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Direckshun
06-21-2012, 12:11 PM
Does anybody know if any cities have tried this?

What do you guys think of this particular scenario?

This piece by Robert Hockett is really, really well researched and argued. Worth reading the whole thing.

http://blogs.reuters.com/great-debate/2012/06/19/a-solution-for-underwater-mortgages-eminent-domain/

A solution for underwater mortgages: Eminent domain
By Robert Hockett
June 19, 2012

It has been nearly six years since U.S. home prices peaked and then plunged, and still the nation’s mortgage markets remain mired in slump. Despite occasional signs of improvement in some localities, the S&P Case Shiller Index (http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----) shows home prices down 9 percent from their previous post-bubble high – itself very low in relation to trend. Meanwhile a backlog of some 400,000 homes awaited liquidation at the end of 2011 (http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=0f96e0ff-8500-41a5-a0f2-0139d0df2e07), and an additional 2.86 million mortgages were 12 or more months delinquent. That’s a “shadow inventory” of 3.25 million homes already foreclosed or now facing foreclosure – an inventory that weighs on home prices, families and neighborhoods alike.

It also weighs on our economy, at the city, state and national levels. As a recent Federal Reserve Board white paper (http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf) and other sources abundantly demonstrate, foreclosure and slump in the housing markets feed back into the broader economy by diminishing wealth and consumer spending. That lowers growth and employment – bad enough in themselves, but also sweeping more mortgages into the wave of defaults. Hence the familiar downward-spiraling “feedback loop” of high foreclosure rates, causing low growth and employment, causing yet more foreclosure, and so on.

Easily the worst source of drag is the large class of “underwater” mortgages – loans on which more is owed than the underlying post-bubble housing collateral is now worth. It isn’t hard to see why. Wrought by the rise in housing prices until 2006, the so-called wealth effect supported consumer spending even when wages and salaries stagnated. But it runs in both directions: Homeowners with “negative equity” cut their spending the most. Even tax cuts, rather than flowing toward employment-supporting consumer expenditures, go toward trimming back overhung mortgage debt. That’s why the 2009 stimulus did so little.

In light of these truths it is now widely appreciated that principal writedowns will be required for a broad swath of underwater mortgages. Even many creditors – the prospective bearers of writedown-wrought losses – understand and embrace this. For they are better than defaults, which underwater mortgages do at high rates. Indeed for most underwater mortgage debt, principal writedowns maximize expected value.

So writedowns will have to be done. The question is how. Unfortunately, a host of what lawyers and economists know as “collective action problems” stand in the way of the win-win solution here. For one thing, the securitization agreements pursuant to which many modern mortgage loans are pooled and then sold often require unanimity or supermajority votes among mortgage-backed securities (MBS) holders before loans can be modified. And today’s fragmented owners of MBS cannot even find one another, much less reach agreement on what’s best for them. For another thing, these same agreements likewise typically prohibit loan servicers, who act on behalf of the loan holders, from modifying as well.

But there is more. Many underwater homes are subject to second liens that secure home equity lines of credit (HELOCs) taken out by mortgagors to supplement stagnating wage incomes during the housing boom years. First liens don’t benefit by modifications unless second liens modify too. But second liens feel less pressure to modify because borrowers, now strapped by post-bust liquidity needs, pay them off first – reversing the legal order of creditor priorities. As if to add insult to injury, the second lienholders often are banks – the same banks that service the first lien loans. That is a massive conflict of interest. And there are yet more obstacles to creditor-benefiting coordination.

What then to do? To solve a collective action problem, we need a collective agent. That’s what governments are. But which government? For a number of reasons, the federal government is presently not the right choice. The federal HAMP and HARP programs, for one thing, don’t prioritize principal writedowns. When they do use them, moreover, they do so by paying the servicers – in effect bribing them to do what is already in the best interest of their principals. The GSEs – Fannie and Freddie – for their part, are prevented from entertaining writedowns by their regulator – FHFA – a regulator that seems to be hostile to writedowns and would do so at unnecessary cost, through HAMP, in any event.

Who then is the proper collective agent? The answer is right before our noses: the cities. Using their traditional eminent domain authority, municipalities can “take” (mortgages-condemnation-housing-idUSBRE85719Z20120608) – it’s a constitutional term of art – underwater mortgages from holders for fair market value. They can then write down the loans to just under the values of underlying homes, bringing these back above water. They can finance these takings with moneys supplied by investors, who then are repaid on the refinanced mortgages. By working with the cities in this way, investors effectively sidestep all the collective action hurdles that now prevent them from doing what most would wish to do anyway – write down principal to maximize loan value.

Is this sort of thing actually done? Of course. Cities take property for public use at fair market value all the time, and do it with all kinds of property – tangible and intangible, contractual and property-related. The question is only whether fair value really is paid and a proper public purpose justifies the forced sale. Preventing a self-amplifying tsunami of foreclosure, mass homelessness, blighted property, lost revenue base, and ultimate retraction of essential city services – in short, urban blight on a disastrous scale – is widely recognized in the courts as the most compelling of public purposes justifying eminent domain use.

Seven years ago, in its infamous Kelo v. City of New London (http://www.law.cornell.edu/supct/html/04-108.ZS.html) decision, the U.S. Supreme Court upheld a controversial exercise of the eminent domain authority by a city that ousted its residents from their homes for the benefit of a private developer, all in the name of revitalization. The promised renaissance never panned out, and the affected residents – most of them elderly and anything but wealthy – were ultimately uprooted and traumatized to no purpose. How redemptive it would be, against that sad backdrop, to see cities employing the eminent domain authority to keep residents in their homes this time around – and maximizing the values of more realistically valued loans in so doing.

Our nation was long ago founded on the principle that state and local governments are, for some, even many, purposes, better vested with authority than is the federal government. They are the most directly in touch with their residents’ day-to-day struggles and needs, and they are the most directly accountable to their electorates. A local eminent domain solution to the nation’s ongoing underwater mortgage crisis looks, accordingly, to be just what the proverbial doctor would order. For that massive collective action problem that lies at the heart of our ongoing mortgage inertia, municipalities are the necessary collective agent.

HonestChieffan
06-21-2012, 12:16 PM
Front page KC Star this week....Fed Govt poured 220,000 average into 1400-1500 sq foot homes. Now they cannot get an offer...none....and the asking price is like 125k, Zero down, and if you live in for ten years there is an additional 30k bonus.

Lets have this government buy up houses, assume the debt, piss away bazillions and find out no one wants the house anyway...explaining why it didn't sell already.

Saul Good
06-21-2012, 12:19 PM
I see no upside to this whatsoever. It sounds like another bailout to me.

mikey23545
06-21-2012, 12:30 PM
A solution for underwater mortgages:


<iframe width="560" height="315" src="http://www.youtube.com/embed/J6TcpfBHlbs" frameborder="0" allowfullscreen></iframe>

jjjayb
06-21-2012, 03:13 PM
A lot of people are under water, or more commonly referred to as upside down in their car loans too. Maybe Uncle Sam should step in and fix that too. :rolleyes: Or, here's an idea. If you're upside down in your house, don't sell it. Stay in it. Pay your mortgage and eventually you'll be upside right.

vailpass
06-21-2012, 04:35 PM
A lot of people are under water, or more commonly referred to as upside down in their car loans too. Maybe Uncle Sam should step in and fix that too. :rolleyes: Or, here's an idea. If you're upside down in your house, don't sell it. Stay in it. Pay your mortgage and eventually you'll be upside right.

That is some seriously radical thinking there that will offend a lot of the people that took out $500k no-interest house loans on their $45k salary and are now crying for help because they are being foreclosed on.

If you take out loans on which you can afford to make the payments you can ride out the periods of housing market lows.

FD
06-21-2012, 04:47 PM
The problem with this, as with all principal modification plans, is that you don't know which mortgages need it. Creditors would happily write down principle for the segment of mortgages that will likely default but there is no good way to identify those, at least not without creating a moral hazard problem. I can't imagine asking city governments to step in to this process would help fix this problem.

RedNeckRaider
06-21-2012, 06:16 PM
That is some seriously radical thinking there that will offend a lot of the people that took out $500k no-interest house loans on their $45k salary and are now crying for help because they are being foreclosed on.

If you take out loans on which you can afford to make the payments you can ride out the periods of housing market lows.

It is not their fault damn it! They really, really wanted that fancy house! It is unfair to lose it just because they cannot afford it. The government needs to pay it off, so they can buy a fancy car also. Spread the wealth you greedy bastards~