You Don’t Need A Weatherman…

…to tell which which way the wind blows.  Not when even Marty Feldstein marches in with a more aggressive mortgage forgiveness plan than we’ve seen out of either Congress or the administration.

I don’t love the plan as offered, to the extent that an 800 word op-ed. offers much in the way of a fine-grained proposal.  Feldstein, Ronald Reagan’s head of the Council of Economic Advisors, calls for forgiving out-of-the-money mortgages down to 110% of the homes’ value — a threshold that would touch 11 million out of the 15 million  homes in the United States.  Lenders would absorb half the loss and the government would cover the other half, at a cost Feldstein asserts would be less than $350 billion.

I don’t have much to say about that part of the plan.  Why 110%?  Is there any data that suggests that’s the number to encourage underwater mortgagees to stick with the loan?

Or…how much of the current foreclosure crisis is driven by unemployment, and hence at this moment is unlikely to be touched by a payment reduction that still leaves the house underwater?

No clue, here (and no expertise to justify a guess), but these are empirical questions that could be answered…and in any event Feldstein — now at Harvard — is at least trying to come to grips with that insane number of 15 million houses that embody enormous financial loss.

The part of the this proposal that I think is almost certainly a bad deal is the price homeowners would pay to get their mortgage reduction:  Feldstein would transform these loans from non-recourse status —  in which the lender can claim the collateral, the house, but no other assets if the borrower defaults — into an instrument that puts all the borrowers assets are at risk.  To me, taking financially vulnerable people in the midst of  a bad economy and placing them at still greater economic risk seems to me both cruel and stupid.

Much better, in my view, are the proposals that place the government — the taxpayer, you and me, baby — into financial partnership with both the borrower and lender.  In these approaches, the borrower who gets mortgage relief has to share with the lender (and/or the Feds) any gain made from an ultimate sale of the property.  Everybody’s incentives align, and the borrower is not one layoff away from utter ruin, as he or she would be in the Feldstein scheme.

But what really stood out for me is not that Feldstein has come up with the least middle-class-friendly version of mortgage relief out there — that’s how he rolls — but that even such an old Reagan hand has driven to the core of the matter:

…As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.

Yup, Dorothy, we’re not in Kansas anymore — or perhaps, pace  Thomas Frank, even in Kansas they’ve starting to grasp the most brutish of brute fact.

Yes, it sucks that the taxpayer must bail out over-extended borrowers and the reckless (criminal) financial institutions that placed those loans.  But life does blow sometimes — as most actual grown-ups understand.  Increasingly, those able to recognize the difference between ought and is accept that it’s better to deal with that fact than to watch the entire fiscal structure of our economy swirl down the toilet of whinging infant Congressional Republican orthodoxy.

Feldstein concludes by restating that same message.  Better the nation take its medicine than seek to extract the pleasure of righteousness amidst the rubble:

I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves. Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods. The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.

That’s DFH talk, of course.  Without quite saying it out loud Feldstein here offers the suggestion that society has both values and obligations that trump the every-man-a-wolf-to-his-fellow-man cult of the individual that passes for  contemporary GOP “thought” on the social compact.

When you’ve lost Marty…

Image:  John Constable, The Hay Wain, 1821

Lest We Forget: How The Banks Are REALLY Screwing Us In The Foreclosure Mess

Everyone, and I mean everyone you ought to be reading, has been working through the mechanics and the meaning of the foreclosure fraud being performed on the nation by our biggest banks.  For a quick overview, head on over to Rortybomb, just read your way down, and check out Naked Capitalism as well.  I promise you, once you start down the trail of links, you’ll have days of infuriating study ahead of you.

But for all the justified outrage at the simple disdain for the concept of property rights and the rule of law* there’s something else being missed here, something that astute observers have commented on, but that seems to be a bit obscured as we all, understandably, rubberneck in horror at the trainwreck that the major banks have made of the foreclosure process.

And that is that the entire foreclosure endeavor is in fact a huge imposed cost on American homeowners and our economy; it almost certainly runs against the long-term interests of the financial system as whole, whatever the incentives may be for individual companies (and it may well be a long term fail for many of the short-term beneficiaries as well).  Foreclosure as it is being practiced now is likely to be a net negative for homeowners now, to the point that subsidizing in some way those who got into trouble is economically rational, even if it might be galling to those who’ve paid up and gone about their business.

At least, that’s how I read this paper by John Campbell and Stefanio Giglio and my MIT colleague Parag Pathak, “Forced Sales and House Prices.”  It uses an ingenious trick to isolate the implications of forced foreclosure sales for prices of both the foreclosed home and nearby properties by tracking such sales in comparison with other forced sales, like those that follow the death of an owner.

Their results are of a sort fairly common in applied or empirical economics:  quantifications of the seemingly obvious.  Foreclosed properties sell at a deep discount to their local markets and in doing so, drive down the values and sales prices of nearby homes.  Money quote:

We find that foreclosures predict lower prices for houses located less than 0.25 mile, and particularly less than 0.1 mile away. Although foreclosures and prices are both endogenous variables, the fact that foreclosures lead prices at such short distances does reinforce the concern that foreclosures have negative external effects in the housing market. Our preferred estimate of the spillover effect suggests that each foreclosure that takes place 0.05 miles away lowers the price of a house by about 1%.

Not the sexiest prose in the history of styli and tablets, I’ll admit, but the point is clear enough: this study found that foreclosures sell at 27% discount to the unforced sale price, and that the loss to the seller (the foreclosing banks) is compounded by a loss to every homeowner in the neighborhood.

As foreclosures mount, that loss grows — and, the study found, such effects are often concentrated in lower-priced neighborhoods, which is to say that when scum like those dispossessing Kirk use fraud and deceit (advising him to skip a payment to start up the loan modification process, only to use the action taken on that advice to begin the process of seizing Kirk’s home) — and thus maximize their short term return by dragging out a foreclosure process, they are imposing a charge on every homeowner and every bank lending on homes in Kirk’s neighborhood.

Expand your view to the country as a whole and you see that over the last decade, the banks lent recklessly, leveraged insanely, and then resorted to a range of unsavory-to-illegal manouvers to limit exposure to the consequences of decisions that, taken altogether, effectively bankrupted the US and much of the world’s financial system.

They have received enormous sums to prevent an overt bankruptcy, and in response have pursued tactics that do untold harm to thousands, perhaps millions of American citizens as they foreclose on the properties they recklessly exposed themselves to over the last several years.  As they pursue those foreclosures, those banks have both deceitfully tripped some homeowners into default (see Kirk, above) while performing multiple frauds and failures to proceed in a legal fashion in a sequence of actions that looks suspiciously like a fee-maximizing game of delay.

In  so doing our financial lords and masters harm us all by slashing yet further the value not only of homes in default, but those of hundreds of thousands, maybe millions of homeowners who had nothing to do with either the bad loans in the first place or the foreclosure fiasco now taking place. This is effectively not so much as a tax as a taking — one that reduces the wealth of millions of Americans who don’t have scratch to spare thank you very much

Duncan Black (can’t find the link in haste…will try to dig it up) among many others have been screaming for years that the appropriate policy from both a social and an economic point of view has been mortgage cramdown — I’d add you’d need a (non-kangaroo) court-supervised dispositions of the properties too far underwater to permit any reasonable mortage adjustment to save the day.  But whatever the details, there is a growing body of work that suggests it would be cheaper for our country, if not for an individual bank or holder of an ill-begotten MBS, to keep people in and maintaining their homes while not imposing what amounts to a huge fine on every nearby homeowner who has kept their property out of default.

And that is not just this DFH talking.  This is the clear implication (expressed in a rather different language than the authors of the original work would use, no doubt) of the soberest of sources, two Harvard and one MIT economist, as respectable a set of oracles as you could possibly hope to find.**

One last thought:  There are those (as noted below — see the Wall St. Journal) who argue that the foreclosure documentation mess is merely a matter of trickery and delay on the part of those who shouldn’t have bought houses in the first place, and that,in the words of the Journal,  “the bigger damage here is to the housing market, which desperately needs to find a bottom by clearing excess inventory and working through foreclosures as rapidly as possible…”

If, however, you live in the reality based community, and not in the ideological bubble chamber that is the Journal’s — and the modern GOP’s — true home, then you would read things like the paper cited above, and maybe think twice before suggesting that the best outcome for America (and maybe the banks too, in fact) is to accelerate a process that destroys value for homeowners who are not in arrears, in the process of depressing the country’s real estate market for years, at least.  Just a thought, you know.

*One of the weirdest things about the whole housing mess to me has been the wholesale abandonment by the alleged “conservatives” among us of any commitment to — or even basic understanding of — the idea of property rights, contract law, and the roles and duties of parties to contracts governing real property.  We have McArdle outraged that folks who got their sums wrong walk away from mortgages — as if the banks did not have a full, contractually specified recourse, to take possession of property they were supposed to have exercised proper caution in evaluating.  We have the Wall St. Journal dismissing as mere sloppy paperwork sustained, widespread and long-lasting fraud by the major banks in their attempt to pursue contractual remedies to which they are not entitled.  It seems to me that there is nothing more likely to produce a long-term threat to the American real estate market than confirming the belief that one of the biggest risks in home purchasing is that your lending will f**k you over.  Yet the Wall St. Journal thinks it appropriate to dismiss criminal conspiracies by banks as mere high spirits.  Astonishing — but worth remembering the next time that paper opines on the sanctity and infallibility of “free” markets.

**I hope it is obvious, and if it is not, let me make it so here: every interpretative statement and every conclusion not drawn from a direct quote from Campbell, Giglio and Pathak is mine and mine alone.  If I’ve made analytical errors, they are mine, not theirs; if you dispute my characterizations or conclusions, your beef is with me, not them.  To give you just another taste of their reasoning however, here’s one more passage from the concluding section of the paper cited above:

Our results cannot be definitive on the causality from foreclosures to house prices, but the combination of timing effects (stronger from lagged foreclosures than from future foreclosures) and geographical effects (stronger at extremely short distances) suggests that there is reason to be concerned about spillovers from foreclosures to neighboring houses…

The authors are cautious writers.  They make it clear, however, and they quantify their reasoning, that foreclosure does damage to the sales price of both the defaulted property and the neighborhood.  As I say, a quantified glimpse of the obvious — but it is often necessary to prove what you know, both so you can say so with authority, and because every now and then the obvious is false.  Just not this time.

Images:  Winslow Homer, “The Camp Fire,” 1877-78

Dorothea Lange, “Migrant family from Arkansas playing hill-billy songs. Farm Security Administration emergency migratory camp. Calipatria, California” 1939

Too Busy To Post, Too Enraged Not To Note The Latest Bit of Fraud/Nonsense–Mortgage Backed Securities/Foreclosure disaster edition

On multiple deadlines today, but I couldn’t resist this juxtaposition.

First, this, from two weeks ago (h/t LegalForesicAuditors.com):

NEW YORK — JPMorgan Chase has temporarily stopped foreclosing on more than 50,000 homes so it can review documents that might contain errors.

JPMorgan’s move Wednesday makes it the second major company to take such action this month, underscoring a growing legal problem. The issue could stall an already overloaded foreclosure process.

…..

JPMorgan acknowledged Wednesday that its employees signed some affidavits about loan documents without personally verifying the files. These affidavits verifies the accuracy of the loan information, including who owns the mortgage.

….

In some states, lenders can foreclose quickly on delinquent mortgage borrowers. But 20 states use a lengthy court process for foreclosures. They require documents to verify information on the mortgage, including who owns it. Florida, New York, New Jersey and Illinois are the biggest states with this process. 

Christopher Immel, a Florida lawyer who represents homeowners, said people who already have lost homes could sue their lender, alleging errors in documents.

In August, a judge in Duval County, Fla., ruled that JPMorgan could not foreclose on two homeowners. The reasoning was that Fannie Mae carried the mortgage on its books and JPMorgan Chase only collected payments on the loan. JPMorgan Chase had identified itself as the owner of the loan.

….

More lawsuits could come soon.

In May, JPMorgan employee Beth Ann Cottrell said in a deposition that she and her staff of eight signed about 18,000 legal documents a month without reviewing every file. In a similar testimony, GMAC employee Jeffrey Stephan said he signed 10,000 documents a month without personally verifying the mortgage information.

And then there’s this, hot of the intertubes via NYTimes.com:

JPMorgan Chase kicked off what was expected to be a mixed quarterly earnings season for big banks on Wednesday with a 23 percent increase in third-quarter income.

After powering ahead for the last year on the strength of its trading operations, JPMorgan topped investor expectations with the help of improvement in its credit card business and a gain from money it had previously set aside to cover possible losses from bad loans.

Net income rose to $4.42 billion, from $3.58 billion a year earlier. Earnings were a $1.01 a share, handily topping analyst forecasts for 88 cents. Earnings were 82 cents a share in the period a year ago.

The Times piece does note the fact that the bank faces significant costs and potential liability as it confronts the failure of its foreclosure process, and it quotes JPMorgan’s new CFO trying to discount the implications of this issue, saying “The whole mortgage issue costs us so much money now, to me it [the foreclosure SNAFU] is incremental.”

Just two quick thoughts:

1:  Given the different avenues through which JPMorgan is exposed to potential liability (as holder of delinquent loans, and through its role in the making of the market in mortgage backed securities affected by flawed documentaton — see this excellent series for more), the confidence expressed by the CFO in question, Mr. Douglas Braunstein, reminds me of this moment of assurance:

2:  What justification can anyone provide for the ongoing employment and wealth of the management of the major US banks/investment houses?

And to add just one more query in the spirit of honest curiousity:  what rationale is left for avoiding a modernized version of Glass-Seagall?  Commercial lending is a public utility, and needs to be both regulated and guaranteed as such.  Everything else can be at one’s own risk — but the two activities have to be kept separate, not just by alleged Chinese Walls, but institutionally, at the level of holding of capital and the existence of public insurance/guarantees.

Tell me, anyone, why this is wrong.

All of which is to say that before the Obama adminstration or Congress starts immunizing the big Wall St. firms from the consequences of what appears to be a decade of profiteering on real estate fraud, we gotta take the current structure down to the foundations.

Carthago Delenda Est.

Image:  Vincent van Gogh, “The Cottage,” 1885.

David Brooks is Always Wrong Too: Why Does Brooks (And The Republicans) Hate Contracts So Much?

DougJ over at Balloon Juice highlights this latest bit of sleight of hand from that genial con, David Brooks:

Financiers send the world into recession and don’t seem to suffer. Neighbors take on huge mortgages and then just walk away when they go underwater.

Now, I’ll have more to say about this column, as it is yet one more textbook case of bad faith, ignorance and, I’d wager, deliberate, useful error. (There’s a nastier term for that, but people of Mr. Brooks delicate constitution tend to faint when Anglo-Saxonisms slip into the discussion, so I’ll let y’all fill in the gaps.)

But here I just want to say something that seems to me so obvious that I hadn’t bothered to point it out yet.  That is, the difference between the two poles of this false dichotomy lies not just in the kinds of disparities Doug points out:  financiers who get rich by destroying the fabric of civilization are not quite the same as individual home-owners.*

Rather, or additionally the nature of the act committed by a financier betting the firm (but not his compensation — see Michael Lewis’s The Big Short for blood-pressure raising details if you are interested) is fundamentally unlike that performed by a mortgage borrower dropping her or his keys.

The financier has obligations — fiduciary ones to investors, and social ones that derive from the claim that finance plays an essential role in building a prosperous society — the argument used to justify outsize compensation and the rest.  There are legal ones too:  no fraud, no insider dealing and the rest.  This raft of requirements add up to a duty of care that our robber barons clearly failed to meet over the last few years.  They broke the social compact, and they continue to do so, IMHO.

Home owners, mortgage holders, by contrast, have a very specific set of obligations, defined in a contract.  Failure to perform their commitments under that contract carry specified, limited consequences, known and agreed to by both sides.

Anyone whose bought a house knows this very well; dealing with all this is why a closing takes a couple of hours, 975 signatures (I made that number up) and so on.  You learn that you are bound to pay the mortgage as scheduled, pay your taxes (when not escrowed), keep insurance on the property and so on.  If you choose or are compelled to cease to do so, the lender has certain rights, of which the chief is to seize the property on which it holds the mortgage.

That is: you don’t pay, they get your house.  That’s not a moral failing (unless the lender defrauded you, of course — or you lied to your bank); that’s a contract.  You can pay or not, and different outcomes, spelled out, result from either of those actions.

It’s a contract!  We love contracts, property rights, the rule of law — don’t we?

No we don’t.

Not if “we” happen to be conservative, especially if we slip into the skin of a faux “values” arbiter, or a glibertarian.  Contracts have two sides — but Brooks, and folks like Megan McCardle, who predictably wrote similarly breathlessly about the bad behavior of folks exercising their rights under perfectly clear (standard!) contracts a while back, only recognize that part of the contract that benefits the approved parties, the rich, the powerful, the institutional.

Surrendering a house that you cannot pay for may reflect all kinds of things about you personally:  everything from your status as one of millions of collaterally damaged folks undone by global financial disaster and global economic shifts to your actions as a lying scumsucker of a social climber taking advantage of easy money to live high for a few years.  (In which case more than ever, caveat lender.)

No where along that spectrum though, is that behavior anything but perfectly acceptable under the long-held practices of a contract-ruled social and economic system.  That’s a little different from what the banksters did:  stack up a huge pile of dry wood (the financial system, overleveraged through derivatives created for no economic purpose), add gasoline (an insurance scheme that had no actual solvent counterparties guaranteeing loss payouts) and then stand around flipping glowing butts at the pile just to see what would happen.

That Brooks refuses to see the difference between individuals acting as their legal constraints permit them, and those who thus played chicken with the entire global banking system is a measure of his mind.  To me, it says that he is a shill, a hack, a dishonest broker.  YMMV.

*Demonized here as deluded climbers — the “huge mortgage” trope.  If you actually start digging into the numbers that’s bullshit, as one might guess considering (a) the source and (b) the fatuous blanket quality of the statement.  This is a Brooks tell, how you know that he is a propagandist, and not an original thinker.  I’m still tracking down precise data, but a place to start to get a handle on mortgage size and delinquency would be this HUD report to Congress on the root causes of the foreclosure crisis.  A key point there:  it was house price appreciation, not the magnitude of the price of a given home, that seems to have driven the bus when it comes to the collapse of the bubble and the foreclosure crisis.  Brooks is doing a shifty bit here, that is, blaming individual moral failings instead of the much more complex and society-wide issue of why prices rose so unsustainably.  That has obvious policy implications, which is the point: Brooks plays a clever game, and it takes some digging to get past the easy and plausible generalizations with which he masks his real aim.

Change We Can Believe In: McCain Steals Your Wallet edition

These just in:

McCain wants to  charge you more for health insurance. (h/t TPM)…and

McCain wins when you lose your house.   (h/t Atrios).

Spread the word.