Taxicab Recession
Last year, when I had just flewn into SFO after a call-back interview, I took a cab right back to Berkeley. The cab driver turned out to be an Armenian. We struck a conversation about this and that (you know, the home country, having sex with sheep, etc.). He then couldn't understand why I'm not going to plop down money to buy a home right away. Apparently he owned a $700,000 house in Livermore.
Well now Chuck Schumer is calling for Federal aid to home owners who are having trouble paying their mortgages. At the risk of out Tom Fletchering Tom Fletcher, I just really don't get this. Why? I mean I don't expect everyone to be an econ major. I don't even expect people to make wise decisions (see Tversky and Kahneman). And yes, there was some shady lending practices by financially savvy institutions who shouldn't have been exploiting a family's dream to own a home. BUT, despite all that, I don't understand why the Fed government has to bail out people who made a stupid decision. I just don't get it.
Well now Chuck Schumer is calling for Federal aid to home owners who are having trouble paying their mortgages. At the risk of out Tom Fletchering Tom Fletcher, I just really don't get this. Why? I mean I don't expect everyone to be an econ major. I don't even expect people to make wise decisions (see Tversky and Kahneman). And yes, there was some shady lending practices by financially savvy institutions who shouldn't have been exploiting a family's dream to own a home. BUT, despite all that, I don't understand why the Fed government has to bail out people who made a stupid decision. I just don't get it.
posted by Armen Adzhemyan at 10:21 PM
29 Comments:
I agree. There should have been tighter regulation of these subprime lenders from the beginning, but now that the damage is done, federal ail just bails out both stupid parties (the lender and the buyer).
Foreclosure + bankruptcy may really be the best option. The home-owner escapes a financial burden he couldn't weather, while the shady lender gets stuck with a house whose value has necessarily dropped below the mortgage (if it hadn't, the owner could simply sell and walk away rather than keep making payments.)
Can we also perhaps have a moment of silence (or maybea hearty chug of beer) for Kurt Vonnegut? He's surely one of the great counter-culture writers of the 20th century -- but also too-often typecast as this off-the-wall misanthrope. If you read some of his more autobiographical novels, as well as the short stories, he has some pathos too. Everyone talks about Slaughterhouse Five, but Welcome to the Monkey House is up there with Updike and Fitzgerald among the great short story collections of all time. If I wasn't going to be a lawyer, I'd be installing storm window fixtures in Hyannis Port...
Aside from typical American fixation on homeownership, I think there are two serious answers to your question. Whether either is a good justification in this case is an empirical matter I don't pretend to be able to answer.
But here goes: there are two constituencies aside from the homeowner and the loan originator that might be worthy of protection from the harm associated with widespread bankruptcy and foreclosure. First, home loans typically don't remain with the originating lender in a modern housing economy. They are securitized and repackaged in a variety of ways. Some of these ways (e.g. exchange-traded real estate investment trusts) invite investment by people who have very little ability to estimate the risk of the underlying loans. So that's a constituency that has very attentuated responsibility for the problem, but which is likely to bear substantial costs from widespread default.
Second, precipitous drop in value in any one section of the market can force investors to liquidate positions in other sections of the market, so a collapse in the sub-prime mortgage market (and associated securitized loan markets) could in theory cause a panic in other capital markets, which could hurt all of us.
I happen to think this problem was predictable, in view of the types of repayment schedules sub-prime (and other) borrowers have been offered over the past ten years or so. I think Congress should have acted a long time ago to prevent this problem. And I don't have all that much sympathy for the parties most directly involved. But that may not mean that a bailout is a bad choice.
Re: Vonnegut. A moral giant of American literature. He will be missed.
Issac,
I think that you are wrong about the attenuated connection between repackagers and the shady lending practices. The repackagers weren't forced to buy the motgages and their decision to securitize them in effect gave the go ahead to the lending institutions to continue with their overly aggressive tactics.
Also before one considers the short -term economic consequences of allowing widespread foreclosure, one must consider the long term consequences of completely changing the incentives in the lending industry by bailing them out. Even with tighter regulations eventusally they will find a loophole and become over-aggressive expecting that they will be bailed-out again. Once you take the market mechanism out of the picture government will always be necessary for oversight
We wouldn't be having a huge subprime mortgage problem if the voters hadn't managed to drive up the price of a 1 bedroom home in Compton to 400k. California's prop 13 property tax initiative is one of the greatest examples of why we shouldn't have ballot initiatives. A bunch of rich real estate developers managed to convince joe shmoe homeowner to pass a law that would save individual taxpayers a couple thousand a year if they stayed in their current home and as a little side effect dramatically reduced the number of homes in the market and pushed home prices to these insane levels. It looks like the developers were clever enough to realize that joe shmoe would never understand that saving a couple grand in property tax would imprison them in their own home and starve their local public services of much needed funding.
1) My first point was that the market for residential real estate debt consists of multiple levels of investment and repackaging. The degree of information available to each level of purchaser is an empirical question. The attenuation of responsibility for investors at each level is an issue requiring the application of moral judgment to complex empirical facts. Entrepreneurial firms that buy and sell individual notes representing sub-prime debt are in a different position from large firms that buy, sell, or compile large pools of debt. Both are in a very different position from individual investors who buy shares in exchange-traded REITs or whose pension plans invest in traditional REITs. I don't have enough information or experience to say whether any particular group of investor should be held to account for the unscrupulous tactics of loan originators. My comment wasn't intended as a defense of any particular set of loan repackagers. Rather, I was just trying to make the observation that many different kinds of entities and persons make up this chain of ownership--and under some sets of facts and moral intuitions we might be willing to bail out the undeserving in order to protect the (relatively) innocent.
2) Allowing the entire market to suffer the consequences of sloppy or unscrupulous loan origination and underwriting policy MAY discipline originators and underwriters in the future. But it might not. Again, I believe this is an empirical question. Markets are not children who must "learn their lessons" and who will grow into responsible maturity with firm, consequences-oriented parenting. The people who originate these loans are employees, many of whom either work on commission or are evaluated on the basis of how many loans they write. The people who create underwriting policy are responsible to their own shareholders and must make quarterly reports. Suffering in other sectors of the market may or may not inculcate responsible long-term policy formation in the residential real estate debt markets.
Also, as a historical note, a bailout wouldn't "completely change the incentives" of the capital markets. The idea of unsupported, self-disciplining markets is appealing, but it is a fantasy. Before the federal government became rich and powerful enough to bail out markets, private bankers used to try to do it. Refusing to EVER bail out markets might seem doctrinally pure, but it only makes sense if you ignore a gigantic set of agency and information costs, as well as the interdependence of capital markets--and the historical reality that unregulated, unsupported markets have tended to be chaotic and costly.
I would like to agree with 10:36.
Ballot propositions are one of the most anti-democratic institutions in this country. On their face what could be more democratic than a populist policy making system, but in reality people are too stupid (Euphemistically bounded rationality) to really make tough interconnected policy decisions. Ballot propositions are created by special interests and are won by the biggest pocket books, or the smartest advertisers.
Done with my rant
I agree that Prop 13 was a terrible idea. However, it doesn't explain the sub-prime debt issue, which is a national rather than a California-specific problem.
In a way it does, Isaac. Granted, home prices depend on a whole lot of things (e.g., prices plummeting in the early 90s), but when a measure limits the supply of available housing, it tends to drive prices up. The higher home prices led to the crafty lending practices. Interest only loans? WTF? I mean how stupid do you have to be to agree to that? "Yeah sure, I'll give you all your money up front, and then when the shit hits the fan, you can just take my house to recoup the rest."
I forgot to mention, when I told the cabbie that I won't be able to afford a home immediately, he said, "Oh, my niece does home loans. She took care of ours. I don't know what she did, but the payments are really low." Note, this was a $700,000 home in Livermore with low monthly payments.
Two responses, Armen. First, I don't agree that high prices lead to questionable lending criteria. RISING prices do. Lenders and prospective homeowners were "comfortable" with interest-only and reverse-amortization loans because they saw prices going up steadily and thought that would continue. Stupid, but there you go. Higher prices alone wouldn't do the same thing. It's easy to see why Prop 13 would make prices higher--not as clear why it would make them rise faster. Second, I repeat: California, while large, is not the same as the United States. Is the debt problem greater here than it is in other parts of the country with comparable real-estate values? Do we have some reason to think that foreclosures in CA triggered a national wave? Maybe--I haven't seen that information myself.
Sorry--strike "and reverse amortization" from my previous comment. I thought it meant something different than it does. My bad.
10:36, with your critique of prop 13, are you implying that people should be forced to move out of their house because they can't pay uncapped property taxes due to sky-rocketing property values? is widespread turnover a good thing?
If you're going to get hypertechnical about it, it's NOT really a countrywide (pun intended) problem either. Even in quickly developing cities, like Phoenis, home prices are not rising as fast as California or NY. Hell I think people in Nebraska would fall over laughing if you told them the median price of an average family home in the Bay Area.
The poor innocent homeowner being forced to move because of the yuppie invasion is exactly what convinces so many people to support prop 13. Yes, the tax on a 400k is going to be pretty damn high, but that home wouldn't be 400k if it weren't for the lack of homes on the market.
I am much more concerned about the people who can't get a home in the first place, or are forced to take some insane mortgage to get one, than people who are forced to sell their massively overvalued home due to rising tax rates.
Look at TX, they have significantly higher property taxes yet people aren't losing their homes. Why? Because you don't have home prices quadrupling every couple years.
i don't mean to be all chicken-and-egg with you, but property taxes were rising rapidly BEFORE prop 13 (that's why it was passed), and before prop 13 locked up the supply, as you say.
you forget about demand; i know i'm going to draw flak on this one, but the CA coast is like the best place to live in the US. the prices are so high because so many people want to live there (even if the schools suck, due to prop 13). You go inland, and the house prices drop dramatically.
Texas is no comparison. It has no state income tax, which in CA can be as high as 9%. Also, in places like Houston, there are basically no zoning laws, which can be used to control housing. Finally, would you want to live in Texas?
i don't understand why people who want to buy houses now are more important than people who have own houses.
Property taxes are progressive,meaning that they take a disproportionate amount of money from the wealthy. Capping property taxes is a regressive move and it makes home ownership much more difficult for the middle and working classes (At this point even difficult for professionals). If prop 13 were really passed because of egalitarian concerns or a desire to not kick granny to the curb, than property taxes would be uncapped and middle class or working class families would be given a state tax deduction to make up for the higher property tax. Voila
I’m not here to praise prop 13, rather I’m responding to the statement that forcing people to sell their homes is desirable to keeping prices low, without acknowledgement of the upward force demand puts on prices. Your plan would be fine by me, but it the above critics would object that it would lock up the supply.
Armen, as to your pun. None taken.
Property taxes are "progressive" with respect to accumulated wealth but not with respect to income. This is a very important distinction in certain parts of the country. In Vermont, for instance, you have a lot of families that we call "land poor." This means they have large land holdings from generations of farming, but can barely make a living. For them, property taxes are hugely problematic, tending to force the sale of land. Of course, we might think that's appropriate, but it's not so simple as poor v. rich.
Its far from socially efficient to allow the landed poor to hold onto their inherited land for centuries, just as it is socially inefficient to allow huge intergenerational wealth transfers. Prop 13 and the impotence of the "Death" tax unfortunately cause great to the poor. (I don't personally care about the poor, but I do find inefficiency to be distastfull.)
Sorry to post this here, but has anyone asked the registrar why the classes aren't posted yet???? I'm too afraid to ask her. As I recall, we got a note about a month ago saying that classes would be posted on April 4 or 5.
Anyone want to discuss Don Imus? Is what he said that obviously a racial remark? It seems like the public and the media have really over-reacted just a bit. I feel like the media by putting so much focus on the comment is what has really caused harm to the Rutgers "ladies"
Pure political move. He gets credit in some circles for being "on the side of regular Americans" while not having to deal with the reality of having to pay for such a crazy idea.
I mean, come on - it's not like they are S&L's.
Hey, Armen, I'm not a fan of spelling flames but would it kill you to write "rescission"? You're not a 1L anymore and you need to set an example.
But I mean recession, as in a downturn in the economy. I don't get how rescission fits in, plus it doesn't rhyme that well with confession.
I didn't know we were in a recession. (Are we?) I thought you meant rescission, as in contract-do-over for people who signed stupid contracts. Forget I ever mentioned it. Regardless, you aren't a 1L anymore and you still need to set an example. Just not on this this issue, where your spelling was correct. We will be watching.
What was the case where the Supreme Court held ballot propositions were not unconstitutional?
Armen -
The fallacy in your analysis is that if the buyers get a bailout, they weren't stupid to buy the house. Their decision can only be called stupid if they are not bailed out; since they will be, either directly or through changes in foreclosure law, they were not.
Thus, there is no bailout of stupid people and your argument fails.
Post a Comment
<< Home