Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Sunday, August 14, 2011

Sunday Musings-DEBT

The recent downgrade by the S&P of US debt was lousy, but it was a wake up call. US citizens have too much debt- and it isn't all their fault. College tuition is rising faster than inflation. It's keeping pace with medical care. It's a crisis in the making, a real catch 22. So students take out loans for tuition then put their text books on credit cards. Hello!

Now the next big debt bubble: Student Loans- largely fueled by for-profit institutions. Problem here, folks, is that there is no way out for the borrows. Waltz on over to for a very good article on the next crash.

That was the morning coffee conversation with my fiance this morning. Then we went grocery shopping and we were having a conversation with the clerk. She and her husband are having trouble paying their mortgage. So they called the bank to see about renegotiating their 6% interest rate into something lower. The bank informed them that to do this, they would have to reassess the property and that they are not currently assessing property. End of conversation. She and her husband told them that they were considering strategic default. This had no effect on the bank. (People in my part of the world are rather open about their finances-oddly enough.)

After leaving the grocery store, my finance and I started to figure out what perverse incentive was keeping the bank from a simple re-negotiation. Of course, this has been written about all over, but not by me. So my turn. This is what we realized:

1) Banks don't pay property taxes on the homes they are holding.(thus the strapped states and counties)
2) Banks can keep inflated assets on their balance sheets, thus not having to recognize their losses to investors. The idea is to keep investors interested in Bank stocks. But investors have been bearish on banks stocks because of the confusing about what these banks actually hold on their balance sheets and because banks are keeping larger cash slush to cover bad debt,
3) Banks collected on the PMI. In other words, they got the insurance money on the loss.
4) all told, even if the bank tears the house down, they've made more money on it than they would have if they sold the houses at a loss.

The way this works is that the bank will foreclose. Then the house is supposed to go to auction. So the bank will bid whatever price is equal to the outstanding mortgage. Of course, the outstanding mortgage is usually based on very inflated prices. So the bank usually wins the house at auction. Then the county tax collector sends the bank a bill for the outstanding taxes, the banks asks for a deferment until they sell the house. Without the proper legal remedy, the tax collector agrees to to the deferment. But then the bank holds the property off the market, not wanting to further deflate prices with overstock.

So in the end, the original owner has a great incentive to walk away- believing that in 3 years he will be able to buy a new house at a cheaper price. The banks on the other hand were hoping to see interest rates rise. But the Fed just told them not to hold their breath. So score 1 to the people.

We need to start putting banks back in line- charging them property taxes and putting bans on their ability to package student loans into securities. They also need to change the rules on student loans. At this point, I must start to agree with those conservatives who point out that student loans encourage sharking by universities and colleges- particularly the for-profits. Loan limits need to be set lower. And students should be given a 20 day grace before interest accrues on their loans, like credit cards.


Raised By Republicans said...

As someone who has no trouble paying my mortgage but who plans to sell in the next year or so, this is not the worst situation. Anything that takes houses off the market is fine with me. There are way way too many houses and not nearly enough rental properties. Dumping houses on to the traditional housing market would be horrible from my perspective.

Did you hear by the way that the feds are going to have Fannie and Freddie Mac sell their stock of forclosed houses in blocks of houses to private investors who will then rent them out. That's a great plan. Yet another example of a good idea that will actually help people in direct ways that Obama is not claiming enough credit for.

USWest said...

This has been going on- investors buying up lots of houses and then renting them.

Actually,it would be better for the bank to renegotiate the mortgages with people so that no additional houses go to foreclosure.

I am having no trouble with my mortgage either. I don't want to sell, but I do want to refi and get rid of PMI. But I can't because of falling property values. So I I have to see if there is extra money in the budget to get up to 20% paid off, which is a little bit of a challenge sometimes.

But this isn't just about me of you. It's about society as a whole.

Raised By Republicans said...

Absolutely, society as a whole would be better off if there were a better way to manage mortgages. Better yet, housing costs should be more in line with median household incomes.

I guess all I meant was that as bad as things are, most home owners are less concerned about refinancing than they are about resale.

But all that said, it seems like a start would be to charge these banks property taxes for the properties they own. That would have encouraged them to sell them sooner and we might have had a deeper housing crash but it would be potentially over by now. And buyers like you would have been able to buy cheaper houses in the first place and get into a more reasonable housing market. It also would bring the houses back into the property tax cycle - albeit at lower values. At least the local governments would get SOMETHING out of these properties.