Will news of more upside-down borrowers = cramdowns?

A Deutsche Bank report this week estimates that 26% of U.S. homeowners with mortgages are underwater (owe more than their homes are worth) and predicts that plummeting house prices will push the figure to 48% by 2011.

The causes of this phenomenon are not news to many of us in Southern California: Falling home prices quickly brought values below mortgage amounts, especially for homes purchased in recent years with little money down. Deutsche Bank's researchers point out: "A loan made in California in 2003 enjoyed three years of home price appreciation before prices began to fall, cushioning the impact. A loan made in September 2006 in Los Angeles has experienced nothing but depreciation."

As negative equity rises, more foreclosures inevitably follow. When negative equity levels for individual households become extreme, however, economists and policy makers worry that more people will walk away from their houses rather than keep making payments on a home that, it appears, won't return anything on the investment any time soon.

The latest negative equity news, combined with a federal "report card" this week showing only 9% of loans eligible to be modified under the latest federal aid plan had actually been changed. 

Lawmakers are likely to push for more initiatives to head off the 48% national negative equity level Deutsche Bank says is coming. House Financial Services Committee chairman Barney Frank (D-Mass.) has already warned that if more loans aren't worked out, he'll renew the push to allow bankruptcy judges to order reductions in mortgage amounts. Slicing a chunk of principal off mortgages would be one way to make homes "right-side up."

So-called cramdowns were advocated by former Treasuy Secretary Lawrence Summers, now a top White House economic official, and are backed by a majority of Congressional Democrats.

Deutsche Bank says the Los Angeles metro area ranks 33rd in the percentage of upside-down mortgage holders, with 51% of borrowers currently underwater. Merced is in first place, with 81% of borrowers upside down.

Because Southern California home prices began falling earlier than those in other parts of the country, Deutsche Bank thinks we may be closer to the bottom. L.A. doesn't make the list of the 33 regions predicted to have the worst negative equity in 2010.

A bunch of Florida metro areas replace California cities on the 2010 list. Fort Lauderdale tops that list, with 92% of mortgages there projected to be upside down in 2010. At the bottom of the 2010 list is Naples, Fla., with 65% of homes with mortgages projected to have negative equity -- far higher than the current Los Angeles level.

-- Peter Y. Hong

Comments

[Rich]

One of the features of the "bubble" markets was that easy loan terms to less-qualified applicants enabled prices to balloon orders of magnitude beyond what median salaries could ever afford. Under these conditions owners are more likely to walk away from a mortgage than somebody whose negative equity is minor. "Cram downs" would probably be most effective for these mega-mortgages, but at the same time the magnitude of the losses become unacceptable to the banks. It's another example of a remedy that only works for marginally underwater borrowers (who may not need them) but becomes untenable for the major ones, enough of which could collapse certain lenders. We may be witnessing the folding of the upper middle class back into the lower middle class as people who overbought lose their savings through having them locked into real estate which can't be sold for the buying price perhaps ever again...

[Danny]

Cramdowns would destroy the banks. That's why it won't happen. Banks are priority #1. Now, just letting a huge percentage of these underwater homedebtors default will probably ALSO destroy the banks, but when in doubt the powers-that-be will always kick the can down the road.

[kosher krab]

Didn't anyone own a house in Merced before 2000? Or when the home prices shot up there did everyone just jump on the chance to cash in?

[Tim K.]

I'm not sure we'll have more cramdowns, but if we do, the bigger impact will be that lenders will be a lot more scared to lend money to just anyone.

Namely, I think interest rates from private lenders will go up. If the Obama Administration forces Freddie and Fannie to continue to eat up these loans at below-market rates, then we might see more cheap (and very risky) loans get put on the taxpayer dime.

Either way, it's pain now or pain later.

[original thinker]

"When negative equity levels for individual households become extreme, however, economists and policy makers WORRY THAT MORE PEOPLE WILL WALK AWAY
from their houses rather than keep making payments on a home that, it appears,
won't return anything on the investment any time soon. "

This is the key to the problem. Forget cramdowns.
Try enforcing fiscal responsibility! Ever try walking away
from an IRS tax lien? Create the same enforcement
conditions to solve our upside-down mortgage problem.

We shouldn't have to be worried that people will walk away.
Just make a sweeping change in non-recourse loan law
and keep these people tied to their reckless speculation --
indentured servants of their bubble-based greed.

Diocletian had to deal with this problem in the
late-3rd century to keep the Roman Empire
afloat. His choice: try to walk and we nail
you to the front door. It worked perfectly and
the Empire held together another century. We
need a lot more of the same now. Responsible
citizens have already paid too much for the
housing deadbeats ("homemoaners") among us.
Mortgage means "death grip" in Latin. It's
time we switched over to some good old
remedys to enforce payment for home purchases.

[dog-walker]

original thinker... well if your thought is eighteen-hundred years old... maybe it's not exactly... well...

but, really... why blame the individual home buyer when the bankers have access to better information, write loans for a living all day every day, have cadres of staff and established relationships with nice lists of appraisers to line up market information, and get paid monumental bonuses because they're supposedly so essential and talented nobody else could possibly do their jobs?

the bankers decided of their own free will, with far greater market power than any individual buyer, to negotiate contracts that allow buyers to return the property/collatoral to the bank in lieu of payment.

we don't need to nail anybody to any doorway, we just need to let the free market execute the stinkin' banks...

media reps, gov. officials, commentators, industry analysts and leading econimists all prattle on about how the world economy would screech to a halt if the banks died their natural, well deserved deaths...

because credit is so essential to our way of life...

think of what that means...

virtually all business and retail activity depends on CREDIT...

almost everyone who buys a house takes out a loan that will take most of the rest of thier life to pay off...

most business have to take loans to pay their employees month by month...

corporations take out loans to buy other corporations...

your neighbor takes out a loan to pay for his daughter's braces, and the twelve dollar wax-job he bought at the carwash on the corner, and the new kitchen he put in for his wife, and probably even the milk and oatmeal she feeds their new baby boy...

virtually all economic activity is mediated by a small group of non-elected, unaccountable, mostly white men who've been educated at about ten schools...

and so these Masters get to take three to five percent (their profit) of EVERYTHING!

three to five percent of the value of your home, and car, and back surgery, and grocery bill, and lifetime earnings...

i, personally, choose not to do business with these usurers, who i consider to be a kind of lice on the civic body, rightly proscribed in the old testament, and lower on the moral ladder than a lizzard that eats its own babies.

i deal in cash... which allows me to set aside five to eight percent (my cost) of my lifetime earnings for something other than the to satisfy the cupidity of the robert rubins of this world and their many acolytes and protoges.

so i say... hold the banksters to their lawfully drawn and freely entered contracts... and if they die from it... put stakes through their hearts and bury them with garlic...

imagine the economic stimulus that would flow from a five to eight percent reduction in the cost of EVERYTHING!

[John]

How about making ALL mortgage lenders keep their loans for at least 5 years.

How about making the leveraging of mortgage loans ILLEGAL.

Just these 2 acts would prevent any future housing bubbles.

Regarding the current criminal mess, make banks reduce the monthly mortgage to 38% of monthly take home income. If you still can't afford the house, you lose it. Cram down , sham down, whatever. The stupid, criminal banks made these loans, now they should have to live with them.

One way or the other, they will live with their bad decisions.

[GG]

Not everyone that bought in 2005 or 2006 is a speculator. Sometimes bad things happen to good people who have great intentions and they can't afford to stay in the home and it's upside down as well. They might not have any other options than to hand the keys to the bank.

I think a lot of posters to this blog forget we are talking about real people who didn't intentionally try to drive prices up or get in over their head.

[sff]

You know there have been much much bigger property bubbles in places like london, dublin, and dubai. But they haven't collapsed like we have here because only in the USA can you walk away from your mortgage without declaring bankruptcy. Now that the rest of the world is aware of this there will never again be an international market for US mortgage debt. Cramming down mortgages will only add to the misery. The US government is the only buyer for US mortgage securities now... until it runs out of credit.

[theron]

"The road to hell is paved with good intentions."

The message I've always taken from my favorite quote is it's not enough to have good intentions. You need to put your thinking cap on too :)

[JL]

I'm really tired of hearing the "I told you so" and charges that the afflicted homeowners are "greedy speculators" receiving a well-deserved comeuppance. This simply isn't true in most cases. Take my example, a young 30s professional who bought a home I could afford, put down a good downpayment and got a fixed-rate conforming loan. I just happened to have bad timing. Now I owe at least $100,000 more than my home is worth, as my neighbors foreclosure and my value depreciates further. My social and professional cohorts in this age group, early thirties professionals, are stuck in the same situation and feel horribly trapped. You can't tell me this is all our fault.

[original thinker]

JL rationalizes:
"I'm really tired of hearing the "I told you so" and charges that the afflicted homeowners are "greedy speculators" receiving a well-deserved comeuppance. This simply isn't true in most cases. Take my example, a young 30s professional who bought a home I could afford, put down a good downpayment and got a fixed-rate conforming loan. I just happened to have bad timing. Now I owe at least $100,000 more than my home is worth, as my neighbors foreclosure and my value depreciates further. My social and professional cohorts in this age group, early thirties professionals, are stuck in the same situation and feel horribly trapped. You can't tell me this is all our fault."

Bad timing in a bubble is actually gross stupidity
fostered in greed. It's like buying a hot stock too late.

Too bad, JL. Sorry you're under water. Just stay and
pay for your mistake and I'll be applauding. This is
how to accept your share of the blame. Diocletian's
edict and his trusty keg of nails are just there to keep
you honest when you're feeling "horribly trapped".

[sfvrealestate]

Loved the posts from JL and Dog-Walker. The banks own us.

[Nelcisco]

SFVRE,
Speaking of banks owning us, I know you had issues w/ BofA yourself, hows that go'in? Did you finally get it done or are they still dangl'in that carrot?

[Fujishige]

If you bought a home you could afford, and you didn't lose your job or are forced to move, what's the problem? You can still make the payments that you had planned on making, and you still have the house you planned on living in.

[Renter]

Why are individuals always expected to display more personal responsibility than banks/companies? Republicans never howl about personal responsibility when they read that companies are making predatory loans, securitizing mortgages so they don't have any risk, dumping toxic waste in the ocean, etc. Doing the right thing goes both ways, but as with the governor, it only seems to apply to the weakest when times get tough.