Wikinvest Wire

Why stop at reducing the principal?

Tuesday, March 04, 2008

Geez, they should just get right to the chase and start cutting checks for tens of thousands or hundreds of thousands of dollars for each homeowner who now owes more than their house is worth.

And what about credit cards and auto loans? Why not get out ahead of the curve on those problems that are now starting to blossom?

Reduce my outstanding balance!

Gimme some free cheese!

While we're at it, let's make health care free for everybody without raising taxes and how about increasing the minimum wage to $100,000 per year.

Pass a law that stocks can never fall on a year-over-year basis and forbid the sellers of commodities from raising prices faster than the government's official rate of inflation, which will be required by law to never increase by more than three percent per year.

Reading this report from the Associated Press about Fed Chairman Ben Bernanke's speech this morning (the Fed website appears to be too busy right now to serve up the full speech), you'd think that's where we are all headed:

Federal Reserve Chairman Ben Bernanke called Tuesday for more action to prevent distressed homeowners from falling into foreclosure, including a suggestion for mortgage lenders to reduce loan amounts to provide relief to struggling homeowners.

"This situation calls for a vigorous response," Bernanke said in a speech to a banking group in Florida.
...
On the idea of cutting mortgage values, Bernanke said, "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure. "

With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. "They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.

Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again. "When the mortgage is 'under water' a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.
Oh yeah! That money I lost in the stock market crash eight years ago?

I want it back.

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22 comments:

Anonymous said...

Why is everyone so concerned about these underwater homeowners??

Why aren't they talking about all of the homeless people in this country who desperately need housing themselves?

Or all of the fixed income seniors who are getting killed by high gas and food prices and low interest rates?

Don't these people deserve $$ help too?

Anonymous said...

I need a new roof and I can't afford it. I think I'm going to take out a loan and not pay the money back. It seems to work if you buy the whole house, why not just a roof?

Chuck Fouts said...

There are several reasons to keep borrowers in their houses. If people start walking away from their homes it can turn into viral urban blight. Cleveland is a prime example of this. Also, a good part of the responsibility for this fiasco lies with the lenders. Why not have them be held responsible? The real problem with this idea though is that lenders don't have any incentive to lower mortgage balances for a majority of their loans. The loans are going to be FHA or PMI backed. They most likely get more money back via the foreclosure process rather than lowering the mortgage principal. This leads to what Bernanke is really worried about and that is Fannie, Freddie, and the Private Mortgage Insurers needing to be bailed out. That kind of money comes out of the tax payers pocket instead of the banks. All in all, Bernanke's crazy idea makes more sense to me than the others ideas I have heard.

Anonymous said...

Quoting: "Why is everyone so concerned about these underwater homeowners??"

That's because our government consists of a bunch of immoral bustards who like (or so they think) to have things their way. They like to depose governments who are not according to them friendly, start unnecessary wars and bully anyone else in doing what they like and not what is morally right. So do you think they will do it right when it gets to running our economy?

Their idea of a perfect society is one in which your house is part of a humungus ponzi scheme where it appreciates by double digits on a yearly basis and in doing so it 'makes' money for you so that you can go and buy a gas guzzler SUV, a 500W home entertainment system, and vacation to Hawaii and feel you are on the top of the world.

Moral of the story: If you are an idiot, or an immoral SOB then uncle Sam desperately needs your help in building the the US of A.

Anonymous said...

Quoting: "There are several reasons to keep borrowers in their houses. If people start walking away from their homes it can turn into viral urban blight. Cleveland is a prime example of this. Also, a good part of the responsibility for this fiasco lies with the lenders. Why not have them be held responsible? The real problem with this idea though is that lenders don't have any incentive to lower mortgage balances for a majority of their loans. The loans are going to be FHA or PMI backed. They most likely get more money back via the foreclosure process rather than lowering the mortgage principal. This leads to what Bernanke is really worried about and that is Fannie, Freddie, and the Private Mortgage Insurers needing to be bailed out. That kind of money comes out of the tax payers pocket instead of the banks. All in all, Bernanke's crazy idea makes more sense to me than the others ideas I have heard."


I hate it when people like to rationalize irrational behavior. What we need is not moral harards but a reality check. A severe economic pullback will really fix all that. Don't like feeling poor? Well, it is time you should. Trust me. It will be for the much better in the long run...

Anonymous said...

Damn, and I just walked away from a sweet 4,000 square foot million dollar McMansion that only cost me $1,300 a month for the last three years!!!!

Anonymous said...

When will people relize you can't run a country this way. Everyone has to by a new TV every three months and a new car once a year. Oh and the latest monthly techno gaget. To do this they simply suck the equity out of their home on an anual basis because housing prices always rise. Why wasn't anyone concerned about the "inflation" of housing prices. I'm getting tired. Who wants to start a cabutz, commun...

odograph said...

From what I've read at Calculated Risk, etc., is that these renegotiations were always possible.

And why not, we experience that in business. We are felt out, or feel out, to see if a new contract can supersede an old one.

So the question really is why the big B needs to encourage this quiet status quo, and elevate it to national discourse?

Are we up S creek?

thesilentcritic said...

I played by the rules, lived in a modest house that I could afford, didn't buy anything extravagant or go into debt beyond my mortgage. This idea is seriously unfair to me.

If this idea were to really happen, how I wish I could take out a $100K heloc and splurge on gold, TVs and an extravagant vacation or two... then have most of it covered by the lender... ugh.

donna said...

I want back my money on that food I bought yesterday. I ate it, so it isn't worth anything now.

And right there with you, silentcritic - I feel cheated for living within my means. How dumb is that?

Nick said...

Ok, this may sound crazy from me (especially given my other comments and certainly my blog), but... I kinda agree with Benny on this one. Beware of falling sky! Bear with me...

Banks and other lenders have a problem with all their bad loans which is going to get worse. As people figure out they can walk away from underwater loans with various levels of downside (from a simple defaulted "everybody did it then" debt to "many people did it then" bankruptcy), lenders will be left holding a lot of properties they can't unload. As states try to combat urban blighting, they will figure out ways to fine the lenders lots and lots of money to compensate for lost property tax revenue. Add in the foreclosure cost, chance of people declaring bankruptcy and keeping their homes while clearing their debt (which is certainly possible), and lawsuits over predatory lending, and lenders are staring down the proverbial abyss.

Given those considerations, it really might be cheaper for the lenders to write off some of the principle of the debt, and a prudent financial move. The goal of the lenders is to get people paying 100% of their income to the lenders, forever, without pushing the people who borrowed money to the point where bankruptcy or defaulting is seen as the better option. If giving people some phantom equity furthers that goal, it's certainly an option worth considering, compared to the probable alternatives for most of the "obvious default" loans.

I know, I feel dirty for agreeing with Benny... but that's just how I see this one.

Anonymous said...

Then why not make it illegal for the underwater homeowners to walk out? you can walk out, but your debt will still be there, forever,
that will make you a little more
responsible?

njdoc said...

Comrade Bernanke makes an excellent point. He has a most ingenious 5 year plan to help people. There was a record wheat harvest in Ukraine this year.

Nick said...

Because bankruptcy laws are designed to allow an outlet for people who are underwater "forever" to have the opportunity to have a fresh start at the expense of their credit, and as a legal alternative to more drastic actions which would be more detrimental to the society when people are faced with "no way out" situations. The risk of people walking out of debt should be priced into loans, based on credit ratings and people's individual circumstances. Nobody held a gun to lenders' heads and forced them to loan money to people with no-doc apps for multi-million dollar homes; there is supposed to be risk for the lender.

As long as it's the lenders and investors who under-priced the risk who are taking the losses (and not the taxpayers, directly or indirectly), it's probably a good thing for the economy. It's not like all the financial institutions got caught up in the Ponzi scheme that was CDO's/etc., and the ones that didn't, like the people who didn't buy houses they couldn't afford, should be allowed to benefit indirectly by the people who did irresponsible financial things now taking heavy losses.

Remember, the suggestion was that banks write off principle instead of foreclosing for underwater loans, both of which cost the banks money. In the write-off case, the banks can keep the underwater homeowners paying longer, which in the long-term might be worse for the homeowners (compared to a credit rating hit now). Defaulting is always worse for the loan holder, particularly in non-recourse situations, and especially in bankruptcy cases where the owner keeps the property and the lender gets nothing.

Of course, if I were the banks I'd find other ways to extend the financing in order to ensure that it's both a recourse loan and they get all their money. For example, refinance the loan into one which has a variable rate, and whenever the monthly payment is above a threshold (whatever is the affordable limit for the person), the extra interest adds to the principle, extending the term of the loan (with the option to pay down the principle at any time). Add a provision for the bank to optionally re-evaluate and adjust the threshold every 5 years based on the individual's income and financial situation, and you've got lending nirvana: a loan they will be paying forever, at the maximum they can afford to pay. Homeowners keep homes, banks keep loans, win-win (for the lenders and the government).

That's how I see it, anyway.

little larry sellers said...

From what I can see, there are three MAJOR problems with Bernanke's plan:

1) This idea of making debt more manageable at the moment does nothing to address the problem that far too many people live beyond their means. In fact, bailouts will encourage them to continue their spending ways, which only creates more debt and voids the current solution. This would only serve to anger people who have the audacity to live within their means.

2) Our economy is based on constant expansion. Who cares if we stretch out loans forever to make the payments feasible? At best, we would be maintaining a status quo (keeping strapped homeowners in their current houses) but this would all but prevent the expansion everyone desires. No one wants to simply be a slave to their current debt forever without being able to splurge on more goodies.

3) Lenders are still operating under the "too big to fail" doctrine. Tying in with problem #1, until lenders feel actual pain for grossly underestimating risk, shouldn't they just continue on the current path? Shouldn't executives keep taking huge risks to obtain huge bonuses, knowing that Uncle Sam will bail them out if they need it?

This is the problem with arguing that letting the housing bubble burst would cause too much pain. Until people feel pain, they will continue to spend and take on risk like crazy. Why shouldn't they? And if we're saying that letting this housing mess sort itself out would destroy our economy, why should we believe that enabling the Goldilocks economy for a few more years would change the underlying problems?

Nick said...

To little larry sellers:

As for points #1 and #3, I agree that bailouts encourage reckless spending and unsafe risk taking, and should be avoided in general. However, I think many people are missing the forest for the trees: the proposal is not a government bailout; in fact, it's one of the few proposals regarding the housing bubble burst coming from a government organization which is not a bailout with public funds. Yes, some irresponsible buyers may get off paying less than what they should, and that's a shame... but the alternative of them paying nothing is worse for the banks and the system in general.

As for point #2, I would say yes, this doesn't get the economy back to the reckless deficit-spending driven expanding bubble economy everyone seems to want, and I fail to see why that's a bad thing. If the financially irresponsible people who tried to get rich during the bubble end up in bad long-term loans, and the banks which made the bad loans end up eating some losses, how is that bad for future investment decision making?

I think the bubble should certainly be allowed to burst, and people who overextended themselves with risky bets should take losses. My hope is that those losses don't end up getting shouldered by the people who were financially responsible in the form of government bailouts and inflation. To the extent that Benny is proposing options which allow irresponsible lenders to take losses while making irresponsible borrowers more accountable for paying off their debts (by making them harder to walk away from by refi, for example) without spending public funds, I support those proposals. As I said, if I were the banks I might do stuff differently for the same end-goal, but it still seems one of the better propositions to minimize lender-losses long-term, which serves the interests of the target audience.

Anonymous said...

Quoting: "Why is everyone so concerned about these underwater homeowners??"

Ben doesn't give a rip about the homeowners. He is looking out for the banks that already have too many empty houses sitting on their books. Why do you think they're only interested in helping folks with no equity? Reason is the bank is certain to lose money by foreclosing. If the bank has any chance whatsoever of getting all their money back, the deliquent homeowner will be tossed out in a hurry.

Ben is looking out for the banks. Take that one to the bank.

Anonymous said...

I think his plan is the only way 'responsible' homeowners don't wind up paying - think of the alternatives. A gov't sponsored bailout funded by taxpayer dollars is probably the most infuriating scenario for the rest of us, but the alternative is a wave of defaults/foreclosures that inevitably drives down prices and destroys the value/equity of EVERYONES home. So moral hazard aside, banks footing the bill may not be all that bad

Ben Bittrolff said...

Dammit. I knew I shouldn't have been responsible. I should have maxed out everything, and lived the high life.

little larry sellers said...

Taxpayer dollars used for a bailout?!? That's absurd. Of course, we'll simply print the money to deal with this situation, just like so many others. Voters don't like taxes, but no one seems to object to keeping the printing presses running full tilt. And we wonder why we have a weak dollar.


To Nick:

I think the main point here is that we're talking about treating the symptoms rather than the actual disease. Our housing bubble is just the latest (and costliest) phase of a greater bubble economy. Trying various tricks to keep people in homes they cannot afford only prolongs the inevitable if we refuse to adopt a more sane policy. I would define sane policy as minimizing manipulation in down cycles, or to use the metaphor of many others, to take the punch bowl away when the party gets out of hand. Since the Greenspan era, the Fed not only refuses to take the punch bowl away, it loudly insists that all guests keep drinking.

Anonymous said...

Then why not make it illegal for the underwater homeowners to walk out? you can walk out, but your debt will still be there, forever,
that will make you a little more
responsible?

===now this is a BRILLIANT idea. And while we are at it, let's bring back the concept of indentured servitude. After all, most of our ancestors came here with anchors of debt around their necks. It made them tough and strong; why can it not work again?!?!

And debtor prisons too...!!!! Bring them back.

How can we invest in these ideas?!?!?

Nick said...

I think everyone here (unless someone from the fed actually reads this blog) would probably agree that the best solution would be to fix the monetary policies which got us into this mess in the first place, no debate from me at least. That said, the current situation is what it is, and no amount of regretting previous government actions is going to fix it. Moreover, as much as I would agree that less manipulation and bailouts is the right answer long-term, manipulation and bailouts is pretty much inevitable, barring something extreme and unforeseen happening.

As I see it, there are a few likely scenarios, depending on who's plan/policy gets implemented. These could all happen together, or in any combination:
- Fed will print money and create 15% real inflation while keeping fake inflation (CPI) under 5%
- Taxpayer money will be spent to stimulate spending (eg: the stimulus packages)
- Fed and/or government will bail out banks (nationalization, free loans, forcing consolidation of bad businesses, direct monetary injection, paying off loans, etc.)
- Government will buy up vacant housing (with taxpayer money), and give it to low-income people (probably with massively subsidized loans)

That's how I see it, anyway.

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