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Stressed Home Owners: Is There a Bailout in the Works?
I ran across this article from Kiplinger Forecasts this morning. It does a fair job of addressing the question on every troubled home owner’s mind: Is there a bail out coming?
So far, the answer appears to be no. Despite high level legislative chatter, the recent Bush proposal for FHASecure—the details of which remain vague, and the inevitable debate about the “moral hazard” of keeping the dirty bath water to save the baby, no broad plan has emerged. That may be understandable in light of the fact that 70% of the foreclosure problem exists in 7 states. If your state didn’t contribute to the problem, do you want to pay for its solution?
And yet there is something bigger at stake.
The foreclosures in those 7 states will have a broad negative impact on consumer spending. That hurts retail sales and profits, and ultimately jobs. The negative wealth effect and spending pull-back on the part of foreclosure victims is actually the smaller part of the problem. Think about the much larger group who won’t lose their homes. They’re feeling the pinch too. And they’ll spend less as a result. It’s like the scare-movies they show you in driver’s training. Even though that wasn’t your blood on asphalt, you’ll drive a little more carefully after seeing what happened to the other guy.
The GSEs have created initiatives to provide triage for the real estate wounded. These are helpful to new home buyers certainly, but they don’t stop the hemmorage for the homeowner whose payment has doubled and who owes more than her home is worth. And that affects the economy, which affects all of us.
Despite that, legislators continue to argue against inadvertently saving a few bad guys in the process, or sending the message that it’s okay to speculate. Hey, I’m as angry as anybody about the role that greed played in this mess. But where was the tough love when we spent $500 billion of taxpayer money bailing out crooked S&L owners in the 80’s, just so that they could buy back their own foreclosures at the RTC auction for pennies on the dollar.
I feel a lot more inclined to help Joe homeowner keep his home. That’s good for all of us.
September 30th, 2007 at 7:06 am
Marc,
You knocked it out of the park with reference to the S&L delimma on this one. Unfortunately at that time we blamed the appraisers for the errors and so they all went through (and are still having changes come about that are just not fully implemented yet) and now the originators will probably see the same effect in our fields. While I am for fixing the problem and creating a solution- I’d sure hate to see everyone getting spanked for something only a few folks took advantage of. Keep up the good work, and Thanks again for staying on the frontlines!
Chris
October 1st, 2007 at 1:13 pm
I am curious - what type of bailout would you like to see?
October 1st, 2007 at 1:13 pm
Matthew, I’d like to find a way for folks who are upside down in value be able to refinance their adjustable and subprime 1st mortgages and avoid the large payment increases that are putting them out on the street.
Most of the problems are cause by the 1st loans, not the 2nd’s that were piggybacked behind those 1sts. The idea behind FHA Secure is a good one. Get FHA to allow a refi of toxic 1st loans and a resubordination of the 2nd to a combined LTV that exceeds 100% of the property value.
But the challenge is finding the holder of the 2nd loan and getting them to agree quickly to the resubordination. The loans, like other mortgages, are securitized, packaged, sliced and diced, and sold to various investors presumably all over the world. Finding someone to talk to is a problem. Getting them to agree is an even bigger challenge. Accomplishing all that before the homeowner goes belly up is darn near impossible.
Perhaps we can legislate a mandatory or automatic resubordination of these 2nds, something that does not require asking their permission. The 2nd holder would lose nothing, in fact they would avoid losses from foreclosures. The home owner gets to live to fight another day. She avoids the big payment shock and gets into a safe 30 yr FHA mortgage with no surprises. We reduce the number of foreclosures which stabilize the real estate market and consumer spending.