By now we are all eminently aware of our nation’s mortgage crisis. Lenders over-lent, buyers over-bought, and state-of-the-art hedging ensured nobody would ever be held accountable.
But four years on, economists estimate that underwater mortgages are subtracting a full percent from GDP growth–out of two–while entrenching abysmal new norms of unemployment.
So how does it end? As a financial industry friend counseled, “If someone asks when markets will recover, say, ‘A year for stocks, two for the economy, and three years for real estate.’ And if that doesn’t pan out, tell them the same thing next year.” Well, that worked too, for a while. But folks have quit asking.
Wall Streeters aren’t the only one-percenters shrugging for answers. The vox populi, long on hand-wringing and blame-gaming, have been short on solutions.
I’m here to offer one. In the interest of bipartisan comradeship, there will be blood. Shared blood. Call it “Right-Sizing the American Mortgage.” (Can’t ya just see it in backdrop?)
First, try to move on. This is a no-blame zone. Whether you’re a Reaganite blaming Clinton and Fannie or a seething 99-percenter who holds Goldman and Greenspan responsible, we can all concede there’s plenty of blame to go around. And those blessed 2006 market highs are goner than Colonel Qaddafi.
Lukewarm backward-looking fixes–like the modest financial relief in the legal settlement between banks and the states, and the Obama administration’s recently revised refinancing rules–don’t get it done. Merely lengthening the rope for homeowners does not a new solution make. We must redirect the risks and defuse the hazards. The good news? It’s not too late.
Here’s what Obama’s Depression-era salve fails to defuse: How do you give good people an incentive to carry on, without the moral hazard of forgiving the mistakes of the buyers and the banks?
That moral hazard says to us, “Wash your hands of your underwater mortgage, and start over. Leave the keys. Stick it to those sneaky lenders who made you accept a mortgage you couldn’t afford.”
But such a retreat would not only exert a deleterious effect on your personal credit rating. Far worse, if performed en masse, such an evacuation would fatally exacerbate the lenders’ main problem. “Under”-performing loans would devolve into voids, zeros, a tornado of double-wide defaults shot straight through those elegantly hedged portfolios. Wouldn’t that just be the bankers’ problem? Unfortunately, no. Unpleasant is the truth: when lenders and bankers fail, the economy gets hurt too.
Which brings us to the other half of our moral dilemma: the big banks’ reluctance to “mark to market”–i.e. honestly account for–the real-world prevailing value of all those inflated mortgages they’ve been left holding. And denial of reality is understandable, for if any of the Freddies, Morgans, or Citis–operating as they do on rampant leverage coupled with wafer-thin capital requirements–were to acknowledge the stark reality of current home and commercial real estate prices on their balance sheets, they would each go belly up that very day. Which wouldn’t be nearly as funny as it sounds.
So marked-to-market’s a non-starter, leaving the market mire, and the paralyzing status quo: whether you’re a homeowner or a lender, you can’t hope to sell what you’re unwilling to price. And without a price, none of us can move on. The underwater owner stays in his home. The bank holds onto its money. The owner won’t spend and the bank won’t lend and so the economy won’t heal. Someone must go first, but who? You or them? Wait, what? You? Them?
You AND them.
So what if the banks, who live in steadfast denial of the liquid value of these loans, were to act in concert with those homeowners encumbered by same?
Meet each other halfway, like a hostage exchange.
There should be blood. To begin with, each party concedes a 15-percent haircut on their values from inception.
Read that again. First you accept a 15-percent cut on the value of your home; then the lender accepts another 15-percent cut on the value of your home.
So your lingering million-dollar mortgage on a formerly million-dollar house is now an $850,000 mortgage on a $700,000 house. Fifteen plus 15 equals a 30-percent writedown. Sound harsh? Not when compared with reality–you’re already down at least 25 percent from peak. There can be no absolution without penance, and everybody seems to prefer that others pay that penance. And if you’re in one of those markets that haven’t fallen, well, this is an optional game. You don’t have to play. But if you won’t play, you don’t get the lender’s side of the writedown.
And this is the right kind of writedown. Said mutual bloodletting would do a lot to alleviate those perverse moral hazards–you can’t get a break by walking away scot-free, and the bailed-out bankers finally have to pay a price for what they did. The good news is: this plan would split the pain down its middle, relieve capital constraints, unleash Yankee frontierism, and let the invisible hand get on doing its business. The banks won’t be happy, but they can survive, because a diminished mortgage payment is better than none at all. Homeowners won’t have all their problems solved, but they get a nice boost in the right direction.
So here’s where politics takes a smoke break and behavioral economics assumes the conch. We still have to solve the equation of those families who, because of, say, job loss, or regional economic failure, still would not be saved by the above re-valuation. Give them a choice. By that I mean: new life.
Deep-underwater homeowners get an out. Provide them the chance to divorce their misshapen palatial dreams and give back the house, not just the keys. But don’t walk away: right-size yourself!
Right-size your mortgage by enrolling in the plan, quitting your current residence, even your city or region, to relocate directly to a more income-appropriate property, in Promisetown, USA, that’s been similarly relinquished, by a smaller-sized struggler, in our interstate household relief program. With scale-size loan to fit. A patiently coordinated de-escalation.
How might it all look? Imagine a nationwide housing database. Shouldn’t be hard; we’ve already got one. It’s called MLS, and almost anyone contemplating a mortgage has trolled its waters. Suppose back in the salad days you codgered your way into a $600,000 mortgage when it probably ought to have been $300,000. Read on. You’re in luck. Simply come clean, acknowledge your over-reach, and sign up with the program. Now move out.
Simply put your home, along with your outsized payment, back into this MLS housing pool, and pick yourself another property, downstream, with its attendant monthly bill, and move there instead. Could it possibly be so simple? It can. Operation twist and torque worked. No broker necessary, although enterprising agents willing to master this boom will surely encounter lots of For Hiring signs. Ding, ding, and ding.
Oh I know, sounds politically unpalatable, with a new public-private partnership (read: bureaucracy) required to administer this. But it shouldn’t be too much of a bureaucracy, and establishing such a database wouldn’t take much. A Harvard Comp Sci could have this new right-size MLS site programmed and operational within a week. (A Cornell kid would have it up and running overnight.) Dig.
And the bill for this “Public-Private Partnership” would be footed by those selfsame zombie banks that fear nothing on earth worse than having to reacquaint those deadbeat pools with reality. They’d take a loss, yes, as people down-sized. But banks would gladly absorb a one-time payment if it came with legal amnesty for all their sins. Stuck it to ’em after all, didn’t ya?
Sure, the swap may compromise your living space, but the peace of mind, relaxed monthly burden, professional freedom, and reinvigorated economic activity should more than compensate for the loss of capitalist pride.
Just imagine the relief, the empowerment, of going online and selecting the house and mortgage you would’ve been better off taking in the first place. All of this can be yours.
Not to mention the instant vaulting economic relief of an unstuck housing market taking a bold leap forward. The Dow would rally 2,000 points within days (faster than the year our industry friend forecast). Housing inventory levels, currently mired at a dismal 14 months’ supply, would drop dramatically, as cash-strapped strivers accept this second chance lifeline. And the economy would blossom, freed from the suffocating yoke of a housing glut and attendant construction famine.
But above all else, it would keep the dream alive. I’m finished.
Jordan Wallens is a Cornell graduate and author of Gridchronic. He has worked in the investment business for 17 years and lives in Los Feliz with his wife and son.
*Photo courtesy of bbcworldservice.