Wall Street and the real estate boys bring around an economic collapse, but we bail them out so they aren’t hit too hard. But then the economy is such a mess, revenues are down because of that, so the obvious place for budget cutting is here:
In the large immigrant community of Jamaica, Queens, which is ground zero of New York City’s foreclosure crisis, a small squad of young lawyers fans out to local courts every day to do battle with lenders, negotiate hard-fought changes to onerous loans and provide free legal representation to low-income homeowners about to lose their homes.
Now, however, the anti-foreclosure team itself is facing foreclosure.
The state’s budget squeeze has put at risk more than 120 legal aid and homeowner-counseling agencies across the state that have provided a last-ditch legal and economic lifeline to thousands of distressed homeowners.
“I am not sure I will have enough money to pay my staff by the end of this year,” said Jennifer Ching, the project director of Queens Legal Services, one of the groups whose future is threatened. “New York could soon find itself with thousands of unrepresented homeowners who risk falling through the cracks.”
Foreclosure-prevention programs, which over the past three years have helped more than 3,000 homeowners facing foreclosure in New York City, have been financed since 2009 by federal stimulus spending, but that money will run out by the end of this year. That has left lawmakers scrambling to try to find new state financing, while the small army of pro bono lawyers fighting foreclosures wait and worry. Some have already stopped taking on new clients.
That makes sense!
PeakVT
Cramdown, higher inflation, right-to-rent, shared appreciation – we could address the foreclosure epidemic in one or more ways if our government wasn’t so heavily controlled by the big
investmentgambling banks.gene108
Makes perfect sense.
The money a bank can make, after the housing market picks up, by selling a foreclosed house more than off-sets the problems a foreclosee faces by now being homeless.
I mean, it may be a while before the banks can sell the houses again at a profit, because so many more homes are going into foreclosure and driving down property values.
Er…foreclosure may actually be self-defeating…
gene108
I’ve never understood the appeal of lowering the recorded value of investments.
There’s no easy way to quantify losses, especially in real estate.
The flip side is, if banks are forced to write down assets during a depressed economic period, do they get to write-up the value of assets during boom times?
For whatever flaws recording assets at historical values has it seems to me to be the only way to put a firm number on the value of an asset, until the asset is sold.
piratedan
There are times like these when I wonder about whether we shouldn’t just go ahead and go full gonzo and nationalize banks and healthcare… sure while the best we could expect is to replace these titans of industry and finance with mediocre civil servants who have no nose for profit but think of the possibilities. They can go out and start new business and find new ways to develop wealth for our strapped nation that wouldn’t involve throwing western civilization into chaos or profiting by the erstwhile denying of treatment to grandma or the poor. Just think on what they could do when they unleash their business acumen into the real free market where there aren’t any government subsidies or regulations to shackle them…..
alas, its only a dream…..
Comrade Dread
It’s creative destruction.
There’s more potential moneymaking schemes in throwing out these people than there is in saving their homes and their credit.
Besides, if they had just applied themselves harder, they could have been investment bankers contributing to our society and not middle class schlubs who can’t pay their bills.
ruemara
It’s my hometown, Cole. Blacks, Latinos, Pinoy, IOW a very minority majority community. Just a guess, but I think they may get it when there’s a fucking riot or 20 where we pull these guys out of their offices and rip them to shreds. Whatever. Far too many just want to ignore it because it won’t happen to them and it’s just their fault for not being wealthy. I guess we will have to destroy America to save it. May not be 2012, may be 2016, but we’ll go right back to being greedy fuckers who have no idea how to keep a democracy going because we are so sure that it won’t ever hurt us.
David Hunt
I wouldn’t say that it makes sense, but it is predictable.
Dave
One day, this story will end the way these things always do … with pitchforks and torches.
Zifnab
@gene108:
The homeowner has a payment of $X and $Y to pay it. If X > Y, then the homeowner is going to be delinquent and get foreclosed on. A foreclosed property has a host of expenses associated with it that cost the mortgage company money. If the company can flip the house quick, it’s a good deal. But in the worst crisis since the Depression, I’m not seeing it.
So it’s generally argued that keeping the homeowner paying is preferable to kicking him out and trying to resell the property.
To keep the homeowner in, you need to get $X <= $Y. That means reducing the payments. And payments are pegged to the value of the loan. (Technically, you could just reduce payments and stretch out the length of the loan, but most people have 30 year mortgages with the first 15 years paying down barely more than the interest anyway – a 50 year mortgage wouldn't look much better, rate-wise).
Cramdown just says "Fuck it all, banks. You're taking a lose either way. Just take it up front and keep getting your mortgage checks." And banks hate that idea, because they still think a house that appreciated 400% in ten years really worth that inflated price after the economy craters and prices back down by half.
Comrade Javamanphil
Poor people just don’t deserve nice things like homes and cars. They do not value them like the banking class does. It pains them, but the bankers must foreclose until you can truly appreciate how awesome they are.
Hunter Gathers
Well, if these people weren’t so fucking stupid and immoral and became investment bankers or were good enough to be born the sons and daughters of investment bankers, then they wouldn’t be looking for their Big Government Welfare handout.
Yevgraf (fka Michael)
In an environment where the forced sale nets the lender 50 cents on the dollar, a bankruptcy cramdown of principal and interest to the point where the lender manages to pick up 70 cents on the dollar actually helps the overall economy, regardless of what Rick Santelli and the overpaid commodities thugs on the trading floor think.
SenyorDave
I’m sure that David Brooks will get around to writing a column about this as soon as he can pull his nose out of Mitch Daniels’s ass.
Will someone please explain why Daniels inspires anything other than contempt. As Budget Director under Bush, he helped turn a large surplus into a massive deficit.
Plus, he put the cost of the wars (Iraq and Afghanistan) as “off-budget”, so they weren’t even included in the deficit. Hey Mitch, try that in a public company as a CFO – your lyin’ ass would have ended up in jail!
jl
@gene108: You miss the point of the cramdown.
There are two cramdowns. The real cramdown that cannot be avoided, and the policy cramdown that attempts to organize the real cramdown so that it does not do too much damage to the real economy.
Some players, almost certainly, will have to take a real cramdown. The consensus Very Serious Person policy toward the housing bust and financial crisis has failed. The idea was to bail out the big banks and financial corps to tide them over until the recovery started. After the recovery started, and housing values recovered, the bad debts that banks still have on their books would be a much smaller problem.
The recovery has been very slow and weak, it is now faltering (though thank goodness this has not seriously affected the weak and slow jobs recovery), average housing prices and values are still falling, the estimated percentage of homeowners under water has recently increased to 28%.
It is still the case that important financial players hold paper nominal claims on real assets that are greater than the value of the underlying real assets themselves. The VSP ‘housing market will catch up in the roaring recovery’ strategy completely failed. Some one will take a real cramdown.
The point of the policy cramdown is to limit the damage that the real cramdown will do.
One example of the damage the real cramdown does is that big banks and financial firms spend far more time fighting over who will end up with the hot potato of bad paper debt than making productive loans to the real economy. Another is the slow motion foreclosure train wreck which costs a lot of money to stage, and disrupts the actually useful productive activities of the millions of ‘lesser people’.
Whether the specific policy called the ‘cramdown’ is the best way to limit the damage of the real cramdown is debatable, but by now, it is very very likely that some(s) one will take a big real cramdown, whether they like it or not. The only question is whether it will be really big, huge or ginormous; who gets it; and when.
Only a relatively small part of the tarp went directly to bad mortgages. Most of it went to the various securities built on top of the mortgages. The underlying mortgage crisis and housing bust is still with us, in an kind of long term chronic phase.
You can see the real damage every day:
public and private pension ‘crisis’
police, fire, teacher, maintenance and other public service worker layoffs
park and rec closures,
sky rocketing tuition, reduction in enrollment at public universities
job growth insufficient to remove unemployment created by the crisis and recession (especially long term unemployed)
continued reduction in value of real assets held by the ‘lesser people’
All this damage however, is in fact, suffered by the mere ‘lesser people’ who got a much smaller bailout than the big boys, because they are chumps who were foolish enough to specialize in actually learning to add value in the real economy, rather than in shuffling money and swindling.
WereBear
So it sounds like “cramdown” is a good idea.
Which explains why we aren’t doing it.
Gotcha.
jl
@Zifnab: thanks, you said what I tried to say, but did it in plain English.
ChrisNYC
Except it’s not a budget cut.
There was no money in NY State’s budget to cover this — it was funded by the federal stimulus and that money is running out in December. This was an attempt to *add* new state spending, to cover these legal services during the period Jan-Mar 2012, before the state 2012 budget goes into effect.
A lot of public services in NY are facing really deep cuts. 4500 teacher layoffs. Legal Services Corp. is powerful and huge and gets lots of public and private funding. (And, purely coincidentally I’m sure, lots of coverage in the NYT.) Just saying that LSNY crying poverty (when there are tons of legal services places that actually run on a shoestring) is a bit much.
Martin
@gene108:
Well, if you look at how the subprime situation played out, it might make more sense. Housing prices did not rise homogeneously. Specific cities and neighborhoods were targeted by subprime brokers – places where demand was high and brokers could artificially increase housing prices by dumping cheap loans and refis on the market. As prices soared, buyers felt pressure to buy fast, and more speculators came into the market, driving prices further. The brokers were making a killing on this, because that shitty $600K no-money-down interest only loan looked pretty attractive to banks when the value of the property soared to $900K. The subprime brokers knew exactly what they were doing, and while they were writing these loans, they were building up their database of properties they expected to be able to buy cheap on the auction market in a few years. They bailed out of the broker business at the peak and took their profits, left the banks with the shit, and waited for the foreclosures to happen, and used their profits to buy up properties that nobody else would touch and either rent them out or flip them when the market was right.
It’s as reliable a business here in SoCal as setting up a payday loan service next to a military base. Everyone paying attention knows the scam. The foreclosure rate in my neighborhood is in the low single digits. You go 2 neighborhoods over and it’s north of 20%. You think that’s a statistical anomaly?
WaterGirl
@Martin:
That sentence is a thing of beauty, even if it made me cry. These people are less than human. They have no soul.
gene108
My point is until an actual transaction takes place, what is your rational for valuing an asset?
There’s no standard that says, if housing prices two neighborhoods over collapse because of 20% foreclosure rates, then the value of your house is devalued to ‘x’.
You are picking some arbitrary standard and forcing a business to value its assets based on this arbitrary standard, because you think it is a good idea.
The second problem I see is what about strategic defaults? I can afford my payments, but I’m not going to pay because my house value is underwater or some other reason, and the owner wants the bank to foreclose.
How do you decide what is a genuine case of hardship and what is a strategic default?
Also, too, if you are asking banks to write down the value of assets of delinquent mortgage payers, why not write-down the value of all other real estate investments? Why selective treatment for delinquent mortgage payers?
Banks hate cramdown, because when you force any business to reduce the value of assets they have to take a loss in the current period.
For banks lower asset values, also means they have to keep more money on reserve to meet lending requirements, which will hurt their ability to make money.
I can’t blame banks for fighting against cramdown.
Stretching out the mortgage payment to 50 years makes more sense. When the struggling home owner is back on their feet they can pay more into principal or refinance.
jl
@gene108: Your concern about things like genuine hardship and strategic default, and piecing through hypothesis about who wants, or does not want, who to foreclose, and why, make sense in a normal economy where foreclosures occurs at normal rates.
But now the problems in mortgage markets are not rate individual occurances that conform to normal rates and are due to individual risk factors. Rather, they are much higher due a systemic breakdown in the financial and economic system. So, they take up so much attention and cause so much disruption that procedures used in normal times may create large costs to the economy. And systematic features of the economy that produce the higher rates of foreclosure threaten to continue, creating a vicious cycle of housing market problems, foreclosure, resulting opportunity costs for financial system in having to deal with them through normal means, and a slower weaker economic recovery, leading to continued housing market problems.
“Stretching out the mortgage payment to 50 years makes more sense. When the struggling home owner is back on their feet they can pay more into principal or refinance.”
At some point, the stretching out of payments becomes so thin and so long that it results in an unavoidable reduction in the expected value of the security. What is the probability that many of these people ever will be able to make payments in any foreseeable future that are large enough to make up for the lower payments now and in the near future. That probability is low.
Geeno
@Martin:
It’s been so long since I was in the banking business, I can remember when it was illegal for a lender’s employee or any family member to bid on foreclosed property. It was considered a kind of insider trading. That probably went out with Glass-Steagall.