The Democrats need to get out front with proposals to protect the victims of the option ARM racket before the disaster hits.
I’m with Atrios. The coming option ARM trainwreck combines consumer fraud with (in this case purely legal) corporate book-cooking. Democrats need to start pounding the table now to take full political advantage of the disaster as it unfolds. I especially like the idea of legal assistance for victims of mortgage brokers’ flim-flam tactics.
Of course, the Republicans could beat the Democrats to the punch by actually doing something about the problem before it turns into a catastrophe, but it’s a safe bet they won’t.
Author: Mark Kleiman
Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out.
Books:
Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken)
When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist
Against Excess: Drug Policy for Results (Basic, 1993)
Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989)
UCLA Homepage
Curriculum Vitae
Contact: Markarkleiman-at-gmail.com
View all posts by Mark Kleiman
Typical, just typical.
While you might have been harping on this, I don't recall any of your fellow liberal Democrats railing about the supposed evils of adjustable rate mortgages. How many of them were proposing three, four, five years ago to eliminate ARMs? How many of them were proposing to raise the lending standards, to cut off thousands and thousands of would-be homeowners from the pleasure of owning their own homes? How many of them were telling people who, because of (the non-existent) democratic proposals to eliminate ARMs and the other methods of 'creative financing', weren't going to be able to buy a new house or refinance their existing house that it was actually for their own good, that the Democrats, as advocates for the nanny state, were going to keep people from doing, according to you, stupid things? Of course, their inaction in the past won't stop them from grandstanding as you suggest. What's consistency and integrity when there are some political points to try and score?
And while there is probably no doubt that there are and were some less-than-stellar players in the mortgage industry, you seem awful willing to indict an entire industry - as well as, at least in hindsight - to deny homeowners of all stripes the ability to buy a house using a financing method… just because there was some combination of bad apples and idiots who, for whatever reason, bought off more than they could chew.
And, had the country followed your advice (assuming this is in fact your advice at the time) and cut off - or at least cut way back on - ARMs, I'm sure you feel the negative effects on the economy - the jobs not created, the wealth spread around - would have been ok, right?
On the other hand, had Bush and Congress followed my advice and cut taxes again, then we wouldn't be having this supposed crisis, would we? Sure, rates might be higher, but people would have higher disposable incomes to pay those higher mortgages. So what we have here is another instance of Democrats creating the circumstances by which the economy gets into trouble and then they try to score political points… just par for the course.
Was the previous post a parody?
Was Steve Sturm's previous post a parody?
(In Bush's American, it's hard to differentiate between parody, stupidity and CW.)
If not, let's cut taxes back to zero. We'll all be rich - buy lots of houses - sell them, make a bundle and retire! And, let's see, we can have a bunch of immigrants do all the work for us. Sounds like a plan.
I was going to write something funny about "personal responsibility" and how the Repubs would trot that out (and oh! the irony). But I bow to steve sturm's superiority in the channel-a-right-wing-idiot department and won't submit my feeble attempt.
i dunno (and your compatriots): You (probably) unwittingly showed why, even when the GOP is as bad as they are, you democrats are having trouble being taken seriously by the American people: to you all on the left, 'personal responsibility' is something to be made fun of. Think of this: if you all weren't such total fools, do you think there would be even a chance of the GOP retaining control of at least one chamber of Congress? If you all had demonstrated to the public that you had even a trace of being grounded in what you so proudly refer to 'reality', the GOP would be facing huge losses this fall, instead of a few seats here and there.
Contrary to your warped thinking, the majority of people in this country like the idea of people being held accountable for their actions. We don't cry tears for the guys who chose not to read the paperwork. We look at the positives of new programs, not the relatively isolated examples where something goes wrong and scream that we need federal outlays.
So go ahead and make your jokes..
Tim Worstall: if lenders have put options as you say, the consequences are much worse for the housing market and for borrowers. Repossessions and forced sales could set up a positive feedback loop and a crash. There's a case for emergency legislation to prevent such sales so long as the payments are being met.
The UK housing slump of 1988-1990 created a lot of negative equity, but most homewowners simply continued to pay and eventually prices rose again. I would guess there must have been a big impact on labour mobility, as a lot of workers couldn't afford to move, but that's a priori and I can't point you to evidence.
I've alerted Mark to the comment spam.
Tim, I've owned 2 houses, and I've lost tens of thousands of dollars on each. Neither MO, nor FL had "put options" when I was upside down in my mortgage. I'm unaware of *any* state where one can hand the keys back (to either a house or a car) without being liable for the difference. I managed to negotiate my way out of writing 5-digit checks on both (and down to 4-digit checks), and lost all my (20%) downpayment and mortgage payments. Some banks aren't foreclosing on properties, they're sueing the owners to keep them making the payments. And the new bankruptcy law makes it impossible to get out of those suits/judgements.
As part of the S&L scandal in the 80s, many of the S&Ls were sitting on repossessed properties (called REO in the real estate business). As some of the S&Ls ended up in liquidation, the properties they had in their portfolios ended up getting dumped onto the market, driving the market down far faster than it was going. I currently live in Denver, and there were some neighborhoods where prices in the mid 80s dropped 80% from their early 80s boom/bubble prices (I travelled here on business every month during those years). Those folks didn't recover what they had paid for their properties until the late 90s and early 00s.
I think we're headed for another S&L type of crash, and this one will take a huge bailout like LTCM to keep the economy from crashing. I'm currently renting and socking about $300/week away for when the prices hit bottom and there is blood in the streets. But then I also have 2 months food in the apt (that's all that fits), because I think that between the housing bubble and attacking Iran, we're heading for some fugly times ahead.
It was partisan bickering that kept the S&L crisis from being resolved when it was first noticed. And the cost of resolving it more than doubled before the bickering was sort of set aside.
Responsible lending loan counselors have been warning people off of ARMs for decades. I work for the non-profit ACORN, which has a related loan counseling operation called ACORN Housing Corporation. We've been taking on major subprime lenders like Household Finance and Ameriquest to get them to change their practices (with some success, I might add).
We've been pushing model legislation in various states to regulate high interest loans (extra wait times, required loan counseling by a state-approved non-profit, caps on rates, etc), but the kind of thing you're talking about will probably push that lending stuff to the next level. Hopefully it won't take a housing crash to do it.
We did a study on places most likely to be adversely affected, and have some policy prescriptions we recommend.
<a href="http://www.acorn.org/index.php?id=9412&tx_ttnews%5Btt_news%5D=18757&tx_ttnews%5BbackPid%5D=8360&cHash=17cbeeb38b" rel="nofollow"> <a href="http://;http://www.acorn.org/index.php?id=9412&tx_ttnews%5Btt_news%5D=18757&tx_ttnews%5BbackPid%5D=8360&cHash=17cbeeb38b” target=”_blank”>;http://www.acorn.org/index.php?id=9412&tx_ttnews%5Btt_news%5D=18757&tx_ttnews%5BbackPid%5D=8360&cHash=17cbeeb38b
P.S. Ughh. That's some nasty comment spam.
While the idea of getting political advantage from the possibly imminent housing/ARM implosion is attractive, are there any actual ideas as to how to make it work?
"Tightening up on bad lending standards" will make the crash happen sooner, as no one will be able to afford the wildly inflated prices even if they wanted to, and easily leaves one open to counter-attack ("the Option-ARM was dangerous but powerful in the hands of someone as responsible as yourself, but the Democrats didn't trust you and took it away, and brought an end to the greatest housing boom in history.").
Legal assistance to f*cked borrowers also sounds good, but against whom? Most of their money went to people like Mark, and they now effectively owe money to whatever pension fund is holding the securities backed by their mortgage. The mortgage broker and real estate agent probably spent all their money on a Ford Expedition that gets 8 mpg and a house that is now worth half what they paid.
Jake,
Someone is still servicing those loans, and the servicer can be negotiated with, especially if there's threat of legal action of some kind. Its bad press for big companies to foreclose on little old ladies, or military families, etc, and there's definitely room for manuever. Now foreclosing on someone's third home that was bought as an investment is a harder case to make as to why that's a problem.
Wow, I am just dumbfounded at this post. Is there any situation at all in which Mark believes people should have to bear the consequences of their own poor decisions?
Of course, mortgage brokers who committed actual fraud ("your ARM will never adjust up") should have to make their clients whole. But there are already laws on the books to handle that. Surely, Mark, you don't claim that all or even the most of people who took out ARMs didn't understand the basic framework of the contract into which they were entering?
Perhaps I mis-understand you, though. Perhaps you just don't give a damn about the ethics, but you see a great political-tactical opportunity for your preferred party to use "we-feel-your-pain" rhetoric and government money to buy the votes of a whole class of people who would love to be told that their problems are not their fault. Is that the Machivellian idea here?
But it's also bad form for a pension fund to come back and say "we just took a 10% haircut because it turns out that the mortgage-backed securities that we bought were all ARMs sold to people who can't pay them."
Sure, fraud should be prosecuted, but if people make bad decisions they have to live with the consequences.
We must resist the temptation to bail out either the lenders or the borrowers.