24 March 2008

Should the Government Ease Foreclosures?

Senator Hillary Clinton called for Federal intervention in the US Housing Market problems, with recommendations of using $30bil to directly assist states, cities, and homeowners facing foreclosure. "That's why I'm calling for the creation of a one-time emergency $30 billion fund that would go directly to cities and states to address the housing crisis," said Senator Clinton (text of the speech published in the NY Times). "This money could be used to purchase foreclosed or distressed properties, which cities and states could then resell to low-income families or convert into affordable rental housing. It could be used to help neighborhoods with high foreclosure rates avoid increased crime and blight by investing in everything from police and fire support to graffiti removal and better lighting. It could be used by local agencies to provide counseling and refinancing to help families avoid foreclosure in the first place."

Is intervention a good idea? Let's be clear about why a financial institution forecloses on a property: because the debtor fails on repayment. Let's be clear why a debtor fails on repayment: because he/she lacks the liquid funds required to make the payment month after month. Let's be clear how this could happen:
  • Unforeseen circumstance This may include loss of income for an extended period of time or drop in income for an extended period of time, among other reasons.
  • Financial decisions that are risky This may include buying a house that one cannot afford (too much house for not enough income), spending on other things that put a mortgage payment at risk (e.g., stuff like TV's or automobiles), committing to an adjustable rate mortgage which allows the debtor to buy a more expensive property by lower payments for a period of time.
  • Inflation and increases in expenditures If general expenses for a household increase significantly more than income over a period of time, then there will be less income to devote to a "fixed" cost like a mortgage payment. This may include increases in costs for health care, vehicles, tuition for children, and other budget items which may be added as well as broader inflation of items including fuel and utilities.
Financial institutions involved in financing homes make their money from fees, from timely payments of their loans, and from minimizing their risk (including defaults). As more financial institutions transferred more of their loans elsewhere, more of their income was derived from fees associated with originating new loans, home equity loans, and refinances.

For the American homeowner, this is not to me a cryptic story of the "...unscrupulous mortgage broker..." preying on the unsuspecting renter who all of a sudden decides to buy a home. Nor is it those with home values now underwater, although clearly this is a horrible situation that many from the Bay area remember none to fondly from their last housing bubble in the Internet-inspired frenzy.

No, this is more to me about too many wanting too much. How many of us plan for 10-20% less income each year? I confess I do not, nor am I anything approaching fiscally perfect in my household. Yet there are levels of fiscal responsibility that each of us has to live with. For some, they are able to take on great risk with hopes of a big payoff in a business or an investment. For others, they take on not risk but simply greater consumption for a lifestyle that delivers happiness or lessens melancholy, however fleeting. For still others, they live frugally to a fault, never spending yet delaying their enjoyment of their wealth.

None of these are the right path toward long-term security and joy, yet each of these have their own downsides. Intervene in those downsides, and what does that say to all of us remaining. I remember telling my broker in the Fall of 2000 that I wanted to sell a stock that had reached $200/share only be talked out of it. I finally sold the shares a couple years later at $10/share. Would I like to sue to get that $190/share difference back? Sure, but it was my decision. No one did this for me or to me, it was me and me alone.

This may be too indicting, and as many things I ask for consideration in my lack of expertise in this area that I type away in. One man's thoughts and opinions, for your consumption. And as always, eager for any thoughts on the matter.


Blogger joseph said...

There was a time in late 60's where the academics thought they could fine tune the economy and never have real problems again. They instigated wage and price controls and a few short years later, we were at 20 % interest and 13 % inflation. I hope we aren't headed for anything like that.

6:15 PM  
Blogger Astin said...

I'm not entirely sure I get Hillary's plan. It sounds like she's advocating the government buying up foreclosed homes and reselling them or converting them. If this is the case, it make a sort of sense in that they'd likely make a profit on this, and are really the only institution large enough and unfocused enough to validate it. It sounds somewhat contra to the historical stance of the US Government though.

But if she's advocating doing this to pull peoples' asses out of the fire, then it's a terrible idea. It steps all over the free market and a free economy and sends a terrible message to those who exercised fiscal responsibility. I feel bad for those who lost it all due to unforseen circumstances... I have much less pity for those who overstepped their means.

4:34 PM  
Blogger The Wife said...

I'm kind of with you. With the exception of a few unscrupulous mortgage brokers who may have preyed on the known ignorance of certain people, I'm a huge believer in fiscal responsibility, trying to live below your means (ask DrChako how painful that is sometimes), and "if its too good to be true, it probably is".

People should have been suspicious that they couldn't own a house years ago, but suddenly were able to, with no real change in circumstance. And if you are teetering on the decision to buy a home and its the interest-only vs. traditional mortgage product decision, the answer probably should have been "no".

But then, we are a two-income family. Maybe I don't have a grip on reality. But then again, we used to live on 15% of my income alone. Maybe I do.

6:21 PM  
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