Peter Schiff on the Housing Market and the Rescue Plan

I had some harsh words last week for Peter Schiff, which prompted a comment from Jack:

Taking on Schiff? Get ready for a barrage of hate mail from him and his lackeys!

In fact, I got no hate mail at all, just a polite email from Peter's brother Andrew, saying that I should talk through my ideas with Peter. I did, and the following Q&A is the result. I hope you find it interesting. As always with these things, my interlocutor gets the last word.

Felix Salmon: You write that "Without question, the Bush administration’s mortgage rescue plan will exacerbate, not alleviate, the problems in the housing market," and that "there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe". If these things are really so certain, why do you think that the Bush administration and the American Securitization Forum were so happy to sign on to this plan?

Peter Schiff: In the short run the plan will keep some homes out of foreclosure and appease voters, who will be able to continue the delusions that they still have home equity. Also, the plan might create some false hope, thereby slowing down the adjustment. However, over the long run, which may happen sooner then many politicians naively believe, the plan will make mortgages even harder to get, and ultimately lead to even lower home prices and more foreclosures than might have been the case without the plan.
The best thing is for the government to stay out and let the lenders work this out with the borrowers without any outside interference. In many cases foreclosure is better then keeping people in homes they cannot afford that are worth less then their mortgages. Let investors buy these properties, put up real cash, have some equity, and rent them out.

FS: Surely though we've seen quite clearly that the loan servicers simply don't have the capacity to work out every delinquent or soon-to-be-delinquent loan on a case-by-case basis.
And when you say that foreclosure is "better" in many cases if it comes sooner rather than later, presumably you don't mean for the borrower, but rather for the lender. Given that lenders can be trusted to act in their own self-interest, do you really think that they will put off foreclosures in such situations just because Hank Paulson had a press conference?

PS: I did not say it would be easy for the lenders but they should be allowed to work it out without government interference. For most subprime borrowers, their houses are liabilities not assets. How does it serve their interests to keep them in huge mortgages they cannot afford on homes that are worth less than the mortgages? Losing these homes means getting out of debt and a chance of a new start. They can rent something they can afford, or save up to buy a house once they are actually in a position to afford one. This will be a lot easier in a few years anyway when houses are much cheaper.

FS: Do you have any evidence that the lenders resent the government "interference" which I consider to be little more than allowing the lenders to get around a table and work something out without risk of being accused of illegal collusion? It seems to me that the lenders are actually quite happy about having been able to work out this deal, and would be happy whether the government chivvied them along or not.
As for the homeowners, of course their houses are assets: it's their mortgages which are liabilities. Losing their houses only means getting out of debt in certain limited circumstances: (a) when the loan is non-recourse -- which is rare in the subprime world, especially since most subprime mortgages were refinances; (b) when the servicer accepts a short sale; (c) when the homeowner declares bankruptcy as part of the foreclosure process. If they do declare bankruptcy, then their ability to even rent a smaller house in the near term, let along buy a new one in the long term, is definitely diminished.
And in all of these cases, the homeowner is still better off staying in their own home if the frozen teaser mortgage payments are lower than the amount the homeowner is going to have to pay in rent. Since the mortgage-freeze plan is explicitly targeted only at those subprime borrowers who have been making their teaser-rate mortgage payments in full so far, does it not make sense for both homeowner and lender to continue that state of affairs? You might be right that home prices are going to fall a lot in the coming years, in which case it would make sense for any homeowner -- not just subprime borrowers -- to sell their house right now and rent. But I don't see that anybody's speculation about the future direction of housing prices should be enough to start turfing people out of their homes.

PS: Lenders do not need any help from government to negotiate deals that are in their best interests. This plan amounts to coercion, where lenders are being "asked" to make concessions that absent government intervention that might not otherwise be willing to make. It is possible that in some cases freezing teaser rates might make sense, but such decisions should be left to the lenders. It is also possible that in many cases foreclosure would be a better option for the lender then a freeze, yet this plan may prevent such an outcome to the detriment of lenders.
Apart from moral and legal issues, such actions are bound to have a chilling effect on the willingness of lenders to continue extending credit to American borrowers or cause future rates and terms by which such credit is extended to be less favorable.
Sure a house is an asset (though despite conventional wisdom a depreciating one) but you cannot separate it from a mortgage that encumbers it. They must be viewed together, and if the mortgage exceeds the value of the house, then together they amount to a liability. Most subprime borrowers either put none of their own money into these properties, or if they did, they extracted any original down-payments though refinancing. As such they have no right to occupy properties that rightfully belong to the lenders who actually paid for them. If a teaser rate is so low that it amounts to less then what "owners" might otherwise pay in rent, why should lenders be required to provide such subsidies -- especially since these "owner/renters" have no equity in the properties and will likely not maintain them at all during the period of the freeze? Therefore not only will lenders suffer below market interest payments during the freeze, but the houses will be that much less valuable when they are ultimately sold in foreclosure when the freezes expire.
Why not let lenders foreclose now, cut their losses, and put these homes in the hands of responsible owners with financial incentives to maintain their investments? Let current occupants either rent back their houses from investors, or move elsewhere. There is nothing wrong with being a renter, I should know as I am one myself. If these overstretched subprime borrowers actually want to be home owners one day and not simply real estate speculators with other peoples' money, they can save up a 20% down payment and buy a less expensive house they can actually afford.
For those subprime borrowers with other assets and good incomes, let them negotiate new mortgages with the banks for lesser amounts, but where the borrower kicks in some new cash back to the lender. This way the owners will actually have an asset (a house worth more than the mortgage against it) and a financial incentive to take care of it.
This approach will allow for a far more rapid decline in real estate prices and therefore a return to a normal housing/mortgage market. However as politicians would rather voters continue to harbor delusions of phantom home equity, this market based approach is being resisted by those seeking re-election. However, in the long run, this plan will actually cause real estate prices to fall even further than what might have been the case without it.

Comments

[ElisaS:]

I am a mortgage broker in Australia currently being hit by the shock waves caused by the subprime market in the US. This may sound like a very basic question but aren't there any safeguards in place to monitor lending practices?

Here we have an independent body and set of guidelines that helps to protect both borrowers and lenders, there are still occassions where people get themselves into loans they cannot afford but generally it is because they have a change in circumstances or the interest rates have increased.

2007 Dec 20 04:35 PM

[Jan:]

When we were very young we got in trouble with "too much debt", and through our hard work and dedication 15 years later we are without debt and looking at buying a house outright. We learned our lesson about credit and how they can ruin your life. If I can't pay for an item I don't want it. When people get thrown out of their houses and have to pay back all of their credit card debt, student loans, car loans, while flat on their back they will swear off the "evil" of credit. That will get the bank's attention!

2007 Dec 20 07:48 PM

[RLLD:]

The government was the primary source of this issue, and I would prefer the government remove themselves from any potential "fix". Had they not manipulated the rates to begin with we would not be in this situation, and the typical 5-year bubble would have run its course. let the free market address the correction on it's own, and the "useful idiots" can absorb their punishment, and learn an important lesson.

2007 Dec 21 11:12 AM

[jimhcom:]

Peter Schiff has an excellent grasp on the reality of this situation. The market is the only entity that can correct this problem. When prices drop to the point where investers believe there is upside in investing, things will normalize. These "deals" only slow the process and keep investors on the side lines. Goverment interferance in free markets has never worked,and it will only make the current situation worse.

2007 Dec 21 11:52 AM

[logical:]

There seems to be an 'all or nothing' mindset developing regarding these subprime borrowers. But in the real world, each homeowner's case is different, and each deserves to be treated individually. These are people's properties, and it is their money that is making the payments. If they truly are in over their heads, then yes, they will have to face that fact. But many are salvagable. Should they be thrown out just so housing can correct faster?

That makes no sense. A LOT of people aren't selling at today's prices. They're waiting. Housing isn't frozen because of those with rate resets. It's frozen because even those with equity can't accept the losses they'd suffer if they sold.

Throwing people out of their homes is not going to solve the problem. It's bigger than that. Why is everyone so anxious to shake a moralistic finger at subprime borrowers when it was the vampires on Wall Street who made the big bucks off this mess? Subprime borrowers are subsidizing $20 million apts overlooking Central Park, and yet the wealthy like Peter Schiff blame them?? Talk about elitist snobs!

Peter Schiff wants marginal people to be tossed out so he can see where the economy is going, so that he can make investments to line his own pockets. Follow his press releases and writings -- he ends every interview with a plug for his book and an advertizement for his investing group. Peter Schiff is a shameless hustler. Oh, and check out his fees. Ouch.

2007 Dec 22 12:57 AM

[User 132595:]

This governemnt bailout plain will only prolong the agony. You have to let market forces prevail and correct the market. If you do not and try and interfare and prop of home prices temporariy it could destroy the US economy. It will deflate the US currency and increase inflation so terrible world wide depression

2007 Dec 22 06:51 AM

[User 132615:]

logical,

He is only stating the obvious. People forget that Reposession has been around forever. Greed is what got us here and everyone thought they were entitled to own with help of Mr. Bush and company. Well this is the real world, a strawberry picker can't afford a 600K home. Let the market correct so we can begin anew and be stronger from it. Our debt based society is the main problem here. Negative savings rates, gotta have this and that, keep up with jones vision is not blurry.

People that cant afford a home can rent. I'm tired of all the whiners who say how can we let this happen to these people. Well, it has always happened. Should we bailout the people who foreclosed in 1994 too. The 4th class of homeowners is important here as they are the ones who sat on the sideline, saved thier money, kept thier credit spotless and waited for the bubble to burst. It was only time until the pin burst this balloon. Borrowers, lenders, loan officers and wall street were greedy. Looks like greed doesn't win all the time.

2007 Dec 22 10:48 AM

[NoFate:]

NO BAILOUT - They can either afford the house they are in or should consider renting. Why should investors or taxpayers pay someone's rent for a place they cannot afford? Besides, extension of the 2% teaser payments don't even cover the interest payment, so the debt grows as the housing value declines ...ridiculous!

NO TAX CUTS - Have you seen the deficit lately? Have you seen the value of the US dollar? Do you want some tiny bit of social security someday? Do you care at all that we are adding more and more debt that our grand children will have to pay back to the CHINESE someday!

NO FREE LUNCH - People got a free lunch for 5 years pulling equity out of their homes and not actually EARNING the money. It is time to STOP SHOPPING and go back to work!

We need a recession.

- It washes away the crooked and unprofitable businesses.

- It teaches investors to respect risk.

- It teaches employees to stop living paycheck to paycheck.

2007 Dec 22 11:24 PM

[Stanley:]

Can someone in support of borrower bailouts explain why keeping people strapped with $3000/mo mortgages they cannot afford on depretiating houses is better for then letting them rent the same houses for $1500/mo? I think Peter is right on this one. We'd all be better off the quicker this mess corrects.

2007 Dec 23 02:01 AM

[STUKA:]

I absolutely agree with Peter Schiff and I think the author and folks like Logical are barking up the wrong tree. I am a renter; by choice. I am not connected to the mortgage or the real estate industry and have no inherent biases. I was told I could "afford" a million dollar mortgate by multiple brokers, but not one put a gun to my head forcing me to take one. The Lenders may be vampires, cheats or whatever; they did not coerce anyone to take loans for amounts that could not be paid back. No bailout should take place. If homeowners are so worried about foreclosures, let there be a 50 percent Capital Gains tax on all real estate appreciation from 2000 and those funds can be used to bail out homeowners. Renters should not bear the brunt of a collapsing housing market.

2007 Dec 23 08:30 PM

[Barry Robbins:]

The basic fact is that real estate is still too expensive. This is the root of the problem. The best approach is to move toward more affordable housing at a measured pace. This means that real estate must continue to decline in value. Many people think a roughly 20% decline in prices would be appropriate. If you have less than 10% equity in your home, then you should consider your options.

2007 Dec 23 09:54 PM

[Alex S. Gabor:]

"Peter Schiff is a big if, anything, moron, idiotic moron, or moronic idiot, he is just another mouthpiece of the Octodragon," says Penny King".

Google it! "Octodgron", "Penny King" and "Alex S. Gabor"..."the United States Government is a figment of the bankers and lawyers imaginations, the people give it no further credit. Greed will be their epitaph." so sayeth the "Penny King".

2007 Dec 23 10:22 PM

[logical:]

I think it's disingenuous to discuss this mess only from the point of view of the foreclosures. This housing bubble has trapped everyone. It's going to bankrupt families who didn't buy stupid, and it's going to bankrupt states.

It was a bubble, folks. It's not just a case of some greedy subprimers getting uppity and forgetting their place. It's a massive failure of the financial system. The wealthy banksters and Wall Street are the ones who got greedy first. I blame JSP less for wanting to join the middle class than I blame the Masters of the Universe for wanting to 'make' another million or so a year off the JSPs who never should have been given loans in the first place on houses that were inflated in price. The taxpayer bail-out is for the big banks and fund managers. The individual homeowners who may get rate-freezes are just a means for that to happen. This is about bailing out the big guys.

If people can't see the big picture here, then they must be myopic! Stop being jealous that some $50k a year guy maybe got a home equity loan he didn't work for, and realize that the big playas in the financial system are on the verge of bringing the entire country down! You are going to be paying taxes for a very long time to cover the mistakes of millionaires. Joe Six Pack was just a tool.

2007 Dec 24 02:10 AM

[Hopeful:]

Get ready for the shock of our lives. What we are witnessing is the first thread to unravel in the fabric of our society. Think I'm kidding - or some nutcase doom and gloomer. Let me tell you, Schiff is dead on in his overall economic predictions and his take on the symptomatic mortgage crisis. And where this mortgage crisis is concerned - it is a train without a brakeman headed straight for Main Street USA at terminal velocity loaded with TNT. No central bank is going to stop it. I mean come on, they're pumping money at this thing so fast and every red cent is simply going to prop up the balance sheets of every bank with their hand out at the Discount Window and the special poverty auctions now underway. Wake up people! I worked at New Century. I saw it all. I spent twenty plus years in the mortgage industry and watched it deteriorate from a respectable profession to an industry overrun with carpet-baggers and charletons. And while the funding did come from the Wall Street wizards behind the curtain - it went out into the hands of everyday people hoping to Flip a profit on the never-ending gravy train of real estate riches. I've said it a million times - everyone is culpable. From the Fed chairman to the investment banker, to the MBS investors and lenders, to the borrowers and the loan officers, to the underwriting managers and product development teams - why didn't anyone ever stand up and say 'Hey, these people can't afford these mortgages.' The whole thing was a joke. It was a huge transfer of ill-gotten wealth that is now unwinding in the reverse. So let it unwind. It'll be a tougher pill to swallow for some. But a necessary one. Oh yeah, buy Schiffs book. And buy some some gold. Short the real estate indexes and divest yourself of dollar denominated equities. I don't think we're at the hoarding of canned goods stage yet but keep your eye on rising commodity prices.

2007 Dec 25 11:18 AM

[bert:]

Schiff is on to the basic point that government intervention is ultimately immoral and that the immorality of the intervention ultimately has negative consequences. The government interventionists often do not see this larger picture. Their fallacies are very appealing and it is almost impossible to unravel them, but Schiff does a mighty job of it!!!

2007 Dec 28 04:32 AM

[Surfer1104:]

I owned several condo's in Myrtle Beach , within 5 years both condo's almost tripled in price. I was fortunate to unload one condo the unsold condo is up for sale at the same price I bought it for 6 years ago and no buyer inquiries. In fact the price of ocean front condo's in Myrtle Beach can be bought for unheard of prices by desperate sellers who overpaid for them and financed the purchased with exotic adjustable rate , no money down , interest only loans hoping to flip the condo now the owners are stuck. I know some buyers who who used their lump some pensions payouts to buy condo's hoping to double their money. Now these people are stuck with condo's they overpaid for, cannot sell and have their retirement money all invested in properties they cannot sell. I can only imagine how many people are getting burned daily around the country who got caught up in the Greenspan bubble.

2007 Dec 28 09:29 AM

[eisenhowergal:]

The acerbic, downright nasty attitude toward real estate borrowers, evidenced here by many, certainly encapsulizes a deep and prevailing ignorance afflicting this country now, regarding the true nature of this crisis. One of the most shocking misconceptions is that said borrowers are "uninvested" in their properties. Are you functioning under the misapprehension that, unless you are in a position to pay 75% down for your house, you don't own it? Funny, haven't noticed the lenders Schiff refers to as "owning the properties" either paying the property taxes, the utilities or any other upkeep on those properties..just collecting the exorbitant interest payments. First of all, in spite of massive propaganda to the contrary, most homeowners, including those who have purchased or refinanced within the last five years, have put down payments on their properties, and most weren't "speculators", looking to "flip" those properties in three months. Those folks, the ones who turned over loan after loan, with nothing down and no committment..who, in collaboration with the lenders, drove the prices way up in the process, are long gone and out of it, by now.

Instead, they've morphed into the pack of vultures that is presently hovering over the foreclosure properties..driving down the property values farther and faster than anyone could rationally, possibly imagine. When Schiff puts the words "lender" and "suffer" in the same sentence, I must reach for the barf bag. Once you are granted a license to do business in a particular capacity, once you profess to be a qualified professional in your field, you automatically assume certain responsibilities for your actions, not to mention those of a legal nature. Far too many in the industry conveniently turned a blind eye to the consquences of their actions, with impunity, yet they are the so-called "professionals" entrusted with the public's confidence. Guess that's better referred to as a "confidence game". It's widely overlooked that most people with mortgages (which is just about everyone who owns a home) are suffering now, too..even without adjustable payments. If you have no need to sell your property for any reason, consider yourself fortunate, but many people (to relocate or retire, or for other family, medical, or employment reasons) do. Good luck to them.

Traditionally, real estate has been considered as viable an investment as anything ever offered in the stock market..moreso. In fact, although most in my generation were rarely educated in the ways of Wall Street, it is now considered an imperative to "invest" in something..hence my puzzlement at the national schizophrenia surrounding this situation. You do the best you can, you try to educate yourself as thoroughly as possible, to make the right decision. You are, however, constantly reminded that, if you want to retire with anything other than publicly subsidized housing in your future..INVEST! Perhaps there should be a box on the purchase contract requiring that the buyer possess both a law degree and a PhD in economics, or be barred from ever purchasing a home. For those who are piously pontificating upon the virtues of renting and not buying, decrying the owning of real estate, I ask..well, what's in YOUR portfolio? Do you have a 401K..an IRA..an REIT? Do you invest in anything, at all? Then, shut up. You own real estate, too. Schiff and his pompous fellow graduates of the Marie Antoinette Academy of Social Awareness speak of working people's lives as though they were pieces on a Monopoly board.

What shall they do, Peter..trade in the Mazzerati for a Ford, or change from a nanny to day care? Oops, they're already driving the Ford, and never could afford a nanny in the first place. I refinanced my house to buy a rental property, not to flip it. It was supposed to be there for my retirement, as I am now of that age. For the ignorati amongst us, real estate traditionally appreciates at a steady but relatively small rate each year. There are sometimes rather rapid adjustments in both directions, but eventually, they are relatively minor and smooth out. What folks don't seem to realize now is that, in the space of less than five months, I've watched my rental property depreciate to prices, not only below what I paid four years ago, but below prices of twelve years ago! the home I live in, bought fifteen years ago, is worth little more than I paid for it. California's prices have been high, but that is NOT normal!! I now can't afford to sell..even though my health is not so good, I must consider retirement, and pretty much HAVE to sell at a huge loss. I lose it all. The lending institutions were the leaders in fomenting this speculation, and their rush to foreclosure has fomented the decline in values, even more rapidly.

What the foolish zygotes in this crowd don't seem to understand is that, regardless whether you've owned property or not during the past five years, everyone is going to be negatively affected by this, in one way or another. Need I mention that property values affect property taxes, which affect public services, which affect your personal safety and well-being every day. Life is funny, and pride cometh before the fall, as they say. Today you may feel secure, but tomorrow you may find yourself with some unforseen personal emergency. Whether you offer real-estate or another form of security, the credit crunch is going to affect you, either by availability or by rate, or some other factor. If you need to sell, you will never get a fair price now, and won't you be surprised when you find that your job has also, albeit unexpectedly, been affected by this crisis. In the predicted two years until the "correction" occurs, many millions of people will be ruined by this needless fiasco..this home price tsunami. I sympathize with Joshua and appreciate the comments by Logical. You begin to wonder if everyone is in an oblivious trance, or whether stupidity has just become a national contagion, when you see some of the asinine commentary expressed here and elsewhere.

2008 Jan 01 12:29 PM

[my_inner_voice:]

What is bothering me is how "logical" is Logical and the interviewee Peter Schiff. Would they have had written these lines in 2000? In 2001? If logics always triumphs, then how come no one can predict the stock market?

Most buyers, like me, simply want a family home. Bay area become prohibitive, we moved to Rocklin and finally got a house. I could afford then the price, I can still afford it now. It is the most beautiful home my family ever had. Does this has a "rationale" or not? As long as I can pay it (my mortgage for the next 5 years is less than the rent I paid in San Jose Saratoga area). Sure I build no equity. Neither a renter does.

But you know what? The prices of real estate and of the homes in desirable area, in California, long term, will be back. If we create the jobs and we keep entrepreneurial, California is a world magnet. It may take 5 years, but we will recover the prices.

I went to San Francisco for the new Year. Zillions of tourists fotograph every boiled crab on Fishermans Wharf. They look at Apple in Cupertino as if it were the Church of the iPod. They dream to have a time share in San Francisco.

We may be insecure, but no where near the rest of the world is.

2008 Jan 04 02:15 AM

[joe magner:]

The reason for the U.S. housing crisis begins with he need to dreate more money to cirulate in the U.S. markets and economy. Debt was the only way as we nolonger manufacture anything of worth besides Military Systems...We import so much and that has been a drain on our econmy at home so money creation was a must.

Watch the movie "Money as Debt" - video.google.com/video...
its available in parts on youtube.

2008 Jul 28 09:56 AM

[yj:]

Peter Schiff is an idiot.
On October 28th 2008 he gave an interview on Bloomberg TV stating that the investment strategies

outlined on BOTH his books (Crash Proof and The Little Book of Bull Moves in Bear Markets.) "are

NOT working"

The prices of Gold and Commodities are not taking off as he hoped, and investing in foreign

currencies was a disastrous move, as the dollar has gone up while most foreign currencies have

collapsed.
Investing in foreign markets had an even worse effect than even investing in the US market, as

exports to the US have collapsed and the dollar has gone up.
Anyone who drank the decoupling of foreign economies Kool Aid is a fool and is now paying the

price.

Peter thinks that despite the failure of his theories, this is still a good opportunity for buying

"foreign stocks" and he claims that the Chinese and other Asian economies are going to consume all

the cheap junk they have been exporting to the USA.
Yeah, right.. and with what money they are going to be doing that?
Without all the money we have been sending them for their cheaply made exports, those economies

are just as broke as we are.

He was also blaming our current economic collapse to "government intervention" when everyone with

half a brain knows that it was the lack of government regulation on mortgage lending and

investment banking what allowed Wall Street companies and banks to create the collapsing shadow

banking system filled with unregulated derivatives and CDOs, all thanks to Phil Gramm and his

"Commodity Futures Modernization Act of 2000"


This guy is clueless, as anyone who followed the advice written in both his books already knows.
The Austrian school of economics that Schiff peddles, where the free unregulated markets rule is a

monumental failure, and you will see the tide turn around against it in the form of much needed

regulations to the lunacy unleashed by 8 years of the brilliant Bush presidency.

In November 21st 2008, Peter Schiff was still defending his failed financial strategies on

Bloomberg TV, predicting "massive inflation" and claiming that foreign economies like Japan were

in way better shape than we are and that gold is going to go through the roof..

The guy is clueless.. i guess he still has no concept of what a deflationary recession is..

inflation is YEARS away and it is the least of our worries.

To get a clue as to what to the economic future holds, read Nouriel Roubini's website, who

acutally happens to be a qualified economist, not some hack like Peter Schiff..

2008 Nov 21 07:11 PM