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President Obama on Oct. 24 announced yet another housing bailout.
This time, borrowers who are underwater by more than 25%, are on time with their payments, and have Fannie Mae/Freddie Mac mortgages dating before March 2009 will be allowed to refinance their home mortgages at cheaper rates.
That looks to me like subsidizing the terminally stupid.
Housing loans are non-recourse in most states. So if you're underwater on your home loan by more than 25% and you're paying an above market interest rate of say 6% on your loan, you're paying around 10% of the value of your house to the bank every year (including principal) while being unable to move. Since rental yields are in the 4% to 6% range, you'd be much better off walking away from the house, taking the hit to your credit rating, and renting for a few years.
The problem with all these federal schemes to assist underwater homeowners is that they prevent the market from clearing. That leaves an overhang of properties with owners who either cannot pay the mortgage or have a mortgage hugely larger than the value of their home.
In a free market, a tsunami of foreclosures would have occurred by now, and buyers could be sure that a price bottom had been reached. But in today's market, even though the S&P/Case-Shiller 20-city home price index has shown signs of bottoming out, buyers know there is a lot of artificial support being applied and have no assurance that the market won't lurch downwards again after they have bought.
Yet, economically, conditions are right for the housing market to bottom out.
Third-quarter gross domestic product (GDP) was up at a 2.5% rate, and, more importantly, private sector output rose at a 3% rate. That isn't a raging boom, but it shows that there is no immediate prospect of the economy sliding back into recession.
Interest rates are close to record lows. House prices, having returned on average to about 2002 levels, are now as affordable as they were at the bottom of the last downturn in the early 1990s.
The rental market also is showing considerable signs of strength. Economic recovery and an uncertain housing market are driving people into renting and pushed rents up. That, together with the overhang of pre-foreclosure homes, is now the principal obstacle to further housing recovery.
Of course, in the more economically vibrant areas of the country, such as the Mountain states and Texas, where unemployment is low, both home purchase and buy-to-rent deals are very attractive for those who can obtain mortgage finance.
The U.S. Federal Reserve is tilting the playing field in favor of those attempting to get mortgages by keeping interest rates ultra-low. The Senate also has voted to tilt the playing field in their favor, by raising the limit of Freddie Mac and Fannie Mae guarantees back to $729,750 – an absurdly high amount for a program that was meant to help the middle class.
However, the banks themselves are being very cautious, restricting lending to those well within traditional parameters of no more than an 80% loan to value ratio and no more than 25% of income consumed by mortgage payments. That helps the rental market, by preventing well-qualified renters from buying homes, but it does nothing for housing market recovery.
Given the restrictions on mortgage availability and the continued overhang of foreclosures and pre-foreclosures, housing stocks remain unattractive. Their land inventories remain a burden and the pace of new home sales remains extremely depressed. Further, even when the housing market recovers it will do so first through the absorption of existing inventory, so the demand for new building will remain low.
A few weeks ago I recommended apartment stocks on the basis that demand for rentals is increasing, rents are increasing, and finance remains cheap. However, they remain highly leveraged and currently sell at a rich multiple of both book value and earnings.
The housing market is bottoming out and if you can get a mortgage, a house is an increasingly good investment. But for equity market investors, there's not much to go for.
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So it's a good idea to walk away from your responsibilities and your house simply because values have dropped? What happened to personal responsibility? Walking away from your debt is never a good idea. Not only for your credit history/score, but for simple moral value.
Dan I don't understand it myself. Three out of 4 home owners in my area are doing just that – walking away from their mortgage. Number one reason for this is because they lost their job and they no longer can afford to make the mortgage payment. Our government has come up with all these "Fanny Ass" programs knowing they will not work but it save the politicans their face. With the drop in property values of 40% or more throughout the United States since 2006 and if you put 5% down and your still young enough to rebuild your credit later walking away from your mortgage and letting the property go into foreclosure seems to be the new wave or attitude for now and in the future.
Bravo!
It's nice to see comments from a person of integrity who values living
up to his commitment over personal gain.
I cannot believe that you have written this commentary. I am one of these homeowners that is doing the right thing. I have signed up to purchase a home for a stated price, contracted to pay for a set number of years, and have no intention of "walking away" due to a bad investment. However, because I am upside down (I put 35% down on my home when I purchased it, and since then, the market has fallen drastically) the bank will not refinance my loan. I have attempted several times to refinance, to take advantage of lower interest rates, to make the payment a bit more palatable, which would provide me more discretionary income to help the ecomony. Since the banks know they have me by the proverbial "testicles", they will do nothing regarding the refinance. This "program" would help significantly, and the only person that it would hurt is the banks future profits, that they feel they have locked in. Please don't tell people to not honor their commitments. If you purchased a stock for $100 per share, but then it fell to $50.00 per share in a two year period, should you be able to walk away from that investment, and have the brokerage house or the company accept your loss?
RIGHT ON. It seems media is controlled too much by conservatives.
Don't you mean it's controlled too much by liberals? Can you elaborate on your comment and what you mean by that?
Rob, your 100% right. The banks have us by the balls and will do nothing for us.
You are quite right.
Only your example with the stock does not work. The broker would be happy if you leave the stock to him. That is unless you are heavily leveraged on margin and walk away after a margin call telling you you are under water.
I understand that Mr. Hutchinson believes what he is writing here, but I do not think it fair to subscribers to suggest that the economy has no immediate prospect of sliding into recession — without offering a caveat. The only thing maintaining current levels of GDP is massive government spending, which is non-productive, and which is clearly unsustainable.
Personally, given the big picture confronting us, I am at a loss as to how a downward spiral can be avoided. I think we need to be upfront with each other about how tenuous the situation is. Maybe investment in a house will pay off no matter what happens. Or maybe not. What are the odds? I am not at all confident.
Your readers are extremely vulnerable to you. Let's try to be more direct in making sure people understand the very real uncertainty.
I think you are a liar
Despite the cold 'statistics', your thesis is wrong and wrong headed. After Katrina, some of us moved residences to other states and bought houses before the bubble burst. All normal parameters were applied to qualify me and get a new house in the new state. It wasn't stupid at all. When the old house's tenant lease expired, I sold it for maximum profit. You want to penalize me for continuing to pay my mortgage when valuations on an illiquid asset have tanked, not my fault. More than an investment, my house is a home, home base for my business, and retirement community-based.
I actually refinanced out of an ARM, seeing the impending housing crash. Unlike you, I do not abandon contracts (mortgage or otherwise) that become inconvenient. That's the answer for irresponsible conservatives who don't consider the ramifications–poor credit rating, drain on cash in lieu of future loans, moral turpitude, and loss of the permanent homestead aside from investment considerations. Is that also the motivation for gross cut/cap/and balancing talk in congress by TEA proponents. `
Your option to abandon the mortgage doesn't occur to those of us who are responsible citizens, unfortunately caught in an economic squeeze, considerate (if not moral) contract signers and proud consumers of big and small purchases.
I Am "terminally stupid" for buying a house in an area that has now been riddled with fraudclousures due to banks lying and approving people for loans they should have never got, which in turn has now left me 100's of thousands of dollars underwater? A rigged system is my fault? Quit blaming the victims. Stories like this written by people like you don't help anyone. Learn about the problem before you spew more of your banking bs on people. How about you write a story about how the only fix for this problem is principal reductions and how the fhfa (ie fannine and freddie) refuse to allow their loans to participate in principal reduction programs like the fhfa short refinance, yet at the same time they are suing 17 bank (more on the way) for mortgage related fraud. Its fraud for the investors, but when it comes to making the tax paying americans who live in the areas where much of this fraud occurred its no longer fraud its just a "free market" problem. Write about that..idiot.
In most higher end real estate markets in the United States are riddled with "fraudclousures"/foreclosures. For anyone owning a home today they should never put the house on the real estate market and expect a decent price for the property. In the entire county of the state where I live 3 out of 4 houses that are on the market at any given time are foreclosures or as the press puts it "distressed" properties. The way I see it the banking system as it is known today has to completely fail before the housing market will ever recover in the United States.
Cas , you did nothing wrong but get got up in a big ponzi scheme. Nothing more than a big " pump and dump" If you were in the stock market at least you would have some legal recourse. Responsible people lost lots of money. Anyboby who disagrees with you are one's who didn't lose a thing. They would be upset if it was their money lost. Nobody expects their investment to rise every time. But when your lost is fifty to sixty percent,I assure you there was fraud involved. People who put down large down payments on their home should have their rate dropped to two percent no question asked. Irresponsible homeowner's should walk away as they have not lost anything
Terminally stupid? Just walk away from your house? Pack your kids up. Move to an apartment?
Spoken like a person without understanding of how so many working people are having to operate.
Examine your intentions. Do they unite or divide?
Sincerely
Ricardo Trinidad
Hutchinson doesn't seem to understand the magnatude of the problem. By allowing responsible borrowers to refinance, it will create a more favorible situation to both parties since it is always better to have extra money in one's pocket. The bank benefits as well by having a more stable borrower. Fewer people benefit from a foreclosure or short-sale, with the bank taking it in the shorts most. Open your eyes! On the local front, why is city planning issuing out so many permits? This is the time to add significantly more red tape! By shoring up the "used" market, a new bull market will eventually be created in the "new" home constructions market.
Obama's Housing Plan: Subsidizing the Terminally Stupid
Who are Terminally stupid? People who are paying mortgage even though their home value has gone down?
Should they stop paying the mortgage? Leave and let more homes on market?
Of course you mention that banks are also restricting mortgages otherwise more people will buy the home and inventory of homes will go down But you are not calling banks stupid!
Obama did not create this MESS Banks did.
What about houses NO fannie mae and freddie mac mortgages, Banks like Wells fargo do not want help a good customers paying the mortgages for more than 5 years, ARM interest. They prefer foreclosure your home lossing money. Obama must extend the program for others with mortgages in comercial banks, like Chase, Wells Fargo, Bank of America. The most abusive banks in America. The people only want market interest rate, but BANKS are refusing it.
This article is garbage. Please remove it.
Actually, the market has by no means bottomed out. Even the prices of today are grossly excessive. Years ago, there were rough rules of thumb on rent and ownership. A wise renter did not lay out more than a quarter of monthly gross pay for housing. Otherwise, there wasn't room in the budget for much else. A home buyer would do well to think in terms of a year's pay for the house. However, since then, the idea has risen that a house is an investment rather than a consumer durable. So, people have pumped money into housing that doesn't earn its keep rather than in savings or investment that pays a return, interest or dividend. All a home-owner gains is if he sells at a higher inflation-adjusted price than he paid. If not, he loses out. Worse yet, he's stuck with the house. We have seen this a lot lately. People lose their jobs. They might find a new job if they move. But, they can't move until they sell their house. Meanwhile, the payments are due. Bimeby,they lose the house in foreclosure. Then, they can move, but they've no money to pay for it. A vicious circle, all because the music stopped and the stools were occupied. The housing market has a long way to fall before it reaches equilibrium. People know this, which is why they don't buy what will be cheaper later.
WOW! Reading the comments here some of you aren't getting the same message I get. Maybe I have a different outlook due to the fact I'm facing a modification through making home affordable right now. I'm stuck in a house with a loan of 320,000.00 dollars, with a market value of 170,000.00 dollars. The modification offers to date has been a lowering of the payment by about $300.00. The interest rate is a 5 year variable rate, going fixed after that. Sounds too good to be true? Right, it is! Think about it, under this mod. program the payment is up to 33% of your gross income! Not 25% as stated above that the banks are willing to loan at. Now for the real problem being faced by people that take these mods. is that 5-10 years from now the picture will be no better! Another words if I take the loan mod. and make the payments that are 55% of my net income, praying that inflation stays down and I don't end up in foreclosure again, and I try to sell my house at the end of the 5 year adjustable rate. I will still be up side down! All the government is doing is offering an extension of what I'm facing now! So, I can do one of two things at this point. Take the modification and think of it as rent until the payment is higher than local area rentals and then walk away or if allowed by then do a short sale. Or walk away now or do a short sale now! I didn't set up the housing market crash, the banker's and the government did! It was all in the plan to get rid of the middle classes! My home was an investment, which now is no longer true! The only real way to solve this problem is to make the banks fix what they broke. They need to lower the loans to current market value and rewrite peoples loans! The banks should be loosing for what they did, not the people who worked in good faith getting a loan from them! So I agree with the article! If you're up side down in your home than you need to do something about it or plan to keep making the payments and die there! That is if you can keep making the payments when inflation skyrockets in the next couple of years! Good luck!
Your thought are questionable at best just like those that said that the reason that the government should not do this because it would potentially stick the taxpayers with more liabilities. This is false because the taxpayer is already on the hook for these loans as they are already Fannie or Freddi loans. You are correct that the housing market is the most affordable it has ever been, There are a lot of people such as myself and others that have responded that did the right thing. Put cash down, and in my case aggressively paid down part of the mortgage which is the only reason that I am not underwater right now. But I am locked in to higher than prevailing interest rates because the banks (many of them that were at the bottom of the problem and have received the most from the gov't.) make it impossible to refinance. We are caught between having had to pay inflated prices because of gov't policies and artificially high interest rates
In fact, I would go a step further by taking every high interest Freddie or Fanni loan and repricing it to current rates based strictly on credit scores. For example if you had 800 credit scores and the current interest rate was 5.25% and the current rate is 4.25% for that credit score, reprice it to that rate with out the hassles of a complete refinancing. This is only true if the people are current. They would be less likely to walk away and the monies would be free to be spent in the economy. Some of the cost would be returned to the gov't in the form of higher taxes as interest rate deductions are lost because of less interest paid. And since people would be less likely to walk away because they are no longer paying 10% of the homes value each year but closer to 5%
Does this solve all the problems? No. People that are too far underwater and cannot make payments are still likely to walk. But the numbers would be far less and much more manageable. The tweeners would likely stick it out and by continuing to pay monthly will eventually get to where they are no longer underwater. Some might use the extra proceeds to pay down principle and others will rebuild savings or buy things stimulating the economy. It buys time for the economy to recover and helps stimulate it in a lot of ways. It is the equivalent of a soft landing. It may draw out the bottom a bit but it would lessen the numbers that would bail lessening the overall impact and saving the government a lot of money while increasing taxes (lessening of mortgage deductions and increase spending expanding the economy). The fact is that the government is already on the hook for all these loans. This way, the will get stuck with less of them and the people that do things right will be able to find a way out of this mess.
I WAS a responsible homeowner back in 4/09 when I applied for a HAMP…Loss of a roommate to a convalescent home, increased property taxes and increased credit card interest rates (Dodd-Frank) hit at the same time. I was paying my mortgage at month's end. Needless to say, after retaining a lawyer, attending court-ordered mediations, resending several HAMP applications well within the bank's due date deadlines and deciding to represent myself, I now have a modified loan as of 11/11. Because this was dragged out so long, my house is WELL under water to the tune of 100k…of course I have to pay the bank/attorney fees- added to the back end with an increased mortgage amount (now that I can afford it). Did I mention the new mortgage payment is $100 lower than one of my pay bi-monthly checks? They're trying to set me up to fail…
Me, too. I am under water with my mortgage but I have no intention to breach my contract. I am old fashioned.
It would not cost the government any money if I could refinance at a lower rate. It would cost the bank but it would also reduce my risk of default if I paid a lower rate. So that would be a win-win-win situation.
Some of the worst enemies of any market are subsidies and monopolies. Both exist big time in the US. That's where the government needs to get active.
I seem to be in same boat that you are in except that I am not sure that I will survive long enough to pay off my loan. Age 82. Will continue to pay cause renting is almost as expensive as paying. Can't even claim tax deduction because my payments come only from retirement and SS.
Still keep getting calls from those who want me to pay to try and get my payment reduced. They want money up front-scammers.
This is not "just subsidizing the terminally stupid" as you imply. It is what needs to be done. I would go one step further and make it almost automatic. Have to realize that the government is already on the hook for these loans and the lower interest rates are available because that is the market. It is just that one group has been blocked from these rates. These are people that have kept up payments even though their houses are under water. Does this lengthen out the bottom? Probably a bit but it also makes it so that a lot of home would no longer be walked away from. That would put in its own bottom as the oversupply would disappear. Some that are severely underwater would still walk away but the gov't is already on the hook for these loans. The majority would not. And as people continue to make payments, eventually they are not under water. This would free up cash that would be used to pay down the mortgage, pay down other debt, spend or save. There would be less pressure on rental property keeping rates down putting more money into the economy. All would be good for the economy. Gov't tax receipts would go up as mortgage deductions would go down. To the extent that owners spent the savings, the economy would be stimulated further increasing tax receipts of Federal, State and local governments.
This is one of the only stimulus packages that actually reaches consumers It is one of the only approaches that makes sense as it reduces the drag on the economy that the present housing market is. I would go a step further and make the changes almost automatic resetting rates based on credit scores rather than full refinancing. That often keeps people from doing things even if there is a benefit.
Martin, up to now I had a lot of respect for your commentary about just about everything. However, after reading this, I'm now convinced you are just another fat cat that doesn't get it. A lot of people want to do the right thing. I don't see the rich republicans doing anything because they don't care about the little guy.
The banks, like the borrowers, made a bad investment. But the contract between the homeowner and the bank is bi-lateral, not unilateral. Why is it that only the homeowner has the obligation to perform, but not the bank? In Arizona, if I don't pay the bank back, the bank has agreed that they will take back the house and forgive the difference. Why is it wrong for me to ask the bank to honor its agreement with me?
Not sure what Global Investment Strategists do for living,but comments by Martin Hutchinson are way out of line. He is entitled to his opinion, however suggestion to walk away from your responsibility does not sit well with me. If you would do that in Australia, the debt goes with you. So you are not any better off. Then with advisers like Mr. Hutchinson and Financial Institutions with names like Fannie May and Freddie Mac all I can say is "good luck".
One thing I do know We are not in this mortgage mess without the BANKS allowing what happened before the meltdown to exist! I understand what some may not about the housing market. In order for a broker to offer the loan the banks had to offer them! Mortgage Brokers did not make these risky programs it was the BANKS. If the banls wanted to stay responsible they would have stuck with 80% LTV and 20% down we would not be in this mess! The more skin in the game the less likely a person will default. I have been in my house for 8yrs and I am in florida we are upside dowm like a mug!! I love my house but I am not in love with it! My house is a liability not an asset! (making a mortgage pymt not receiving a pymt) Before I let my family sink you better know I will walk away. A hell of a lot of fraud was committed by the banks it takes two to be commited not one. So if you have to walk away!
I don't think you made many friends with this article. You did not give enough thought to what you were writing. To walk away from your responsibilities is obviously not the right thing to do. I am glad these people took the time to speak up.
I have been called many things, but 'terminally stupid' is not one of them. A contract is a contract. Would you recommend people walk away from every contract when all of a sudden the contract becomes burdensome? Despite my dislike for the advice to just walk away, I do agree that allowing the housing market to bottom out on it's own is the wise thing to do. It was one of the reasons why I supported John McCain for President. His prescription was harsh, but we would be done with all this recession, double dip news and on our way to recovery. All this propping up just prolongs the pain and the bad news.
Terminally stupid huh? Thanks for the insult. Just walk away? This kind of advice I can can get anywhere and not have to pay for it. I used to value your opinon.
Absolutely people should walk away from your home. The banks do not care about individuals at all. So why should the individual care about the banks/bankers? Move your money and accounts to a non-profit credit union. The banking industry has forgotten the proverb: "Do unto others as you would have them do unto you." With this in mind, they have turned a blind eye and deaf ear on the decent, hard working, average American home owners. So why should they be treated honorably? They care not for people, but rather, only for profits.
I am perplexed by the multiple posts that seem to equate being conservative with walking away from financial responsibilities… the logic doesn't even follow and makes those of you of who I am speaking transparently shallow and clearly emotionally invested in "your side". The commentor who wrote that the media is dominated by conservatives is a fool, plain out.
It's liberal ideology that drove the government to pressure lenders to give everyone a loan. Bush's liberal tendencies drove the bailout that kept the faulty parties – short-sighted politicians and lenders and consumers who did not do their duty to protect themselves (from themselves) – from getting a painful but proper and ultiimately positive dose of reallity. Obama (liberal deity) continues the trend. Conservatives, at least here in the South, don't like the federal government, don't look to it, don't want its help. We don't choose to shirk our responsibilities (again, if generalizations must be made, certainly more a liberal trait in my observation) when things get tough. I would venture to say that, in reality, the people who choose to do that are doing so because they are selfish people who were never taught the value of a man's word and integrity over financial gain, not because they have any particular political slant.
The greatest generation was great because they lived through extreme hardship perpetuated by liberal coddling ended only by a world war. Many people were forced to migrate all over the country to look for work; I hear people whining about not being able to move out of their several-hundred-thousand-dollar homes. Said people should count themselves fortunate. Even though I am in the same difficult situation, I certainly do.
Author of the article is has poor insight into his own stupidity; surely the readers of such a financial site and those engaged enough to write on here are overall a very financially responsible group. Know your audience…
Its not really breach of contract to walk away. The contract is subject to the laws of the state in which it is signed. If the loan is non-recourse in that state, that is part of the contract. It was the lenders' poor practices that caused the housing bubble, people walking away is justly deserved and will hopefully prevent this situation from being repeated.
Just my 2 cents – BTW, I am Canadian not living in US, and we are still in our housing bubble, though it is not as big as the US one, yet.
I think that terminally stupic was a bad choice of words. I also appreciate the responsible message in all of your comments and I agree that we should honor our contracts. However I also know that when it comes to mortgages the past decade we have been sold a bad bill of goods. I use to be a mortgage broker and we did business in ohio and met all of our clients face to face. We took the time to help clients fix their credit so that we could get them the best deal possible and not just throw them into a sub-prime deal and leave them there to fail. These loans were poorly designed programs with a high probability of failure. That is why they were bundled and sold as securities and not held in house by the banks that originated them. If they were such good and honorable investments the banks would have held onto them. At the same time the government and the media were making the citizens feel as though home prices could never decline. Some of us were leary enough to know that nothing can go up in value forever; it will eventually become unaffordable and lose value. Some people knew that they were purchasing homes that they could not afford and that was on them but what about the people who purchased a home they could afford but got hit a financial snag. The banks are refusing to work with people. I have seen it first hand with some friends who tried to work with the banks. They took our bailout money and now are refusing to lend any of it. This tells us that they are expecting high inflation in the coming months. They know if they lend the money out now the money they make off of the loans will be worth less and not worth the risk. That is economics lesson that I don't have time to write and that you probably don't want to read anyway. My point is the author is right from a free economy standpoint; I don't feel that he is telling people to just walk away from their homes and their obligations. I think he is saying that we are just delaying the enebidable with these government programs. Also where is that money going to come from? Higher taxes, causing more of a burden on those of us trying to stay in our homes. What will be the straw that breaks your camels back before you are forced to walk away from your home. I do agree with you guys that we need to quit sugar coating our financial situation; I feel that we are in the beginning stages of a depression.
As I see your plan, I could buy a newe car and as soon as I drive it off the flooe it is worth thousands less and I get buyers remorse and so I should take it back and hand the bank the keys, seems your plan is something like that