Housing Market Outrage

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There is little question that the root of our current economic problems is the housing market crash. The severity of the problem is daunting: at the end of 2010, 23.1 percent of all residential properties with a mortgage were “underwater,” meaning that borrowers owe more on their mortgages than their homes are currently worth. That “negative equity” totals $750 billion. Moreover, the housing market is largely frozen, due in large part to the fact that banks attempting to foreclose on delinquent homeowners cannot produce titles for said properties. They were “bundled” to sell on Wall Street, and the “paper trail” determining who actually owns the deed to a given property has been obliterated. This reality produces an extremely troubling question: how much moral hazard are Americans willing to accept to get the housing market functioning again?

With to respect that market, moral hazard has been an all-encompassing affliction. Lending institutions were more than happy to grant mortgages to borrowers manifestly ill-equipped to pay them back. Borrowers were more than happy to sign on the dotted line and take the money, even as they ignored the implicit contractual obligations. Government was happy to pressure lending institutions to make sub-prime loans to unqualified applicants, often with ridiculous terms attached, such as no money down. Banks in turn extended those ridiculous terms to prime borrowers, vastly expanding the pool of risky loans. The risky loans were then pooled together and sold to investors, many of whom were convinced to buy them when the financial ratings agencies (who were paid by the banks), gave those securities an AAA rating.

Virtually all of the activity that took place during the boom years was based on two ridiculous premises: one, a house was viewed to a large degree as an entitlement, when the government contended (and still does) that a certain number of mortgages should be exempt from the normal requirements imposed on borrowers; and two, real estate values would continue to go up indefinitely. Neither of these premises withstood reality. The rest is history.

So how do we get out from under? One plan is being floated by the Obama administration. Another one is being proposed by the banks and the state attorneys general. The former is aimed at aiding homeowners, by allowing them to re-finance their loans to prevent foreclosure, with a possible reduction in principal as well. This plan underwrites borrower irresponsibility, allowing people who bought more house than they could afford, or failed to make payments to which they contractually obligated themselves, off the hook for their bad decisions.

The latter is a plan attempting to address the reality that banks, via a concept known as “robo signing,” were foreclosing on properties for which they could not produce proper documentation of ownership. This plan underwrites lender irresponsibility by giving them the opportunity to pay a one-time fine, and possibly get immunity from further litigation related to improper foreclosures. That allows a lot of bankers who knew better than to make questionable loans and bundle them into questionable securities off the hook for their bad decisions as well.

Both plans are aimed at stabilizing, and eventually re-invigorating, the housing market.

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  • Gamem

    The questionable assumption in this article is that the unjust measures to save the economy discussed by Mr. Ahlert really will help. The money used to save the economy has to come from somewhere and that somewhere is from honest people who are productive enough to make the money. Taking their money away will hurt the economy perhaps more than bailing out the banks will help it. The ostensible reason for no money down loans imposed by our government was to make housing affordable to the poor. Well dropping housing prices is making it more affordable, unfortunately vanishing incomes is making affordable houses less affordable but taking money away from people who are productive simply makes their incomes vanish as well. The government's role should have been to enforce justice all along. Than the current situation would not have happened. Enforcing injustice is not the answer.

  • Michael

    The housing market is subject to supply and demand like any other market. Easy fix. No new construction permits, though old houses could be torn down and rebuilt. Aggressively tear down abandoned properties that have been vacant for a year or more. Do this for a couple of years and the problem will fix itself. It will hurt the construction business but everyone else will benefit. Some construction contractors might get into the demolition business.

  • StephenD

    Being "one of those" who owe more than my home is worth yet still honor my commitment to pay my mortgage presents a dilemma. On the one hand I could consider "Strategic Default" and let this be strictly a business decision. But the fact is, it goes against my moral fiber. As much as I counted on the equity I had a few years ago in the property, I still can't just "walk away" from it. Now, seeing this Administration perform for those with less moral conviction, getting a drop in principle and perhaps even interest with an extended loan, I must fight feeling like a fool for doing the right thing. What makes matters worse is knowing part of my good faith payments will go to offset those with ill faith.

  • dan

    At the risk of sounding like a simpleton, it seems to me that all that has happened are just symptoms of the much deeper and causative disease: Government involvement (politicization) of the private housing industry (sales and financing) with promulgation of the lie that housing is a right. In addition to the single family home debacle, apartment complexes throughout the nation are cesspools thanks to government subsidized rents under Section 8 (and no telling how many other subsidy programs). Many low income seniors and other law abiding and decent folk, including the legitimately disabled, either can't get into "good" complexes because of the reputation of that program and ravages of previous Section 8 "renters" or must live in complexes plagued by drug dealers, rudeness, theft, vandalism, and constant physical threats. What the answer is I don't know. But injustice and basic decency has become rampant, medieval in some places.

  • CharlesWhiteVIII

    How can one Be “Morally” obligated to an entire scheme that was (is) crooked? There is no “Moral” agreement if it is a dishonest deal! The Greed and Dishonesty in the Housing collapse goes further than just the “Government laws and Rules”, the “Bankers” and “Wall Street” it goes all the way down to the Illegal Alien by the millions that were drawn here during the Boom to the Contractors that hired them to the Construction Companies that subcontract out the work and all the way up to Wall Street! Yes there are many buyers who “got more house” then they could afford, a lot of them bought 2nd and 3rd homes trying to cash-in (flip the houses) on the raging greed. (continued)

    • CharlesWhiteVIII

      Most of the Buyers where scammed by the whole industry not just the top tiers! I purchased my home according to the rules (I am no finance wizard but I am not an idiot ether) but now my 300K house (not mine but many neighbors) sells for 133K to 144K on the County Courthouse steps, I don’t even live in the worst markets area but I did buy into a neighborhood that was ravaged by crooks and now I am suppose to bend over and take it without a kiss! Sorry the deals were dirty, it breaks the “Moral” obligation, Wall Street got the bailout (my tax money) the Banks got the bailout (my tax money) H3LL the Foreign investors got bailed out (my tax money) and the CEO of the now bankrupt Construction company and Subcontracting Companies still have their Big savings and assets, (continued)

      • CharlesWhiteVIII

        the Illegal Alien is still here only now their collecting even more of my “Tax Money” thru all the “Welfare services my Government gives out at the expense of “Me”, mean while I getting less to take home as taxes and prices go up (just got the letter from the “monopoly” water department that there’s an increase of 20% this October and a projected 18% next year) and I am suppose to keep paying a Mortgage that is 50% underwater and the HOUSE WILL NEVER BE WORTH THE AMOUNT I PAIDED FOR IT IN MY LIFETIME!!! NO THAT’S “MORALLY” WRONG! I have tried to do the upstanding and “morally” correct thing but now that the truth is out that the entire system was out to “Steal” from me, the “law abiding” American I think the “Deal” is NULL AND INVALID! NO "MORAL" OBLIGATION! In fact it is "Moral", Prudent and wise for me to remove myself from the "immoral" obligation.

  • sdsali

    Add into the mixture, a lot of the houses sold were overpriced and individual sellers, not just big construction companies walked away with what is collectively trillions of dollars of unjustified profit gained as a result of a government created and fueled housing bubble. I know people who bought in that market. And housing prices are still not down where they were a decade ago. So maybe the Resolution Trust Corporation approach would have been better. Government takes over the loans from what should be failing institutions, makes individual deals with the borrowers, rewarding those who have kept up their payments and punishing those who engaged in strategic defaults, and banning the brokers and loan purveyors who encouraged cheating and irresponsibility from the industry for 10 years.

  • Jim

    Immense fraud yet few are going to jail.How come?

    Some of the worst are reelected.