Bernanke seems to be slowly working his way to the conclusion that the economy and the finance crisis can’t be fixed without helping homeowners. As usual, he’s late to the party, but I suppose better late than never. His proposals, such as they are, are vague. Let’s run through how it has to be done if it’s going to be done right.
1) The face amount of the mortgage needs to be reduced by the long term value of the house, as if the housing bubble hadn’t occured. This is both to reduce foreclosures and to help reset housing prices where they should be.
2) Payments need to be set at a maximum of about 30% of income. This is the decades old rule of thumb for how much a family should be paying for housing. It’s also important because the more a person is spending on housing, the less they’re spending on anything else, and consumer spending recovering will be important to any lasting recovery.
3) Any government mortgage needs to be senior, with no other debt able to supersede it.
4) Mortgage contracts going forward, sold by anyone, need to be defined by the government as to what the terms can be. Maximum effective interest rates, which must include any possible combination of fees, must have a maximum set by the government (ie. a federal anti-usury law), probably at prime + X, based on prime at the time the mortgage was written. This will limit balloon payments, jumpers and other such traps.
5) A floor needs to be set under housing prices. That floor should be set at either 30% what the median income in a zip code is, or at what prices were in 2002. This is the value the government will buy out a mortgage for, and it means that everyone knows what the least a mortgage (and therefore the securities based on mortgages) are worth.
6) Bernanke wants to lower interest rates, but he wants to do it indirectly, by buying Ginnie Mae securities or having Congress subsidize the loans. This is inefficient, the simplest way is to just use the banks taken over (which should include Citigroup) to make loans at whatever rate the Fed thinks is appropriate and avoid private banks refusal to lend.
7) Since a collapse in housing prices, while overall a good thing because it will increase real non-debt related consumer spending and will make Americans more competitive, will also cause deflationary pressure, some steps should be taken to increase the real economic value of houses. This means:
- Areas that will be eligible for federal aid in the form of mortgage repurchases and rewrites must change their zoning to allow home businesses;
- A major broadband build-out must be done, with no usage caps, to allow folks to work from home. The current 5 gig limit that the majors seem to be moving towards is too low;
- As part of the infrastructure stimulus a massive refit of buildings for energy efficiency and generation must take place, to allow people to micro-generate power and make money that way; and,
- The power net must be reconfigured to allow micro-metering so that people can sell the energy they produce and see how much energy is costing at any given time.
All of these things will increase the real economic value of houses, and after the initial suburban shock at the idea of someone working at home, will increase the value of houses, but will do so in a way that makes economic sense. A place you can make money from, and not just live in, is worth more. A place that takes less energy to run is worth more.
This will also set a floor under a significant cause of the financial crisis, allowing firms to have a chance of actually calculating losses. The problem right now is no one knows where the bottom is, so it’s impossible to know how bad a shape anyone is in. Finding that floor, or rather creating one, is essential to "restoring confidence".
(More detailed notes on resetting mortgages.)
Related posts:
Spotlight
Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About Firedoglake
Advanced search
ZED?
Ian, since your suggestions are logical, clear, easy to follow, and hard to pervert into fraudulent profit, they will of course be sneered at by the “financial innovators.”
Hey Pups when you get don’t forget to Support the Lake by Digging the post!
sound proposals Ian, seems this would help the home owners, the financial institutions and not least the Economy which sure needs some coddling!
Ian, since your suggestions are logical, clear, easy to follow, and hard to pervert into fraudulent profit, they will of course be sneered at by the
“financial innovators.”Republicans.. Put the blame where it belongs!“or at what prices were in 2002″
Too late. They are there already in some of the neighborhoods here. We’re heading to 2001 or even 2000 in the worst.
I am not sure how this would help those who were encouraged to borrow against the inflated value of their houses. And also there are many homeowners who are simply underwater who bought/were sold too much house. I would think that house renting might be a temporary solution but I don’t see anything other than transiting them into less house or some other form of renting.
If you reset the mortgage at a reduced face, that makes a big difference precisely to those people.
Ian – stimulative post as usual
I agree that payments need to be configured to allow people to stay in houses and that the gov’t should be in first position but i think the gov’t should also be in second position if a house should resell in a fifty fifty split with owner to recoup the write off.
Something needs to be done for homeowners/buyers who are making it but are upside down. If they bought for 350K and it is worth $275 is it just tough shit for them? What if they get transfered or have to move?
This discussion on the Auto industry both on CNN and MSNBC….. what a crap load of lies…..
Oh and Bush said …… we don’t want to throw good money after bad….. HUH…. what the F*ck have they been doing in the Financial industry?
It’s his legacy position. “Lookee here. I destroyed the UAW single handed.”
If ever the Reptiles fix mortgages, you can bet those houses won’t be worth squat in another year.
I’m heavily invested in UAW…… its my family history…..
my grandfather and two great uncles participated in the 1935-1935 Flint Michigan sit down strike which was the birth of the UAW…… the union employed my grandparents, they were the jobs the WWII generation came back to while they went to college on the GI bill….. they were the engineers, managers and raised families of professions doctors, nurses and teachers….. My 90+ yr old aunt lives on her UAW pension….
We have to move in this direction, but it’s going to be tough to make it fair. There are some problems with your plan.
Take, for example, the 30% cap. Now compare couple A, who decided to be house-poor, spending 50% of their income so they could afford a McMansion, and couple B, with the same income, who settled for a tiny starter house which costs 30% of their income (and this is hardly hypothetical in an expensive real estate market). You propose to give couple A their big house for the same price as couple B’s small house.
The major reason we’re talking about resetting mortgage face values is to permit people whose mortgages are underwater to refinance with more decent terms. In the above situation, if A and B bought recently they might both be underwater, and both should benefit from any reset.
It may be to late for taking care of the homeowners to save the economy.
By my calculations year to date we have lost 1 to 1.1 million jobs. Dec ?
I predict Jan job losses to top 200K. We are in an increasing downward spiral in the job market. Stopping this now has become a priority. People without jobs cannot qualify for any mortgage.
There is a fly in the ointment when trying to restructure mortgages. The law is unclear who actually holds title in any mortgage that has been securitized.
While the securitizations were accompanied by several hundred pages of fine print in actual fact there is no settled law on who holds title and control of the property. Just because a bunch of lawyers make up a contract doesn’t make it legal. This whole issue is huge and like so many other things in this mess it goes unmentioned. Nobody wants to bring it up but you can be sure every time one of these plans gets floated as general thing some lawyers are looking into them in horror.
To restate. Securitizations many not be legal contracts. Ad hoc necessity and inertia continue to effect forclosures and perhaps some reworks but you can bet in a few years this is going to work it’s way up to the supreme court. If the court is stll run by the Robert’s majority then of course it will be settled in favor of the largest corporations because that is the foundation of Robert’s jurisprudence.
Exactly. All this reducing the payment etc. is frought with moral hazard. People are going to have to lose their homes to actually be fair.
Doing these workouts takes a long time and careful analysis to be fair.
I think the 30% number is high. Articles I read say 28% DTI or debt to income. The idea that you can have 30% of your debt be your house and the rest of the debt stays on top of that is unsustainable. What they are doing it putting off further into the future the day of reckoning by doing these workouts.
Calculated Risk has been covering this extensively. The folks getting workouts are getting back into trouble as well fairly quickly. Can’t find the linky’s quickly.
It is not pretty but people have to lose their houses and the prices have to drop substantially. I know Ian is not arguing against this but lowering payments to 30% of income is tons different from 30% total Debt to income or 28% which is the figure I have read about in the past.
Also realize that if these folks get a new mortgage that they can’t really afford long term that is problematic but it is also problematic that prices still have to fall in many locations.
NOLA still has a bubble with the median home exceeding 3 times the median income by $20,000 and on top of that rents are reasonably cheap and homeowner’s insurance is five times the cost in other places. New Orleans was never considered a bubble in any study or article I have read but the fundamentals do not lie. There is a slight bubble here.
Some places have to drop 50%. Some places have to go back further than 2002. I would argue New Orleans is one of those, maybe closer to 1999 or 2000.
Guideline #2 completely changes the nature of the traditional 30-year mortgage, because it depends not on a fixed timetable, but on the owner’s income. Unless properly regulated, wouldn’t this enable me to buy a $30 million dollar house which, at my income level, would require oh, say, 375 years for me to pay off? The industry just won’t go for that.
The 30% rule works well at time of purchase to keep people from committing themselves to more house than they can afford, but I dont see how it can work as a financing method.
What is needed is a kind of homeowners insurance for DINKs (Double Income, No Kids) who buy based on their combined income, to cover for what happens if the couple divorces, or one of them loses his/her job, or retires. In normal times, this would not be difficult: you sell the house, and move into something you can afford.
But in today’s upside down market, many people can’t do that, because the sale price won’t even cover the balance of the original house loan. This is what you need the new kind of homeowner’s insurance for.
Bob in HI
Looking for the LTV percentage article from CR but found this story:
http://calculatedrisk.blogspot…..-debt.html
So these liars took loan after loan and lied about their income. Do they get to have their house for 30% of their $65,000 income? They bought for $220,000 twenty years ago. Their house was worth $450,000 in bankruptcy sale but before that the “value” got as high as $856,000.
At 65,000 of income doing the 3x rule of thumb they should only be able to get a loan for….ta da $195,000. Less than what they bought the house for twenty years ago.
I am sorry people are going to lose thier houses but there is no rule that says you have to lie on your mortgage loans and buy ten times the house you can reasonably afford.
Fraud is bad and shouldn’t be rewarded. OTOH, banks encouraged fraud by explicitly telling mortgage appliers that they would not check the info.
I resent the implication that people caught in this situation are “liars.” This response is at least cruel and insensitive, and is probably based on ignorance. I know of at least one case in which the loan was based on actual income at the time of the loan, but income changed when husband died and wife retired. This cannot be considered “unusual.”
What mortgages fail to take into account is that life changes– and income changes– but the mortgage is supposed to stay the same so the bank can get its money, come hexx or high water.
The basic problem is that mortgages are rigid, but life isn’t. Precious Profits are exalted as Holy and Sacred, but the solvency of homeowners is considered a minor trifle, and let the consequences be damxed. At least insolvent homeowners are no longer thrown into Debtor’s Prison. And to their credit, local banks can be flexible and accommodating with their local customers. But things get creepy when local banks sell their mortgages to out of towners, who then sell their mortgages to 4th parties, and so on, until the mortgage is “owned” by people who don’t give a damx about the mortgage holders, they just want their money.
Bob in HI
Ian,
Thanks for coming back to check in. Yes, the fraud is bad. But we need a way to tell the difference between fraud, speculation, and genuine hardship.
A few of the right things are starting to set the definitions, such as
* Is the home a primary residence?
Means testing should be an added ingredient. The trouble is that “caring” takes time, and cuts into the profit margin.
Bob in HI
I’m still looking for the stimulus the lands in the hands of those who made rational decisions based on their needs, not their wants. Bailing out wannabe capitalist barons is the equivalent of buying booze for teenagers.
Not long ago, just before the truth became obvious, the US dollar kept falling – remember when it was at par with the Canadian dollar? Now you can get $127 Canadian for $100 US. If the dollar’s value (as currency) increased when (inflated) real estate values fell, is there anything like a balance there? Did real value really fall that much? Also, isn’t it important and significant that the dollar’s serious depreciation or plunge has been reversed? Good? Bad? Both? What?
What’s wrong with also leasing homes like they (used to) lease cars, especially since homes seldom wear out or blow a gasket?
You are right. There’s no owners of notes in the sense of an identifiable some one being entitled to the principle and interest of a specific note. The problem is that most mortgage foreclosures are of people who cannot afford lawyers to object to foreclosure because the plaintiff lacks “standing”. They go through to foreclosure anyhow. Were more mortgages defended successfully (and that’s a question because state court judges are as connected to the “establishment” as a majority of the Supremes)it would solve the mortgage problem by imposing a reduced value on the mortgages-otherwise the plaintiff gets no return from an “unenforceable” mortgage. Of course, if no one has standing to sue, no one has standing to settle, but that can be overlooked.
Another solution is to give the bailout directly to the homeowner. I haven’t done the math, but three trillion divided by say 100 million households should come up with a half million per household. That pays the mortgage, leaves the house unencumbered with something left over to buy a new car.