The New York Times Demonstrates its Profound Lack of Economic Understanding
A NYT Foreclosure Prevention Editorial is included below in its entirety followed by AMD.com response. A link to the original is included for your benefit.
Foreclosures: No End in Sight
New York Times Editorial
June 1, 2009
A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it.
The plan offers up to $75 billion in incentives to lenders to reduce loan payments for troubled borrowers. Since it went into effect in March, some 100,000 homeowners have been offered a modification, according to the Treasury Department, though a tally is not yet available on how many offers have been accepted.
That’s a slow start given the administration’s goal of preventing up to four million foreclosures. It is even more worrisome when one considers the size of the problem and the speed at which it is spreading. The Mortgage Bankers Association reported last week that in the first three months of the year, about 5.4 million mortgages were delinquent or in some stage of foreclosure.
Not all of those families will lose their homes. Some will find the money to catch up on their payments. Others will qualify for loan modifications that allow them to hang on. But as borrowers become more hard pressed, lenders — whose participation in the Obama plan is largely voluntary — may not be able or willing to keep up with the spiraling demand for relief.
One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.
This page has long argued that a robust anti-foreclosure plan should directly address the plight of underwater homeowners by reducing the loans’ principal balance. That would restore some equity to borrowers — and give them a further incentive to hold on to their homes — in addition to lowering monthly payments. The mortgage industry has resisted this approach, and the Obama plan does not emphasize it.
With joblessness rising, lower monthly payments could quickly become unaffordable for many Americans. In a recent report, researchers at the Federal Reserve Bank of Boston argued that unemployment is driving foreclosures and to make a difference, anti-foreclosure policy should focus on helping unemployed homeowners. The report suggests a temporary program of loans or grants to help them pay their mortgages while they look for another job.
The government will also have to make far more aggressive efforts to create jobs. The federal stimulus plan will preserve and generate a few million jobs, but that will barely make a dent — in the overall economic crisis or the foreclosure disaster. Since the recession began in December 2007, nearly six million jobs have been lost, and millions more are bound to go missing before this downturn is over.
President Obama needs to put more effort and political capital into promoting the middle-class agenda that he outlined during the campaign, including a push for new jobs in new industries, expanded union membership and a fairer distribution of profits among shareholders, executives and employees.
There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.
AMD.com Commentary
This editorial is as intellectually vacant a perspective as I have read on the subject of foreclosures, the Depression or proposed public policy responses to the downturn. There were two nuggets of understanding contained within the editorial’s conclusion though.
“Until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise”
This is correct. Foreclosures always increase after rising unemployment. This is an economic certainty and can not be avoided with Government intervention.
The second insight is that “There will be no recovery until there is a halt in the relentless rise in foreclosures”. Sadly the editorialists do not recognize the implication of this piece of wisdom, because they do not have a realistic understanding of the economy. Massive foreclosures are inevitable through 2012 because:
• There are millions of Affordable Mortgages whose adjustable interest rates will relentlessly reset
• Housing prices will continue to fall from unsupportable valuations to sustainable levels
• Unemployment will persistently increase
• Housing is dramatically overleveraged
The NYT’s suggestion that we "give" equity to underwater homeowners is a misguided, naive attempt to deal with the leverage problem, while ignoring the other factors that will inevitably cause foreclosures.
All available data shows that Government directed foreclosure prevention, even when principal is reduced, does not work.
I assume the NYT proposal would involve the Government borrowing money to reduce the debt of homeowners who as taxpayers would be responsible for the new Government debt? Brilliant! How does shifting debt from homeowners to taxpayers save the economy?
Or maybe the editorialist’s solution would be to destroy the banking industry through forced write-downs of mortgage debt? Of course we would have to suspend the U.S. Constitution (private property) and destroy contract law, but if it is ok with the New York Times...
How much equity does the NYT propose we "give" to homeowners who over-borrowed to buy over-valued houses that they couldn't afford? Furthermore, each homeowner's situation is unique. A New York City condo owner may be underwater by $200,000 while a house owner in Alabama may only be underwater by $20,000. Would the NYT write off $300,000 of the condo owner's debt to restore equity while only reducing our homeowner's burden by $30,000? That's not very progressive!
And how much money are they planning on giving to renters who behaved responsibly? What about young people interested in buying houses that would continue to be unaffordable because the Government has propped up values at unjustifiable levels. I assume it is expected that "the responsible" will once again be forced to finance the Government's efforts to "reward bad behavior".
If the NYT actually understood what was driving the Depression they would stop suggesting asinine, ineffective and costly "solutions" that can not possibly work.
Foreclosures are inevitable because houses are overvalued. People paid more than fundamental value to buy these assets in highly leveraged transactions. The solution is to let prices fall to sustainable levels. To that end, foreclosures are possibly the only hero in this ongoing story. Futile and costly attempts to forestall these vital, market-clearing transactions will lengthen and deepen the Depression.
Categories: Housing Stabilization Proposals, In Defense of Foreclosures
Hello Whitney,
I just found your blog and have had a good time flitting around the site, reading your profile, etc. lo these last 10 minutes. It's always kind of creepy when you find too many parallels with strangers--the coffee/good beer fixation, the interest in Singapore, London, etc. But also reassuring in a way, don't you think?
Anyway, I have a couple of questions for you about the content of this piece, your critique of the NYT editorial about foreclosures.
First, while from a strictly market based, rational perspective it is undoubtedly true that mass foreclosures are the "solution" to our crisis, how on earth do you think it can be "sold" politically to a public that sees THIS as a personal disaster multiplied millions of times over?
Second, don't you have any doubts about the fairness/wisdom of foreclosing on an entire generation (mostly Gen Xers and younger boomers) who had the bad luck to buy into the bubble because we (foolishly) trusted the govt and Wall St to have vetted the safety of these newfangled mortgages--WRONG--in favor of mostly 20 and 30 somethings whose principal virtue is to have been too young to have bought at the time?
Lastly, how is it more destructive to the banksters' bottom line to have to unload millions of massively devalued REO properties than to write down (probably) half that amount to current mortgagees, who will eat part of the loss to remain in their current homes and avoid the ignominy of foreclosure?
I am not trying to be snide, I actually want to hear your responses.
Thanks,
Kelli in Chicago
Reply to this
Hey Kelli,
Thanks for the comment and fantastic use of the word “ignominy”. I do find it comforting that there are people out there who share my interests. I am further encouraged by the existence of intellectually curious, articulate people willing to engage in meaningful conversation about interesting subjects. I am positively giddy about the prospect of moving to a place where I can engage in such activities more frequently.
As an aside, I have given consideration to moving to Chicago but am mortally fearful of the cold. I could handle New York but the Windy City may be too much. If you have a perspective on the subject I am all ears.
You have raised some complicated issues. I wish I knew a way to adequately respond to them with brevity. This may be longer and more winding than you were expecting. I hope you will bear with me and hear it out. My logic may sound cold or insensitive at times, but sadly it is grounded in realism and the understanding that while it is painful, no amount of Government directed efforts to prevent foreclosures will do anything other than to create more pain by lengthening and deepening the downturn.
Foreclosures
The solution to our national housing problem is lower, sustainable prices. Ideally the Government would have never distorted homeownership and Affordable Mortgages would never have sent prices sky-ward. But it is what it is. Foreclosures are simply the mechanism that is forcing the market to clear and discover a sustainable price level.
Prior to foreclosures emerging you may remember that home sale transactions plummeted as the market locked up. The credit market had collapsed, potential buyers were fearful and owners unrealistic about prices. Foreclosures were and are vital to working through this impasse and resolving the housing problem through price discovery.
Bizarrely, politicians and the media are now hailing increasing transactions as a positive sign of recovery. In fact, it is simply a function of growing foreclosures which always clear the market.
Foreclosure Pain
This is a matter of perspective, but I don’t see how the existence of foreclosures needs to be “sold” to the public. This is still a free country. With freedom comes personal responsibility. The property law doctrine of Caveat Emptor (Buyer Beware) has been with us for more than 2,000 years (May be off by a few centuries). No one is forced to buy a home or take out a mortgage. Both of these decisions take time, consideration, effort and are executed by responsible adults.
It is a sad fact that there are personal disasters multiplied a million times over happening every day in the U.S. People lose jobs, get divorced, choose not to excercise, drink too much, gamble, speculate on the stock market, run up credit card debt, buy too much car, etc… Obviously the scale of a foreclosure dwarfs some of these in financial terms, but no where in the Constitution is the Government directed or authorized to protect us from ourselves or provide us with housing.
I am not hardened to the plight of individuals. But I have given considerable thought to the sources of foreclosures as well as to the substantive benefits of lower home prices.
Foreclosures are occurring because many buyers behaved irresponsibly (Admittedly not all). A large number of the people facing foreclosure monetized their Home Equity and spent it through the magic of HELOCs. These people should not be rewarded and do not deserve a reprieve. Many owners were speculators. Some simply committed fraud.
I feel awful for those people who did nothing wrong but are being injured by the downturn. Not everyone has the economic wherewithal to understand why prices were rising unsustainably. You are right in that some people were just unlucky to have entered the market at the wrong time. But again, thus is life. How do we prevent such things? And how do we correct such injustices? Neither is practical.
Like you, I directly blame the politicians who invented the Housing Bubble for their loss. I further blame the media for its complicity, and those morally compromised real estate brokers and mortgage brokers who held themselves out to be “experts” but cared only for executing irresponsible sales in exchange for transaction fees.
The Government was absolutely complicit in the explosion of Affordable Mortgages which distorted housing prices and the broader economy. It was ridiculous that any of these instruments were allowed to exist especially given the non-recourse character of mortgages. Instead of limiting the use of these idiotic financing tools, policy makers heralded them as innovative and promoted them as a wonder for increasing homeownership.
Generational Analysis
Your generational comments are interesting but I think your perspective is off mark. People of all ages are getting destroyed in this downturn. Young people bought overvalued starter homes, but the middle-age bought overpriced dream homes and the grey-hairs bought expensive vacation homes.
In fact, I am working on an article presently entitled “The Baby Boom Goes Bust”. I would much rather be your average GenXer than your average 65-year-old who counted on ever rising Home Equity and stock markets to fund retirement.
From my perspective the Gen Xers are much better off than their elders. It is far more palatable to lose equity on a starter home than on a McMansion. Furthermore, most young people aspire to buy larger homes eventually. These people are directly benefiting from falling prices. You may lose 20% on your $200,000 home but your next house which was $400,000 is now only $320,000. You actually win in that scenario although it might not feel good.
You have focused on those people being injured by falling prices and foreclosures. But think of all the people who directly benefit. 33% of households do not own homes. These people gain from falling prices. Think about all the young people and children who haven’t bought a home yet. Affordable housing is a good thing. Should the Government succeed in propping up prices it would directly injure this estimated 40% of Americans.
There are many people who lived within their means and chose not to over borrow to purchase over valued housing. Why should the Government attempt to fix prices to their detriment? Aren’t these the people who should get to benefit from a return to rationality?
Finally, there is the largely ignored reality of a distressed homeowner’s financial opportunity set. These people are servicing a mortgage balance in excess of the value of their home. By definition, they could rent or buy an equivalent home for less money than they are presently paying each month. Navigating foreclosure has to suck, but many of these people are financially better off getting out of their overvalued mortgages. I realize I am ignoring damage to credit and psychological distress.
Talk to any of your friends who have recently gotten out of a mortgage. The change in demeanor and psychology is striking. Such people go from worrying about falling values to cheering as the price of their future home becomes more affordable.
Foreclosures versus Equity Write-Downs
If it were in a lenders best interest to give equity to a homeowner rather than navigate foreclosure, they would do so themselves.
You have to remember, anyone entering foreclosure has no equity. If they did they would simply sell the house and move on.
Banks typically sell foreclosures for a 15% to 30% discount to market price. Functionally, how would a Government program work? The owner already has some amount of negative equity. How much value do you give to them? Can they immediately turn around sell the property and pocket the gifted equity? What happens if prices fall further and equity evaporates again? What happens if they reenter default? Who pays for the equity gift? Present me with a specific proposal and I will show you why it doesn’t work.
I wrote two rebuttals to Housing Stabilization plans featured in the New York Times and Wall Street Journal in October. If you have the inclination you may find it interesting to review such specific proposals and read my perspective on why they would fail.
Believe me, banks don’t foreclose because they like doing so. They lose massive sums of money. They would love to prevent foreclosures, but such an outcome is not realistic except in a minority of circumstances.
You may not have seen recent articles about the absolute failure of efforts to forestall foreclosures through mortgage modifications. Approximately 50% to 70% of altered mortgages have re-entered default and resulted in foreclosure. Meanwhile time passes, more interest payments are foregone and house prices fall further.
It is an unfortunate fact that rewarding bad behavior results in more bad behavior. There are ALWAYS exceptions to the rule, but my analytical perspective is focused on the aggregate.
You may not like it but no amount of Government intervention will fix this downturn. The Great Depression and the Japanese Lost Decade (which is still ongoing) offer wonderful examples of this lesson. Sadly our self-serving politicians have drawn the wrong conclusions from these Government perpetuated disasters.
A non-exhaustive list of our failed initiatives to date is included below.
Financial pain is inevitable given the scale of the economic distortion. The only uncertainty is how much and how long. Government initiatives attempting to prevent foreclosures only lengthen and deepen the downturn.
As for your concerns over appearing snide; you should see some of the other comments I receive and choose not to publish.
Thank you for your comment and if by some chance you made it all the way through my response I hope this rant has better illuminated my perspective.
Whitney
Reply to this