Robert Shiller’s book Irrational Exuberance was a watershed work in behavioral economics. When I first read it, the housing bubble suddenly made sense to me. Much of what I believe I know about financial markets, human behavior, and the housing bubble is built upon his work. He is one of my heroes.
And he has completely lost his mind.
For all his brilliance, Robert Shiller is not noted for coming up with insightful policies based in his understanding of behavioral economics. Irrational Exuberance contained no policy recommendations, and his book, The Subprime Solution, was criticized as fanciful and unrealistic. His latest editorial in the New York Times is so ridiculous, I am shocked he put it in the public view.
Reviving Real Estate Requires Collective Action
By ROBERT J. SHILLER — Published: June 23, 2012 
IMAGINE that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.
This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.
Yes, mortgage lenders need to write down the amounts owed by delinquent loan owners, but they don’t need to give them the house in the process. Lenders need to foreclose on delinquent borrowers and get them out of the property so a borrower ready, willing, and able to make the payments can live in the house. Why does his solution need to keep the undeserving in the houses rightfully belonging to others?
The last thing we need is to write down the mortgages of all underwater loan owners to fair market value and give them a pass. What about all the HELOC abusers? Do we really want to give them trillions in free money? That is the ultimate extreme of moral hazard. Who would ever borrow responsibly again in the future? Wouldn’t everyone keep their HELOCs maxed hoping for another crash so taxpayers could pay them off?
Plus, this is not for the collective good. This is for the good of a few loan owners. Perhaps some homeowners might benefit from higher house prices, but how much do they need to pay for the bailout to get this benefit? Renters get no benefit at all, and future homebuyers get screwed.
What about all the investors who will lose money in the deal? What about the pensioners who bought mortgage-backed securities for the cashflow in their retirement. We are supposed to screw them to save HELOC abusers and loan owners?
Oh, wait. are we supposed to make the taxpayer cover the losses? Or should we just print the money? WTF is he thinking?
In the 1971 book “The Logic of Collective Action: Public Goods and the Theory of Groups,” the economist Mancur Olson argued that collective action problems are pervasive, plaguing nations and economic groups alike. “Most groups cannot provide themselves with optimal amounts of a collective good,” he said, because they cannot manage a “selective incentive” or arrange “coercion or some reward.”
In the current real estate market, the relevant group is enormous and complex. It includes those who own first and second mortgages or home equity lines of credit or residential mortgage-backed securities or the various tranches of mortgage collateralized debt obligations or shares in banks and finance companies that in turn own mortgages. These people live all over the world and have no way of communicating with each other, let alone coming to an agreement to give homeowners a break.
And you know what? They don’t want to give loan owners a break. They want to get their money back plus interest per the contract they signed with the loan owner. They either want their money back, or they want the property back. There is no other option.
My colleague Karl Case and I showed in 1996 that when the value of a home falls below the value of the mortgage debt — when it is underwater — a person is much more likely to default on the mortgage. And it is well known that in foreclosures, lenders lose so much on the legal costs and depressed market values of the homes that it would be in their interest to lower mortgage balances so the homeowners stay in place and don’t default.
No it is not in their interest to write down these mortgages. First, it creates moral hazard because everyone will expect this free money, and next time they will do whatever it takes to get it. But more importantly, only a small fraction of loan owners actually will default or go into foreclosure. To write down the mortgages on all the underwater borrowers would be much, much more costly that foreclosing on those who actually do default.
If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy.
This proposal will do much to raise the hopes among loanowners looking for free money, but it will do nothing for homeowners. It probably would stimulate the economy because the first thing the loanowners and homeowners alike would do is start maxing out their HELOCs in preparation for the next crash. The smart ones would hide this money in safe-deposit boxes or overseas accounts. The dumb ones will blow it like they always do.
John Geanakoplos, a Yale economist, and Susan P. Koniak, a Boston University law professor, have proposed legislation that gives community-based, government-appointed trustees a central role. The trustees would have the authority to impose a write-down of mortgage principal that served the interests of mortgage issuers as a group, without having to prove that each and every one would be better off. But Congress has not acted on their idea. And so we are still lacking the authority to make everyone sit down.
WTF? He wants to give trustees the right to unilaterally impose mortgage write downs at their whim? Who is going to loan money to anyone in that jurisdiction? No private lender would. Perhaps we should just totally nationalize the mortgage market. That’s basically what he’s talking about.
Perhaps Mr. Shiller should contact the old Soviet Union’s central economy planners. Perhaps they could give him some useful insights on how to administer such a communist program?
ROBERT C. HOCKETT, a Cornell University law professor, has outlined another approach, which uses the principle of eminent domain, to solve this collective action problem. Eminent domain has been part of Western legal tradition for centuries. The principle allows governments to seize property, with fair compensation to owners, when a case can be made that such seizure serves the public interest.
Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.
But eminent domain law needn’t be restricted to real estate. It could be applied to mortgages as well.
We’re going to have government bureaucrats condemning mortgages? Who will determine which mortgages should be condemned? What happens to the mortgagee when the loan becomes condemned? Do they get a free house? Who do they pay the remainder too? What happens if they don’t pay?
Governments could seize underwater mortgages, paying investors fair market value for them. This is common sense too.
This is completely unnecessary. Simply bring back mark-to-market accounting, and the market will do this itself. Once the banks can no longer maintain the fantasy of face value on the loan, they will foreclose on the squatters and the mess will be cleaned up quickly. No eminent domain is required. Why would anyone want to empower a bureaucrat like that?
The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.
Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.
Again, who absorbs the losses? If what the good professor described were feasible, banks would have done this ages ago. Unfortunately, this would expose the banks as insolvent, so mark-to-fantasy accounting has permitted them to avoid recognizing these losses for the last four years. Plus, banks don’t want to do this if it permits loan owners to stay in their properties because the attendant moral hazard.
The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off.
Bullshit. The original mortgage holders get wiped out. The bank becomes insolvent, the stockholders get wiped out, and the bondholders take a huge haircut… perhaps this idea has merit… no, not really.
There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway.
You think? The guy paying the price is generally the one who will oppose the idea. If we did this to the banks, we would put them out of business — which wouldn’t be all bad — but it isn’t reasonable to make one of two parties to a private contract absorb such a one-sided change with no due process. That is communism. Remember…
San Bernardino County in California is working with a private company, Mortgage Resolution Partners, on the possibility of putting such a plan into action. We must hope this effort succeeds. If it works, it can be replicated all over the country.
But first we have to realize that much of our economic suffering takes the form of a collective action problem.
The only collective action problem here is with the banks allowing too many delinquent borrowers to stay in homes they aren’t paying for. If they collectively acted to foreclose on these people, this situation would get resolved, and we could get back to a normal real estate market.
We have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices.
On that we can all agree — except the banks who will cling to this fantasy until the bitter end.
We need to summon our resources to exercise the authority that allows collective action.
We need to become a communist state, right?
Professor Koniak says the solution to this problem has been so slow in coming for a simple reason: “It’s the will that’s lacking! The will!”
It’s the will, plus about three trillion dollars! Let’s get Ben to fire up the printing press, right?
Unbelievable [shakes head]. I am simply dumfounded.
They squatted for a long, long time
Today’s featured property first became distressed sometime in 2007. Now, five years later, it is finally coming to market to be sold to a stable borrower. The resolution of this bad loan has been anything but speedy.
- The property was purchased by the Ponzi family on 8/14/2003 for $396,000. The owners used a $317,000 first mortgage and a $79,000 down payment.
- On 12/11/2003 they took out a stand-alone second for $42,000.
- On 12/31/2003 they refinanced with a $333,700 first mortgage and a $94,300 HELOC.
- On 2/23/2005 they refinanced with a $500,000 first mortgage.
- On 3/5/2006 they obtained a $100,000 HELOC.
- Assuming they maxed out the HELOC, the total property debt was $600,000 and the total mortgage equity withdrawal was $205,000 in just over three years.
They defaulted sometime in 2007 and were finally served notice on 3/5/2008. They were not forced out in a foreclosure auction until 4/26/2011. They squatted for at least three full years. Then the bank sat on the property for a year while it declined in value another 10%. Real bright.
Costa Mesa Overview
Median home price is $424,000. Based on a rental parity value of $558,000, this market is under valued.
Monthly payment affordability has been improving over the last 12 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis declined from $292/SF to $292/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $25 last month from $2,291 to $2,316.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 6
Proprietary OC Housing News home purchase analysis 
3125 JEFFERSON Ave Costa Mesa, CA 92626
$400,000 …….. Asking Price
$395,000 ………. Purchase Price
8/14/2003 ………. Purchase Date
$5,000 ………. Gross Gain (Loss)
($31,600) ………… Commissions and Costs at 8%
============================================
($26,600) ………. Net Gain (Loss)
============================================
1.3% ………. Gross Percent Change
-6.7% ………. Net Percent Change
0.1% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$400,000 …….. Asking Price
$14,000 ………… 3.5% Down FHA Financing
3.62% …………. Mortgage Interest Rate
30 ……………… Number of Years
$386,000 …….. Mortgage
$100,956 ………. Income Requirement
$1,759 ………… Monthly Mortgage Payment
$347 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$100 ………… Homeowners Insurance at 0.3%
$402 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,608 ………. Monthly Cash Outlays
($264) ………. Tax Savings
($595) ………. Equity Hidden in Payment
$16 ………….. Lost Income to Down Payment
$120 ………….. Maintenance and Replacement Reserves
============================================
$1,885 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,500 ………… Furnishing and Move In at 1% + $1,500
$5,500 ………… Closing Costs at 1% + $1,500
$3,860 ………… Interest Points
$14,000 ………… Down Payment
============================================
$28,860 ………. Total Cash Costs
$28,800 ………. Emergency Cash Reserves
============================================
$57,660 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # I12078198 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$529,900 934 CHEYENNE St |
0.3 miles 4 bd / 1.75 ba 1,662 Sq. Ft. |
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$639,000 1080 VISALIA Dr |
0.35 miles 3 bd / 2 ba 1,684 Sq. Ft. |
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$439,900 917 HYDE Ct |
0.4 miles 3 bd / 2.5 ba 1,860 Sq. Ft. |
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$549,000 1095 SAN PABLO Cir |
0.55 miles 4 bd / 1.75 ba 1,617 Sq. Ft. |
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$590,000 963 SONORA St |
0.75 miles 3 bd / 1.75 ba 1,550 Sq. Ft. |
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$492,000 1916 West WEST WIND |
0.96 miles 3 bd / 2 ba 2,000 Sq. Ft. |
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$599,900 2984 TEAKWOOD Pl |
1.46 miles 4 bd / 2 ba 1,557 Sq. Ft. |
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$449,900 2034 West CHANDLER Ave |
1.52 miles 3 bd / 1.75 ba 1,518 Sq. Ft. |
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$719,900 310 SALT POND |
1.53 miles 3 bd / 2.5 ba 1,700 Sq. Ft. |
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$499,000 1605 West CARRIAGE Dr |
1.57 miles 4 bd / 2.5 ba 2,156 Sq. Ft. |
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35 Responses to “Robert Shiller has completely lost his mind”
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Is that snow on the front lawn? Mysterious….
“bolstering the value of all homes and, ultimately, the whole economy”
Why are economists and politicians so hellbent on increasing spending through mortgage equity withdraw? Don’t they understand if people are paying less for home loans they will have money left over to spend?
I don’t think they do. Either that or they don’t care because the HELOC stimulus is large and immediate whereas the lower payment stimulus is smaller and longer term. The fact that HELOC stimulus is an unsustainable Ponzi Scheme doesn’t seem to bother them.
IMHO: They are not dumb and understand the situation well. The higher prices and loan notes automatically generates large underwriting fees and keep giving with maintenance fees based on the principal (large commis to juice themselves). Keeping up the prices while getting rid of the prior defective note will remove nearly all liability from the banksters and transfer the liabilities to the taxpayers. It will convert the people to mortgage slaves that will be easier to control through fear of not having a job to pay back the loan and if they are working, so busy as not to think and organize nor to invest. A major mistake in the USSR’s control in Poland was the long ration lines and high under employment — people had time to think and talk about their grievances. The USSR would have been much more successful if they has an efficient and expensive distribution system for goods and keep the people working to a point of exhaustion. Solving the banking housing crisis is very difficult – It like curing a junkie who crying for help but doesn’t think he he’s part of the problem. The banksters are both pusher and junkie, while the HELOC abusers are just junkies. Cut of the supply and both may have painful and possible life threatening DT’s. The banksters may in desperation bring down the entire country to recover their principal. It’s as if the govt’s solution is to cover the cost of the drugs until the banks recover their pricipal.
How can you revive RE when the new economy is the Bernanke ‘put’ ? You can’t.
Shiller has jumped the shark.
I saw that article yesterday and went Oh My God. But today’s headline is even better.
Can I have my local City purchase my student, auto, or credit card loan from my lender, so I can have a modification too? just kidding.
PS what if you are the City of Stockton? Can you eminent domain your own debt?
The State of California would love to eminent domain its debt. We could solve our budget problems overnight.
Distressed Properties 46% of Market
Home price purchases were mixed month-over-month in May, with non-distressed prices up and short sales down, according to the Campbell/Inside Mortgage Finance HousingPulse tracking survey.
From April to May, transactions reported by HousingPulse survey respondents revealed the average price for non-distressed properties rose 1.7 percent, while the average price for short sales fell 0.7 percent. For damaged REOs, the average price went up 1.8 percent and for move-in ready REOs, the average price dropped 1.5 percent.
The stabilization of home prices seen in some instances is due to a shortage of inventory, HousingPulse reported. These shortages are led by underwater homeowners who are holding onto their homes until home prices move up.
Also, for distressed properties, there’s a shortage of inventory due to slower processing of foreclosures by mortgage servicers, according to HousingPulse.
Move-in ready REO properties are in demand and sat on the market for an average of 10.6 weeks in May, the lowest of any property category.
Using a three-month moving average, the HousingPulse Distressed Property Index (DPI) revealed that the share of distressed properties in the housing market in May was 46.1 percent. This marks the 27th consecutive month in which the DPI hovered above 40 percent.
Anecdotal evidence also suggests that the shortage is especially prevalent in California.
One realtor in the state said that inventory in Orange County was “super low” and the months’ supply of unsold homes is down to just 45 days.
Another California agent said that inventory in the Santa Clarita Valley, which is 35 miles north of Los Angeles, is very low, and reported less than 500 listings, which is well below the 1,500-1,800 properties the agent stated is the average.
The Campbell/Inside Mortgage Finance HousingPulse Tracking Survey includes approximately 2,500 real estate agents nationwide each month.
“…mortgage lenders need to write down the amounts owed by individual homeowners…”
Darwin must be spinning in his grave.
Schiller’s piece certainly could of been lifted from “Everyone’s a winner” philosophy adopted by some school systems.
Certainly not a OP-ED piece I would expect from Robert Schiller.
The Latest in Eminent Domain: They’re Coming After the Banks
The latest trendy shtick being discussed, is the idea that eminent domain be used to take the mortgages of “underwater” homes. Under this approach, those mortgages (or perhaps more accurately, the notes secured by them) would be acquired at their depressed current market values, and the homeowner-motgagors would then be able to repay their mortgage debts at the lower levels, i.e., the true, lower market value in the current market rather than the inflated prices at which they bought them during the real estate “bubble.” See Tom Braithwaite, Investors Invoke Law to Solve Housing Crisis, Financial Times, June 10, 2012. The California city of Hesperia is actively considering suc h a scheme. Beau Yarborough, Hesperia Considers Using Eminent Domain on Underwater Mortgages, High Desert Daily Press, June 6, 2012,. Click on http://www.vvdailypress.com/news/hesperia-34861-mortgages-underwater.html.
While this would, in our opinion, be a lousy idea for a number of policy reasons, we are surprised it took so long for somebody to figure this out. After all, there is a market in mortgages, and when the mortgagees’ interest is taken by eminent domain there is no reason why they should not receive their secured notes’ fair market value as their “just compensation,” the same as holders of all other interests in the taken property, rather than the nominally outstanding loan balance which in the case of those “underwater” homes may not be collectable in the foreseeable future, or at all. Would such eminent domain takings be deemed a permissible “public use” within the meaning of the Fifth Amendment? Probably, given the current state of the right-to-take law. This would not be much of a stretch after Hawaii Housing Authority v. Midkiff which redistributed land titles from landowner-lessors to homeowner-lessees.
However, there are two obvious problems with such a scheme — at least they are obvious to us. First, the condemnor (envisioned as some sort of public-private entity) will have to come up with the money with which to pay for the reduced-value notes secured by those mortgages, before the affected homeowners will be able to pay off the new (reduced) debt in installments. Where will that money come from? Our hunch is that some sort of TIF-like revenue bonds will be issued (this is where the “public” part of that public-private partnership comes in) and sold to raise that money. Which may or may not be a good idea, being that everybody, including local government, is in hock up to the eyeballs, and what this may accomplish would be the creation of another, albeit smaller “bubble.” No one is going to do this as an altruistic gesture, and certainly the private end of any public-private partnership will want to make a profit. Why else do it? There are so many unknowns to all that — at least by our lights — that we don’t want want to go there right now. Just stay tuned and see what happens.
But there is another aspect to this idea that can have calamitous consequences. Remember that, though lots of mortgaged homes may be “under water,” the loans secured by them are carried on the banks’ books at levels of the original loans — this may be a fiction, but it is our admittedly inexpert understanding that this is how it is done. So when those mortgages are taken by eminent domain, and the prices paid to the banks for them are toted up, their value (now reduced to cash) will be much smaller that what the banks have been carrying on their books as the value of those loans. Will that development abruptly cause some banks at least to wind up with assets valued below the legally required minimum? Could be.
And don’t think that this is mere speculation on our part. We remember the S & L crisis of some years ago, where some perfectly sound S & Ls held large amounts of junk bonds that were paying interest at high rates like clockwork. And then, one day Uncle Sam changed the rules and demanded that those junk bonds not be deemed acceptable as S & L capital, so they had to be sold at fire-sale prices then and there. Result: some otherwise sound S & Ls went under because after being forced to dump their junk bond holdings all at once in a depressed market, they wound up with insufficient capital.
Could that happen to some banks when the loans secured by mortgages on their books are abruptly re-valued downward in eminent domain proceedings? By our lights it could. When what up to then was carried on the banks’ books at their “bubble” values is abruptly down-valued to their shrunken, post-bubble values, there is no telling what the bottom line will be.
And remember that the end of our troubles in that field is not yet in sight. It could get worse. As we note from time to time, home prices out here in la-la land are still way too high, given what people are paid as wages and salaries, so a further downward “adjustment” in home prices is a distinct possibility. What then?
Remember that public economists and tycoons have enormous incentives to conceal or at least minimize the extent of coming bad news because being candid could cause a panic, and this is something no one wants. So it’s a good idea that all positive forecasts be taken with a bit of skepticism. At least that’s the way we see it.
In the meantime, if this scheme proceeds, we can look forward to more lucrative employment by condemnation lawyers many of whom could use the work.
Follow up. It turns out that Fannie Mae and Freddie Mac own or guarantee some 29% of underwater mortgages, but — guess what? — most of these borrowers continue to make their scheduled payments, evidently hoping to hang in until the market recovers. But if you make a reduction in loan balance available, whether by eminent domain or otherwise, these people will be provided with a powerful incentive to stop making payments on their mortgages, hoping to get bailed out by the government. Which makes the proposed scheme a very bad idea.
For another point of view, explaining why such a bailout (albeit one without use of eminent domain) would be a bad idea, ranging from the cost to taxpayers (what else?), the limited number of benefitted homeowners, and the moral hazard of it, click here.
Second update. The academy has now weighed in on this subject. See Robert Hockett’s Cornell Law School Research Paper No. 12-12 — click here. We confess that our eyes glazed over when we came across the following passage in Professor Hockett’s paper abstract: “I argue that ongoing and self-worsening slump in the primary and secondary mortgage markets is rooted in a host of recursive collective action challenges structurally akin to those that brought on the real estate bubble and bust themselves.” Got that?
Delighted to see you post this item, but may I mention that it comes from my blog http://www.gideonstrumpet.info that deals with eminent domain and land use.
That was a great article.
About Gideon’s Trumpet
Gideon Kanner, Professor of Law Emeritus at the Loyola Law School in Los Angeles, holds degrees in engineering (B.M.E., The Cooper Union, 1954) and law (U.S.C, 1961). He is Editor of Just Compensation, a monthly periodical on the law of eminent domain, and has been active as a practicing appellate lawyer in the field of eminent domain and inverse condemnation for 40 years. He is past president of the California Academy of Appellate Lawyers.
Prof. Kanner served on the Advisory Committee on the Uniform Eminent Domain Code and has been a consultant on eminent domain to the California Law Revision Commission for over 30 years. He acted as consultant to the Japanese Construction Ministry in connection with that country’s reform of its expropriation law. He was also co-organizer of and presenter at the International Colloquium on Comparative Expropriation Law, held at Oxford University in 1990, and a recipient of a British Academy scholarship in that connection.
Prof. Kanner is a frequent author in the law journals and a lecturer at CLE programs. For the past twenty years he has co-chaired three ALI-ABA programs (on eminent domain, inverse condemnation and land-use), and has acted as chairman and speaker at the annual Institute on Planning, Zoning and Eminent Domain sponsored by the Center for American and International Law. He is the recipient of the ALI-ABA Harrison Tweed award for outstanding merit in continuing legal education. He also received the Shattuck prize from the American Institute of Real Estate Appraisers (now the Appraisal Institute) for outstanding contribution to appraisal literature. In 2004, the William & Mary College School of Law established an annual award for best writing on property rights, the Brigham-Kanner Award, named after Prof. Kanner along with Toby Prince Brigham, a distinguished Florida lawyer.
Prof. Kanner was counsel for property owners in a number of precedent-setting eminent domain cases before the California Supreme Court, and has appeared as counsel for parties and amici curiae in a half-dozen taking cases in the U.S. Supreme Court. He is listed in Best Lawyers in America.
Excellent commentary and insightful observations.
The banks did create a massive shit storm via complete abandonment of underwriting quality and it did pull everyone into its wake. For that, at a minimum, that has to be some accommodation of normal human needs.
It may be worthwhile to allow foreclosures between 2005 and 2015 to go unremarked and unrecorded on credit reports so that while no one will start fresh, at least people who did get screwed and otherwise kept their financial house in order could proceed through an orderly foreclosure, transition and maybe go buy another home, likely meeting prices that aren’t completely nuts.
Reasonable?
People who complete short sales without missing a payment are immediately eligible for an FHA loan. The current underwriting standards already has provisions for those who were the most responsible. The trick is to reward them without rewarding everyone else. A blanket amnesty wouldn’t do that.
I understand your goal, but if your plan were enacted, I would basically be forced to stop making my mortgage payment. At that point, the only negative to living rent-free for as long as possible and then allowing a foreclosure, would be the embarrassment in explaining it to friends/family and having to move.
It is Op-ed pieces like this and similar articles, that make me violently mad.
I mean I have been saving money for the past 5 years I’ve been out of college and blessed to have a good job. I have put up coming back from school and living with the parents to save up to buy a nice house at what I thought would be a good price.
Now I am looking to buy an apartment in Manhattan or a house (single or multi-family) in Northern New Jersey and the prices have only dropped by a small amount. Nowhere near where they have to be (at least 2001 housing prices).
I have watched my friends either rent in the City and not have an ounce of savings (going to parents for money when needed, probably from HELOCs) or buy using huge government sponsored loans to spend the savings, that should have been used for a real down payment for BMWs.
The one person that actually saved to pay for the majority of the house in cash, is the one that gets screwed.
If they ever do anything like writing down peoples principles or forgiving debt (other than through bankruptcy), I will flip and become militant.
The only people that ever get screwed by government are the ones that follow the laws and the ones that do the right thing. I feel like a complete idiot, I mean out of all my friends I am the only one that has tried to exercise self-control and discipline for hopeful long-term gain and will be the one to actually suffer in the short and long term.
Sorry for the rant, just hearing these ideas from guys who do have some influence, makes me mad. Plus, this is probably what will happen.
What you’ve described provides further clarity as to why policy-driven, central-planned economies have never succeeded at any time in world history.
It’s sad, but people who responsibly manage their finances will be anachronistic in the future. All the incentives are to live today and pass the bills on to everyone else.
That’s why democracies have failed. The majority or powerful takes for the under-represented. In this case, the children and unborn.
“gladly pay you Tuesday for a hamburger today” Wimpy from Popeye th Salilor is really “If you lean me a hamburger today, I’ll pay it back tomorrow, when you lean me a hamburger tomorrow.”
“I feel like a complete idiot, I mean out of all my friends I am the only one that has tried to exercise self-control and discipline for hopeful long-term gain and will be the one to actually suffer in the short and long term.”
I hear you. You mention a saving plan to some people and it’s like you are speaking a foreign language. Financial discipline is so 1950′s.
What makes it worse is that if you have cash, you are losing purchasing power every day they print a new trillion. Then again most depressions are deflationary and this one might end up the same way, so cash will again end up being King.
Though I have used that kind of wishful thinking to get to this position.
@Mike: it is also the thinking of immigrants from the former Soviet Union.
@elO: family moves from one central committee planned economy, just in time for a start of another. Irony alert. On the positive, you can still save up a lot more money (to later lose to the government) here then you could back in the USSR (as the Beetles said, you don’t know how lucky you are:).
@Kalushkin,
Beetle were pro-USSR, saying how luck they were to be in the USSR. “Imagine” is their dream of being in the USSR or new world order.
Most of my friends are savers and have not HELOC’ed except to use that money for other investments. A few of their parents who used BK to erase their debt. Most of the time the apple doesn’t fall far from the tree, but there are exceptions.
@Mike: I feel stupid for working and saving. I could have joined the herd and received free HELOC money, refinanced them into a first, had a long and big party, squattered for years (also saving the equility money and the years of free rent money), then walked away — non-recourse.
All I have to show for my hard work and saving are age, fatigue and devaluing savings.
A planned economy for who’s benefit?
Do what I did. Live out of a little van on the street and work your ass off for twenty years. If you’re lucky, by the time you’re to old to work you have saved enough to pay cash for a place to live someplace where property taxes are low, you can grow a little garden, and people still have their teeth.
If they forgive all the homeowner debt (I mean LOANowner debt) student debt will be next…you just know it.
People complain about the poor savings rate in this country. I can’t think of a better way to discourage savings than to forgive reckless borrowing. Combined with super low interest rates, this policy will make all savers look like fools.
Yes. The real danger of zero percent interest rates over long periods of time is that savers will simply stop saving. If everyone consumes and nobody saves, the economy will go to crap in a hurry.
Read the full paper on the eminent domain plan, to which Professor Shiller links, and you will find full replies to all of your queries. Current loan holders receive full value in the form of the condemnation awards. Governments pay nothing because the award money is provided by new investors. The solution is literally win-win precisely *because* the plan solves a collective action problem. Collective action problems create waste – in Shiller’s opening example, the waste of everyone’s standing when they could sit – and the gains had by solving such problems are nothing other than the elimination of waste. We are currently wasting value, ‘leaving money on the table,’ precisely because the securitized mortgage loans’ PSAs prevent current holders from selling the loans at fair market value as they wish to do. The eminent domain solution simply enables those sales. Again, read the paper and you’ll see that every objection raised here is already addressed in the plan.
Nice try Mr. Shiller
I know who’s lost his mind – and it aint Robert Shiller. Banks who lend on bubble-inflated land prices have deep structural problems with their risk management procedures – problems bordering on fraud. Of course they should adjust their loans back to the real market and renegotiate loans from there.
After hundreds of years, banks don’t know real estate bubbles burst? C’mon! They want to tie mortgagors down to 30 year leases on sky high mortgages regardless – then be bailed out when things go awry.
Guess where your true moral hazard lies, guys – and it aint with Joe Sixpack!
Lenders certainly have the greater moral hazard, but with bailouts, both parties now have huge moral hazard incentives. When both parties to a private transaction believe they cannot lose money because the government will bail them out, the risky behavior will escalate wildly out of control.
I saw Robert Shiller this morning on the news. I thought the exact same thing as many others here. My neighborhood which is top-tier ocean is so underwater, so many properties are in foreclosure, so many about to be because there are NO buyers (this is straight from personal experience right in my own region.) I see things just getting worse not better. I ask what are these people (and related institutions) trying to pump NOW to suckers? It isn’t working with me or my community at all. I smell another sad attempt at mass market manipulation the only problem is …there is no money, there are no buyers. My response to all this today is “Go sell crazy elsewhere.”
Anything prices above the conforming limit is in serious peril. 20% down is required and real income verification. There are far more homes priced in these ranges than there are people who can afford them.
You admit the banks will stick with the fantasy that they are sovent to the bitter end but yet you want to leave it up to them (or time) to fix the problem due to your mistrust of the Government and your belief that home/loan owners are crooks.
Seems like everyone is a crook in your paradigm.
None of the players in the housing bubble were without their share of blame. The banks were clearly crooked as they inflated a massive housing bubble to pass the losses on to taxpayers. The borrowers were somewhat less guilty, but many of them borrowed imprudently to obtain appreciation for HELOC spending. They were running personal Ponzi schemes they had no intention or ability of paying back. These problems should have been contained to the lenders and borrowers who were committing these misdeeds, but once politicians sought to bail both of them out, then politicians added to the problem and became just as crooked as the people they were bailing out. As the current system stands, both banks and loan owners can steal from all taxpayers with impunity, and there is not way for us the don’t participate in the madness to protect ourselves.
[...] No, explanation necessary, see this Irvine Renter post. [...]