Mortgage Walkaways May Be Urban Myth
One of the big reasons cited for not bailing out homeowners who were taken in by abusive lenders appears to be an urban legend.
At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing "folklore" about residential walkaways but said that the phenomenon was more likely connected to investors than people who live in their homes, or "owner-occupants.""The vast majority of borrowers we find have been acting in good faith," she said. "If they get behind, they are interested in working with their lender."
Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.
Marks and others assert that mortgage bankers have an incentive to blame the rise in delinquencies and foreclosures on borrowers skipping out on obligations they're financially able to meet, because that diverts attention from the lenders' own role in the mortgage crisis.
"So many of the loans made were irresponsible -- for the borrowers and for the lenders," said Kurt Eggert, an expert on predatory lending at Chapman University Law School in Orange County. "Lenders have an interest in painting themselves as responsible, even caring entities. They want to cast blame for the sub-prime meltdown as much as possible on their borrowers."
Crucial nuance here is that FNMA is, by default, is dealing with prime and conforming mortgages only. Their actives do not include subprime loans. With that in mind, the picture is undoubtedly much rosier than it is on the whole.
Xbox Live tag Gorilla800lbs
The whole thing was overblown. The overwhelming majority of mortgages are not sub-prime and are perfectly fine.
I thought that was the big reason we were supposed to bail out homeowners. All these people were supposed to be walking away from homes and leaving every neighborhood blighted.
You are confusing two different arguments, Funken. One says "Help the victims, because they want to live in their houses, and if they leave their business will be lost to their neighborhood, and low home prices will blight the area." The other says "Don't help them, because they are all speculators who didn't want to live there anyway, and entered into the deal fraudulently in the first place, so they deserve to take the loss."
Do you feel that most of the increase in foreclosures is from people taken in by abusive lenders, or people who were intentionally taking risks and are now willing to just walk away?
I suspect the number of people defrauded by lenders is a much lower percentage of problem mortgages than people who were willing to overstate their income with the willing assistance of lenders to get mortgages.
That's a separate issue from the people who bought homes that are now worth less than they paid for them but who can still afford the mortgage payments. Some of those people may walk away, but most will stay. In the NE, it took about ten years to get over the last big housing bust. It was a problem, but nobody in the federal government came along and rejiggered the debt to make sure nobody took a loss or stayed underwater. In fact, I bought a condo in 2000 from a guy who had only just come back above water after buying the place new in 1997. Where was his bailout?
And yet we are seeing several companies here on the East Coast in court, accused of defrauding hundreds or thousands in cities like New York and DC. So I think the story is not yet told on that. I think that given it's in the interest of the loan companies to make the argument you support, we should be automatically suspicious that they might be acting to deflect attention from their own problems by blaming the victims.
We've discussed before why a bailout is perhaps reasonable in this situation, given it's unusual nature and capability to impact other areas of the economy. It's been well beyond an ordinary slowdown. There's a difference between "geez, the market sucks" and "Mr. Bernanke, we just lost 5 of the largest banks in the country...". As you recall, that was the magnitude of the risk over the last 6 months.
Too many dollars, not enough real wealth. Speculative bubbles in all directions. Of course the fallout is catastrophic. If they manage to rescue it this time, the ensuing bubbles and fallout will be even worse the next time.
I thought the primary walkaway scenario was people with teaser rate loans. Since their homes were worth less than the amount owed on the loan they were unable to refinance before the higher rate kicked in. I could imagine that being a common scenario in California and other expensive markets where so many loans are 100% interest only.
You could certainly argue that people who were betting the housing market would only go up and who took these teaser loans were delusional and deserve to get shafted, but really, in 2003-2006 you would have been the odd man out to predict anything but that. I'm talking average citizens here, not economists or people in the real estate business so I'm willing to give them a break.
For the people who've had their rates jump from 5-6% to 10%+ thanks to teaser loans, I'd support some sort of bailout that'd let them refinance at a market rate. They should also be on the hook for some amount of principal repayment to get their loan value back to no more then 110% of the home value. All home owners would be required to prove it was their primary place of residence and that they accurately reported their income when they applied for the loan.
XBL: MikeMac75
I'd be more in favor of special bailout plans if they were financed in the same year as the money was given out and were subject to a separate temporary tax. If the cost of a bailout to you personally was $1,000-$2,000 in extra tax money, would you be in favor of it?
Similar bailouts were done over a decade or so in the 30's and early 40's. By the time the program was stopped, the government had made a significant *profit* on the deals and handed that money over to the treasury. There was no cost to taxpayers over the life of the program.
The U.S. also stayed in depression a lot longer than other nations and benefited from a huge damand for material from overseas in the years leading up to WW2. At the end of the war, the economies of the rest of the world were in tatters, giving us a huge economic advantage. Can you guarantee that's what's going to happen this time, as well?
HOLC issued loans to a little more than half the applicants and still saw a 20% default rate. If economic growth had not put a lot of people back to work in the late 1930s and into the 1940s, the default rate would probably have been higher.
Maybe, it would depend on the details of the plan and what sort of social/community benefit I think it'd have. Of course, that's not the way the US Government works, now is it? You'd just pile a few more billion on to the beloved National Debt.
XBL: MikeMac75
Why should I? It has no effect on how the real estate market recovers from the current situation. My point is that, when handled correctly, the government can take advantage of the fact that depressed prices will eventually rebound. Not back to extremes, but as I've pointed out before, it's better to get something rather than nothing.
Besides, I'm not arguing that we do exactly the same thing and require exactly the same situation to succeed. I'm arguing instead that we've already done something similar and it succeeded at benefit to the taxpayers and the communities involved. Why can't that happen again?
And yet they still made money on the deals overall. So far your knee is just jerking as the mallet hits it - neither of these points raise structural problems with the idea of a government buyout of failed mortgages. Instead, they just show that the program was well-managed and provide a guide to follow, if we decide to do something similar today.
No, I'm pointing out that the success of one program in the 1930s environment does not mean that such a program is useful now or would turn a profit. I have always argued that the level of home prices are so high that they have to fall, and that increased federal debt represents a future burden on the economy. I don't see anything kneejerk in questioning the utility of the government getting into the mortgage lending business now, based around the idea that some people are underwater or may lose homes.
Implicit in that argument is the idea that the market will never increase again. Unless we are going to be stuck with the current prices forever, it will be possible to buy low and sell high. Even the government can manage that.
I think the structure and rules of the program would be far more important than the overall economic environment. I don't think the program's success was due to the way the Depression behaved - in that case, for example, we'd have to explain how businesses that did well then do well now.
I agree with you that increasing government debt is usually bad, but if the investment occurs at the bottom of a market, and the intent is to sell later to recover costs, then perhaps that's a reasonable risk. The multiplier for that is the benefit of avoiding the side effects of large numbers of defaults.
You're assuming that the market is at the bottom, but housing prices had grown in an unprecedented rate over the past 7-10 years. From what I've read, you need further drops to go back down to traditional valuations. If that happens over the next 2-3 years, we'll have more people underwater. They will demand to be refinanced, too.
The reason I think the depression and following war was critical was due to the combination of low house prices initially followed by extremely high economic growth and wage increases that followed a few years afterwards because of the demands of a war economy. We are unlikely to see wages rise across the spectrum over the next ten years, and unless the economy contracts substantially in the near term, are looking at fairly slow growth. That's what we have to keep in mind when it comes time to take on new debt and pump up the amount of debt people carry.
Ah, I see. You're not against the idea, you just think the economy is in a ten year slump. With that as an assumption, it would be more of a risk. But I still think it would be manageable with the right rules about which mortgages to pick up upon default.
If you reward stupidity, you get more stupidity.
Just like in the Great Depression, eh, Malor?
" WASHINGTON - Median home prices fell in two-thirds of the cities surveyed during the first three months of this year, a real estate trade group reported Tuesday.
....Lawrence Yun, chief economist for the Realtors, said that part of the problem in the first three months of the year was that it was hard to get so-called jumbo loans because of the credit squeeze triggered by rising mortgage defaults, particularly for subprime loans, mortgages made to borrowers with weak credit histories. Jumbo loans are critical to finance homes in high-cost areas of the country."
This is one of the disturbing aspects of the mortgage mess. We need to lend people in certain areas of the country massive sums of money to pay for high priced homes that are high priced because so many people find it easy to get jumbo loans.
I don't understand your comment. The idea would be to screen out buyers who were not taken advantage of, but rather took the risk upon themselves. Why would that fit the jumbo loan market? It most cases, it would not, I would guess.
There's no need to give unlimited aid to anyone with their hand out.
Is there a loan amount limit planned? I thought the idea was that certain mortgages get traded for government bonds or that the government lends money to people provided they can make the payments. We've already seen a big push to allow existing government sponsored lenders to make bigger loans.
I'm not aware that anyone has actually proposed setting up an agency like the one we had in the 30's. I'm just arguing that it could be done today and be successful. I'm not responsible for politicians who can't shake off the special interest money.
Even Bush's plan from last December had rules to help keep speculators from benefiting. But I'm not up on which plans have survived to face Congressional votes.
Jumbo loans by themselves are not a problem. There are jumbo loans, and then there are dumb jumbo loans. I have two mortgages on my house -- yes, because it sold for $445K (North NJ) and I had to loan about $390 of that, above the conforming mortgage limit. My 2nd mortage is 7% APR fixed, however, and I have no issues with not only paying it as it goes, but actually pre-paying it with a little extra principal each month.
Xbox Live tag Gorilla800lbs
The significance I see in the jumbo loan amount is the scale it gives to the problem and the equities involved. The treasury lending four people 100k each is different than lending one person 400k, even though each is getting the same kind of help. Also, the bigger the mortgage, the more trouble a person will have paying it in the case of disruption in the person's income stream.
It also raises this disquieting notion of a taxpayer making 50k a year and living in a 100k home in places like upstate New York or the midwest being asked to put up tax money to help out upper middle class folks in places like California, Nevada, and Florida. Fundamentally I think people understand the desire to help out the poor and prevent homelessness in tough times. It's a different story when the issue is protecting someone's suburban lifestyle in a desirable neighborhood.
Are you questioning the orthodoxy of the "ownership society"? Heretical questions like that will get you burnt at the GOP stake.
There is only an up or down--up to a man's age-old dream, the ultimate in individual freedom consistent with law and order--or down to the ant heap totalitarianism,... those who would trade our freedom for security have embarked on this downward course.
I admit, it's been disappointing seeing the republicans embrace use that line to justify their policies in other contexts. But who else is out there disputing it? With homes, there's simply too much business behind the idea that a home is always a great investment. The sad thing is that unlike snake oil, when people bought into it they didn't just pay $50 bucks or whatever and learn a lesson. They went hundreds of thousands of dollars into debt. Dug themselves an unbelievably deep hole.
I was thinking about starting another thread about a news item I heard regarding people still borrowing money to buy consumer goods. Who are these people and how do they sleep at night? It's like 80% of America has decided that a rainy day can never come, even as there are reports of rain all around them.
I get ya. It looks like the days of using equity in one's home as a sort of consumer credit card are over. I know a number of folks that were riffed during the tech bust that were convinced that they could wait out the employment slump by drawing on the equity in their homes. The idea was to avoid irreparable damage to their resumes by refusing to take positions at salary rates that would necessarily set them back 10 years or more. Most of them stayed out for less than a year, but the debts they rolled up in that time have put a number of them in very uncomfortable water (if not under it).
One can say they were irresponsible for not taking the first thing that came to them in the slump, but telling someone to take a $15k pay cut and have to dig themselves out of that resume hit is a lot demand of anyone.
There is only an up or down--up to a man's age-old dream, the ultimate in individual freedom consistent with law and order--or down to the ant heap totalitarianism,... those who would trade our freedom for security have embarked on this downward course.
This American Life just tackled the job of explaining the reason for the current credit crisis. They did a really good job, you can download/stream it off their website.
Xbox Live - fuzzybunny81