Just because I’m petty and George Bush was very proud of the increase the home ownership rate under his presidency, latest census figures out today have the home ownership rate at 66.5%. It peaked at 69.2% in 2004, falling to 67.5% as Bush was about to leave office.
66.5% brings us back to 1998 levels. While this is a bad thing to some extent due to the fact that it’s in part a symptom of other bad things, there really isn’t any reason that everyone should feel inclined to own a home.
What this amounts to, really, is a vast transfer of wealth from the working poor and the middle class to the bankers and financial elites. Not only were these huge, risky institutions bailed out by the government and shielded from the worst consequences of their recklessness, they also made a ton of money selling and re-selling mortgages that people never should have been able to afford in the first place. Then, when all was said and done, they were able to come back in and foreclose on the very people they’d already made so much money swindling – and whose tax dollars went in part to bailing the banks out in the first place. This doesn’t even take into account the mismanagement of pension funds and other investments which, inexplicably, have made a lot of the financial folks very rich while ruining the retirement prospects of countless ordinary Americans.
We should be looking at ways to reform the bankruptcy process – to give homeowners the same benefit of doubt we gave to struggling banks:
We could easily pass a streamlined, modified version of bankruptcy just for this crisis. Adam Levitin has proposed this with his Chapter M for Mortgage bankruptcy. It would remove foreclosure actions from state court to federal bankruptcy court. Successful petitions can be offered a standardized pre-packaged bankruptcy plan. The plan would be based on HAMP modification guidelines (interest rate reduction to achieve 31% DTI goal, but without federal funding) plus cramdown to address negative equity.
We can make this fair on the backend. If the homeowner redefaults we can speed up the foreclosure process. It wouldn’t affect non-mortgage lenders. It is fast-tracked relative to traditional Chapter 13. It can have clawback mechanisms to address potential future appreciation.
And going through the process can give the lender clean title. Because there’s this whole issue of who owns what in the securitization chain which is a few court cases away from putting our financial system over a cliff. And the best feature is that it has no cost to the federal government. Like other smart policy, it builds off already existing infrastructure, so it can be started immediately using existing courts and Chapter 7 panel trustees for sales.
This makes a lot more sense to me than giving people tax credits for new home purchases, or allowing the current system of home foreclosures to go on indefinitely. The point isn’t to get the housing market back to the good ol’ days of the mid oughts, or to punish people for getting in over their heads (often at the insistence of ethically dubious lenders and a real estate industry drunk on the delusion of a housing market that could never possibly implode). We don’t want, and couldn’t sustain anyway, a return to the inflated prices of 2003 – 2006. But we don’t need the adjustment to happen in the most painful way possible either. With unemployment in the double digits, anything we can do to keep people in their homes without impossible debt sheets is a good thing – not just for the homeowners, but for the economy at large.
Good post, E.D. More like this, please.
Changing the bankruptcy laws would make Joe Biden sad.
“We could easily pass a streamlined, modified version of bankruptcy just for this crisis.”
Assumes facts not in evidence.
Or: As long as we can get all the rainbow unicorns to vote with us!
I got there first, Suck it Up! Eat my dust!
Suck It Up!
“We could easily pass….”
Uhm, what? this person knows this how?
@catclub: Okay so easily is probably not the best word…
Mortgage Cramdown makes sense, incentivizes banks to make better loans (as they bear more risk), and is a totally fair way to try and keep people in their homes. Three reasons it will never become US law.
One meme I wish would get more traction: The bankruptcy law was changed back in 2005, when the economy was still (allegedly) screaming along. The crash didn’t occur until 2008, nearly three years later.
So the powers-that-be must have seen our current situation coming, at least to some extent.
I took that “We could easily pass…” to mean that writing the bill would not be overly complicated. Actually passing anything through the Republican House is pretty much a non-starter. Not that the Bankster supporters in the Senate would be an improvement.
Atrios is petty, and so am I. I can’t help pointing out that this – in an otherwise very good post – is still some wildly delusional myth-mongering:
We never gave the bankers the benefit of the doubt, they took it. They unilaterally pillaged and destroyed the mortgage sector, made illegal sales/purchases of MBS, blackmailed the government with a threat of Global Financial Collapse when the financial chickens came home to roost, then re-scammed tax-payers under TARP and with illegal foreclosures.
Why exactly is leveling the playing field an equitable solution to the ongoing power imbalances between institutional investors and individual home-owners and taxpayers? (That’s actually rhetorical, but I’d love to hear your answer.)
Yes, exactly like the S&L bailout in the mid-80s. Wealthy people took advantage of newly-created loopholes, stuffed their pockets with cash making risky investments, until the institutions failed and the middle-class bailed them out to the tune of billions.
Which is why some of us gave up on the Republican free-market fairy many years ago. I’ve seen this movie before, and it always ends the same way.
Something like that simply could never pass. Not because the politicians are in the pocket of the banks. Not because it’s a bad policy. But because your average joe will see his neighbor’s mortgage payment go down as a result of this, and be jealous and get pissed off over it.
@E.D. Kain: I think pass is the word choice that is problematic in that statement.
I would love to see a big bunch of cramdown in trade for clear titles to the banks.
Fair is fair. The feds keep forgetting that you give something to get something, and that applies to banks and our Galtian overlords as well as the mensches out there. Our government gave away everything to those rat-bastard banksters. The banksters need to feel a bit of the clawback themselves.
The other component I would like to see added to this excellent proposal:
If, upon review of the homeowner’s financial condition, it’s apparent that they are unable to afford even the adjusted mortgage payments and are truly stuck in more house than they can afford, why can’t the bank work with the homeowner to locate the nearest foreclosed properties sitting vacant in its vast inventory which the homeowner could actually afford, transition that homeowner into one of them, then take possession of the more expensive home for resale to someone who can make the payments? Bank keeps a customer and gets a nicer property to sell to someone who can make the payments.
@Angela: “just for this crisis.”
Doesn’t work either.
But besides those quibbles, its all good.
Well said E.D.
@ED Kain (quoting another article):
As many high-priced attorneys as the banks have on retainer, as frequently as banks in the real estate mortgage business particularly need to deal with real estate law (and real estate law specialists)…I’m dumbfounded that so few of them could foresee the basic problems which severing ownership of the loan from formal recorded chain of title could potentially cause. In theory, the mortagee of title could still act under its own name to sue for breach of the mortgagor’s payment obligations, even though the actual right to receive those payments had been sold off in the form of what amounts to commercial paper rather than a real estate mortgage. And the current owners of that paper could have legal means, in theory at least, to exert leverage against the mortgagee of title to do so. However, that is an indirect, messy, expensive, and less than wholly reliable way to have to go about that, which is precisely why banks and other outfits invested in securitized real estate paper are pushing so hard for creation of quick and easy cheats around the rigid, but longstanding formalities of state real estate law. However, they want to be able to do so WITHOUT opening the corresponding mutual part of the convenience at the consumer end: shortcutting through the legal red tape and difficulty of load modifications and cramdown reevaluations, etc…e.g. a new Chapter M mortgage bankruptcy process. Be careful, or what will emerge is something like the last bankruptcy law modification, where all the benefits of the new law flow to the predatory businesses, and few to none to the consumers.
You will note the improvement in this version over the S&L crisis of the late 80’s. This time nobody even goes to jail.
@Stillwater: you’re right. My choice of words was mainly to illustrate that we bailed out banks because we were told that they were failing / struggling and that we essentially gave them the benefit of the doubt we will not give to homeowners. I realize we actually had little or no say over the matter.
To your question, are you suggesting that we tilt the playing field rather than level it? If you can tell me how, I might be willing to endorse it. But even leveling is a Herculean task all by itself.
What did Sen. Durbin say when the Cramdown Bill failed? “The banks own this place!”
because your average joe will see his neighbor’s mortgage payment go down as a result of this, and be jealous and get pissed off over it.
…like crabs in a bucket.
Villago Delenda Est
This is all very reasonable.
Which is why it will never happen.
I am afraid that the only way to fix this mess is for banksters to be thrown in jail, all their wealth confiscated, their families impoverished.
Then change will come.
Not a second before.
@catclub: Well, no bankers have gone to prison. Debtors prisons are all the rage
A Commenter at Balloon Juice (formerlyThe Grand Panjandrum)
I can’t remember if it was Atrios or Krugman (or possibly someone else) who, last year did a rough calculation of then available data and showed that ALMOST EVERY penny of wealth created during the Bush II administration went to the banksters. This is just more confirmation of what we already know: it’s Goldman Sachs world and we’re just living in it.
Closing on a house in a few days, we’re paying it’s 2001 value, in a fairly solid local market. I still feel like it’s a huge gamble though, but then we actually need the 3 beds and a yard so its a home vs an investment.
ED – your last few posts are showing the sort of insight into how things work that should take you far away from any form of free market libertarianism, which has been vicious and destructive in its recent incarnation. How’s that going for you? I mean, are you throwing us bones or are you serious?
Indeed. This truth is what is most galling to me. That no one will see any time for this, and will to boot walk away smiling with stuffed pockets is, well, criminal. Rule of Law and all that…
No, no, no, no. We can’t have banks making the situation for homeowners better. Can’t have it.
Foreclosure is done in the states. I don’t know, perhaps someone does, if the Feds can put mortgage defaults into Federal bankrupcy court.
This wouldn’t help with the lack of paperwork on the note that is no longer with the mortgage.
Who owns the mortgage on some houses is still up in the air. Gaining clear title means that the previous owner has to be verified.
If the banks had gone down, what would have happened to homeowners that had mortgages with those banks? The FDIC couldn’t have covered the losses of those huge banks.
What a mess.
“mid oughts”=mid aughts?
@E.D. Kain: are you suggesting that we tilt the playing field rather than level it? If you can tell me how, I might be willing to endorse it. But even leveling is a Herculean task all by itself.
Leveling it in the ways outlined in your post would be a huge victory for homeowners. In fact, depending on the parameters adopted, HAMP and cramdown could actually tilt things in the homeowners favor to some degree (unlikely in an unlikely scenario). I was being cagey in suggesting that mere leveling wasn’t sufficient. I personally think something punitive and regulatory is called for given the obscene levels of illegality and abuse exhibited by the banksters.
One thing Rorty skips over is the title transfer issues. This is a really sticky problem, since the purported note holders don’t have any legal standing to demand payment, let alone initiate foreclosure proceedings, on titles they paid for but weren’t legally transferred. It seems sorta intractable to me. But it was part of the big scam, and assessing the extent to which this glaring illegal behavior ought to swept under the rug is difficult.
Somewhere along about 2005-2006, in some secret financial control room, steam was shooting out of pipes, gauges were pegged to the red zone, sirens were going off. Henry Paulson tried to kick the can down the road until Nov. 5, 2008, and almost made it… but not quite. Would the White House today have a different occupant if the events of 9/2008 hadn’t happened until after the election?
Along the same lines: you’ll never make me believe that the current foreclosure mess (where every securitized mortgage is possibly flawed) just snuck up and surprised everyone. But as noted above, until the appropriate parties are jailed and impoverished, nothing will change.
E.D., it would be best if you could put it succinctly, i.e. “We must transfer wealth away from banks to middle- and lower-class homeowners.”
Good post, E.D. While I agree with your sentiments about transferring wealth back to the middle and lower classes, all evidence suggests that the financial industry is fully in control of the political process not just here in the USA, but globally. How do we pry their fingers from our collective neck?
This would happen automatically. In such a situation the debtor would give notice to the owner of record of the mortgage deed / trust lien as of the day of the filing for bankruptcy. Hidden owners, owners of questionable securities based on the owners, and so on would not get notice, and the owner or nominee of record (MERS, in many cases) would be deemed as full and complete notice under the Bankruptcy rules.
Then the cramdown would take place, saving assets (if any) for the sake of the class of non-secured creditors. But the bankruptcy court, by making that cramdown ruling, will settle once and for all who holds the mortgage deed/lien. This ruling pre-empts state law, and requires anyone who wants to stir up the title to pay hefty fees just to ask permission to reopen the bankruptcy case.
MERS, for what it is worth, ends up holding the note and the mortgage, and has to sort out the damages between the security holder and the banks that issued them. The rest of us get clarity in the title system (as recording the bankruptcy judgment in the state registries would establish clear title), the debtors get a fairer break than they deserve, and all the ripped off security buyers get an accurate adjusted valuation for their securities that allows them to cite credible damages when they sue the banks for their dishonest dealings.
Everyone discusses the issue of the banks and vast wealth inequality from a policy choice perspective rather than the social and psychological construct that drives it. For some time since the brief period of awakening right after WWII, Americans have had a “plantation” psychology that dictates that whatever the massah wants the massah gets and its alright no matter how beaten and downtrodden everyone else is. That mindset unfortunately must be shattered and class awareness aroused in the population for any of this to change. Don’t see that happening anytime soon… nope
I bought a house in late 2004, and by mid 2005 it was already apparent that some kind of ‘dip’ was coming (though at the time I thought it would be a repeat of the housing dip we had in the early 1990s and not, you know, Great Depression II).
CalculatedRisk, housingbubble.org and other blogs were already warning anyone who’d listen about an upcoming crisis by mid 2006, right about when the new bankruptcy laws kicked in. Most of this was explained away as anti-Bush hysteria at the time.
From 2005-2007, Greenspan (in hindsight) sure seemed in a hurry to get interest rates back up as fast as he could, while he could, with his little ‘gift’ of a 25 basis point Fed rate increase coming every 6 weeks like clockwork.
And, finally, the Aug/Sept 2008 crisis did not come from out of nowhere: It was just the biggest in a series of crises (there were smaller crashes in spring 2007, late summer 2007 and Feb 2008 that prefigured the final, big one that came at election time). I first heard the ‘blame it on subprime’ spin as early as Feb. 2007 on CNBC.
Add to that whatever happened with Oil in the summer of 2008 (nearly $150/barrel, with fully-loaded tankers just offshore, waiting for the price to go up even more before docking to unload their cargoes? Really?).
So yes, I think the PTB knew damned well that something bad was coming.
@Judas Escargot: Housingbubble.org (or was it housingbubble.com then?) was covering the bubble back in early 2004. Back then there was zero coverage of the problem in the media and if it were not for the internet thousands of concerned people would have had no-one to compare stories with.
In the Boston area the properties stopped penciling out as rational investments back in 1998, when people started looking for ways to invest their .com stock gains.
@Montysano: well that’s the question, isn’t it? Better organization and smarter populist action on the left. A concerted effort to pass laws challenging banks or revoke laws (or change laws) favorable to the banks. Essentially the left needs to harness something like the tea party and then use its power to do good instead of evil. I don’t think there’s any good, short-term solution. It may be a war of ideas needs to be won.
Someone kick this commie bastid off the blog!!
I didn’t pay much attention to housing in the financial sense until I bought (I’m kind of self-centered that way). So I didn’t notice, myself, until 2005-2006– but I’d def. believe that 2004 date.
In the Boston area the properties stopped penciling out as rational investments back in 1998, when people started looking for ways to invest their .com stock gains.
I’m out in the ‘halo’ (Salem), which at that time still had many old multifams being carved up into condos by ‘developers’ looking for a quick buck. Prices collapsed sooner up here because the start of the downturn just so happened to coincide with a glut of shiny new condos. In my area, prices rapidly plummeted to ~1998 levels by the end of 2008, and have stayed there ever since. And it won’t get better until the banks decide to give loans to first-time buyers for those little condos.
Boston proper, however, is IMO still in a bubble propped up by the three big high-value industries here: Software, Biotech/medical and the financial sector. I have no idea how well these industries will hold up over the next 2-4 years with the ‘new austerity’ coming, since they are all heavily subsidized by the govt in various ways (and I doubt a GOP House is going to be giving much thought to Massachusetts’ economic needs).
Good post ED. Here’s the thing. None of this will happen. Nothing like this will happen. The banks involved *MIGHT* pay a fine and admit no wrongdoing, but no real change to protect consumers will be undertaken.
No CEOs who were in charge of the banks or people in charge of the investment desks will do a perp walk.
No individuals will be held accountable for the disaster. This is what happens when you allow unfettered private corporate donations in your political process.
We have the government that the corporations want. Sure, we vote for our representatives and president, etc…., but the choices are already limited by the corporatist system we live in.
If we actually want accountability, the first thing that has to happen is for corporations to be removed from our political landscape.
I’ll hold out a tiny sliver of hope for it, but I doubt it will ever happen. Why would our politicians change the system that’s working for them ($$$$) and the corporations? (More $$$$$)
More uninformed craziness. What about the Mortgage Relief Act?
Kain is jumbling what goes on in the beginning of the process, tax credits to buy homes, and what happens at the end, with foreclosure. But since the first time home buyer tax credits expired, there is not much sense in even bringing this up anymore. On the other hand, the issue that no one wants to address is the fact that declining wages and job uncertainty hurts both potential home buyers and renters.
And oh yeah, I wouldn’t call what has been happening here a “transfer of wealth.” I’d call it theft.
Well, yes. It would be a huge thing if the Right/Tea Party quit hollering “Free markets! No regulation!” and realized that they were working against their own self interest. I see some signs of this happening, but not nearly enough.
This has to be TPTB’s worst nightmare: a bipartisan grassroots movement to wrest political power away from moneyed interests. Which is why Fox/Beck/Limbaugh are no accident. They are well paid to encourage and sustain the partisan divide.
Probably even possibly isn’t a good word here. The Republicans wouldn’t ever go for this. When Shylock wanted to cut the guys heart out, the Republicans would have stood up for his rights to dig up the soil the guy’s blood soaked into………….
@zmulls: Couldn’t we make it on primary residences only, that would eliminate a lot of those problems.
@Allan: Excellent idea!
@Xenos: MERS hardly ever holds the note. It is usually named as the mortgagee and nominee for the lender, who initally, at least, holds the note.
The note is often assigned to the servicer, like Wells Fargo or CitiMortgage, who is often assigned the mortgage when default has occurred and foreclosure is likely.
That’s how I see it happening from my perch as a title examiner, examining REO files from a foreclosure law firm retained by Fannie Mae.
We recently had one where the mortgage wasn’t assigned by MERS to the foreclosing lender until after the sheriff’s sale. I thought it sounded like an Ibanez situation, and we put it to our national underwriter. But they said, “Meh. Whoever holds the note has a right to foreclose.” I thought the reasoning was bad, and would damage the integrity of the real estate recording system. You can’t tell who owns the note from the real estate record if it’s divorced from the mortgage like that.
I thought finding a way to keep people in homes they can’t afford was a terrible moral hazard. I can never keep up with how your well thought out and inciteful pieces like this relate to your strongly held principles. But then I don’t run away from the word liberal like it has the cooties.
@Karmakin: This. EDK’s first response was MORAL HAZARD! It is essentially the emotional response to seeing someone getting something you think they don’t deserve or you aren’t getting or whatever. Now, he has a well above average interest in governance and policy and he has had BJ to challenge that instinct. What are the odds of the approximately 50% of Americans who respond on that instinct being persuaded like ED?
I don’t think it’s likely. There’s a reason why politicians on the right toy with the idea of default. They know that the anti-liberal passions they planted in the bigots will walk right over that cliff rather than go against the elites in their tribe.
@Montysano: Deregulate and let the market work it’s magic. Duh.
It’s clear we deregulated past the point where we can actually move the other direction using the political process. The non-activist Roberts court dealt the final blow, but the patient was not going to survive anyhow. Now the only thing that can actually change things would be something even more catastrophic than the crash of 2008. And does society withstand that? Probably, hopefully. But definitely not gracefully.
cramdown should have been part of the initial bailout bill. Banks did it in the past to avoid large losses, sharing smaller losses with homeowners. But this time the got the government to pay them to not take any loss & fucked owners as often as possible. Its too late for many people now.
BTW – got a letter today:
DEBT SETTLEMENT NOTICE
Our records indicate you have not responded to our previous attempts to contact you
It is important you contact us at 877-550-3137 within 10 days
It is of course advertising bullshit. I wish great physical harm on the assholes that do this sort of thing. Sadly, they probably are successful at scaring some people into calling them & I bet they screw those people over really well.
This sounds very sensible, but it won’t work. You’re talking about cramdown — letting judges modify the amount of the mortgage to reflect the true (lower) value of the house and the adjust the homeowners’ mortgage payments on that basis.
But the reason that’s not possible is that the entire American banking system is insolvent. The American banking system is being kept afloat right now by smoke and mirrors, with a massive process of “extend and pretend.” You see, while a bank keeps a bad loan on its books, the loan gets counted as an asset. So banks are frantically doing everything they can to keep from writing off bad loans as bad.
If cramdown were allowed, the values of all those loans would be drastically reduced. This means that trillions of dollars worth of the banks’ assets would evaporate, and at that point, “extend and pretend” would no longer be possible. Most of the U.S. banking system would have to shut down and be taken over by the feds. You’d have real chaos.
Right now, the American financial system is screwed because it can’t go forward and it can’t go back. Obama’s people in the White House understand this very well and the Federal Reserve understands this very well. But most other people don’t seem to get it. We can’t go forward because writing down all these bad loans would suddenly reveal that the American banking system emperor has no clothes — trillions in assets would disappear overnight and bank after bank would suddenly not have enough assets to operate. But we can’t go forward, either — because property values are never going to return to those 2006 bubble values in our lifetimes.
So what’s the solution?
Smoke and mirrors. Half measures, like banks dragging their feet while foreclosing, or simply refusing to foreclose, while those 35% mastercard interest rates produce an income stream large enough to eventually cover all those bad home loans. The Federal Reserve is dragging its feet and fiddling and twiddling with half-measures like quantitative easing, because the alternative would be to nationalize all the insolvent banks, which is basically all the banks in America (minus some small local banks & S&Ls).
Meanwhile, bank after bank keeps swallowing hundreds of billions of new bailout dollars, like black holes. Why? Because the banking system in America is insolvent, and the illusion that they aren’t is being maintained with smoke and mirrors — but being insolvent means you constantly need new infusions of cash, because your income can’t cover your expenses.
It’s a giant mess. And it’s going to go on and on and on, probably for the next 20 or 30 years, however it long it takes the banks to cover all those bad home loans with $75 overdraft fees and 35% credit card fees.
@E.D. Kain: So in otherwords, a complete change of human nature where people are totally selfless and make the arguments you have been very resistant to but even more so to reach those who aren’t as easily brought along as you? Got that.
Lefties, give up everything: your lives, your funds, your non-shrillness and DO MORE TO MAKE GREEDY PEOPLE LESS GREEDY. Duh. Why haven’t lefties done that before? Maybe we need a Fairness Doctrine to help lefties get their message out.
Basically, it is all our faults that EDK thinks helping homeowners getting help on their mortgages is a terrible moral hazard and we should do more to make sure he and others don’t think that way in the future so as to protect the market from self-implosion.
And that’s the rub of it. Now he cares about human outcomes since it’s gotten to the point that if we don’t take care of the homeowners, the precious producers of our society will also suffer.
BH in MA
I thing the whole “clear title” thing is going to be a real problem. The banks totally screwed themselves in the interest of speed and reducing costs. The documentation is bad and it’s not just a matter of who has the right to foreclose:
1. The mortgages were supposed to have been transferred to trusts and weren’t transferred properly based on the rules of the trust itself.
2. If the mortgages aren’t in the trust and the trust doesn’t have the right to foreclose, the bank didn’t really create a “mortgage backed” security, did they? Sounds like fraud.
3. The trusts are set up under very specific rules to make them tax exempt. Even if the entity who DOES have the right to foreclose wants to “give” the foreclosure money to the trust THERE IS NO LEGAL WAY TO GET THE MONEY INTO THE TRUST.
4. The trusts are set up the way they are in order to be tax exempt. If the mortages weren’t transferred to the trust and were instead held somewhere OUTSIDE this legally tax-exempt entity, why I believe somebody somewhere owes a shitload of back taxes.
ANY attempt to fix these problems with a wave of a magic legislative wand will seriously damage individual property rights and go against centuries of settled real estate laws. Basically we would be allowing the banks to say that they own the mortages they own and have the rights to foreclose, etc. on various properties because they say they do. This mess is the result of the system they designed and regulations they skirted and the laws they broke. Clear title is a reward they do no deserve.