"Fed Up"

Idiots in an echo chamber.

Newts and Hip Waders: Made for Each Other

This certainly would be advice worth seven guineas, or thereabouts , er, I mean $300,000 from Freddie Mac....

"My advice as an historian when they walked in and said we are now making loans to people that have no credit history and have no record of paying back anything but that’s what the government wants us to do. I said at the time, this is a bubble. This is insane. This is impossible."

Fascinating stuff. If you ignore his public silence on the bubble, even in the face of very public attacks on people who were explicitly warning of a housing bubble, and ignore the zombie lie that the housing bubble was rooted in banks giving too many loans to poor people, you could almost believe that he actually is the smartest man in the GOP.

What did Newt do to warn the public of this absolute insanity?

Gingrich talked and wrote about what he saw as the benefits of the Freddie Mac business model.

Sheer genius!

Hands Off Our Slums?

A recent editorial in the Times complains about a competition "asking students, architects and businesses to compete to design the best prototype for a $300 house". The authors complain that the concept is too simple:

To start with, space is scarce. There is almost no room for new construction or ready-made houses. Most residents are renters, paying $20 to $100 a month for small apartments.

Those who own houses have far more equity in them than $300 — a typical home is worth at least $3,000. Many families have owned their houses for two or three generations, upgrading them as their incomes increase. With additions, these homes become what we call “tool houses,” acting as workshops, manufacturing units, warehouses and shops. They facilitate trade and production, and allow homeowners to improve their living standards over time.

None of this would be possible with a $300 house, which would have to be as standardized as possible to keep costs low. No number of add-ons would be able to match the flexibility of need-based construction.

If the $300 house is comparable to the $20 to $100 per month rental, even if you include the cost of a small plot of land it seems like a pretty good deal. And as for homewners, it's pretty easy to see how a $300 house could be conceived as a modular structure, subject to having additions. I'll grant, that's not a requirement of the contest, but it would be easy enough for somebody entering the contest to design a modular structure.

Whatever the faults of a thought experiment such as this, that's all it is. The winner's idea is not going to replace all alternatives for the slum dwellers of the world, and even less so if it would not meet their needs. But the winning idea may provide a framework for providing even better value for the residents of "slum" housing - how to improve hygiene without breaking the bank, or how to implement solar heating or cooking and save money on fuel.

The authors also express concern that if, in fact, the contest results in the broad availability of cheap, attractive, quality housing, it will hurt the local construction industry. And yes, at that price point we probably would be talking about pre-fabricated housing, reducing the need for local workers and probably reducing the need for continued repair and maintenance. But... what in life is not a trade-off? Is it better that some people have to seek other lines of work, or that other people who would prefer the relative quality and sanitation offered by the winning design continue to live in less suitable housing in order to preserve that status quo?

The authors also appear to presuppose that the winning design would have to be implemented on a wholesale basis, rather than replacing individual housing units within the existing community:

The $300 house responds to our misconceptions more than to real needs. Of course problems do exist in urban India. Many people live without toilets or running water. Hot and unhealthy asbestos-cement sheets cover millions of roofs. Makeshift homes often flood during monsoons. But replacing individual, incrementally built houses with a ready-made solution would do more harm than good.

Even if we assume that every entry in the contest would require the bulldozing of neighborhoods, and I doubt that such an assumption is well-grounded in the facts of the competition, the authors are free to make their competing proposal. For that matter, they can start their own contest with their own preconditions and price point, including that the proposals be for homes that, with appropriate assistance, local residents could build for themselves.

"I Didn't See This Coming, Either"

In the past couple of months I've seen the documentary, Inside Job, a competent explanation of how the financial industry crisis arose, and of the ensuing collapse and bail-out. There are no big surprises for those who followed the crisis, but it's a good refresher course - and probably a good primer for those who are still wondering how the crisis occurred. I also saw the star-studded HBO dramatization of Andrew Ross Sorkin's novel, "I Love You, Hank Paulson" Too Big to Fail. That production offers a frenzied account of how the crisis was handled, but (in my opinion deliberately) omits mention of how the crisis arose or what has happened since Paulson "forced" the nation's biggest banks to accept billions of taxpayer dollars, no strings attached.

Two things struck me about the HBO production. First, if Sorkin's account is accurate, perhaps Henry Paulson's epitaph should be, "I didn't see this coming, either." Perhaps in order to maintain him as a sympathetic character, there's next to no mention of Paulson's background in Goldman Sachs, and what mention there is comes in the form of telling us how unfair it is that the government is viewed as being unduly influenced by the former Goldman Sachs employees who manage the treasury, or how hard Paulson worked to save Lehman Brothers (merely, we are told, the seventh largest investment banking firm in the country - why would Goldman Sachs care about such a minor player) and how it was that bank's intransigence and not Paulson's policy that resulted in its bankruptcy. There may be truth to that, but it's still very interesting how much effort Sorkin applies to salvaging Paulson's reputation as opposed to explaining how Paulson managed to avoid recognizing the perilous condition of the financial sector before we reached the crisis point. Seriously - thanks to Sorkin I now know Paulson's religion and that he has to be arm-twisted to take a sleeping pill (which he may or may not have actually taken), than I do about his history with Goldman Sachs.

The film ends with Paulson expressing a hopeful but concerned expectation that the banks would follow through on their implied promise to lend out the billions of "no strings attached" dollars to boost the economy, but unlike the rest of the film in which Sorkin's interpretations and conclusions are spoon-fed to the audience, you only "get" the ending if you already know that the banks did no such thing - but you're expected to believe that Paulson didn't see that coming. From Sorkin, you get no sense of any of the inside dealing and willful blindness that was behind the bubble or AIG's failure. This is stuff that just happened - a perfect storm, it would seem, of industry actions for for which nobody should be held accountable. You get no sense of regulatory capture - but as I've commented, Sorkin's coverage of the financial industry seems to me to be the journalistic equivalent of regulatory capture. The dramatization of his book reinforces that perception, and then some.

Some of the explanations for policy choices are left with the not-so-credible statements we've previously received. For example, we have no choice but to give the nation's biggest banks all those billions of dollars because if only the failing banks are given money everybody will know which banks are failing. The competing explanation, that it would not be fair to the non-failing banks if their incompetent competitors get that kind of boost and they do not, is omitted. But by the time of that cash infusion, everybody who was following the crisis knew or could easily determine which banks needed the money and which did not. The "we need to maintain a level playing field" argument would have been more credible; although I suppose that would have undermined Sorkin's explanation for why no strings could be attached to the money. You could achieve that level playing field by offering the money, strings attached, on equal terms to every bank. And not so much as a whisper about how your word is your bond in the financial and insurance sectors - maybe that's a rule only for insurance companies?

Timothy Geithner, on the other hand, gets no similar amount of love. When he's on screen the goal seems primarily to be to attribute to him some of the worst and least popular aspects of the bail-out - blank checks for the banks, "cash for trash".... That may be entirely fair. Whatever I can make of defenses of his intentions and integrity, I can't recall the last time I've heard a defense of his competence in relation to the management of this crisis. But really, given how a simple measure such as some form of bankruptcy cram-down for homeowners' first mortgages could have helped over the past two years, simplifying the process of getting people out of their upside-down homes without foreclosures or short sales, keeping struggling people in their homes, and in stabilizing housing prices, who could muster an energetic defense for a guy whose only concern was in shoveling as much taxpayer cash as possible, no strings attached, into the institutions most responsible for the nation's problems.

The Downside of Building Codes

The question, "Are we really better off with building codes", has spawned an interesting discussion. "Yes, but...."

The best built house on my street sold last year for considerably less than it cost to build. (I'm not sure when the last house on this street sold for more than its replacement cost, but that's another issue.) The second-best constructed house sold more recently, also for less than it cost to build. They did both sell for more than the house my wife and I purchased last year, but they're selling on par with what you would expect on a "per square foot with finished basement" basis. If you choose to build a house above and beyond code, you can't expect to get much (if any) of that investment back when you sell.

Building codes represent the minimum standard of construction, and in many ways are to home construction what domestic cars in the 1970's were to advanced automotive engineering. Yes, code improvements have increased amounts of insulation typically used and, despite it being true that there are some astonishing homes built over a century ago that put most modern homes to shame, for the most part homes are actually more solid and comfortable than they were a century ago. (It's like music - you focus on the works of art of past generation, but forget how much ended up as noise in history's scrap heap. A lot of older homes exist only due to significant renovation or have been replaced, and it's pretty easy to find older homes that are barely standing.) But if you build to code you're getting a house that's substantially less solid, less energy efficient, and less likely to last than a house that could be built based upon readily available knowledge, materials and building technologies.

I do agree that part of the problem is that it's easy to become a builder, and up until the housing crash was pretty easy to make money building and selling homes on a "maximum square feet for the money" basis using semi-skilled labor. I personally would like to see a concerted effort in developing and implementing new construction technologies that can help make housing better, longer-lasting, more energy efficient and less expensive. But I see little sign that the residential construction industry will collaborate to make that a reality, or that the government will impose something analogous to CAFE on home builders, requiring them to build better homes and thus creating an economic incentive to use, develop and implement better techniques and technologies.

Bankruptcy and Primary Residences

The housing bubble was blown up to its absurd proportion by the joint willingness of people to purchase homes that, in many cases, they could not reasonably afford, coupled with a mortgage industry that knew as much but was happy to lend them money anyway. I'm not personally happy that either side in that type of transaction is getting bailed out but, like it or not, they affected (and continue to affect) their neighbors. In a faltering economy, even some responsible borrowers are struggling with mortgage payments inflated by the housing bubble, while housing values may be further depressed by abandoned homes (perhaps half-built), empty lots from abandoned or unsuccessful development, and foreclosures in their neighborhoods.

With hundreds of billions, really trillions of dollars of taxpayer funds being used to prop up the lenders in that scenario, while speculators walk away from bankrupt corporations or get relief through bankruptcy court, it should be no surprise that people like Todd Zwicki are shocked that any relief might be directed at... ordinary homeowners. I'm not sure where I can find Zywicki's outrage at hundreds of billions of dollars being directed at financial institutions, and I don't see in his editorial any lament that debtors can "cram down" the value of their investment properties and vacation homes in bankruptcy. But how horrible, that bankruptcy judges may be able to "rewrite" mortgages for people who own only one home.

In the first place, mortgage costs will rise. If bankruptcy judges can rewrite mortgage loans after they are made, it will increase the risk of mortgage lending at the time they are made. Increased risk increases the overall cost of lending, which in turn will require future borrowers to pay higher interest rates and upfront costs, such as higher down payments and points.

There are three obvious responses to that.

• Why should mortgage lenders sit in a privileged position as compared to other lenders? I recognize that this is the "American way" - you hire lobbyists to get legislation to favor your industry over others - but what is it that makes home lenders so special? In bankruptcy, where some bills will go unpaid, at least in relation to the unsecured portion of their loans why should financial institutions be privileged over doctors and hospitals?

• Is there any reason to believe that the increased costs will be substantial, particularly in relation to borrowers who aren't marginal? Are second mortgages or mortgages for vacation properties significantly more expensive than primary home mortgages?

• So what? If the net effect of bankruptcy law is that lenders think twice about housing prices "always going up", or require a sufficient down payment and proof of income to be reasonably certain that the loan will be repaid even if the market is flat or values decline, isn't that a good thing?

Further, Zywicki ignores the fact that this legislation limits itself to mortgages in existence at the time it passes. That should ameliorate its assumed effect on future lending decisions. In terms of that change, Zywicki writes,

This is illustrated by a recent example: In 2005, Congress eliminated the power of bankruptcy judges to modify auto loans. A recent staff report by the Federal Reserve Bank of New York estimated a 265 basis-point reduction on average in auto loan terms as a result of the reform.

The car loan example is an interesting one, as it highlights how lobbyists for an industry can shift costs to other lenders. Bankruptcy reforms restrict judges from reducing car payments in a Chapter 13 plan so, instead, payments to other creditors go down. Zywicki doesn't explain why that's a superior outcome.

But more to the point, as you may have guessed from the fact that car loan rates haven't dropped by 2.65%, he seems to have his numbers wrong. The Federal Reserve Bank of New York observed that "auto loan interest rates were higher for households in states with high home equity exemptions" and performed an analysis to "see whether BAR [the 2005 Bankruptcy Reform Act] undoes that link":

Overall, auto loan delinquency rates tended downward after BAR in higher or unlimited exemption states, significantly so for direct loans. Consistent with that result, auto loan interest spreads also declined after BAR in states with high or unlimited exemptions. The link between spreads and exemptions was more significant using unscaled exemptions, but the magnitudes were comparable regardless. The decline in the average auto loan spread was 15 basis points lower after BAR for unlimited exemption states, a 5.7 percent decline relative to the mean over all states (265 basis points). The regression results show clearly in Chart 5.

Looking at chart five, you find that the chart tracks the "interest rate on new automobile loan (5 year) minus rate on government bond (5 year)." The mean over all states is 265 basis points. Prior to BAR the interest rates for auto loans in states with "unlimited home equity bankruptcy exemptions" tended to be higher than those in other states. Subsequent to BAR, on average, the difference diminished by 15 basis points, 0.15%. That's a significant number for lenders, and appears attributable to BAR, but it's hardly the massive reduction Zywicki claims.

Zywicki's next argument is a red herring:

But by recent count, some five million homeowners are currently delinquent on their mortgages and some 12 million to 15 million homeowners owe more on their mortgages than the home is worth. If even a fraction of those homeowners file for bankruptcy to reduce their interest rates or strip down their principle amounts to the value of their homes, we could see an unprecedented surge in filings, overwhelming the bankruptcy system.

We should not fashion bankruptcy laws to prevent bankrupt people from declaring bankruptcy, merely because of the potential that it might be difficult for bankruptcy courts to do their job. We should instead provide bankruptcy courts with the necessary manpower and resources to do their job.

Beyond that, Zywicki pretends that this legislation will help people who aren't bankrupt. Sure, millions of people "owe more than their house is worth" - and the vast majority of them aren't bankrupt and are making their house payments. The problem faced by the majority of people who aren't making their payments isn't the value of their home - it's the fact that they can't afford their payments. Given that bankruptcy is not cost-free, many of those people will struggle, try to work things out with their lenders, and find ways other than bankruptcy to work their way through their financial difficulties. Others will weigh their options and walk away from their homes - either by allowing foreclosure or by surrendering their homes in bankruptcy.

Continuing his supposition that this legislation will cause people who aren't bankrupt to declare bankruptcy, Zywicki writes,

Finally, a bankruptcy proceeding sweeps in all of the filer's other debts, including credit cards, car loans, unpaid medical bills, etc. This means that a surge in new bankruptcy filings, brought about by a judge's power to modify mortgages, could destabilize the market for all other types of consumer credit.

I guess Zywicki has forgotten his earlier comments on the non-modifiability of car loans. But even overlooking that, I'm not sure how this follows. If you force people in bankruptcy to either give up their homes or to pay the full amount of their mortgages, you already create a significant distortion. In the former case, the home lender gets a foreclosure, and it may be that the other creditors recover a bit more money by removing mortgage payments from a Chapter 13 repayment plan. In the latter case, a Chapter 13 plan incorporates the higher-than-market mortgage payment, and other creditors get less. I guess the "horrible" outcome for Zywicki is the homeowner who otherwise would have allowed foreclosure but who can now stay in their home, resulting in smaller payments to other creditors. I somehow suspect, though, that the nightmare prospect for lenders is instead that borrowers who would have stayed in their homes anyway will have their mortgages revised, resulting in greater payments to other creditors and lesser payments to housing lenders.

Zywicki makes a reasonable point in relation to the interest rate that should be paid post-modification.

Consider that the pending legislation requires the judge to set the interest rate at the prime rate plus "a reasonable premium for risk." Question: What is a reasonable risk premium for an already risky subprime borrower who has filed for bankruptcy and is getting the equivalent of a new loan with nothing down?

Of course, he then extrapolates to suggest that if a borrower is bankrupt, they should be paying double-digit interest, and that anything affordable would be a "submarket rate, apparently violating the premise of the statute and piling further harm on the lender". If this were a medical study, at this point I would be asking "which pharmaceutical company is bankrolling Zywicki's research"? It may well be that the legislation should provide additional guidance to judges when it comes to setting interest rates. But Zywicki's comments betray his contempt for the goals, and perhaps even the concept, of bankruptcy.

Zywicki offers a single example that he pretends illustrates how the proposed legislation could be abused:

Imagine the following situation: A few years ago a borrower took out a $300,000 loan with nothing down to buy a new house. The house rises in value to $400,000, at which time he refinances or takes out a home-equity loan to buy a big-screen TV and expensive vacations. He still has no equity in the house.

The house subsequently falls in value to $250,000, at which point the borrower files for bankruptcy, the mortgage principal is written down, and the homeowner keeps all the goodies purchased with the home-equity loan. Several years from now, however, the house appreciates in value back to $300,000 or more -- at which point the homeowner sells the house for a tidy profit.

I do find some humor in the way Zywicki depicts the borrower in his example as the modern equivalent of Ronald Reagan's Cadillac-driving welfare queen. Never mind what's typical - he's trying to evoke an emotional reaction.

Okay... so I have a marginal borrower who comes into my bank and says, "Give me a $300,000 loan for my $300,000 house." I wouldn't ordinarily give him the loan, and would historically have required 10-20% down to protect my investment, but I've decided that housing prices will invariably go up at 10-20% per year so I authorize the loan.

Within three or four years I'm proved "right" - the home now appraises for $400,000. So I'm very secure in the event of default. Now the borrower comes back to me and says, "I want to take out every penny of equity." I again note that he was a marginal borrower at $300,000, and that's even more the case at $400,000. But I'm more convinced than every that housing hyperinflation appreciation at a rate of 10-20% per year is inevitable, and that housing values never go down, so again I authorize the loan.

Then the bubble bursts, and the economy crashes. The borrower loses his job and falls behind on his payments. His house appraises for only $250,000. Traditionally I would foreclose, try to sell the house as quickly as possible, and hope to recover about $220,000 to $230,000 after the costs of foreclosure and sale. If I were in a state that allows deficiency judgments, I might seek one from the borrower - although it would be dischargeable in bankruptcy. Not a good outcome for me....

Under the new law, the borrower declares bankruptcy. A court revises his mortgage to reflect the market value of his home, and sets an interest rate a few points above prime. He makes his payments. But sixty months later, at the end of his repayment plan, he is able to sell the house for $300,000. All I get back is the $250,000, plus of course the interest I've obtained over the course of the repayment plan (not a bad rate of return, but well below what I would have charged this borrower in the post-bubble market). (Sure, I gave this guy a 0% teaser rate to get him to sign up, but let's not change the subject.)

I'm well ahead of where I would have been had I foreclosed at the bottom of the bubble, but so is the borrower. I'm in the same position as any other creditor at the end of bankruptcy, seeing a debtor who has recovered from a crisis and is now able to pay off some of the debts that were discharged, but for reasons I can't fathom he's protected by the law. It's almost as if bankruptcy is supposed to help people get back on their feet and get a fresh start - how absurd is that!

Meanwhile, the only thing I could have done to protect myself would have been to apply reasonable lending standards, and not let a marginal borrower repeatedly max out the equity in his home. Or voluntarily worked with the borrower to restructure the loan or payments in a manner that would have kept him out of bankruptcy. How unfair is that!

What if I'm in state where first mortgages are non-recourse loans, and where I lent $400,000 for a first mortgage to a home buyer whose house is now worth $250,000? If the borrower allows foreclosure, I can't get a deficiency judgment. If the borrower goes into bankruptcy under the proposed law, I get a $150,000 unsecured claim that should be partially repaid over the course of the repayment plan. That would appear to improve my position at the expense of other unsecured creditors. If the debtor is ordered to repay 1/3 of his unsecured debt over the course of the repayment plan, my recovery is $250,000 + $50,000 = $300,000, the assumed market value of the house at the end of the plan.

Credit Suisse took a look at this proposed reform, weighing the good and bad. Its report reflects that the impact of this reform is likely to be substantially less than Zywicki suggests, for reasons that seem obvious:

The impact of the law reform at this stage is unclear as we’re not sure what percentage of borrowers can and will take advantage of this option. For borrowers who can’t even pay the secured amount of the mortgage, bankruptcy isn’t an option. For borrowers who have lots of excess income, bankruptcy will provide little benefit. So only borrowers who want to stay in their homes, can afford the secured amount but not the entire mortgage, and are willing and able to go through the invasive procedure of Chapter 13 bankruptcy seem likely to apply.

Bottom line is that the new plan adds an important new tool in the foreclosure avoidance arsenal and will likely result in a marginal reduction of foreclosures.

A benefit I see in resolving these issues in bankruptcy is that the burden is primarily borne by the two responsible parties - the borrower and lender. There's a further benefit, in that if foreclosures are prevented, housing values in the rest of the neighborhood are less likely to be negatively affected by foreclosure sales or abandoned properties. But the biggest benefit, as I see it, is that lenders might think twice before repeating the reckless lending policies that inflated the bubble and led to the current financial crisis.

Purely a Coincidence, I'm Sure....

I just noticed that my bank has reduced the borrowing limit on my HELOC to about half what it was when I opened the line of credit two years ago. They've given themselves a considerable equity buffer above my maximum mortgage + maximum home equity borrowing, even as compared to the lowest priced houses in the neighborhood. (For the record, it's a modest 1950's subdivision where, to people who don't live here, "all the houses look alike" - and to the rest of us they look very similar.)

This doesn't really affect me, as I'm a conservative borrower, but I'm in a neighborhood where home values seem pretty stable and I have a credit rating that usually has banks lining up to try to loan me money.

Home Ownership

Paul Krugman convincingly argues that the glories of home ownership are overstated, but I think he overstates his own case.

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.”

Krugman correctly notes that home ownership carries financial risk (made all the more clear by the bursting of the "housing bubble"), ties people down, and increases commuting costs. On the second issue, I would respond that many of the costs and complexity of moving - real estate agent commissions, title insurance, transferring title, etc. - are unnecessarily inflated and could be significantly reduced with some common sense reforms of how property is titled and transferred.

But despite the risk, under the traditional model of a down payment and the use of home equity loans for home improvement as opposed to discretionary spending, owning a home is very likely to result in the long-term accumulation of wealth. It also helps create community - sure, you're tied down, but you're much more likely to take care of your own home than your rental property, and that benefits your other "tied down" neighbors. Consider what often happens to housing values when there are "too many rentals" in a neighborhood.

At the same time, we should not overlook the tax burdens created by suburbanization, which raises not only the costs of commuting but also requires substantial infrastructure costs - roads, highways, emergency services, extending utilities, etc. - to be largely borne by other taxpayers. When most people own homes, that cost arguably is spread around such that it may not seem unfair, but it's a substantial cost and is largely invisible. There's a big something to be said for encouraging people to live in existing urban centers instead of building new suburbs.

There probably is a population for which the "American dream" of owning a home overshadows a realistic appraisal of whether home ownership is a good idea for them. Do they have a sufficient, stable income to afford a home - including upkeep and commuting costs? Will they be moving soon or frequently, or should they expect to? Do they understand and wish to assume the responsibilities of home ownership, or would they be better of renting (or buying a condo)? The solution there is education.

Bush On The Mortgage Mess

Bush plans to veto the proposed "housing-relief bill", expressing,

The president on Wednesday repeated his opposition to a bill “that will reward speculators and lenders” who have suffered because of their own foolishness.

If that's truly the way he feels, he should be advocating for changes in bankruptcy law that would permit lenders and borrowers to share the cost of their folly through first mortgage cramdowns in bankruptcy court. But of course, he doesn't actually favor that - he seems to instead favor "solutions" which direct taxpayer money to lenders but not to borrowers.

Housing Handouts

Pretty much everybody and his brother has published an editorial describing one stimulus or another for the housing market. A minority prefer to leave things alone. George Will, on the other hand, takes a middle road, apparently clinging to his belief that a handout is only a handout when it is made to an individual and not a corporation.

Oh? The idea that protracted golden years of idleness are a universal right is a delusion of recent vintage. Deranged by the entitlement mentality fostered by a metastasizing welfare state, Americans now have such low pain thresholds that suffering is defined as a slight delay in beginning a subsidized retirement often lasting one-third of the retiree's adult lifetime.

You know, for a guy who looks like he has never engaged in physical labor in his entire lifetime, Will should give it a try. He's only 67 years old - let's see how well he does when he's pushing something heavier than a pen, for something closer to minimum wage than his sinecures at The Washington Post and Newsweek.

Subprime mortgages are a small minority of mortgages, and only a minority of subprime borrowers are not making their payments. Casting this minority of a minority as victims of "predatory" lending fits the liberal narrative that most Americans are victims of this or that sinister elite or impersonal force and are not competent to cope with life's complexities without government supervision.

This represents Will at his best - half right. I agree with him that most of the people who are in trouble made poor individual choices. But that does not mean that there were no predatory practices by lenders, and it certainly doesn't justify Will's willful blindness toward the massive federal handouts being given to lenders who were much better positioned than any individual to recognize the folly of these loans - yet made them time, and time, and time again. As is his wont, Will also has to wrap his point in a silly smear against "liberals". (But perhaps he's now among those who think of John McCain and G.W. Bush as liberals, so who even knows what that means at this point.)

But I agree with this point, despite its condescension:

The 96 percent of mortgage borrowers who are fulfilling their commitments, often by scrimping, may be grumpy bystanders if many of the other 4 percent - those who found the phrase "variable rate" impenetrably mysterious - are eligible for ameliorations of their obligations.

The proposed "remedies" to the "foreclosure crisis" seem to be taking the form of handouts - either bailing out borrowers who are in over their heads, or subsidizing new home buyers to try to soak up some of the "excess inventory" in the housing market. Picking up where Will left off, David Ignatius presents a "slippery slope" (i.e., logically fallacious) argument as to where this all leads us.

We're now in a comparable cycle of bestowing special economic favors on members of the national family who have been hurt by the credit market crisis. "It's not fair," argue the housing interests and consumer advocacy groups. "Bear Stearns got a financial bailout, so why shouldn't we?" And they're right, by the simplest schoolyard definition of fairness.

So the line grows of people demanding breaks on financial obligations they can't afford. Last week, the Bush administration agreed to rescue 100,000 homeowners who are at risk of foreclosure on their mortgages. Congressional Democrats promptly announced that this wasn't fair enough and that they intended to expand the bailout to as many as 2 million distressed borrowers.

But why stop there? What about onerous commercial mortgages? And credit card debt? And student loans? Why should anyone have to pay back anything? It's not fair

Well, actually, we do have a mechanism where businesses and individuals can escape debts. It's enshrined in the body of the Constitution. It's called... bankruptcy. With some relatively modest tweaking of bankruptcy law, borrowers facing foreclosure can get individualized relief through the bankruptcy courts. The lenders who chose to give them too much money will take a loss, sure, but often less than the cost of a foreclosure. And there is no need for federal handouts to the borrowers.

As for those handouts, some of them inspire the "Say what?" response....

The only solution is for the federal government to offer a temporary 5 percent tax rebate — up to $25,000 — for first-time home buyers.

Here's where the point made by Ignatius and Will kicks in - that proposal is manifestly unfair to responsible borrowers, including first-time home buyers who may have lost part or all of their equity after buying houses they can afford. It also assumes that the problem exists at the bottom of the market. While I don't dispute that there seem to be many areas where foreclosures are affecting large numbers of entry level homes, there are also many areas where even with a subsidy the homes affected are out of the reach of first-time buyers.

I guess the idea is that making homeowners out of a population that has insufficient savings or interest in presently becoming homeowners will reinflate the bubble, such that other owners "get their equity back". But if that works, does it do more than postpone the present market correction? And don't we risk creating a new population of home buyers who don't have the financial stability or discipline to consistently pay their mortgages, setting ourselves up for "foreclosure crisis II"? There's a reason, after all, that lenders traditionally chose not to give mortgages to first-time borrowers who hadn't saved up a down payment, even if somebody else was willing to give them the money. Also, while the subsidy may inspire renters to buy homes, what happens to the vacant rental properties? Higher vacancies usually lead to lower rent, and rental rates typically correlate to housing values.

Meanwhile it does appear that there are individuals and investors who are bargain hunting, raising the question of whether such a subsidy at the bottom end of the market is even necessary.

Who Should Get The Taxpayers' Money

In flattering McCain (who Will still appears to detest), George Will presents a false dichotomy, pretending McCain supports a solution to the "economy's housing-related credit woes" that doesn't involve any bail-outs whatsoever. Quoting McCain, Will writes:

He says "it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." For now, he is with Senate Republicans in opposing the Democrats' proposal to empower judges to rewrite the terms of some mortgages, an idea that strikes at the sanctity of contracts and hence at the ethic of promise-keeping that is fundamental to social life. He opposes an additional dose of the toxin that has made the credit system sick -- he favors strengthening rather than weakening down-payment requirements for loans backed by the Federal Housing Administration. And he has admirably avoided the rhetoric of victimology, such as that used when The Post editorialized that "lenders pushed tens of billions of dollars in potentially high-interest mortgage debt on people ill-equipped to handle it."

So the honest translation would be that McCain opposes only aid directed at borrowers. While he wants stronger guarantees that federal loans will be repaid, something that to me is a perfectly reasonable demand, he has not actually opposed bail-outs of financial institutions. He just wants to add a few more strings to the bail-out packages they receive.

The honest question this might raise is, why support bail-outs of those who were in the best position to prevent this from happening in the first place, while providing no benefit at all to those (whatever you think of their culpability) on the other side of the loan? If Will were to think about it, he would recognize that offering bankruptcy relief to those borrowers wouldn't let them avoid their loans - it would allow them to discount their loans to the present market value of their homes. The borrowers would have their creditworthiness severely downgraded for a decade. But the owners of the loans, not the taxpayers, would have to absorb the difference. That, it seems, is unacceptable to either George Will or John McCain.

I'm not going to benefit from the bailouts - If I even own stock in any of the financial institutions involved, it's part of a mutual fund. And I'm the opposite of the sort who purchases "more home than I can afford" than maxes out my HELOC. As a conservative borrower and spender, who believes in paying my bills in full, I am hardly brimming with sympathy for those who chose to believe promises that were plainly too good to be true. Yet if my choice is between having my tax money used for a bailout, or having irresponsible lenders take a loss due to the bankruptcies of their irresponsible borrowers? I'll support the bankruptcy reform, thank you very much.

Housing Demand

Today Robert Samuelson assures us that there is no oversupply of housing - it's just that there's not enough demand. And that, he's confident, will stop being a problem as soon as housing prices drop "to a level where housing can escape its present stagnation".

It's elementary economics. Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don't sell. We can either keep the price at $1 and watch the apples rot or cut the price until people buy. Housing is no different.

If we have a few million customers, that's true. If we have 1,000 customers, that may be true. If we have one customer, cutting the price per apple to a penny probably won't convince the customer to buy them all, save perhaps if he owns a cider mill. But that's an aside from Samuelson's argument - yes, if you cut prices low enough, you will find buyers for all homes presently on the market. If Toll Brothers started selling McMansions for $1, the demand would outstrip anything they could reasonably supply.

Samuelson is correct that, as exemplified by the guy building the huge house in his neighborhood, there remains demand for housing and even for McMansions. But isn't there a bit more than that to the picture?

Builders want their profits - and some may go bankrupt or go out of business if they immediately cut prices to the point where supply and demand curves cross. Lenders who have foreclosed on houses want to cut their losses. Homeowners who are upside-down on their mortgages don't want to have to pay back the difference when they sell their homes, or hope to stay in their homes until they can find a buyer who will pay what their house is "really worth". A lot of people who aren't upside-down still want to hold onto their homes until they can get what it's "really worth". Oversupply in some pockets of the nation is real - where high-end houses were being snapped up by speculators, not by people intending to make the houses their homes, and few people presently even qualify to buy the homes.

I don't argue with Samuelson's belief that the sooner all of this shakes out, the sooner "housing can escape its present stagnation".

The understandable impulse to minimize foreclosures should not be a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalizes tomorrow's homeowners. An unstoppable free-fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices.

The problem for the economy and housing market is, with or without intervention, that process is likely to occur over a period of years.

A McMansion In My Back Yard?

Robert Samuelson, apparently inspired by the construction of a huge house in his neighborhood, takes on the McMansion:

Down the block from my home, workmen are finishing a new house. It replaces a bungalow that had measured about 1,500 square feet. The new home has a covered front porch, two fireplaces and a finished basement. It comes in at just under 5,700 square feet. What is it with Americans and their homes?

Eugene Robinson has a passing comment in today's column, Outside the Echo Chamber, which seems germane:

We in Washington are increasingly isolated from the people in whose interest we claim to labor. The economic gap between us and most of the country is widening to a chasm. In most American cities, a $600,000 house in a leafy neighborhood would be considered an extravagance reserved for the wealthy. Here, we'd call it a bargain.

Assuming a $600,000 purchase price, the person who replaced the old bungalow with the modern "McMansion" paid probably $400,000 - $450,000 for the land under the bungalow. Samuelson, sitting in what is no doubt a very large house for the era in which it was built, should consider the economics of the redevelopment of that lot - the value of the huge house that is being built is likely commensurate with the value of the lot.

It is interesting to me that "housing lust" is only a problem if it reaches "the masses" - the "huge" house Samuelson describes is small compared to many mansions (and let's not forget castles) of the past - the difference appears to be one of prevalence and availability. If you're going to focus on our planet's limited resources, and whether this form of housing is wasteful, that's one thing. But if you're going to get moralistic and speak of "house lust", I think you should explain why it is suddenly wrong for the average (or, really, the average upper middle class) American to want the same type of self-indulgent, showy, overpriced housing that the rich have always enjoyed (even if on a smaller lot).

Worse, government subsidizes these supersize homes along with suburban sprawl and, just incidentally, global warming. In 2008, the tax deduction for mortgage interest payments will cost the federal government $89 billion. The savings go heavily to the upper-middle class and the wealthy -- the least needy people -- and encourage ever-larger homes. Even with energy-saving appliances, those homes are likely to generate more greenhouse gases than their smaller predecessors. As individuals and a society, we've overinvested in housing; we'd be better off if more of our savings went into productive investments elsewhere.

In the case of the house in Samuelson's neighborhood, the issue of "subsidy" was resolved decades ago (probably 80 or so years ago) when it went up as an upper middle class (or wealthy) suburb of Bethesda. If the home is well constructed, its heating and cooling bills may not be much different from that of neighboring houses (including Samuelson's). If it uses geothermal heating and cooling - something that I think the government should be actively encouraging and subsidizing - the cost will be substantially less - perhaps $150 per month to heat and cool an enormous house. And yes, I think it is better for a lot in an existing neighborhood to be redeveloped, than for a similar home to be built in a new subdivision. (No houses like that will be going up in my neighborhood - the lots aren't big enough, and the land's not worth enough.)

I do agree with Samuelson that indulging in an oversized house is an extravagence, and that we should be concerned about the environmental impact of new developments, as well as the cost of bringing municipal services to those developments. But those concerns are neither new nor limited to Toll Brothers-type neighborhoods. I am also of the opinion that we are not likely to suddenly put the brakes on American consumerism or a mentality of "keeping up with the Joneses", so our energies are probably better spent focusing on how to minimize the environmental footprint of our present levels of consumerism while taking a more gradual approach to the reinvention of society.

Buying a House

The Washington Post today addresses some efforts by traditional real estate companies to impede competition from their electronic competitors. But I think they're missing the forest for the trees. We make the buying and selling of real estate excessively complicated, with a flurry of required documents, deeds, and associated title searches. Yet there is no reason why a real estate deed, and its transfer, needs to be significantly more complicated than that for an automobile. The success of the real estate industry in preventing a more efficient system for titling and transferring real estate significantly raises the cost of every home transaction. Yes, Internet competition can help lower those costs, but perhaps it is also time to explore modern alternatives to the archaic system of land title used in every state but Iowa.