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Elizabeth Warren Highlights Washington’s Losing Battle on Housing

Posted by Larry Doyle on October 9, 2009 9:21 AM |

Who in Washington will give you a straight answer? Elizabeth Warren.

Who is Elizabeth Warren? Her Wikipedia bio reads:

Elizabeth Warren

Elizabeth Warren

Elizabeth Warren (born 1949) is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy, and commercial law. In the wake of the 2008-9 financial crisis, she has also become the chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout, formally known as the Troubled Assets Relief Program. In 2007, she first developed the idea to create a new Consumer Financial Protection Agency, which President Barack Obama, Christopher Dodd, and Barney Frank are now advocating as part of their financial regulatory reform proposals.

In May 2009, Warren was named one of Time Magazine’s 100 Most Influential People in the World.

Ms. Warren consistently takes no prisoners or provides no pandering in making honest assessments of the interaction between Washington and Wall Street. She has called the banks on the carpet. She has called Secretary Geithner on the carpet. She has called Congress on the carpet. Why? A general lack of honesty, integrity, and transparency in dealing with the American public.

When she speaks, I listen.

What did she have to say this morning? In commenting on a recently released report on the effectiveness of government programs to support housing, Warren questioned the scalability and the permanence of the impact of the TARP funding. Bloomberg provides further color in writing TARP Oversight Group Says Treasury Mortgage Plan Not Effective. The report highlights:

“Rising unemployment, generally flat or even falling home prices and impending mortgage-rate resets threaten to cast millions more out of their homes,” the report said. “The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted.”

New programs or program enhancements? Yesterday I opined “Washington Needs a New Housing Model” and wrote:

While the administration swims upstream on this issue, bank policy of tight credit and restrictive lending only further exacerbates the housing market. Make no mistake, though, banks are taking that approach to tight credit at the behest of regulators who know the level of losses in the banking system and are trying to preserve the industry as a whole.

I like a rallying equity market as much as anybody, but I wouldn’t spend any paper gains just yet. Why? The new housing model is displaying that:

“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” concluded Sapienza.  “This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe.”

This model needs some quick-dry crazy glue, which could only be applied in the form of a serious principal reduction program. Banks would take immediate and massive hits to capital which they clearly won’t accept.

So how can we generate some support for housing?

Aside from a principal reduction program, the penalty for those who would strategically default on their mortgage needs to be far more onerous.

The principal reduction would negatively impact bank earnings. Too bad. The banks are currently feeding at the taxpayer trough and would not be here without the bailouts. The individuals who are capable of making their payments need to accept the moral responsibility that is embedded in a contract.

Given the massive violation of moral hazards and breaking of contracts by Uncle Sam, that old man does not have a lot of credibility on that front.

What do we really learn here? Ultimately, the market is the market and efforts to manipulate or support a falling market will only be temporary. The market needs to find the clearing level where private money will purchase properties. That private money will wait while Uncle Sam continues to try to prop the market.

In the meantime, do not expect any meaningful support for housing.


  • divvytrader

    last paragraph says it all ……..

  • AMEN Larry! It’s not fair to all of us that do pay our mortgage every month (on time) when people are strategically defaulting on their mortgage every day without any penalty or consequence. When you borrow money, you are morally and legally obligated to pay it back, regardless of anything else. Banks also need to pay the consequences of making stupid loans.

  • Mark G.

    “the penalty for those who would strategically default on their mortgage needs to be far more onerous”

    “When you borrow money, you are morally and legally obligated to pay it back”

    When any person exercises their rights that exist within a legally binding agreement, they are not acting morally or immorally, they are simply exercising their defined rights that are written into the agreement.

  • bighenri

    As one walking on a mortgage, I’d like to elaborate a bit on motivations and “justifications” that I believe are embedded in the ethical and practical decision many people are making in this regard.

    On a practical front, my wife and I lost approximately 40% ($200k) on the value of our California house between July ’07 and July ’09. Given conditions that we see in the market now, and what I foresee as a protracted downturn in the housing market, it will be nigh on a decade before we could get that asset value back.

    Yes, you’re right. We made a horrible financial decision, not you. Nonetheless, there is a way to prevent my family from paying to the banks, what I could be paying into my children’s future for the next many years. $200k is the value of a good university education – front to back. We bought at a sweet spot for our income level, so our mortgage is affordable, but constitutes a large piece of our monthly income.

    On the ethical front, I’ll begin, “with your grandpappy may not have seen this level of decimation in the housing market.” These are not ordinary times. Don’t stop reading. There’s more substance below.

    There are two material points to be made. First, following on Mark’s comment, California and about ten other states provide anti-deficiency codes to help place the onus of property valuation on the banks. This is designed to keep them honest. In theory, they are better situated to understand the true value of the property, and are interested in the future health of their own institutions. Sadly, the second seems not to be the case as CDS and CDO “innovations” were used to acquire perverted short term gains. No, I don’t believe for a minute that the Wall Street crowd didn’t know what was up.

    That get’s to the second point. Accounting principles were rewritten allowing the AIG CDO game to flurish. A simple fraud was purpetrated on the American people by our financial industry. The executives running those companies got richer by destroying them and then had the audacity to beg for your tax dollar to keep them operating. I’ll save you my diatribe against the lawmakers whom I believe allowed this to occur.

    So, as my family watched our property value evaporate, TARP and other vehicles were implemented to stabilize deflationary pressures by pumping the banks with cash. This policy did little to aid you and me beyond keeping my interest rate low and allowing me to invest again with the banks who created this mess. Instead it aided financiers and Wall Street investors who still have not reformed their ways. See Barclay’s recent shenanigans.

    If defaltion were the real concern, the government could easily have passed that money through every residential mortgage holder in the US by way of principle reductions. The money would have ended up in the same place, but every mortgage holder would have been the richer for it. And people would have been spending too, since they would have had extra cashflow – you know, to buy cars and stuff.

    Would this approach have been more ethical than a bank bailout? Certainly, it’s debatable. What about all those people in the country who own their houses outright? They would have benefited from a more robust economy thought. Right?

    The bottom line is, we bought a house based in the assumption that the banking system was interested in a sustainable market. I no longer believe that was true. My reapraisal of the system dynamics, and the subsequent bailout at our collective expense, led me to be less interested in my contract with the bank. My loss and legal recourse led me to believe it is best for me and my family to walk. While I understand the anger pointed at me and others who are choosing this route, I submit that the primary ethical dilema is resolved – to the extent that it is – by my contention that the banks and larger system defaulted on us. Not the other way around.

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