Blinder: 'Fiddling on Foreclosures'
“The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms. Yet the…
We bail out the banks who didn’t check the finances of the borrower (intentionally) and you blame the borrower who was coached, in most cases, by the mortgage broker. Face it, they have a major role in this. Sure the borrower is partially at fault. But remember, many put what little they had into it. The lax laws that allowed mortgages with no down payment (even 5%) added considerably to target those who could not afford the upkeep. Each case should be individually reviewed. I’m sorry my tax dollars are going to bail out banks who knew more than they revealed.
Benson and northslope, I agree with a lot of what you have to say but not everything. Yes, in an ideal world the banks who gave loans to unqualified lenders and the lenders who knowingly and speculatively took advantage of that reality deserve to suffer the full consequences of a collapse. And yes, there’s a danger that by getting involved government could delay RE hitting its market-clearing equilibrium. However, my problem with your “100% hands-off” approach is that it’s not just the bankers and borrowers who get hurt when there’s a serious correction – it’s potentially you and me as well. People losing their homes due to “massive foreclosures” means financial panic means businesses cutting back in anticipation of lighter demand means unemployment going up means we all suffer. This was the rationale for the banking bailouts – again, in an ideal world all of the banks should be allowed to fail for having taken clearly reckless risks – but if we do let them fail we potentially end up in a 30’s style depression (25-30% unemployment) vs. a 1980’s serious recession (10%). Yes, there must be a correction to the excesses of the last several years, but how hard does the landing have to be, and how wide the collateral impact? Are we in danger of overshooting the “market clearing equilibrium” b/c of a financial panic?
I think there are limited things that govt’ can do that will help to soften the blow w/out completely negating the ‘risk of failure’reinforcement mechanism of our capitalist society. I wouldn’t be surprised if there’s a broad swath of people living paycheck to paycheck who bought above their heads–and who could avoid economic catastrophe with modestly renegotiated terms. Should these people have taken on the responsibility to become more financially savvy upfront? Yes. And is it near-impossible to tell these people apart from the savvy and unscrupulous people who were trying to game the system? Yes. But, given the economic reality we all now face, does it make sense to just let em’ fail (banks and borrowers) just to prove a point? Should we cut off America’s nose just to spite its face? I’m not so sure.
I don’t think it sounds hard hearted. Will it suck for many people? Sure, but many things have that effect. You are right about political leaders being unlikely to let it continue. I think many of them have a wanna-be hero complex where they imagine themselves swooping in to save the day in the foreclosure arena.
Snappy;
Yes, basically I am advocating that the foreclosures continue and that there be a “cleansing” process. I’m not sure that our political leaders have the fortitude to let it go forth.
I know it sounds hard-hearted to say that foreclusures should continue, but it really isn’t. If someone is in over their head, where is the mercy in telling them that they should continue to try swimming? Interviews with many folks who have gone through foreclosures finds that it actually brings a sense of releief when it’s all over, as they no longer have a huge burden on their back, and can start again. I would be supportive of giving those who have gone through foreclosure some type of classes on how to pick themsleves up and get started again. I am also supportive of providing classes through the community colleges in which folks can improve their job skills, so that they can truly uplift themselves. Again, it goes back to the whole idea of incentivizing thrift/productivity versus consumption.
If you are interested in further exploring this whole topic of the government’s subsidizing consumption versus thrift, I heartily recommend a book that was published in 1996 called “The Return of Thrift”, by Philip Longman:
http://www.amazon.com/gp/product/product-description/0684823004/ref=dp_proddesc_0?ie=UTF8&n=283155&s=books
This book is uncanny in its prescience.
You make a good argument Benson. I have often been awed by the prices of homes in ‘high times’ and wondered, ‘who is buying this? who can afford this? when all the people who are stinking rich get done buying, who else is expected to afford this?’ If homeownership is a real ‘american dream’ supported and touted by the government, then something should be done to make achieving that dream viable, and it must start with the prices and realistic home valuations.
I have to ask, based on the last part of your post (which I totally agree with by the way), would you suggest then that the massive foreclosures be allowed to continue and then sort of ‘wipe the slate clean’ and start over with reasonable pricing based on real incomes? If not, what would be the net effect of no longer “subsidizing consupmtion”?
Correction to my previous post:
Both the banks and the BORROWERS were winking at each other wrt these liar loans.
Snappy;
It takes two to tango. Both the banks and the lenders were winking at each other wrt these liar loans.
I think Northslopetenter put it well. If someone has suddenly fallen on hard times due to an unexpected illness or such, that’s one thing. Rewarding flippers and irresponsibility is another.
I am totally opposed to any government bailout for the housing market, for two reasons:
-it makes no sense to prop up a market for which the pricing is still unreasonably high. In trading terms, the market needs to “clear”, that is, find the pricing level that makes sense in terms of peoples’ income levels. By propping up those who are in danger of forclosing, you are hurting two parties: a) the person who currently owns the house. You are incentivizing them to stay in a house that they cannot afford. Studies have shown that even if the terms of their mortgage are relaxed, these folks oftern still foreclose, due to poor habits of thrift, or unsteady income, etc; b) a person who could aford to buy the house at its true lower market price.
-although I didn’t vote for Obama, I am hopeful that he will realize that a fundamental change must take place in US society. The government must stop subsidizing consumption (which is what the mortgage interest deduction and loan relxation is,effectively) but rather, start rewarding plain old-fashioned thrift.
That does smell like fraud. It’s a shame. Common sense and good business sense should dictate that lenders concern themselves with quality over quantity as the high numbers now seem pointless because people can’t pay back the loans. I guess common sense and good business sense are lacking in the banking/lending industry.
Liar Loans are loans where the applicant lied about his/her finances and the lender did not do proper due diligence.
Many of these got approved in recent years as lenders were more interested in quantity of loans than quality of loans.
It is, frankly, a type of fraud and people who participated in it should not be helped.