I camp in a magical place.
The trees shine shadows of light, the sun, rays of darkness.
Easing the Pain of the Borrower
The American dream of home ownership has failed. The writing is on the wall, hundreds of thousands of Americans will probably lose their homes in the coming years. Mortgage companies are already folding and will continue to do so.
The vast majority of articles written about the housing market focus on the dire situation the mortgage lenders or investors are in. That is the most visible public pain, one that is measured by stock prices and deals that fail to go through.
The real pain is in the individual households. Families wonder if they can make the next mortgage payment while their home values slide below their loan values. There is nothing more effective at removing a family from the productive economy than foreclosure and/or bankruptcy.
Who is to blame for all of this? The government played a hand, lowering interest rates to historic lows only to relentlessly ratchet them back up. The mortgage lenders eased requirements and floated “honey pot” deals, willing to sell risky mortgages to build the business. Appraisers fed the fire taking home values to astronomical levels. What about the borrowers? The government and the mortgage industry duped borrowers into taking the deal of a lifetime and now it seems that “deal” only lasted a couple of years. I don’t think it’s prudent to expect most mortgage customers to understand their mortgages and the long term financial implications. The true due diligence for determining risk acceptance levels is in the hands of the mortgage companies. Whether a customer can afford a home is up to the mortgage company to decide, that is the point of having to quality for a loan.
I am not worried about the mortgage companies. Companies come, companies go, that’s just how the system works. As mortgage companies fail, their loans will be sold to the highest bidder. The loans never go away. The pain of the people in the crosshairs cannot be bought or sold. It is inevitable.
So what can be done? I think the mortgage industry needs to absorb most of this pain. If this causes more companies to fail, so be it. Their loose lending is the root cause of the entire problem.
Rising interest rates are a primary contributor to our current problems. Lenders sold loans based on borrower’s current ability to afford them. That affordability was based on the interest rate at that time. Assumptions on mortgages have to take a long term view given 30 and even 40 year mortgages are common. The mortgage lenders got this assumption critically wrong as the Fed proceeded to raise interest rates 17 times in a row over a 2 year period from 1% to 5.25% (525% increase in 24 months). How could the lenders not have seen this coming?
The Fed set the trap, the banks took the bait, and then the Fed crushed the party. The Fed could help the situation by lowering interest rates. The Fed will do as the Fed will do.
Mortgage lenders should take responsibility for their failed assumptions. Delinquent loans need to be reviewed for affordability and the interest rate charged needs to scale to an affordable level. In a situation where the borrower’s level of affordability hasn’t changed since the purchase of the loan the original loan terms should be used. If the borrower’s affordability level is lower then regular processes such as foreclosure should continue. In situations where affordability isn’t increasing but the value of the home is falling below the value of the loan the bank should be able to take possession of the home to sell it before the value of the home gets too low. The borrower’s credit should take a ding for this, they bought into the rosy picture that failed.
This step would effectively make blocks of mortgages low interest investment tools with reasonably lower default opportunities. This isn’t the best investment, but it’s much better than the current situation which has very high default exposure.
A “no-doc” mortgage is one where stated income is used to underwrite a mortgage application. At no time does the lender verify the income of the borrower. This is a complete failure of due diligence on the part of the lender. These loans should be scaled to the documented affordability of the borrower, down to a 0% rate if necessary. If affordability can’t be achieved (0% interest on a 30 year loan is not affordable) the bank can take the house for resale. Fraud on the part of the borrower should be prosecuted. In the event of borrower fraud the bank can take the house rather than make a deal.
The tax code should be amended to remove this double whammy. It disproportionately crushes the failed borrower who has already lost a home and has ruined credit.
Finally, those of us who can afford our houses continue paying our mortgages as usual. People fraudulently taking advantage of these offers would be prosecuted fully.
I hold the Fed and the companies at fault because they are experts in their fields. Borrowers are just regular people, they count on the lending companies to limit their credit exposure to a manageable level. Consider how much money is trading hands, mortgages can easily clear $500,000. If I was lending money in that range, I would take special care to ensure the borrower was in a good position to repay the loan. I would pay particular attention to long term issues, I want to minimize the chance of the borrower defaulting. Lenders just didn’t underwrite at an appropriate level, and housing prices got out of hand.
The Federal government should not bail out the situation. Let the market handle it. Of course, President Bush already wants the Federal government to “lend” a hand by guaranteeing some adjustable rate mortgages through the Federal Housing Authority (FHA). As if the Federal government doesn’t have enough debt obligations already.
Home “ownership” statistics should only include houses that are at least 50% paid off. Calling someone who owes 100% of a loan an “owner” of anything other than debt is bad statistics.
Would a luxury car dealership lend someone $250,000 to purchase a Ferrari on a no-doc 1 Year ARM (30 year full term, one year fixed rate, no income verification)? Of course not. But home lenders were doing just this with houses a couple of years ago. They made some stupid bets. It’s time they reap that stupidity in the form of losses.
I want to make you an offer. I’m having auto troubles, could you push my car 20 miles to the repair station? I’ll give you $4.00 for you efforts.
Do we have a deal?
Such is the utility of gasoline. It’s dirt cheap compared to human labor.
Now then, what’s worth more to you, a gallon of gasoline or a gallon of fresh Florida orange juice? A better question, which could you do without?
Which is cheaper?
Shoot, the orange juice couldn’t even power a human to push a car 20 miles.
Anyway, gas is cheap.
I have a simple plan that would result in increased safety and gas mileage across the country. It doesn’t involve new technologies and it would be good for municipal service providers including the police and fire departments.
What is this simple plan for our gasoline-addicted society?
100% strict speed limit enforcement with double or triple the number of police handling enforcement.
Here’s a graph showing estimated gas mileage by speed for various types of vehicles. Here’s an article describing the basic physics involved and why mileage does down at speeds over 60 miles per hour (hint: wind drag).
All of life is about knowing what the rules are and how we can bend them to our advantage or convenience. In the United States it is general knowledge that one can drive around 10 miles per hour over a highway speed limit and generally not get ticketed. 15 to 20 above the limit is not uncommon. I openly admit to speeding to work every day due to my understanding of this rule and the convenience it affords.
I think it is time to change the rules. Let’s make it: 1 Mile Per Hour over the limit is a ticket 100% of the time.
That’s crystal clear.
And while we are at it let’s double or triple the number of traffic enforcement officers on interstates, highways, and major roads.
Here’s a quick off-the-cuff calculation for the economics of this. Let’s say a police officer is paid $50,000 per year (new hire St. Louis metropolitan Police officers make between $35,000 and $57,000 according to this link). Let’s say it costs the force $100,000 annually for this officer including Social Security matching, uniform, weapon, and squad car. $100,000 divided by 52 results in a weekly cost to the force for an officer of $1,923 per week.
Now, let’s say a speeding ticket is $200 (needs to be high enough to be an effective deterrent). If an officer working five days a week issues three tickets per day then the revenues from that would come to $3,000 per week, about a third more than the cost to the force. And three tickets doesn’t seem that high for someone assigned primarily to traffic enforcement (the only known speed trap that I pass on my way home from work has a car pulled almost 100% of the time). At two tickets per day the revenue drops to $2,000 per week, which is still solvent for my sample numbers.
It follows that having more police distributed around an area would allow for improved response to emergencies.
So strict speed limit rules and increased enforcement provide:
On the flip side, all drivers lose is a little convenience in the form of time. My 20 mile commute taking 17 minutes at 70 miles per hour would take 21.8 minutes at 55 miles per hour. The difference is one song on the radio. Hardly an inconvenience. People who have wisely chosen to live closer to their workplace would be rewarded and those choosing long commutes would be inconvenienced. Those that aren’t dependent on a car for personal transport would not be effected. So be it. All who drive would benefit from better gas mileage.
A lot more people would probably lose their driver’s licenses. But, if you break the rules of a game you might have to sit out, this is no different than anything in life. Try cheating at work and see how it goes.
This proposal makes the best choice (going the speed limit) the easiest choice. That’s the best way to engineer change.
War is the cutting edge of natural selection.
That’s it, just a quote. Those who survive the battlefield go on to procreate. The baby boomers are a great example of this. Those who die on the battlefield will no longer participate in the future of humanity.
This article is a great example of how dehumanizing war is. The psychological stresses are beyond my comprehension. Robots will not procreate after the war.
Good night.
The tar sands are a good example of how the market takes care of things. The market isn’t about efficient resource allocation, it’s about maximizing profit. The flaw is that the market doesn’t consider the lost utility of the input resources when producing an output.
Production of oil equivalents from tar sands utilizes large amounts of clean water and natural gas. The future of both water and natural gas for tar sand production is in question.
This production represents an indirect conversion of clean water and natural gas to oil. Think of this as the alchemist’s dream of converting lead into gold except water and natural gas are more like silver and clean water than lead.
Since it is profitable the market has no qualms about utilizing other natural resources to create a pseudo-natural resource. In fact the market should demand it if it’s profitable.
But it is an appalling waste of depletable natural resources. It’s basically a trade of clean water, fit for human consumption or agriculture, and home heating/electric generation capacity for transport fuel. Consider the unique resources involved and their independent benefits. What are the benefits of water? What are the benefits of natural gas? We are wasting the future benefits of clean water and natural gas for the benefits of oil today. What value is oil if there’s not enough water or natural gas? Seriously, what is more valuable than clean water? 1.1 billion people on Earth don’t have access to safe drinking water.
It is sad tragedy that Canada would make such a trade, at some point the water and natural gas will be sorely missed. Buy the market has a job to do today, and that job is to maximize profits. The market doesn’t require water for survival and it isn’t threatened by cold temperatures in the winter. Long term planning fails in the face of immediate profits.
Blind World, the band I sing and play guitar in, will be playing live on Friday April 6th around 10PM.
We will be playing at: Ground Floor 215 E. Main Belleville, IL
Here's the flyer for the show.