Fixing the Mortgage Crisis

Published by marco on

The blog post, Be a Hero, Barry by Robert X. Cringely, proposes an elegant solution to one of the main drags on the economy today: the millions of people (over 80% of mortgage-holders) who continue to make exorbitant payments on their now-nearly-equityless homes. They are moral heroes for continuing to pour money into what amounts to a black hole, an investment that will never pan out. They are also paying a huge amount of interest—especially compared to today’s rates—because they’re trapped and unable to refinance their mortgages.

According to Cringely:

“Rates are down, sure, but qualifying rules are stricter and there are at least 30 million U.S. homeowners who are literally trapped in their old mortgages. A few walk away, but most don’t because they worry about ruining their credit. And this means that while new 30 year mortgage rates are in the 3-4 percent range, the average rate paid by these trapped homeowners on their old mortgages is twice that. And since their loan initiation overhead was amortized years ago, their actual yield is even higher.

“Are you making seven percent on your money?”

No? The banks are. And they’re pleased as punch with the situation, which is why they’re giving people such a huge runaround when they try to qualify for refinancing via government programs for which they qualify.

“This is all you need to know to understand the stalled U.S. housing market: it is stalled because a class of investors has found a way for their investments to not only live on after the housing bubble popped, they are actually making more — in some cases a lot more — than they were on that money when the loans were originated. They are doing so well, in fact, that they can’t imagine a circumstance under which they would ever allow the ghost mortgages to go away, no matter the cost to the economy or the nation.”

Why should they, you may argue? They have legal documents—well, most of them don’t because they didn’t bother securing valid documentation for their mortgages—and they can continue to squeeze their customers. The problem is that their squeezing is preventing the economy from recovering for anyone other than those doing the squeezing. That’s not a problem in their eyes, or in the eyes of strict libertarians, who would be only too happy to let a large part of their fellow countrymen starve in the streets because they allowed themselves to be hoodwinked. But those of with any morals or ethics whatsoever, or with any interest in using the tremendous wealth of the U.S. to provide a viable civilization that doesn’t resemble Tina Turner’s Thunderdome, are more than a little concerned. We would actually appreciate it if the U.S. were run by the representatives we elected instead of by an oligarchy over which we have no control whatsoever (oh, yeah, you can boycott their products; let me know how that works for you) and whose benevolence toward anyone outside of their class is nonexistent.

So, the obvious-in-hindsight solution is to let people with mortgages held by government organizations refinance at current interest rates. Immediately and without delay and without paperwork. They will continue to pay their mortgages—as they have been—but they will no longer be required to torpedo themselves financially by paying usurious interest rates on top of it. They may even be able to stay afloat enough to keep their jobs and actually contribute to their local economies, which is pretty much the part that’s been missing from any of the stellar economic planning we’ve seen of late.

“The way to do this is for Fannie Mae and Freddie Mac and the Federal Housing Administration and the Veterans Administration and any other government-sponsored mortgage programs you can name to waive the appraisal requirement on non cash-out refinance applications for owner-occupied homes under these programs.”

It’s a stimulus that costs essentially nothing and which can be enacted immediately without an act or Congress or even an Executive Signing Order. And it applies to the people who are in the most trouble and whose participation is needed to prevent another recession or even a depression. Poor Cringely ends his post with “Run with it, Barry. Be a hero”, but I don’t think that’s a football Obama’s willing to carry. He hasn’t shown the will to do anything even remotely social or for the general public, so it’s hard to imagine he’s going to start now. Maybe he’s do it for the purely Machiavellian reason that it might lift his poll numbers…but considering the Republican field of candidates, he doesn’t really have much to worry about there either.

Interested to see what happens, though. I bet we see a tax cut for the rich instead—one that costs the government dozens of times as much in revenue as this plan would.