In praise of default
Join us for a live chat today at 1 p.m. ET with James, who will be taking questions about his piece.
Call me a default-ista.
For a huge number of borrowers, be they U.S. homeowners or the sovereign nation of Greece, a default or radical rescheduling of debt might just be the best, most practicable option.
More to the point, default in many of these situations may be not just in the best interests of the debtor but of the economy as a whole.
First, homeowners. Something approaching 50 percent of U.S. mortgage-holders are underwater, meaning the value of the property is less than the value of the mortgage. If a second leg down in housing is under way, that figure will get much higher and the distance to the surface much longer.
It is an axiom of mortgage lending that it is usually far better for the lender to modify, or to cut the principal or repayments, than to suffer the expense of a default. Yet, what few modifications are being done are usually not nearly generous enough to give the borrower an honest economic interest in sticking with the loan.
Many of these borrowers would themselves be better off with a default; better off not overpaying for an asset rather than renting more cheaply, better off because they are not in a stable enough situation for homeownership and better off because it would leave them free to pursue jobs and opportunities elsewhere.
Housing’s Humpty Dumpty moment
(James Saft is a Reuters columnist. The opinions expressed are his own)
All the King’s horses and all the King’s men have been busy propping up the housing market but sometime this year, perhaps soon, it will face a Humpty Dumpty moment.
While it gets a lot less attention than the banking bailout, the official forces targeted at supporting house prices are truly vast; a generous tax break for buyers and a mortgage market that has essentially been nationalized.
That’s bought a recovery of sorts — Standard & Poor’s/Case-Shiller home-price index released on Tuesday showed that in 20 major cities home prices rose 0.2 percent on a seasonally adjusted basis between October and November, despite a national unemployment rate of 10 percent and a slow-motion cascade of foreclosures.
But like the egg in the nursery rhyme, which once broken cannot be reassembled, housing still faces some pretty horrendous fundamentals. It needs a strong recovery in employment to arrive before political consensus for housing support cools. (Full disclosure: I just bought a house, but hey, everybody’s got to live somewhere).
Already there are signs that housing may be faltering. Existing home sales declined sharply in December, though this was partly because many rushed to close purchases before a now extended deadline for tax rebates expired on Dec. 1.
Housing starts too fell in the month and, significantly, the Federal Reserve removed language pointing to improvement in housing from its statement accompanying its decision to keep interest rates at record lows.
Fact is, people who REALLY run America are great con artists and globaliztion is their tool for transfering wealth from the rest of the world to the USA. Surely you’ve heard of the old scam of inflating house values, getting a big fat mortgage based on the inflated value, using the money on yourself and then letting the lender get stuck with the loss. Who do you think is buying up the bonds issued by fannie mae and freddie mac and FHA??? It’s European pension plans, the governments of Japan and China as well as many individuals who invest in Bond mutual funds; all of that foreign money pours into the USA into the hands of the americans who take out the mortgages. They then spend the money within the USA on crap and pay taxes spent on weapons all of which funnel money to the guys who are facilitating the inflated house values. It’s really quite obvious once you think about it a little bit.
Even UK guarantee can’t stop housing crash
– James Saft is a Reuters columnist. The opinions expressed are his own –
Britain needs to reflate its mortgage markets to save its economy and its banks. Problem is, few want to borrow and there is precious little money to lend.
British property prices are down about 15 percent in a year and mortgage approvals are down 52 percent. Given the freeze in the securitization market and the scarcity of savings in Britain, new net mortgage lending may even fall below zero in 2009, according to James Crosby, former head of UK mortgage bank HBOS, who authored a government report on the mortgage market.
While the Crosby report rightly points out the damage that such an unprecedented fall would do to employment and the economy, it is also worth pointing out that it would be dire indeed for another segment — the banks, which ultimately will suffer the losses as borrowers fall into negative equity and default or lose their jobs and default.
Britons simply don’t save enough to supply their banks with enough to lend to fund the debt requirement implied by their housing prices. That circle was squared in the old days by borrowing money from abroad, either through banks borrowing and re-lending or via securitization.
The solution to this advocated by Britain, as laid out in the Crosby Report and endorsed by finance minister Alistair Darling, is to plaster a government guarantee on up to 100 billion pounds of mortgage securities.
The securities would only contain house purchase loans and would be highly rated by, you guessed it, the same agencies that rated the old, now discredited stuff. The securities would also exclude nasty high loan-to-value loans, or loans made to people who have already demonstrated they are not that good at paying back money.
“Bank liabilities in the United States are about 20 percent of the size of the economy. In Britain, the figure is 285 percent.”
if thats true, and I have no reason to doubt that it isnt, England will be the next Iceland within 6 months
coyotle, I think it’s just about possible that Gordon2352 was joking….