Note to White House Economists: It's the Housing Market, Stupid!
The White House is making slow but sure progress on small business legislation and will likely pass tax legislation as well - both to increase tax rates on the highest incomes and to make permanent the "supply side" research and development tax credit and a temporary equipment expensing rule. Mostly, that is nibling on the margins.
The real challenge to the economy is still the housing market, with way too many people - like this author - hopelessly under water on our mortgages and - not seeing a raise in a few years - having no prospect of paying them down any faster than we are now. Many are already in foreclosure or are in danger of it - which is almost a rational thing to do, since walking away from the property is the only way to get rid of that bit of excess debt (unless, of course, you rent it out as an investment property).
What is that again?
If you live in your own home, you can't write down principal on the first mortgage - but if you rent it to someone else, you can. Of course, if you have a subsidized starter third mortgage under the low income housing program (like the one we have from the city of Alexandria), if you move out, that mortgage becomes due and payable. That is not necessarily a bad thing, since it is an excuse to file for bankruptcy to have that loan discharged as well.
Bankruptcy reform is part of the reason so many people are in the pickle they are in now. Before "reform" you could cram down your first mortgage without losing your home in Chapter 13 bankruptcy. Thanks to the efforts of my local House member, Jim Moran (the principal sponsor of "reform") - with the Republican House which supported the reform, that is no longer possible.
After reform, investment models for mortgage backed securities were reset to "take no prisoners" mode, since no bankruptcy court could make anyone's debt smaller by judicial fiat.
While the perception that housing prices would never go down was surely part of distorting securities modeling too - the models could not have gone full bore crazy without the change to bankruptcy law - as cram down authority would have had to have been factored in had it still existed. That prospect would have had lenders take a longer look at who they were lending money to and would likely have stopped liar loans dead in their tracks. Without liar loans, housing prices could not have balooned like they did, which would have stopped the need for exotic finance tools, like the option ARM A, and the housing crisis would have been avoided.
At the very least, Jim Moran should lose his job to Independent Green candidate Ron Fisher. More importantly, his Bankruptcy Reform should be repealed and cram down authority restored.
That won't help everyone, of course. My wife and I are loath to consider bankruptcy - although shedding the second and third mortgages and our credit cards would certainly save us some cash in both the short and long terms - although I would rather keep the third (it has no interest or payment provision) and cram down the first (which would save real money).
The other option is to seek an arrangement from our lender, the Virginia Housing Development Authority - however they have not announced that they are participating in the White House program to allow borrowers to write down their mortgage debt to 115% of principal, with the lender than having claw-back rights at sale if the property goes for more than that. We can afford our current mortgage, but we would like it to be on a property that is actually worth what we can pay, not on something that is $100,000 under our debt.
As I said, we aren't alone in this. Most people can pay their mortgages, however doing so is distasteful when it only remediates negative equity - and with the foreclosure rate it seems that most of us are losing value faster than we can pay down our debts.
This is where the White House comes in. They should not only push bankruptcy reform, they should push the Federal Reserve, FannieMae and FreddieMac to use their leverage as holders of mortgage backed securities to mark these securities to market and adjust the underlying loans to either market, or at most 115% of market. That, and they should keep buying up these mortgages at a discount - possibly with help from the Treasury. When this happens, the borrowers who need this assistance the most will likely spend what they are saving on their monthly mortgage payments in all manner of ways to jump start the economy - everything from deferred home improvements to simply having a nice Christmas. Some of us will likely sell, either to move to a better job or to a bigger house. Housing values will stop falling and the prospect of a double dip recession - which can correctly be called the continuation of an economic depression - will be avoided.
Failure to do something bold like that will have the opposite effect. Deflation will have housing values further decline, leading to a downward spiral, with mortgage backed securities worth less and less because no one has the courage to stop the bleeding.
What I find particularly disheartening about this issue is that no one else is raising Federal Reserve leverage over Mortgage Backed Securities as an option. I have not been shy about doing this on some pretty prominent web sites. I have shared my thoughts with the White House and my local members of Congress and the Senate and I can't be the only one who has come up with this option. It is still not discussed. That, to me, is fishy.
Would this option bankrupt the Federal Reserve? I don't know. If it would, someone should explain how. If there are other downsides, someone should air those as well so that they can be mitigated - but the proposal should at least be discussed. If no action is taken in this area, things will not get better any time soon - and they may get considerably worse - especially if efforts are undertaken too soon to balance the budget - which turned a recovery in 1935 into a Depression in 1937.
2010 is not the only reason for the White House to pay attention to this issue. If nothing is done about housing by 2012, President Obama's propsects for a second term begin to look doubtful - even if the Tea Party Express gets Sarah Palin on the top of the Republican ticket.
The real challenge to the economy is still the housing market, with way too many people - like this author - hopelessly under water on our mortgages and - not seeing a raise in a few years - having no prospect of paying them down any faster than we are now. Many are already in foreclosure or are in danger of it - which is almost a rational thing to do, since walking away from the property is the only way to get rid of that bit of excess debt (unless, of course, you rent it out as an investment property).
What is that again?
If you live in your own home, you can't write down principal on the first mortgage - but if you rent it to someone else, you can. Of course, if you have a subsidized starter third mortgage under the low income housing program (like the one we have from the city of Alexandria), if you move out, that mortgage becomes due and payable. That is not necessarily a bad thing, since it is an excuse to file for bankruptcy to have that loan discharged as well.
Bankruptcy reform is part of the reason so many people are in the pickle they are in now. Before "reform" you could cram down your first mortgage without losing your home in Chapter 13 bankruptcy. Thanks to the efforts of my local House member, Jim Moran (the principal sponsor of "reform") - with the Republican House which supported the reform, that is no longer possible.
After reform, investment models for mortgage backed securities were reset to "take no prisoners" mode, since no bankruptcy court could make anyone's debt smaller by judicial fiat.
While the perception that housing prices would never go down was surely part of distorting securities modeling too - the models could not have gone full bore crazy without the change to bankruptcy law - as cram down authority would have had to have been factored in had it still existed. That prospect would have had lenders take a longer look at who they were lending money to and would likely have stopped liar loans dead in their tracks. Without liar loans, housing prices could not have balooned like they did, which would have stopped the need for exotic finance tools, like the option ARM A, and the housing crisis would have been avoided.
At the very least, Jim Moran should lose his job to Independent Green candidate Ron Fisher. More importantly, his Bankruptcy Reform should be repealed and cram down authority restored.
That won't help everyone, of course. My wife and I are loath to consider bankruptcy - although shedding the second and third mortgages and our credit cards would certainly save us some cash in both the short and long terms - although I would rather keep the third (it has no interest or payment provision) and cram down the first (which would save real money).
The other option is to seek an arrangement from our lender, the Virginia Housing Development Authority - however they have not announced that they are participating in the White House program to allow borrowers to write down their mortgage debt to 115% of principal, with the lender than having claw-back rights at sale if the property goes for more than that. We can afford our current mortgage, but we would like it to be on a property that is actually worth what we can pay, not on something that is $100,000 under our debt.
As I said, we aren't alone in this. Most people can pay their mortgages, however doing so is distasteful when it only remediates negative equity - and with the foreclosure rate it seems that most of us are losing value faster than we can pay down our debts.
This is where the White House comes in. They should not only push bankruptcy reform, they should push the Federal Reserve, FannieMae and FreddieMac to use their leverage as holders of mortgage backed securities to mark these securities to market and adjust the underlying loans to either market, or at most 115% of market. That, and they should keep buying up these mortgages at a discount - possibly with help from the Treasury. When this happens, the borrowers who need this assistance the most will likely spend what they are saving on their monthly mortgage payments in all manner of ways to jump start the economy - everything from deferred home improvements to simply having a nice Christmas. Some of us will likely sell, either to move to a better job or to a bigger house. Housing values will stop falling and the prospect of a double dip recession - which can correctly be called the continuation of an economic depression - will be avoided.
Failure to do something bold like that will have the opposite effect. Deflation will have housing values further decline, leading to a downward spiral, with mortgage backed securities worth less and less because no one has the courage to stop the bleeding.
What I find particularly disheartening about this issue is that no one else is raising Federal Reserve leverage over Mortgage Backed Securities as an option. I have not been shy about doing this on some pretty prominent web sites. I have shared my thoughts with the White House and my local members of Congress and the Senate and I can't be the only one who has come up with this option. It is still not discussed. That, to me, is fishy.
Would this option bankrupt the Federal Reserve? I don't know. If it would, someone should explain how. If there are other downsides, someone should air those as well so that they can be mitigated - but the proposal should at least be discussed. If no action is taken in this area, things will not get better any time soon - and they may get considerably worse - especially if efforts are undertaken too soon to balance the budget - which turned a recovery in 1935 into a Depression in 1937.
2010 is not the only reason for the White House to pay attention to this issue. If nothing is done about housing by 2012, President Obama's propsects for a second term begin to look doubtful - even if the Tea Party Express gets Sarah Palin on the top of the Republican ticket.
posted by Michael Bindner at 10:11 PM
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