There's dumb, there's insane, and then there's Stiglitz and Zandi with this bit of tripe:
With principal writedown no longer an option, the government needs to find a new way to facilitate mass mortgage refinancings. With rates at record lows, refinancing would allow homeowners to significantly reduce their monthly payments, freeing up money to spend on other things. A mass refinancing program would work like a potent tax cut.
Refinancing would also significantly reduce the chance of default for underwater homeowners. With fewer losses from past loans burdening their balance sheets, lenders could make more new loans, and communities plagued by mass foreclosures might see relief from blight.
What they're advocating is a mass-refinancing game ala-HOLC from the Depression.
But there are several problems with this premise.
First, it didn't work, objectively. HOLC did nothing to end The Depression. It arguably made it worse, as it locked people into homes that they should have objectively abandoned and in addition it held the price artificially high, preventing market clearing.
The Depression did not end until we entered WWII. That worked, but not for the reason commonly believed (the "broken window" fallacy.) Rather, we both destroyed virtually all of the industrial production capacity in the western world (along with two major cities in Japan) and we killed off a huge number of productive workers. This made America the "last man standing" from an industrial perspective and we profited mightily from that in the next two decades.
But nobody in their right mind advocates starting a nuclear war in today's world to do the same thing -- right Joseph?
The other part of the "magic" of the 1950s and 60s was, of course, the "boomers." That too was a consequence of the war (more specifically, the end of the war) which created a huge boost in family-related things, including houses. Today such a "baby boom" is anywhere from unlikely to impossible; we have a much higher population density in America today than we did at the time (139 million .vs. 330 million) and resources were comparatively cheap. Today we have none of those advantages.
The problem Stiglitz and Zandi have with this proposal is that they're not bothering with the second-level analysis -- who is going to buy these homes as they turn over, and with what?
Yet that's the key. In the 1950s we had young families coming up from the baby boom's formation that required housing; there was a strong organic driver of demand, and the converstion of industry from wartime production to peacetime resulted in plenty of jobs and little debt for those who were coming back into the civilian workforce. The soldier returning home and starting a family did so with little to his name, but he also had little or no debt on his back as well. Given a good salary he was thus able to support his wife and children -- and did. At the same time the women who had temporarily manned factories making bombs, guns and aircraft during the war returned to the home and raised children.
Today our young people fall into two classes -- those who are qualified to pull coffees at Starbucks and those who have college degrees but also come with $50,000 or more in college debt. Neither is capable of taking on a $1,000/mo house payment, say much less a $2,000 one.
Yet that's position being put forward. If we were to "refinance" those "underwater" mortgages we do several things that are bad, not good:
- We prevent the market from clearing. Underwater homeowners cannot sell and thus cannot move to where jobs are. We should encourage, not discourage, market clearing prices.
- Bankruptcy is a good, not bad, thing. It is the mechanism by which the losses made when a bad loan is originated are crystallized. The important thing to remember is that loss happens when a bad loan is made; all acts beyond that point are only an attempt to allocate or defer recognition of that loss, but cannot change the fact that it occurred.
- Debt loads are too high, and until they come down dramatically there is no market at the current price. This is the gist of the problem when it comes to housing and everything else. We have literally poisoned the well with our young people and educational loans; unfortunately this sort of short-sighted policy is all too common among the ivory tower elites, including Stiglitz. Without a buyer there is no sale! So who's the buyer for all these McMansions as the boomers age? It certainly is not the young guy or gal with a Sociology Degree and $50,000 or more in college debt -- a debt that instantly blows their debt-to-income ratios off the charts and precludes purchase of a house!
In short what we have here is yet another attempt to hold asset prices high in the mistaken belief that this will somehow "help the economy." It will do no such thing, as it fails to recognize and deal with the fact that the natural buyer is out of the market due to our policies on educational lending and costs, while at the same time it attempts to bail out the speculator, the foolish and the banksters who wrote the paper, along with those who were foolish enough to buy it.
The fact of the matter is that rates should go up, not down. The market should be encouraged to clear. The people who are underwater should be encouraged to abandon their property to the market, wherever it may wind up. Prices will collapse and inventory will clear. Those who are overburdened will declare bankruptcy and start over. Those who foolishly lent money will lose their investments.
But this clearing of the market is the only way out. At the same time we must stop the inexorable march toward more debt and more leverage everywhere in our society. College loans must become rare rather than common, educational costs must come down, the abuse of populations and the environment in foreign lands must become more difficult and less profitable and that which we demand of government we must pay for in the present tense.
Until all of those happen there is no durable path forward, arm-waving by hopelessly conflicted and desperate men such as Stiglitz and Zandi aside.
The Obama Administration's latest attempt to manipulate the housing market hit a wall yesterday, with FHFA saying "no" to principal reduction.
Fannie Mae (FNMA) and Freddie Mac won’t forgive principal on delinquent mortgages they guarantee even as the U.S. Treasury Department offers them incentive payments for writedowns, the companies’ regulator said today.
Months of analysis showed there would be no clear benefit to taxpayers if the Federal Housing Finance Agency changed its policy barring the government-owned mortgage-finance companies from loan modifications including debt writedowns, Edward J. DeMarco, the agency’s acting director, said at a briefing with reporters in Washington.
“We concluded the potential benefit was too small and uncertain relative to unknown costs and risks,” DeMarco said.
Of course those on the left were immediately out claiming this decision was "political."
I don't buy it.
The problem with blanket programs of "amnesty" on principal value is that they tend to encourage strategic defaults. Just like the market has "anticipated" and gamed every decision The Fed has made over the last five years as the economy went down the toilet, and the drug-addled equity market has done since, so would such a program encourage the same sort of game-playing and "anticipation."
On balance this sort of game-playing is destructive, not constructive. The fact of the matter is that for everyone who "wins" from such a program, someone must lose. That "someone" would be the taxpayer, for such funds can come from only one place -- more national debt.
To a large degree this is like taking a $20 from your left pocket and placing it in your right, then claiming you're $20 richer. You're not, of course; all you've done is shift money around. What's worse is that due to frictional effects which exist in all economic transactions you actually make the system poorer.
And finally, the worst effect of all is that you retard and inhibit the loss of price in houses to sustainable levels -- a place where people can buy a home without depending on the premise of "ever rising prices" to be able to afford it.
The fact is that houses, when used as a place to sleep, are a consumer durable good, not an "investment." They require constant input of more funds (and/or sweat) in the form of upkeep, and what's worse state and local governments assess annual taxes on their ownership so they are all massive losers over the long haul. Of course the counter-argument is that "renting includes these costs in the rent so you can't escape" but the point isn't escape -- it's what housing is, and how it impacts on the macro-level economy as a whole.
Economic balance requires that houses sell for about 2x annual incomes. The fact of the matter is that houses are still "rich" to median incomes on this basis by about 30%; they would have to fall to about $100,000 in order to reach "fair value."
Worse, this presumes a 20% down payment, and the percentage of homebuyers who put that away continues to be in the tank. A big part of that is the insane leverage that we have heaped on college students via loans, destroying not only accumulation of capital for down payments but also payment capacity via the student loan payment that must be made first. Subtract off the missing down payment from the median price if you're looking at "lower" or "more affordable" down payments, as the 2x median incomes assumes 80% financing to call that "affordable." That would put the median home price, in a 0% down world, at $80,000!
This of course makes Realtors and others in the industry gasp; "that's impossible!" they claim. The blanching continues among county and state finance executives, who quickly calculate what happens when their revenue from property taxes goes down by 30% (or more.)
But not only is this sort of further price decline not impossible, it's entirely reasonable from a historical basis, and it is likely to happen before the economic adjustment is all said and done.
The best way to encourage the economic adjustment that has to take place is to "eat our peas" and allow the defaults that should happen to happen, along with the price adjustments that come from it. Along these lines we should be forcing mark-to-market for all held housing inventory on various balance sheets, especially bank balance sheets. This would in turn force disgorgement into the market and discovery of the clearing price, which is essential if we are to restore health to the housing industry -- and the rest of the economy.
This is odd....
I have in my hot little hands a notice from Bank of America that appears to have been sent out to title companies across the country, warning them of a short-sale scam on high-value properties.
The letter states that any approval letter purporting to have come from BAC that meets certain criteria should have both a notice asking for a verification call and provides an explicit response that should be given if the approval is authentic.
One has to wonder exactly what's going on here..... it would be rather interesting if some new set of scammers have figured out how to dupe title companies with allegedly-valid short-sale approvals that are in fact fictitious!
I don't think there would be much value in reproducing the letter verbatim, but this does point out that if you're involved as someone transacting in a short sale, as a seller or buyer, you need to be very careful. If the "approval" is in fact fake all sorts of very un-funny consequences could ensue up and down the line.
If you've heard of actual scams please post it up in the comment section!
The housing market has turned—at last.
The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. The numbers are now convincing.
I love how people look at a "market" where the distortions are ridiculously large, to the point of overpowering everything else, se a small uptick and say "the numbers are now convincing."
What am I talking about? Let's just look at the mortgage rate -- 3.5%.
Now let's look at a prototypical $200,000 loan for 30 years at 3.5%. This produces a payment of $895.48.
How much house does $895.48 buy if rates go up to a more-normal 6%?
Answer: $150,104.
So you think housing has "bottomed" eh? That's very nice. You have an imputed 25% valuation increase in the price of houses today that will, over time, go away.
This is something that nobody talks about, except me. I've brought this up repeatedly -- you want to buy houses when rates are historically high, not low, because then when rates go down you get the imputed increase.
In this case you're buying the already-applied imputed increase, which means you are buying an embedded 25% over-valuation compared against historically-reasonable 30 year money rates.
Bottom? Maybe for a little while. But distorted markets always, eventually, correct back to the mean -- or more.
There's an old saying that goes something like this:
Will you stop*****ing on me and calling it rain?
Peter Orszag makes the following observation in a "View" column today on Bloomberg:
Bernanke said in his speech on April 13, at a conference sponsored by the Russell Sage Foundation and the Century Foundation, that “any theory of the crisis that ties its magnitude to the size of the housing bust must also explain why the fall of dot-com stock prices just a few years earlier, which destroyed as much or more paper wealth -- more than $8 trillion -- resulted in a relatively short and mild recession and no major financial instability.”
...
The Fed chairman is right: The housing crisis was much more damaging because the initial impact was concentrated in a highly leveraged financial sector and then substantially amplified as those losses cascaded.
The rest of the column is basically a scolding on the "miss", ignoring the real policy question that should be debated and answered:
How did it come to be that one of the key items for every person's personal comfort and indeed their life -- housing -- came to be a "highly-leveraged financial sector", what intentional government distortions made this possible, and how do we withdraw those distortions so that (1) it doesn't happen again and (2) necessary components of everyday life -- such as housing -- are not subject to the rank manipulations of this sort in the future?
But this debate is not being held -- on purpose -- because to do so exposes the soft underbelly of far too much for comfort among the so-called "financial elites."
Housing should not be a materially-levered part of the economy. Unlike commercial real estate which can bend and flow with demand -- when the local bar goes out of business if there are no others in town someone will soon decide that opening a watering hole makes sense -- housing displaces people on a permanent basis and does critical and personal damage to the nation's population when leverage is abused in this area of the economy.
It was, to a large degree, this same sort of leverage abuse in the 1920s with balloon mortgages (that had to be rolled every five years or so) that led to the Depression being as nasty as it was. The "Hooverville" shanties popped up due to people being displaced -- and they were displaced because the nation's housing stock became financialized and levered from the consumer on up.
The Government of course tried to "fix" the problem with FNMA, now known as "Fannie Mae", which was originally created to try to bail out banks during The Depression. This eventually led Fannie to be levered 80:1 by the time 2007 rolled around and, ultimately, was responsible for its collapse.
So what's next?
Good question. This much I can tell you with certainty -- there has been no recognition among the policy wonks, nor any attempt to correct the problem with leverage in the housing sector. In fact the exact opposite has happened -- the government has, to the maximum possible extent, done everything in its power to prevent that leverage from coming back out!
It's not working because it can't work.
And this morning's ADP number simply underlines the point -- until we stop screwing around with trying to protect financial "bigwigs" from the consequences of their own acts and this leverage comes out of the system there will be no economic recovery -- because there can't be.
