The Volokh Conspiracy

Understand some things -

1 ) They CAN 'walk away as easily as someone who put no money down'. It'll piss them off more, but their loss is already their loss, realized or unrealized. The money wasted on the inflated purchase price is already gone to someone else's pocket, and is not coming back. Thus their present position is no different than someone who put no money down. Their PRIOR position WAS different, but that's in the past now.

2 ) CONGRESS does not bail ANYONE out. They merely decide who YOU and I are going to bail out. If there is a bail-out, it is CONGRESS STEALING FROM YOU to make someone else's mortgage payment. Call it what it is - THEFT, not 'help'. If you're so concerned about helping this person you know, send them a month's mortgage payment. Why wait for Congress to take it away from you, screw it up, and THEN give it to someone you don't know ?

well, none of them should be bailed out. as another matter, the immigrants made a poor fin decision, and i don't care--equally.

Many 'homeowners' are people with little equity, no equity or even negative equity who are basically making monthly rental payments to a mortgage company.

Anyone with a mortgage soon realizes this, if they didn't prior do taking a mortgage- the difference is, with a mortgage, you stand to get your money back if you wise up a little.

That's why you do it.

Did a search on the organization, seems sort of a "right to housing" outfit, sorta kinda maybe, but I couldn't give any specifics.

Anyway, the part of the study quoted states the obvious, which is to my eye more of the obvious such as the government wants to spend millions on to educate people about mortgages... how about a nice, one-page pamphlet instead?

"victims"? maybe.

White, middle-class babymakers will always vote to grease their skids at everybody else's expense, and they will always win, Bill of Rights notwithstanding. What's good for them is good for Amerika.

I don't see how a comparison is possible, because the rental stock is dominated by apartments while the housing stock is dominated by single family homes. Don't buy a house at the peak of the boom, is my advice. My stock portfolio is only now recovering to 1998 levels, so I don't know why stocks are seen as a better investment than a single-family home. GE's profit dip is going to send a chill through the market, for example.

Consider that someone owns the house you would rent, and they are making money by renting it. They have owned it for a while, and that is the secret for all homebuyers. I knew an immigrant couple in a similar situation to DB's friends. He was a mechanic's helper and she was a data clerk. They told me that with their salaries, they could not afford to rent the house they lived in. Luckily they had bought their house five years previously, so their housing costs were relatively fixed while rents moved with the market.

Secrets:

- Only buy when you plan to stay put for five years or more.
- Don't buy at the peak of the market.
- Don't buy above your income -- get a conventional mortgage with its rigorous income and credit checking.
- Don't use your house as a piggy bank.
- The amount of money wasted on condo fees could help you buy a single-family home. Cut your own grass, paint your own walls. Sock some money in your own bank account each year for a new roof, furnace, etc.

Another issue is all the interference to try and prop prices up keeps people like us on the sidelines. We have our 20% to put down sitting in the bank but there is no way a person can buy right now. Seems to me you will never see any sort of bottom in prices until the inventory of unsold homes starts to move. Housing being basically ponzi don't you need new buyers? Prices need to come down to in line with historical averages compared to incomes.

I am also waiting to see what congress does in regards to incentives to purchase. In Florida insurance is also a major problem. So far I haven't seen anything they are passing that will make a difference. By the time they move past bailouts paid for by lobbying, the market will have already corrected. Still, now you have to wait because it would suck to buy right before some tax credit incentive comes out.

Who were you quoting, and where did that "70% more expensive" come from?

The way out of the housing bust would be for the government to print more money, causing 10% inflation for 3 or 4 years. That would raise the price of housing back up to peak of the market levels and everyone would be fine... except people with cash and other investments that don't rise with inflation.

Isn't this what the government is doing now with the cheap dollar and the bailouts? Where does the bailout money come from?

Much of the "foreclosure crisis" involves homes purchased with no-money-down loans from which owners are walking away now that they have negative equity. [Not to mention long-time homeowners who cash-out refinanced regularly, ensuring that they never built any equity; I've read of individuals who have spent literally tens or even hundreds of thousands of dollars they received from refinances, and now want a bailout because they can't afford a few hundred dollars a month increase in their mortgage payment resulting from their last refinance into an ARM.] There is no more reason to consider such cases part of a social crisis than if the same individuals has leased apartments well beyond their means and have now been evicted.

I'm perfectly willing to fund a bailout for such people, provided that the bailout takes the sole form of rebuilding Pruitt-Igoe for them and forbidding them to live elsewhere.

Sure, they didn't have to buy when they did, but they are certainly in a sense victims of the bubble, caused by the irresponsible lending and borrowing practices of others.

What other sort of victim is there? They were harmed as a consequence of the punishment-worthy actions of others. I'm not aware of any other definition of "victim"...

The whole ownership concept for lower income people is a scam. With no skin in the game they're just renters who have to assume market risk, seismic risk, storm risk, etc. The very people who can least afford these risks are the ones saddled with it. Once developers built apartment complexes and owners rented them out.

The wave of foreclosures has also has destroyed neighborhoods as the "owners" abandon their properties. This alone will cause Congress to do something. Unfortunately Congress will do the wrong thing as it almost always does.

Here is my solution.

1. Convert the current owners facing foreclosure into renters of the property they currently occupy.

2. Give these new renters a (European type) call option on the property they occupy. Make the strike price something like the outstanding principal.

3. Set the expiration date at something like 2-5 years.

4. If the renters fail to exercise their option then the owner/bank can sell the property or continue to rent it.

The advantage of this scheme is it arrests the destruction of neighborhoods. It gives the people facing foreclosure a breather. By the time the option expires the credit crisis and the recession should have passed. If real estate is higher then some renters might get their property back. With all its problems this scheme is likely better than what Congress plans to do. It will also help avoid the tremendous ill will generated by something that looks like a bail out of people who make poor decisions at taxpayer expense.

2. Give these new renters a (European type) call option on the property they occupy. Make the strike price something like the outstanding principal.

doesn't this give a sweet deal to the occupants, and a no-deal for those who "just rent" other properties?

IOW the government gives the defaulters a pass with a future and a break as their rent works down the principle, none to the other guy.

I'm askin'.

My time in Boston as both renter and owner disagrees with both those suppositions. Single-family homes are the minority.

Well, that depends on what the definition of "Boston" is. If it's "City of Boston", you're correct. If it's Boscamberville, you're still correct. But if it's "Greater Boston Metro Area", you're wrong.

A. Zarkov makes good points. Unfortunately there is no one to tell many prospective homebuyers that they would be better off renting. So many people have it in their head that a home is a surefire investment; that paying rent is like lighting money on fire; and that some combination of tax deductions and equity-building makes homeowners come out way ahead of renters regardless of a straight comparison of rent to mortgage payments. It used to be that the market sorted this out, because people who were better off renting usually could not get mortgages anyway, but the rise of exotic mortgages and the strong incentives for brokers and loan officers to sell as many mortgages as possible broke that down.

We'll buy when we have a solid down payment and know we'll be somewhere five years. In the meantime, we've been taking advantage of very favorable rental markets.

"Sure, they didn't have to buy when they did, but they are certainly in a sense victims of the bubble, caused by the irresponsible lending and borrowing practices of others. "

As far as I can tell, given that the drive to end regulation of fraud and so forth generally comes from the right, the conservative argument for these sorts of people seems to be: "serves them right for choosing to be part of the economy! They should have known better!"

1. At least in my state, and I suspect in many others, a residential mortgagee can walk away -- the mortgage holder cannot seek a deficency judgment, but has to be content with repossessing. In this context, the benefit of the bailout goes to the bank, not to the individual. Esp. when the situation is not that the buyer is unable to make payments, but that he/she finds that the house is no longer worth what they paid, i.e., is a bad investment that they might just walk away from.

2. I sometimes long for the good old days when a pol could just take a bribe. The ability of the briber, and the avarice of the bribee, had some limits, and if a person didn't want to participate in the bribe, there was no way to force them to do so. In this context, pols are driven to spend billions to buy votes, not out of the pocket of any bribe offeror, but out of yours and mine.

3. I should hope that if there is any bailout, there would some provision that if those helped hang on, and later turn a nice profit upon sale, we taxpayers who actually didn't overspend might be reimbursed.

"At least in my state, and I suspect in many others, a residential mortgagee can walk away -- the mortgage holder cannot seek a deficency judgment,..."

Non-recourse is more limited than you might think. In California it applies to purchase loans for a primary residence. All those poor souls who used their houses as an ATM machine won't necessarily avoid a deficiency judgment.

Any person who uses the phrase "blah blah Amerika blah" is doing the debate equivalent of smashing his head into a concrete wall in hopes of stopping his headache.

"This is reminiscent of Groucho Marx' advice for investing in the stock market"

I think you mean Will Rogers:

"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

What's good for them is good for Amerika.

There was a time when the "Amerika" crap would annoy me. Not any more. I appreciate the signaling. As soon as my eye spots it, and it usually sticks out like a sore thumb, my brain is conditioned to stop reading and considering whatever might be there.

Brooks Lyman -

Talk about snobbery! The rednecks may be clinging to their guns, or not, but dismissing renters as people with no stake in society, or as the logical constituency for government handouts, is insulting. As I see it, it's the people who bought houses on the bubble who are hollering for the government to do something. Those of us who stayed in our apartments, waiting for the madness to subside, are now convinced we made the right decision. We'll be buyers eventually, just not under stupid conditions.

Which group would you rather have making economic decisions that affect you?

FEARLESS: You obviously need to enroll in an introductory macroeconomics class at your nearest community college since you clearly never heard of the Great Depression that started in the United States in 1929. The Great Depression commenced with several bank failures (over 700 in the beginning and over 3000 by the end) that led to loans being called, a massive liquidity crisis that brought the economy to a grinding halt, and ultimately a 25% unemployment rate. Federal Reserve Ben Bernanke is a student of the Great Depression and wrote a thesis on the subject. Therefore, it is not suprising that Bernanke decided that the Federal Reserve needed to intervene in the Bear Stearns matter in order to stop a potential wave of bank failures.

Also, you incorrectly state that the Federal Reserve bailed out Bear Stearns. Apparently, you are unaware that the price for Bear Stearns' shares was $170/share several months ago. However, Bear Stearns's shares are now worth $10/share under the purported Federal Reserve bailout($2/share under Ben Bernanke's original plan). I hardly think that Bear Stearns' shareholders and/or employees whose retirement accounts were funded primarily with Bear Stearns' shares will agree with your meritless conclusory assertion that there was a bailout for Bear Stearns. Otherwise, how can you explain the several lawsuits being filed by Bear Stearns' shareholders against this purported bailout???

Instead, what the Federal Reserve has done is made a guaranty to JPMorgan that in the unlikely event that JPMorgan is forced to write off Billions of Dollars in losses related to taking over Bear Stearns' subprime mortgages, that JPMorgan will incur the first $1 Billion in such losses while the Federal Reserve will be on the hook for the remaining losses up to $29 Billion. The foregoing is hardly an incentive for JPMorgan to proactively incur Billions of Dollars in losses since it is on the hook for the first $1 Billion. If anything, JPMorgan's shareholders will demand that JPMorgan take the necessary steps to avoid having to writeoff even the first $1 Billion in losses.

Since Bernanke and the Federal Reserve intervened in the Bear Stearns matter, the liquidity crisis has been slowly easing as banks have been drawing on the Federal Reserve's discount window. Confidence is slowly returning to the equity markets since the markets are on notice that Bernanke and the Federal Reserve will do whatever necessary to prevent the failure of a major bank that could start a domino effect of bank failures throughout the system. It will not become apparent until years later but the Federal Reserve intervention with respect to Bear Stearns will be seen as a positive turning point in this particular recession, which benefits all individual investors and pension funds invested in the markets.

Frankly, Congress should not bail out the homeowners. Property prices skyrocketed to unbelievable heights and there must be a reversion to the mean if properties are to become affordable again to future middle class buyers. This is what happened to tech stocks in the early part of this decade and the same must occur with any asset class, including homes, that experiences a bubble. (You can thank that incompetent Alan Greenspan for these bubbles by boycotting his books.) If a home buyer bought a home or property because it's price was appreciating in double digits for the past few years, then that buyer is an idiot for chasing a return that could never be sustained at such level. The same goes for any buyer that attempts to chase returns in any asset class, which is why I will not buy gold or precious metals now even though their returns have skyrocketed these past six months because I know that what goes up must eventually come back down.

The banks owe this mess to themselves. Cape Cod type shack in working class area of NJ was manipulated by banks to $300k.

The only way out, is to create mass inflation (15% a year) to eat up inflated "value" down to supply and demand market value. So the $300k shack will be $300k, but of different value $$. McDonald's will pay for flipping burgers $14/h.

It seems that between mass Wall Street failures and printing money, Bernanke opted for printing.

So many people have it in their head that a home is a surefire investment; that paying rent is like lighting money on fire; and that some combination of tax deductions and equity-building makes homeowners come out way ahead of renters regardless of a straight comparison of rent to mortgage payments. It used to be that the market sorted this out, because people who were better off renting usually could not get mortgages anyway.

My cousins who have rented since they married now pay twice as much for their apartment as I do for my single family house. I am the one with extra money to invest in stocks, not them. I have something tangible to show for my mortgage payments; they have a stack of rent receipts. My wife and I lived frugally for 18 months to save up for a down payment and closing costs; then for the next few years we continued to drive our elderly cars and went on tent camping vacations. By that time our salaries had increased and we could enjoy a few luxuries.

There are indeed signs that the market is reaching its peak. For one thing, you read thoughtful articles in the newspaper ("Is the Market Reaching Its Peak?"). You read about it on the Internet, such as the Housingbubbleblog.

dismissing renters as people with no stake in society, is insulting.

We never received any political campaign mail the whole time we were renting, in two different states. Once we bought a house, we received campaign ads with every election. Political parties see renters as transient people with no stake in society, so I guess we were insulted by both the Democratic and Republican parties. The importance of giving citizens a stake in their community was recognized by Reagan and the Congress 20 years ago, when the mortgage deduction was preserved while other loan deductions were restricted/eliminated. The failure of Congress to limit mortgage deductibility to buy/build/improve one's residence was the fatal flaw.

What Mark H. said about Professor Bernstein's immigrant friends.

They're still living in their house, which is the purpose they purchased it for. Unless they got a funny mortgage and are going to be aced out with increasing monthly payments, what's the problem?

In another 27 years, they will own free and clear a valuable and easily salable property in Washington. If they had rented for 30 years, they would have had zip.

If buying were cheaper than renting, that would open up an arbitrage opportunity which would quickly be closed up. Otherwise, everybody would be able to buy that piece of property and immediately turn around and rent it out for more money. This is, of course, not possible, because the market would have driven up the price of buying to match the price of renting.

Furthermore, there are always irrational people who believe the ownership-is-crucial mantra and drive the prices of buying up even further. Thus, renting is always cheaper than buying.

All I am saying is this. If it is okay to help investment bankers in the name of economic stabilization, it is okay to help homeowners in the name of economic stabilization.

Those who think it is okay to help the former, but not the latter, show that they are not really about personal responsibility and taking the consequences for your actions after all. Why shouldn't the share holders of Bear Sterns lose more of their money than they would have without an intervention? Why should JPMorgan Chase be able to subsidize their purchase of another investment bank with federal money?

Problems with individual homeowners tend not cause systematic instability. Collapse of a major bank WILL almost certainly lead to cascading failures. (NB: The too big to fail problem is a policy and statutory issue beyond the scope of the present discussion.) That equity holders in Bear got some cash was a necessary evil in order to grease the skids. It wasn't ideal, and they likely wouldn't have gotten very much in bankruptcy, but they had a very valuable ability (which the market valued at $10/share + government guarantees) to leverage the bankruptcy. For that matter, we aren't sure that they wouldn't have gotten anything in bankruptcy, because Bear experienced a liquidity insolvency, not insolvency in the classic sense.

Contrary to your assertions, it isn't at all hypocritical to say that the federal government has a proper role in maintaining the banking and monetary system, but that it has no place bailing out individual homeowners. Alternatively, one can look at the Bear Stearns issue as a bailout of both . Individuals - even those who have done everything right - certainly wouldn't be able to get mortgages if the credit markets collapse; hell, most probably wouldn't even have jobs.

Contrary to your assertions, it isn't at all hypocritical to say that the federal government has a proper role in maintaining the banking and monetary system, but that it has no place bailing out individual homeowners. Alternatively, one can look at the Bear Stearns issue as a bailout of both . Individuals - even those who have done everything right - certainly wouldn't be able to get mortgages if the credit markets collapse; hell, most probably wouldn't even have jobs.

It is hypocritical. Helping many individual homeowners would also help stabilize the economy. Just as much as the bail out of Bear Stearns.

If Bear Stearns were allowed to fail, that wouldn't destroy the economy. It would destabilized to some degree. But many homeowners going through foreclosure also destabilizes the economy to some degree.

Now, if you are saying that in some particular cost-benefit analysis, you think we should bail out investment banks but not homeowners, that is not necessarily hypocritical. As long as you are open to the idea of bailing out homeowners but not investment banks in a world where the numbers turn out a little different.

But, if instead you are saying we should not bail out homeowners as a general matter of principle, or because of moral hazard, then you are a hypocrite. There is moral hazard when you bail out Bear Sterns.

In fact, who is most responsible for this mess? Less sophisticated homeowners whose eyes were bigger than their stomachs, or the sophisticated mortgage sellers who took on irresponsible risks enable homeowners to bite more than they could chew?

I believe that the sophisticated mortgage sellers are more responsible, precisely because they are more sophisticated and should have known better. Call me crazy or elitist if you must, but I don't have the same expectations regarding the financial sophistication of a garbage man compared to an investment banker.

It is hypocritical. Helping many individual homeowners would also help stabilize the economy. Just as much as the bail out of Bear Stearns.

"Helping" individual homeowners by giving them a bailout will only artifically sustain the real property price bubble that needed to pop and is only now slowly deflating -- finally. There is no dispute that real property prices bubbled to ridiculous peaks during the last few years, which was beginning to prevent even middle class buyers from purchasing a starter home in certain markets (e.g. California is a prime example). As with any asset class that experiences a bubble (e.g. tech stocks in the early part of this decade), there will always be a reversion to the mean -- eventually.

"Once it is paid off, your housing costs consist of taxes and maintenance."

That's your cash flow not your cost. You must include opportunity costs. The owner can either sell the property or rent it out. So in a sense the owner always pays rent. If he own a house that's too big for his needs, then he can always rent it out, and rent a smaller place and come out ahead economically.

Piggybacking on Gaius,

I again emphasize that Bear Stearns suffered a liquidity insolvency NOT a classic insolvency, i.e, it essentially suffered a bank run. Source: Chairman Bernanke. [Search for "early warning" - it's about midway down the page]. Unlike FDIC-insured commercial banks, investment banks have no structural protection against runs. Thus, you combine (i) a very real risk of actual insolvency due to unsettled trades with the failed bank with (ii) the resulting bank runs causing liquidity insolvency, and the result is a cascading collapse. And yes, that IS an "economic collapse."

It takes two to tango in this dance -- neither the mortgage seller nor the home buyer is more responsible than the other.

It takes two to tango. Neither the patient or the brain surgeon is more responsible for the outcome of brain surgery.

Give me a break. Your living in total lala land if you think that garbage men are equally sophisticated regarding finances as investment bankers.

But if your right, I do know one thing. Investment bankers should be making much closer to minimum-wage.

The sub-prime mortgage seller is in a position to provide the sub-prime home buyer with a loan that the buyer could not otherwise obtain on traditional terms. Hence, a demand and supply was formed to create a market for sub-prime mortgages.

And the only reason that the sub-prime mortgage seller is in the position is because they were like a dyslexic brain surgeon.

Isn't wonderful that people could finance houses they couldn't afford. Isn't it wonderful that these banks helped them do that. That had nothing to do with rising house prices at all.

I again emphasize that Bear Stearns suffered a liquidity insolvency NOT a classic insolvency, i.e, it essentially suffered a bank run.

Well, this is based on your view that you know more about the value of the assets held by Bear Stearns than the market.

So much for efficient markets. It all blows up in your face now, doesn't it.

If the market cannot value Bear Stearns properly, then exactly when should we believe that it allocates resources optimally in other circumstances?

The bailout of Bear Stearns has massive implications concerning the free market. People cannot just say, bail out Bear Sterns, because this is a "liquidity insolvency" and not a "classic insolvency" (i.e. markets are allocating resources in an irrational manner) and then say that we should consider market outcomes to be sacred.

That is the bottom-line. It IS hypocritical to bail out investment banks because of market failure, but not bail out homeowners because of market failure.

AnonLawStudent,

Indeed, the "excessively wealthy investment bankers" have shouldered quite a load in the last year or so trying to keep the economy afloat.

Yeah, shuffling paper around ensuring the "efficient" allocation of resources. Thank goodness for the investment bankers.

And they have shouldered quite a load trying to fix the mess their previous failures to allocate resources properly has caused, haven't they? They do deserve credit.

Kind of like the brain surgeon who does a second surgery when the first one didn't go quite right.

It has everything to do with the SEC's view, i.e., the outside party with access to the most data.

Oh, so your saying that a government agency has a superior view concerning the value of Bear Stearns than the market? Okay... That's what I would like to call a market failure.

A liquidity insolvency is when the market fails to value assets according to their "true" value. Do I get a lollipop?

Do you have a better description of what they do besides shuffling paper? Because, I don't see them building bridges. =)

I see them paying for bridges to be built. But I don't see them building bridges.

Shuffling paper, my friend, is what investment bankers do.

Zarkov wrote:

The economic advantage of renting over owning depends on the market for housing. One is not always better than the other. But the idea that owning must be better because all you have after 30 years is a pile of rent receipts is false."

I think what you meant to say is that the economic benefit of financing a purchase rather than renting depends on the market. Fee ownership without a mortgage is obviously better. And as others have pointed out, for an owner its an achievable goal. Renting doesn't end unless you buy.

The decision whether to rent or finance through a mortgage really depends mostly on how long you plan to live in your home.

The economic term is "intermediation," in simple terms, a collective handshaking and risk assumption service. Most market participants find it quite valuable. But, by your definition, I guess the designers and production managers at Boeing don't actually "build" airplanes either. The laborer may denigrate those who provide intellectual assets, but his labor is a virtually worthless commodity without them.

That is ridiculous. Having domain knowledge and designing an airplane is an entirely different realm than what these investment bankers do. I would bet that most investment bankers (not all) do not even have half the brains of a good Boeing engineer.

Anyway, my point is not to denigrate investment bankers. You seem to want to do the opposite and put them on a pedestal as Olympian Gods who are "carrying the load."

All I have to say is that they are the ones that fucked up. Ultimately, they are the people determining how money gets allocated, and they sent money into the housing market like there was no tomorrow. Securitization and all that.

All I am saying is this.

If even the gods of the market have to come crying to the government like little bitches, they better not pretend like they picked themselves up from their own bootstraps. They are now crying to be bailed out of the mess they created.

The principle is this.

Market failures happen. And there is nothing wrong with bailing people out when they do. Even if they are paper shuffling investment bankers.

The economic term is "intermediation," in simple terms, a collective handshaking and risk assumption service.

And you must agree that they quite simply, fucked up, in providing this service. Period.

Its financial malpractice.

Give me a break. Your living in total lala land if you think that garbage men are equally sophisticated regarding finances as investment bankers.

But if your right, I do know one thing. Investment bankers should be making much closer to minimum-wage.

Fearless, as I stated in my prior post, investment bankers did not originate the sub-prime mortgages. The originators of the sub-prime mortgages were mortgage brokers or loan officers at commercial banks who are paid by commissions to sell sub-prime mortgages. It does not take sophistication to sell a loan; one just needs good sale skills.

Its financial malpractice.

There is no legal authority that exists that would support the notion of financial malpractice in a lender-borrower transaction. At least not in the United States (perhaps in Vladimir's Ilyich Lenin's mind). When we quit dumbing down individuals in this country, maybe individuals will learn to read contracts or consult with an attorney before they execute contracts.

Slowly deflate = economic stability.
Pop = economic dislocation.

If the housing market is overvalued, what's the economic benefit for prices to take a long time to return to normal?


I will say that there is real collateral damage that can be done to third-parties by the sub-prime implosion. If half the houses in your neighborhood go empty because the owner/occupants are defaulting, it will have a distinct effect on you, and not just on your home value.

A. Zarkov's plan sounds the best I've heard so far. It encourages people to stay in the house, and gives them a way to get back. It gives more benefit to those who supplied down payments. And it still frees up some housing stock from people who don't want to stick around or were just totally out of their housing league.

'Well, this is based on your view that you know more about the value of the assets held by Bear Stearns than the market.'

What assets? BS didn't have assets, it was leveraged 31:1. All it had were obligations.

you people who say that individual homeowners' problems are qualitatively different are forgetting that it is the fact that individual homeowners were having problems with payments that led to the financial instability in the first place. Only it is much much cheaper to address the source - homeowners. And there was massive fraud on these mortgage products, that while most followed the law by burying the real costs on page 4 of a 14 page loan doc in small print, is still meant to mislead.

If anyone has actually seen an adjustable rate mortgage doc will know what I am talking about. The quoted rate is an APR that assumes that LIBOR will be 0.5% (but does not actually say that anywhere in the docs), and required payments actually increased even though interest rates went down in the adjustment period.

Displacing large numbers of homeowners has to lead to financial instability - those displaced will have zero credit, no money to buy goods, etc. More than one investment bank is at risk from the assets that they have to write down when homeowners default. Bailing homeowners out is better for our economy than giving JP Morgan the gift of Bear Stearns risk free (that first billion is a joke - add it to the purchase price).

Can you explain how selling a loan (an asset of the bank) for consideration such as cash or another note changes either the debt or equity side of the debt/equity ratio that banks are trying to manage?

By regulation, banks are required to maintain certain levels of risk-adjusted capital - the specific amount required is a proportion of total deposits - in the form of cash and cash-like securities. IIR, a "well capitalized" depository institution must have a leverage ratio >5%, total risk based capital > 10%, and Tier 1 RBCR >6%. (There are lower levels of regulatory allowable capital, but there are also significant incentives for a bank to remain "well capitalized"). If capital falls too low by any of these measures, the appropriate regulator may step in under the prompt corrective action provisions of the banking laws. Large banks actually tend to have more than the capital levels required by regulation because it makes the capital they obtain from the market significantly cheaper. It's significantly more complicated than a simple debt-equity measure - too much to explain in a blog thread.

Re: just wait until the flow of folks out of foreclosed homes and into the rental markets starts to spike rents and this will be introduced and passed post haste.

Not going to happen: we overbuilt on housing so there's a glut of rentals on the market. For example, numerous condos are going to end up as apartments instead. This is already happening. And more to come as people who have to move for jobs, etc can't find buyers and rent their houses out instead.

Re: Non-recourse is more limited than you might think. In California it applies to purchase loans for a primary residence.

Unless the mortgagee knows that the mortgager has substantial assets it's rare for them to go after the deficiency. Defaulted HELOCs and second liens may be turned over to a collection agency to try to shake some money loose but after six months or so even these generally end up charged off.

Re: Our society and our liberties are in large measure based on the secure and verifiable ownership of property; encouraging renting instead of home-ownership creates a larger class of people with no stake in our society/country

We are not talking about turning half the country into renters, just doing so at the margins. And the foreclosure crisis will turn a lot of these people back into renters anyway. The country will not be harmed if we return to the renter/owner percentages that applied a generation ago.

Re: We never received any political campaign mail the whole time we were renting, in two different states.

It's very easy to get your name on the politicians mailing lists. Simply register as a partisan voter. Or suscribe to a partisan journal.

Re: Thus, renting is always cheaper than buying.

If that were true there would be no rentals because it would mean all landlords would take a loss. No, in a normal market buying must be cheaper than renting so that the landlord can turn a small profit, making it worth his while. I know this was true in the 90s. I rented out a house I owned to friends (who eventually bought it) with the rent the exact amount of the house payment; I could have easily asked $100 or so higher in rent. Today's upside down market is very unusual in this regard.

Re: Displacing large numbers of homeowners has to lead to financial instability - those displaced will have zero credit, no money to buy goods, etc.

Nonsense. The "displaced" people will still have their jobs, and since they will be paying less in housing costs they should have more disposable income. Their credit will take a hit resulting in higher interest rates and lower limits, but unless they declare bankruptcy they will not be without credit.

The economic advantage of renting over owning depends on the market for housing. One is not always better than the other.

Renting would seem always worse than buying unless you were in the time of a housing bubble which over the last 100 years was almost never.

Assuming you are wise and get 15 year loan, the result after 15 years is a free and clear home vs. a pile of 180 monthly rent receipts.

If Bear Sterns was bailed out, weren't the shareholders, and not the investment bankers the primary beneficiaries?

I'm a renter and I sure get plenty of political literature around election tme. Guess my vote is worth just as much as a homeowner's vote here. Yay me? I think I also have a stake in society, because I live in it. I also take offense at people claiming otherwise.

Gaius Marius -- when you have a bunch of con men out telling suckers that homes are affordable, you can't assign more responsibility to the suckers than to the con men. The con men were out there every day, handling a dozen suckers a day. The suckers were buying houses for the first time in their lives, in most cases. Only a used car salesman would be able to sympathize with the magic mortgage brokers.

I have no sympathy for the "suckers" who spend more time at the video rental shop trying to figure what DVD to rent for the weekend than the time spent reading through the mortgage documents.

Rent vs. Buy - it may take some time for the lines to cross, but eventually they do, and then the buyer wins. In recent years, too many people thought they could win by buying within a year or two... in a sane market, it's more like 7-10 years.

If anyone has actually seen an adjustable rate mortgage doc will know what I am talking about. The quoted rate is an APR that assumes that LIBOR will be 0.5% (but does not actually say that anywhere in the docs), and required payments actually increased even though interest rates went down in the adjustment period.

Can you show us an example of this? I'm asking because I'm genuinely interested in seeing. Surely out of all these bad loans someone must've scanned their mortgage docs and put them up on line.

I have no doubt that there are dishonest brokers. I had one lie directly to me back in 2003 when things were still good (but they were giving me a good rate, and I immediately called my lawyer, who was the best investment I ever made).

But it's pretty rare for them to put their lies down on print. When I used an ARM I remember one of the sheets showed exactly how high my mortgage payments could theoretically rise.

A hypothetical $600K California house, 20% down payment, 30 year mortgage at 6%, $100K annual income will yield about an 8% discount over the life of the loan. Counting maintenance it's more like 6%.

This house will likely rent for $2,000/month. Mortgage, taxes and insurance will cost a little over $3,600. With the discount you're at about $3,400.

So in the first paragraph you discuss apples (discount over the life of the loan), and in the second paragraph you discuss oranges (instantaneous cost of renting vs. buying). My actual $600K California house costs me less than $1000 a month for mortgage, taxes, and insurance, because I fixed my housing costs years ago by buying instead of renting. That's $1000 a month I'm not putting into rent.

Gaius Marius: When I bought my house the lender verified my application to the tiniest detail. I was questioned about underestimating my bonus payment -- every assertion had to be right on, neither higher nor lower. Borrowers can reasonably expect lenders to act in their own self-interest, by not making loans that they don't expect to be repaid. I expect mortgage lenders to know what "due diligence" entails, not a couple of high school graduates.