Five years after the federal government bailed out more than 1 million struggling homeowners, many who got the relief may end up losing their homes after all.
…The initiative was based on the flawed assumption that the economy would bounce back more quickly, undoing the damage wrought by plunging home prices and high unemployment.
No, the initiative was based on the flawed assumption that keeping people in homes that they should never have purchased in the first place was a good idea. At the time, I kept saying over and over that we should pay people’s moving expenses to get into rental units that they could afford.
These results are exactly what I predicted would happen. I remember complaining about setting people up to fail again when I testified at a Congressional hearing almost five years ago.
It’s like the Extreme Home Makeover phenomena. You can’t just give someone a big, complicated house and then have people who are identical to other people you observe in big complicated houses.
As I’ve said elsewhere I had an argument circa 2000 where the person in business school relayed that it was common knowledge, as stated by the business professor, that intervention into the housing market was one of the wins for government. He laughed at me because I wasn’t quite so sure about that.
There is one thing I am 100% certain about. That person does not reflect for one brain cell-second upon that conversation.
Btw, rather than dinking around with short-term adjustable interest rates, I suggested at the time that they extend mortgages to 40 or 50 years.
Standard disclaimer of “I’m not an economist and I don’t play one on TV” (does anyone get that reference anymore?)
If we extend mortgages to 50 years, that means the principle on the mortgage will get paid off more slowly and the homeowner will pay more in interest. Add to that, if the principle takes longer to pay off, then the homeowner is more susceptible to changes in the actual value of the house as opposed to how much is owed on the mortgage, and thus increases the risk of getting upside down.
Yes, all true, but the main problem for the economy and the banks and the homeowners was the jingle mail. Everyone got screwed by the housing bubble, but moving forward the problem was the fire sale and the banks going under. I recall studies from a few years ago indicating that homeowners precipitated strategic default only after getting upside down AND having a cash flow problem such as a job loss. In other words, keeping people in their overpriced houses would be the best solution as that wouldn’t book the losses for the bank, might take the packaged mortgages out of the “unknown but might be horrible” valuation and put them in the “not wonderful but known” valuation quadrant, and could have stopped the housing deflation by not putting distressed properties on the market.
Oh, I should add, and what they did accomplished some of those in the short-term, but in a way that seemed a little more fishy, problematic, and, well, short-term. And if they could do what they did, then they can’t really claim that they didn’t have the authority to have done anything else.
I guess that at the time I was naive and thought the idea was to help homeowners get through it in the most ethical way possible and that doesn’t seem like that was the goal.
Good point. It’s like giving a bigger business to a failed business managers or more money to politicians to fix failed policies.
Of course you were right. But following your advice would mean political suicide.
FYI, your next blog post regarding correlation doesn’t have a working link to the individual post, and it has no title.