Elizabeth Warren Highlights Washington's Losing Housing Battle

Who in Washington will give you a straight answer? Elizabeth Warren.

Who is Elizabeth Warren?

Her Wikipedia bio reads:

Elizabeth Warren (born 1949) is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy, and commercial law. In the wake of the 2008-9 financial crisis, she has also become the chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout, formally known as the Troubled Assets Relief Program. In 2007, she first developed the idea to create a new Consumer Financial Protection Agency, which President Barack Obama, Christopher Dodd, and Barney Frank are now advocating as part of their financial regulatory reform proposals.

In May 2009, Warren was named one of Time Magazine’s 100 Most InfluentialPeople in the World.

Ms. Warren consistently takes no prisoners or provides no pandering in making honest assessments of the interaction between Washington and Wall Street. She has called the banks on the carpet. She has called Secretary Geithner on the carpet. She has called Congress on the carpet. Why? A general lack of honesty, integrity, and transparency in dealing with the American public.

When she speaks, I listen.

What did she have to say Friday morning? In commenting on a recently released report on the effectiveness of government programs to support housing, Warren questioned the scalability and the permanence of the impact of the TARP funding. Bloomberg provides further color in writing Friday morning TARP Oversight Group Says Treasury Mortgage Plan Not Effective.

The report highlights,

“Rising unemployment, generally flat or even falling home prices and impending mortgage-rate resets threaten to cast millions more out of their homes,” the report said. “The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted.”

New programs or program enhancements? On Thursday I opined in Washington Needs a New Housing Model:

While the administration swims upstream on this issue, bank policy of tight credit and restrictive lending only further exacerbates the housing market. Make no mistake, though, banks are taking that approach to tight credit at the behest of regulators who know the level of losses in the banking system and are trying to preserve the industry as a whole.

I like a rallying equity market as much as anybody, but I wouldn’t spend any paper gains just yet. Why? The new housing model is displaying that:

“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” concluded Sapienza. “This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe.”

This model needs some quick-dry crazy glue, which could only be applied in the form of a serious principal reduction program. Banks would take immediate and massive hits to capital which they clearly won’t accept.

So how can we generate some support for housing?

Aside from a principal reduction program, the penalty for those who would strategically default on their mortgage needs to be far more onerous.

The principal reduction would negatively impact bank earnings. Too bad. The banks are feeding at the taxpayer trough currently and would not be here without the bailouts. The individuals who are capable of making their payments need to accept the moral responsibility that is embedded in a contract.

Although given the massive violation of moral hazards and breaking of contracts by Uncle Sam, that old man does not have a lot of credibility on that front.

What do we really learn here? Ultimately the market is the market and efforts to manipulate or support a falling market will only be temporary. The market needs to find the clearing level where private money will purchase properties. That private money will wait while Uncle Sam continues to try to prop the market.

In the meantime, do not expect any meaningful support for housing.

Comments

[davidbdc:]

We don't need principal reduction programs. Its just a nice phrase to describe taking from me and giving to you!

Washington is losing the housing battle because they never should have been involved in the first place. Washington started the whole sub-prime push with legislation that never should have been passed. They helped it along with total ignorance to common sense and encouraging regulators to NOT regulate.

Washington should get out of the way and let the price of homes fall to wherever it falls to.....

Why are home assets deserving of "free" money? People made investment decisions and they made them poorly. Now the government should turn back the clock for these poeple? Sorry, I've got lots of stocks I'd like to turn the clock back on and I don't expect anyone to show up to give me my money back.

What Washington should be doing is prosecuting those that preyed on the elderly, selling them things that they didn't understand and were hopelessly wrong for them. They should prosecute those that falsified loan documents. They should prosecute those that have broken the law!! Thats a battle they could actually win. In the S&L debacle more than 3000 people were prosecuted and sent to jail - what do we have currently? Two hedge fund guys are on trial? Seems to me that this is at least on the same scale.....2998 to go!

Oct 11 08:33 AM

[Tack:]

Davidbdc:

You're right on the money.

Washington liberals encouraged, legislated and provided the means for vast lending to unqualified buyers, all in its usual vote-getting shenanigans. Now, that it's become clear that they inadvertently screwed those very same voters by inducing them to buy homes they had no genuine ability to afford, the politicians have to cobble together a huge giveaway program (funded by the prudent, of course) to try to save the very same voting block they duped the first time around.

Oct 11 08:45 AM

[Griz:]

Agreed. Washington is trying to keep the house of cards intact until consumer morale improves, it is a waiting game. Problem is that the passing of time has begun to reinforce thrift instead of consumption; everything I see supports my belief that this paradigm shift is just beginning. Demand decline, the removal of "moral default stigma", rising unemployment, a coming epic reset wave and the impending house supply glut (which has been hidden by banks from the market) all conspire to drive housing prices much much lower in the coming years. Add onto that, the need for boomers to start downsizing/reducing their holdings as well...

Oct 11 08:50 AM

[ssven218:]

Hello Mr. Doyle , I have a few questions about your article and comments on davidbdc's reply. First, I agree that we have a big problem with the housing market. to be truthful everybody involved is responsible.
What i do not understand is eveybody keeps talking about mortgage resets, these should work in the homeowners favor with LIBOR being historically low and the fed rate being 0%, the homeowners mortgages should reset lower.
Second with the drop in home prices, the parrelle drop in property taxes should give homeowners another source of relief. since homes have dropped on average 30 to 40 percent over three years, that should give homeowners a good bit of tax relief.
Third in reply to davidbdc's post, i agree, part of the problem was the bush administrations pro business stance and lack of oversight.We are now in a time where we need to keep everyone who can afford their house in it,otherwise the housing prices will keep declining.
I am on a Making Homes Affordable modification, they lowered my payments to 31% of my income, since I lost 800 dollars a month in Income. This is only temporary (5 Years), but , i do not expect the bank to lower my principal, that is my responsibility.just like the stock market, you do not lose anything until you sell and the market will rise, just not in the manner of the 2003-2006 era.
lastly, the banks have been predatory on the elderly, selling them mortgages they do not understand on homes the were paid off.do not try to tell me the banks are not predatory, look at the billions in fees the banks have taken from the public by structuring their debits and the extremely high interest rates on credit cards, when they pay 0%, thanks to you and me.(Federal Government Taxpayer)
ssven218


On Oct 11 08:33 AM davidbdc wrote:

> We don't need principal reduction programs. Its just a nice phrase
> to describe taking from me and giving to you!
>
> Washington is losing the housing battle because they never should
> have been involved in the first place. Washington started the whole
> sub-prime push with legislation that never should have been passed.
> They helped it along with total ignorance to common sense and encouraging
> regulators to NOT regulate.
>
> Washington should get out of the way and let the price of homes fall
> to wherever it falls to.....
>
> Why are home assets deserving of "free" money? People made investment
> decisions and they made them poorly. Now the government should turn
> back the clock for these poeple? Sorry, I've got lots of stocks
> I'd like to turn the clock back on and I don't expect anyone to show
> up to give me my money back.
>
> What Washington should be doing is prosecuting those that preyed
> on the elderly, selling them things that they didn't understand and
> were hopelessly wrong for them. They should prosecute those that
> falsified loan documents. They should prosecute those that have
> broken the law!! Thats a battle they could actually win. In the
> S&L debacle more than 3000 people were prosecuted and sent to
> jail - what do we have currently? Two hedge fund guys are on trial?
> Seems to me that this is at least on the same scale.....2998 to go!

Oct 11 09:06 AM

[ThePhoenix:]

Your comment: "The individuals who are capable of making their payments need to accept the moral responsibility that is embedded in a contract." Morality is a religious concept and best left there. Contract law is promise for a promise of which the breach of that promise has legal consequences. Advocating that the legal consequences be modified is exactly what was done in 1930's when legislation across the country limited the impact on consumers by lenders who lent carelessly and then attempted to extract everything from consumers using deficiency judgments and take hard working folks paychecks that were used to support their families.

Truth is, the lending institutions made the rules on lending standards and consumers entered into contracts with those rules in place. They were motivated by profit and the banks were motivated by profit which caused them both to enter into contracts. The consumers and banks knew the risk of default of the contracts. Now, the profit is gone and consumers are weighing the risk of default on those contracts with the knowledge of the legal remedies and they are making the business decision to walk. You are suggesting that the rules be changed, i.e. legal remedies, now that the banks and government do not like that consumers are making these business decisions.

Sounds like what is going on here is the banks want all of the wins on the back of the consumer, which is not fair and what they tried to do in the 1930's. No changing the rules. As more consumers walk from their homes this will give incentive to lenders to properly balance the risks that they have. Their lending of money is not risk free.

Looks like 1930 all over again, risky lending... except the laws are different, the risk is known. This time the banks wants more risks to consumers for their risky lending practices... what? You want judgments against their earnings so you can take food away from their children again??? Was not a good choice in the 1930's and not a good choice now.

Oct 11 01:34 PM

[Snitzer:]

ssven218 makes a good point asking about the resetting ARMs. Seems like to me that yes, they should reset lower, thus helping the property owners. Not having a mortgage I've not given it that much thought.

Oct 12 12:20 AM

[Gregman2:]

Excellent points. A real predicament. As consumer credit scoring erodes with our jobs base, tightening credit becomes a real threat
and more will lose their homes. What's Barney Frank's solution?

Oct 12 01:13 AM

[Robespierre:]

To say that this was done as a way for main street to afford a house is ignorance to the max. Look at who was pushing for de-regulation and you will see why all these "affordable housing" programs were created for. Also, look at who benefits the most by all these remedial "save the home" programs. Also, look at who is having "record earnings" to see who is benefiting the most of. Also, look at who bought the most congressmen in the financial committees. The answer to all of those questions is: The to big to fail CEOs.


On Oct 11 08:45 AM Tack wrote:

> Davidbdc:
>
> You're right on the money.
>
> Washington liberals encouraged, legislated and provided the means
> for vast lending to unqualified buyers, all in its usual vote-getting
> shenanigans. Now, that it's become clear that they inadvertently
> screwed those very same voters by inducing them to buy homes they
> had no genuine ability to afford, the politicians have to cobble
> together a huge giveaway program (funded by the prudent, of course)
> to try to save the very same voting block they duped the first time
> around.

Oct 12 10:05 AM

[Destin:]

"Second with the drop in home prices, the parrelle drop in property taxes should give homeowners another source of relief. since homes have dropped on average 30 to 40 percent over three years, that should give homeowners a good bit of tax relief."

Unfortunately this requires good faith from the states, who have a vested interest in keeping appraisals high due to collapsing sales & income tax revenues. Here in Georgia the homestead exemption has been rolled back "temporarily" to help shore up the budget deficit, which has resulted in an instant ~$250 annual property tax increase for every homeowner. Extending unemployment benefits is the primary stated reason, but as someone currently collecting said benefits I am not exactly in a position to complain.

Oct 12 02:25 PM

[eaglett1111:]

Wall Street caused this mess. Who inflated home prices to begin with? Who began offering subprime loans? What household in America didn't receive at least one new credit card offer every week? Anybody got a cc offer lately? Of course not. But once again Wall Street will get their money, because they are raising interest rates and/or raising minimum payments. And we just let them do it. Because the rich need to get richer. I mean that is the American way, isn't it? HAMP is a joke because it is not enforceable. And even if the servicers played, lenders like Deutsche Bank don't, and approximately 18% of all home loans have been bundled and are in part or fully owned by Deutsche. So now the Administration offers a tax credit to first time homebuyers and they'll fall for it and then in a few years they will find that their mortgages, too, have been sliced and diced and their interest rates are going through the roof and they can't get a modification. This is a nightmare that must stop somewhere. Why not now?

Nov 08 05:04 PM