The Mortgage Crisis: Time for Real Solutions

A common call from “mortgage activists” and social commentators has been for the banks to “forgive” a portion of the mortgage principle for people facing foreclosure, to halt foreclosure proceedings for a couple of months, etc.

The idea is that the person is merely a victim of the banks, and the bank is the one that needs to step up and make it right. Now political figures are jumping on the bandwagon: presidential candidates are proposing mortgage rescue funds, state legislatures are proposing moratoriums on foreclosures, Ben Bernanke is calling for banks to forgive part of the principle owed, etc, etc. While I’m sure many of the people calling for these things have the best of intentions in mind, their proposed solutions are cures that are worse than the diseases.

More importantly, their cures indicate a lack of understanding of the true nature of the problem: no matter how you slice it, the majority of the people facing foreclosure are those that either spent too much or simply weren’t financially ready to own a house. Principle forgiveness, mortgage moratoriums and bailouts don’t truly address those problems, unless our government is going to start giving people enough cash to make their mortgages affordable, put them into a positive equity situation or make their payments every month. At the end of the day, the solutions proposed by the activists and politicians will just delay the inevitable and make the housing crisis last longer.

Don’t get me wrong, I’m not a big fan of the banks and I think they did many home buyers (and the economy) a disservice via low loan standards, bad risk management and their own bad decision making. BUT, does our society want to get into the habit of footing the bill for people who were misguided at best or financially irresponsible at worse? Finally, do we really want to support policies that will extend the housing crisis and indirectly over-inflate housing prices?

Again I believe in the altruistic motives of the people proposing solutions to the housing crisis, I just don’t think they realize their cures are much worse than the disease.

True solutions to the housing crisis should be in the form of re-educating the consumer about home ownership, and the banks adopting more realistic standards for originating mortgages. The “assistance” for people facing foreclosure should be in the form of getting them into an affordable housing situation (cheaper house, or renting), or perhaps the banks “forgiving” the hit to their credit rating. Another idea would be for banks and real estate agents to collaborate in matching up qualified buyers with people facing foreclosure, in order to make it easier for people to sell their way out of trouble. If there is debt left over after a house is sold, make it easier for that debt to be rolled into a personal loan, unsecured line of credit, etc.

There are a lot of effective and relatively easy to implement solutions available, if people just confront the reality around what’s truly behind the housing crisis.

Comments

[Cazimi]

The mortgage crisis has gone far beyond sub-prime borrowers facing foreclosure. The Wall Street firms that securitized mortgages, and the ratings agencies that abetted, sold the securities with the assumption that home prices would not suffer a meaningful decline - ever. Putting aside that this is a ridiculous assumption, now, investors who were burned by Wall Street bs are refusing to buy the good mortgage-backed stuff. Thornburg, a first-class operator with the highest quality mortgage paper, is the poster-child for a potentially cataclysmic problem. We are entering the downward spiral, self-fulfilling prophecy stage, where fear-based tightening lending standards take good borrowers out of the market, lowering demand, which lowers prices, which creates more fear-based credit-tightening, which... Restoring confidence in MBS is going to take an explicit guarantee by the govt. of agency paper at least, and it needs to be done soon. BTW the WSJ will scream bail-out, but if this revives the MBS market there won't be anybody to bail because the floor will be in place on value.

[Lilguy]

You say, "There are a lot of effective and relatively easy to implement solutions available . . . ."

OK, like what???

[brokerbila]

From a Real Estate Brokerage Owner in CA
How to Fix the Housing Dilema: As buyers keep waiting to buy, due to falling prices, the problem continues to grow. Now even peolple who bought with $150k of their own money down are begining to walk away from their homes. If we can help put a floor under values we can stop this costly spiral meltdown. Benanke's idea to forgive principal is good, but the following idea is an easier and less costly way for the government to make people want to stay in their homes. Lets create an FDIC sticker for a home like the one on the window at the bank. It basically insures that if you put money in youll get money back later. Lenders currently protect themselves with PMI (Private mortgage insurance). We should make this available to home buyers, that if they agree to
hold the home for a least X number of years that the value will be
insured if they have to sell after that time. The owners could make a small payment per month to pay for the insurance. Buyers would not wait any longer to start buying again and this would put a floor of confidence under the market. At some point in the future a smart insurance company who is already recognizing a bottom in the market anyway could step and make a lot of money at low risk. Government could encourage the insurance industry to create an FDIC like insurance that would stop this spiral down dead in its tracks. Sophisticated investors don't leverage 10:1 without some kind of investment protection insurance, why should the average guy own a home without it.

[Things ComeUndone]

Maybe bankers should take classes about who should get home loans in the first place.

[NoFloorNeeded]

Someone above said we need a floor to stop prices from coming down... is it any shock this person is a realtor as well? It just goes to show that you dont have to be smart to be a realtor or even be able to understand basic economics. If you bought a house and its underwater then thats your fault. Furthermore, the FDIC insure banks that many use, a house is a PERSONAL choice that requeis YOU the owner to be responsible. Sir I content that you are the reason the housing market is in the shape it is in.

[Big BearLake Hostel]

Maybe schools should use some of the time in "home economics" classes on cooking/sewing to actual home education about the economics or owning versus renting and how to save for a down payment.

[Bordeaux]

The best idea I have heard so far is to convert all defaulting buyers into tenants. We can let the Realtors/Real Property Managers work out the details with the lenders (for a reasonable fee, of course).

[Hyman]

Why all the greed and no compassion? These families and their children are being thrown out into the streets! The govt. should help these people out, even if they made some mistakes. People were just following the American dream, trying to get a roof over their heads and maybe building up some equity. Isn't trying to own a home and move up the financial ladder something that we are all encouraged to do from the time we are in first grade? A government's role is to help out its citizens, so now is the time for them to help these people out.

[StopSocialism]

These people are NOT being thrown out on the street. They tried to game the system and lost, and are free to go back to renting. It is not greed to oppose ridiculous and unsustainable entitlements that will ultimately bankrupt a country whose number one export is debt.

[DragonMaster]

Some points to Hyman:
<<The govt. should help these people out,>> gov had nothing but collect my money for its giving and now it itself is bankrupt. You basically ask me as taxpayers to give these people free handouts, not gov. If this is your compassion, I can spend all of saving right away if you can wire your cash (IFF you have) via gov into my account.

<<People were just following the American dream>> dream or greed. There are different. American dream is working hard, saving and building future. These guys spend more than they have - greed and lazy.

<<A government's role is to help out its citizens, so now is the time for them to help these people out.>> Why you ask us? IFF you can give them money, go ahead. Keep in mind that gov does not have money. That is our money.