Saturday, March 08, 2008

Foreclosures: Walt Disney's Chicken Little Movie: Maybe the Sky really is falling this time

Well, one of the anomalies coming out of the subprime and foreclosure crisis is that left-wing George McGovern, who lost to Nixon in 1972, is coming out sounding like a libertarian. Rick Sincere has a commentary on McGovern’s remarks favoring consumer opportunity and responsibility, and denouncing government paternalism, here.

I recall a radio conversation back in 1972, where McGovern walked the line on “legalizing marijuana” and “legalizing marriage between homosexuals” because he said such radicalism would just “drive the Democrats to defeat.” That was about the time that George Wallace was saying “ultra-liberal wasn’t what Americans want.” (I had a “bunkmate” in the Army who supported Wallace in 1968 because he wasn’t a c_a (bad word.) Then in 1993 conservative-turned-libertarian Barry Goldwater wrote his famous piece about gays in the military: “you don’t have to be straight; you just have to shoot straight.”

Nevertheless, the media is filled with a lot of doom and gloom, about foreclosure and delinquency rates, and the total negative equity in American homes (depending on one's semantics, but we reached a new climatological "low" last week), about the effect on other credit markets, hedge funds with their margin calls, student loans, and, of course, the job market – and eventually the stock market and the savings of people like retirees (me) that are invested in them. (No wonder, a trick back in 1976 in New York lectured me on “the abuse of the media.”)

True, some “creative financing” was allowing more Americans to own their own homes. But the whole experience was based on an unsound premise. There was no reason to assume that most homes could appreciate forever, and that, given all the uncertainties, most Americans’ real wages could rise forever to match. The lenient terms, with balloons or rate-increases after five years, assumed that everyone would refinance, but nothing in economics works when everyone has to do it at the same time. Banks underwrote these mortgages, unconcerned about what would happen in a few years. That sounds like irresponsibility, but it has more to do with the short-term obsession of “extreme capitalism” and the way financial institutions reward employees for excessively reckless marketing. There is the “organic chemistry” mentality that we’re all in the same boat.

In fact, there was a column on p B14 of the March 8 Weekend "Wall Street Journal" by Dwight Cass and John Christy, from "BreakingVuews: Financial Insight," titled "Don't Blame the Geeks: Management Deserves Heat for Failure to Identify Wall Street's Credit Risks," that talks about the inadequacy of the usage of older models like "Values at Risk". (WSJ online did not have an online link, and the BreakingViews online is a paid subscription only; the abstract is here.)

The mortgage money went somewhere. That's just accounting! (What is the etymology of the word mortgage: "dead pledge".) Builders could list excessively high prices for new homes and condos, because of the low rates and lenient terms and qualifications. The builders probably got the money. That’s why some of the stories about builders themselves going under (like Dunmore in California), typical story here, are perplexing.

It’s also perplexing that high end builders still offer plenty of properties for millions of dollars. Just look at the Manhattan high rise condo ads in each Sunday’s New York Times Magazine.

Now, there is some doubletalk in the way the administration presents the economy. Effectively, unemployment is higher than reported, because some people stop looking, and other people are underemployed. The official CPI in understated, because real people have to buy gasoline and food, not electronics or weekend plane excursions. And, it seems particularly in this “recession” that people with heavy family responsibilities are disproportionately hard hit: they may have much more credit card debt, and may have been much more likely to have bought more house than they can afford.

There have been some more moderate suggestions Martin Feldstein has a column on p A15 of the Friday March 6, 2008 Wall Street Journal, “How to Stop the Mortgage Crisis,” with a loan substitution program based on future earnings. The link is here. This also sounds related to Federal Reserve chairman Ben Bernanke ‘s call that banks write down loan balances and write off debts and accept further losses in their accounting now, WSJ, March 6, 2008, p A14, link here.

Congressman Barney Frank (D-MA) argues in The Washington Post (March 9 2008, p B07), "The Case for a Housing Rescue," that mortgage obligation write-downs, while they may not fit the idea of "personal responsibility" or "justice" in a literal sense, would be in everyone's long term best interest, including non-foreclosed homeowners and the banks themselves, link here.

I’ve been in this territory before. I had a $40000 condo in Dallas and moved back to the East Coast in 1988 after the job market tanked because of Reagan-driven oil price drops (which were thought of as a good thing for the country as a whole), and probably also because of the misguided Tax Reform Act of 1986 (a real policy blunder). I sold the condo under unqualified FHA assumption (no longer possible) in 1991 for a $10000 loss, and in 1994 the buyer defaulted. I had to take over payments and start foreclosure. The buyer did a Chapter 13 and eventually repaid me in full with interest. At the time it was traumatic for me, and the buyer, and I benefited from some skilled mediation by a Dallas real estate attorney. So this was a local problem that could be handled with “personal responsibility.” Now, it seems like a national problem caused by serious financial mismanagement by major banks and by the federal government, with deficit spending for a war that the American people cannot afford to pay for.

NBC Nightly News, on March 8, 2008, mentioned a service "You Walk Away." Fifteen years ago, I would have called this "immoral." But even in the Texas real estate recession in the late 1980s, some homeowners just mailed in keys and walked. They could be sued for deficiencies then, but a lot of times were not.

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