for me? It seems that Megan is saying that while the appraisal might be accurate(she has conceded this point) at the time it is made...."
I didn't notice any concession on her part, at least not on this thread. Maybe you could find this concession for me. I apologize if I missed it.
ming: I realize that this is probably a theoretical concern for you, but what do you think about the advice to invest extra money in stocks rather than in paying off the house more quickly? My wife and I ignored this advice and paid off our house quickly. And though our situation is somewhat different from yours, we feel pretty secure these days.
Actually, it was something you wrote:
How can this be true except that the appraisals are accurate at the time they are made? I'm going by your interpretation of what she said, of course, and I should have been more careful when I worded that statement - early morning pre-coffee and all.
Note btw that, as RW points out, list prices are not the same as appraisals. Megan has yet to provide evidence that this assertion is correct.
The point is that in most real estate markets--and my mother is a broker--list prices do not vary by 30-50% of the price of the house, because sellers know in about what band houses in their neighborhoods trade. Now houses are selling very slowly, deals are seen as more idiosyncratic, and so it's much harder to figure out what the price is in this market, much less what the price would be if the bank had to sell in a couple of years.
Dan - "You could place a lien on all future profits to be gained from the sale of the house. But if you do that, the owner has no incentive to seek a good sale price. If I only get to keep $300,000 of my sale price whether I sell the house for $300,000 or $350,000, I'll be listing at $300,000."
You see this as all or nothing. You could certainly impose some form of capital gains tax on profits. There are people who simply bought too much house for their income at inflated prices. I think you have to be careful about how easy it becomes to do a cramdown.
I also wonder how a cramdown would be treated for tax purposes. Isn't debt forgiveness treated as income?
Your fundamental point is that appraisals are speedy and accurate.
That isn't quite my point. They are prompt, and they are fairly consistent in terms of determining current market value on a given date, as defined by standardized methods of appraisal. If I understand your definition of it, "accuracy" as you seem to envision it is not an objective of this exercise and is therefore not meaningful.
Your implication appears to be that appraisals are "inaccurate" because they are poor predictors of future value. But it is not the job of the appraiser to advise a client as to whether someone should buy or avoid buying, or sell or avoid selling. Particularly for single-family residences, value on Date X is determined by historical sales data and comparisons of like features and benefits, not on whether it will be a gold mine that will fund one's retirement.
It is a value on a given day, based upon a regulated method. Ms. McArdle wants to act as if there is some great shroud of mystery that will pervert courts into destroying the banking system by undervaluing assets. That is not a legitimate concern, on a lot of levels.
I go back to my fundamental point -- bank balance sheets are overstating asset value and, as a result, are overstating net worth by even greater degrees. It's hard to have a functioning stock market when the lies are so blatant, but the truth difficult to calculate.
The equities market surged upward today because the "Bad Bank" concept promises to tackle the balance sheet problem in ways that the banks themselves will never do. Investors clearly comprehend the problem created by these inaccurate valuations, and the reluctance of banks to face the music without being forced to listen to it. Judging from the response, libertarians must not be investors.
The student-loan bankruptcy exemption doesn't exist just because "Uncle Sam refuses to stand in line." If it didn't exist, then at least prior to 2005, it would've been an irresistably lucrative strategy to:
1) Max out student loans in college, even if you don't need them; save the remainder.
2) Run up as much credit-card debt as possible at the same time, and save what you would have spent with cash (while making payments on time every month). Get a car a year or so before graduation.
3) After graduation, plow all the money you've saved into a down payment on a mortgage, then declare bankruptcy a few months later. Your credit would obviously be screwed for a while, but you'd have a good job (with the help of your mostly-free college education!), a house with substantial equity, a car, and no debt whatsoever. Who needs Visa?
Of course, that gravy train would have dried up pretty quickly, but the gettin' would be too good to resist while it lasted.
RW: "Your implication appears to be that appraisals are "inaccurate" because they are poor predictors of future value."
My idea is that in ordinary times, an appraiser may have twenty comparable properties to look at. Say one of them is an outlier. The appraiser still has 19 others that give a more accurate price. But when sales are slow and prices are known to be falling, then there may be only one comparable property. Who's to say that that is an outlier or a normal price?
So what you have, what you admit to having is theory. A just-so story. Not facts. Do you have any evidence, any evidence at all that this theory might be correct?
My idea is that in ordinary times, an appraiser may have twenty comparable properties to look at. Say one of them is an outlier. The appraiser still has 19 others that give a more accurate price. But when sales are slow and prices are known to be falling, then there may be only one comparable property. Who's to say that that is an outlier or a normal price?
This sort of historical data **helps** the bankers and those in Ms. McArdle's camp.
She laments this as if it would harm lenders, when it actually would help them. She gets it exactly wrong.
The "normal" sales that serve as comparables help to justify a relatively high valuation because yesterday's news tends to do that in a declining market. The fears of the awful lender-unfriendly appraisal are unwarranted. It's the borrower who should be complaining about this, not the lender.
She confuses this with the situation with her real estate broker-mother. Buyers in declining markets often ask for too much, and listing agents are reluctant to counsel their sellers too strongly lest they lose the listing. If the seller is in denial and the agent won't advise the seller of what he doesn't want to hear, then high asking prices, low transaction volumes and long market times are going to be par for the course.
Typo above: I had meant to say that "Sellers in declining markets often ask for too much." Apologies for that.
ScentOfViolets: I don't have any facts. I was merely interpreting what Megan said and arguing that RW seems not to have understood her on one point.
RW: OK, you may be right about this, though I already conceded that earlier. I was only arguing about the accurate appraisal business.
AS FOR THAT PERSON WHO SAID "I BROUGHT A HOUSE THAT I COULD AFFORD" HOW YOU KNOW AT THE TIME OF THOSE PEOPLE BUYING A HOME THEY COULD HAVE AFFORD IT? HOW DON'T YOU KNOW SOME OF THEM JUST HAD A TURN OF BAD LUCK I.E. LOST OF INCOME...DUE TO ANY NUMBER OF THINGS..DEATH OF SPOUSE OR LOST OF JOB YOU NAME IT. SOME PEOPLE DON'T LOOK FOR THE "EASY" WAY OUT BY CHOICE..JUST KEEP THAT IN MIND.