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Posted by Elle on February 29, 2008, 8:40 am
The NY Times has an article today that I think is
fascinating. It points out that, for people with no
downpayment on a home who can no longer afford their
mortgage, foreclosure pays.
Maybe this was obvious to some people, but not until I read
this article did I see some light at the end of this housing
bust. See
http://www.nytimes.com/2008/02/29/us/29walks.html?hp . See
also the company referenced there, www.youwalkaway.com .
Youwalkaway.com makes me proud of America's legal tradition.
For many months I have been feeling sorry for the "little
guy/gal" who was unsophisticated and bought during the
housing bubble, using an ARM with no downpayment or an
interest only mortgage. Shame on those lenders, I thought,
for extracting money from people that, statistically
speaking, they knew could likely not afford a house on these
terms.
Turns out, as the article suggests, that this was actually a
pretty savvy decision on the part of borrowers. (Whether
they knew it or not!) One expert noted: "Now it's like they
can do their renting from the bank, and if house values go
up, they become the owner. If they go down, you have the
choice to give the house back to the bank. You aren't any
worse off than renting, and you got a chance to do extremely
well. If it's heads I win, tails the bank loses, it's worth
the gamble."
As a shareholder in a few banks, I want these lenders to
start cooperating. Better to re-negotiate the terms of the
mortgage than be stuck with a house worth much less than
what the bank paid (on behalf of the borrower). They really
have no other choice anyway, right? (That's not rhetorical.
I welcome commentary on what alternatives lenders have.)
My only regret is that those who run lending businesses did
not have the intelligence to anticipate this and, to date,
have not generally conceded that their backs are against the
wall. It is tempting to urge the firing of whole Boards of
Directors (like WaMu's), or other such severe punishment as
shareholders are able to mete out. Though maybe it takes a
morass like this burst bubble for people to learn anything,
even ostensibly well educated pillars of the banking
community. As perhaps Sgt. Sausage would suggest.
In today's Times is also an article on how talks between
Republicans and Dems have stalled. Dems want a bailout of
homeowners. Republicans do not. At this point I see no
reason for a bailout. Let the lenders eat cake.
Now at last I can also explain the justification for
requiring downpayments on the order of 20% and/or penalizing
those who put down less.
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Posted by on February 29, 2008, 10:16 am
<snip>
> Turns out, as the article suggests, that this was actually a
> pretty savvy decision on the part of borrowers. (Whether
> they knew it or not!) One expert noted: "Now it's like they
> can do their renting from the bank, and if house values go
> up, they become the owner. If they go down, you have the
> choice to give the house back to the bank. You aren't any
> worse off than renting, and you got a chance to do extremely
> well. If it's heads I win, tails the bank loses, it's worth
> the gamble."
In most states, California excepted, mortgages are not "non-recourse"
loans. The borrower is legally and morally obligated to repay the loan
regardless of changes in the market value of the house. You may be
correct in calling voluntary defaults on mortgages "savvy" if ethical
considerations can be ignored, but so is stealing, by those standards.
I'd call it slimy.
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Posted by Elle on February 29, 2008, 11:19 am
> In most states, California excepted, mortgages are not
> "non-recourse"
> loans. The borrower is legally and morally obligated to
> repay the loan
> regardless of changes in the market value of the house.
> You may be
> correct in calling voluntary defaults on mortgages "savvy"
> if ethical
> considerations can be ignored, but so is stealing, by
> those standards.
> I'd call it slimy.
Don't you also feel there is a moral obligation not to take
financial advantage of someone either (1) incapable of
understanding the terms of
a mortgage; or (2) who has a high probability of not being
able to make payments? Alternatively let us assume there is
no such moral obligation, and both sides are responsible
for understanding the fine print. Fact is many lenders
failed to consider the fine print regarding defaulting on
mortgages. Folks in poverty are a reality. Lenders know that
defaulting is a possibility. Else why would things like PMI
exist?
I am not confirming or denying your "most states" claim
without a citation. On the other hand, from the article:
Though many states give banks recourse to sue borrowers for
their losses, [Wellesley Econ Professor Karl E. Case] said,
in practice it's not often done. "It's tough to do
recourse," he said. "It's costly, and the amount of people's
nonhousing wealth tends to be pretty slim."
I think what's happening here is reasonable market action.
Let the lenders reap what they sowed. Of course, one of the
burning issues of 2008 may quickly become (or already is)
the hit that the private mortgage insurance industry takes,
since in theory the insurers are supposed to make up for
much or all of the loss the lender suffers.
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Posted by dapperdobbs on March 1, 2008, 12:59 pm
> I think what's happening here is reasonable market action.
> Let the lenders reap what they sowed. Of course, one of the
> burning issues of 2008 may quickly become (or already is)
> the hit that the private mortgage insurance industry takes,
> since in theory the insurers are supposed to make up for
> much or all of the loss the lender suffers.
With apologies in advance for length and lack of references, I've put
in a lot of time recently reading, talking, and trying to think
through this mess, and I may have a couple of simple clarifying
statements. There are really two parts: the value of homes, and the
value of the mortgages.
As to the first: the census bureau has a very interesting document
that is remarkable for its clarity and ease of use. The title is
Demographic Trends in the 20th Century" a .pdf file the link to which
is found in a blue box to the left of the page to which the link is
supplied below.
http://factfinder.census.gov/servlet/ACSSAFFPeople?_submenuId=people_1&_sse=on
Much in that document explains the remarkable rise in housing prices
this past century. I believe per capita GDP numbers have to be
factored in to complete the picture (e.g. if that number is five times
in 2000 what it was in 1900, then that may be a better indicator than
CPI which does not include housing).
Nevertheless, the price of housing got overbid in 2005, and like any
other market, is "correcting." Some prescient poster on this site
years ago put up a link to an article on the FNMA site talking about
housing booms and busts - in 2005! We have had similar housing
corrections in the past, people upside down, walking away, desperate
"Price Reduced!!" notices, and so on.
The second part, the value of the mortgages, is the BIG problem.
Apparently CDO's are simply renamed instruments of the type first seen
back to 1984. These are highly leveraged. So , take the housing
decline and multiply it by the leverage in CDO's, and you see this is
a bigger problem today than it was in times when CDO's were not so
widespread.
This little problem is what banks are writing off - I believe the
running count estimate is between $175 and $200 billion. The writeoffs
are not over yet. The sheer volume of doubt about the worthiness of
debt can be seen in the low T-Bill rates, but that still isn't the
real problem. The real problem is that unwillingness or inability to
borrow and lend ANYTHING has the banks and broker/ dealers who were
involved in the leveraged CDO's (and other so-called 'derivatives')
scrambling for cash. The past few weeks' lack of liquidity in
municipal bond markets reflects this lack of cash, and led up to the
near melt-down in the municipal bond markets Friday. Tax free A+
municipal paper (short-term!) is paying almost twice what taxable T-
Bills are. This is not a lack of faith in municipal issues, it is not
a credit issue, it is a liquidity issue.
Students of finance will be writing theses about this for years,
probably, but this liquidity crisis does have ripples, and this is the
problem the Fed is trying to ease. The US housing market is, if I
recall estimates correctly, about $27 trillion dollars. The estimates
for derivatives of all kinds is in the order of $450 trillion. (Fun,
huh, being greedy?) The total municipal bond market is about $2.6
trillion. When a number as "small" as $2.6 trillion goes un-funded,
things must be pretty bad on the liquidity front. This is not funny
stuff at all. This illiquidity comes back around to haunt all - if
municipalities such as in CA cannot fund projects, workers don't work,
can't pay their mortgages, and so on in a vicious downward spiral.
Some sharp guy (Kudlow, I believe) suggested the Fed step in and buy
what the banks are writing down. Two years from now, those CDO's will
have recovered their MARKET value. This is what a consortium of banks
finally agreed to do to prevent a disaster centered around LTCM (Long
Ter Capital Management, a hedge fund that collapsed). For Fed is
apparently very reluctanct to get involved directly. But his time, the
banks did not learn from LTCM, and there are no bank consortiums able
to bail themselves out.
So yes, the homeowners or speculators overbought, some greedily, some
out of fear. But that is the smaller part of the problem. The bigger
part is the leveraged mortgages the financial community has been
passing around like popcorn in a movie theatre. I blame the hedge
funds. A 20% drop in the stock market doesn't bother someone who is
not leveraged. But to some guy who is leveraged 20 to 1 in the stock
market, a 2% drop has him sweating bullets and having nightmares.
That's what's going on with the CDO's and other debt. There's a
liquidity crisis and a panic - a crash in that market - there simply
isn't an index like the SP500 that we can see and point to and gasp at
and easily understand. The insurers are in crisis - they don't have
the capital to cover. The entire house of cards was built on
probability theory of risk, and now the unthinkable has happened,
contrary to all "probability" the "black swan" has appeared, and that
house of cards is collapsing.
That's my analysis, and if it turns out to be wrong, I'm sorry, but
many of the pieces are there.
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Posted by Elle on March 6, 2008, 5:06 pm
> The entire house of cards was built on
> probability theory of risk, and now the unthinkable has
> happened,
> contrary to all "probability" the "black swan" has
> appeared, and that
> house of cards is collapsing.
The above is the only part of your post which I question. It
seems to me that today's crisis is very similar to that of
c. 1991. For a few years prior to 1991, lenders were too
generous in credit for financing commercial real estate,
among other things, as I bet you recall. The bubble burst.
Many banks failed. Others cut their dividends, which happens
rarely. IIRC from general reading, some change to regulation
and oversight of lending practices occurred. Searching the
NY Times from about 1989-1991 using keywords like {banks
dividend cut} turns up articles that one would think were
written in the last few months.
I think many people who lived through this foresaw the
current crisis. The lesson for individuals is to beware the
seduction of bubbles in any sector, and stay diversified.
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