Ending the Great Stagnation: Some Practical Issues

I don't know if it's just happenstance or just me but the flavor du jour of a lot of my reading lately has been how we've just got to do something to dig ourselves out from under this debt mountain.   Public, maybe, okay, maybe not, but certainly private--the great ice cornice of mortgage debt that still hangs over our head from the aughts, and the.  Also maybe the fiery implacable demon of student loan debt whose menace is, I suspect, still only beginning to sink in on us.

Yes, well, right, sure.  But as to mortgage debt in particular--just exactly how would you do it?  As a matter of simple politics, we've  observed from the beginning  that there's large  and well-disciplined        view that any effort to assist these deadbeats  borrowers would be about as unpopular as it was to      succor the cigar-chomping gluttons perched atop the mountains of gold merde in the vaults of  Wall Street.

Yes well again.  But suppose we overrode the moral objections and soothed the instrumental fears, just exactly should we do?   Leave debtors in  possession of their homes with lower liabilities?    Write down a whole bunch of principal?  Have a jubilee?

I know the standard way to stick it to the man in creditor's rights is inflation: pay off the expensive debts with inflated confetti money.  Even if that were a good idea, it doesn't seem to be in the offing, so set it aside. I gather also that in the 30s, the Feds did engage in a kind of mortgage relief program where they bought up debt on the cheap, then refinanced with the magic of triple tax free, leaving the debtors in possession under a more tolerable burden (do I have this right?).   I know (this time I'm more sure) that the Supreme Court invalidated a farm bankruptcy law, only to to pirouette around and endorse an almost-indistinguishable statute a couple of years later. Good stories both, but do they matter to us now?

Oh, and there's that little matter of who takes the fall here--who owns those bond we want to write down?  I haven't seen or constructed a comprehensive flow of funds statement here, but I'm thinking of all those pension funds, grotesquely underfunded, scrambling for yield to meet their magical-thinking projections, happy to price as "safe" any borrower with a pulse. The pensions funds. Oh. Right. That would be me.

While You Were Out...

 What a long, strange road it's been:

...the dismantling of the Bretton Woods regime, the deregulation of interest rates, the legalization of adjustable-rate mortgages, the invention of securitization, the elimination of the consumer interest deduction, the demographic wave of baby boomers establishing new households,  deregulation of savings and loans, the savings and loan crisis, the invention of financial derivatives, the lowering of tax rates, or the 21st century real estate bubble...

 Link.

Just as Long as You Call Me for Dinner

I'm not quite sure what Angry Bear is telling me here, but I'm enjoying the attention.

A Payment of How Much?

Yves Smith raises the question whether banks are afraid to foreclose on the rich?  Her piece speaks for itself and I won't attempt to add to it, except--a payment of $20,000 a month?   And "He knows of 20 people personally in his community who have mortgages of over $20,000 a month"--?

Of course I don't know the terms, but a payment of $20,000 a month on a 20-year fixed at five percent annual pencils out to a liability somewhere north of $3 million.


Her source also says that he knows a guy with such a mortgage who "has not made a single payment in over 18 months."  At the same five percent rate, $20,000 a month for a year and a half gives a present value of $346k.   Per the U.S. Census Bureau, the median sales price of a new home in the United States is somewhere a bit  shy of $200k.  So the arrearage alone here would be enough to pay for nearly two of them.


He lives in a fancier neighborhood than I do.

Follow the $%&!

Litigators take note: here's a regulator sifting through a data dump from Ameriquest to try to find evidence of improper lending practices:

To sift through the enormous database of e-mails that Ameriquest provided, Cox tried several search strategies.  One of the best was to do keyword searches for profanities.  These called up some interesting exchanges.  One was an e-mail from a manager to his sales staff: "We are all here to make as much $%&!ing money as possible.  Bottom line.  Nothing else matters.

As we used to say in the Army, $%&!ing a-tall, buddy. 


That's from Michael W. Hudson, The Monster: How a Gang of Predatory Lenders ..." (damn,  my Kindle won't give me the full title).

Mortgage Mods: A View from the Trenches

I've written a bit here and there about the possibility of "mortgage relief."  Here's a bit from a lawyer in the trenches who says her clients want more than relief:

The real problem is the "entitlement" mentality - that everyone is entitled to a modification, including a monthly payment of $1,500 and a principal reduction to today's fair market value.  Much as I would love for my bank to do that for me, it's just not realistic.  I try to explain the situation to my clients as follows: your contract protected you when the market rose and made it so the bank couldn't raise your payments just because there was equity there.  In the same way, it protects the bank when there isn't equity.  I really like the idea of treating some of the principal as a balloon, and hopefully that'll continue to be an option available for debtors and creditors to keep the money changing hands. 

Comment:  Balloons, really?  I know I've given them more than a passing thought, but the more I consider it, the more I realize that a debtor who can't deal with the full balance now will not be to do so any better three years (e.g.) from now.

Update: My source advises me that she is talking about thirty year balloons.  My stars, I never thought of that.  Are we moving closer to the British system where you don't own your real estate but just hold it on a 99-year lease from the Duke of Bilgewater?

Icky But Apt Simile of the Day

On a factory farm, when hens start laying fewer eggs, they are "force-molted"--starved of food and water and light for several days in order to stimulate a final bout of egg laying before their life's work is done. After 2004, when many qualified borrowers had already refinanced and houses were so expensive they could only be bought with exotic mortgages, the real estate and finance industries launched an all out effort to get people into new houses and squeeze out a few last years of golden eggs.

--Simon Johnson and James Kwak, Thirteen Bankers (2009)

Why It Is So Hard to Make Sense out of Housing: One Reason

One of he reasons it is so hard to make sense out of the housing bubble: "housing," so-called, is so many different issues. Consider:

• The campaign, so popular with Democrats and Republicans alike, to extend home ownership to non-owners.

• Houses as piggy banks, or ATM machines--the second mortgage equity access program.

• The slow and painful--and sometimes rapid and painful--decline of once-great cities.

• The campaign of looting, undertaken by organized marauders who succeeded in transferring loan proceeds to themselves by systematic fraud.

• The clueless and luckless "investors" from Nowheresville who stumped up hard cash hoping to share in the transformation of a former alligator farm into the Next Great Sunbelt metropolis.

Behind all these, we have:

• The revolution in finance, including the creation of new devices to "rationalize" (he he) the mortgage market.

• The tsunami of new capital, seeking protection against the dismal returns and the seemingly astronomic risks of Asian investing.

• The grey monster, still porrly defined and worse understood, that we choose, for lack of a better name, to characterize as "the bubble."

Bullet points inspired (although not supplied) by the best thing I've read on housing policy in years. That would be Alyssa Katz' Our Lot. The subtitle is "How Real Estate Came to Own Us," but that's way too facile for a presentation fo subtle and nuanced. Katz covers a daunting range of material: the early community action groups in the 70s; the invention of mortgate securitization in the 80s; the full-court press for expanded ownership in the 90s, and that unspeakable phase when everything when kablooie in the naughts. And she brings off the trick almost unheard of in this kind of semi-journalism: she couples a gift for personalized narrative with a commendable skill at sketching the technical background.

There is nothing here by way of an agenda for reform. And she presents it all with an air of hip detachment which suggests that she knows that life is bound to be like this under capitalism, and we can't expect much to change until the revolution or the next ice age. Yet the details of her own message deny the larger aroma: she makes it clear that the story is far too rich and nuanced for for detachment of any sort, hip or otherwise.

One more substantial drawback: she ends with a chapter, overlong and not nearly so well organized, on New York City, specifically the New York of rent control and condo conversions. As a topic in an overview of this sort, New York is certainly fair game. But the trouble is that she's too close to it: she's been burned by rent control and burned by the market, and she still doesn't have a good fix on exactly what went wrong and how.

But that's not much of a problem. It's the end of the book; you can skip it if you like. For the rest, as a means to get your mind around real estate issues, I can't think of a better place to start.

Department of Wha--? Redux

A couple of days ago I complained that Felix Salmon had rocks in his head on the matter of debtors buying back their own homes at distressed prices from mortgagees. From the trenches, my friend Mary weighs in to tell me that I'm the rocky one:

I disagree with your take on Thornburg Borrowers' Unit ("TBU"), and here's why. ... [W]ouldn't that have the effect of causing sophisticated [borrowers] to go into default on their loans with the purpose of purchasing them at a steep discount?

My understanding is that after the real estate bubble began to collapse, but before the home mortgage lending market collapsed, borrowers with underwater homes were buying new homes at 60% or so of the price of the existing home, while they still had good credit, then walking away from underwater home. Now that home mortgage lending begins to revive, we may see more of that. So TBU doesn't want to make that easier. Borrowers] could buy the note at a discount and end up owning the residence at 40 - 60% of prior debt without the hassle of moving, etc.

Comment: Ooh, cool. I hadn't heard it, but I'll bet she is right that some borrowers succeeded in buying the new home while their credit was still good, and then dumping the old overpriced one back on the lender. I wonder how many. Still, I go bollywackers when I hear a banker (of all people) saying that somebody "should" do something that is not in the contract. But people dump out-of-the-money options all the time. Banks have been telling us for years (without, I grant, a shred of evidence) that (California) purchase-money home loans are made more expensive by the presence of the (statute-mandated) anti-deficiency rule; if I take them at their word, I must assume they have already priced some such risk. I can't believe for a moment that the bank wouldn't take advantage of this kind of opportunity if offered. Why should they be surprised if their cusotmers behave as they do?

Anyway, I never meant to argue that Thornburg was "misbehaving" by not offering the option--only that I thought they were acting against their own interest. Still, I learn something from Mary every time I have the good sense to keep my ears open--so, thanks again.

Where is the Housing Problem?(And the Passage of the Californicator)

Carpe Diem, who has an unfailing eye for the counter-fact, points to an excellent chart showing how the mortgage meltdown is concentrated in four states (link). He's absolutely right, although I suspect there is more to it than you'd guess from these numbers alone. Indeed on his own data, we can see that the housing market is down everywhere--just as not as much other places as in the four disaster areas. Second while mortgages per se are not a general basket case, I suspect the data would show that construction employment--an insecure occupation in the best of times--has taken a dive almost everywhere. And while mortgages in general may not be a huge problem most places, I suspect there are segments of the market in which the problem is quite general. For example, I wouldn't be surprised to find out that vacation homes and time shares are in disaster mode almost everywhere. And non-residential: from what I hear, there is a world of pain in non-residential, and it's not just in the fearful four.

Finally, here's a curious tidbit from Housing Bubble about a secondary non-effect of the concentrated residential meltdown: the absence of the Californicator. This single datapoint recalls that some markets were bouyed up by the exodus of Californians fleeing their own meltdown for more hospitable venues like Oregon, Utah and (here) Colorado. According to this single datapoint, it isn't happening this time. This is indeed surprising: California clearly does seem to be in a mess, but evidently not so much of a mess that people want to leave--yet.

Update: Good comment thread on the topic at American Prospect. Cue one-liner from Ezra but I am not sure it really fits.

Rocket Docket

Lots of distractions today, so I'll decorate the space with a pickup from the ever-watchful Joel on the Florida housing market/meltdown:

A Florida Court's 'Rocket Docket' Blasts Through Foreclosure Cases
2 Questions, 15 Seconds, 45 Days to Get Out; 'What's to Talk About?' Says a Judge


By MICHAEL CORKERY

FORT MYERS, Fla. -- Hoping to save her house, Saundra Hill Scott arrived at the county courthouse clutching dog-eared mortgage bills and letters from her lender.
Foreclosure Court in Fort Myers

View Interactive
Lexey Swall-Bobay for The Wall Street Journal

See photos and hear audio clips from the Lee County Courthouse and Ms. Hill Scott's home.

She need not have bothered. The foreclosure hearing lasted less than 20 seconds, with Judge John Carlin asking her two questions: Are you current on your mortgage and are you living in the home? She answered no and yes and then offered to show him her paperwork.

"I don't need to see that. That's between you and the bank," he said as he gave Ms. Hill Scott, her husband and three grandchildren 60 days to work out a deal with their lender or vacate their three-bedroom house.

While the Obama administration prepares to unveil on Wednesday its plan to rescue the U.S. housing market, officials here in Lee County have come up with their own unique plan for dealing with the crisis. To clear a huge backlog of foreclosures, judges are hearing "rocket dockets" of nearly 1,000 cases a day and calling retired colleagues back to the bench to help ease the workload.

The housing crisis has been pounding the Florida court system like a Category 5 hurricane. Not only does the state have among the highest default rates in the country, its legal system, unlike many other states with devastated housing markets, requires judges to sign off on foreclosures. The combination has created a monster glut of cases that are overwhelming the courts. The Obama plan to encourage more loan modifications nationally may stem the flood of foreclosures in Florida somewhat, but Lee County officials say that the area's large number of unemployed residents and housing speculators may end up losing their properties anyway. ...

Was it not Eugene V. Debs who said that the American judicial system is the only railroad that runs on time.

Cool Map: Geography of the Mortgage Mess

Carpe Diem trolls for cool charts and maps so you and I don't have to. Here is some good stuff from the NY Fed on the mortgage mess. I'm not sure they've got the color thing nailed just yet, but you do see information that you might miss in a spreadsheet. Example: if I read the colors right, California and Florida are indeed the capital of the looneytunes loan market--but some other states in the old Confederacy may actually be doing worse on some measures of loan trouble.

Blackacre as an Out-of-the-Money Option

Just got through explaining to my students how equity is an option on the assets, where the exercise price is the payoff cost of the debt. Made the point that it might be rational to pay a positive sum for equity on an upside-down/underwater balance sheet (that would be you, BS) as lottery ticket value against the prospect that Something May Turn Up. (“Maybe I die! Maybe the king dies! Maybe a horse learns to talk!"). In the jargon, it’s not valueless, it is just “out of the money.” Out of the money options trade all the time.

I also make the point that in a place like here in California, where most of our mortgage debt is “nonrecourse”—the creditor can look to the property only, no deficiency right against the debtor—then the real estate is just another option play.

Then back to the aggregator, where I read more about default rates, foreclosure epidemics, blah blah, and this fascinating thread at Kevin Drum that leads from arson to cannibalism (link).

And it occurs to me—wait a minute, whoa. A lot of these owners are underwater now, in the respect that the loan value exceeds the market value. And a lot of them simply can never expect to get current on their obligations; might as well walk. But for some unknown percentage—but it can’t be that small—for some unknown percentage here, what we are talking about is an out-of-the-money option. Shouldn’t we/they be giving some value to the possibility that “something might turn up?”

For Extra Credit: Felix Salmon’s instructive piece on an effort by the Ohio attorney general to force workouts on lenders, against their will and for their own good (link).

It Ain't Over

All that stuff about lunatic mortgages--lying borrowers and venal brokers and lenders who scooped up the cash until the roof fell in. You think it's over? Ha! Here's the Google Ad at the top of this page as I write:

Refinance Rates at 4.875% $150,000 at $609/month.

And then, the sweetest words in the English language:

No SSN Rqd.

Afterthought: Hm. A little arithmetic suggests that 1/12 of 0.0475=0.004063, and that $150,000*0.004063 = $609. Actually $609.375, but who's counting? Anyway, this appears to be an interest-only loan.

The Old-Fashioned Way

I used to know a banker who said "I won't lend on anything I can't see from my front window." He's looking mighty good this morning. Here's a snippet from the Citibank conference call, announcing its $9.83 billion loss:

Within our bank cards portfolio, approximately two-thirds of the losses occurred in five states -- California , Florida , Illinois , Arizona and Michigan . And the loss rates on customers with mortgages in those states increased by fourfold versus the loss rates in the rest of the country .... Loss rates in the branch-originated mortgage business remained relatively stable, where face-to-face interaction with customers and long-standing relationships have historically resulted in lower losses. The CitiFinancial real estate mortgage portfolio, for example, is comprised primarily of full documentation, fixed-rate loans with low loan to values.

Via Calculated Risk.

The Lyndon Johnson Corollary: the best fertilizer for a farm is the owner's footsteps walking over it.

Tyler Cowen is Shocked, Shocked

I see that Tyler Cowen is back to touting his own form of “blame the victim” re the housing meltdown (link):

IT’S NOT JUST THE LENDERS There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

Oh, Tyler, Tyler. I tried to explain this to you before (link). Okay, I grant you could find any number of consumer advocates who do embrace the straw man that you seek to set afire. But that’s economics, that’s advocacy. Grownups know (and have known all along) that the loan market is like any other bazaar—lots of lying on both sides. And if the lenders try to move money with a steam shovel, can they be surprised that they find some borrowers who are happy to scoop it up with a spoon?

Technically speaking, the answer is: no, they cannot complain. To make a case for fraud, you have to prove not just “misrepresentation,” but “reliance.” Granted that a lot of the paper in the loan apps file would look bad in the Bulwer-Lytton bad fiction finals. But in spite—no precisely because—of that fact, the lenders cannot seriously claim that they were ever misled. If you hoik up some derelict off the street and tell him that you will fork over $1 million if only he will sign a piece of paper avowing that he knocks back $300 thou a year, why of course he’ll sign. There used to be a doctrine—maybe there still is—that a taker of negotiable warehouse receipt cannot claim to be “in good faith” if he takes from “a tramp or a professor.”

There also used to be as rule that “anyone who meets the definition of ‘good faith’…cannot be a ‘bank.’” But that takes us down a different path.

Footnote on “things we learned” in economics: I pluck my example out of Tyler’s menu of wonders that the economists have (allegedly) conferred upon us. If his other examples are as shaky as this one, I’d say he might want to go back and review his fieldnotes. But I have a particular problem with his final example—you live longer if you get out of a cold climate. As one who grew up in New Hampshire and watched the annual procession of snowbirds (and who eventually got out myself) I do not find this exactly news. But if it is news, it is economics? Tyler cites a study by two guys in an economics department. But does that make it economics? If anything, isn’t it demography, or population studies? Or is Tyler’s point that nothing is true until some economist believes it?

Update: Big Picture is a lot less kind than I am. DeLong has reservations. Paul Beard predicts: "Next up, how patients are to blame for malpractice. . ."

Mark Perry discovers that there are markets in everything.

Mortgage Default and the Fraud Fandango

Tyler Cowen has an interesting post up about the scope of mortgage fraud, although I am not sure it says what it may think it says (link):

BasePoint Analytics LLC, a recognized fraud analytics and consulting firm, analyzed over 3 million loans originated between 1997 and 2006 (the majority being 2005-2006 vintage), including 16,000 examples of non-performing loans that had evidence of fraudulent misrepresentation in the original applications. Their research found that as much as 70 of early payment default loans contained fraud misrepresentations on the application.

That is from a Fitch Ratings report (summary here, with an eventual link to buy it), the rest makes for very gory reading as well. ...

Fine as far as it goes, but old time bankruptcy lawyers will remember the “fraud fandango” as it played itself out back before some important law changes around 1970. The consumer debtor would look at the application form where it says “list all your debts;” there were only three blank spaces. “But I have more than three creditors”—“oh, not to worry, we only use that for the credit check.” So the customer would list only three and then when she defaulted, the creditor would profess to be shocked, shocked to learn that there were really 17.

Sometimes, you could persuade the judge to hear these grisly details. So, no fraud because no intent to defraud Even better, sometimes you could show him that the lender would have made the loan even if the debtor had told the whole truth. So, no fraud because no reliance.

I wouldn’t be at all surprised to find that some version of this caper played itself out in the late mortgage uproar. In a good many of these cases it was the brokers, I suspect, who were the initiators of the fraud, rather than the victims. The interesting question is: how far up the line does this go? Wasn’t anybody auditing the brokers? Auditing the auditors? Or was it all just one big clambake where everybody knew there wasn’t enough to go around, but everybody hoped they would get theirs off the table before the bell rang.