Over at Beat the Press, economist Dean Baker describes his plan to deal with the wave of foreclosures:
1. Gives homeowners facing foreclosure the option of renting their home for as long as they want at the fair market rate. This rate is determined by an independent appraiser in the same way that an appraiser determines the market value of a home when a bank issues a mortgage.
2. The proposal requires no taxpayer dollars or new bureaucracies. It would be administered by a judge in the same way that foreclosures are already overseen by judges. It simply changes the rules under which foreclosures can be put into effect.
3. The proposal does not bail out in any way lenders who made predatory mortgages or made risky gambles in the secondary market.
4. There are no windfalls for homeowners. They will have the right to stay in their house, but will no longer own the home. This means that there is no real incentive to abuse the program. The plan would be capped at the value of the median house price in a metropolitan area, so it will not benefit high income homebuyers.
5. Rents will be adjusted in later years by the Labor Department’s consumer price index for rents in the area. If either the owner or renter believes that their rent is unfair, they can arrange, at their own expense, to have the court make a second appraisal.
6. After the foreclosure, the mortgage holder is free to resell the house, but the buyer is still bound by the commitment to accept the former homeowner as a tenant indefinitely.
7. By allowing homeowners to stay in their house as renters, this plan will help to prevent the sort of blight that often afflicts neighborhoods with large numbers of foreclosures. Homes will remain occupied, and long-term renters will have an incentive to keep up the appearance of the property. This should help to sustain property values for whole neighborhoods.
…despite my conflicted thoughts about personal responsibility, I’ve come to put most of the blame on the banks and mortgage brokers (pushed by a ravenous Wall Street securitization machine), rather than the regular folks who got in over their heads, even if those regular folks suspected they might be reaching too far.
It comes down to this: there’s a massive information disparity between the two sides at the mortgage table. The banks and brokers knew damn well that the people they were putting in these houses couldn’t pay them off if the market turned (and whether or not they thought the market would utterly collapse as it has, these financial types know a market always turns). But they didn’t care because they knew they could unload their dirty deeds on some sucker running a pension or hedge fund via the magic of the mortgage-backed securities and collateralized-debt obligation markets.
Ma and Pa Smith, sitting across the desk from Broker Bob, may have worried about whether they’d be able to pay the adjustable-rate mortgage when it reset in four years, but who doesn’t–even if they can afford it. All thirty-year commitments are to some extent a leap of faith, and you’re some kind of sucker if you believe the Smiths weren’t being cajoled and smooth-talked past their worries by the brokers.
This isn’t to mention the outright criminality on the part of the brokers (and yes, the crimes go all the way up the chain to the banks, Wall Street, and the credit-ratings firms–but that’s a somewhat separate story) that was rampant in the boom years. Fudging people’s incomes or conning them into refinancing or giving them ARMs they didn’t want. Want to know the extent of the shadiness? This Wall Street Journal investigation from late last year found that at the peak of the boom, 61 percent of those who got subprime mortgages likely qualified for much lower cost prime loans. Did those home buyers put themselves into higher-cost subprime notes or were they deceived into them? Guess.
Anyone who made ninja loans, loans based on absurd market valuations, or cajoled people into taking on more debt than necessary (which makes it more likely that they’ll default) deserves what he or she gets. As I’ve noted, even prize-winning economists aren’t very sophisticated when it comes to their own investments. If we are to have caveat emptor, then we must also expect caveat mutuor. The good news is that the Obama administration’s plan incorporates these principles, if not the precise plan:
But the key to Obama’s plan is the bankruptcy provision. Until now, every government-enacted plan to reduce foreclosures has relied on incentives to encourage the banking industry to keep people in their homes. As Drum notes, bankruptcy is the stick behind those carrots. Obama is supporting a bill in Congress that would enable bankruptcy judges to reduce the amount a borrower owes to the present value of the home. The beauty here is that investors who own the mortgage securities, not taxpayers, will have to eat the losses. In short, investors will be held responsible for making a poor investment….
If Congress can’t pass bankruptcy law reform, the government should simply force banks to modify loans. The strategy would be simple–either keep borrowers in their homes, or return your check from the federal government.
“Ohio Congressman Marcy Kaptur and economist Dean Baker have some smart ideas,” Nichols writes. “They argue that the proper role for the federal government is not to fund mortgage negotiations but to insist that banks–many of which have already collected billions in taxpayer dollars–carry them out.”
(You might remember Kaptur as the congresswoman who urged people to squat in their homes if the banks botched the paperwork).
I’ve said this before, but it bears repeating: lots of people are going to have to eat shit sandwiches before this is all over–the question is who should do so, and how much.