Friday, November 14, 2008


Allan Meltzer suggests an increase in demand for housing as a way to prevent mortgage defaults.


Jim said...

His suggestion is a short term fix to a long term policy problem: too much credit. Once demand is artificially inflated people will buy houses, then after the incentive is dropped. People will stop buying houses lowering the prices again, and we are back at square one.

We just need to let the markets adjust to rational levels, get the government out of our way and let people make their own judgements on their self interests rather than responding to some obscure policy maker's attempt to interfere in the market.

David Curry said...

I realize there are honest, hard working people who have fallen upon hard times, and are losing their homes to foreclosure as a result. People that wish they could pay their mortgages, but for one reason or another, be it medical problems, or a lost job, they cannot. To those people, this post does not apply. My take on the foreclosure "crisis" affecting our national housing market and more importantly our national mood is admittedly a bit of a cold one. I have written on this before, and the truth is that I do not believe this foreclosure crisis is a result of people falling on tough times. It's a result of people choosing to walk away from their mortgages. Easy proof of this is that the majority of homes in pre-foreclosure are not listed on the open market. Follow me for a bit.

The mortgage note is a unique creature. You promise to pay the bank monthly payments, they give you money, and their money is most often secured ONLY by the real estate that you're purchasing. So the bank gives you the money in return for the right to take your home if you don't pay. This practice is built on trust, the bank trusts that you'll pay the money back. The problem arises when the American consumer breaks that trust and refuses to pay. If you don't pay, the bank forecloses on your home, but usually only several months after you've stopped paying them. Foreclosure is not bankruptcy. You live rent/payment free for upwards of 6 months while the bank works the foreclosure channel. You give them the house, they destroy your credit, and you keep any uncollateralized assets that you have. Your credit? Who cares. You're going to be a renter for a while anyway. You could literally have a $250k mortgage, $250k in the bank, and $50k worth of paid for cars. What happens when the bank forecloses? You give them the house that probably isn't worth the amount of your mortgage, you keep your $250k, and your cars. And now you can go to Cancun in January because that annoying mortgage isn't hanging over your head. Way to go American consumer.

The banks are creating their own problems as well. We all know about "short sales". A short sale is when a homeowner owes $200k on their home. They have a hardship and they get an offer to sell their home for $170k. The bank would have to agree to release the homeowner from the $30k worth of debt that the sale won't satisfy. The bank should do this. Do you hear me banks? DO THIS! But they generally won't. I've been involved in short sale closings this year where the bank has sold a home for $100k that they were owed $190k on. I've also tried to negotiate deals with banks that end up going nowhere. I had a homeowner owe $168k on a home. They had an offer of $125k. The bank said no to the short sale, and as a result that property is in foreclosure. I wouldn't be surprised to see that home sell, once it's an REO property, for less than the $125k that they were offered.

The problem as I see it is one that needs to be dealt with quickly, and not dealt with on a Governmental level. The market needs to self correct. It's trying to do just that, but our government just doesn't want to let it. Consider Obama's promised 90 day moratorium on foreclosures. The concept in this is that people will get their acts together, renegotiate with their banks, and start paying on their notes again. That's the concept, but that's not what will happen. People will just live in their homes, rent and mortgage free, for those 90 days, and all the moratorium will do is put a delay on the housing recovery by stringing out the foreclosure filings for another 3 months. There will be certain people who will take advantage of the 90 day freeze, they'll renegotiate their note, and they'll stay in their homes. I would bet that this won't apply to more than 5% of the pre-foreclosure loans. Remember, restructuring the loan means changing the amortization or the interest rate, but the bank still wants that money you owe them.

The other issue is that most banks are not willing to renegotiate a homeowners mortgage until they are at least 90 days late in their payments. This perpetuates the problem. Foreclosure notices were up 25% in October from October 2007. Why should this be surprising? Banks are forcing people into foreclosure before they'll be willing to renegotiate the loan. By allowing this to happen the banks allow more negative press for the housing market, which in turn drives prices and demand down, which in turn makes more people decide to stop paying their mortgages. Real smart.

Here's the Dave Curry plan to fix this. First, banks need to renegotiate any loans they can, and if they don't want to, get on with the foreclosure process. We need to flush this REO inventory out of the market as quickly as possible. The great news for Walworth County is that foreclosures haven't impacted us much at all. We're lucky. Perhaps by the end of 2009 we'll see the vast majority of this inventory out of the market place. Second, Washington needs to understand why this foreclosure boom is happening. It's happening because people are choosing to walk away (again, not all, but a vast majority) from their homes. If you owe $500k on a home that's now worth $300k, why keep paying? Valuation that was lost in 18 months might take 48 months to gain back, so why pay the juice in the mean time?

Washington needs to understand the psychology of what's driving this phenomenon, and until they do, they'll keep trying to fix a market that's trying to fix itself.

Andrew said...

Hi Rok,

I'm emailing you in regards to a followup email I sent you a month ago in response to a partnership, have you had a chance to think about it?

If you have any questions or would more information, please advise me and we can go from there.

Kind Regards,
Andrew Knight