Bailing out Homeowners
| Wed Oct. 8, 2008 9:50 AM PDT
BAILING OUT HOMEOWNERS....Last night, when John McCain mentioned his plan to directly rescue homeowners facing foreclosure, I wasn't paying attention. To be honest, I'm so hardwired to assume that presidential debates are just rehashes of old talking points that I thought McCain was merely tossing off another platitude — we need to protect the taxpayer, we must help distressed homeowners, we will focus on job creation, blah blah blah. I didn't realize he was serious about the homeowner part, complete with an actual new policy proposal and everything.
And apparently I wasn't the only one. Marc Ambinder reports that "The proposal certainly seemed to have caught even McCain's surrogates off guard; they had not been prepped to answer questions about it. The media didn't quite know what to think, and there hasn't been too much attention paid to this yet, even though it's a bold and expensive idea." So I don't feel quite so bad about missing this.
Of course, the devil is in the details in a plan like this. Who do you rescue? Everyone who's underwater? Everyone with a subprime loan? Everyone in foreclosure? Only people who are victims of fraud? How do you figure out who that is? And what does "rescue" mean? Restructuring their loan? Putting a halt to all repos? How do you prevent people from gaming the system? Will it prevent house prices from settling back to their natural level? Etc. etc.
Technically, most of those details can probably be worked out. But what interests me is that there's another potential hurdle: the public might not actually buy it. The only comment I did make in real time about McCain's proposal was an observation that CNN's focus group "against expectations, really didn't like McCain's idea of bailing out homeowners directly." 
And the reason for that appears to be straightforward: cautious, responsible homeowners who took out cautious, responsible loans and bought cautious, responsible houses, are not necessarily thrilled at the idea of their idiot profligate neighbors getting a federal bailout for the idiot profligate loans they took out on their idiot profligate house/remodel/HELOCs. After all, the bulk of the people who need help are not old friends who bought their houses 20 years ago, it's brand new neighbors who swept into the neighborhood in 2006 on a rising tide of debt and shiny new cars. Sympathy for these folks may not be nearly as high as many of us suppose.
Now, this may seem perverse in some ways. Obviously not everyone in foreclosure acted recklessly. And in any case, is bailing out a neighbor who acted recklessly really any worse than bailing out a bunch of Wall Street fat cats who acted recklessly? Maybe not, but the public is none too thrilled about bailing out the fat cats either. And let's face it: your next door neighbor is.....next door. If he seems like an undeserving sort, bailing him out might cause your blood pressure to go up way more than bailing out a bunch of distant banks. For better or worse, that's just human nature. Especially if your next door neighbor has a dog that drives you nuts by barking all night. Just take a look at the now-famous Irvine Housing Blog for a daily helping of exactly this schadenfreude-filled attitude.
So, technical issues aside, it's quite possible that this is not the political winner McCain thinks it is. I note that Obama hasn't really picked up on it, even though his speech today in Indianapolis was a perfect opportunity to do so. I wonder if he understands something the rest of us don't?
UPDATE: Brad DeLong points out that on a technical basis, the McCain plan sucks very, very badly because it directly bails out the banks that made all the bad loans. Details here.
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Comments
I am probably confused here, but hasn't Dean Baker in recent days been saying that stabilizing housing prices at this time can't work for a variety of reasons?
I can't find the specific link I thought I had read, but hasn't Baker, Krugman, any many others been speaking for awhile about the necessity for housing to return to long term housing / rental ratios ... and stuff like that.
This isn't a slam of McCain's plan, apparently, McCain's plan has been attributed to a knockoff of Hillary Clinton's plan. And if I recall what Baker said correctly, both are in the "nice idea, can't work, shouldn't be tried."
I am probably badly misconstruing what Baker, Krugman, Clinton, and even McCain have been saying.
Submitted by stefan (not verified) on Wed Oct. 8, 2008 9:56 AM PDT.
Yep, sympathy for HELOC marble counter big SUV borrowers is very limited...I can see bailing out pension funds that bought mortgages, but the guys who bought huge houses with teaser option ARMs -- why should they end up in a bigger house than me and pay the same as I did for my smaller house?
Submitted by Howard (not verified) on Wed Oct. 8, 2008 10:00 AM PDT.
Progressive-minded bloggers have been talking about the idea of bailing out/rescuing homeowners facing foreclosure for the past two weeks now by giving bankruptcy judges the power to reset loan terms... in lieu of the Wall Street bail-out/rescue.
When McCain mentioned it last night, not only did his approval numbers immediately tank among the Republican viewers, but I was a bit peeved that McCain attempted to take credit for the idea, actually saying it was his own idea... when if fact it wasn't.
Nobody caught this?
First, it's not a "new" idea, since the bailout bill gives the treasury secretary authority (but not an order) to do something about restructuring home loans and stabilizing prices.
Second, while there may be for some people a resentment of the idea of bailing out profligate neighbors -- but when (as is the case with me) there are three empty homes on your tiny local street (one of which is in foreclosure) that can't be sold in this economy, the bad effect it has on your own home value is a powerful motivator for compassion, I gotta tell you.
Don't forget that right before the crash, many suburban neighborhoods were being infested with infill housing, a/k/a "McMansions". So suburban voters have divided sympathies. They don't want people suffering for being mislead into risky loans while they don't want to see people who built McMansions rewarded with a bailout.
The problem with a homeowner bailout in the vein that McCain proposes is that it will result in a huge windfall for people who bought at the height of the bubble when prices rebound. If someone bought a McMansion for $800k in July '06 and you mark down the mortgage to $550k today, he'll make out like a bandit when prices increase to $600k next year.
So, instead of marking down the loan amount to current prices, why not mark down the mortgage payment amount to a comparable level? So in the above example, keep the balance at $800k, but only charge interest on $550k? Easier for him to stay in the home, and we could structure the loan to permit short sales -- so that he CAN move if he wants, but only if he zeroes out on the house in doing so.
Win-win in my book. You have a ton of people staying in their newly-affordable houses because to move would be to walk away with nothing. This removes a ton of houses off of the market, which makes everything better for those who aren't underwater and do need to sell. It stops a massive wave of foreclosures from driving down prices in otherwise nice neighborhoods, and although you might be a little chafed at your neighbor getting bailed out, you'll at least have the consolation that he can never, ever sell his house or risk walking away with nothing.
Submitted by Howard (not verified) on Wed Oct. 8, 2008 10:24 AM PDT.
McCain took credit for the idea by saying this is "my proposal, it's not Sen. Obama's proposal, it's not President Bush's proposal."
Two weeks ago, Obama said at a press conference, "[W]e should consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities. In the past, such an approach has allowed taxpayers to profit as the housing market recovered. This is not simply a question of looking out for homeowners; it's doubtful that the economy as a whole can recover without the restoration of our housing sector, including a rebound in the home values that have suffered dramatically in recent months."
Next thing you know, McCain will be saying he invented the Internets...
I like Joe's idea. I like the idea of making short sales possible(in other words, making all the loans nonrecourse), which would have the benefit of perhaps unfreezing this effed-up housing market, but keeping homeowners responsible for the full value of the loan in the event housing values begin to rebound.
I caught a little bit of Suze Orman on CNN yesterday. She seemed to indicate that some banks screwed people over by making it seem like loans with such parts as NegAm wouldn't be as bad as the banks knew they'd be in. In other words, they took advantage of people.
I'm not sure how I feel about that, assuming it's true. Part of me wants to say that if you're old enough to buy a house, you should be responsible enough to know or to ask about the details. But if there's a legitimate case to be made that some people were taken advantage of, then I guess it wouldn't hurt to look into helping them. That's the issue of fairness.
But, like you, I wonder about the cost, and how this would affect home prices returning to their natural levels. I'm going to plead ignorance here, but I have to wonder, do a lot of banks, or any banks, let people rework the terms of their mortgages if they can do something that will work for the bank and for the homeowner? If not, have they started recently? Like I said, I don't know all of the details of this policy, but I have to think it would make more sense for a bank to take a small loss by rewriting a mortgage and letting people stay in their homes rather than having one more foreclosed home on the market. If banks would be open to that, or are already doing it, what's the point of having the government step in?
As for other homeowners who were responsible, I guess the pitch could be that this might stop the slide in home prices, which would work out for everyone, assuming that's what would happen.
You really weren't listening last night, were you? Obama's response to McCain was that there is a homeowner rescue plan included in the bailout bill. Here's the link:
HOPE for homeowners
Unless he has a different program worked out, I would bet that all McCain did was try to steal credit for this one.
Submitted by Legacy on Wed Oct. 8, 2008 10:51 AM PDT.
Emma: McCain's plan is a brand new one that's much, much bigger than anything in the current bailout bill. Whole different animal.
Try Dean Baker's Own to Rent: The Way to Save Subprime Borrowers.
It would keep irresponsible home buyers or irresponsible lenders from making a windfall, and it would prevent loads of empty houses from being dumped on the market (bad for your neighborhood and bad for the banking situation).
Note that this article was written over a year ago. Apparently some people were thinking ahead of our mainstream financial geniuses.
First, McCain said that he would order the Treasury Secretary to immediately buy up these mortgages. Can the president in fact do that? If the president can then why was it necessary for the congress to pass the bailout bill and authorize Henry Paulson to go out and buy toxic securities.
Second, won't the congress have to authorize the expenditure, just like the bailout bill?
Third, if this is such a great idea why didn't McCain propose it two weeks ago when he "suspended" his campaign because his "leadership" was needed to get the bailout package through congress? Why should we have to wait until the end of January to see this put into action?
These of course are all rhetorical questions. McCain probably never read the three-page Paulson plan, likely hasn't read even an executive summary of the bailout bill, and probably dreamed up this idea on his own yesterday afternoon and decided to spring it on everyone in the debate.
This is yet another case of putting the election of John McCain first and the country second.
I like Joe's idea. I like the idea of making short sales possible(in other words, making all the loans nonrecourse), which would have the benefit of perhaps unfreezing this effed-up housing market
If lots of people are stuck in their bubble-priced houses and can't move without taking a bath, doesn't this put a large crimp on the number of buyers available? And thus wouldn't this drive down the price of any houses that go on sale?
One way or another housing prices have to return to a level that the underlying economy can support. And an economy in the toilet won't support high prices.
it will result in a huge windfall ... when prices rebound.
Housing prices are not going to "rebound".
housing prices have to return to a level that the underlying economy can support.
Exactly. Inflation-adjusted household incomes for the bottom three-quarters of households have gone sideways or even down for more than ten years. All the house-price appreciation for those households over the same period, over and above the rate of inflation, is illusory, and will disappear over the next couple years as the bubble unwinds.
When the median household income is once again adequate to prudently purchase the median home, housing prices will have stabilized; when that inflation-adjusted median household income rises, then housing prices will sustainably rise in concert. Anything beyond that is just smoke and mirrors.
Those who hope to see their house prices rebound should be fighting tooth and nail for substantial wage increases for all their neighbors.
I'd like to own a house, but right now I can't afford one. Is it too late to get neck-deep in debt and yell HELP? Where do I sign up for my government-sponsored house? And if the Feds are going to be writing checks for bad financial decisions, can I get a refund for the "Auto Cool Solar Powered Car Fan" I bought that doesn't work? (Please add the shipping and handling cost, too, okay?)
If lots of people are stuck in their bubble-priced houses and can't move without taking a bath, doesn't this put a large crimp on the number of buyers available? And thus wouldn't this drive down the price of any houses that go on sale?
Absolutely.
What's worse, and what few people understand is that when they DO sell their home short (and upwards of 20% of sales nationwide are short sales) and take that bath the sellers are precluded from getting another mortgage - any mortgage - for two years, according to Fannie Mae rules.
Homeowners who have been through foreclosure may not get another mortgage for FIVE years according to the same rules.
So for every short sale and foreclosure a potential buyer is removed from the market, driving down home values over the long term by reducing demand when there is a glut of inventory.
Unless those rules are rewritten to address the extraordinary circumstances we're undergoing, they will simply prolong a housing crisis that is feeding on itself synergistically.
