Is Mortgage Principal Reduction a way to arrest the downward spiral in housing?

Update: Jared Bernstein also agrees that principal reduction is a good idea. He even has this line:

Research has clearly revealed that owing more than the value on your home is the strongest predictor of foreclosure, and housing finance analysts widely agree that principal reduction is the best medicine to avoid this outcome.

I've become involved with a Quora post about Mortgage Principal Reduction. You can see the responses here.

This is my latest response to all the latest postings:

Full disclosure: I own a home and am underwater. I am current on my mortgage, in which I owe about 140% of the current value of the home.

Moral hazard. These banks are still around even though they should have gone under in 2008. They are zombies now and will die out sooner or later. The  next crisis is coming. Our crony capitalist system is 'fixed' and is not sustainable. Where is the moral hazard for these banks that gave out the NINJA loans, the liar loans, etc.? These banks make millions in fees, get saved by taxpayer money, shower themselves in bonuses, then refuse to help the very customers that they took money from ( in fees and taxes). These banks don't even know where the papers are to a lot of the mortgages (see the robo signing scandal) and are in such a hurry to save themselves that they are foreclosing on the wrong people. This question of principal reduction has become a big 'pity the poor banks' forum. Most people that have answered this question seem to be assuming that everyone will simply try to take advantage of the principal reduction for those underwater and will be greedy. I am just saying that I would like to see us figure out a way to arrest the falling of prices and stabilize the market. You could tie the write down to something so that when housing stabilizes and begins to rise again, the bank that is holding the mortgage would see some or most of the upside. The point is, you can address the moral hazard part and do the write downs. The 'wait and see' approach has not stopped housing prices from falling, so I don't think that is no longer an option.

Another question: How much of these 'toxic assets' do the banks still own? They won't say because as soon as they let that cat out, they are finished because it will be revealed that the emperor has no clothes. It's called mark-to-market accounting. The banks hate mark-to-market because they have to reflect asset value loss on their balance sheets, and that can results in lower earnings. The current value of the mortgages would reveal a lot of banks to already be insolvent. So doing a principal reduction and a refi would actually allow the banks to have a more realistic number on their books and reduce the risk of losing the whole mortgage in foreclosure or having owners do a strategic default.

Most of the answers here are assuming that the current state of banking is likely to continue for the foreseeable future. I think that is a big assumption.

This notion that the banks are hands off on the economy is odd. The banks spent the past 30 years using the national economy as a giant casino and share much of the responsibility for cratering the economy in 2008. But lets not forget that if you don't have banks, you don't have a national economy. These banks are publicly owned companies that answer to shareholders, not private partners. I would like to see the banks return to being privately owned, boring-banking, 3-6-3 institutions that we had in the middle of last century but we will have to wait for the next crisis for that scenario to increase in likelihood.

It makes absolute sense to spend on infrastructure with federal borrowing costs at historic lows. Putting that off just makes it more expensive for future generations because it has to get done. But who thinks long term in this country? Not politicians and certainly not the banks.

Cleveland is tearing down homes because they are left abandoned after the foreclosure and are then looted for anything of value. This makes them completely worthless, which further depresses the values in the surrounding neighborhood. I have never seen anything like it. The banks are supposed to sell the properties ASAP in a foreclosure even if that means taking a loss. This is something that is not happening at all in Cleveland because they apparently can't give them away and are not willing to spend thr thousands of dollars needed to fix the homes to make them sellable. Which means that the banks would rather take a total loss on the home instead of trying to keep the current owners in the house and getting some of the money back. Which to me proves that the banks can take the hit that people in this forum are saying isn't possible. This is why I don't understand why the banks are willing to take take a total loss on a home vs taking a partial loss on the home and letting the owners stay at a reduced principal and interest. The only reason this make sense is that the banks know they are in trouble, so they are just milking all they can through foreclosure fees and other fees to bleed the system dry until their day comes.

Debt forgiveness is one of the hallmarks of our society. For example, bankruptcy laws have been on the books since our country's founding, in part due to our founding fathers' disgust with European usury laws, and an understanding that extreme, unworkable debt serves no purpose but to enslave the debtor to his or her creditors. I mean, even Mitt Romney suggested at a forum in Florida on January 23. http://www.huffingtonpost.com/2012/01/23/mitt-romney-foreclosure-florida_n_1223394.html

To quote an article by Eliot Spitzer and Dylan Ratigan about this  http://www.ritholtz.com/blog/2012/01/mitt-romneys-state-of-the-union-challenge-on-the-mortgage-crisis/

    "If you force the banks to recognize losses on the mortgage debt they are holding, then all of a sudden they will have an incentive to write down debt. Otherwise, a bank will do anything it can to maintain the fiction that the debt is worth 100 cents on the dollar, including lie, harass, and robo-sign. "

There is even a video segment where they address this topic: http://www.dylanratigan.com/2012/01/24/eliot-spitzer-simon-johnson/

People have been screaming about inflation for years yet it's not there. Let's stop being spooked by these phantom bond vigilantes. It will take strong leadership right our economy, and I'm still looking for it. The banks made a huge number of loans based on the assumption that housing would not drop in value. It was assumed that letting the banks go under in 2008 would have been as disaster so we bailed them out and kept all the players in place and have been limping along ever since. Now the assumption is that principal reductions will lead to chaos. Could this assumption also be wrong? The only moral hazard I see is that we are allowing these gambling addicts that call themselves bankers to stay at the table.

Talking to an A$$hole

I had an amusing conversation with some person on Facebook last week. (This post is going to get really, really R rated with a touch of Louie CK, so I apologize for the language in advance). Look at the last few posts:

Me:

Equality of opportunity means you give everyone the same choices starting out. Equal education, healthcare, basic safety net. After that you are on your own. Go squander your education or run with it. Freeing people up from having to worry about medical bills or being on the street if their company goes bust is what allows people to accomplish awesome things. Otherwise only those with great wealth to begin with can free themselves of those worries. Yet you find that disagreeable. I'm not talking about giving everyone gold plated health insurance or a free car to drive. If you are worried that America is on that path though, fear not. America is the only advanced country where it actually does matter who your parents are, what income bracket you were born into, or if you have health problems. Our safety nets have so many holes in them that entire swaths of our citizens and their children live in poverty and are malnourished. So don't get upset at us progressives for talking like this, because America is a lot more like the world you say you want to live in vs. the one I'm talking about. It's more of a myth now to hear stories about someone who was poor and struck it rich. America loves this story though. Because everyone in America is convinced that they will someday be rich. That's why we love rich people because that could be us someday. That's why tax cuts for the wealthy are so popular. Everyone thinks they will be rich, so why would they vote to increase their future taxes? It's an awesome and effective deception. But we don't live in that world. We are all different and most of us are just average. It's good to remember that our world was created by people who were no smarter than us though, and that is why we need equal opportunity so that we as a people can continue on with this great experiment to pursue life, liberty, and happiness.

His response:

I know many people who began in poverty and are now much higher on the economic ladder. Simply because you don't know anyone who had capabilities to succeed beyond their beginning economic status does not negate their existence. You, sir, live with a Utopian vision of a money free existence where everyone busts their ass for the sake of feeling good. How much SOMA would it take to calm the masses into such a vision?

America IS a land where one can succeed if one has the desire, the drive, and the requisite ability.

My father in law, for one, began his life in and out of foster care because his mother had trouble taking care of her four older children. When he left home before eighteen it was with $50 that he had saved from working and that he managed to keep from being stolen by his own family.

Now he makes that much every 15-20 minutes. He had no lucky breaks or silver spoon or connections of any kind and he made it because it IS possible in America.

That is the beauty of my country. If you try, you have the possibility of exceptional advancement.

There are tradeoffs in such a society. I know my father-in-law feels awkward going back to where he grew up. He is more successful than anyone else in his neighborhood. Some even demand money from him so he doesn't go back too often. There is transparent resentment over his success.

I find it difficult to see such a man and then to see a diatribe such as yours written by someone with the same possibilities for success.

Before I knew him, I thought I would remain in the same economic stratum as my parents, which is what something like 90% of the population does. Instead, I now understand that determination is what's needed. Determination and ability, which can be learned, as long as you're honest with yourself and position your career so that it's moving forward.

I work long hours and have travelled extensively for work. I am a platinum elite member of Marriott and I've got a lot of air miles stored up.

I've put close to 35,000 miles on my car in one year and I begin my work days at 6 AM and end at 5:30-9 PM. I spend my free time playing with my family, educating myself about the industry, working out, watching my Cowboys lose, and sleeping.

I've lost patience for people that I grew up with that had the same advantages yet squandered everything. Now, they demand "fairness" and "equality" because they can't get work after spending time in jail or because they chose to teach English in Barbados during their twenties.

I have to go now. Today, I'm weightlifting, then grocery shopping, then getting my kid to her overpriced daycare where she learns English, Spanish and, as of June, Mandarin. Then I'll write a dozen reports, which will take only today if I'm lucky. Ill then cook dinner, watch television with my wife, put my kid to bed, work some more, then go to sleep between 9 and 10. Tomorrow ill be up at 5:30 AM starting the whole thing again.

Keep your ideals of a stress free, money provided existence. In the world we actually live in, I'm proud of my accomplishments and I look forward to more.

Then in another post, this guy laid out what his plans are for his future:

I think you're underestimating nationwide anger at Obama. In any case, I'm gun shopping and I have a Costco membership. My family will be okay in the case of an anti-Christian soulless liberal dictatorship headed by King Barack and Queen Michele. The soul of America must be fought for but I'm hedging myself against the possibility that we continue supporting Islamo-Fascism, Race Card politics, nationwide infrastructure erosion, and idiot welfare policies.

My Dad's right. When I've made my millions, we'll campaign together, creating a new Independant Party with the pragmatism of Teddy Roosevelt, the drive of James Polk, and the political savvy of Lincoln.

The dude really pissed me off and he is a total asshole, but the point of his attacking me was...I don't know what. The guy is my age, yet he thinks like this. Boy, his dad must have been a total asshole too. Sounds like he was if he came from the poorer neighborhoods and had to deal with all that crap. And I don't blame his dad for being an asshole because that is what he probably had to be just to survive in that environment. Two points here. I don't really care about his dad, and I also think that it's insane that in America today we still have to have areas of the country that are mired in poverty. WHAT the fuck is that all about?? Anyways, he seemed to believe that the changes I was proposing would turn us all into lazy loafs. Uh, no you fucking idiot. I'm not proposing we go to some fucking ass backwards collective like Communist China during Mao. Those people did nothing because they wouldn't get rewarded for doing more. That's fucking retarded. How the fuck do these idiots form their worldview? I propose that the field is tilted back towards being slightly favorable to Main Street, and suddenly I'm this moron. Go fuck off, pal. Why come to the conclusion that I'm some jobless hippy fuck just because I'm saying that there is some gross inequality going on. I think that if you look at what I'm saying, I would probably INCREASE this douche's chances of getting wealthy and making his goals because the changes I am urging would throw out all the scheming and rotten douche bag bankers, executives, and lawyers that are currently sitting at the top and kicking everyone else in the face. But this fuck nut doesn't get it. Maybe he is one of those douche bag idiots, and if we clear out all those assholes, then his chances really would go down the drain. Acutally, as I was reviewing the Facebook posts for this blog, I learned that the guy works in the fossil fuel extraction business, and almost all of those folks seem to think that any changes to the status quo = doom for everyone. So that does make him part of the problem, not because he is working on something that provides me with fuel that I need, but that he seems to think that his efforts are the only way forward. Well, too bad for you, you fucking idiot shithead. I don't give a rats fuck how hard you or your dad work. Don't come at me and use that as the straw man against my reasonable arguments, you piece of shit. I work hard too, you motherfucker. You think you are better than me. You are not, sir. Equality of Opportunity is NOT Maoism, you dumb fuck.

John Stewart and Jim DeMint discuss things

Stewart did an awesome job confronting DeMint on Republican fallacies. Stewart shows remarkable and keeps his cool while bringing out the facts for DeMint. I'm really, really impressed with his performance here. DeMint's claim that the Bush tax cuts did not lower federal revenue are total bunk. DeMint's concept of how Social Security is sad because it's incorrect. Current retirees did NOT earn what they are pulling out of the system. FICA and payroll taxes go directly to current beneficiaries. It's a direct transfer of wealth from current workers and younger (those under 65) workers to retirees. It was designed that way to make it very, very hard to change either system. Both systems were designed to run deficits. His ideas are wrong because he refuses to grasp reality and facts. I think you could argue that you could make it so that SS and Medicare/Medicaid do not run in the red so much if at all, but the only way to do that without cutting benefits is to raise taxes, which is an absolute no go for all Republicans and many Democrats. Stewart comes back to the fact that the portrayal of Republican ideas that if we restrain free markets in any way is a surefire way to hell, or that raising taxes will immediately make America the next European Bankruptcy is what makes having conversations with folks who believe that so frustrating. Their reality is not based on facts. They claim that 2+2 = 5, and if you say, 'no it's actually 4', they reply 'well, maybe so, but my point is....' That's not way to have a conversation! Yes, we reward those who have merit. Most wealthy in this country earned their wealth by working hard and doing the right things. That's great! But we do live in a society, and to keep that society going so that others might have that same chance, we all need to chip in to maintain what we have got here. Helping out our fellow citizens in some small way is not a prescription for communism nor does it mean that I hate freedom.

Here are all three segments:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Exclusive - Jim DeMint Extended Interview Pt. 1
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Exclusive - Jim DeMint Extended Interview Pt. 2
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Exclusive - Jim DeMint Extended Interview Pt. 3
www.thedailyshow.com
Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook

Why people are mad at the rich bankers

People love a success story. Look at the outpouring of grief and support for Steve Jobs' death. What makes people mad is when success is accomplished through cheating or unfairly. Look at how people go NUTS over something as dumb as steroids in sports. We Americans think we have this great idea of what fairness is, and when that fairness is violated, we really get upset. So that is why people on the right and left are really mad at bankers right now. They received bailouts and are now doing very, very well. But the bankers don't get it. Joshua M. Brown over at The Reformed Broker really nails it in this post.

Old Person Whining

My Dad sent me this today:

THE GREEN THING

  

Checking  out at the store, the young cashier suggested to the older woman that she  should bring her own grocery bags because plastic bags weren't good for  the environment.

The woman apologized and explained, "We didn't  have this green thing back in my earlier days."

The clerk  responded, "That's our problem today. Your generation did not care enough  to save our environment for future generations."

She was right --  our generation didn't have the green thing in its day or didn't call it "green."

Back then,  we returned milk bottles, soda bottles and beer bottles to the store. The  store sent them back to the plant to be washed and sterilized and  refilled, so it could use the same bottles over and over. So they really  were recycled. But we didn't have the green thing back in our  day.

We walked up stairs, because we didn't have an escalator in  every store and office building. We walked to the grocery store and didn't  climb into a 300-horsepower machine every time we had to go two blocks.  But she was right. We didn't have the green thing in our day.

Back  then, we washed the baby's diapers because we didn't have the throw-away  kind. We dried clothes on a line, not in an energy gobbling machine  burning up 220 volts -- wind and solar power really did dry our clothes  back in our early days. Kids got hand-me-down clothes from their brothers  or sisters, not always brand-new clothing. But that young lady is right.  We didn't have the green thing back in our day.

Back then, we had  one TV, or radio, in the house -- not a TV in every room. And the TV had a  small screen the size of a handkerchief (remember them?), not a screen the  size of the state of Montana . In the kitchen, we blended and stirred by  hand because we didn't have electric machines to do everything for us. When we packaged a fragile item to send in the mail, we used wadded up old  newspapers to cushion it, not Styrofoam or plastic bubble wrap  Back then,  we didn't fire up an engine and burn gasoline just to cut the lawn. We  used a push mower that ran on human power. We exercised by working so we  didn't need to go to a health club to run on treadmills that operate on  electricity. But she's right.  We didn't have the green thing back  then.

We drank from a fountain when we were thirsty instead of  using a cup or a plastic bottle every time we had a drink of water. We  refilled writing pens with ink instead of buying a new pen, and we  replaced the razor blades in a razor instead of throwing away the whole  razor just because the blade got dull. But we didn't have the green thing  back then.

Back then, people took the streetcar or a bus, and kids  rode their bikes to school or walked instead of turning their moms into a  24-hour taxi service. We had one electrical outlet in a room, not an  entire bank of sockets to power a dozen appliances. And we didn't need a  computerized gadget to receive a signal beamed from satellites 2,000 miles  out in space in order to find the nearest pizza joint.

But the current generation laments how wasteful we old folks were just because we didn't have the green thing back then?

Please forward  this on to another selfish old person who needs a lesson in conservation from a smartass young person.


Remember:  Don't make old people mad! 

 

We don't  like being old in the first place, so it doesn't take much to tick us  off.

I wrote a response, but I'm not sure I should send it to him.

Wow…ok, this will probably make you mad, but here goes. 

Nobody brings bottles and cans into the stores anymore because the stores refuse to take them, and people fight curbside recycling programs until they are forced to use them and they everyone says how wonderful they are. And the above comment from the clerk was about plastic bags, not glass and aluminum. Walking everywhere was seen as an inconvenience, so the older folks created cars and suburbs and sprawl so they wouldn't have to walk everywhere, then became old and didn’t like being old so they created pills for erectile dysfunction and cholesterol and shove these ads all over the TV so that my 4 year old asks me what that is, and they parade around in free, government-funded electric wheelchairs and scream about DEATHPANELS! as soon as someone mentions making any changes to Medicare for anyone over 55. Advances in technology and medicine have lulled us into believing we can fix anything that's wrong with our bodies, pain and expense be damned. Our politicians capitalize on this antagonism by assuring the old folks that their government benefits will be fine, that all the proposed changes only apply to the next generation. But who pays for the old folks benefits? Folks who aren’t retired yet. But the workers still have to put up with being told how we are doing everything wrong while we are expected to support our older generation on top of supporting ourselves.

We are forced to drive everywhere because our parents designed our cities to force us to use cars because that is ‘freedom’ and we only go to our cities to work and then flee to the suburbs, making the cities practically deserts at night. These old folks have taught us that economic growth is the ultimate goal for capitalism, yet all we have to show for it is more JUNK with less overall happiness. Maybe old people are mad because they are being shown that their views of the world might be incorrect in some ways. What’s wrong with that? I know some of my views are incorrect, and I would like to learn why and how. But we don’t reward knowledge anymore unless it can make you obscene amounts of money.

People choose to use dryers. We aren’t forced to use them. But we are continually bashed over the head with very, very effective advertising saying that we should use dryers and that walking is for dummies and that we aren’t manly men if we don’t own GIGANTIC MADE IN THE USA FORD F-350 Diesels that have HEMIS and can pull a gigantic boat that we never use. All I wanted to do was watch a freaking football game, yet I have to hear about how my lifestyle is inadequate during every commercial break. So dryers are bad but washing machines are good? When was the last time you hand washed all your clothes? I have to mute the TV during the ads because the commercials are so loud that even if I flee the room I am bombarded by the sound and fury of these commercials. Yet if I ignore these ads and refuse to buy things I don’t need, I am told that I am being un-American for not buying things and keeping the economy going. I don’t think that the old people were told that not buying is un-American, yet these same older folks who run and profit from these companies in retirement are telling us to do so. I don’t get it. If we just eliminate the god awful amounts of CRAP that we make, we would be much better off.

I like using a fountain for drinking water. A lot of people don’t because in a lot of places in the country the city water is HORRIBLE because old and young alike refuse to pay for new water infrastructure. Old folks remember what the old days were like because they were experiencing all of this fabulous new infrastructure that was NEW so that the water tasted a lot better and wasn’t full of giardia from the well or stream.

I take the bus because it makes sense and is actually cheaper than driving my car everywhere. Old people must think we are really pathetic for letting our kids run our lives, yet aren’t they the ones that taught us to do that when they were driving us around to soccer and baseball games in the 80’s? People do this because they think that our kids want to have really fulfilling childhoods because that will get them and edge in life and they are just sick and tired of hearing grandpa bitch about how he had to walk to school in 8 feet of snow uphill both ways every time they say hello to him and maybe they don’t want their kids to turn out the same way.

Old folks were wasteful back in the day, but like most Americans today including me and you, we are all wasteful now and have embraced the wasteful lifestyle. I think being able to use my phone to find a pizza joint is awesome now, and saves a lot of paper instead of using a phone book that doesn’t ever get used. If you agree with how dumb a smartphone is, why do you own one yourself?

Kids today are a product of their upbringing, so if kids are whining now, isn’t that because the parents (now the older generations) spoiled the snot out of them and didn’t teach them that reality doesn’t always mean getting a gold star for finger painting or their 5^th grade graduation? We teach kids that they are special, but if everyone is special, then no one is.

Old folks scold kids for staying inside and playing video games, and while exercise is a must, I bet those old folks would have played video games if they had been around when they were young. They would have eaten (and do eat) at McDonalds. When the old folks were young, all these appliances were touted and embraced as signs of PROGRESS and American ingenuity. Now they are being labeled as terrible devices that make everyone lazy. I’m pretty sure that our grandparents’ grandparents grumbled about how cars were dumb and the horse and buggy was all that was needed (never mind the massive piles of dung that would collect in the streets). People were and are wasteful because they don’t know any better. Why is knowledge treated as a bad thing nowadays? It’s human nature to resist change, but as humans aren’t we obliged to take care of our environment and not just exploit it?

So just spare me the old person whining, and I’ll spare you mine. What ever happened to ‘We are all in this together.”?

That’s how I was raised.