Wednesday, October 22, 2008

Financial crisis jeopardizes green investment; is a total homeowner mortgage bailout practical?

Thomas L. Fiedman (“The World Is Flat” and “Hot, Flat and Crowded”) has an intriguing op-ed on p A29 of the Oct. 22, 2008 New York Times, “Bailout (and Buildup)”. (Somehow the article title reminds me of “Piddle, Twiddle and Resolve” or maybe even “Laugh a Little, Cry a Little.”) The obvious concern is that the push toward renewable and green energy will get sidetracked by the financial crisis, especially by temporarily lower crude oil prices. The link is here.

He wants the federal government to require every electric utility to produce 20% of its power from green sources by 2025. He wants utilities to price according to participation in energy savings programs, an Internet-like plan that he describes in his recent book. Third, he wants to write off taxes all investment in clean energy. And fourth, rather than on a conventional economic stimulus package like the one earlier this year, he wants a package targeted on clean energy development. All of this sounds sensible.

Then on p B1 of Business Day in the New York Times, David Leonhardt, in his “Economic Scene” column, writes a column “Life Preserver for Owners under Water.” Online, the article is called “The Trouble with a Homeowner Bailout.” , link here. We could have 19 million upsidedown mortgages by 2010. The trouble is that homeowners capable of continuing to pay might walk away from upsidedown mortgages anyway, as a preemptive measure. Bailing every upsidedown homeowner out could cost the taxpayers $4 trillion, or over $13000 per person in the country.

It has been widely written that in the United States defaulting homeowners can simply leave the keys and walk away, and that in other countries (especially Australia) homeowners are liable for deficiencies. That’s not quite true. In the early 1990s, after the S&L crisis, some defaulting homeowners were vigorously pursued for deficiencies with letter lawsuits. Sometimes default judgments were obtained and in some instances actual collection activities and garnishments happened. All of this is documented in gruesome detail in a relatively obscure orange paperback book James A. Wiedemer. "A Homeowner's Guide to Foreclosure: How to Protect your Home and your Rights." (Dearborn Financial Press, 1992). In some cases, original owners of unqualified assumptions were pursued (and the FHA stopped allowing these kinds of assumptions as a result). But the practice was uneven. This time around, it seems that the problem is so overwhelming quantitatively and mathematically that such tactics just aren’t practical anymore.

Remember the days when people saved up for 20% down payments? That seemed to be one of the best lender hedges against defaults. But that doesn’t work when you want to put someone who makes $50000 a year (probably a family with several kids and maybe part of the sandwich generation, face eldercare issues) in a $500000 house. The prices of homes really need to be reasonable and reflect what they are actually worth to consumers. And like it or not, this crash is forcing that to happen.

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