I am so unenthused about this whole idea. I'm a renter, living in southern California; I've never been able to afford a house, and since I'm now in my sixtieth year, I expect to live out my life as a renter. Over the past few years, I watched housing prices spiral upward, to the point where the median southern Californian couldn't realistically afford a house . . . which drove more people into the rental market. At the same time, an increasing number of rentals were lost to condo conversions. Both processes sent rents spiraling upward, too, to the point where I was worried about being able to afford to rent in a safe neighborhood at all.
Now, I could see that we were going through a bubble, and that buying property at inflated prices wouldn't be a good idea even if I could afford it. But I was still paying the price of the bubble, in higher rents. I was deeply relieved to see it deflate, and to see housing prices start moving down again toward something vaguely realistic. Not far down enough to bring me into the housing market, but having more rentals come onto the market is all to the good.
But now I see the government stepping in to help out rich people . . . richer than I am . . . who could afford to buy houses, not to mention reckless people who bought houses they couldn't afford. And I have no doubt that this will hurt me, because if you raise house prices, you inevitably raise housing costs. Why should my cost of living be artificially forced upward to benefit people who are substantially richer than I am? Let the housing market find its natural level. Intervention in the housing market is just one more case of the federal government helping out rich people at public expense.
The only good thing about Obama's plan is that it will prevent almost no foreclosures, but will do this while throwing another 275 billion dollars down the black hole of bad debt.
But here is the real problem- when this plan doesn't work to buoy home values and stem the foreclosure rate, another, bigger plan will be brought forward that will accomplish even less at higher cost.
Who is being helped by this useless, half-assed plan? Anyone that could actually afford to pay a reduced mortgage payment isn't going to be made homeless by a foreclosure. It would have made far more sense to add more subsidies to the rents for the truly homeless (you can at least make a moral argument for that one). This plan almost seems like a make work program. I am guessing we will never get to see how many people actually are saved from foreclosure at what cost, and won't get to see the amount spent on overhead implementing it.
I think the defensible argument for the housing plan is that something has to be done to prevent a damaging overshoot of prices to the low side. But, there's not much evidence that there's a need for the government to prop up prices and engineer a soft landing. Affordability is still below the historical norm in most areas, even where the decline has been steepest.
Yancey, newspaper accounts of Obama's plan provided estimates, probably supplied by the administration, that the plan would prevent nine million foreclosures in the next year or so. Your estimate is zero. Can you point me to an analysis that supports your post?
I'm not simply being argumentative. I've learned from this site and others that there are valid reasons to oppose fiscal stimulus plans, and although I don't think they're right in this particular recession, they could be in some cases. Can you supply similar arguments against Obama's housing plan? In particular, is there any factual basis to your statement that "Anyone that could actually afford to pay a reduced mortgage payment isn't going to be made homeless by a foreclosure."?
I'm actually hoping for a further 20% fall in my area, although perhaps not all at once. It all got ridiculously out of touch with prevailing salaries, and ultimately it's salaries (rather than financial shenanigans) that determine what people can pay.
When prices are back in line with what the buyers can afford with old-school mortgages, life will be back to normal.
Stan -- Anyone who can afford to pay a reduced mortgage payment can probably also pay rent. Perhaps for smaller quarters, but there are a lot of stages between an owner-occupied house and a cardboard box.
M. C., I understand this, and I stand corrected if Yancey merely meant what you said. I still can't understand the disdain many conservatives feel for people who are going to lose their homes due to foreclosure. Where I live, southeast Michigan, a lot of autoworkers and autoworker retirees are in this situation. I can't believe that all or even most of these people are either a) speculators, or b)losers who deserve their fate.
There was an illustrator who worked for the Disney Studios in the early days, Bill Peet. He illustrated a biography about his childhood during the depression. It's also fun, with some revealing information about the early days and working with Walt Disney.
And remember: Disney marked his turf by providing cheap distraction in hard times.
Anyone interested in the impact of Depression-style economies on childhood and families might want to give a read. It's a children's book, and easy to understand, and filled with real-life experience of the Depression.
Because not understanding this perspective becomes your perspective when you talk about families and what's begun happening; homes taken away, parents who cannot find work, and families breaking apart and reforming.
Unfortunately, if you are underwater and paying 31 percent of your gross income while the government gives the bank a subsidy, you're a renter anyway (and you're probably renting at an above market price).
Can you provide a link to the analysis that supports the 9 million figure? I've seen that claim, too, but no support for it. If you've found somewhere that spells out the details that claim is based on, please share it. Thanks.
This is off-topic. But could someone please explain why we continue to talk about BofA and Citi investors potentially being wiped out, when that is a fait accompli? You seen these tickers?
"Yancey, newspaper accounts of Obama's plan provided estimates, probably supplied by the administration, that the plan would prevent nine million foreclosures in the next year or so. Your estimate is zero. Can you point me to an analysis that supports your post?"
I'm not Yancey, but I think it's just simple arithmetic. In the most severely hit areas, people are underwater hundreds of thousands of dollars. $275 billion divided by $9 million households equals about $31k per household. Anybody who can be saved by $31k isn't in that big a hole.
I'm also wondering what the game plan is. The two possibilities I see are:
1. use this plan to stall and appear to be doing something
2. to keep bailing out distressed homeowners with more and more money
Option 1. will be better for the country as a whole, but I think it's very unfair to hold out false hope to distressed homeowners, to keep bleeding them in the hope of keeping the national economy afloat when the solution that is actually in their best interest is to walk. My personal solution would be to offer $5k grants to pay for moving expenses and getting a rental. I've already heard of banks paying $2k to distressed homeowners as "cash for keys." On the other end, I'd pressure banks to sell quickly to avoid blight.
I'm glad to hear/see there is a plausible argument for it. And to me it does seem more thought through than the stimulus package which is nice because it is a product specifically of the Obama administration and not in collaboration with Congress. There is such a thing as 'rational ignorance,' and I thing for most of us who are not in housing finance this plan is in that area. So we do best to leave it to those people who have been elected and paid to look into it. We can kibitiz and drink beer and argue about it, wondering if a cogent commenter will appear, but any relevant opinion probably awaits another day.
Billy - if I'm pension fund or mutual fund with a large outstanding interest in C or BAC or (what's looks soon to be WFC) there's a HUGE difference b/t $2 and $0
Mark - They sell quickly b/c homes across the country would be GOBBLED up by downward overshoot. This would happen because the banks would be more than willing to lend $60-80K to a guy like me but are a lot less likely (as I'm likely to borrow it) twice or three times that amount at this point. Which (gasp) is what some of the condo resellers in Downtown Mpls want! I actually think second tier banks like NTRS and BBT would welcome this scenario. They would lock in the financially fit (or relatively speaking) as long term customers and grow their portfolio eventually replacing the Citi's of the world.
"31K isn't a lot of money? wow. Mind giving me 31K and see if that wouldn't cause a problem?"
It's not a lot of money if you borrowed $500k to buy a house which is now worth $200k and that you could rent for $1000 and that you suspect will be dropping even more in value. That's the way it is in much of non-coastal California, Nevada, Arizona, and Florida. For details, see thehousingbubbleblog.com.
"If you chopped 31K off a home loan, and assumed that the rate was at 5.5% and stays at 5.5% then you're looking at a savings of about $175 a month."
Alternately, you could walk, score a couple thousand dollars from the lender for good behavior (i.e. not trashing the place), go rent for $1000 a month, and have somebody else fix the roof and pay the taxes.
"Banks selling quickly:
and how do they sell quickly when there's no one able to get loans and no one with the cash to buy?"
Amy P is right on. The only public interest in foreclosures is the possibility of blight, which happens when empty houses linger on the market. The cure for that is to adopt federal rules encouraging quick foreclosure - preempting state laws that allow defaulting borrowers to drag things out for months - and further requiring banks and other lenders to sell or rent quickly, say, within 60 days. That will result in fire sales at fire sale prices and, voila, the markets will clear, and all those lovely over-priced homes and condos in California, Nevada and Florida will fill up with young families who have been heretofore priced out of the housing market.
Will all those young families in Michigan and Ohio want to move to Nevada and Florida to buy homes in a downsizing economy? Seriously?
Will the banks and other lenders recover much money if they sell at fire sale prices? Er, how?
"Public interest" in preventing foreclosures is roundabout
DBL points out blight prevention but more importantly what the Obama (and Bush) strategies are is to slowly let the market reabsorb overpriced houses
Keeping people making payments of 31-38% of their income may only delay the inevitable if the mortgage is 50% greater than the value of the home, but you are managing the liquidation to what is called - in the business - an orderly liquidation
Obama's team knows that redefault rates on restructured mortgages are high. Everybody does. They are not heads-down stupid, they simply are taking a strategy that if you slow down the mortgage "unwind", ease the burden on banks and - combined with flooding the market with mortgage money for buyers- eventually the problem will work itself down
They are likely correct. I can't imagine anyone else taking that much different a view - Bush/Paulson wasn't so different
The figure is $75 billion for mortgage relief. The other $200 billion is to simply keep the GSEs in business- and this means "solvent" by government accounting standards.
Stan,
How could not understand what I wrote? This plan only helps people that can actually pay a mortgage that is 31% of their income- such people can certainly pay rent for housing, so they won't go homeless. People that don't have jobs any longer, or other assets, are not helped at all since they can't pay even the reduced mortgage, so it won't keep them out of foreclosure.
In addition, workouts on mortgages that lower the monthly payment by the amounts discussed still end up as a majority of defaults in the end if they were going to default without the reduction, but with just a bit of delay. There is wealth of information on this from just the last 2 years, and you can find a lot of it over at CalculatedRisk.
The 9 million figure put out is the absolute maximum that are eligible for this plan, and it assumes that they will all take advantage, that they will all not then default later and go into foreclosure, or realize that they are still better off walking away from an underwater mortgage, even if the payments are reduced by 25%. My prediction is that all $75 billion gets spent and less than 1 million will even have taken advantage of it, and that fewer than that will end up not going through foreclosure anyway.
Really, can't even you think of a better use of $75 billion dollars than to send it to people whose potential "fate" is to end up renting a place that costs as much or less than their reduced mortgage payment? Seriously, the people eligible for this plan are not the poor. Even the Obama team realized this, and that is why that token little bit was tossed to renters.
"Because foreclosures also hurt innocent bystanders"
The bailout also hurts innocent bystanders who have to pay for it. If I am going to pay for it one way or the other, I'd rather pay in a way that preserves freedom and liberty, not in the way that moves us toward more government control over my life.
And what about the long term effects? - one of which is to likely encourage future risky financial behavior, because, afterall, if things go badly, the government will just bail you out.
You cannot escape the fact that this type of government intervention changes behavior.
Most of the truly responsible people I know are now wondering why they have been such chumps? If they are careful and don't live beyond their means, the government will just take their money to save someone who did spend and borrow foolishly.
In Maine, foreclosed houses on the market are typically sold "as is," and the "as is" problem is typically frozen pipes because the bank didn't want to bother heating the house (or draining the water systems so they wouldn't freeze.)
That would indicate that banks, as owners (and maintainers) of houses is not a great combination.
And my guess would be that bankers are no better at being landlords then they were at maintaining newly-vacated houses in cold weather.
FORECLOSED PROPERTIES ARE A DISTRACTION FROM THE BUSINESS OF BANKING.
I know that I am wondering why I was such a chump as to buy a house that was affordable, put 20% down, get a fixed rate mortgage and even go the extra step of buying a two family instead of a single family so that in the event of a major disaster such as job loss, I could rent part of the house to help cover the mortgage.
No one has shown any data that the majority of people facing foreclosure are in the situation because of job loss or other calamity.
That tells me that this isn't the truth, the truth is that most of these people should never have bought their houses in the first place, they overpaid, bought houses they couldn't afford based on income alone and took out risky mortgages based on the idea that housing prices would continue to skyrocket.
With more than 90% of home owners fully current on their morgages this idea that everyone's neighborhood is going to become crime ridden and blighted is false...there is a very high concentration of troubled mortgages in a handful of states and cities...where the housing bubble and overbuilding was at its worst.
Really, can't even you think of a better use of $75 billion dollars than to send it to people whose potential "fate" is to end up renting a place that costs as much or less than their reduced mortgage payment? Seriously, the people eligible for this plan are not the poor. Even the Obama team realized this, and that is why that token little bit was tossed to renters.
----------------------------------
Then why don't you and others send your damned plan into your Congressman, and have people vote up or down on it? Get back to us after its laughed out of the Congress.
Generally, most of the commenters here are in favor of doing nothing and making the inevitable tidal wave of foreclosures become a tsunami. If you are OK with one foreclosed house on your block, well, how about three or four? What will YOUR house's price look like then?
@anon
No one has shown any data that the majority of people facing foreclosure are in the situation because of job loss or other calamity.
-----------------------
You DO know that we are in a recession, right?
BTW, if you are out of a job, you can't afford rent, even if rent is lower than your mortgage payment- a fact that seems to have escaped many of the commenters who just know that people can move from foreclosed homes into the happy situation of renting somewhere just as good at a lower amount.
Frankly, the lack of empathy for people here is pretty mind-boggling. It was as if they expected that people who bought a house could foresee that losing a job in 2008. And do you guys honestly believe that someone with a wife and kids facing foreclosure on an upside down mortgage truly WANTED to be in this situation? Their problem was that they believed what they were told by the very people whom you guys all extol as master capitalists! Now that WAS stupid, but considering that they are by definition unsophisticated , I understand that. I wish the rest of you could be as understanding.
I don't believe the majority of people in danger of losing their houses are in that situation because they became unemployed. I am unaware of any data that supports this viewpoint. In those cases I am more than happy to help the owner.
When you buy a house it is a risk, you run the risk that the house was over priced, that the price will fall due to unforseen circumstances, that the neighborhood will become rundown. All kinds of risks. All this talk about how people got taken is bs, it doesn't take a rhodes scholar to understand what an adjustable rate mortgage is, if you bet that your house would appreciate or you could refinance and lost, then, you lost. That was a choice that every borrower made in terms of fixed rate, balloon, adjustable, interest only or whatever.
THe fact that someone didn't "want" to lose their house is irrelevant. If they behaved irresponsibly they should not get rewarded. Period.
For what possible reason should I feel sorry for someone who bought a house that their income did not justify to begin with and now can't pay their mortgage, let alone subsidize via a taxpayer bailout?
This is ultimately a bank bailout plan. This plan moves "bad" assets away from lenders and investors, and into Fannie and Freddie.
The underlying message is that the quasi-nationalized Freddie Mac and Fannie Mae are going to play the role of "bad banks" in the bad bank plan. They are going to use them to move assets into balance sheets that are better positioned to take the hit, namely arms of the federal government. In the process, we are likely going to pay a lot more for these loans than they would be worth on the street, so the bankers will benefit from the above-market price.
Most of you don't understand that most of the "bad" loans in the market are being paid by their borrowers. They are bad not because of a lack of payments, but because of a lack of collateral.
If you can't understand this core element of the problem, then this whole thing will fly above your heads. The bank insolvency crisis is coming from this inadequacy of collateral, which is the byproduct of too much debt being placed on overpriced assets, including those acquired by prime borrowers. Making the payments alone isn't enough to fix what's wrong here.
It's ridiculous that these discussions devolve into some variant of class warfare. It isn't about bad borrowers or executive compensation, but about keeping the monetary system from collapsing. Those who fixate on subprimes are just being duped.
I agree that this plan is mostly about slowing the unwinding and supporting the banks. I don't think it will do much, which is just as well, because I think the unwinding is proceeding as it should. This is just more propping up of banks and postponing the inevitable. Also, there is a cost to this kind of intervention in the marketplace beyond the expenditure of taxpayer money. I don't think this plan will have any real effect on the housing market except to undermine the confidence of buyers. Right now, prices are falling (toward historical affordability) and buyers are materializing as one would expect. This plan tells those buyers that the government is trying to artificially put a floor under prices. Very harmful.
"FORECLOSED PROPERTIES ARE A DISTRACTION FROM THE BUSINESS OF BANKING."
To an extent, but they are also part of the reality of lending. I know of one small bank, unfortunately bought out by a larger "chain" bank a few years ago, that sent its "Facilities and Maintenance Manager" around to properties it foreclosed on to shut things down in an orderly manner and to check on them occasionally.
Yes DW - it is a bank bailout plan! and that is a damn good thing
Agree that making the mortgage payments alone isn't enough to fix the problem but the assumption is that many of these loans will eventually migrate to Fan&Fred (which are explicitly wards of the state) or be refinaced, or the houses will be sold. (short sales) There are things that make mortgages terminate - death, divorce, moving.
As to Psittakos comment that sends it the wrong message to buyers, P notes that the unwind is happening, people are buying at lower prices in CA, AZ, Michigan. This trend will continue. People should want to buy houses for housing, not as an investment - if you can afford the the house and like the house and neighborhood, then buy it. Trying to time houses as if they were stocks is the mentality that got us here in the first place.
Believe me, the Feds will not be subsidizing every mortgage. As it stands, I doubt their coverage will be as broad as they'd like. Have yet to see details of how they - the Feds - will track and pay their subsidy on eligible loans. Treansparently, they are injecting money into the banking system so that the market does not go to, or through, the floor so fast that the losses take down even more large banks.
I'm talking about buyers looking for a house they can afford to buy and live in. This sends a message to them that the government doesn't like market values. They are right to react with disgust. The housing market has been subsidized for years in various ways. Isn't that at least part what of got us into this? It certainly isn't the people who want to buy a house when prices return to affordable levels. I agree it's about the solvency of the banks, but artificial house prices will never solve that problem. Really, I understand what you're saying, but I just can't believe that this kind of tinkering by the government will ever do more good than harm.
The government started " tinkering" with the housing market when it started guaranteeing mortgages via the FHA and VA programs. Before those programs, there WAS no such thing as the 30 year, fixed rate mortgage. Do you want to stop that sort of tinkering, too? The mortgage interest deduction on housing is another huge subsidy to home buyers. How's that for sending a message that the government doesn't like market values?
I note that Fannie Mae and Freddie Mac have been tinkering for decades with the secondary mortgage market, apparently with great success.
IOW, just because things got screwed up lately, partly because the government regulators didn't regulate, doesn't mean that we should go back to 1929.
AS for those worrying lately about " moral hazard" , there is simply no way to design a program to help the deserving without sometimes helping the non deserving . If you can think of one, post it-or better still, write your representative.
Why would we want to add additional subsidies before housing prices have returned to historical levels? When a bubble is bursting, I just don't think more of what created it is the answer. I am well aware that housing has been subsidized for generations. Nobody is suggesting that we do away with all of that right now. But we have to allow this bubble to burst. Then we can move forward.
I don't the 30-year fixed is such a great product, anymore than the 7-year auto loan is a great idea. Anytime you spread your payments over a long period of time, it reduces buyer sensitivity to the total price, because the focus is on the low, low monthly payment. I don't think there's anything you buy that you should be paying 30 years for.
Actually, the 30-year mortgage was not a product of the New Deal. It was developed in the 1920s by the Republican Secretary of Commerce, Herbert Hoover, as part of a Republican program to disperse homeownership more widely through the population.
The plan is to allow the bubble to collapse slowly, not all in a rush. Had the libertarians had their week, we would be on our way to thousands of banks collapsing all at once, and Hoovervilles full of unemployed people because the homeless shelters are overflowing. The bailouts are there to prevent that. What's amazing is the libertarians' steadfast failure to believe that things like that can't happen, despite the fact that in the 1930s they actually DID happen
@Amy P
Guess you don't plan to buy a house anytime soon, eh? If you are OK with only rich folks being able to buy houses , then 5, 10 0r 15 year mortgages with 20% down is obviously the way to go. But most people disagree with you and it did work fine to spread home ownership throughout the broad middle class from 1930-1990
@Stoddard
So Hubert Hoover had one good idea. Glory be! In any case , FHA and VA greatly facilitated the spread of such mortgages.
I have addressed the soft landing. House prices are moving toward historical affordability. That's good. This housing plan does not even pretend to help any poor people.
"Guess you don't plan to buy a house anytime soon, eh? If you are OK with only rich folks being able to buy houses , then 5, 10 0r 15 year mortgages with 20% down is obviously the way to go. But most people disagree with you and it did work fine to spread home ownership throughout the broad middle class from 1930-1990."
Homeownership is a misery to those who are unprepared to deal with it. Likewise, not being able to come up with a downpayment is a sure signal that the house you are looking out will not be a blessing.
I don't have much of a downpayment yet and the prices aren't where I want them to be yet, so I'm waiting.
Psittakos: Spare me your moralizing about only rich people being able to buy houses. Nothing the federal government has done has enabled ME to afford to buy a house. I'm in my sixtieth year, I live in a rented apartment, and I live surrounded by other people who can't afford houses either. There are lots of people who aren't rich enough to buy houses, despite all the efforts of the federal government to subsidize homeownership.
And what I'm seeing is that the current collapse of housing prices has made life easier for people at my wealth level. I used to worry about the loss of rental properties to the condo market, and the increasing number of people who couldn't afford the inflated price of real property, were going to send rents spiraling upward to where I couldn't pay them. Now there are rental vacancies all around me, and I hear of condominia being put back on the rental market again because no one is buying them. It's even remotely possible that continued fall in housing prices might make it possible for me to buy.
But instead, I hear a debate between people who want to keep housing prices from collapsing by subsidizing the moneylenders, and people who want to do it by subsidizing the homeowners. And either way, it's a benefit to people richer than I am, paid for by my taxes. Nor do I see how preventing the high bubble-based housing prices from collapsing is a benefit. Remember just a year or two ago that the big worry about American housing was that it was getting too expensive, and too many people couldn't afford it? Well, now that problem is getting solved . . . and you're complaining about it. Did you imagine that it was possible, at the same time, to make homeownership affordable to everyone, and to prevent housing prices from ever falling or even rising more slowly? Because that strikes me as like wishing to live in an Escher painting rather than in the real world. You have to have one or the other, and I'd rather have housing prices fall to their historical ratio to real income . . . and if the rich people who paid too much for houses lose out, well, capitalist economies aren't risk-free.
I think you have me confused with Stonetools. I am with you on this! Let house prices fall to historical affordability. That's where prices want to go.
Heh, first you confuse 'em, then you defeat 'em :-).
@Stoddard
Well, I understand your feeling (I'm a renter , too, btw). but the people, through its representatives, decided 70 plus years ago, to subsidize home ownership to make it easier for people to own homes. Your beef is not with some abstraction called the federal government, it is with the people of the United States who have supported this policy through war and peace and through successive Democratic and republican administrations.And in fact, the federal government has done a lot to help both you and Amy P to own a house, even if you haven't been able to take advantage of their programs.
Frankly, your complaining about federal housing programs is like the guy who doesn't own a car who complains about federal spending on the interstate highway system. " If it doesn't benefit me directly RIGHT now, I'm agin' it".
The bottom line is this: sure these programs are going to help some people that shouldn't be helped. There is now way to design a program to help the deserving that won't sometimes help the undeserving. The question is : do you want a society where there are not dozens, but thousands, of bank failures, where there are foreclosed homes on every block and where there are armies of ill-housed or homeless people at every turn? Because if the federal government stood aside and did little or nothing, as it did 1929-1933, that it what would happen.
Because foreclosures also hurt innocent bystanders, there is a public interest in limiting them.
Wonder how that line will go over amongst Megan's regulars?
I am so unenthused about this whole idea. I'm a renter, living in southern California; I've never been able to afford a house, and since I'm now in my sixtieth year, I expect to live out my life as a renter. Over the past few years, I watched housing prices spiral upward, to the point where the median southern Californian couldn't realistically afford a house . . . which drove more people into the rental market. At the same time, an increasing number of rentals were lost to condo conversions. Both processes sent rents spiraling upward, too, to the point where I was worried about being able to afford to rent in a safe neighborhood at all.
Now, I could see that we were going through a bubble, and that buying property at inflated prices wouldn't be a good idea even if I could afford it. But I was still paying the price of the bubble, in higher rents. I was deeply relieved to see it deflate, and to see housing prices start moving down again toward something vaguely realistic. Not far down enough to bring me into the housing market, but having more rentals come onto the market is all to the good.
But now I see the government stepping in to help out rich people . . . richer than I am . . . who could afford to buy houses, not to mention reckless people who bought houses they couldn't afford. And I have no doubt that this will hurt me, because if you raise house prices, you inevitably raise housing costs. Why should my cost of living be artificially forced upward to benefit people who are substantially richer than I am? Let the housing market find its natural level. Intervention in the housing market is just one more case of the federal government helping out rich people at public expense.
The prevention of foreclosures hurts new home buyers. Foreclosures make illiquid assets liquid.
Foreclosures are the result of the problem, not the problem. It's as if he is arguing that not throwing a brick through a shop window hurts glaziers.
The only good thing about Obama's plan is that it will prevent almost no foreclosures, but will do this while throwing another 275 billion dollars down the black hole of bad debt.
But here is the real problem- when this plan doesn't work to buoy home values and stem the foreclosure rate, another, bigger plan will be brought forward that will accomplish even less at higher cost.
Who is being helped by this useless, half-assed plan? Anyone that could actually afford to pay a reduced mortgage payment isn't going to be made homeless by a foreclosure. It would have made far more sense to add more subsidies to the rents for the truly homeless (you can at least make a moral argument for that one). This plan almost seems like a make work program. I am guessing we will never get to see how many people actually are saved from foreclosure at what cost, and won't get to see the amount spent on overhead implementing it.
I think the defensible argument for the housing plan is that something has to be done to prevent a damaging overshoot of prices to the low side. But, there's not much evidence that there's a need for the government to prop up prices and engineer a soft landing. Affordability is still below the historical norm in most areas, even where the decline has been steepest.
Yancey, newspaper accounts of Obama's plan provided estimates, probably supplied by the administration, that the plan would prevent nine million foreclosures in the next year or so. Your estimate is zero. Can you point me to an analysis that supports your post?
I'm not simply being argumentative. I've learned from this site and others that there are valid reasons to oppose fiscal stimulus plans, and although I don't think they're right in this particular recession, they could be in some cases. Can you supply similar arguments against Obama's housing plan? In particular, is there any factual basis to your statement that "Anyone that could actually afford to pay a reduced mortgage payment isn't going to be made homeless by a foreclosure."?
I'm actually hoping for a further 20% fall in my area, although perhaps not all at once. It all got ridiculously out of touch with prevailing salaries, and ultimately it's salaries (rather than financial shenanigans) that determine what people can pay.
When prices are back in line with what the buyers can afford with old-school mortgages, life will be back to normal.
Stan -- Anyone who can afford to pay a reduced mortgage payment can probably also pay rent. Perhaps for smaller quarters, but there are a lot of stages between an owner-occupied house and a cardboard box.
M. C., I understand this, and I stand corrected if Yancey merely meant what you said. I still can't understand the disdain many conservatives feel for people who are going to lose their homes due to foreclosure. Where I live, southeast Michigan, a lot of autoworkers and autoworker retirees are in this situation. I can't believe that all or even most of these people are either a) speculators, or b)losers who deserve their fate.
There was an illustrator who worked for the Disney Studios in the early days, Bill Peet. He illustrated a biography about his childhood during the depression. It's also fun, with some revealing information about the early days and working with Walt Disney.
And remember: Disney marked his turf by providing cheap distraction in hard times.
Anyone interested in the impact of Depression-style economies on childhood and families might want to give a read. It's a children's book, and easy to understand, and filled with real-life experience of the Depression.
Because not understanding this perspective becomes your perspective when you talk about families and what's begun happening; homes taken away, parents who cannot find work, and families breaking apart and reforming.
Unfortunately, if you are underwater and paying 31 percent of your gross income while the government gives the bank a subsidy, you're a renter anyway (and you're probably renting at an above market price).
Stan -
Can you provide a link to the analysis that supports the 9 million figure? I've seen that claim, too, but no support for it. If you've found somewhere that spells out the details that claim is based on, please share it. Thanks.
Yahoos, I can't provide a link estimating the 9 million figure. This type of thing seems to be too detailed for newspapers or television. Sorry.
This is off-topic. But could someone please explain why we continue to talk about BofA and Citi investors potentially being wiped out, when that is a fait accompli? You seen these tickers?
"Yancey, newspaper accounts of Obama's plan provided estimates, probably supplied by the administration, that the plan would prevent nine million foreclosures in the next year or so. Your estimate is zero. Can you point me to an analysis that supports your post?"
I'm not Yancey, but I think it's just simple arithmetic. In the most severely hit areas, people are underwater hundreds of thousands of dollars. $275 billion divided by $9 million households equals about $31k per household. Anybody who can be saved by $31k isn't in that big a hole.
I'm also wondering what the game plan is. The two possibilities I see are:
1. use this plan to stall and appear to be doing something
2. to keep bailing out distressed homeowners with more and more money
Option 1. will be better for the country as a whole, but I think it's very unfair to hold out false hope to distressed homeowners, to keep bleeding them in the hope of keeping the national economy afloat when the solution that is actually in their best interest is to walk. My personal solution would be to offer $5k grants to pay for moving expenses and getting a rental. I've already heard of banks paying $2k to distressed homeowners as "cash for keys." On the other end, I'd pressure banks to sell quickly to avoid blight.
31K isn't a lot of money? wow. Mind giving me 31K and see if that wouldn't cause a problem?
If you chopped 31K off a home loan, and assumed that the rate was at 5.5% and stays at 5.5% then you're looking at a savings of about $175 a month.
that number would be higher if they got to refi to a lower interest as well.
It may not be big in your world, but in mine almost $200 a month is nice.
Banks selling quickly:
and how do they sell quickly when there's no one able to get loans and no one with the cash to buy?
I'm glad to hear/see there is a plausible argument for it. And to me it does seem more thought through than the stimulus package which is nice because it is a product specifically of the Obama administration and not in collaboration with Congress. There is such a thing as 'rational ignorance,' and I thing for most of us who are not in housing finance this plan is in that area. So we do best to leave it to those people who have been elected and paid to look into it. We can kibitiz and drink beer and argue about it, wondering if a cogent commenter will appear, but any relevant opinion probably awaits another day.
Billy - if I'm pension fund or mutual fund with a large outstanding interest in C or BAC or (what's looks soon to be WFC) there's a HUGE difference b/t $2 and $0
Mark - They sell quickly b/c homes across the country would be GOBBLED up by downward overshoot. This would happen because the banks would be more than willing to lend $60-80K to a guy like me but are a lot less likely (as I'm likely to borrow it) twice or three times that amount at this point. Which (gasp) is what some of the condo resellers in Downtown Mpls want! I actually think second tier banks like NTRS and BBT would welcome this scenario. They would lock in the financially fit (or relatively speaking) as long term customers and grow their portfolio eventually replacing the Citi's of the world.
k1
ryanculver.blogspot.com
"31K isn't a lot of money? wow. Mind giving me 31K and see if that wouldn't cause a problem?"
It's not a lot of money if you borrowed $500k to buy a house which is now worth $200k and that you could rent for $1000 and that you suspect will be dropping even more in value. That's the way it is in much of non-coastal California, Nevada, Arizona, and Florida. For details, see thehousingbubbleblog.com.
"If you chopped 31K off a home loan, and assumed that the rate was at 5.5% and stays at 5.5% then you're looking at a savings of about $175 a month."
Alternately, you could walk, score a couple thousand dollars from the lender for good behavior (i.e. not trashing the place), go rent for $1000 a month, and have somebody else fix the roof and pay the taxes.
"Banks selling quickly:
and how do they sell quickly when there's no one able to get loans and no one with the cash to buy?"
What is this "no one" is "able to get loans"?
Amy P is right on. The only public interest in foreclosures is the possibility of blight, which happens when empty houses linger on the market. The cure for that is to adopt federal rules encouraging quick foreclosure - preempting state laws that allow defaulting borrowers to drag things out for months - and further requiring banks and other lenders to sell or rent quickly, say, within 60 days. That will result in fire sales at fire sale prices and, voila, the markets will clear, and all those lovely over-priced homes and condos in California, Nevada and Florida will fill up with young families who have been heretofore priced out of the housing market.
Will all those young families in Michigan and Ohio want to move to Nevada and Florida to buy homes in a downsizing economy? Seriously?
Will the banks and other lenders recover much money if they sell at fire sale prices? Er, how?
"Public interest" in preventing foreclosures is roundabout
DBL points out blight prevention but more importantly what the Obama (and Bush) strategies are is to slowly let the market reabsorb overpriced houses
Keeping people making payments of 31-38% of their income may only delay the inevitable if the mortgage is 50% greater than the value of the home, but you are managing the liquidation to what is called - in the business - an orderly liquidation
Obama's team knows that redefault rates on restructured mortgages are high. Everybody does. They are not heads-down stupid, they simply are taking a strategy that if you slow down the mortgage "unwind", ease the burden on banks and - combined with flooding the market with mortgage money for buyers- eventually the problem will work itself down
They are likely correct. I can't imagine anyone else taking that much different a view - Bush/Paulson wasn't so different
The figure is $75 billion for mortgage relief. The other $200 billion is to simply keep the GSEs in business- and this means "solvent" by government accounting standards.
Stan,
How could not understand what I wrote? This plan only helps people that can actually pay a mortgage that is 31% of their income- such people can certainly pay rent for housing, so they won't go homeless. People that don't have jobs any longer, or other assets, are not helped at all since they can't pay even the reduced mortgage, so it won't keep them out of foreclosure.
In addition, workouts on mortgages that lower the monthly payment by the amounts discussed still end up as a majority of defaults in the end if they were going to default without the reduction, but with just a bit of delay. There is wealth of information on this from just the last 2 years, and you can find a lot of it over at CalculatedRisk.
The 9 million figure put out is the absolute maximum that are eligible for this plan, and it assumes that they will all take advantage, that they will all not then default later and go into foreclosure, or realize that they are still better off walking away from an underwater mortgage, even if the payments are reduced by 25%. My prediction is that all $75 billion gets spent and less than 1 million will even have taken advantage of it, and that fewer than that will end up not going through foreclosure anyway.
Really, can't even you think of a better use of $75 billion dollars than to send it to people whose potential "fate" is to end up renting a place that costs as much or less than their reduced mortgage payment? Seriously, the people eligible for this plan are not the poor. Even the Obama team realized this, and that is why that token little bit was tossed to renters.
"Because foreclosures also hurt innocent bystanders"
The bailout also hurts innocent bystanders who have to pay for it. If I am going to pay for it one way or the other, I'd rather pay in a way that preserves freedom and liberty, not in the way that moves us toward more government control over my life.
And what about the long term effects? - one of which is to likely encourage future risky financial behavior, because, afterall, if things go badly, the government will just bail you out.
You cannot escape the fact that this type of government intervention changes behavior.
Most of the truly responsible people I know are now wondering why they have been such chumps? If they are careful and don't live beyond their means, the government will just take their money to save someone who did spend and borrow foolishly.
In Maine, foreclosed houses on the market are typically sold "as is," and the "as is" problem is typically frozen pipes because the bank didn't want to bother heating the house (or draining the water systems so they wouldn't freeze.)
That would indicate that banks, as owners (and maintainers) of houses is not a great combination.
And my guess would be that bankers are no better at being landlords then they were at maintaining newly-vacated houses in cold weather.
FORECLOSED PROPERTIES ARE A DISTRACTION FROM THE BUSINESS OF BANKING.
I know that I am wondering why I was such a chump as to buy a house that was affordable, put 20% down, get a fixed rate mortgage and even go the extra step of buying a two family instead of a single family so that in the event of a major disaster such as job loss, I could rent part of the house to help cover the mortgage.
No one has shown any data that the majority of people facing foreclosure are in the situation because of job loss or other calamity.
That tells me that this isn't the truth, the truth is that most of these people should never have bought their houses in the first place, they overpaid, bought houses they couldn't afford based on income alone and took out risky mortgages based on the idea that housing prices would continue to skyrocket.
With more than 90% of home owners fully current on their morgages this idea that everyone's neighborhood is going to become crime ridden and blighted is false...there is a very high concentration of troubled mortgages in a handful of states and cities...where the housing bubble and overbuilding was at its worst.
@Yancey ward
Really, can't even you think of a better use of $75 billion dollars than to send it to people whose potential "fate" is to end up renting a place that costs as much or less than their reduced mortgage payment? Seriously, the people eligible for this plan are not the poor. Even the Obama team realized this, and that is why that token little bit was tossed to renters.
----------------------------------
Then why don't you and others send your damned plan into your Congressman, and have people vote up or down on it? Get back to us after its laughed out of the Congress.
Generally, most of the commenters here are in favor of doing nothing and making the inevitable tidal wave of foreclosures become a tsunami. If you are OK with one foreclosed house on your block, well, how about three or four? What will YOUR house's price look like then?
@anon
No one has shown any data that the majority of people facing foreclosure are in the situation because of job loss or other calamity.
-----------------------
You DO know that we are in a recession, right?
BTW, if you are out of a job, you can't afford rent, even if rent is lower than your mortgage payment- a fact that seems to have escaped many of the commenters who just know that people can move from foreclosed homes into the happy situation of renting somewhere just as good at a lower amount.
Frankly, the lack of empathy for people here is pretty mind-boggling. It was as if they expected that people who bought a house could foresee that losing a job in 2008. And do you guys honestly believe that someone with a wife and kids facing foreclosure on an upside down mortgage truly WANTED to be in this situation? Their problem was that they believed what they were told by the very people whom you guys all extol as master capitalists! Now that WAS stupid, but considering that they are by definition unsophisticated , I understand that. I wish the rest of you could be as understanding.
I don't believe the majority of people in danger of losing their houses are in that situation because they became unemployed. I am unaware of any data that supports this viewpoint. In those cases I am more than happy to help the owner.
When you buy a house it is a risk, you run the risk that the house was over priced, that the price will fall due to unforseen circumstances, that the neighborhood will become rundown. All kinds of risks. All this talk about how people got taken is bs, it doesn't take a rhodes scholar to understand what an adjustable rate mortgage is, if you bet that your house would appreciate or you could refinance and lost, then, you lost. That was a choice that every borrower made in terms of fixed rate, balloon, adjustable, interest only or whatever.
THe fact that someone didn't "want" to lose their house is irrelevant. If they behaved irresponsibly they should not get rewarded. Period.
For what possible reason should I feel sorry for someone who bought a house that their income did not justify to begin with and now can't pay their mortgage, let alone subsidize via a taxpayer bailout?
This is ultimately a bank bailout plan. This plan moves "bad" assets away from lenders and investors, and into Fannie and Freddie.
The underlying message is that the quasi-nationalized Freddie Mac and Fannie Mae are going to play the role of "bad banks" in the bad bank plan. They are going to use them to move assets into balance sheets that are better positioned to take the hit, namely arms of the federal government. In the process, we are likely going to pay a lot more for these loans than they would be worth on the street, so the bankers will benefit from the above-market price.
Most of you don't understand that most of the "bad" loans in the market are being paid by their borrowers. They are bad not because of a lack of payments, but because of a lack of collateral.
If you can't understand this core element of the problem, then this whole thing will fly above your heads. The bank insolvency crisis is coming from this inadequacy of collateral, which is the byproduct of too much debt being placed on overpriced assets, including those acquired by prime borrowers. Making the payments alone isn't enough to fix what's wrong here.
It's ridiculous that these discussions devolve into some variant of class warfare. It isn't about bad borrowers or executive compensation, but about keeping the monetary system from collapsing. Those who fixate on subprimes are just being duped.
Jozef:
I agree that this plan is mostly about slowing the unwinding and supporting the banks. I don't think it will do much, which is just as well, because I think the unwinding is proceeding as it should. This is just more propping up of banks and postponing the inevitable. Also, there is a cost to this kind of intervention in the marketplace beyond the expenditure of taxpayer money. I don't think this plan will have any real effect on the housing market except to undermine the confidence of buyers. Right now, prices are falling (toward historical affordability) and buyers are materializing as one would expect. This plan tells those buyers that the government is trying to artificially put a floor under prices. Very harmful.
"FORECLOSED PROPERTIES ARE A DISTRACTION FROM THE BUSINESS OF BANKING."
To an extent, but they are also part of the reality of lending. I know of one small bank, unfortunately bought out by a larger "chain" bank a few years ago, that sent its "Facilities and Maintenance Manager" around to properties it foreclosed on to shut things down in an orderly manner and to check on them occasionally.
Yes DW - it is a bank bailout plan! and that is a damn good thing
Agree that making the mortgage payments alone isn't enough to fix the problem but the assumption is that many of these loans will eventually migrate to Fan&Fred (which are explicitly wards of the state) or be refinaced, or the houses will be sold. (short sales) There are things that make mortgages terminate - death, divorce, moving.
As to Psittakos comment that sends it the wrong message to buyers, P notes that the unwind is happening, people are buying at lower prices in CA, AZ, Michigan. This trend will continue. People should want to buy houses for housing, not as an investment - if you can afford the the house and like the house and neighborhood, then buy it. Trying to time houses as if they were stocks is the mentality that got us here in the first place.
Believe me, the Feds will not be subsidizing every mortgage. As it stands, I doubt their coverage will be as broad as they'd like. Have yet to see details of how they - the Feds - will track and pay their subsidy on eligible loans. Treansparently, they are injecting money into the banking system so that the market does not go to, or through, the floor so fast that the losses take down even more large banks.
Jozef,
I'm talking about buyers looking for a house they can afford to buy and live in. This sends a message to them that the government doesn't like market values. They are right to react with disgust. The housing market has been subsidized for years in various ways. Isn't that at least part what of got us into this? It certainly isn't the people who want to buy a house when prices return to affordable levels. I agree it's about the solvency of the banks, but artificial house prices will never solve that problem. Really, I understand what you're saying, but I just can't believe that this kind of tinkering by the government will ever do more good than harm.
@Psittakos
The government started " tinkering" with the housing market when it started guaranteeing mortgages via the FHA and VA programs. Before those programs, there WAS no such thing as the 30 year, fixed rate mortgage. Do you want to stop that sort of tinkering, too? The mortgage interest deduction on housing is another huge subsidy to home buyers. How's that for sending a message that the government doesn't like market values?
I note that Fannie Mae and Freddie Mac have been tinkering for decades with the secondary mortgage market, apparently with great success.
IOW, just because things got screwed up lately, partly because the government regulators didn't regulate, doesn't mean that we should go back to 1929.
AS for those worrying lately about " moral hazard" , there is simply no way to design a program to help the deserving without sometimes helping the non deserving . If you can think of one, post it-or better still, write your representative.
Stonetools,
Why would we want to add additional subsidies before housing prices have returned to historical levels? When a bubble is bursting, I just don't think more of what created it is the answer. I am well aware that housing has been subsidized for generations. Nobody is suggesting that we do away with all of that right now. But we have to allow this bubble to burst. Then we can move forward.
stonetools,
I don't the 30-year fixed is such a great product, anymore than the 7-year auto loan is a great idea. Anytime you spread your payments over a long period of time, it reduces buyer sensitivity to the total price, because the focus is on the low, low monthly payment. I don't think there's anything you buy that you should be paying 30 years for.
stonetools,
Actually, the 30-year mortgage was not a product of the New Deal. It was developed in the 1920s by the Republican Secretary of Commerce, Herbert Hoover, as part of a Republican program to disperse homeownership more widely through the population.
@Psittakos
The plan is to allow the bubble to collapse slowly, not all in a rush. Had the libertarians had their week, we would be on our way to thousands of banks collapsing all at once, and Hoovervilles full of unemployed people because the homeless shelters are overflowing. The bailouts are there to prevent that. What's amazing is the libertarians' steadfast failure to believe that things like that can't happen, despite the fact that in the 1930s they actually DID happen
@Amy P
Guess you don't plan to buy a house anytime soon, eh? If you are OK with only rich folks being able to buy houses , then 5, 10 0r 15 year mortgages with 20% down is obviously the way to go. But most people disagree with you and it did work fine to spread home ownership throughout the broad middle class from 1930-1990
@Stoddard
So Hubert Hoover had one good idea. Glory be! In any case , FHA and VA greatly facilitated the spread of such mortgages.
Stonetools,
I have addressed the soft landing. House prices are moving toward historical affordability. That's good. This housing plan does not even pretend to help any poor people.
"Guess you don't plan to buy a house anytime soon, eh? If you are OK with only rich folks being able to buy houses , then 5, 10 0r 15 year mortgages with 20% down is obviously the way to go. But most people disagree with you and it did work fine to spread home ownership throughout the broad middle class from 1930-1990."
Homeownership is a misery to those who are unprepared to deal with it. Likewise, not being able to come up with a downpayment is a sure signal that the house you are looking out will not be a blessing.
I don't have much of a downpayment yet and the prices aren't where I want them to be yet, so I'm waiting.
Psittakos: Spare me your moralizing about only rich people being able to buy houses. Nothing the federal government has done has enabled ME to afford to buy a house. I'm in my sixtieth year, I live in a rented apartment, and I live surrounded by other people who can't afford houses either. There are lots of people who aren't rich enough to buy houses, despite all the efforts of the federal government to subsidize homeownership.
And what I'm seeing is that the current collapse of housing prices has made life easier for people at my wealth level. I used to worry about the loss of rental properties to the condo market, and the increasing number of people who couldn't afford the inflated price of real property, were going to send rents spiraling upward to where I couldn't pay them. Now there are rental vacancies all around me, and I hear of condominia being put back on the rental market again because no one is buying them. It's even remotely possible that continued fall in housing prices might make it possible for me to buy.
But instead, I hear a debate between people who want to keep housing prices from collapsing by subsidizing the moneylenders, and people who want to do it by subsidizing the homeowners. And either way, it's a benefit to people richer than I am, paid for by my taxes. Nor do I see how preventing the high bubble-based housing prices from collapsing is a benefit. Remember just a year or two ago that the big worry about American housing was that it was getting too expensive, and too many people couldn't afford it? Well, now that problem is getting solved . . . and you're complaining about it. Did you imagine that it was possible, at the same time, to make homeownership affordable to everyone, and to prevent housing prices from ever falling or even rising more slowly? Because that strikes me as like wishing to live in an Escher painting rather than in the real world. You have to have one or the other, and I'd rather have housing prices fall to their historical ratio to real income . . . and if the rich people who paid too much for houses lose out, well, capitalist economies aren't risk-free.
William H. Stoddard,
I think you have me confused with Stonetools. I am with you on this! Let house prices fall to historical affordability. That's where prices want to go.
Psittakos:
I see that you're right. The typographic conventions of posting here sometimes confuse me. Thanks!
Heh, first you confuse 'em, then you defeat 'em :-).
@Stoddard
Well, I understand your feeling (I'm a renter , too, btw). but the people, through its representatives, decided 70 plus years ago, to subsidize home ownership to make it easier for people to own homes. Your beef is not with some abstraction called the federal government, it is with the people of the United States who have supported this policy through war and peace and through successive Democratic and republican administrations.And in fact, the federal government has done a lot to help both you and Amy P to own a house, even if you haven't been able to take advantage of their programs.
Frankly, your complaining about federal housing programs is like the guy who doesn't own a car who complains about federal spending on the interstate highway system. " If it doesn't benefit me directly RIGHT now, I'm agin' it".
The bottom line is this: sure these programs are going to help some people that shouldn't be helped. There is now way to design a program to help the deserving that won't sometimes help the undeserving. The question is : do you want a society where there are not dozens, but thousands, of bank failures, where there are foreclosed homes on every block and where there are armies of ill-housed or homeless people at every turn? Because if the federal government stood aside and did little or nothing, as it did 1929-1933, that it what would happen.