Whatever Disagreements I May Have With Jonah…

In order to save the banksters from paying the consequences of their own greed and fraud, it is necessary to push larger and larger amounts of credit through the banking system.

While I can't say what ALL Republicans have said, the consistent comment I've heard is that we may be subsidizing that bad bets of homeowners who over-extended while ignoring those who didn't buy more than they could afford. Of course those folks have their own reward (isn't doing the "right thing" its own reward)

Now the counter argument has been that letting the "bad bet" homeowners default further reduces property values and puts more of the responsible homeowners at risk.

Please take the above post off

This is an excellent post. For an example of the mentality that is debasing contemporary dialogue see this racist tirade by Julian Elson. Lovers of liberty and freedom need to stand about against people like Julian Elson. Julian Elson is the cancer that is killing the internets.

"But I really don’t understand why it’s such an unbearable crisis for responsible homeowners themselves."

It's not an unbearable crisis for homeowners. It's an unbearable crisis for politicians and bureaucrats. For government to expand they need to create new classes of dependent people. Otherwise they will not be able to cultivate votes, demand large budget increases, and funnel huge new contracts to their friends. Also in order to save the banksters from paying the consequences of their own greed and fraud, it is necessary to push larger and larger amounts of credit through the banking system. Cleaning up balance sheets and liquidating toxic assets would be a real crisis (for the banksters).

It may seem like a sensible, pragmatic solution to you, if they would only leave the markets alone and let people sort out their housing and financial problems for themselves, peacefully and without any drama. But that would be a disaster for the people who are running things. Not because they can't survive in a free market, but because they don't want to.

It's very simple. You have an incentive to walk whenever you can pay less in rent than you
do in mortgage payments. How attractive that incentive is depends on how badly you need the difference. If your need for that difference is pressing, you walk.

Very simple. And wrong.

You don't just pay rent. You pay in lost future credit, and perhaps job, opportunities. You pay in lost reputation among your peers. You pay in self-respect. On the other hand, you do gain mobility.

It's true that it's a trade-off calculation. But, it's not just the prices of mortgage vs. rent.

In Canada, a bank that forecloses on a mortgage thereby forgives the debt (the "personal covenant"). I'm not familiar with American law, and I assume it may vary state-by-state. But if that's the case, there is no reason why a person walking away from a house that was underwater would jeopardize thier credit rating.

I'm no expert, but I know I've read that it haunts your credit for seven years.

I also know that there are services that claim to be able to have such items removed.

Maybe somebody else knows how cheaply, easily and reliably this can be done.

In any case, there's a cost worth weighing in the calculation.

You can't remove a foreclosure from your credit report once it happens. If you really need to get out from under a mortgage that is for more than the home's value, by far the best option is to reach a deal with the bank to either do a short sale, or surrender the deed in lieu of foreclosure. Such a deal usually includes provisions to improve the borrower's chances of getting credit later.

There is a (in my opinion) pernicious deception being bruted by the socalled MSM and the politerati, that this crisis is a mortgate, or toxic mortgage issue. It's not. It's a gainful employment issue. JOBS!!! Real, sustainable, secure, living wage jobs are the key to restoring credibility and stability in the markets. If you are unemployed, no matter how toxic your mortgate or how much that individual may desire to own something, anything, - there are simply no options. Unemployment, and underemployment are the real root cause of this global economic crisis. Government can print endless amounts of paper and call it curreny, or bail out FAILE institutions, and FAILED management bruting FAILED models, or lower interest rates to zero, or concoct any strategy for shielding predator class cronies and oligarchs from radical haircuts, or outright insolvency - but until people get back to work is relatively well paying secure jobs, with real bargaining power, {(NOT) 35 hour a week, benefitless, $8 dollar an hour slave wages} - there is no hope of recovery. The old ways, the old models, the old leaders, the old system is dead and rotting in a putrid swamp. New ways, new models, new leaders and a new more equitable, fair, legal, and fiercely regulated economic system must be erected replacing the old and catastrophically FAILED system. All the old message-force multipliers and the old system FAILED. It's over. There is no righting this horrorshow wrong, and no way to remedy the criminal and FAILED economic system of the past. It must be intelligently dismantled and replace with a new more equitable, lawful, transparent, and moral system.

If not - then high ho high ho it's off to the Mayan calender end of the world as we know it we go.

Tony Foresta

Don't forget inflation. I assume it will help with this problem. There is a general appreciation in housing over time, but the change in the value of the dollar could be of immense help. Inflation has all sorts of nasty consequences but in this case a high rate of inflation may be preferable to alternatives.

I've read this general theme, with varying amounts of schadenfreude, several times today, and while I don't like this plan, isn't there a real problem here because once they're under-water homeowners only have two choices: keep paying or hand the house over the bank by one mechanism or another. All the normal options of redeeming the loan by some other mechanism, barring a huge cash windfall, are absent.

Lots of people had, and some still have, mortgages that are only intended to be held for short periods of time. At the most innocuous end of the spectrum, these are 3, 5 and 7 year hybrid ARMs which won't actually cause any pain until rates go back up. At the less innocuous end, there are loans that were intended to exploit growing equity to allow refinance into other products - most sub-prime loans were of this class. People with these mortgages could in many (not all) cases have continued to afford their homes (and still could, given current rates) had they not lost their equity just as lending standards tightened to require more equity. Other than schadenfreude, I don't see how anyone benefits by leaving these people in that position.

Similarly, many people need to move house for one reason or another, and in many places rents do not cover the cost of mortgage interest, insurance and property tax, let alone principal payments or maintenance. The option of renting out their old house and renting or buying elsewhere may not be practical, so they're stuck - its foreclosure or staying where you are.

There are other scenarios, including family problems, life changes, etc. that may mean the house becomes unaffordable. I know many people in these situations, and none of them were irresponsible speculators. They just expected the housing and mortgage markets to continue to operate in a normal way.

Why should we care? Three reasons, besides ordinary compassion - Firstly, the health of the economy requires that people trust banks and the normal operation of markets. The longer they feel they can't, the deeper the crisis gets. Secondly, because labour and capital mobility benefit the economy as a whole and leaving people stuck with houses they don't want won't help with that. And thirdly, because its in everyone's interest that the grossly overvalued housing markets are allowed to clear quickly. Helping sellers will help them to accept lower prices, and until they do, buyers are going to be reluctant to buy.

Simon

Sounds great Simon.

How much of your money would be better spent subsidizing troubled mortgages than anything else you can think of doing with it?

For me, it's $0.

If it's more than that for you, then maybe you should write a check.

There are lots of projects that have some value, and it's tempting to spend other people's money (along with a little of your own) on them. But, I think it's almost always better (practically and morally) to have a policy of not doing that.

That would be wonderful were we not in a giant, largely government-created mess. Unfortunately governments can create messes to which there is no private sector solution, and this would appear to be one.

It's not schadenfreude, it's supply and demand. As the supply of houses increase, prices drop.

As a responsible renter, this is good for me and those like me as we will then be able to afford homes that now are over-priced.

Supply and demand is very simple...even most democrats can understand it.

I can't speak for you, but I see a lot of schadenfreude in people's responses to this. Everyone who bought a house during the peak was an irresponsible speculator who bought what they couldn't afford and deserves to suffer, so we can delight in their misfortunes. Sorry, but it isn't true - this has caught those who were responsible along with those who were not.

As a fellow responsible renter, I agree with everything else you say. Prices have to fall and I have no interest in putting a floor under them. What I am interested in is measure to help the market clear (ie prices to fall) as fast as possible, and with the miniumum in collateral damage to people who didn't do anything wrong. This plan makes some moves in that direction, and some others that are bad. Rather than making some kind of sensible analysis, Will just quoted someone elses glib, thoughtless response.

I guess the lesson here is that the unexamined opinion (Jonah's and Will's) is worth about what we pay for them.

That's all well and good as long as the bank doesn't call you up and demand additional collateral because your existing equity can't cover the gap. In that case it IS pretty disastrous.

In general that actually can't happen. Most mortgages in the US are no recourse loans. The bank agreed at the outset to accept the collateral in lieu of payments and not to pursue the borrower for any other compensation. More fool the bank.

It would be nice if more (any?) Republicans in Congress agreed with this.

There's always Ron Paul.

Remember the quaint terms "Buyer beware" and "Don't buy over your head"? You are so right JB. Where is personal responsibility? You roll the dice and you don't have to pay up. Big (Government) Brother comes along and bails you out. Oh, that's right, the rest of us bails you out!

A.P. elites MARK S. SMITH and ALAN ZIBEL tell us "Another key component [of the $75 billion mortgage relief plan] would specifically help those said to be "under water" — with dwellings whose market value have sunk below the principal still owed on the mortgages. Such mortgages have traditionally been almost impossible to refinance."

Not being able to refinance your home if you can't afford the current payments sure seems like a real problem.

Why is renting such a problem? I rent because I am responsible and didn't buy a house I couldn't afford. These irresponsible people can move into apartments, their houses can decline in value, and renters will then move into those houses now that they are priced correctly.

This Obama plan is nothing but welfare for stupid and irresponsible people. The money would be better spent given to renters.

Hear Hear! What incentive, besides personal dignity, is there anymore to live a financially prudent life?

Jonah is right that if the value of your house dips slightly (about 16.6% in his example) and you can reasonably assume that in a few years it will return that lost value or you plan to stay in your home until you pay off your mortgage, then there really is little reason to walk away and destroy your credit rating.

But what if the value of your home has dipped 40% and there is little prospect of getting that value back anytime soon? Add to that the increased importance of mobility in career advancement and I think the prospect of people walking away from their mortgages becomes much greater.

How many people are going to continue to pay for a mortgage that will cost them $800,000 over 30 years and will only give them back $400,000 - 500,000. It's not unreasonable for people to sacrifice their credit rating if they think the amount of money they will save by doing so outweighs the cost.

But what if the value of your home has dipped 40% and there is little prospect of getting that value back anytime soon? Add to that the increased importance of mobility in career advancement and I think the prospect of people walking away from their mortgages becomes much greater.

I understand why people in these types of situations feel screwed, but they brought it upon themselves. If you treat your house as an investment, then you have to accept the downside risk that your gamble, which at bottom is what an investment is, will not pay off. When it doesn't pay off, you don't get to screw everyone else over, especially the prudent folks who didn't put themselves at unnecessary risk.

Consider a person who rents an apartment, lives below his means and invests heavily in the stock market. Right now, that person would be reeling from the stock market crash, but should he get special treatment or a tax payer-subsidized soft-landing? If no, then why are the housing speculators treated different? They should not be. A house is a place to live; if you want to gamble with your place of residence, that is your business, but don't reach for my wallet when you lose your gamble.

If your financial situation was conducive to owning your present home and you love the house, Jonah is correct. There is no problem. People who bought over their heads would have been in trouble anyway. Flippers (who come in all political flavors, btw), have major problems. Paying a mortgage on a home worth less than the sale price (and little or no equity to eat - also not great fun) and having no buyers on the horizon has led many to "walk away" from their "commitment".