In our discussions about foreclosures, nomadism and homelessness (see the comments to my "fertile crescent" post), we've been talking about the problem of the coming foreclosures for agrarian society. I've been arguing that if you can get past the first wave of foreclosures, we may have a good chance to keep our land and houses. You can see some of my suggestions on this here: http://casaubonsbook.blogspot.com/2007/05/how-to-keep-your-house.html
But political change in existing bankruptcy laws would make an enormous difference in the coming tidal wave of foreclosures, see the article here:http://money.cnn.com/2007/10/01/real_estate/subprime_bankruptcy_change/index.htm?postversion=2007100115
"Under the House bill, the bankruptcy judge would have the option of reducing what the homeowner owes the lender. Say a homeowner's property is worth less than what he owes. The judge could reduce the principal to match the home's current market value as well as reduce the loan's interest rate.
The rest of the original principal would then be treated as unsecured. That means it becomes a lower priority for repayment than the borrower's secured debt, such as the newly reduced principal on his home. Unsecured debts may be discharged."
This bill is going to have a rough time getting through. As this article rightly points out, the 2005 changes in bankruptcy law meant that we've got a new form of debt slavery going: http://globaleconomicanalysis.blogspot.com/2007/10/debt-slave-act-of-2005-revisited.html?ref=patrick.net. This bill could use your political support, and lots of it. The house you save may be your own.
The reality is that, as an author I like says, "all true wealth is biological" - your house may be worth little or much, but the land that grows your dinner, and the soil that you build for the next generation, the wood that heats your house and cooks your dinner - that is worth something. Help people hang on to their houses. Get in touch with your congressman.
Sharon
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32 comments:
Sharon,
I read your blog often, and I often agree with your ideas wholeheartedly.
My parents are going to lose their land (probably) to foreclosure. The simple reason being they bought a house more expensive than they can afford. In the area where they live, the house payments are much more than they can pay, even with both of them working.
I live in California, and I see this everywhere. My husband is a system administrrator, and I work as well, so together I think we make pretty good money. We have no idea how these people make house payments on these houses - we could never afford the payments on a house with a 30 year fixed loan. The people who bought houses recently can't either - they all chose loans that have a teaser rate, or don't pay down the mortgage. So they aren't "really" homeowners in the traditional sense.
That's why I disagree - I think people shouldn't be bailed out of homes they couldn't afford in the first place. Prices NEED to drop. I don't believe you're doing anyone a favor by keeping them in houses with overinflated values - and you're locking out people like me who refuse to buy a house priced at levels that have no correlation to wages, only to bad financial bets by banks and families - everyone thought house prices were always going to go up.
If my parents get foreclosed on, then in 5 - 7 years, let them buy a small house at a price they can afford.
Thanks for your blog, I really enjoy reading it.
Is there a single blogger I read who doesn't quote Lois McMaster Bujold on occasion? I've always loved that line of Cordelia's.
We are also locked out of the housing market in our area. We'd hoped to get in on a rural development program but you have to have really, really good credit to qualify. (Which we don't, having had medical bills while in school.) We are a single income family. 1 1/2 income? Not sure how you count it in the start-up phase of a business. ('Nother geek husband here, but mine does repairs/support stuff.)
There are probably about fifty houses in our very rural area (county has 7,400) priced over half a million. Nothing but mobiles under $179,000. The market here is not moving. Half the properties, land and houses, and even ranches (all running in the multi-millions, one as high as $30m), on the MLS say price reduced. Prices as much as $120,000/acre without water frontage or water rights. Without water rights, which most property sellers, aside from the ranchers, are selling seperately, Western lands are useless. You can only live there as long as your electricity and well hold out.
Either prices need to drop or wages need to quadruple. I suppose which happens depends on how fast the Fed inflates the currancy trying to slow the current recession.
I'm not saying prices everywhere need to drop, but it's a pretty good bet that in most places in the west they do. There are probably some people with lousy credit or not enough knowledge who got slammed on bad loans on properties they could've afforded with traditional loans. I'm not sure how you help them or even sort them out from the others. I'm afraid the only thing that can practicly be done is to refuse government bail outs to the mortage holders when they start going under, which at least should have the effect of making others think twice about lending practices in the future.
Lisa, I've been seeing some pretty scary things about water in CA. You all doing okay?
To Lisa, and anyone who can clarify for me:
I don't understand the economics of the current proposed bill well yet, having just seen it, but I think it might have the effect of bringing down housing prices, by reminding banks that they cannot continue to mindlessly jack up the housing market rates without consequence. I'm not sure this will be a consequence, but I'm throwing it out as a possibility.
But more importantly, rolling foreclosures will have far more effects on our economy than simply teaching overstretched borrowers a lesson. The home-loan market is leveraged into the ground--sometimes home loans are leveraged out 8 or 9 steps from bank to bank. This means that one foreclosure can actually affect up to 9 (or even more) financial institutions in this bizarre, interwoven web of debt that the banks have created. Waves of foreclosures could, very literally, bring down our entire banking system. It is one thing to criticize the borrowers who got in over their heads, but criticism also should be heaped upon the lending institutions who, first, allowed (even encouraged) them to do this, and second, have built this house of cards version of debt to sustain the loan market. And while part of me doesn't want to bail out folks like my own parents, who are very much in the same position as yours, I also don't want to see our entire banking system, and hence our economy, collapse into rubble (hmmm... well, maybe I do, hard to say; depends on what day you catch me on). And I worry about what happens to my own mortgage if/when the managing bank for it goes belly-up? Just because I am a responsible home-purchaser does not insulate me from the problems of rolling foreclosures.
I think the time for lesson-learning was yesterday, and we missed it. Now we're all in the lifeboat together, like it or not.
You all raise really good points - foreclosures and people unloading their houses rapidly do mean a way into the market for people. But I tend to agree with Robyn that the social effects of large scale foreclosure are potentially worse than bailing people out. The reality is that the housing bubble burst hasn't percolated down much yet, but since more than 20% of our GDP has been tied to housing, it is only a matter of time before people start losing houses because they are out of work, etc..
And I think a large chunk of the population thrown out of their homes would have just massively destructive effects on the economy. Not to mention that as Robyn says, this isn't just overbuying - the current bankruptcy laws effectively reward banks for predatory lending practices.
BoysMom, are you committed to your area, because lord knows, there's a lot cheaper options out here - with plenty of water. Here's one:
http://www.krutz-properties.com/listing%20detail%20861.htm. That's about 30 minutes from me, in an area I like with good land and water and lots of Amish people. It certainly isn't a mansion, but it is a house on a decent bit of land
I just mention it - that sort of thing isn't that uncommon around here. The housing boom didn't affect everywhere the same. I understand not all of us can leave, but it is worth thinking about.
Sharon
Boysmom, there's a farmhouse on 31 acres with its own well and septic selling back near my parents for $125,000; not the prettiest place I've ever seen, and unless you're involved in small-scale agriculture in some way there's not a lot in the way of jobs, but it's a thought.
(If my husband hadn't made it through the latest round of layoffs, we might have bought it ourselves: Utah's housing market didn't see a boom to the same extent as other places and prices haven't dropped as hard -- we could still have managed enough out of this house to buy outright back there, though it would be hard to move back.)
We are committed to one of a few Western states because a) my husband and sons have asthema and are symptom free in the desert, b) my parents live in this area and I am an only child, c) homeschooling laws. We are also cautious about what community we locate in because my husband is black and I am white. For the last job hunt, we looked only at jobs in Idaho, Wyoming, and Montana. (If those three weren't issues, we'd probably become expats, or rather I would, other than these issues we'd be more strongly tied to my husband's homeland than the US.)
We were in PA and NY two summers ago, we drove, and the only way we could live in the midwest or the east is to have my husband and sons on inhailers. We thought we might have to cut our visit to his sister's family short they were having so much trouble breathing. It's not worth the health cost.
The market out here is softening, and I expect will get worse (or better for buyers) as the drilling jobs play out in the natural gas fields over the next five years.
I don't feel sorry for the banks at all, and I expect that something will be sorted out, legally speaking, for those who can make their mortgage payments. Those mortgages have value and will be counted as assets and go to creditors in bankruptcy.
Being brought down sounds like exactly what the banking industry deserves. They show no qualms about pushing individuals into bankruptcy with usurious interest rates, why should they receive mercy (in our tax dollars) that they did not offer to others?
If foreclosures take off in my community we will have a large problem with homelessness because all the hotels are already filled with long-term renters (hotels as apartment buildings, who would have imagined?) and we have extreemly cold winters. (A lot of people live full time in RVs, too.) Fortunately, several of our local churchs have the custom of keeping their doors unlocked all the time for those who need shelter.
Eventually foreclosed on proporties will be unloaded by whoever ends up owning them for much less than they had first sold for, and those who are not currently in over their heads will buy them up and rent them out, solving the housing problem. The buildings aren't going anywhere. If we could find a faster way to get houses from foreclosures to rentals it'd be nice, but I don't see it.
Our economy is very shaky already, thanks to the amount of debt the federal government, and many of the rest of us, have, and the amount of inflation the Federal Reserve creates. I don't believe the economic problems are fixable without a major correction, and such a major correction, probably kin to the Great Depression, would be better faced before all fossil fuels have moved past peak, and would also cause a significant positive environmental effect.
Hard on people, yes, but I don't think any of us sees a future utopia of consumption on the horizon somewhere, just different and varyingly difficult options.
I would like to tie in the home finance situation with the theme of localization and community-centered sustainability that is so common on Sharon's blog. A major reason why we are in this situation is that those who hold the mortgages are poorly informed as to the true risk involved with them. I do not believe there is anything inherently wrong with teaser rates, ARM's, etc. In fact, there are great tools for certain situations. The problem is that these mortgages were priced (interest rate, fees) too cheap because the investors in them generally did not have full and honest appraisals of the risk involved, though some did and chose to ignore them at their own peril. The reason for all this, IMO, is the great distance put between the borrower an the loan holder.
In the old days where a local bank carefully analyzed a mortgage applicant had its merits, though it also had its downsides in poor liquidity. I believe we have swung too far in the opposite direction. Real financial accountability comes from full disclosure of the risks to the investor and borrower. If the investor is some sovereign foreign investment fund or an anonymous individual whose pension fund is invested in CDO's (collateralized debt obligations), how is this good for a sustainable financial system?
Liquidity is a double-edged sword. Too much is as bad as not enough. Keeping our finances more regional, just like our food system, has a lot of merit. Too bad that it is currently very hard to take out a locally held mortgage through a loan officer who has a vested interest in you paying back the loan over years instead of packaging it up for sale the next day.
Outsourcing for our food, energy and finance all have hazards. They can lead us to ignore personal responsibility and to a cascade of system-wide failures.
Buckaroo
I think there is a lot of feeling that people who made bad purchases, who didn't understand what they were signing (esp. people who trusted translators) and people who were trying flip don't deserve to be helped. And generally whoever is posting about this, ends up by saying, some about how he or she had the sense not to buy a peak. Well, hindsite is 20/20, isn't it? But I think feeling like that will make it hard to get a law passed to help people. And I have a horrible feeling it will help those who are better off, rather than those at the very bottom.
Society is going to take a bath on this. But it would be nice if we could avoid an explosion of homelessness. We're seeing more and more people at the soup kitchen becuase the landlord was forclosed upon.
MEA
People who were misled as to the terms of their loan deserve help. But I don't see anyway to sort them out from those who thought that prices would keep going up and they'd make a profit in five years on the sale. Do you?
We didn't have money to buy at peak. We didn't have hardly any income. I can't take credit for that. But I do drive my husband nuts by reading the fine print. On everything. We do live in a buyer beware society, and people in general ought to be aware of that.
MEA, I just don't see how it can be done without bailing out the lenders who started it all. Which is going to cost all of us even more. How much more debt can the government take? How much more taxes can we pay? How much more inflation can we suvive? Where else can this amount of money come from? The longer we put off paying the piper the bigger the bill's going to be.
You make some good points Robyn, I guess there are many scenarios that could play out. Here's one that I think of:
Japan had a housing run-up, and a deflating economy with falling to stagnant real estate values for the last 18 years. Let's say you bought a house for $700,000 in 2006. You can't afford the payments once they adjust beyond the teaser rate, and your house is now worth 625,000. So, you go through bankruptcy and the banks eat the cost differential. The payments are still high, though.
Now it's 5 years later. Your house is now worth 415,000 or less. You are still house poor, and it looks like you'll be stuck in the house for the rest of your life because the difference between the market value and what you owe on the mortgage won't allow you to sell. I can't imagine that at some point you wouldn't just walk away.
Oh, and if you lose your house to foreclosure, it doesn't mean homelessness. You don't necessarily go from a 3 bed, 2 ba on a cul-de-sac to skid row. You just have to rent.
I'd rather see foreclosure forgiveness - a government guaranteed mortgage for people with a foreclosure on their record. That's all an FHA loan is - the government will pay 99 cents on the dollar for a first-time homebuyer loan that fails.
I don't know, maybe the systemic risk of too many foreclosures is too great and we need to keep people in these homes so they can pay some off some of the fraud.
The water situation out here in California is pretty bad. My husband is from the midwest, I'm a native - he thinks "if its yellow let it mellow, if it's brown flush it down" is gross...but I'm trying to teach him that water is a valuable resource we must conserve out here in the west.
It's finally starting to rain, so we'll see what the winter rainy season brings. We live about 4 miles from the reservoir that feeds our area, and we drove up to Lake Berryessa in Napa a few weekends ago. Both are so low, lower than I can remember in my lifetime. It's time to pray for a massive snowpack in the Sierras, because I don't know what will happen next summer if we don't fill up our water supply.
This is our reservoir:
http://3dparks.wr.usgs.gov/3Dbayarea/html/CrystalSprings.htm
Those are old pictures, when it was full. There are large islands visible now, and the shoreline has contracted considerably.
Hi, Boysmom.
Well, given that the economy is going to tank anyway, why not come up with a scheme where by people who can't manage the mortage get to keep the house. The lenders will take a bath, and it isn't "fair" to people who paid for their house, but we'll have fewer dislocated people.
I can only speak for my local area, but while the people with grand houses can (if they can sell) move into something smaller or rent, the people I'm seeing have reached the point where they are so streched that coming up with 1st month/last month is beyond them. There is very little affordable rental around here.
Aside from that, I think about the children and they fact that the last thing they need is the stress of a move.
MEA
One real problem is that the housing situation and its problems just work differently from place to place.
In some places it is people who always thoughtthe market was going up who are in trouble. They think of there house as part place-to-live and part investment. When the investment side tanks they are stuck, or walk away. There is a real problem with bailing out investors, it screws with the incentive system.
But that's not how it is here. Southern Indiana has the second highest foreclosure rate in the country, even though the market isn't over-heated and is much cheaper. 415,000 would be a palace here, not "house-poor." The problem are job-loss, medical bills, and income squeezes. The people two houses up from us were evicted, from a (probably, about) 70,000$ home. Their house hadn't even lost value, they just couldn't pay for it anymore. Were they foolish to buy it at the terms they did? I doubt it, they probably could affords it when they got it. But things happen. Their house wasn't in a cul-de-sac to begin with, and they could still rent this year, but I seem to recall it was a rental property on skid row, and it probably costs almost as much (or more) than the house payments they couldn't afford, and they'll probably be homeless or squatting or have givent eh kids to the grandparents or something in a year or two unless they get a turn of good luck. Certainly our house payments are less than our rental payments in the same town were (although we weren't renting on skid row). Here it isn't the folk in the nice houses foreclosing, their jobs tend to be more stable and keep up with inflation better, and they have more cushion, its the folk trying to get out of the trailer parks. And there are still many empty houses in our neighborhood, because the owners would rather keep them empty than to sell them quite as low as the poor folk in the trailer parks can afford to buy them. Tonight we'll dine with two other families who just moved out of the trailer parks for the first time this year, crossing their fingers that they can keep the little cheap houses they've bought. And one of them is an IT systems administrator at a local factory.
Honestly, no one can really afford a 30 year, or even 20 year mortgage any more, even fixed rate, even with low terms. Even if you can make the monthlies - this year. Because no jobs are stable over a 20-30 year horizon anymore. Certainly job incomes in real purchasing parity power aren't. Especially this 20-30 year horizon. Any business model that makes sense now in a (fairly) cheap-energy economy won't make sense later in an expensive energy economy. In a sense, ala Buckaroo, the problem is that no one can give any investor, no matter how well informed, an honest appraisal of the risks over the 20-30 year horizon, because the whole frickin society and economy is at real risk, rather than individuals being "risks."
Now Indiana isn't the same as California or even Idaho, so I don't know what the solution is. part of what is so frustrating about housing and the dollar, is that it is so out of whack in differetn parts of the US. But a well-crafted policy needs to help folk out of the trailer parks and into empty houses, as well as discouraging investors from over-inflating prices in overheated markets.
-Brian M.
Thanks Brian for your comment, that was illuminating. I guess I just see the bubble areas where it is the huge increase in values as "the problem", but you're right, it isn't that way all across the nation.
Lisa, I'll happily hope for a good 100" base in the Sierras; if you could spare a kind thought for the Wasatch and Uintas in exchange, I would be obliged to you.
My father asked about local holidays; I told him the happiest one for me was the opening day of ski season, as it meant there was enough of a snowpack that if the spring run-off didn't come too early or too warm, the reservoirs would fill and the artesians could recharge a bit -- and I could have showers in the summer, and with raised beds and ollas I could even keep my veg beds going.
Good luck on rainfall and snowfall!
Also, one more thing to expand upon Robyn and Boysmom's points.
One of our Ethics Bowl cases this year is about the Payday Loans industry. A huge chunk of the problem, in California AND Indiana is predatory loaning. The upscale outfits target well-off folk and try to get them into the lifestyle of condo flipping, and get them to buy more house than they can really afford, and use gimmicky tricks like ARMs or teaser rates. As Buckaroo says, these aren't inherently wrong, they can be good ideas in some very specific situations. But they are wrong for most of the people who use them and the lenders zogging well know it (even if they don't pass that information on to the mortgage markets). And this is a big part of what overheats and drives up the prices in the active markets.
But the same basic thing happens in different form to the low-scale market too. They get seduced into a cycle of using credit cards or payday loans, occasionally when things are tight, like for unexpected medical co-pays near the end of a month, or Christmas. And once you take a nibble, the system is designed to make you use it again and again. 91% of people who use payday loans, use them 5 or more months a year. And revolving credit card debt and refinancing scams are almost as bad, and even pushier.
The banking system is leveraged to the hilt, and in bed with predatory lenders. And a lot of our problems are reaping the consequences of the predators' success.
Brian M.
MEA, some sort of mortgage forgiveness might work, but who's going to pay for it?
If you had the funds, refinancing these to a 0% loan like Habitat for Humanity does would probably be fair enough (perhaps with some caveat that the owner has to have lived in the house a certain amount of time or not own more than one house) and certainly a moral option, but where's the money going to come from? The feds don't have a savings account, though there are some states that do, and perhaps those states can and will do something for their people. If taxes (and I include inflation as a tax) go up to pay for this, how many more people will that put out of their homes, owners and renters? There's 1 trillion dollars of ARMS due to reset in the next eighteen months. Just to bail out those people and none of the others will cost us each over $3,000. (Did I do that right? 1 trillion divided by 3 hundred-million . . .) That'd be more than a third of our yearly gross income. That's a huge bite. (Now if you could somehow get the feds to cut spending in other areas mortgage help might be feasible, but we know that's not likely.)
State based solutions are likely more affordable: like I said, a few states have surplus acounts, and as Brian pointed out the problem has different shapes in different areas. But then I'm almost always in favor of solving the problem through the politicians you can go yell at when they do something stupid than those who are thousands of miles away. In urban areas, allowing people in single family zoned areas to rent out rooms might cut down on forclosures.
Brian, one option to get people into better housing situations for the modern 2-3 year employment situation might be the old company house idea. Teton County (Jackson Hole) is doing that for their employees because otherwise the employees can't afford to live there, and Haliburton built a hotel to house their workers here. You'd have to make it tax positive for companies to do it in most areas, and maybe model it off of COBRA in that the company couldn't just fire and evict you, but you'd have the option to rent for six months, or something similar.
It'd be nice, and helpful, if we could get our states to give up the two heartbeats/room laws, too. I understand why those laws were passed, but they're going to make things worse for families in the years to come.
If the mortages are going to be forgiven, they won't be repaid. Of course, in many cases they aren't going to repaid anyway. The lenders are going to take a bath either way. If people get to remain in their homes, there is a little less dislocation in society, that's all.
I don't see it happening.
Not all of the trillion dollars in ARMs are going to default, certainly not all in the same year, and the horizon isn't as bad in the following time frames. So a bailout wouldn't be quite that bad. But if more than a few percent of them default in any one year, a lot of banks are going to collapse, and at the very least that will mean the FDIC will be paying large bailouts out of the tax coffers. One attitude that will sway a lot of DC folk is that it will be a bailout now or a bailout later. But yeah, it will be ugly either way.
Company houses are a good economic idea in many cases, I know some big companies use them, universities usually offer that for grad students and such too. But they tend not to be very long term solutions. I don't know anyone that stays in that situation more than a few years. Having your employer be your landlord too, kinda sucks, Ill bet, too much opportunity for systemic abuse.
And as I understand it anonymous, it isn't usually the lenders that are taking a bath on the mortgage collapses. They've re-sold the mortgages to someone else, and typically badly obscured the risks involved, and the corporate risk accounting system nodded, winked, touched their nose and looked away. Now no one trusts the risk ratings and their is a credit crisis. The first casualties back in late August were a bunch of little German Banks that went under, turns out they'd bought up all kinds of bogus British mortgages that went south. Its a weird, weird global economic system, and sometimes who gets shafted when things blow up is highly counter-intuitive. The housing foreclosure crisis in the US might wind up destroying Brazil, or the aluminum industry, or the American Heart Association or something.
-Brian M.
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