To put the bubble behind us, we need to place mortgage lenders on a path to settling up with underwater homeowners. One of the few viable ways to do this is for banks to accept the voluntary surrender of deeds and then lease the homes back to their former owners. The former homeowners should then retain a right to purchase their homes back at fair market value, after, say, five years, during which time they would need to get their financial affairs in order.
Daniel Aplert in the New York Times
August 3rd, 2009 at 10:08 am
The NPR show, “This American Life” has done a whole series of shows on the financial crisis. Their episode, “Giant Pool of Money”, goes inside of the housing crisis from everyone one who was involved. They interview everyone from people with bad credit qualifying for mortgages to guys on Wall Street who would slice and dice these mortgages and sell them to other people on Wall Street. This episode was awarded a Peabody and is a must listen.
http://www.thisamericanlife.org/radio_episode.aspx?sched=1242
TAL has done a series of shows on the financial crisis. There is one episode TAL did, where they interviewed a number of financial analysts who said that banks do not necessarily have to foreclose on so many homes. They could have renegotiated with most of homeowners. Or they could have done what Richard Florida called for, turn the homeowners into renters, thus allowing them to stay in their homes.
http://www.thislife.org/Economy.aspx
August 3rd, 2009 at 11:48 pm
I think this suggestion would be a disaster, and I’ll explain why. Banks are leveraged up to 30:1. They are trying to hide insolvency by overinflating asset values with even some assistance from the government and the federal reserve.
If they got the deeds to these underwater properties they would promptly book them at a value exceeding anything it would actually get if sold at today’s market value, just as they are doing with mortgage backed securities that are worth 20 cents on the dollar but are marked to 90 cents. At these prices, of course, people can’t afford to buy them without the irresponsible lending practices of the past.
The problem is that this would be allowed, even encouraged, so to improve the bank’s books. Each property going back to the bank to be booked as an asset would be valued at much more than it would have brought at a bankruptcy auction, or even if sold through a realtor.
The result would be that millions of homes would be removed from the market and held by banks until the market “recovered” to where they could sell and recover most of the principal. Meanwhile, smaller homes (on average) built with rercession-priced material and labor on land bought for half of peak value will be constructed to meet the demand pumped up artificially by the banks removal of those millions of homes, at prices people can actually pay.
In the end there will be even more inventory constructed even though much currently sits empty. And if the folks renting from the banks moved into smaller, more affordable homes in the interim, the banks would implode under the illiquidity of the millions of houses they’re left holding. Backstopped by the US taxpayer ultimately, this would cost us trillions.
The right way for overpriced homes to become affordable is for them to be foreclosed and sold outright for less than the original purchase price, for what people can afford without subprime and teaser rates that create the illusion of affordability, and the loss taken by the financial institution/bondholders. All else is simply the next scheme that plays “kick the can.”