Posts tagged ‘Housing Crisis’

05/10/2012

Housing Crisis: “Easy Credit” Not Cause

While Republicans attributed the 2008 housing collapse to many factors during the 2011 and 2012 debates, including Fannie Mae and Freddie Mac, “easy credit,” and “loans to people who could not afford them,” they never really hit the nail on the head, because they never even mentioned “adjustable interest rates.”

Fannie Mae and Freddie Mac were not in and of themselves a problem. In the Great Depression, when housing crashed the first time, the Congress responded in 1938 by establishing “Fannie Mae,” the Federal National Mortgage Association (FNMA), which created a “secondary mortgage market” by accepting the assignment of mortgage notes from banks in consideration for cash, so banks could promptly turn around and make more loans. It was good public policy, because it effectively increased the sum of money available for lending, and increased the level of home ownership. There is no reason today to abolish that concept.

After Fannie proved useful, the Republicans in Congress made the mistake of converting it into a “mixed ownership corporation” in 1950, by allowing private investors to purchase its common stock. They also erred in 1968 by making Fannie 100% privately-owned, while maintaining their line of credit to the U.S. Treasury. Since Fannie wanted only lower risk private mortgages, Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC), was created to accept the riskier notes, made by the FHA, VA, and FmHA. While the privatization of Fannie made it harder to monitor, that mistake did not cause the recent housing meltdown.

Some argued “easy credit” and relaxed lending standards contributed to the crisis, as borrowers were no longer required to put 20% down, or sufficiently prove a credit worthiness. As the crash hit and the values of many mortgages went underwater, many borrowers had little or nothing to lose, and simply walked away from their obligations. While this sounds like a possible cause, if the borrowers had stayed employed, and their interest rates remained unchanged, they would have continued making their monthly payments, and no defaults would have occurred. “Easy credit” allowing people to buy with small or non-existent down-payments had nothing to do with why they defaulted.

Mortgage Notes, containing “adjustable interest rates” which could escalate or balloon to unsustainable levels over time, were the real problem. Notes that allowed “interest only” payments, reduced no principle, and left borrowers in a perpetual state of debt, were also a menace. Once rates jumped upward for borrowers who had no extra cash, breaches were inevitable. Lenders like Countrywide should have been stopped from making such bad loans. President Obama said in his Jan. 25, 2012 speech, mortgages were sold to people who could not afford them, by lenders who knew it, and this is why regulations are needed to prevent financial fraud.

The way to get back to financial stability in the housing market is to outlaw “adjustable interest rates,” and permit only “fixed interest rates.” If borrowers had the certainly of knowing a monthly payment that could never change, defaults would have been limited to only those who lost their jobs, and the downturn in the housing market would have been relatively mild.

05/09/2012

Obama Inherited the Great Recession

The way many Republicans and right-wingers talk about the American economy, one might think the Great Recession of 2008 was somehow single-handedly caused by President Obama, but in case we have forgotten, the crash occurred under the watch of President George W. Bush, and when he vacated the White House in Jan. 2009, he left behind several major economic problems.

OBAMA NOT TO BLAME: While Gov. Romney repeatedly said during the Republican debates, he did not blame Obama for the Great Recession, he dishonesty suggested Obama’s policies were somehow responsible for making it deeper, and causing it to go on longer than it should have.

WHAT WOULD ROMNEY HAVE DONE? But what would Romney have done if he had been President in Jan. 2009? What if he had inherited the Great Recession?

HOUSING CRISIS: The housing market had collapsed, as the value of millions upon millions of homes, all across the country, had dropped to roughly half their previous values. Many suddenly realized they owed far more on their mortgages than their homes were worth. Their residences were considered “underwater.” As the Fed used Monetary Policy to keep lending interest rates low, Obama instituted a homeowners program to allow refinancing at lower rates. If Romney would have been President, he would have taken no action to get private homeowners out from their underwater status. It is just wrong to suggest millions of homes could have recovered from their depressed values in just 4 years.

BANKING MELTDOWN: Banks and some insurance companies were collapsing as the Bush Administration, followed by Obama, did everything they could to shore them up with government bailout loans. While it is now easy to say we should have just let them go bankrupt, the ripple effect of a free market free-fall would have been catastrophic. A hands-off policy would have triggered another Great Depression, with major economic failures in all economic sectors, bringing record levels of unemployment.

AUTO BANKRUPTCY: The recession caused General Motors and Chrysler to lose so many sales, they faced bankruptcy, and no private bank was able to lend them any money. The only option was a federal bailout loan, but Romney repeatedly opposed any financial help whatsoever for the beleaguered auto industry. If he had been President, these major industrial employers would have gone bankrupt, and the ripple effect would have killed thousands upon thousands of additional jobs at component part factories throughout the industrial Midwest. Once again, inaction would have turned the Great Recession into another Great Depression.

WALL STREET CRASH: Obama inherited a stock market that had crashed, and a Wall Street trading system that was dealing in unregulated derivatives, contributing greatly to the problem. While Democrats took action by passing the Dodd-Frank bill to eliminate financial abuses, the Republicans held firm to a hands-off business as usual approach. What would Romney have done?

HIGH UNEMPLOYMENT: When Obama took office, the level of unemployment was literally sky-rocking by the hour. Obama did what any reasonable President would have done, by signing a job stimulus bill, designed to help people get back to work. While the federal government used Keynesian economics through deficit spending to prime the pump, Republican Governors in nearly 30 states did exactly the opposite, which was counterproductive, by laying off people, and making the recession worse.

A pure capitalist total free market response to the Great Recession would have triggered a Great Depression. The history of the 1929 Stock Market crash, and the subsequent four years of inaction under President Hoover, proved that point. Governments must do what they can to help the nation out of a deep recession, and it appears Obama did as good a job as any President could have.

01/31/2012

Housing: What Are “Freddie” & “Fannie?”

FANNIE MAE: CREATED IN 1938 IN GREAT DEPRESSION: The U.S. government enacted the National Housing Act (NHA) in 1934, during the Great Depression, with a goal of making home mortgages more affordable. “Fannie Mae,” the Federal National Mortgage Association (FNMA), was formed under a 1938 amendment.

SECONDARY MORTGAGE MARKET INCREASED LOANS: As local banks had consumers sign Notes and Mortgages, they promptly turned around, and assigned their paperwork to Fannie Mae, in consideration for cash, so they could make even more loans, thereby increasing the level of home ownership. Fannie’s practice of buying mortgages from local lenders became known as the “secondary mortgage market.”

FANNIE WAS PRIVATIZED IN 1968: The Congress changed the nature of Fannie Mae in 1950 from a purely governmental agency, to a “mixed ownership corporation,” by allowing private investors to purchase their common stock. To completely remove Fannie Mae from the federal budget, it was converted in 1968 to a private corporation, with the authority to buy “private mortgages.”

“FREDDIE MAC” WAS FORMED IN 1970: Mortgages backed by government agencies, such as the FHA, VA, and FmHA, fell under the control of a new agency, known as Ginnie Mae, the Government National Mortgage Association. In 1970, it became part of the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as “Freddie Mac.”

MORTGAGES STARTED BEING SOLD AS SECURITIES: Private mortgages were sold and assigned to Fannie Mae, while government-backed paper was sent to Freddie Mac. Although Fannie no longer had a government guarantee, they still enjoyed a line of credit from the U.S. Treasury. Fannie and Freddie both started re-selling their mortgages as securities.

FANNIE ASSUMED GREATER RISK UNDER 1992 LAW: The Housing and Community Development Act of 1992, signed into law by President George H. W. Bush, was intended to make financing more affordable for low and moderate income people. While Freddie Mac maintained their traditional high standards, Fannie started taking risks in the sub-prime market in the 1990s.

EASY CREDIT FOR MORTGAGE LOANS: In the past, borrowers had to put up to 20% down and present tax returns and other documents that showed they were credit worthy. Lenders started bypassing traditional qualifying income documentation, and no longer insisted on down-payments.

VARIABLE INTEREST RATES DOOMED NOTES TO FAIL: Notes were drafted for short-term gain, by taking “interest only,” meaning borrowers would never pay off their mortgages. “Variable interest rates” were used instead of “fixed rates,” which allowed monthly payments to be increased at later dates to levels lenders knew, or should have known, borrowers could not afford.

FANNIE AND FREDDIE CONSUMED HALF OF MARKET: Fannie became the largest purchaser of risky mortgages sold by Countrywide Financial. Fannie and Freddie either owned or guaranteed about 5 trillion of debt.

MORTGAGE-BACKED SECURITIES TRADING GREW: Around 2003 and 2004, when evidence of a sub-prime mortgage crisis began to emerge, the market nevertheless continued trading in Mortgage-Backed Securities (MBS).

HIGHER INTEREST RATES LED TO FORECLOSURES: When higher amounts were charged under “adjustable rate mortgages,” borrowers with poor credit ratings, and no money down, simply walked away from properties in what became a foreclosure crisis.

FORECLOSURES CAUSED HOUSING PRICES TO DROP: Foreclosures and an excess housing supply, caused prices to drop, and they have remained down since then, because few now qualify for loans under traditional lending standards requiring down-payments, employment, and good credit ratings.

CONSERVATOR TOOK OVER FREDDIE & FANNIE: Freddie and Fannie were placed under a conservatorship by the Federal Housing Finance Agency in Sep. 2008. Their stocks, trading at less than $1 a share, dropped off the NYSE in 2010. The Federal Reserve has been granting low interest loans to Fannie and Freddie, which are estimated to ultimately cost the federal government between 224 and 360 billion.

12/08/2011

Romney’s Economy: For Rich Insiders

Former Mass. Gov. Mitt Romney, often called a Republican front-runner, should not, on issues regarding the economy, receive the vote of most Americans, because: 1) his tax policies would favor rich individuals and corporations; 2) his Free Trade policies would kill more manufacturing and U.S. jobs; 3) his promise to eliminate Public Broadcasting would reduce the flow of reliable and objective information; 4) his financial policies would save only the big banks and Wall Street; 5) his housing policies would do nothing for underwater homeowners; 6) his energy plans would ignore wind and solar, but would promote oil, gas, and nuclear special interests; and 7) his health insurance mandate idea will yield private insurance windfalls at the expense of taxpayers.

TAXES: While Romney said he wants to repeal tax breaks, he would in fact give more of them to the rich, by eliminating taxes on dividends, interest, and capital gains. He also wants to lower the corporate income tax rate from 35% to 25%. He appeared willing to tax the poor, when he said everyone should pay, regardless of income, though he did oppose Cain’s 9% national sales tax, which would have hurt the poor the most. Although Romney favors an expanded military role abroad, he opposes raising revenue to pay for it, because he thinks more taxes would only kill jobs. While he has said he wants to cut spending, he would run up even more debt, by staying in our unfunded War in Afghanistan. Although he said we should not pass massive debt on to the next generation, he was not sincere, since he will not stop wasting money on foreign military entanglements.

TRADE: Although Romney promised to issue an Executive Order identifying China as a currency manipulator, because they let the prices of their goods fall below market levels, and he pledged to sue them in the Dispute Resolution Body (DSB) of the World Trade Organization, to win the right to selectively impose tariffs, he has no intention of turning back the clock on Free Trade, or the WTO policies that have led to the death of many U.S. industries.

AUTO: Romney said the government should not have loaned money to GM or Chrysler, even though the act successfully saved thousands of American jobs. He would have let them go bankrupt.

JOBS: When Romney was asked to explain why people were laid off from the companies he acquired, he had little to say. He was however clear about his desire to fight unions, and his criticism of the National Labor Relations Board, for taking action against big business. He called corporate profits good, as he believes they trigger new hiring. He called Wall Street protesters people engaged in: “dangerous class warfare.”

FIRST AMENDMENT: While little harm would be done if Romney succeeded in abolishing the Endowment for the Arts, his desire to eliminate Public Broadcasting is a serious threat to the free flow of information, and an affront to those who respect the First Amendment. Those who routinely follow the PBS News Hour and BBC America, searching for reliable news from objective sources, find his desire a real threat to democracy, since we need PBS and the BBC to be informed citizens. As to faith, he correctly said the Founders appreciated the Freedom of Religion, and wrote a Constitution that respected all beliefs.

BANK CRISIS: While Romney said Fed chair Bernanke pumped too much money in the economy, he would not remove Fed power to do so, as he does not want Congress in charge of the currency. He defended President Bush for taking action to keep the banks open, adding we must prevent another contagion. When asked what he would do if the economies of the entire world were collapsing, he promised to take action.

HOUSING: Romney said the housing crisis was caused by Fannie Mae and Freddie Mac, as they gave loans to people who could not afford them. He said slowing down the foreclosure process, buying up troubled homes, or giving a couple thousand towards the purchase of a new home, won’t solve the problem. He predicted home prices will not return, until the free market works.

ENERGY: Romney suggested developing our own oil, gas, and nuclear energy, to achieve energy independence. He said little about putting a new emphasis on solar, wind, or clean energy.

HEALTH CARE: Romney has been the greatest lobbyist the health insurance industry has ever had. He said a problem arose in his state, where 8% of the people had no health insurance, and they sought emergency room care, which shifted costs to taxpayers. He argued everyone has a personal obligation to buy health insurance, an idea he said he got from Newt Gingrich. He enacted a personal mandate and forced everyone to purchase coverage from private carriers. Although subsidies were provided for those who could not afford it, the Mass. plan did not create a more efficient government-run health care plan, like the single-payer system used in Canada. As to the U.S., Romney said Americans were not and are not satisfied with the status quo, because premiums are out of control. Many of Romney’s critics called the new National Health Care law signed by Obama, basically the same as Romney’s state plan. Romney tried, but failed miserably to convince them they were different. He argued the Mass plan was for one state, while the President’s, one-size-fits-all plan was for the entire nation. He argued Obama’s plan raises taxes and spends trillions. He promised a repeal of what has been called Obamacare, claiming we could save 95 billion a year. In a contradictory statement, he offered only to give the states waivers, so they could opt out. He also took both sides of the individual mandate issue, by first saying everyone should buy insurance, but then by arguing mandates are unconstitutional. In the event Obama’s law is repealed, or declared unconstitutional, the question arose as to what to do next. He acknowledged health care costs are disconnected from patient awareness, and people need to have a stake in the cost of health care. He accused the government of having too heavy a role. He advocated co-insurance for patients, but sounded like he did not realize most Americans already had that. Romney said he would turn Medicaid and Medicare over to the states and let them run health care.

SOCIAL SECURITY: Romney called the Social Security retirement program essential, and said it must be saved, not abolished. He called the use of trust fund money for other purposes criminal, and agreed to make the system sound. As to the unfunded prescription drug program, started by President George W. Bush, Romney would not repeal it.

IMMIGRATION: Romney wants no amnesty for illegal immigrants, a fence with agents to secure it, and an elimination of the magnet caused by states that give tuition breaks, and employers who hire illegal aliens. He would implement the federal E-Verify program. He said 4.5 million want to come here legally. He would admit those with degrees in math or science.

10/31/2011

Gingrich Sees Problems, But No Solutions

FOREIGN POLICY: Former House Speaker Newt Gingrich often points out what is wrong, but offers no solutions. He said Obama was mistaken to intervene in Libya against Gaddafi. He thinks Greece should not belong to the European Union, but offers no answer to the Euro Crisis. He expressed concern over trade with China, but stated no Free Trade alternative. He worries about civil war in Mexico, but has no suggestions. He named North Korea and Iran as threats, but said nothing of what he would do. He predicted a more dangerous Pakistan, but did not say how to divert it. He said Reagan was wrong to trade arms for hostages, but did not say what he would have done. He wants loyalty oaths.

FOREIGN AID: Newt came up with a bad idea to replace direct foreign aid to developing countries with a system of bribery conditioned upon whether or not their votes in the UN are consistent with ours. His approach would force nations to choose between receiving aid, or exercising free and democratic votes.

FEDERAL RESERVE: Newt was correct to demand a release of all Fed documents, and an audit of the agency, as he suggested they have too much power, deal with billions in secret, and fail to explain why they bail out one group over another.

HOUSING CRISIS: Gingrich correctly said the Countrywide lobbyists made it too easy to buy a home during the past decade, but neglected to discuss a solution to the current housing crisis.

LABOR: Gingrich showed a lack of fitness for the White House as he suggested dismantling the National Labor Relations Board. Newt wants paychecks instead of food stamps, which is fine, but failed to explain where jobs would come from. His idea to make the unemployed get job training would depend on the details.

IMMIGRATION: Newt’s plea to “secure the borders” sounds the same as other Republicans, but he skips over implementation. It’s fine to suggest a modern visa program, to require U.S. History in schools, and to establish English as our official language, but it is doubtful Newt would actually go ahead and force employers to verify the Social Security numbers of job applicants.

HEALTH CARE: Like other Republicans, Newt would repeal the new health care law, and just like them, he offers no answers to the health care and health insurance crisis. He was critical of the insurance mandate imposed in Massachusetts, but failed to suggest any regulations to control health care costs or insurance premiums. Newt makes simplistic attacks on Medicare by referring to abusers as “crooks,” but throws the baby out with the bath water, as he thinks young workers should have a right to choose, code for destroying the system as we know it.

ENERGY: Gingrich wants a safe way of taking care of nuclear waste, but he fails to explain how that is even possible.

TAXES: Gingrich appeared to be heading somewhere when he said GE paid no income taxes, but then he failed to suggest a solution to corporate tax avoidance. He instead pushed the discredited idea of eliminating Capital Gains Taxes.

EDUCATION: Gingrich would divert badly needed public tax dollars to religious schools by expanding Pell Grants for K-12.

NO SOLUTIONS NEWT: Gingrich offered no solutions to our trade deficits with China, violence in neighboring Mexico, or the Euro Crisis. He seeks to bribe votes in the UN. He has no answers for the Housing Crisis. He would make life harder for working people by dismantling the NLRB. He had no realistic solution to the flow of illegal immigrants. He stated no answer to the galloping cost of health care, and health insurance premiums. He wants to destroy Medicare as we know it. He appears willing to use nuclear power, but has no solution for nuclear waste. He would help bankrupt the federal treasury by giving capital gains taxes away, and by diverting public funds to religious schools. With answers like those suggested by Newt, who needs problems?

10/12/2011

Republican Debate New Hamp (10-11-11)

The Republican candidates met in New Hampshire on Oct. 11, 2011 to debate economic issues.

INTERNATIONAL TRADE: Romney said we have been run over by China for 20 years, and he would issue an Executive Order identifying them as a currency manipulator, and then prosecute them in the WTO.  He did not want a trade war, but did not want to let them use us either. Huntsman worried if we apply penalties, we will get the same in return, because we also manipulate our currency, and a trade war would hurt our agricultural exporters.

EURO CRISIS: Gingrich said the Greek economy should not be using the Euro-Zone Currency. Ron Paul uncovered the Federal Reserve sent 5 billion overseas to bail out foreign banks.

DEFENSE SPENDING: Romney will not cut defense spending.

BANKING: If the economies of the entire world were collapsing, Romney would take action. He said we need to prevent a contagion from affecting U.S. banks. President Bush had to take action to keep all banks from closing. Santorum opposed the bailout of the Wall Street banks, and the creation of the Troubled Asset Relief Program (TARP), which Romney, Huntsman, Perry, and Cain supported. Bachmann said the banks cannot grow, because they are being required to comply with new rules. Cain thought the Wall Street protesters should target the government.

FEDERAL RESERVE: Gingrich said the fix has been in since the Bush Administration. Newt said Paulsen, Bernanke, and Geithner are not smart, and he would fire Bernanke and Geithner over the crisis. He singled out Bernanke for spending billions bailing out one group, over another. He said it is wrong for one man to have that kind of secret power. He wants all Fed documents released, so we can better prepare for the next crisis. Romney would also discharge Bernanke. Cain had no objection to a Fed audit. Paul called the Fed the engine of inflation and the source of recessions.

INTEREST RATES: Paul said Greenspan kept interest rates too low for too long. Easy credit caused a bubble and then it burst and now we need a correction. We should not have someone at the Fed deciding what interest rates should be, or how much money we should have. We should go back to the gold standard, Paul said. Because the Fed is setting artificially low interest rates, Bachmann blamed the financial meltdown on the government.

HOUSING: We built too many houses, Paul said, and then the Wall Street speculators got bailed out, but the Middle Class lost homes. Freddie Mac and Fannie Mae caused overbuilding and distortions, and the government must get out of housing. Bachmann said the government pushed housing goals, as Freddie and Fannie put mortgages in a difficult place. Gingrich said the easy ability to buy homes is where we went wrong the last decade. He blamed the Countryside deal on the lobbyists for Freddie Mac.

JOBS: Romney said funds should not have been used to bail out GM and Chrysler. The NLRB should not be telling Boeing it cannot build in a non-union state. He said we borrowed 800 billion for a job stimulus, but didn’t see any jobs. Huntsman would regain our industrial base by lowering taxes and lessening regulations. Santorum said we are uncompetitive, and must reduce corporate taxes from 35% to zero on those who invest in plant and equipment in this country. Perry wants our manufacturing back.

ENERGY: Perry would repeal regulations that interfere with the energy industry. He would put 1.2 million people to work in the industry, so the U.S. can become energy independent. It was wrong, he said, for Obama to invest in Solyndra, a solar energy firm. When asked about doing the same in Texas, he said his legislature had oversight and created 54,000 jobs. Santorum would drill in Pennsylvania, saying it is a gas capital.

HEALTH CARE: Romney said Americans are not satisfied with the status quo. Although he would repeal Obamacare, he asked, what are we going to replace it with? In Mass, he dealt with the 8% who were uninsured. He said Perry has one million uninsured kids in Texas, while Mass has less than 1%. Romney said Obama’s plan raises taxes and spends trillions. Huntsman wants a health care solution that works in the market. He warned the IRS is already gearing up with 19,500 employees to administer the insurance mandate. Santorum would repeal Obamacare, but not by waivers. He would repeal the taxes and spending for it, so the insurance mandate would have no teeth.

MEDICARE: Gingrich was asked: Are the last two years of life under Medicare wasteful spending? He did not want death panels. Bachmann warned Part B for hospitals will be broke in nine years. She thinks Obama would push people out of Medicare into Obamacare, and 15 political appointees will make major decisions for 300 million Americans. Perry says Medicare needs to be block-granted to the states.

BUDGET & DEBT: Cain wants revenues to equal spending. Perry would propose a Balanced Budget Amendment, because we raise taxes, but never get spending reductions. Paul said the debt is a burden on the economy. Bachmann opposed increases in the Debt Ceiling, because she did not want to give Obama another 2.4 trillion. We spend 40% more than we take in, she said, and cut backs on spending would be only part of the answer. Romney said we cannot have more tax revenues, because that would kill jobs.

TAXES: Romney would not raise taxes. We don’t need Cain’s 999 tax plan, said Perry. The last thing Bachmann would do is let Congress impose a national sales tax, a suggested by Cain. Santorum said Cain’s plan would not pass, because no one supports a national sales tax. Huntsman would not do Cain’s tax plan, but instead something doable, like eliminating loopholes and deductions for individuals, as recommended by the bipartisan Simpson-Bowles Commission. Huntsman would also phase out corporate welfare and subsidies. He said he had a flat tax in Utah.

9-9-9 PLAN: Cain would throw out the entire tax code, including the progressive income tax, the capital gains tax, death taxes, and payroll taxes, and he would replace it with a 9-9-9 plan: 9% corporate business flat tax, 9% federal income tax, and 9% national sales tax. He was asked why Americans would be willing to pay more for bread and milk, under his new 9% national sales tax. He gave an incorrect answer, suggesting ordinary people are now paying 15.3%, when in fact they pay only 7.65%. He tried to suggest they would be save 6%. He thought people would have more for sales taxes, since they would pay less in payroll taxes. Cain also appeared ignorant of how Congress works, when he said he would ask them to require a 2/3rds vote before increasing any of his 999 taxes. He would need a Constitutional Amendment.

06/09/2011

Foreclosures Should Be Simple

A headline in the St. Petersburg Times asked: “What should foreclosure help cost?” While most foreclosure cases are simple and routine and should not cost very much, it is impossible to categorically determine the amount of attorney’s fees in every case, since some present unique issues that require more work than others. What can be said is the first hour or so of advice in nearly all cases is perhaps the most useful and worthwhile.

Defendants in foreclosures need some legal advice, so they can understand the process and intelligently decide what to do next. At a minimum, they should understand they gave the lender a note and mortgage, in consideration for a loan. A note is a contract in which they agreed to repay the lender, and a mortgage is an instrument that created a lien to secure the amounts due.

If a borrower fails to pay as agreed, they are deemed in default and the lender proceeds with a foreclosure. The case starts with a complaint, which alleges a breach of the note. A summons is also served with the complaint, commanding an answer.

In the vast majority of cases, the defendant does not bother to file an answer, because there is nothing to deny, and the bank takes a default judgment. If the defendant files an answer, denying some or all of the allegations, the case slows down, but not by much.

In most foreclosure cases, there is generally no need for a trial, because the facts are truly not in dispute. The bank seeks what is known as a Summary Judgment. Without a factual dispute, the court simply decides which side is correct, based on the law of the case. For example, a banker may swear in an affidavit $100,000 was loaned and the borrower failed to make payments as agreed. If the defendant files no counter-affidavit, because the banker is correct, there is no factual dispute, and no reason for a trial. The court simply enters a Summary Judgment for the bank.

In the Judgment of Foreclosure, the court sets a period of redemption, and orders the land sold, if the defendant fails to redeem by paying the entire judgment plus costs, within the time allotted. At a sheriff’s sale, the bank bids what they are owed. If someone outbids the bank, the bank is paid from the proceeds. If no one outbids them, the bank receives a sheriff’s deed. The sale process must then be confirmed by the court.

Many banks are now slow to complete the foreclosure process, because they do not wish to end up owning real estate they cannot resell. They do not want to be stuck owing real estate taxes, insurance, dues, upkeep, and other expenses on the property. Judges should force the banks to complete their foreclosure cases, or suffer a dismissal with prejudice, for a want of prosecution. The country needs to move all of the foreclosed properties through the system, so the nation can get on with a recovery in the housing market.

05/19/2011

Housing: Basic Supply and Demand

The news reported the ongoing lack of progress in the building construction industry. The problem is easy to understand, when applying basic supply and demand economics.

The supply of housing increased due to foreclosures. Buildings that a few years ago would have been owner-occupied are empty now, because of defaults on mortgage notes. One cause of the problem was the easing of regulation, and the promotion of adjustable-rate mortgages (ARM) that allow payments to be increased during the life of the loan. In the old days, fixed-rate mortgages were the norm, and borrowers made monthly payments, without worrying about increases.

The demand for purchasing homes simultaneously declined, as fewer people now qualify for mortgages. In the old days, a potential buyer needed a substantial down-payment, which generally stopped them from simply walking away upon default. The easing of regulation allowed the financially unqualified to buy, and as they defaulted, they simply stopped paying, and allowed the bank to foreclosure without trying to redeem, since they had no skin in the game. During the period of easy credit, too many buyers entered the market, and now that they no longer qualify for loans, due to a return to traditional lending standards, such as the requirement of a down-payment, there are too few qualified people available to purchase too many buildings.

With the supply of homes exceeding the number of qualified buyers on the demand side, prices have dropped, or at best stayed flat. This is simple economics. So until the oversupply of homes is removed from the equation, there will not be any real growth in the construction industry. Only when new construction is no longer competing against the oversupply of existing foreclosed properties, will the situation improve.

The flat-line growth in the value of homes has also affected those who could bring cash to the table, or who could qualify for loans. This is true despite the availability of relatively low interest rates. In my case, for example, we moved from Wisconsin to Florida 2½ years ago and intended to buy, but as we examined the market, several factors caused us to continue renting for the time being.

First, housing values are not increasing, and in some areas they are actually declining. If after just a few years, we wanted to sell again, any sale, after paying the sales agent, would result in a loss.

Second, the cost of Florida condo generally includes relatively large monthly dues, twice as much as one would pay in the Midwest. It appears a lot of profit-taking is built into them that could be cut out. Dues are like taxes, as they cannot be recouped.

Third, the cost of insurance in Pinellas County is too high, based largely on unfounded fears of a direct hit by a hurricane. Once again, these payments are not recoverable in any future resale.

Fourth, since wealthy Floridians enjoy no state income tax, much of the burden of running local government is based on a relatively high real estate tax, which is not offset by state revenue-sharing.

Fifth, when looking for a condo, one has to consider the number of neighboring tenant-occupied or vacant units in foreclosure, since owner-occupied units are generally better maintained. In this regard, the number of foreclosed units was a factor.

To comfortably buy, purchasers need to know their investment is more likely to grow than decline; the dues, insurance and real estate taxes must be minimal; and the vast majority of the units in any condo project must be financially above water. Given the current situation, at least for now, we will continue renting.