Obama housing fix too timid?

A key participant in the country’s debate over housing policy is blasting the Obama administration’s plan to fix the mortgage mess as “much too timid” but says he’s adamantly opposed to mortgage “cram-downs” in Bankruptcy Court.

Since last fall, real estate guru Chris Mayer, senior vice dean at Columbia University's business school, has argued that the Treasury Department should refinance “the entire universe” of loans guaranteed by Freddie Mac and Fannie Mae -- nearly half of all residential mortgages -- at an interest rate below 5%. He also wants to give loan servicers -- the bill collectors for mortgage investors -– legal protection to aggressively modify home loans without being sued.

But Mayer told L.A. Times reporters and editors today that a proposal to allow bankruptcy judges to reduce the principal on first mortgages, as they already can on other types of debt, would tempt homeowners to reject solid offers by lenders and servicers to modify loans, hoping to get a better deal in court. The option to seek the imposition of a principal reduction, known as a cram-down, might trigger a wave of bankruptcy filings, overwhelming the country’s bankruptcy judges, who number fewer than 400, he said.

And allowing judges to cram down mortgage balances would surely force lenders to raise mortgage rates, Mayer said.

“I don’t think that raising the cost of credit in a recession and during a credit crunch is good policy,” he said. Mayer also argued that principal reductions aren’t needed — because, he said, even “underwater” homeowners won’t walk away from their mortgages as long as they can afford their monthly payments.

A congressional vote on a mortgage cram-down measure was postponed this week by House Speaker Nancy Pelosi after industry groups including the Mortgage Bankers Assn. and the American Bankers Assn. objected and some lawmakers withdrew their support. A Pelosi spokesman said the House would probably consider the bill Tuesday or Wednesday.

--E. Scott Reckard

Comments

[Freshly Drowning]

It is outrageous that the mortgage brokers and banker industry is opposing principal reductions. They will not lose out on any deals -- their profits just won't increase. From a public policy standpoint, there is no reason why banks cannot take a lien that binds the owner and subsequent purchasers to pay over to the lender all apprecation if the house is ever sold. As things stand, the taxpayer is paying vis a vis the losses that lenders can take on their tax returns following foreclosures.

[D.L. Henderson]

My son just purchased a 5 br 3 1/2 bath house for $172,000. The house had sold for $580,000 in 2005. My son was at the house with his real estate agent, when the previous owner who had just lost the house to foreclosure 45 days earlier, saw them together. The man asked my son how much he had paid; he told him $172,000 from the bank that had foreclosed on the property. The man told my son he tried up until the day he moved out to get the bank to accept his offer of $322,000 at a fixed 6% interest rate. He could afford that payment and continue to live in the house. He said the bank would not talk to him in any way, they just foreclosed. My son got a Cram Down from the bank for a total of $408,000 at 4.75%. Everyone is saying how this will affect the future mortgage rates etc. My feeling is the bank lost $150,000 and the extra interest rate from the previous owner. This also hurts the houses around my son’s new house because it will bring down the value of the other homes, due to the low amount my son paid. I am very happy for my son. But, the bank could have made much more money and saved the values of the surrounding homes.

[Dan]

Too timid? The basic issue is a supply/demand imbalance. The government can't do much practical about it (within any reasonable budget--and reasonable has changed over the past few months).

In essence, any money they put in to this is a transfer from taxpayers to people who overleveraged themselves without much other benefit.

Adding cramdowns would likewise be a disaster for anyone who wants to buy a house in the future.

[gigi621]

Yes, it's too timid! Why? Because it is based on the inaccurate and anchronistic social poison of class warfare. We truly are all in this together. That means nothing will work until you also address the problems and stymied financial potential of all homeowners. -- I agree wtih this - "Who the Mortgage Rescue Plan Won't Help and Why that Stinks for the Economy" --- http://www.associatedcontent.com/article/1518722/a_surfers_take_who_the_mortgage_rescue.html?cat=9

[JayC]

The belief that people won't walk away from their homes so long as they can afford the monthly payments is untrue. It doesn't take a person long to realize that if he can buy the same house down the street for half the price of the mortgagae he's servicing, his better option is to walk away from his current trap and get into a cheaper one, even if he can afford both. Your credit is worth something, but its value has a limit.

[Underwater Bill]

Some of the commenters here just don’t get it. It is just so easy to sit back and criticize. My modest, 700-square foot cottage is worth 40% of what I paid for it when I bought it as a good deal in 2003. I have always been responsible and at the time I had a job that paid well enough to pay off the loan and then some. My home is surrounded by foreclosures and prices are not like to come back. If my lender reduces my loan to the current value, I am willing to agree to a lien that me and subsequent owners agree to pay over to the lender every penny of appreciation if I resell the house for the life of the loan. This is not a bad deal for the bank. They can do this with me, or they can take it at foreclosure. Of course, with foreclosure, the lender still gets teh write-off for the loss, which the taxpayer pays for.

[Tim K.]

I think Obama's response is correct. The reality is there is only so much you can do to prop up housing values. You could empty the entire budget at the housing problem and you'd still not make a dent.

The problem was too much funny money was created because of world-wide investor sentiment that housing was skyrocketing to the moon. That sentiment is gone, and no amount of cash will replace that - the only way to do that is to convince EVERYONE the world over that housing prices are on a fast upward climb. That's not going to happen anytime soon.

Obama made a calculated bet that he had to do *something* because the average person would not understand the world economic forces at work. But in reality it was wise of him to not waste all our money on this largely useless endeavour. Housing prices really DO need to come down, and I think Obama and his economic advisors know this, they just can't say it.

So he made a grand overture that looks big, but he's now announced he's moved onto other things, like healthcare, which are problems that he actually CAN solve with much less money than he would have to throw at housing.

[tonylogan]

I've never commented on a commenters comment before... I also will not be getting a job at the Times anytime soon...

But Tim K. you said it so clearly, I have no need to rant.