…to tell which which way the wind blows. Not when even Marty Feldstein marches in with a more aggressive mortgage forgiveness plan than we’ve seen out of either Congress or the administration.
I don’t love the plan as offered, to the extent that an 800 word op-ed. offers much in the way of a fine-grained proposal. Feldstein, Ronald Reagan’s head of the Council of Economic Advisors, calls for forgiving out-of-the-money mortgages down to 110% of the homes’ value — a threshold that would touch 11 million out of the 15 million homes in the United States. Lenders would absorb half the loss and the government would cover the other half, at a cost Feldstein asserts would be less than $350 billion.
I don’t have much to say about that part of the plan. Why 110%? Is there any data that suggests that’s the number to encourage underwater mortgagees to stick with the loan?
Or…how much of the current foreclosure crisis is driven by unemployment, and hence at this moment is unlikely to be touched by a payment reduction that still leaves the house underwater?
No clue, here (and no expertise to justify a guess), but these are empirical questions that could be answered…and in any event Feldstein — now at Harvard — is at least trying to come to grips with that insane number of 15 million houses that embody enormous financial loss.
The part of the this proposal that I think is almost certainly a bad deal is the price homeowners would pay to get their mortgage reduction: Feldstein would transform these loans from non-recourse status — in which the lender can claim the collateral, the house, but no other assets if the borrower defaults — into an instrument that puts all the borrowers assets are at risk. To me, taking financially vulnerable people in the midst of a bad economy and placing them at still greater economic risk seems to me both cruel and stupid.
Much better, in my view, are the proposals that place the government — the taxpayer, you and me, baby — into financial partnership with both the borrower and lender. In these approaches, the borrower who gets mortgage relief has to share with the lender (and/or the Feds) any gain made from an ultimate sale of the property. Everybody’s incentives align, and the borrower is not one layoff away from utter ruin, as he or she would be in the Feldstein scheme.
But what really stood out for me is not that Feldstein has come up with the least middle-class-friendly version of mortgage relief out there — that’s how he rolls — but that even such an old Reagan hand has driven to the core of the matter:
…As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.
Yup, Dorothy, we’re not in Kansas anymore — or perhaps, pace Thomas Frank, even in Kansas they’ve starting to grasp the most brutish of brute fact.
Yes, it sucks that the taxpayer must bail out over-extended borrowers and the reckless (criminal) financial institutions that placed those loans. But life does blow sometimes — as most actual grown-ups understand. Increasingly, those able to recognize the difference between ought and is accept that it’s better to deal with that fact than to watch the entire fiscal structure of our economy swirl down the toilet of whinging infant Congressional Republican orthodoxy.
Feldstein concludes by restating that same message. Better the nation take its medicine than seek to extract the pleasure of righteousness amidst the rubble:
I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves. Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods. The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.
That’s DFH talk, of course. Without quite saying it out loud Feldstein here offers the suggestion that society has both values and obligations that trump the every-man-a-wolf-to-his-fellow-man cult of the individual that passes for contemporary GOP “thought” on the social compact.
When you’ve lost Marty…
Image: John Constable, The Hay Wain, 1821
JGabriel
Tom Levenson:
The guy from Young Frankenstein?
.
Tom Pretentious Art Douche Levenson
@JGabriel: What hump?
JGabriel
Tom Levenson:
Oh. Not so much then.
.
Librarian
I remember that when Feldstein worked for Reagan, he got into some trouble for disagreeing with some aspects of the trickle-down economic policies that were the Reaganite orthodoxy. So, even he is sometimes capable of recognizing bullshit when hw sees it.
JGabriel
@Tom Pretentious Art Douche Levenson: Abbie Normal’s?
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Thoughtful Black Co-Citizen
How about the lenders absorb ALL of the cost, apologize profusely and walk barefoot around Wall Street ten times.
In return we will agree not to go all La Marseillaise on their asses until at least 2013.
JGabriel
Tom Levenson:
Yeah, I’m not seeing the point of that either. Is it even clear that the housing market has stopped losing value?
110% of today’s value might be 120% of next year’s value. And then you’re in the same damn boat / submarine. Best to shoot for 100% and hope the house doesn’t lose any further value.
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Tom Pretentious Art Douche Levenson
@Librarian: True enough. Feldstein has some cred. Not a lot, IMHO, but he did in fact challenge real interests aligned against him at a time when it took courage to do so. So there’s that.
Dougerhead
This is very interesting. I have a lot of liberal friends who work in some form of finance who think that we should probably just let them drop because the bubble got them up so high that they’re out of whack.
NYT
Marty Feldstein, ex-board member of AIG whilst they engaged in fraudulent accounting, massive underreserving, wrote hundreds of billions of dollars in unprofitable derivatives and engaged in a large securities lending operation which replaced the safe low yielding assets of their insurance subsidiaries with high yielding garbage.
He is now proposing that American taxpayers, as a whole pay 175 billion dollars to banks and other mortgage holders.
Also banks and other mortgage holders get full recourse on a large number of underwater non-recourse loans.
Cost to banks and mortgage holders is the likely amount of 175 billion worth of underwater non recourse loans which they would have otherwise recovered – ie not very much.
Feldstein is proposing another bank bailout disguised as help to homeowners. Just like the last HAMP
sfinny
@JGabriel: OK, that is funny. But seriously, my question on this is the effect to various banks. People speak of Banksters as a monolithic entity, but really it is everything from local small banks to large investment/bank institutions. So my question is how this write down, which initially seems like an interesting idea, effects the local or regional banks. Does this actually reduce their loan and lease losses allowance? I agree that a certain amount of taxpayer money could avoid more pain in the future.
JGabriel
Under FDR, didn’t the government address a similar situation by just buying up underwater homes at market value, and demolishing them?
Costly in today’s world, yes. But the homeowner gets to recoup what they put into the house for a fresh downpayment on a cheaper home, the bank gets the rest (to close out the loan while absorbing the loss), and housing demand increases — improving the housing market and the construction business.
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mclaren
Meanwhile, banks have taken to demolishing foreclosed houses in a desperate effort to reduce the available housing stock.
Banks turn to demolition of foreclosed properties to ease housing-market pressures.
And economists Akerloff and Romer have now written a paper in which they describe corporate looting as a significant component of economic activity when the financial system collapses.
Thoughtful Black Co-Citizen
@NYT: Eggsacktlee.
And the first fully-paid off and occupied house will get knocked down in 5…4…3…
(Note I am too classy to suggest the same techniques might be used on the banks to reduce the number of financial institutions that start this shit in the first place.)
gnomedad
Could be worse. Could be raining.
JGabriel
I’ll say one thing: this seems like the perfect time to start a bank.
Think about it. You’d be starting off clean, no overhang of bad or underwater loans. That’s gotta be a competitive advantage right there.
And you could refuse to engage in some of the shady practices, like debit card fees, that the big banks are proposing now.
You’d have the perfect marketing campaign:
I mean, seriously, a bank that could honestly advertise itself as not being an asshole could make a KILLING in today’s market. And, frankly, you’d think not being assholes would be a pretty low bar to clear.
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trex
From the article:
Under the old plan, if I lose my job and can’t get a new one I lose my house and my credit rating.
Under the new plan, if I lose my job and can’t get a new one I lose my house, my credit rating – and all my shit along with it.
As NYT pointe out above, lenders-as-creditors can and are already going after people in court for outstanding debt on foreclosures and short sales in those states that allow it, while at the same time lenders have policies on many if not most loans that insure them for around 90% of the loan’s original value – likely much higher than the outstanding amount after X years of payments.
The principal reduction and refi elements of Feldstein’s plan are no brainers. Hell, even a
refimortgage modification at today’s rates with no principal reduction would help millions of homeowners lower their payments and stay in their home. But five years into this crisis most banks still resist doing even basic mods because they’d rather roll the dice on borrowers’ guilt and fear keeping them making high payments – and on their own ability to recoup future losses via judicial measures – than accept a reduction in interest revenue.Given their behavior to date and all the current incentives to keep porking the borrower, it’s hard to see the banking lobby even remotely considering a plan like Feldstein’s,,even if it would make it easier for them to pry away your savings and assets on default
James E. Powell
This is where he is totally off. The Republicans do not have a stake in preventing a weak economy with greater job losses. That is, in fact, exactly what they are determined to produce.
Fucen Pneumatic Fuck Wrench Tarmal
so some folks still believe that real estate should only ever increase in value, that even if its out of your price range, is too big, isn’t worth the money, whatever, the time value of money is more immutable than special relativity, thus there is no such thing as a bad home, or land purchase.
interesting.
get the consumers of those 15 million bad loans, the real estate agents who pimped the whole mess, the banks, their investors, the traders, all in a squared in space suiitable for development into a future ex-exurban subdivision, with medieval weapons, and let them fight for the title of world’s biggest asshole.
if you could have, or should have thought that it sounds to good to be true, and you did it anyway, you are not a victim.
LosGatosCA
Marty Feldman was Igor to Dr Franken-steen.
Martin Feldstein was just as humorous trying to defend the Laughernomics assertion that cutting income taxes raises tax income revenues:
“It is not that you get more revenue by lowering tax rates, it is that you don’t lose as much,” he said. [The New York Times, 3/26/08]
He’s almost as good as DeNiro in Meet the Parents delivering a punchline with a straight face.
Xenos
The borrowers would accept full recourse to get the mortgage reduction.
Fwiffo
I know that the answer to “what about the moral hazard” is “well, we have to if we don’t want the world to end”, but still, what about the moral hazard?
I mean, I recognized the bubble for what it was, and elected to rent instead of buying a house, nor did I lend money to somebody buying a house. As a result, nobody’s going to give me big piles of free money. I guess next time I’ll jump into the bubble with both feet so I can get in on the free money racket.
Again, because of all the side effects, we really do have to bail people and lenders out, but how do we not get in this situation of rewarding bad behavior again?
Brother Shotgun of Sweet Reason
And may I just add that I’ve come to love the word “whinging”. It just adds a soupcon of je ne sais quoi to the more pedestrian “whining”.
That is all.
Mike Goetz
Making the loans recourse is pure robbery. Horrible idea.
However, this
“The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.”
is not DFH talk in the slightest. I’ve never heard a hippie defend paper “wealth” used as a piggy bank to buy consumer junk. That’s delusional bourgeois avarice.
Help people stay in their houses to live in, sure, but I have no interest in reinflating the fake-money bubble.
Calming Influence
Fuck that phony moral hazard “we gotta keep an eye on the slackers ’cause I earned mine you must be a leech” shit. The moral hazard we face right now is this: we dismantled regulations and thus allowed Wall Street the opportunity to gorge themselves without risk, and they took down the economy. Will they do it again?
Jim C
Did Bill Ayers ghost-write this post?
triangular gutters
How you feel about the different proposals for clearing the housing market probably depends on how much you’re invested in it. Uh, so to speak.
Markets vary, but in some coastal urban areas, it seems like many people still couldn’t afford to buy their own houses. One may say they’re not making any more land, but some areas have seen net outflow of population, so they’re not making any more people either. More to the point, the people there aren’t making any more money. This has led to years of inventory, partially because the asking prices are still too high. Not knowing whether you’ll have a job in a couple years has reduced appetite to stretch too.
As a Gen X Bitter Renter (R) I see many of these house prices as yet another transfer payment to Boomers, who traded tulip bulbs with each other until all connection with the future value of land and improvements was lost. Housing market repair strategies that do not eventually lower housing costs and/or ones that preserve the imbalance of wealth between generations are deeply unfair to Gen Y. Many are also regressive inside generations; those who had relative paper wealth may even come out ahead of those who did not or could not lever themselves up over their career.
Finally, most of the Villagers have large financial stakes in house price appreciation; the people we read think of reduced house prices as a personal wealth effect hit rather than a reduction in the drag of unproductive assets on society. This is one subject where the truly affluent may be less swayed, as a house was never the major investment in their portfolio, it was just a place to stay and count their money.
Villago Delenda Est
I have a better idea.
Let’s let the banksters eat it financially, as opposed to lining them up against a wall.
This SHOULD be a really easy choice for them.
However, because they’re Ferengi fucks, they’ll actually rather die than give up their precious latinum, even though they’ll just not be around to cry about their loot being lifted.
Cliff
@mclaren:
I wondered if this was going to happen. They have too many houses, they own the houses, they cannot sell them, QED.
Villago Delenda Est
What pisses me off about all this is that it’s your standard history repeating itself.
We went through this RECENTLY, in the damn 80’s. All those terrible regulations were there FOR A REASON. They were not just arbitrarily imposed out of pure spite…the idea that they were is another example of Republicans/Randites/Financiers/Glibtards PROJECTING. They’re the ones who do things out of spite. The regulations were put in place (sort of like the separation of church and state, now that I think about it) to protect the banksters from their own worst natures. To keep them from digging holes they can’t get out of without insisting that other people sacrifice their own bodies to save the idiots who dug the damn hole in the first place.
If the rules of the jungle that they’re so fond of were actually allowed to prevail, they’d all be dead men.
Luthe
@JGabriel
@mclaren: As someone who is currently involved in the affordable housing sector, let me just say FUCK NO, DON’T DEMOLISH A THING. For all there is a glut of homes on the market, there is also a severe shortage of affordable housing for lower-income buyers and renters. There is also a huge overlap between neighborhoods with high foreclosure rates and low-income neighborhoods that need more decent quality affordable housing. And that’s not even getting into the problem of affordable housing in the suburbs…
Susan S
Some years ago I found myself on a panel with various economists,Alan Blinder [at the time, Vice Chair of the Fed], an asset manager from one of the billionaire level firms, and Mr. Feldstein. The topic was something about individuals and investing..and two things I remember most: Most of the observations seemed totally disconnected to the real world..at the time I managed about $75 mill for 250, 300 clients..no one of great wealth. I was truly shocked at the disconnect between the economic reflections and the real world money of middle America. But sitting next to Mr. Feldstein, I watched, interested him take copious, involved , interested notes during each presentation. He was far more engaged than any of the younger speakers. This man could be knitting on his porch..at least he is proposing ideas. The full recourse is a horrible idea..but no worse than subsidizing rich investors to buy and rent back homes.
My solution..reduce the terribly stringent requirements..I would like to buy another home..could easily afford the monthly payment..but down payments are impossible. Let people in for 5% and I suspect the RE market turns quickly.
JGabriel
OT. Or maybe not given the post title (You Don’t Need A Weatherman …), but the rain is coming down like a fucking waterfall here in Manhattan. I wouldn’t be surprised if there are stories in the news tomorrow about flash-flooding in NYC.
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Bago
The arrests are starting in Seattle.
Catsy
So you’re telling me that contemporary American conservatism is far to the right of even Reagan-era conservatism? Next you’ll be trying to convince me that Michael Moore is fat.
mclaren
Houses are getting demolished precisely in order to sustain unsustainable housing prices. They’re frantically and desperately trying to maintain the illusion that Emperor is still wearing clothes.
“The [San Diego real estate] market is abuzz currently. The action is incredible. Offers flying everywhere. I think the buyers are scrambling knowing that these rates are incredible right now. And I think it is going to be a healthy 4th quarter. (..)
“I think we get into spring time – if rates are still this low – it’s going to be a real frenzy.” – Jim Klinge, Oct 2011
Source: Calculated Risk Blog.
For those not in the know, the San Diego real estate market is one of the most unaffordable in the country. At the height of the subprime bubble, less than 10% of the residents in San Diego county could afford a home. And even now, the vast majority of San Diegans remain priced out of the housing market.
It’s all part of the banks’s frenzied and doomed effort to ‘extend and pretend.’ They have to keep pretending that all those underwater mortgages they own aren’t going to crater in value. As long as they keep pretending those foreclosed houses the banks own are still worth ridiculous zillions of dollars, the banks can carry ’em on their books as assets…albeit “non-performing assets.” But if the banks have to write those foreclosed houses off for their true value at 10 cents on the dollar, why, then, the banks are fucked.
At that point, the game of financial musical chairs ends and the banks are left with balance sheets that bleed so much red ink, the banks would have to be shut down and taken over by national regulators.
Xenos
Wait a minute… any refi in a non-recourse state automatically becomes recourse, anyway. So what is the deal here? We set an arbitrary price, a floor for the market, at 110% of current value? And taxpayers pay for this privilege with a 175 Billion check to the banks?
The more you look at this proposal the more evident it sucks.
No wonder the NYT is giving this such a high profile. Wankers.
Here is a proposal – we send 175 billion to American families in the form of food stamps, or anything that can’t be paid to banks or other vultures. That will stimulate the economy in a way it needs to be stimulated.
Yutsano
@Xenos: If you do that the money might get distributed to a welfare queen in her Cadillac or some of teh ghey. And we can’t have that happen now can we?
Steeplejack
@Yutsano:
Yutsy, good to see you’re still up and representing the night shift. I have been AWOL the last week or so because of a weird combination of horrendous work bullshit, semi-forced vacation days taking me out of town (my deadline to lose accrued vacation is October 31) and the fucked-up political scene driving me nuts. Have been trying to keep up in lurker mode, with mixed results.
Going to bed now, because of a long day tomorrow. Have to make a long trek to visit the dermatologist in Foggy Bottom, then back to NoVa for an afternoon-evening work shift. Check you later.
MikeJ
@Steeplejack:
Must. Not. Make. Easy. Jokes.
Yutsano
@MikeJ: You’re exercising self-control NOW??
@Steeplejack: My might shifting has been erratic also, mostly related to tangental events in life. I think it might be settling down some, especially if I get the back surgery here some time in the next couple of months. Then I get three weeks of bliss! WHEE!!
Xenos
Yutsano – you do govt. collections work at night (might not be a bad idea once FATCA and FBAR start netting folks in certain time-zones)? Or is this just insomnia?
Dr. Squid
Daaad! It’s the man from the Hay Wain by Constable to see you!
Yutsano
@Xenos:
You managed to make my job sound much more nefarious than it is. There is a later shift for my office, but I get home by 9 PM every night (usually). It’s probably why I might end up staying where I am: I’m inherently a night owl.
Xenos
What is nefarious about collections? Damned hard to run a country if you can’t make sure the taxes get paid. I have done some collections work, and it does make people hate you, but it can still be done honestly, ethically, and with respect for the people you are chasing down.
James E. Powell
@Yutsano:
Even worse, some of that money will fall into the hands of illegal immigrants who will use it to buy cell phones or something.
The prophet Nostradumbass
I saw something today I hadn’t seen in years. A sticker on a van that said “America, Love it or Leave it”
Xenos
@The prophet Nostradumbass: Was it clear who it was addressed to?
Yutsano
@Xenos:
I take the Judge Judy approach: I’m a pussycat. But don’t lie to me, don’t try to charm me, and don’t try to get overemotional with me. None of that works. I deal in facts and reality. But if you want your levy released for that 15-20 minute call I’m your best friend in the world. Not all of them figure that out. The ones who thank me do. :)
Samara Morgan
@Tom Pretentious Art Douche Levenson: i liek your new name.
Can i be Pretentious Sociobiology Douche?
Raven (formerly stuckinred)
Wait till you see the clip of Perry’s wife in South Carolina. Poor Ricky has been “brutalized” because of his faith. She appears to be dumber than he is, if that is possible.
Raven (formerly stuckinred)
debbie
Clearly schooled by Callista.
A Mom Anon
@Raven (formerly stuckinred): Let’s all send her tiny violins.
My idea for a new reality teevee show,Survivor:Appalachia(or maybe Detroit,or perhaps Pine Ridge,SD)sounds more and more appealing all the time. Drop various rich anal pores into these areas armed with nothing but expensive clothes,shoes and jewelry and let the fun begin.
Odie Hugh Manatee
@Raven (formerly stuckinred):
More like his candidacy has gone up in flames, like the biblical burning bush.
From Texas.
If this is a “test”, Parry failed. Horribly. Too bad though, I really wanted to see some redneck crazy in this next election. Looks like it will be Bland Mitt or The Inverted Number of the Beast Pizza Delivery Guy.
Glad I’m not a Republican…lol!
Raven (formerly stuckinred)
Mornin Joe leading with Mrs Perry and he’s hammering her. nice
JB Allen
Wait a minute. In how many states are residential mortgage loans truly non-recourse? In most states, even those deemed non-recourse states, lenders can pursue deficiency judgments, although some states require a few more hoops to jump through to get to that point.
SiubhanDuinne
Funniest description I’ve read of Rick Perry is this (from the awesome Charlie Pierce, over Esquire way):
Ash Can
@Raven (formerly stuckinred): That’s fine, but I can’t help thinking that, now that Perry’s down, the kicking begins. Did this guy have anything to say about N — head or Perry’s boasting about executions?
Ash Can
@SiubhanDuinne: LOL!
Samara Morgan
@SiubhanDuinne: Perry-tinitus.
Barry
@Librarian: “I remember that when Feldstein worked for Reagan, he got into some trouble for disagreeing with some aspects of the trickle-down economic policies that were the Reaganite orthodoxy. So, even he is sometimes capable of recognizing bullshit when hw sees it.”
Feldstein is a rabid anti-Social Security nutjob. Which, unfortunately, doesn’t make him stand out among economists, but does mean that nothing he says should be taken without a ton of salt.
SiubhanDuinne
@A Mom Anon:
Brilliant idea. I think that’s a winner concept.
Quincy
OT, but OWS seems to have gotten the UAW a little riled up (in a good way). A strike would certainly reinvigorate the wingnut “greedy union thugs” meme. Could look bad since Ford workers are supposedly getting more than their GM/Chrysler counterparts, and of course plenty of people don’t have jobs at all. On the other hand, broadening the dissent to a specific dispute over corporate greed/executive pay vs. worker pay could help translate the movement for the type of people who don’t like to occupy anything.
bjacques
“You take the blonde, I’ll take the one in the toiban!”
Apocryphal Gandhi amended to read: First they ignore you, then they laugh at you, then they offer you a sucker’s deal, then they fight you, then you win.
soonergrunt
OT–Zucotti Park “Cleanup” postponed:
http://livewire.talkingpointsmemo.com/updates/1164
Ben Cisco
@Villago Delenda Est:
Probably goes without saying by now, but I approve of this post.
ornery
No, not until there are changes (re-regulation) in the financial sector. Otherwise we’re just cleaning up a mess so the Big Boys can make another.
sherparick
A key point is that although more realistic than most Conservative Economists, Professor Feldstein is, and always has been, a faithful servant of the rentier class.
Dean Baker, who is even more right than Paul Krugman, and originally called and warned of the bubble in 2002, takes Feldstein’s proposal apart as follows:http://www.cepr.net/index.php/blogs/beat-the-press/martin-feldstein-strikes-out-again-big-time
“Martin Feldstein Strikes Out Again: Big Time
Thursday, 13 October 2011 08:41
Harvard economics professor Martin Feldstein, who made himself famous by predicting in 1993 that Clinton tax increases would not raise any revenue, strikes out big time in his proposal for the housing market in today’s NYT. He tells readers:
1) House prices are continuing to fall because of the wave of foreclosures;
2) That consumers are not spending because they are losing housing wealth;
3) That a major reason that unemployment is high is that underwater homeowners can’t move to place with jobs;
In response, he proposes a plan that could bail out banks from underwater mortgages while leaving millions of homeowners as near indentured servants.
Let’s deal with each of these points in turn.
First, house prices are falling for the same reason that the price of Pets.com stock plummeted in 2000. The housing bubble has not fully deflated. If Feldstein bothered to check the data he would know that real house prices are still about 8-10 percent above their long-term trend. Consistent with over-valued prices we see that there is still a near record vacancy rate in housing (topped only by the levels hit in 2010). In other words, the main reason for house prices to decline is simply excess supply. There are certainly areas where foreclosures have blighted communities and thereby caused prices to fall further, but this is not the main story of house price decline.
Second, consumers actually are still spending at an above normal rate. The savings rate out of disposable income is still just 5 percent. This is above the near zero rate at the peak of the housing bubble, but it is well below the 8 percent average of the pre-bubble years. It is strange that Mr. Feldstein appears to be unaware of the lower than normal saving rate (and higher than normal consumption) since he has done a great deal of work on precisely this topic and his original claim to fame was a paper showing that Social Security lower household savings.
We should actually anticipate that savings will increase further when the bubble has fully deflated and, according to Feldstein’s pas writings, this would be a good thing. It is striking that he now seems to view saving as bad.
Feldstein’s third claim is simply not supporting by any evidence. There have been several studies that examined the extent to which being underwater has prevented job losers from moving to new jobs (including one by John Schmitt and Kris Warner). They all have found little or no effect. People are prepared to leave their homes or two-earner couples separate so that one earner can move to a job. This is simply not a major cause of unemployment.
So Feldstein has no real basis for his claims about the disastrous impact that the housing market is having on the economy. However, his policy solution is a disaster. He proposes to have the government pick up half of the loss on seriously underwater mortgages. In exchange, if the homeowner consents, the lender can track them to the ends of the earth for their remaining debt.
There are two really really big problems with the Feldstein plan. First, it is completely voluntary for lenders. This means that they will not take up the deal with people who they think are likely candidates to repay their mortgage. There are many underwater homeowners who are struggling to pay their bills. Feldstein’s plan offers them nothing. The bank knows that they will pay, so they will not put their mortgage in the program.
However, there will be more questionable loans that will go into the program. Some of these people may be able to make their payments after the principle write-down. They will then get to live in their home until they move and in all probability never accumulate a dime in equity (but the bank got half of its loss picked up by the government).
Others will take the deal and then find themselves still unable to pay their mortgage — remember we still have 9.1 percent unemployment and most people in Washington don’t seem to give a damn. Under the Feldstein plan the debt will now become a recourse loan, which means that the bank can hound foreclosed homeowners until the day they die for any portion of the mortgage that is not repaid by the sale of the house.
So there you have it, a solution for a non-problem that gives banks tens of billions of dollars for bad mortgages and makes foreclosed homeowners debtors for life. What could be better than that?
sherparick
Regarding house prices (and unfortunately I know this brute fact real well since I bought in 2006), if you look at the charts at Calculated Risk house prices untill 1999 basically kept pace with the general inflation in prices and incomes. The ratio home price to rents stayed pretty constant (with a slight upward trend since 1970) and median home price to medican income ratio stayed at 3 to 1.
With the 2000-01 recession, disinflation really started to bite, and median incomes remain flat pretty much to 2007 (and have now fallen 10%, whoopee!! this is how current deficits get solved without currency depreciations) and rents stayed flat. However, the housing bubble took off and the price to median income ration started to 4 to one or even 5 to 1 by 2006 when the U.S. median home price reached $256,000 while median income was around $53,000 dollars. http://en.wikipedia.org/wiki/United_States_housing_bubble
So part of Marty’s plan is to get Americans once again to buy houses at prices they don’t have the income to afford. And then when it comes a cropper again, blame poor people, black people, brown people, liberals, hippies, and Government. Just these irresponsible low lifes and soft hearted and/or corrupt liberals here folks, nothing to see. Rinse and recycle again the ideological and tribal beliefs for next crisis.
daveNYC
Turning the loans into recourse ones is bad, but a lot of loans out there are already recourse mortgages. All those 5/15/80 things, and refis too.
Dropping the mortgage down to 110% of current house value isn’t really going to help much though. It does improve the debt load of the owner, so it would probably boost consumer spending, but it still doesn’t improve the mobility of the owner. If they’re in state X and need to move to state Y for a job, they’d still have to bring a check to the closing.
superking
I am again going to offer my own plan here: Fannie Mae and Freddie Mac, who are owned by the government, and who in turn own something like 55% of all mortgages in the US, should simply write down every single loan they own to 80% LTV. It’s simple, and they absorb the whole losses.
MTiffany
@JGabriel: It’d be nice if Obama were to invoke his eminent domain powers SCOTUS ‘found’ in Kelo v. City of New London and have HUD appropriate all the underwater mortgage properties in the US at current market value. Not going to happen, ever… but it’d be nice to see ‘the markets’ choke that one down. Plus, the feds could unilaterally adjust the mortgages down to what the properties are really worth, and then collect a huge monthly wad of cash from people who get to stay in their homes. Maybe even turn a profit when by selling the mortgages off when the economy recovers.
Amir Khalid
@Samara Morgan:
You need not ask, my sweet. You are already.
Libtard
@Xenos:
On what planet are mortgages non-recourse loans?
Feldstein is spreading a false notion that is absolutely poisonous, and now, so is Balloon Juice.
It’s called a “deficiency judgment,” and they’re becoming a lot more common. People have this gross misconception that they can just “walk away,” so instead of filing bankruptcy, they just “walk away” and then, after they’ve got back on their feet, here comes the bank, after it is too late to file avoid getting thrown into Chapter 13 and stuck on a payment plan.
This idea that mortgages are non-recourse is both ignorant and dangerous.
KD
Is there any way that credit unions could take over someone’s mortgage at the house’s value in today’s market, and then the individual could choose to default on the loan that is left at the original bank and they would just have to eat it.
How could something like that even work – there must be some way to do it.
I would much rather move my mortgage payments over to a credit union (a la the move your money by Nov 5 facebook campaign)
Any ideas?
Ruckus
@JGabriel:
I found a local small bank that says that. In a lot nicer way, but still. Their record looks good, their balance sheet is OK. And when I walk in they sure don’t act like assholes. Now to be honest the local people at my old bank, Bunch of Assholes didn’t act like assholes when I walked in, but the place has that air about it.
Catsy
@Samara Morgan: That is not the collection of appellations I would’ve picked for you, but it’s at least an improvement on your usual alternating roles of Tin Foil Stalker and Crazy Cat Lady.
Lynn Dee
Thank you, Tom and Mr. Constable. This is a favorite of mine too — and all the more so since 2005’s Pride and Prejudice, oddly enough!