Jul112014
Should we allow deadbeats to buy homes again to stimulate housing?
People who quit making payments and allowed their homes to be auctioned want another chance to own a home, probably for more free loan money.
Many people who lost their homes because they stopped making payments and allowed the house to fall into foreclosure would like to get back into the housing market. If the standards are lowered and the waiting period after a foreclosure is decreased, these former owners could buy again and stimulate housing. But is that a good idea?
A small number of former owners endured a foreclosure because they lost their jobs and couldn’t make even a modified payment to keep their homes. If there is any group deserving of a second chance, it’s these people; however, there is no way to let them back in without letting in those who lost their homes because they HELOCed themselves into oblivion, and surely we don’t want to cut those people a break.
Home ownership is a privilege, not a right. It is earned through establishing sound financial management traits such as saving and paying bills on time to improve a credit score. A significant number of people who lost their homes in foreclosure lack those traits, and even if they were put back into an ownership position, they would likely fail a second time, and since taxpayers back most of these loans, making deadbeats homeowners again is not a good idea.
Foreclosure-Sale Rules Shut Out Willing Buyers: The Foreclosed-Upon
Designed to Prevent Fraud, ‘Arms-Length’ Policies Also Pinch Struggling Homeowners
By Joe Light, June 13, 2014 4:58 p.m. ET
Last year, after being foreclosed on but before being evicted, Daud Sharif and his family thought they might have had a way to stay in their Andover, Mass., home.
A nonprofit civic-development group called Boston Community Capital offered to buy the home from Freddie Mac for $265,000—about 35% below the original mortgage—and sell it back to Mr. Sharif at a price that was higher than what Boston Community paid but lower than the price Mr. Sharif initially paid for the house in 2004.
Freddie Mac didn’t respond to the offer, selling the home to someone else for $270,000. Freddie Mac spokesman Brad German said the mortgage-finance company received multiple offers on the property and sold it to the highest one.
Elyse Cherry, chief executive of Boston Community, said her group wasn’t given a chance to counter. “We were negotiating in the dark,” she said. “We would have been more than willing to match or maybe offer more.”
Boston Community knew a counteroffer likely wouldn’t have mattered. As a policy, Freddie Mac, and its larger rival Fannie Mae don’t allow foreclosed homes to be sold back to foreclosed-upon families unless they can pay the full unpaid mortgage balance plus accrued interest and expenses.
At issue are rules designed to discourage borrowers from intentionally defaulting on their mortgage in the hope of buying it back at a lower price—and leaving Fannie, Freddie, investors and banks with losses.
This was a good and necessary policy to prevent strategic default. If people could have repurchased their homes at lower prices, the bail-and-buy phenomenon would have been so common that more charities like the one above would have sprung up to pummel the banks — which might have pleased many of us, but it wouldn’t have been good policy.
The mortgage giants also require that short sales—where homeowners are allowed to sell a home at a price that doesn’t cover the mortgage outstanding—be “arms length” transactions, in which buyers have no relationship with the delinquent homeowner.
Critics around the country, including nonprofit groups like Boston Community, say the foreclosure-sale and arms-length rules undermine their work seeking solutions to help delinquent borrowers keep their homes. They say the rules encourage homes to lie vacant, blighting local neighborhoods and hurting property values.
These non-profits are missing a key point about moral hazard. These people shouldn’t be allowed to keep their homes; they didn’t meet their financial obligations, and they need to endure the consequences.
Mr. German said the rules were put in place in response to a surge in fraud. “We did this to minimize our losses and to protect the taxpayer’s investment in our company,” he said of the short-sale rule.
Earlier this month, tensions over foreclosure-sale policies came to a head when Massachusetts Attorney General Martha Coakley sued Fannie, Freddie and their regulator, the Federal Housing Finance Agency, arguing that their policies violate state law. The law prohibits creditors from blocking home sales to nonprofits solely because they intend to sell or rent the home back to the original owner. A similar law took effect in Maryland earlier this year.
“Fannie and Freddie’s failure to do these buybacks is both illegal and unfair,” said Ms. Coakley, who is running for governor. She said she hoped new FHFA Director Mel Watt would change the policy after taking office in January. Ms. Cherry is the co-chairwoman of the Coakley campaign’s finance committee.
Fannie Mae and Freddie Mac haven’t yet responded to the lawsuit, and a representative for the FHFA declined to comment.
Some mortgage experts say that eliminating the foreclosure-sale and short-sale rules would be a mistake, but there is room for Fannie and Freddie to ease the rules.
“The [short-sale] policy may not be perfect, but I believe we would have more fraud without it,” said Clifford Rossi, a professor at the University of Maryland’s business school who spent two decades working in mortgage banking. On the foreclosure policy, he said that, “in some cases, it could make sense for Fannie and Freddie to allow the transactions” if the companies would earn more money than they would in a sale to a third party.
Preventing moral hazard is not about dollars and cents, it’s about maintaining the integrity of the lending system.
Bridget Berg, senior director for fraud solutions at CoreLogic, a research firm, said lifting the arms-length rule could reduce capital invested in the mortgage market. “These are safeguards to protect the housing industry so investors will continue to invest and borrowers can continue to borrow,” she said. CoreLogic estimates that short-sale scams cost lenders about $375 million in 2011, the last time it made such an estimate.
The policies left Mr. Sharif’s family looking for a new place to live. Mr. Sharif, 56 years old, said he bought the 200-year-old colonial-style home in 2004 for $505,000 and made a down payment of a bit more than 20%, leaving a mortgage of about $400,000. He ran into trouble in March 2009 after losing his job as a software engineer. Mr. Sharif’s home was foreclosed upon in September 2010, several months after he found new work as a consultant.
Over the next couple years, Mr. Sharif said he tried and failed to work with his bank to make a deal in which he would retake possession of the home with a reinstated or modified loan that he could afford. Eventually, Mr. Sharif found a program run by Boston Community. The program so far has provided more than $73 million in mortgage financing for more than 350 properties, according to the nonprofit, using mostly money raised from private investors and foundations.
Since being evicted, Mr. Sharif and his family have rented a small house about a mile away from their old home. He and his son pass his former home every weekday on the way to his son’s school. “My son says, ‘It’s my house,’ ” he said.
No, it’s not your house.
Americans believe in redemption, and many would like to give former homeowners a second chance, and they should get one — after they’ve waiting the prescribed waiting period, saved money, and improved their credit score through disciplined financial management. Shortcutting those steps will simply put unqualified people back into home ownership temporarily, and we all saw how that turned out last time.
[listing mls=”OC14140297″]
The entire homeownership financial paradigm needs to be shitcanned. Thirty years of debt and interest so you can own a stucco shitbox erected on a scrap of land next to your equally indebted fat neighbors? The definition of hell.
Eliminate this debt-fueled BS. Pay cash for homes and watch prices quickly move towards affordability at today’s median income levels. Great for young adults, great for families, great for the economy.
An all cash market would essentially eliminate the first time buyer pool forever. Yes, prices would drop without mortgage financing, but not to the level you suggest. With no 30 year FHA buyers to compete with, institutional investors would swoop up discounted properties before the average family could even get a whiff of affordability. Home ownership rates would plummet – 40%? 30%? 10% ownership? None would surprise me. We would have a nation of permanent renters making hedge funds and institutional investors rich. Not a good idea, IMO.
Mortgage financing is fine – it just needs to be done responsibly, a tune IR has been preaching for years.
An all cash market would essentially eliminate the first time buyer pool forever. Yes, prices would drop without mortgage financing, but not to the level you suggest.
If we did not have mortgage financing, Orange County home pricing would likely decline by at least 75%. Reason-being, the multiple of home price to median income is distorted in Orange County. It might take a few years to get there due to perceived value from mainly foreigners, but prices would drop dramatically in OC without financing.
We would have a nation of permanent renters making hedge funds and institutional investors rich.
The only people that do not fit the above statement have no mortgage. Lending institutions are today’s landlords. If you don’t believe me, stop paying your mortgage, and your landlord will have you evicted.
During the housing bubble when lenders were making interest-only and negative amortization loans, they were landlords, and the money-renters were too stupid to recognize it. Now, with many of these people on non-amortizing loan modifications, the lenders are again their landlords, but since these loanowers have their names on title, and since they have some feeble hope of future equity, they feel like they still own something. They don’t.
Sometimes when I get angry at what the banks did, I feel the sentiments Jack expressed, but when I think about the reality of how life works, I come back to the need for lending for long-term assets for the reasons you describe.
If the market became all-cash, prices would certainly drop from where they are today, but as you point out, investors would step in at some price level and buy the properties for cashflow effectively putting a floor. At that point we become a nation of renters.
By the time someone saved enough money to pay cash, something very few would ever accomplish, they’ve worked most of their working lives. The whole point of lending for assets like houses is to allow people to have and enjoy the house while they are paying for it.
IMO, where it all goes bad is when lender conflate this asset-backed debt with consumer debt. Mortgage debt should be limited to paying for the house, not for cars, vacations, and other crap. Also, lenders jump the shark when they allow mortgages that don’t amortize because the borrower never pays it off. At least this practice was banned by the new mortgage rules.
+1
Deposits used to drive lending. Then, the standard was flipped, and lending drives deposits became the norm. That’s the point where the stage was set for things to go bad.
If all we did was eliminate the secondary mortgage market (thus disallowing primary lenders [local banks] to sell off their loans)
problem solved.
1st time buyers could enter the market because prices would drop to reasonable levels.
This is the way the system *used* to work.
Lets keep government entities out of the equation!
Somewhere, down deep in a DC dungeon, there are members of the FOMC wearing black hooded robes with large red pentagrams on the back, standing around circle, chanting:
“Should we allow deadbeats to buy homes again to stimulate housing”
“Should we allow deadbeats to buy homes again to stimulate housing?”
A spirit rises from the flames and asks, “Can you get taxpayers to cover the losses?”
When they realize the answer is yes, the chanting changes…
“We should allow deadbeats to buy homes again to stimulate housing”
“We should allow deadbeats to buy homes again to stimulate housing”
Shh…. 😉
Uh.. it is evident that ‘preserving failure’ is the basis of the financial/economic model, so the deadbeats are required as sustenance.
Sadly, there is a lot of truth in your statement. The entire stimulus model from the federal reserve is designed to preserve failure, and a fresh crop of bagholders, which could be deadbeats that make the taxpayer the bagholder, these new bagholders are necessary to keep the system alive.
[…] Should we allow deadbeats to buy homes again to stimulate housing? A small number of former owners endured a foreclosure because they lost their jobs and couldn't make even a modified payment to keep their homes. If there is any group deserving of a second chance, … The mortgage giants also require that short sales … Read more on OC Housing News (blog) […]
These optimists completely miss the upcoming impact of the deflation of the Chinese housing bubble.
China set to dominate foreign homebuyers market
Analysts expect Chinese to overtake Canadians within 5 years
The share of U.S. homes purchased by international buyers is on the rise. As HousingWire reported on Tuesday, international buyers spent nearly $100 billion on properties and investments from April 2013 to March 2014.
The $99.2 billion that international buyers pumped into the market in from April 2013 to March 2014 represents a substantial increase from the previous 2012-2013 level of $68.2 billion, according to the National Association of Realtors.
According to the NAR report, Canada maintained the largest share of purchases, dropping from 23% in 2013 to 19% in 2014; however, China held the lead in dollar volume, purchasing an estimated $22 billion with an average sale cost of $590,826.
China was also the fastest growing source of transactions, now accounting for 16% of all purchases, up 4% from last year. Domestically the Chinese are facing their own property meltdown, one that could help push real estate investors into new markets.
Of note in that data is the increase of Chinese buyers from 2013 to 2014. Paul Diggle, property economist at Capital Economics, suggests that the increase in Chinese buyers could be a harbinger of things to come.
“This bigger picture hides a rapid rise in purchases by Chinese investors, who may overtake Canadians as the largest group of foreign buyers of US housing within the next five years,” Diggle said.
Diggle expands on the increase in the share of Chinese buyers over the last few years in his U.S. Housing Market Update. “The upshot is that the share of foreign homebuyers who are Chinese increased to 16% in 2014, up from 12% in 2013 and just 5% back in 2009,” Diggle said.
“Put another way, the value of homes bought by Chinese buyers in the US has increased from $1.2 billion to $7.5 billion, or slightly more than 500%, over five years.”
Despite the tremendous growth of Chinese buyers, the share of international buyers still only represent 3.8% of the total property sales in the U.S., according to Diggle. That’s up from 3.2% in 2013, but it’s below the 4.4% share in 2012 and the high of 4.6% in 2010.
“Looking ahead, tightening monetary policy will support the dollar and ensure overall foreign demand remains a relatively small part of the housing recovery,” Diggle said.
“But that will disguise the growing presence of Chinese buyers, who will outweigh Canadians as the largest source of foreign demand within five years should the trends of the past five years continue,” Diggle added.
This prediction will be an epic fail Mr. Diggle hopes everyone forgets about.
The author of that article is ignoring (or not aware of) a lot of recent news coming out of China.
Posts from ZH need to be taken with a grain of salt, but some more fuel for the fire:
Did China Just Crush The US Housing Market?
http://www.zerohedge.com/news/2014-07-10/did-china-just-crush-us-housing-market
Some very interesting sector ‘whackage’ underway today ..
MGIC Investment Corp. MTG -10.61%
Radian Group Inc. RDN -5.07%
Genworth Financial Inc. GNW -3.87%
I feel like this data is already old, but 538 is a solid site.
http://fivethirtyeight.com/datalab/why-the-chinese-are-snapping-up-real-estate-in-the-u-s/
Maybe with some traffic they’ll do more analysis.
California equity locusts helped inflate the housing bubble here in the US, particularly in second-home communities like Bend, Oregon. When the bubble collapsed, these second-home communities were particularly hard hit because people had to sell to support their primary residence debt.
It’s entirely possible that the US has become the Chinese second-home community populated by equity locusts. When their bubble collapses, this equity flow dries up, and it may easily reverse.
Those projections of endless growth in Chinese purchases of US real estate are a joke.
The ‘moral hazard’ argument is specious. A legal contract exists because ‘morality’ has no place in the transaction. Both parties are assumed to be rational adults and agree to the terms of the mortgage agreement: The borrower agrees to pay under the terms of the contract, and the lender agrees that when the borrower has made all the agreed upon payments, it will transfer title of ownership to the borrower. That’s it. If either side fails to live up to the terms of the contract, the consequences are clearly spelled out.
Large banks and companies ‘walk away’ from commitments all the time. They don’t feel bad about it — they take their lumps and move on. Whoever was on the other side of the arrangement is either happy to have gotten their asset back, or feels burned because they didn’t negotiate a good enough contract to make sure they don’t get burned. This is business, and ‘morality’, to the extent it exists, is represented by contract law.
Average folks buying a house tend to attach all sorts of other emotions and existential anxieties/needs to the house. It is understandable, and when it all works out, great. But it is nobody’s “fault” when it doesn’t, and it is in my opinion misguided for the government to promote policies that exacerbate this. The reason is that business, which are by nature “amoral” will prey on it.
To all the comments above that lament the U.S. turning into “a nation of renters”, there are many such nations around the world, and they don’t appear to be that much worse off than us. There are advantages and disadvantages to each approach.
All Homedebtors RENT to own, so the US has been a nation of renters for many decades. Nothing wrong with that. What is wrong, however, is the general populous utilizing the word OWN in conjunction with the words real estate; ie., stop paying your prop taxes and you’ll find out who the rightful owner really is.
But it is “somebody’s fault.” Very few of us could remain current on our mortgage payments if we had a prolonged income loss. Absent that factor, any other factors causing your default can be largely attributed to your fault.
By “nobody’s fault” I meant that for example if housing prices suddenly decline, it is not the fault of government policy, which must then be changed such that prices rise again (and the homeowner is then back above water). If banks begin to truly price in credit risk, the cost of borrowing will be very very much higher, and that is not “the government’s fault” or the “banks’ fault”, such that the government must subsidize housing loans so that the average guy can buy a house etc etc.
If both sides “agree” to live up to the terms of the contract, why is it that only the borrower(s) sign the promissory note? I think it’s because the borrowers are promising to pay back the money they borrowed. That makes morality the central issue then. If they can’t be trusted to pay it back, they won’t be receiving any loans, no matter how much they bitch to their Congressman. So anybody receiving a mortgage is assumed to be trustworthy enough to lend money to. That trustworthiness is in essence a moral judgement made by the lender. If a borrower defaults, it’s a breach of that moral obligation to pay their lender back.
The lender is not making any obligations to the borrower. They don’t sign a document saying they will accept a house in lieu of getting repaid, although legally that is their recourse. The word ‘foreclosure’ does not appear in the typical mortgage note. It’s what our lawmakers decided a lender could do to recoup their money from a borrower that defaults on their promise.
A moral obligation is merely a conscientious duty, and is NOT CONNECTED in any way with a legal obligation.
Period!
Exactly. So walking away from a mortgage when you have the ability to pay is legal but it remains immoral because you are breaking a promise to repay the money. Hence, the need to avoid policies that encourage moral hazard.
Mellow: I understand your point of view, but you are conflating the business contract undertaken between the two parties with morals. It can be reasonably argued that the banks are making a judgement to lend or not lend based on the ‘moral character’ of the borrower. But I think close examination of that position reveals it has several flaws. I may have outstanding moral character (I could even be a saint!) but without income I will not get a loan.
Consider a business transaction between two companies. One may be a ruthless b*stard of a ‘company’ but may be extraordinarily profitable and a reliable debtor. Banks will not hesitate to do business with companies they know will pay them back. The larger and more divorced from a community a bank or company is, the more likely they will ignore any non-contractual constraints on their behavior. How many companies continued to do business with apartheid South Africa, because it was so profitable?
Your argument regarding foreclosure etc. and the absence of any obligation made by the lender to the borrower is literally correct, but its essence is disingenuous. The fact that the law (lawmakers, reiterated by centuries of court precedent) allow for the lender to recoup its money by repossessing the property, even though the lender has not signed a document saying they will accept the house in lieu, supports this.
I agree that the default of the borrower is a breach of a moral obligation. I also agree that it will affect their ability to borrow money again. I do not agree that the legal contract between the borrower and lender is moral — the terms of the contract may be influenced by the morality of the time and place, but the contract is a legal one.
I think David’s point is valid. In the business world contracts are broken all the time and in a vacuum the idea of “moral hazard” is fairly preposterous. It is simply business. In any given agreement the contracting parities simy decide whether it is it more economically efficient to perform or breach the contract and act accordingly. The problem is that the lender and borrower do not negotiate in a vacuum but rather the transaction is strictly regulated and incintivized by federal and state policy. These incintives are funded by the taxpayer so those who are more risk adverse than others must bear part of the risk of the frivolous no matter how concientious they have been. That is the challenge. If interest rates were allowed to exist organically and if lenders were free to pursue normal contract remedies with the clear understanding that the lender would recieve no help from the state then there would be no moral hazard problem.
Oregon: “The problem is that the lender and borrower do not negotiate in a vacuum but rather the transaction is strictly regulated and incintivized by federal and state policy. These incintives are funded by the taxpayer so those who are more risk adverse than others must bear part of the risk of the frivolous no matter how concientious they have been”
I agree completely. And I think that the real culprits in this instance — the ones that were truly frivolous — were the financial institutions. They decided liar loans were ok; that the collateralization of debt was just fine; that ARM’s etc etc were prudent to sell. I could go on. Most consumers are amateurs when it comes to buying houses, while banks are (supposed to be) experts when it comes to identifying qualified borrowers and structuring sensible products. They behaved as if it was a party and that there would be no consequences. And we are footing the bill.