The ugly math of foreclosure

January 29, 2009

Stopping the housing crash is central to fixing the economy, and halting foreclosures would be a big step towards that, according to Ken Rosen from Berkeley, who is notable as being one of the economists who was suitably gloomy last year in Davos. Foreclosures cost 50-60 percent of the value of the mortgage whereas you might be able to keep someone in their house for 30 percent, he said. A house with a modified loan isn’t sold on, which further depresses house prices and errodes bank capital.

“What we need is a moratorium on foreclosure while we get a plan in place. We could have five to eight million more foreclosures in the U.S. if we don’t do something about this. Banks have already written down these mortgages.”

Big problem however is securities and contract low. Since so many of these mortgages are in complex mortgage securities it can be cumbersome or impossible to get everyone to agree to mods. The Fed is already moving to do just that on loans it has on itsbooks from Bear Stearns and AIG and is encouraging other owners to do the same.

A bad bank plan could also accelerate this, as the government will end up owning many more nonperforming mortgages which it can write down itself.

It is interesting to look at this in a British context, as they will be where the U.S. is shortly. There is a big difference between British and American law however, in that most U.S. mortgages are non-recourse, meaning that the lender can’t pursue the borrower for the money but can only collect the house as collateral. Not true in the UK, which has led some to argue that the house price falls will be less severe, as borrowers will be stuck with the house rather than banks. Simon Gleeson, partner in the London office of lawyers Clifford Chance, points out however that it usually doesn’t make sense to go after a borrower in the UK for their other assets, even if you have the legal right to.

“If they are giving up on what is usually their biggest asset, they probably don’t have too much else,” Gleeson said in Davos. So it was during the last UK crash, he said.

Bank of England loan mod programme anyone?

Jim Saft is a Reuters columnist. Any views expressed are his own.


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Let’s be clear about what many foreclosure prevention advocates are talking about:

Your spendthrift neighbors who got in over their heads buying granite countertops and Cadillac Escalades are going to have their MORTGAGE PRINCIPALS REDUCED to market values. You, on the other hand, get to continue slaving away to pay your mortgage as a reward for your prudent behaviour. Put another way: the bankrupt family across the street just won tens, if not hundreds, of thousands of dollars in the Great Bailout Lottery while you get bupkis. How do you like them apples?

But wait, there’s more! To add insult to injury, principal reductions don’t even prop up the neighborhood housing values! They’re deflationary! The lucky lottery winners next door will be able to sell their house at the current (low) market price because they now have a much reduced cost basis! That’s unlike loan mods that reduce interest rates, which are basically inflationary.

These bailouts are morally bankrupt. Do not take this lightly. Let your representatives, and anyone else who’ll listen, know about this travesty.

Posted by Robert Jones | Report as abusive

—Stopping the housing crash is central to fixing the economy, and halting foreclosures would be a big step towards that, according to Ken Rosen from Berkeley, who is notable as being one of the economists who was suitably gloomy last year in Davos.—-

What abject nonsense.

Enhancing and accelerating the housing crash is central to correcting and resetting the economy. Anything done to delay what some call a “crash”, which really is just a return of housing prices to a sane zone, will merely delay delay delay and drag out the doldroms.

When the median house in the USA, where median income is under 50k, hits about 125k, then normal affordability will have returned to the game.

Housing is NOT a “nest egg”. It is a nest that costs lots of money to maintain. Not gonna make ya rich. Only was an “egg” from the days when one lived in it for 30 years, paid off the mortgage, didn’t ever take a HELOC (home equity line of credit) and had the pleasure to pay only taxes in old age.

Houses don’t “always go up”.

“They” ARE making more land. Hah!

You don’t need to rush to get on the “property ladder”. Snort!

Don’t buy “the most house you possibly can swing”. Gad!


Housing is an expense, a utilitarian item. Not a dream (close thing, dream, to delusion, no?)

People get wealthy by living below their means and by saving, not by engaging in national ponzi schemes, counting on ever more stupid newbies powered by national credit bubbles to buy their stick and plaster albatross for ever more money.


Housing will fall fall fall for at least 4 years. After all, the biggest “stupid loan’ resets don’t even peak for two more years. Then flat prices for more than a decade.

Wash out all the fools who thought buying shelter somehow would make them wealthy.

Oh yeah, cities all raising the mill rate on property taxes as they go bust. That should help property values. Hah!.

Fun times.

Me? Doctor. $250k income. Gorgeous rental at $850/mo with all utilities. Saving money hand over fist. Vacations. Enjoyment. No stress. Explain to me how “helping” a $50k earner “into” a $500k house was doing him a favor.



Posted by evildoc | Report as abusive

It is obvious that the taxpayer is going to end up owning the major banks (either through direct or defacto nationalization). We already own trillions in toxic mortgage crap. So far all this money has gone to prop up the banks and hedge funds and pay out billions in bonuses to the people principally responsable for this mess.

Yes, a cram-down program would benefit the spedthrift and irresponsable buyers at the expense of the responsable as well as our children, grandchildren and great-grandchildren, but it makes more sense than foreclosures. Banks are presently refusing to negotiate for a few reasons. First, most owners are heavily in debt and therefore terrible risk based on traditional methods of evaluation. Second, accepting a lower mortgage means writing down a loss immediately, leading to massive losses for the banks. Third, they can presently sell the toxic crap to the government (the taxpayers, duh!) at much better rates even under foreclosure so why write it down.

The result is that WE THE PEOPLE end up owning the foreclosures anyway. We will lose tens if not hundreds of thousands more on a foreclosed property than on most cramdowns. In the meantime, using the present system, the money we lose is going to Wall Street bonuses, salaries, and shareholders.

The fair/unfair debate is a moot point when we see that the bailout has paid for $18 BILLION in bonuses on Wall Street. The argument is economic. Of course, we should weigh the moral hazard aspects as well but that won’t happen in our lifetime.

Property values are doomed. We will get back to normal prices whatever happens, meaning a further 30% drop in prices. We can get there a few different ways, but I prefer methods which stop paying out money to Wall Street.

Me? Former investment banker, now retired. I also believe that a $50k earner should live in a $150k house. But then again, I also believe Bush and Cheney should be arrested, waterboarded and executed for treason, so what do I know.

Posted by Expat | Report as abusive

[…] Math Of Foreclosure Posted in Foreclosure by Robert Sticha on February 2nd, 2009 This is kind of interesting Foreclosures cost 50-60 percent of the value of the mortgage whereas you might be able to keep […]

Posted by The Math Of Foreclosure « Robert Sticha’s – Mortgage For A Small Planet | Report as abusive

Thank your for explaining the ugly math of foreclosure.

Posted by investment | Report as abusive