Monday, November 17, 2008

A Note on the Mortgage Crisis

I’ve heard all manner of potential solutions and short term stopgaps to address the problems in the housing market. None of them make a whole lot of sense, most of them draw very arbitrary lines which tend to give relief to the most egregious offenders of sound market practices on all sides of the issue, and none of them address the real problem. First and foremost, the mortgage crisis, foreclosure crisis, credit crisis, bad paper, etc etc etc, are all misnamed and as a result are not being attended to properly.

The problem is not credit and the consequences of its unavailability. It was the opposite of that which caused the crisis. Too much credit was extended inappropriately on collateral (houses) which do not have the value to meet the obligation if the borrower can’t pay. This is and has been from the start a VALUE crisis. There is simply not enough value in the property to cover the debt. And for at least any time in the even distantly foreseeable future, there won’t be. The mortgages used to back these houses are garbage from end to end and pretty much have been, at least in south Florida, where I am, by my estimation, since sometime around early to mid-2004. The result of that reality is that values have sunk back to that level and because of downward pressure from over supply and no demand is pushing them below those past levels.

How to really address it? Allow EVERYONE to renegotiate/refinance their loans based on something approaching real values from 2004 if not earlier. Loosen lending rules somewhat to allow folks in homes to stay, but VERIFY THEIR INCOMES (as opposed to what went on without verification, assuring foreclosures in the first place at any value). People who really can’t pay at any rate have to go and shouldn’t have been there in the first place. Not everyone should own a home (how’s that for non-bleeding heart liberalism?).

Banks takes their losses up front. Maybe some adjustments can be made in accounting rules to allow it to be spread out over time and stay in business. Meantime, the foreclosure rate drops dramatically, values becomes realistic, bargains are available on vacant properties, allowing real buyers to step in, and before long, normal value increases can start up again in a legitimate real estate market. Community tax bases stabilize. Cops, firemen, teachers, and nurses can move into the neighborhoods they work in again. Main street gets healthy.

Focus can shift to investigating fraudulent deals (banks, mortgage brokers, borrowers). The big hit will be taken by the folks at the top, but they already have their bailout money in hand. The Chinese I suppose might take issue with this plan, but I suspect they are gonna get screwed at some point no matter what. Serves ‘em right for sending lead-based chew toys for our dogs and children.

And by the way, for the sake of full disclosure, I stand professionally at the nexus of a lot of this mess so I’ve had kind of a bird’s eye view of it all as it was happening, hence my particular perspective. So naturally I would stand to make a ton of money doing title insurance for all these deals. But my point here is not to promote a plan that would make me money, I have plenty of other avenues to earn a living available to me. My intent is as an American interested in seeing us do better. ALL of us and there’s the Mighty Liberal part. The plans proposed so far only apply, and not very well, to the top dogs who caused a lot of this and are not taking the hits they should for the trouble.

No comments: