Indeed.

…but that is a topic for another post.

Fair enough.

foxmarks – contact me by email and I’ll see if I can find you a nice Ph.D. program in economic sociology. In the meantime, I’d recommend you read some literature – say Doug North’s Institutions, Institutional Change and Economic Performance which will explain (from an unimpeachably right wing point of view), precisely why we can’t expect interests to align so as to maximize productivity in the absence of appropriate institutions.

unf – nice to see you back again. The press release that thomas provides (as distinct from his analysis) gives some idea of what the administration has on the table.

thomas – as someone who studies business self-regulation and governance for a living, I can tell you that there is an unanimous consensus that pious exhortations count for diddly-squat in getting business to do things, unless they are backed up by the threat of sanctions/formal regulation. One tiny pilot program does not a precedent set. Business, after all, as right wingers are fond of telling us, are in it to make profits, not to support social responsibility etc etc.The descriptions of Bush’s initiative in the business press, as best as I can see, very nearly universally describe them using terms such as ‘modest’ – and with good reason. The exhortations count for zilch – they fulfil the same rhetorical purpose as the claims in the 1980s that mentally ill people who were being turfed out of (admittedly often horrible) hospitals, were being put out to the ‘community.’ Just as there was no community then, there is no reason to believe that the relevant firms are going to provide a single jot or tittle more flexibility on repayments than is compatible with their interests in a market facing a serious credit crunch. Which is to say, not very much at all. The FHA reforms will help a maximum of 80,000 people out of 2-2.5 million mortgage holders at risk. The Stabenow legislation will be helpful – but is hardly controversial or a serious use of Presidential agenda-setting power.

jasper – fair enough that this doesn’t affect a fair chunk of the working poor. But it does affect another chunk- lots of the distressed debt is precisely from people who had rented in the past and who thought that they could own. There’s a lot that could be written about the perverse incentives towards ownership in the US tax system – but that is a topic for another post.

Did you not read my reference to “lenders” and “hedge funds” or did you just ignore it? Besides, I hardly think every overextended borrower is “poor”—especially in comparison to the millions of American renters who would be hurt by a taxpayer-funded scheme to prop up the price of houses.

“Besides, a certain amount of financial pain may be worth it if it results from a necessary rebalancing of the economy, and if the people feeling said pain learn lessons that will benefit them in the future.”

What kind of lessons are we talking about here, and why does it seem that only poor people have any lessons to learn from financial crises?

Well, they’re not really a problem for all of the rest of us. Just some of the rest of us. If one happens to find oneself in that category of fairly poor Americans known as “renters” lots of foreclosures are desirable. Just remember one thing: any grand, corporatist schemes to help lenders, hedge funds and overextended borrowers will also act a subsidization of property values. Which sucks if you’re some poor schmuck in California or Long Island who’s been working like a dog trying to save enough dough to get on the property ladder. Besides, a certain amount of financial pain may be worth it if it results from a necessary rebalancing of the economy, and if the people feeling said pain learn lessons that will benefit them in the future.

When a bank forecloses on a house, they haven’t gotten their money back. They’ve gotten an empty house that they now must sell (bits and pieces of a house can’t be handed out as dividends, you know). It is entirely possible, particularly in plummeting markets and with borrowers who had creative financing (those most vulnerable to foreclosure), that a foreclosure sale will yield less than the face value of the loan. Every foreclosure sale in a neighborhood drives down the value of other homes, which only serves to compound the problem.

So, foreclosures are a problem for the lenders. They are also a problem for the rest of us, particularly in areas that have a lot of defaulters: it drives down property values and diminishes tax revenues for local governments and for schools, which leads to reduced services, which lowers property values, wash, rinse, repeat.

“Qu’ils mangent de la brioche” is not a good response to the situation.

Fact Sheet: New Steps to Help Homeowners Avoid Foreclosure

On Friday August 31, 2007, President Bush Announced Steps At The Federal Level To Help Homeowners In Need Of Assistance Avoid Foreclosure. These steps will help homeowners having difficulty paying their mortgages and ensure that the problems now disrupting the housing industry do not happen again. The fundamentals of America’s economy are strong – economic growth is healthy, wages are rising, and unemployment is low. The markets are in a period of transition as participants are re-assessing and re-pricing risk. One area that has shown particular strain is the mortgage market, particularly the subprime sector.

The President Announced The Following Steps To Help American Families Keep Their Homes

• 1. The President Calls On Congress To Pass Federal Housing Administration (FHA) Modernization Legislation. The President’s FHA modernization proposal would lower downpayment requirements, allow FHA to insure bigger loans, and give FHA more pricing flexibility. These reforms would empower FHA to reach more families that need help – first-time homebuyers, minorities, and those with low-to-moderate incomes – and offer more options to homeowners looking to refinance their existing mortgage.

o The Administration Will Also Launch A New FHA Initiative Called “FHA-Secure.” The President has asked Secretary Jackson to pursue important administrative changes to give FHA the flexibility to help more families stay in their homes during this time of transition in the mortgage market. The FHA-Secure program will help people who have good credit but who have not made all of their payments on time because of rising mortgage payments. For the first time, FHA will be able to offer many of these homeowners an option to refinance their existing mortgage so they can make their payments and keep their homes. FHA will also charge mortgage insurance premiums based on the individual risk of each loan, using traditional underwriting standards, so it can expand access and help even more families.

o Since 1934, FHA Has Helped Close To 35 Million People Buy A Home And Stay In Their Home. FHA is a government agency that provides mortgage insurance to borrowers through a network of private sector lenders. It also offers options to homeowners looking to refinance their existing loan. The President’s FHA modernization bill was first sent to the Hill in April 2006, and it passed the House last Congress with over 400 votes. The President has once again asked Congress to send him a clean FHA modernization bill as soon as possible so he can sign it into law.

• 2. The President Calls On Congress To Change A Key Housing Provision Of The Federal Tax Code So It Does Not Punish Families Who Are Forced To Sell Their Homes For Less Than Their Mortgage Is Worth. Current tax law counts cancelled mortgage debt on primary residences as taxable income. For example, if the value of a home declines and $20,000 of the homeowner’s loan is forgiven, the tax code treats that $20,000 as taxable income. The President proposes temporary relief to ensure that cancelled mortgage debt on a primary residence is not counted as income.

o The President Is Working With Congress In A Bipartisan Fashion To Make This Important Change. Senator Debbie Stabenow (D-MI), along with Senator George Voinovich (R-OH) and others, has introduced a bipartisan bill that would protect homeowners from having to pay taxes on cancelled mortgage debt. In the House, Representatives Rob Andrews (D-NJ) and Ron Lewis (R-KY), along with several of their colleagues, have introduced similar legislation. The President looks forward to working with Congress to reach agreement on a bill, so we can deliver this vital tax relief to American homeowners.

• 3. The President Announced That The Administration Will Launch A New Foreclosure Avoidance Initiative To Help Struggling Homeowners Find A Way To Refinance. Housing and Urban Development Secretary Alphonso Jackson and Treasury Secretary Henry Paulson will reach out to a wide variety of groups that offer foreclosure counseling and refinancing for American homeowners. These groups include community organizations like NeighborWorks, mortgage lenders and loan servicers, FHA, and Government-Sponsored Enterprises like Fannie Mae and Freddie Mac. The goal of this initiative is to expand mortgage financing options, identify homeowners before they face hardships, help them understand their financing options, and allow them to find a mortgage product that works for them.

After reading the FT piece, I still don’t know. I don’t even know whether it’s a full plan, a suggested approach, or something in between, or whether it even seeks to “solve the general problem”. Bush’s fault? the FT’s? Who knows?

Perhaps more usefully, does anyone else have a suggestion to solve the general problem? It may be that working at the margins is the only feasible method.

Um… so what’s Bush’s plan to solve the general problem again?

At least one servicing company has made efforts to help customers stay current in payments. In a pilot program that company reportedly helped 200 customers find jobs. In one case, the company helped pay for a car so a customer could keep working. Why? Because the mortgage portfolio is worth more when the notes are paid at full value than when they are foreclosed. (Contrary to what Dsquared says, foreclosures are a solution, but they aren’t the preferred solution. But the incentive structures are already in place.)

Now, that isn’t to say that the expertise to run this kind of program is readily available, or that this is a solution to the general problem. But, as far as I can tell, no one claims this is a magic bullet, only that at the margins efforts from servicing companies could help. (The FT emphasis on this part of the administrations’ response is unusual, not in its skepticism but in its focus.)

The alternative pushed by the folks FT talked to is a more general bailout. It’s not surprising that these folks would want that (guess what? bankers in CA are nervous!), but it is odd that FT wouldn’t mention it, and that their failure to mention it would be evidence of good journalism.