Housing help a bitter pill but needed medicine
We have close friends on the street, and the neighbors there still act like neighbors, kids play in the streets and dog-walkers wave cheery "hellos" instead of hustling by, heads down.
We drooled when the "for sale" sign went up three summers ago, but it ended there. We knew there was no way we could afford it, not when houses identical to our own smaller model were going for $360,000 when they'd sold for half that just five years earlier.
Yes, we could have bought it, on a no-down payment, interest-only loan at an adjustable rate. And if we had, we could be facing foreclosure right now.
That's where, emotionally, the idea of a housing bailout sticks in my craw. Why should people who were foolish, bankers who ignored all rational money-lending standards, brokers who were greedy, appraisers who overvalued properties and those who perpetrated outright fraud and predatory lending be granted "get out of hock free" cards?
Well, because either way, we're going to pay for it. Trying to solve the problem by pouring money directly into the banks is showing no sign of working.
“Sure there were people who made bad decisions,” Desmond Lachman, a scholar at the American Enterprise Institute, told the New York Times. “But if the alternative is that the economy will be crushed, I don’t see why the rest of us have to pay for that” just to make a point to those who overreached.
There are a lot of options, and President Obama is scheduled to release his proposal Wednesday.
Senior adviser David Axelrod said key goals will be stemming foreclosures, helping homeowners "right on the edge" of foreclosure, and ultimately helping raise "home values that have been plummeting."
A bit of historical perspective, please: Home values are plummeting because they should be. They're returning to something close to normal levels. The $360,000 house on our street is in foreclosure, with a market value of $198,000. That's about right.
Any help likely will include provisions to modify the toxic loans. It's tricky to do because who knows who actually owns pieces of what loans these days due to the way they were bundled and sold as securities. And under various contracts and agreements, some investors claim they should get a say before anything is modified.
That modification is needed is no surprise even to Republicans, though former Treasury Secretary Henry Paulson resisted mightily.
Under a program Federal Deposit Insurance Corporation Chairwoman Shelia Bair proposed in November, lenders could reduce monthly payments primarily by cutting the borrower's interest rate to a minimum 3 percent. If necessary, the company could also extend repayment beyond 30 years. Finally, companies could defer repayment of some principal. The borrower still would be on the hook for the full value of the loan.
Mortgage companies would be paid $1,000 to modify each loan, but participating companies must agree to modify as many loans as possible.
The government would agree to share any loses with the finance company, though the agreement would kick in only after the borrower has made six payments on the modified loan. And the government would not cover losses where the modification did not lower the monthly payment by at least 10 percent.
FDIC officials said their experience after taking over the failed IndyMac showed that revaluing properties is not necessary. As of November, the FDIC had offered modifications to about 20,000 IndyMac loans. In 70 percent of the cases, the FDIC was able to create an affordable payment solely by reducing the interest rate. In 21 percent of the cases, the agency also extended the life of the loan. In 9 percent of the cases, it delayed repayment of some principal.
Blair believes the IndyMac plan writ national could cut foreclosures in half.
It's still not all sunshine and roses. Some IndyMac loan holders are told flat-out that they can't afford the property, and in those cases, the loans aren't modified. Some loan-holders default even after the modification - the FDIC estimates 40 percent in the case of IndyMac.
Oh, and then there's the cost: Bair estimated $24 billion a year, the Bush White House said $70 billion.
Critics fear that modifying loans without reducing principal will encourage people to deliberately default when they realize they're paying twice what the guy up the street is.
Conservative economist Martin Feldstein, for example, suggests rewriting loans, but at lower values so borrowers don't have incentives to walk away. The government, the lender and the homeowner each would cover a third of the difference. He also suggests changes in law that allow lenders to go after assets other than the home if an owner does default.
Liberal economists such as Robert Kuttner also believe that loans need to be rewritten, but Kuttner opposes routing the money through the banks. "On the mortgage front, it would be far more effective for government to simply refinance at-risk mortgages directly, he wrote at Huffington Post.
In a sign of how truly odd these times are, none other than Republican Sen. Lindsay Graham mentioned Sunday that bank nationalization might not be out of the question.
“To me, banking and housing are the root cause of this problem,” Graham said on ABC's "This Week." “If you don’t stabilize housing, you’re never going to fix this problem. You’ve got a huge inventory problem. You’ve got foreclosures that have to be dealt with. And that goes back to banks.”
What's in it for those of us who won't get to keep living in homes we bought for inflated prices at ridiculous interest rates?
"The prospect of a downward spiral of house prices is the major risk facing financial institutions," Feldstein wrote in The Wall Street Journal. "It is also a primary source of the further falls in household wealth that will reduce consumer spending and depress the economy."
Copyright 2009 Debra Legg. All rights reserved.