The Mortgage Crisis: Just Stop It
The mortgage crisis of today is that rare public policy issue that lends itself to a simple and utterly foolproof prescription: Just stop it. End it. Shut it down.
After idly observing months of human misery, the Bush administration finally has decided to sit down with the business community and negotiate a fix to the foreclosures that are wiping out communities around the country. But it's too late and too little. The fix they are proposing would cover only a very small percentage of the mortgages at risk. We need real leadership from government.
Right now, we need a moratorium on subprime mortgage foreclosures. Guaranteed, that will dam the flood of Americans losing their homes and their life savings. Government can do this--and fast. It would be nice if it were done with the support of responsible business leaders, but, frankly, it's not necessary to have the business community on board. A foreclosure moratorium will give real incentives for lenders to restructure loans on fair terms.
Instead, the administration is doing what it's always done to address the consequences of the economic free-for-all it espouses: "The public is restless. It's time to offer something that changes almost nothing but looks like we've done something for the people who have nothing."
In the past few months, I have traveled the country meeting those people like Steven Levine in Toledo, Ohio. Steven is about to lose the home he has lived in for 48 years because of home equity loans he is unable pay. Steven is living in a home in northern Ohio with no heat. The power will be turned off within a week. His mother has Alzheimer's and is in a care facility. Now both have to move into his sister's small home in South Carolina. He's not sure how he'll afford placing his mother in a new care facility.
Steven is literally one in millions. Around the country, families are seeing their life savings evaporate along with their dreams. This must end now. We cannot have homes foreclosed and fear stalking our communities while banks and government agencies negotiate over loan-restructuring programs. Only a moratorium will create real incentives to restructure loans. That is the first step.
Next, the mortgage industry and government must create a structured program providing for the replacement of teaser-rate loans, such as 2/28 adjustable loans, with conventional 30-year mortgages at the teaser rate.
Servicers must renounce agreements that reward mortgage companies for foreclosing on homes rather than encourage refinancing or other workout strategies.
And servicers must commit to publicly reporting, company by company, how many subprime loans they are servicing, how many have reset, how many have been restructured and how many foreclosures are occurring and where.
Finally, there must be massive outreach under federal government auspices to subprime borrowers to let them know how they can keep their homes. The Treasury Department has encouraged this type of outreach by private groups, but this effort should be much more extensive and should be clearly governmental in nature.
These are the steps necessary to stabilize our housing markets, prevent cascading defaults and safeguard our economy. They also are the steps necessary to protect the financial institutions and the investors, the very people who will likely complain about government interference.
Ignore those people. Let them have their say and then turn around and govern. The housing financial crisis is not just the problem of a few poor--read powerless--families. It is threatening to spread into a full-blow recession that will cut a swath through the economic lives of people across this country. Everyone in America will feel the pain. They will demand action. But the damage will already have been done.
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You are not simply seeing "a meltdown of subprime mortgages.
You are seeing the starting strokes of what will be known as the "Great Depression of 2008."
Mark my words.
who ends up paying for these bailouts? retired taxpayers on fixed incomes who live in apartments?
why should the responsible and also financially hurting pay for the irresponsible and financially hurting? this whole situation is ludicrous.
I would need to know more about why the Steven Levine you cite re-fi'd his home to the point he could not afford the payments..
How many people facing foreclosure just spent and spent..nee
and how many are truly victims. I, for one, need for information.
As a lender you are faced with these options:
a) Allow the mortgage payments on a loan without any certainty of being paid the principal. That means in the event of a continuous deflation of property values your loan becomes more and more worthless every day.
b) Cut and run now. Take your losses. Get whatever liquidity you can off the situation and reinvest somewhere more wisely with the hope of making up for the losses you have incurred because of your herd mentality.
c) Do option "a" described above but with the caveat that the government will somehow make up for any losses you may have on the loan from this point forward. That means, we are hoping in five years there is a rebound in the real estate and everyone becomes happy again.
Without the government anteing up to cover the losses, the loan owners will not assume the risk. They cannot because there isn't only one person deciding the loan's fate. It is a complex financial institution. The government will not guarantee these loans because the taxpayers will not foot the bill for foolishness of others.
For all those who insist that it's all the fault of greedy or ignorant buyers, consider this one particular aspect:
20 years ago, when you bought a house, one particularly tense moment was waiting for the appraisal results. If the appraisal came in good, you would get the house. But if the appraisal came in too low, you lost the deal - the bank just wouldn't lend you the money.
Although this provided protection for the banks, it ALSO provided significant protection for the buyer, who was prevented from paying way too much for a property. Appropriate, too, since it was the buyer who PAID for the appraisal.
A significant part of this arrangement was that THE APPRAISER DIDN'T KNOW THE PURCHASE PRICE! and therefore had to determine his answer based on a realistic market examination. If it came out too low, everybody got mad at him, but if an appraiser consistently came out too high, the banks would stop using him.
Nowadays, the buyer STILL pays for the appraisal, but the appraiser knows exactly what the purchase price is, and golly gee wiz, every home sold is appraised for exactly the purchase price! Good for the mortgage companies, but not so good for the home buyer or the m-paper investor, either.
Sweeney - If you really want to help folks ...
CHANGE THE BANKRUPTCY LAWS !
I am looking forward to this moratorium on subprime forclosures.
I have a 2-28 arm on my old house which is for sale. I am tired of having to pay the mortgage on the thing.
Instead of paying the mortgage, I will invest my money in some interest bearing vehicle. Since the bank cant forclose, I guess they can just go pound sand.
I sit around and talk with others in the mortgage business and I can state with certainty that a forclosure moratorium is the dumbest idea I have ever heard!
Terrible idea. If you're going to propose debt relief to help the poor, then start by cancelling the credit card debt of people who are too poor to buy a home. Or how about cancel the car loans -- declare them paid in full and let people keep their cars.
Most of the people who are currently in foreclosure bought a home within the past few years with an interest-only adjustable. They took a bigger loan than they could afford, to buy a house they could not afford. They put no money down. From the time they "bought" the house, they have paid zero other than interest on the loan, and have no equity whatsoever. Their entire monthly mortgage payment has been written off of their taxes, which has further depleted our treasury. In many cases, they have paid less to "buy" the home than they would have paid in rent.
Let the foreclosure proceed. Let the bank take back the overpriced home. The people who "bought" the property can go rent for awhile. The bank will resell for maybe 2/3 of the amount of the loan. The previous owners can come back and buy the same house in a few years for hundreds of thousands of dollars less than the amount of their existing loan.
Saying that people who lose their home to foreclosure will lose their life savings is ridiculous. They don't have any savings, which is why they can't pay the mortgage. They couldn't afford the mortgage to begin with. There is no equity in the house. The "owners" own nothing. Give it back to the banks and let them re-sell and take the loss. Don't ask taxpayers to bail out the banks, which is exactly what is proposed.
There is enough blame here to go around. Yes, people bought houses they couldn't afford - either for investment or simply because every kid wanted their own bedroom. However, the Real Estate industry in all its parts openly fed this consumer reality-blindness. Many people who are now going into default were told that if they got into a house via an adjustable mortgage, the upward spiral of house values would make a refinance to a fixed rate mortgage possible in the future.
At times like these, I shudder at the incessent talk about the advantages of the "free markets." Why wasn't the first bank that offered a credit card (let alone a home mortgage) to someone without a job allowed to do so? Where was the banking regulators? They should have shut down these practices the first time they were offered. And why are banks, etc. even allowed to sell mortages to outside investors? And what became of the down payment?
There is no plan that can fix this problem short of freezing all these mortgages at some level and that's not going to happen.
Let's see...
A guy that gets paid a commision for selling a mortgage tells someone " You need an ARM. You'll get a really low rate, and before it resets you can refinance into a low fixed rate. By then your home will be worth soooo much more, the equity alone will GAURANTEE you the fixed rate loan". Do you think that salesman makes more from the ARM than a fixed rate loan?
The person (being naive) believes this and signs the contract. The unscrupulous person gets his commission, the buyer gets a home that is more than he ever thought he could afford.
That naive person is supposed to accept "personal responsibility" for signing the contract. What of the unscrupulous salesman?
The big banks "bundle" mortgages and "promise" a return on an investment. The naive person is supposed to accept "personal responsibility". What of the big banks, or the investor? Isn't "risk" supposed to be inherent in any investment?
As housing prices skyrocketed, builders couldn't build homes fast enough. Young entepreneurs (republicans) bought houses to flip, looking for a "guaranteed" profit. The ones that actually made a profit sold those homes to those naive people. The ones that couldn't will file bancruptcy, let the house be foreclosed and move on. The naive person bought a home, not an investment.
The naive person is supposed to accept "personal responsibility" What of the builders who helped fan the flames? What of the entepreneur who "expected" a gauranteed profit, which only helped to push prices even higher?
If I read correctly up to 2 million ARM's will reset to higher rates over the next two years. If even half of those homes are foreclosed the inventory of existiing hoomes will be so high, that there will be no need for new home construction for quite some time. There goes the construction industry, and all other industries that help service it.
And still we hear these me firsters saying "screw them, give me mine. I don't care if they have to move their whole family out onto the streets. I WANT MINE!"
Conclusion
Everybody was gauranteed something, but only they (the me firsters) banks and investors are to actually realize anything. The poor naive person is screwed.
They probably claim to be christians, too.
Imagine that.
There is plenty of blame to be spread a round to all concerned. Yes, even the naive person who signed the contract. As far as the me firsters are concerned however the naive person is the only one responsible, and should suffer ALL of the consequences.
By the way, the me firsters are also the ones who ran the tech bubble up so high and then came crying when it crashed. They then RAN to the housing sector, because as we all remember real estate is the only "secure" investment. They made sure that is no longer the case. Didn't they? They also made sure that the price of an "average" home is out of the reach of most people. Even now.
And also in some new law, mortgage officers and their companies who have supervised the lending of these atrocious loans ought to be forced to pay back the "points" they earned when they allowed the loan. Pay back to the "former" home owner!
When we are ready for it we should remember FDR's words at his first inauguration, blaming the economic crisis on bankers and financiers, the quest for profit, and the self-interest basis of capitalism:
“ Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence
Let me repeat this last sentence: The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit. Given that the Republicans pretend to have religious values, or pretend to respect the Law and the Constitution, their pretense is troubling. Given how many voters believe their leader's true nature is revealed in their words professing Faith or Strength or Virtue, instead of recognizing that the fruits of their lives are more apt indicators, the time for applying Roosevelt's prescription is not yet at hand. The financial system must first collapse for the true bankruptcy of ideas from these incompetent leaders is felt and understood by the public.
what then?
Why does Bush have to fix it? When are these
business institutions going to sit down THEMSELVES and start working out equitable
standards and preventions and safeguards etc?
Tent, 400 dollars...
We retired early (my health), sold the house in 2000 and traveled for a time. When we stopped traveling, I took one look at the price-income relationship and laughed. No way were those prices sustainable and the weird adjustable mortgages scared me to death. We opted to rent for 58% less a month than the cost of buying the house.
A house in town has been for sale for 2 years. If I had known that anyone was going to come up with these crack-brained schemes being offered by both Reps and Dems I would have bought it using a teaser rate option-only ARM. Then when I couldn’t pay the real payment, the ‘bail 'em out' crowd would have jumped in.
Too bad – I would have just loved to have had the house on 6 acres right on beach on Lake Michigan. Unfortunately, unlike the people you seem to think were ‘victimized’ because they deliberately spent more than they could afford, I figured out pretty easily that a $2,200,000 beach house was not in the budget.
We had the sense not to follow the idiot lemmings off the cliff. I want money too. I want to pick out a house and then make the lender hand over the price to the seller but then have to reduce what I owe to what I can pay.
Let those who bought more than they could afford or who used their houses as ATM machines for ‘stuff’ end up in foreclosure. What is so terrible about that? They will not be homeless – they will just have to rent.
The median house price is close to 5 (FIVE) times the median income!! The median income can NOT pay for that house either in terms of a mortgage or rent.
Housing prices went up so much faster than income that only the top 20% of incomes can reasonably afford a house because of the insane speculation that drove prices up by 200-400% in less than 5 years.
Prices need to, and must, come down in order to recover.
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