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The Sweep-It-Under-the-Rug Housing Plan (updated)

posted by Adam Levitin

There is $700 billion in negative equity in the US. That is the critical figure. Any housing plan that doesn’t take a serious bite out of that $700 billion isn’t worth discussing. It’s just window dressing. And that’s exactly what the latest iteration of the Tom Miller-led AG mortgage servicing settlement is. Sure it’s been sweetened by the addition of some interest rate reductions for underwater, but current homeowners (discussed at the end of this post), but that’s small potatoes. The latest settlement proposal is an exercise in rearranging deck chairs on the Titanic.

It’s time that we recognize that negative equity is the critical problem in the US economy. Fix negative equity and you will fix the US economy. That is because negative equity is the key for repairing household balance sheets, and that is the catalyst for getting consumers spending again, getting banks lending again, and getting businesses hiring again. If we're serious about dealing with negative equity, we need to address it directly and not engage in an extend and pretend dance. 

It's also time that we recognize that negative equity didn't just appear by itself.  This wasn't a freak weather event.  It was a man-made disaster.  We ended up with negative equity because of a housing bubble inflated by very deliberate acts by a limited number of financial institutions that profitted greatly from bloating the economy with cheap and unsustainable mortgage financing. We witnessed a macro-economic crime and are living with the consequences of it. 

Why negative equity matters for the economy

Consumer spending is 70% of GDP. If there’s any stagnation or contraction in consumer spending, its effects reverberate throughout the economy. That’s where we are today. We’re in a balance sheet recession caused by households pulling back on their spending because their concerned about their households’ financial position. The central reason for this concern is that houses—historically the major asset of most households—are worth much less than they were and, in many cases, worth less than the debt they secure. Unless households feel more confident in their balance sheets, they won't go out and spend (and banks won't make them loans to spend).  And that means less consumer demand for goods/services, which means less jobs, and a vicious cycle starts.

The Administration and the AGs’ goal seems to be to make the housing problem go away. It won’t go away. That should be patently obvious by now. The goal has to be to fix the market, not to cover it up its problems.

Negative Equity is a Market Clearing Problem

To understand what is so problematic about negative equity, it’s worth thinking about how a market should function—willing buyers and willing sellers should meet and agree on a price. When they do the deal, the market clears at the deal price and welfare is enhanced through exchanges that both parties see as value-enhancing. The problem with the housing market is that willing buyers and willing sellers can agree on a price, but can’t do the deal. They can’t do it because of the presence of a mortgage on the property. To wit, if you agree to buy my house for $200k, we can’t do the deal if there’s a $265k mortgage on the house. There’s a “due-on-sale” clause on the mortgage, that would accelerate the entire debt. And unless I can pay off the mortgage, it would continue to be on the house, and the lender could foreclose and take the house away from you unless you paid the $65k.

Foreclosures Are an Inefficient Market Clearing Mechanism

We do have one way of clearing the housing market: foreclosures. But foreclosures are an incredibly slow and inefficient method of market clearing, even in the best of times. Foreclosures are rife with negative externalities on neighbors, communities, and local government, and they can result in the market over-clearing because of information problems (foreclosure sale purchasers don’t have a right of inspection pre-sale, so they can’t tell if the plumbing has been torn out before they buy. No refunds. Even if the house is packed with dead cats. Yup. That’s a real case.)

What this means is that Mitt Romney is just delusional when he suggests that the solution to Nevada’s problems is to speed up the pace of foreclosures. The foreclosure timetable has gotten a lot slower, not least because of banks’ paperwork snafus, but there are also system capacity issues. And lots of fast foreclosures would have a firesale effect on prices and drive down prices further. We saw this in other markets in fall 2008. And yes, even delinquent borrowers have due process rights. Delinquent homeowners are people too, my friend.

Now this isn’t the first time in recent memory we’ve had a market freeze. In the fall of 2008, we had market freezes across the economy—markets weren’t clearing because sellers were concerned whether their buyers would be money good. We fixed that with a simple tool—the government guarantee. The government pretty much said it stood behind everyone major. That unfroze markets. But it didn’t unfreeze the mortgage market because the government didn’t stand behind the mortgages. Indeed, the thought of doing so wasn’t even on the table. Treasury and the Fed really only have one tool in their toolbox—throwing the financial wherewithal of the United States behind a faltering entity. That’s easy to do with a few thousand banks. But with millions of homeowners? Not in Treasury’s conceptual universe.

How to Deal with Negative Equity

So we’re left with the problem of negative equity preventing the housing market from clearing. There’s only one way to skin this cat. The negative equity has to be eliminated. Period. We hoped at first that we’d grow out of it. Fat chance. This is the anchor weighing down the ship. So now it’s just a question of whether we try to clear the market via foreclosure or whether someone pays to clear the market, meaning that the book values at which mortgages are carried are written down to market values or something close to it.

Who should pay? This is basic justice. Those who broke the economy should pay to fix it.  You break it, you take it. We bailed out the banks because they are indispensible to the economy as a whole, but that doesn’t mean that they shouldn’t have to pay now. $20-25 billion is a fine price tag for robosigning. But this isn’t and shouldn’t be about robosigning. Robosigning was symptom of a much larger endeavor in reckless lending, in which corner cutting was the order of the day, from MERS to securitization paper work to no-doc loans.  All of this was done to maximize profits and to enable a housing bubble that was hugely profitable to a limited number of financial institutions and with extraordinary collateral damage.  Simply put, there needs to be accountability for blowing up the economy.

Again, those who broke the economy should pay to fix it. And someone needs to go to jail. (We sent over a thousand folks to the pokey for the S&L debacle. So far we’ve sent a couple of small fry to jail. That’s grossly inadequate for justice. But that’s another matter.)  The point is that $20-25 billion is 3% of the book value of the 5 big servicers and just 6% of their market cap. Hardly “breaks the bank.” This settlement is a blip for them. If they can pay $25 billion and see their market value go up $40 billion because of the uncertainty cleared up, it’s a no-brainer for them. But when you look at BoA and see that it’s market cap is $65 billion against a book value of $220 billion, it shows that the market recognizes that BoA’s assets aren’t worth what BoA claims (or that BoA’s got huge unrecognized liabilities). Writing down negative equity would start to make book and market values converge, which is where they should be. And that’s important for getting banks lending.

The Latest Version of the Tom Miller AG Settlement Plan

Sadly, the Tom Miller-DOJ plan doesn't seem to do anything on this front.  As far as I can tell, the Tom Miller-DOJ plan is only about servicing issues. But while servicing is the consumer protection issue of the day, it’s a nothing relative to the scope of the harm involved. If one approaches this as a prosecutor, the major harm done wasn’t the servicing fraud. It was the pump-and-dump the banks did on the entire housing market. They recklessly inflated the housing prices and profited greatly from it. And the taxpayers, the government, and mortgage investors were left holding the bag. Tagging the banks for $20-25 billion and calling it a day would be nothing short of a disgrace. On this one the Tom Miller-led group of AGs need to need to play big or they need to pack it up and go home. Dicking around over $25B with five institutions that have a market cap of around $400 billion is just bush league. But then, that’s all they really can hope to get when they try to negotiate a settlement without doing any investigation. It’s frankly an abuse of the public trust for AGs to be settling claims without investigation.  

[update:  now we learn that this settlement is going to include a release of origination fraud claims against the banks in exchange for an additional $2B-$4B. It's Keystone Cops worse than Keystone Cops. For a while the AGs just looked incompetent in the settlement negotiations. But now it's gone from incompetence to outright malfeasance. To contemplate a release of origination claims that have never been investigated for an additional $4B is so shocking that I have trouble finding genteel words to say about it. To paraphrase Rep. Elijah Cummings, "Is Tom Miller a chump?" Why on earth does he feel compelled to even discuss such a patently bad deal?]    

How Many People Will It Help? Not Many. [Perhaps 60,000.]

Turning to the newest proffer on the table from the banks, they are offering to lower interest rates on performing, underwater mortgages that they hold on their own balance sheets. How many homeowners does that help and how does that compare to the scope of the problem? Let’s assume that there are no eligibility requirements other than that a mortgage be held by a commercial bank, that it be performing, and that it be underwater (which might require a fresh appraisal, but that’s another matter). Commercial banks hold about 20% of the mortgages in the US by principal ($2.12 trillion and roughly 50 million mortgages, we think). The big 4 hold $1.1 trillion in performing mortgages. That’s roughly 10% of the mortgages in the U.S. Let’s assume that 25% of those are underwater, so that’s 2.5% of the mortgages in the US ($279.2 billion or roughly 1.4 million homeowners) that might be affected.

So we’re looking at an upper bound figure of 1.4 million homeowners being helped. I suspect it will be quite a bit lower in practice.  The banks might not agree on which mortgages are underwater and might require various further requirements for getting the interest rate reduction, including waiver of claims by the homeowners. The effect will be to lower the number of homeowners helped, much as all of the various HAMP eligibility requirements made the program capable of helping very few homeowners.

[update:  Actually, we now know roughly how many homeowners will be helped. Perhaps 60,000. Yup. I didn't forget a zero there. it will be much lower.  The debate at present is whether there will be $2B or $4B applied to interest rate reductions.  The banks are offering $2B and Tom Miller is pushing for an extra $2B.  Now we could assume that lots of homeowners get a very small interest rate reduction. If so, it's a yawn. But let's assume that this money is being used to pay down interest rather than pay down principal--both are economically interchangeable, but only a principal reduction affects the balance sheet. (I recognize that one can argue with me on this, but if I'm wrong, it's not by an order of magnitude.  It's by a multiple of 2-3 at most.)  The average amount of negative equity on a home is $65,000.  Take $4B and divide by $65,000 and you get 61,538.  That's a pretty good measure of the number of homeowners who will be helped nationwide.  So if Tom Miller gets his way, another 30,000 homeowners nationwide will get some relief. 

If you want to test my numbers, try thinking of it like this.  With a $200k mortgage at 6.5% the interest payments in a year are $13k.  If the mortgage were refi'd to 4%, the interest payments would be $8k annually.  So a difference of $5k per year. Assume that this lasts 7 years.  That's a cost of $35k/mortgage. (I'm not going to try discounting to present values and am not sure if the $2B or $4B figures include such discounting, but I would guess not.)  So with $4B, we're looking at 114,000 homeowners being helped, and with $2B, we're looking at 57,000 homeowners. That tells me that I'm in the ballpark.  It might be 50,000, it might be 80,000, it might be 120,000, but it's no where close to the 11 million at-risk mortgages identified by Laurie Goodman of Amherst Mortgage Securities.  $4B is a rounding error when dealing with the US mortgage market.  At best this settlement helps 1% of the at-risk population.  How do you think the rest of them are going to feel about their AGs come next election?]

The proposal is also terribly arbitrary in who it helps. You get some help if your loan wasn’t securitized. But homeowners don’t choose whether their loans are securitized. That means if you had a Countrywide Loan, you’re SOL, because there’s a 96% chance your loan was securitized. Given that some lenders had much bigger shares in certain states, the relief will be geographically uneven. I would think that California, for example, would come up short on this deal, even within the context of it being a bad deal in the first place. 

How Much Will It Help?  Not Much.

What about the substance of the relief? The plan seems to be to refinance these underwater, but current homeowners into new loans. Whatever the transaction form, the proposal is effectively for payment mods (albeit with the elimination of all claims and defenses that could have been raised regarding the original loan). To repeat, these refis, are payment mods, not principal write downs. We know that payment mods just don’t work very well, especially if there is deep negative equity. Why are we repeating the same bad idea here? It avoids the banks having to take a write-down (interest shows up on the income statement over time, not the balance sheet).

The mod will make the mortgage more affordable, but will the monthly P&I payments be market rate for the property? Not a chance. The homeowners will still be paying too much for houses in which they have no equity. They won’t be paying quite as much as before, but they’ll still be overpaying. If they run into any trouble and encounter the 4 “D”s: divorce, disability, dismissal, and death, the home will go into foreclosure. These are life cycle events that aren’t going away. Payment mods might have some economic stimulus effect, but this plan isn’t going to save very many homes.

And it’s also not clear what this sort of relief has to do with servicing, if that is what the settlement is about, as the servicing problems are really much more on securitized than portfolio loans. Requiring short sale approval if the sale offer is within 5% of current appraised value would be a much better approach if you want to try to deal with negative equity. It would let borrowers get out of their homes if they wanted to leave.

So the newest feature to the Tom Miller plan would help very few of the underwater homeowners around and won’t help them that much. And this is front-page Wall Street Journal news why? Every time the Administration comes out trumpeting a breakthrough and then fails to deliver something that helps the majority of homeowners it takes a political hit. Haven’t they learned this doesn’t work?

I don’t know what is motivating Tom Miller and the AGs who are going along with the settlement or the DOJ or the Administration in general other than the desire to make this problem go away (US Attorney General Eric Holder has a bit of a conflict in all of this since his old law firm, Covington & Burling, issued the infamous MERS insurance policy opinion letter, blessing that operation--has he recused himself?), but the AG settlement plan that they’re proposing is a travesty. It won’t help fix the economy in a meaningful way, much less address the scope of the wrongdoing: the crippling of the US economy. That’s serious harm, and it calls for a serious remedy. This ain’t it.


Who should pay? This is basic justice. Those who broke the economy should pay to fix it. You break it, you take it.

I would argue that irresponsible home buyers broke the economy, not the banks (although they were the drug dealers, they forced no-one to take out an interest-only ARM with no docs at the point of a gun). So why focus all the ire on the banks? I say make the homeowners pay instead, through bankruptcy, seizure of assets, or garnishment of wages.

Interesting remark. So we shouldn't go after drug dealers either then, we should only prosecute the drug users and not the sellers?

If a mortgage was an option on future price growth, people would walk away in far greater numbers. The quirk of the housing market is that a house is both a financial asset and a consumption good. If I walked into a bank and asked for $500,000 for thirty years at 4% to invest in equities and bonds, they'd tell me to get lost. Why can we gear far less liquid houses to such an extent?

A healthier housing market will require a healthier rental market so that those neither competent nor willing to but can enjoy security of tenure and so that consumers can easily be separated from speculators when prices get out of control.

The obsession with housing as an end to achieve means has to cease.

The solution is to modify and/or refinance troubled mortgages into 1 to 2% interest rate, adjustable rate mortgages (ARM's). These ARM's would be structured with low rate caps to limit the risk of higher rate increases. Delinquent borrowers who can't afford their current mortgage would realize a 40% drop in their payment. Current borrowers with negative equity would be required to direct the savings of their lower payment to pay down principal early - in many cases reaching positive equity within 5 years.

For more details and examples on how to use low interest ARMs to solve our mortgage problems, see here: http://www.calculatedriskblog.com/2011/10/lawler-for-seriously-troubled-loans.html
and here: http://www.kentwillard.com/5-ducats/2011/08/solution-to-mortgage-housing-markets.html

Helping borrowers pay down their own mortgage is preferable to debt forgiveness, which is a precedent that will discourage future lending. Something to consider is that the credit risk of many mortgages is borne by the government, pension funds, and mutual funds so that debt forgiveness would ultimately cost average consumers as well as big banks. Besides, aggregate negative equity far exceeds the bank's ability to absorb the losses.

The fairly simple solution of low interest ARM's has been held back by ideologues who think in zero sum terms and want to punish either the borrower or the lender. The ARM plan has also been prevented by mortgage investors who short sightedly won't offer existing borrowers lower payments because they consider the loans high risk - even though it is much lower risk than their loans are at their current payments. Lastly, refinance plans have been successfully lobbied against by agency MBS investors who do not want their higher interest rate mortgages to pay off early, even though these investors have been bailed out for $150 billion by taxpayers, and refi's to lower payments would likely reduce future taxpayer losses.

Mr. Chow, Drug-dealers provide a service; they exist in the economy, they sell a specific product, and it is up to drug-users -consumers- to find them and do a deal. The banks did more than this. They actively sought out people who they knew could not keep up with a mortgage, knowingly sold them a mortgage who's rates would shoot up to usury in 6-18 months, knowingly deceived those buyers into thinking the lower initial rate would either be maintained, or easily covered by the rising value of the house. And the banks didn't stop there; they not only actively sought out new customers who did not understand the product they were being sold and could not afford it, they actively pressured current customers with safe, fixed-rate, perfectly serviceable mortgages to switch to these designed-to-default products.

In case that isn't clear, I'll make it explicit; the banks and the mortgage originators, in the middle of a real-estate bubble, intentionally created a product that would first drain the savings of those who bought it, then default, leaving the house in question (which they assumed would now be more valuable because only about 5 people believed there was an actual housing bubble in the US, and none of them worked in mortgages) in the hands of the banks. They then sought out and sold this product -intentionally designed to create default and insolvency- to those consumers least likely to understand it, least able to afford it, or owning the most marketable residential properties. They committed fraud, as surely as a man who overs to build you a new roof, tears off your old one, asks for an advance, then disappears.

In actively seeking out, identifying, and targeting their fraud on specific demographics most likely to fall for, or profit the banks through, said fraud, they committed a kind of criminality no drug dealer ever has. They didn't serve a market; they created one, and one deliberately designed to harm the customer to boot. Comparing drug-pushers to the banks and mortgage originators at the heart of this mess is to insult drug-pushers.

"I would argue that irresponsible home buyers broke the economy, not the banks"

Boy, are you missing the point. The point is that the home financing and real estate industries bloated the market through unprofessional, if not criminal. conduct. Consequently, the *vast majority* of people who bought a house within a certain time frame are underwater.

The point is to adjust their mortgages to the real market, not the fantasy market of the criminals. And, I would add, make them vanilla 30-yr mortgages if that's not already the case. Guilt or innocence is not an issue here.

At that point, if there are still people who can't pay their real-market rate mortgage because they should never have had one in the first place, well, then they just didn't manage to win in the end.

The unprofessional and criminal conduct that bloated the market never should never happened, but given that this organized crime ring DID do it, what is wrong with releasing their prisoners?

And, of course, bringing charges against the mob.

The only way out of this is the refinance everyone to shorter amortization loans.

The government needs to step in and give borrowers who can still afford their mortgagees (whether underwater or not) a 1% 10 or 15 year fixed mortgage. The monthly payment would be about the same as the payment on a regular 30 year amortized loan at current rates. The big difference is that most of the payment is actually goign to pay off principal, not interest to the banks.

By doing this the borrower has a chance of paying the principal back so that is a positive (we eliminate the moral hazard of just wholesale principal forgiveness) and also rebuilding equity even at lower overall values. In addition, it gives people an incentive to not say screw it and strategically default.

In five years we would be out of this mess because existing homeowners would then be able to sell at lower prices since they owe substantially less principal and thus avoid short sales and foreclosures. this opens up inventory for the new buyers.

There is nothing that we can do for the folks who are out of work and have no income though.

Wow, Mr. Chow, were you asleep during 2003-2007? Or were you one of the ones packaging deals and pocketing commissions? Here's reality:

By 2003, the middle class was already cooked to a crackly crunch, although it was still lurching around like something gross from a George Romero movie because it hadn't gotten word of its demise. The markets started recovering, but jobs for real people consisted of working project to project with no benefits. Fewer and fewer people could afford to retire or go to the doctor, and costs of trivialities like food and housing kept increasing. Hence, increased debt load.

A lot of people realized they had to get out from under it all somehow and filed bankruptcy. Well, we couldn't have that, so Congress passed the great and glorious BAPCPA. Frankly, this was intended as a headshot at the 99% and should have had as a a preamble, "The way is shut. It was made by those who are rich, and the rich keep it." Thanks to a lot of creative work by debtors' attorneys, it hasn't quite gone that way yet, but the 1% are still working on it.

Fortunately (Hah!), "relief" was on its way in the form of a rising real estate market that was being driven not by buyers but by an exploding investment pool. Demand went up because financing went crazy. Prices went up because payments went down as money got cheap because the finance companies found other ways to get their cut. Yes, borrowers weren't forced to borrow, but they aren't the ones who controlled the appraisers, the insurers, the repo agreements, the securitizations, the tranching, the hedging, the debt swaps, the credit rating agencies, and the regulators. Usually, they didn't even write their own loan apps. The lenders knew what was going on far better than the borrowers, but they kept driving it because they were living off front-end-loaded paper.

So honestly, who was driving the bus when it went over the cliff? Sure, borrowers used some of the loan proceeds to buy stupid and frivolous stuff, but 1) it is apparent the loans themselves were stupid and frivolous and that the lenders knew it but were too happy to go on making them because the shark had to keep swimming, and 2) you'd probably be surprised how much of the proceeds went to stupid and frivolous stuff like retirement accounts, medical bills, and college for the kids.

All gone now, though, and the borrowers are paying, contrary to your allegations. No more papering over the endless budget shortfalls with home equity. If the house itself isn't gone already, it will be. No real job, but no retirement either. No college for the kids except via a boatload of nondischargeable debt that renders the degree economic nonsense. And the hits keep coming. Oh yes, the borrowers are paying. The ones who aren't paying are the ones at the top of the pyramid who ran the show, raked in the benefits, and remain unscathed. So it really isn't that hard to see why ire is directed at them.

But Adam, the Ueberklass doesn't WANT to fix the negative equity problem. Serfs are much easier to control if they owe their souls to the company store.

I was underwater in my first home for 6 of the 9 years I owned it, as I bought way too early in a long downcycle. It had zero effect on my spending during that time. I could cover the mortgage because I had a job that paid what I expected it would when I took that mortgage out.

The $700B of negative equity described is large in absolute context but the magnitue pales in context. Per a quick search on the web, there are no 2011 estimates of total residential real estate value in the US but I see 2009 numbers of around 19 - 20T and if I haircut that even to 16T, total residential mortgage debt is around 10T, leaving 6T of positive home equity, which implies that there is one subset with at least 6.7T of positive equity and that is what the .7 is against. If you zero out all the negative equity through debt reduction, you wind up with 7.4 T or a 10.5% increase. That doesn't seem to me like "the biggest problem in the United States economy". Think about it: if you had 5% inflation for two years you would get to the same result for the economy, although the distribution would be different. That seems like a moderate deviation, not a gigamundo problem. $700B is of course also 30%+ smaller than the federal deficit so again, by way of comparison, hard to say this is the "biggest problem".

I fundamentally disagree that the housingbubble was caused by a bunch of banks. I think it is abundantly clear that it was caused by a combination of loose monetary policy, particularly after the 2001 recession, and by bipartisan housing policies that strove to win votes by substituting home price appreciation and home ownerhsip availability for economic losses being sustained due to globalization. The financial industry is a mere intermediary in the delivery of those policy effects.

Having no fear about a "due on sale" clause in conjunction with the nemo dat principle in your recent article is a dangerous concept to someone who understands creative financing, securitization and all the rubber stamped foreclosures of the last few years. Sounds like a moral hazard to a real estate investor. Awesome site. Keep up the good work!

For those who would blame the homeowners, yes, there were some avaricious homeowners. Credit is a lot like the addict-pusher relationship. There's co-dependency. But I wouldn't assume that 100% LTV financing is a sign of a homeowner acting badly. It's just as easily a sign of property values having been bid up and a family concluding that they only way they can be in a half-way decent neighborhood is to go up to 100% LTV.

For those pushing refis as the solution to everything: I've got no problem with refis, but they're a kick-the-can-down-the-road solution. It will help with foreclosures, but low payments and no equity means you've got problems whenever there's a life cycle event. Russ's point that we could do shorter-term, but lower rate mortgages as a way of eating through negative equity fast is right, but let's also recognize that someone's got to pay the tab for that. Who?

mt--Susan Wachter and I debunk the monetary policy and government policy arguments pretty conclusively, I think, in our Housing Bubble paper. The timing just doesn't work on monetary policy. And monetary policy doesn't explain why money flowed to private-label securitization. The government policy story runs into a major problem as it can't explain the CRE bubble.

But let's get to the numbers. I think you're viewing them wrong.

First, the relevant figure isn't the $16T. It's more like $8T. Roughly half of homeowners own free and clear. (This assumes that the "residential real estate figure" might excludes rental property, which is residential usage, after all. If so, we're talking about an even smaller number. So the negative equity issue is concentrated on $8T or less. $700B to $8T isn't nothing. And that $700B is likely concentrated on a subset of that $8T.

Second, even for those with positive equity, their homevalues are much lower than they had been and they can't easily borrow against them.

And here's the big point. You don't need everyone pulling back on their spending for the economy to get into trouble. You just need a sufficient part of the population pulling back. If consumer spending is 70% of GDP, we need that consumer spending to be growing every year for there to be economic growth in the US. If everyone scaled back their spending, we'd be in the Great Depression. But if even 20-30% of the population is cutting back spending, it's really hard for the economy to have more than the most anemic growth. That's why this is at the heart of everything and is the "biggest problem" in the US economy.

It's simpler that that.

1. No homeowner would be foreclosed if the housing market hadn't crashed. They would simply sell the house.

2. No homeowner crashed the housing market.

3. Therefore no homeowner is to blame for not being able to sell their house instead of being foreclosed.

I would argue that irresponsible home buyers broke the economy, not the banks

Professor Levitin --

Could you explain the legal analysis you go through to conclude that the measure of damages in an unfair trade practices case is the amount of negative equity in the housing market?

Matthew Budzik, AAG, GULC '98

Adam, there of course would be a cost to the current investors who are getting early payoffs. However, they are getting their money back and foregoing the interest. Given how much we have given bailed out banks, at this point I say screw em. Time for them to take one for the team. They can put their money somewhere else. I don't think it is a big deal. No different than any other refinance risk.

However, there is no way we are going to inflate home prices back to allow folks to recoup their equity losses en masse. So the only way to fix the problem is we need a program that is set up so they can have a reasonable chance of actually quickly paying off the mortgages which is why I prefer to see an ultra-low rate shorter amortization plan pushed for homeowners who can still afford their mortgages but just may be underwater.

The problem with low rate refinancing as it has currently been done is that we are still pushing 30 year mortgages. It will take forever and a day to actually make a dent in the principal even though the homeowner may be saving a few hundred a month. Just look at an amortization table.

Saving a typical homeowner $150-$200/month won't help the economy dramatically, especially if that homeowner feels trapped to a huge nonliquid asset like a house that may be $50k underwater.

However, with a 10 year or 15 year loan at like 1 or 1.5%, the homeowner actually has a chance of reducing the principal to a point where they could actually sell without having to bring cash to close or short sale. Plus, the mere opportunity to actually own the home outright makes not strategically defaulting less of an issue.

I guarantee in five years we would be out of this mess since we would no longer have the over hang of underwater mortgages which is why there is absolutely no movement in the RE markets right now. Sellers can't sell and buyers can't buy.

The focus needs to be on homeowners who still can pay mortgages. Secondarily, homeowners who have lost jobs, etc need an expedited foreclosure process.

All I would want to know is what it will cost to clear the market of the underwater mortgages and over what time period that could be achieved without destroying the economy.

Who pays? anyone with a stupid mortgage should bear some of the costs for having gotten into that mess. Banks which bought or offered stupid mortgages should pay a share. The public, via taxes, should pay a share (like sugar to make the medicine go down easier). People with underwater mortgages which were sound when bought should bear no penalty at all.

So, of all extant underwater bad mortgages, how many are there, how far underwater (someone here said $65K avg), how many are bad mortgages requiring banks & owners pay something, how much is left over for the gov't to pay?

Add it all up and I'm guessing there's about $700B underwater with about $400B banks & owners should pay (perhaps $25K ea per underwater bad mortgage) and no easy way to push this through in less than 4 years.

Sound about right?

Adam, the big banks are responsible for the mess, however even small players are responsible,from the minimum wage robo signer, to the get rick quick retailer to folks who went around minority neighborhoods, its hard to really blame "the big banks" solely, in addition mortgage backed securities were invented by bright folks such as mathematics who came up with crazy derivatives and such, the real estate industry wants you to believe that the housing industry needs to recover rather than stabilize for economic benefit, nevertheless
two issues are here, rents are a still a strain on folks as renters do not get the same delay tactics as homeowners, yet if home prices are falling, why do renters still face difficulty, clearly unemployment is an issue, but given dramatic home price drops, you would expect those who still have jobs to face lower rents.

Second, negative equity is a problem, folks will not move to find a job, and may take a pay cut, foreclosures cause more problems then not, but folks are less willing to give up the key even with incentives , however do solutions cause more problems that not, my main concern is that banks will lose more money, foreclosures cause other homes to drop, damages to homes and crime cause money problems that are hard to fix, money is "lost or destroyed", in the sense of a a crop
failure or drought, its easy to foreclosure and destroy or home then build it, surround properties have a domino effect,etc

There are no easy answers, however it is unfair to require folks who are current and have saved money for a down payment to pay, and obama is doing that, part of obama's failure is that many loans are jumbo loans, and low interest rates do not mean the bank will give it to you.

On the other hand, with all the talk about a continued bad economy, it is time to revisit this

I still believe that the key thing to do to resolve the crisis is to force-modify (initiate cramdowns) on ALL real estate loans that are underwater, and also modify to current FIXED rates. A solution like this would fix the problem almost immediately. The elected officials (who were the facilitators of this mess), the banks, and the "bigs" none of them want this, but if TARP had been written to require this, and no funds disbursed unless the banks and other players acquiesced, we would be in the midst of a real recovery now. It's time to get with the plan. Such a plan could also include a "get out of jail free" card for those criminally liable--in other words, simply do a "system reset" -- which isn't such a big deal right now anyway, because TRILLIONS in debt ARE going to be repudiated by countries all over the world, or the investors will accept major haircuts (think Greece--they are twisting in the wind right now, but what else can they really do?). Such a plan is called a "moral hazard," but is it a moral hazard to fix the problem with the same money that created it?? I think NOT.
Steve Bradley
See my latest blog post:


HA! I've been writing about NEGATIVE EQUITY and the effects on home owners and the economy since about 2009.

This involves more than the home owner. These home owners who are trapped by negative equity, thos who lost their homes to short sals and foreclosures are not participating in the U.S. economy.

They are, sadly, the forgotten millions who, without their economic participation, the U.S. economy will not improve.

Sadly too, Congress, the Executive and the economic powers are blind to this loss of economic participation.

Take 25,000,000 American citizens OUT of the economy and what you get is precisely what we have.

This group has no lobby, no representatation in Congress and no voice in economic policy. They are simply trapped by negative equity or already ruined by foreclosure or short sale.

Nothing new here. Just a group of neglected citizens.

Banks gave out shady loans, greedy buyers overspent, and the rest of the nation has been feeling the pinch...some real estate markets will take years to recover.

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