MONEY CULTURE
Daniel Gross
Foreclosure, for Closure
The problems with the Bush and Clinton plans to suspend foreclosures.
Foreclosures have become a major political issue. Ever since December, Hillary Clinton has been making daily calls for a 90-day moratorium on foreclosures. The Bush administration has been inching toward an antiforeclosure policy. The Hope Now alliance was created in October as a voluntary industry effort to aid troubled borrowers. In December the White House and Treasury Secretary Henry Paulson encouraged Hope Now members to offer interest rate freezes and refinancing for certain qualified borrowers as part of an effort to avoid foreclosures. This week the administration rolled out Project Lifeline, which offers qualified borrowers the chance to freeze foreclosure proceedings for 30 days. (Coming next: Operation Desperation.)
All of these proposals are good ideas, and bad ideas, for the same economic reason: forestalling more foreclosure delays price discovery.
After a bubble pops, markets go through a painful process in which they try to agree on prices for formerly inflated assets. This is called "price discovery." When the bubble is in stocks, price discovery happens very quickly. A stock can go from $60 to $0 in a matter of days, if not hours, and sometimes did when the Internet bubble popped in 2000. From a macroeconomic perspective, such stock price discovery is painful but not necessarily devastating. The people who own bubbly stocks lose money. People who bought the stock on margin—i.e., they borrowed to buy it—lose a lot money. Banks who lent to high-flying firms frequently must write off loans. And companies that supply, or service, or depend on the afflicted firms may suffer as well. But, as when the tech bubble popped, stock price discovery usually doesn't lead to systemic failures.
By contrast, the process of price discovery in housing, and housing-related credit, has been much slower—and it has much more dire systemic implications. The housing market peaked in 2006, and it has been slowly slumping. But nationwide, according to the Case-Schiller index, housing prices have fallen only 8.4 percent in the past year. Home prices in some areas of the country may need to fall 30 percent in order to find bottom. That process is likely to take years rather than months.
The slope of the housing decline has been gentle because houses can't be flipped like stocks. People live in their homes, and there are big transaction costs associated with selling them. The market isn't very liquid. And there's another reason housing prices have been slow to fall: there are all kinds of incentives for everyone involved in the housing market to push off the day of reckoning, to delay the process of price discovery.
Start with the homeowner. Homes are highly leveraged purchases, whether it's 20 percent, 10 percent, or 0 percent down. Owners of existing homes are reluctant to mark down the value of their homes 20 percent overnight because, in many instances, it will wipe out their equity. Homebuilders and condo developers don't like to lower prices quickly because it makes those who bought in their development five months earlier feel like chumps. The banks don't want to concede that the houses they lent against are suddenly worth a great deal less than they were a few months ago. Investors who bought the bonds created by slicing and dicing mortgages—and then leveraged up their positions by borrowing money—get massacred when prices fall. The same holds true for bond insurers like Ambac and MBIA, which insured structured finance products created by lashing groups of mortgage-related securities together.
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Member Comments
Posted By: theshark58 @ 03/05/2008 3:25:44 PM
Comment: second try,pardon if duplicated.
First, nice ad Steve... first you said you "were told" about a company and then you said "we".
These companies ONLY HELP THEMSELVES WHILE YOU GET SCREWED.
Back to my comment
Individuals were not being coerced into these loans. People knew what they were doing and were betting the property values were going to go up. They thought that they could refinance and everything would work out. Now the politicians want to bail them out...because they can buy votes.
Sorry, but i BIT THE BULLET AND DID NOT BUY. Each year I file my taxes and have to pay alot of taxes.
I could not buy a house for a tax break because it was just too risky, too much pressure. A 4300 mortgage is just plain crazy ( I live in San Jose).
where are the breaks for the millions who rent? Buyers get the best of both worlds in this scenario... tax breaks, buyouts, while their neighbors who are renting are footing the bill.
First they borrowed, then they bragged, now they beg.
Posted By: theshark58 @ 03/05/2008 3:11:53 PM
Comment: A bailout is just plain wrong.
the people who bought these homes signed papers knowing full well what THEY WERE DOING.
I made the choic not to buy in california even though I am getting killed with taxes.
These individuals gambled that their home values would go up and they would be able to refinance at a lower rate if they had to. Sorry, Vegas does not return your losses.
what government should really look at is the tax breaks homeowners get when they buy, yet renters don't receive any. where is all the outrage for the millions of people who can't buy but are getting raped by their government; where is their tax break.
I can see in 2 months one neighbor who rents, pays his 10k more in income taxes when he files while the neighbor who bought, bragged, and begged gets bailed out.
Posted By: elcaminobootery @ 02/18/2008 7:32:04 PM
Comment: Excellent response. Your readers are informed obviously. You will not bring prices into a stable environment or see true valuations until EVERY American is either removed from homes they cannot afford or brought in line with the income needed to service the debt secured by the home ithey live in. Its put up or get pushed out! However a negotiated settlement with a lender is a fast rising alternative - deed your home back to the lender and repruchase it at a reduced "affordable amount. Companies like borrowerhotline.com do this type of work. But whats important here is that the Stated income and Stated assets programs of the last two years were highly predatory for one specific reason. Look at the neighborhood you reside in. More times than not you will live in an area with people of the same economic earnings capacity as you. Yes, middle income tends to live with similar economic profiles as do upper high end income earners who are more often than not self employed. So when a borrower who lives in a predominantly middle income area reports $20,000 a month needed to qualify for a loan and who was induced to overstate income and the borrower really works as a W2 wage earner - get the message? What the "majority" of borrowers can afford is really what the homes in the area are worth! As a risk comliance specialist for the institutional secondary markets, I never have auditied so many housekeepers and blue collar wage earners living in million dollar homes! Foreclosures loom and create absolute instability to each and every neighborhood. Website www.borrowerhotline.com or go to
www.360blog@yahoo.com M Soliman, Managing Director