Jon Talton over at the Seattle Times pointed me toward an interesting paper by Amherst Securities Group titled The Housing Crisis—Sizing the Problem, Proposing Solutions (pdf).
Here’s their conclusion (emphasis mine):
If governmental policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5). Politically, this cannot happen. Successive modification plans will be attempted until something works. The success rate on mortgage modifications can be raised by making greater use of principal reductions. The moral hazard (strategic default issue) must be addressed by first recognizing it as an economic issue, not a moral one. The costs of default must be made explicit. The 2nd lien issue must also be addressed.
However, supply side actions alone will be insufficient to address the housing crisis. Demand side actions are needed: providing leverage for investors to buy real estate, and increasing credit availability on prudent terms to borrowers with less than pristine credit.
I’d like to briefly discuss the ideas proposed in this paper. Even though it isn’t a Seattle-specific topic, I think that proposals like this are worth some print here. Let’s take the sections I emphasized in their conclusions one at a time.
First, let’s talk about the reasoning that is presented for making the dramatic changes suggested. Here’s an excerpt from the first section of the paper:
There are roughly 80 million homes in the US, 55 million of these have a mortgage.
…we conservatively conclude that 11.57 million borrowers are in danger of losing his/her home. That is about 1 out of every 5 borrowers; an impossible number, and one that is politically unfeasible. Moreover, if the resolution of the currently delinquent loans is not handled well, home prices will drop further thus reinforcing the cycle.
When you throw around phrases like “1 out of every 5” it sounds like you’re talking about really big numbers, but I contend that the “crisis” is not nearly as dramatic as they make it out to be.
According to 2006-2008 data from the US Census Bureau, there are roughly 115 million households in the USA (there are certainly more today, but we’ll use this number for the sake of discussion). If 11.57 million of those households are in danger of foreclosure, we’re talking about 10% of the population. How is allowing something to happen that affects only 10% of the people “politically unfeasible”?
Furthermore, to even arrive at our 10% number, we must assume that every one of the 11.57 million homes in danger of foreclosure is actually owned by a separate borrower. Many, many people took out crazy mortgages during the bubble to buy “investment” properties that they never have and never do intend to live in. This paper assumes a 1:1 relationship between homes and homeowners that is certain not to exist. In reality, 10% is the maximum amount of the population that would be affected if all of these homes were “lost” to foreclosure.
Since over 90% of the people in the country will not be losing their homes, anyone proposing major changes to the way foreclosures are treated is going to have to do better than “Politically, this cannot happen.”
Obviously I don’t think they have made the case that anything needs to be done about this “crisis,” but let’s briefly address some of their proposed “solutions.”
The costs of default must be made explicit.
Here they are suggesting various penalties for strategic defaults, including taxing missed mortgage payments as income. I doubt this would prevent anyone from defaulting, but it might stop them from living rent-free for a couple years, boosting the economy in other ways as they spend the money that they are no longer paying on their mortgage.
…providing leverage for investors to buy real estate…
…increasing credit availability on prudent terms to borrowers with less than pristine credit.
Translation: If you play nice with the bank, you get special super-easy financing to get you into another mortgage immediately after you leave your current underwater home. Extending more easy credit to people who have proven that they are not capable of responsibly handling credit. Sounds like a great plan, doesn’t it?
In summary: The growing number of foreclosures is not a “crisis.” It is a necessary market clearing that should be allowed to take place so home prices and sales volumes are allowed to naturally get back to a sustainable, sane level. Furthermore, the solutions proposed in this paper are misguided at best, and would be counter-productive at worst.