I was so wrong for so long it just proves that you can't be right...,
2009-02-18 13:03:50
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congratulations are in order to our underwriters...,
2009-02-24 10:10:14
cram this mortgage up your...:
The argument against mortgage cramdowns - that is, reducing the principal on the loan by judicial fiat - seems to be that banks will have to charge an additional risk premium if the government is allowed to perform writedowns for them, and this will increase mortgage rates. George Will doesn't like it ("There are about 300 million villains here," he tells george, "and they're the great American people"), Obama doesn't like it.
This doesn't make a lot of sense to me. The banks also had to face the nigh guarantee of the homes going into foreclosure because they placed origination of the loans in the hands of people with no stake past a six month horizon. If banks were charging a risk premium past that horizon it certainly didn't do anything to slow home sales because they had successfully lobbied against laws that would force them to honestly and fully inform their clients of the conditions on the loans. Certainly a nigh guarantee of foreclosure is worse than the risk that some judge might cramdown the principal to prevent the foreclosure?
For that matter, when a home goes through foreclosure it depresses prices of the homes in its vicinity when it's placed back on the market at clearing price, encouraging further foreclosures as underwater home owners take the hard choice of the walk-away. A cramdown at best would bring the mortgage more in line with the market price of the home without any negative price effect on the neighborhood. Cramdowns may also encourage foreclosures by people angry enough over being swindled into a hyperinflated mortgage to take the massive hit on their credit rating (by stopping mortgage payments and entering bankruptcy court on purpose to get a shave on the principal, but intending to stay in the home) - but this won't further depress home prices and has the benefit of freeing up the economic resources of those home owners who otherwise might continue supporting a financial sector in desperate need of a hard reboot.
Surely cramdowns are more in the interest of the gigantic swindle they called the real estate market - with no realistic externalities that I can see - than either successive waves of foreclosures due to a deflationary asset spiral or my plan for an occupants' squatter movement to restore home property rights based on occupancy and use.
