Who is going to eat this freaking haircut?
In a roundabout (and curmudgeonly) way, I encouraged everyone to visit Calculated Risk regularly some time ago. And, even though apparently I got someone’s attention, it bears repeating: Calculated Risk is the best spot to be in if you dare to watch the economic meltdown in the US. CR started out only focused on the mortgage crisis, and that turned out to be a front-row seat for almost the whole show.
The related story of Tanta is a bitter-sweet but uplifting tale. And its all true. She taught probably hundreds of people about housing economics over the course of her time at CR.
The US Congress made a huge mistake this week, and it needs to be reviewed immediately. In exchange for a paltry amount of campaign contributions, the bill, which would have allowed bankruptcy judges to ‘cramdown’ mortgages, has failed.
It is really hard to express just how dumb this is. Look at the chart: Prices are way down all over. People who bought in 2003-2007 are getting killed now. You want to keep them underwater? What do you think is going to happen if you do? You are going to force them into bankruptcy and watch housing prices continue to decline. Precisely which consumers are going to buy up the over-built housing stock? Is a huge influx of young buyers coming down the pipe? Or are we entering a death-spiral of falling prices, increased foreclosures and vacant lots?
Legislation that would have allowed bankruptcy judges to modify mortgages died in the Senate yesterday, handing the Obama administration a significant defeat in its plans to mitigate the foreclosure crisis.Supporters argued that the measure would have kept 1.7 million borrowers in their homes.
The measure would have allowed bankruptcy judges to modify troubled mortgages, lowering the interest rate or principal balance through a process known as a cramdown.
The finance industry is showing precisely how ignorant of simple economics they are. Currently, housing prices are still falling. That means more people are going underwater, every day, because the mortgage industry got overheated and overinflated and everyone paid too much for their property, and because the economy overall is tanking and unemployment is high. If you ask individuals to bear this, you will create a huge drag on economic growth going forward. You will destroy a lot of people’s credit, to the point where it will be hard for them to become buyers again. We have overbuilding and so who precisely will buy, after, that is, the current homeowners suck up the current losses. Which, honestly speaking, should fall directly on the banks.
Sigh. I just don’t know what to say sometimes. I left the US and sometimes it seems like reason and sense abandoned the country just after. Coincidence or correlation, you decide. Theo Francis at BusinessWeek lays out the legal processes involved:
Often called cramdown – from bankruptcy-court jargon for judicially reduced debts generally – the concept is simple: Give judges the same power over primary-residence mortgages that they have over virtually all other debts, including mortgages on vacation homes and multi-family housing.Briefly, proponents say it’s a way to cut through legal tangles and address the foreclosure crisis directly. Opponents, who staved off a similar measure several times before the financial crisis mushroomed, say it could ultimately raise mortgage costs for everyone.
You might be able to discern which side I am on. They are already demolishing houses, and that will not stop. There is going to be a lot of consolidation, in fact. So demand is fast retracting, without a doubt.
But I repeat myself.
Surely the best solution is to allow the judges to set a ‘reasonable’ period for mortgage repayment – in the UK this is done based on several factors (dependants living in family home, purpose of purchase, cause of inability to repay, employment prospects etc.) and judges are increasingly setting the ‘reasonable period’ as the entire remaining length of the mortgage.
Because the first home is not treated the same, evictions will go up unless cramdown is allowed. Second homes would be ok but that isn’t relevant for many people.
Let’s see what happens. I am really starting to think O is a natural, able to keep everyone off balance to get where he wants to go. I guess he issued a new plan the other day, I have to check it out.