Sunday, December 09, 2007

Housing Mess and The Plan - a Few Thoughts

Leaving pure politics behind for a post, I've been keeping an eye on the rapidly unwinding housing bubble. We bought a house earlier this year after the local housing market had begun to go down and I'm curious to see what happens to the "value" of our property over the next decade. We did not stretch that much to buy the house, having a conventional 30 year fixed loan with a 6.125% interest rate. The mortgage, tax and insurance is less than 25% of our after tax income.

But what about efforts to deal with the fallout for sales that were anything but conventional? I think Tanta of Calculated Risk got it most right when she said that the recent plan put out by the Preznit is not primarily intended to help borrowers in any significant way. It's intended to help banks and investors not lose their shirts, though it's unclear whether it can or will do that.

To learn more than you ever thought you could know about mortgages (from start to unsavory finish), check out Tanta's The Compleat Ubernerd series of blog posts explaining in layman's terms how the business works. I don't have anything intelligent to add to her incredible write ups.

The doom-n-gloom housing bloggers go apoplectic at the thought that someone who took out a bad loan might not suffer devastating consequences of their ill-considered actions. Me, I'm not such a Calvinist. There appears to be a heck of a lot of variation from market to market on this thing. It is clearly not just "subprime" and there will need to be a number of approaches to lessen the impact. I think it is in the interests of the country to reduce the cumulative effect of hosuing devaluation and loan failures, though there is less reason to be generous as you get closer to individual borrowers, lenders and investors.

One thing that is emerging is the way in which unscrupulous lenders targeted the elderly and people in bad financial straits, particularly in the midwest, and scammed them into refinance deals that never could have worked. It seems to me that if there is fruad on the lender's side, the lender must be made to bear the consequences of the deal, not the scammed recipient.

There is also a type of deal where the buyer and/or seller were engaged in fraud, and used the house transaction as a way to extract cash and walk away with it, fully intending to let the mortgage go into foreclosure. In these cases, jail time, plus fines, seizure of the properties for auction, and refusal to give any aid to banks who dealt with the fraudulent hucksters. Why? Because a bank's business is to weed out fraud and risk in loans.

Then you have the flipper market where people bought a house, held it for a short period, then expected to flip the property for a profit. Well, sorry, that's a plain old fashioned business speculation deal that went south and you lost. You lose your collateral and the investors who bought the mortgage lose the investment.

But what about the buyers in high priced markets who borrowed more than they could afford to buy a house? That is the biggest group here in San Diego. They bought to hold, they want to stay, but they simply don't have the cash flow to cover the inflated price. A significant number of them purchased based on undocumented income, i.e., they didn't have the income they said they did. Had the lending industry held to normal standards, there would not have been such a run-up on prices because there would not have been loans available for those amounts. That really is the central problem. Lenders created the situation. When the SO and I went in to finance our loan, the mortagage broker flat out said he could lend us more if we didn't provide any documentation. We knew better than to sucker ourselves that way and did a full-doc loan. Lenders were actively pushing people to misrepresent income and claim it was legal. Hell, I leased a car yesterday and the dealership said (for the credit applicaition) "Just write something down (for income). It doesn't have to be true."

So, while borrowers should have a better sense of what to and not to borrow, they are getting no help to figure out what they should do and are being actively directed into unadvantageous loans. In this case, if the loans can be adjusted to be workable, they should be. If they aren't, the borrower should not be penalized as much as the lender (and lender to me is both the mortgage broker and the bank providing the money). The imbalance in knowledge and power in the transaction is too great to make the borrower be the only one left holding the bag.

I haven't really addressed the investors in this, except to say that the companies slicing, dicing and repackaging the loans sure as shit knew (or could reasonably have been expected to know) that the gravy train would stop at some point.

Prices have inflated too much and too fast in some markets (like San Diego) and I can appreciate the anger of some bloggers who feel they have been priced out of housing because they wouldn't take out NINJA or Liar loans. Well, I'm also sorry to say that being left out of a bubble is part of financial life, and you have no choice but to twiddle your thumbs and rent (the way we did) for years until stagnation of home prices gets passed by inflation and you'll have enough to buy.

Or you could vote Democrat (I said this wasn't a *pure* political post...) and demand that there be some controls put on run-away wealth, laissez faire economic malfeasance and living standards for ordinary Americans. A stable, moderately regulated economy will provide the greatest benefit to the greatest number, though it will tend to put a crimp in the styles of get-rich-quick schemers at all levels.


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