The Case for Housing Help
The head of General Motors in the Fifties famously said that "what was good for our country was good for General Motors and vice versa." Today, with homes the largest asset on America's family balance sheet, amounting to about $21 trillion, what's good for housing is what's good for America.
Or very bad for America.
The unprecedented crash in home values, the first since the Great Depression, threatens the entire economy, and it's not over. Home equities are predicted to drop 10 to 12 percent in each of the next two years, reducing value further by the staggering total of $4 trillion to $6 trillion.
The bubble in the housing market that has now burst is causing a daisy chain of damage in America's financial system. The increased defaults in subprime mortgages began to depress mortgage-linked securities last summer, and soon the contagion spread to all sorts of products in the financial world as confidence went into free fall, along with housing prices. This has made it difficult to stabilize the financial markets.
Banks have reacted to their losses on mortgage-backed securities by pulling back mortgage loans, as well as other loans, intensifying the credit crunch and further compounding the economic downturn. The Fed's attempts to halt this negative spiral by cutting interest rates have been largely upset through rising interest rate spreads, i.e., the growing gap between mortgage loan rates and the federal funds rate. The result: Mortgage rates today are higher than when the Fed resorted to emergency rate cuts in January. And because of tighter standards, many types of people who were able to borrow two years ago cannot today, at any interest rate.
No bottom. There is probably no way to stop house prices from falling, but the current crisis won't end until buyers think prices have hit bottom. Only then can we hope to clear the excess supply from the market.
What's critical to recognize is that house prices had begun to fall even before the recession began and without the shock of higher interest rates. This is conclusive evidence that a speculative bubble was in place. It was fueled by excess credit creation and lax lending standards. The estimated losses exceeding $1 trillion are not fanciful when you realize how many of the mortgages that originated in the past several years came with little or zero down payments. Borrowers putting a 10 or 20 percent down payment on their homes are almost mythological figures today.
The stark possibility now is that 15 million homes will have mortgages that exceed their value. We are talking about almost 30 percent of the nation's 51 million households ending up with negative equity, which means the owners have an incentive to walk away from their mortgages. Today, 8.8 million homeowners have a clear financial incentive to abandon their homes. The housing binge is ending with a hangover.
If millions of Americans do walk away from their homes or are forced out by involuntary foreclosures, the effect on the value of whole neighborhoods may be catastrophic. Abandonment increases decay and crime and accelerates further reductions in home values. What a challenge it is to American daily life and American politics! The economy is back at the heart of our politics, and so is fear.
Political policy contributed to where we are. Can it get us out of the mess? Politicians had long wanted to raise homeownership through subsidies, tax breaks, and dedicated agencies, such as Fannie Mae and Freddie Mac. When George W. Bush became president, he challenged lenders and others to create over 5 million new minority homeowners by the end of the decade. In 2003, he created a program that would offer money to the poor so they could secure a first mortgage. Many lenders stopped requiring sizable down payments from people who couldn't afford them. They often did the deals without documentation of family income and net worth. These "no docs" homes amounted to almost 44 percent of subprime borrowers in 2006 alone. But they weren't the only borrowers who were encouraged to take the over-the-top mortgage money. Included were people with higher incomes who wanted to speculate on housing and many homeowners who refinanced to cash out their equity stake, thus assuming more mortgage debt than they could afford. In a word, the nation gorged itself on accelerating home prices.
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Reader Comments
greedy people
If people hadn't been so greedy, and only puchased a house, or car, or anything, that was within their salary bracket to pay for, they wouldn't be in trouble. If the news media and the politions (wanting to garner the vote of those who want what they want for no money down, or better yet, free) would not spend more than they take in and can afford, there would be no "down turn" in our ecomony. Read the "rules for a communistic take over of a "free" society" and you will find we are playing to the scheme of Marxis/socialistic powers. Another 10 to 15 years and we will be just another 3d world clawless tiger. Get ready to explain that to your grandchildren when they realise what you have left them.
Greedy Banks, Greedy WallStreet
Don't place the ENTIRE blame on individuals who "purchase a house well beyond their needs!" There are mortgage companies and banks who do NOT fully explain the terns if the purchase to the consumers. Just a little while ago there was a story on the internet about a young couple who purchased their first house and they were promised up front by the mortgage company that they would have a fixed rate. After the first month, the fixed rate doubled which was not agreed in the contract. The new homeowners took their case to court and it was a proverbial "David versus Goliath". Nobody ever would believe that they would win their case, but they did! In today's housing market, it wouldn't be a bad idea to hire a a lawyer to make sure that the terms of the agreement were in writing and that both parties had a clear understanding of the agreement. No agency and no legislation prohibited unscrupulous banking/lending practices. Even now, there is no attempt to investigate what really occurred to bring about massive foreclosures! If there are
no clear policies, no clear rules, no clear guidelines set forth for bankers, mortgage companies, and lenders alike; how can anyone say emphatically that is clearly the faulty of those who purchased a home but were most likely unable to afford it? Yes, I believe there were many who clearly "gambled" and purchased their first home thinking it was more like a "balancing act" similar to their credit card balances! But the percentage of first-time home owners who were openly deceived cannot be accurately estimated. Greed knows no bounds and until the average consumer can see with their eyes laws on the books to protect them against the immoral and unscrupulous lending practice of many institutions and see that they are enforced, I, like others, will give the average home buyer the benefit of the doubt!
not a solution
mr. zuckerman,
while your article made a sensible appeal to the common self interest, the reality of the situation is different. another government program to bail out the profligate, the foolish, and the greedy is not what this country needs. like all federal handouts any attempt to help a few unfortunates will be stampeded by thousands of con men, politically connected pinheads and other greedy people in search of easy money. one need only look at dozens of other misguided federal programs to see that personal stupidity and corporate greed cannot be legislated away. forcing prudent people once again to help fix the latest mess will only only encourage more fiscal irresponsibility in the future.
you can mark it on your calendar right now. if a federal mortgage bailout happens you can expect a timeline like this; one year to legislate, two years to implement and two years for the public to lose sight of it. a few months later a scandal and the next perp walk. some time at the end of 2013 we can be assured of yet another congressional investigation. i'll go heat up the popcorn.
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Unprecedented?
Mort,
First of all, please excuse my liberties with the english language.
Your statement, "The unprecedented crash in home values, the first since the Great Depression, threatens the entire economy" should read, "The only once before precendented crash...", shouldn't it?
By the way, there's another way of looking at it...
"The unprecedented surge in gloom and doom headlines, up even more than Iraq Quagmire nonsense, threatens the entire economy".
Please, it's only 2% of mortgages that are in foreclosure. Only 30 % of homes even have morgages. That means only 0.6% of homes have anything to fear.
50% of our income gets confiscated annually by government, doesn't that threaten our entire economy?
Government regulates and or taxes all commerce, most all property, our bodies, our education, our jobs, the food we eat, the products we buy, and just about every activity we do. Doesn't that threaten our economy?
When speaking of things "unprecedented" that threatens our economy, you can start a little higher on the priority list, perhaps even in the top 10.
Apr 14, 2008 14:35:14 PM [permalink] [report comment]