Even if the bank eventually forecloses on their home because they took out too much debt compared to the property's worth (bankruptcy provides an escape from that even, for most people), they've still benefited from the additional consumption they obtained -- cars, educations, vacations, new kitchens, etc. -- in a way they would not have been able to without the easy mortgages.
Finally, the net benefit from a mortgage foreclosure due to declining values in real estate go to the last person who sold the home to the bank who bought it from them for the new homeowner. Again, it's another transfer of wealth from the kinds of rich investors everyone likes to beat up on to mostly common, working folks.
So, it's very likely that the bigger losers in the mortgage market collapse are some rich folks whom we'd want to tax the pants off anyway, and more net winners are likely to be working and middle class people. Again, the data has to be pulled to verify, but I'm thinking "what's really not to like about that?"
On top of that you have the cost of the stimulus and rescue packages, which will be borne mostly by the people actually paying tax. (I.e. not wealthy investors.)
The recession is distinct from the bubble. Obviously, losing jobs is bad, especially in absence of generous welfare policies. However, the burdens of stimulus and bailout packages are almost certainly going to be carried more by the rich than anyone else. (That's who has the the taxable wealth, after all.)
The recession is distinct from the bubble.
In the same way and to the same extent that the flooding of New Orleans is distinct from the poor design and maintenance of the levees.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
This means that the claim that easy lending has been bad for most people is the one that needs support of data before it should be accepted as true.
the recession may not have been an inevitable outcome of the housing bubble
The better argument for the deterministic case is that the present recession is NOT a business cycle at all, and neither was the Great Depression. (There aren't excess inventories of unsold goods, for example.) Rather, the present is an extraordinary recession caused by collapses in the financial system. Very few recessions are associated with general collapses of the financial sector. There does seem to be good reason to believe that financial system collapses have a high probability of resulting in economic decline. However, there is a lower correlation between asset bubble collapse and financial system collapse. So, without more research it is difficult to make deterministic claims about bubbles and unemployment, which is what I think you're trying to imply.
What is the conventional description of credit in the economy?
That credit has a causal relationship with this, and not just a symptomatic one, seems harder to support, at least with existing research.
Is that because there is no research on the topic, or because the research that there is doesn't support it?
The view I have summarised above is unconventional, but it was expounded by a well-known economist 100 years ago. As I am not too familiar with the academic literature, may I ask you if you know of some contemporary heterodoc economists who might agree with the view I proposed rather than with the conventional one which, if your summary is fair, seems to postulate that credit is incidental to the business cycle and not even part of a feedback loop? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
The relationship between some poor people gaining wealth due to the housing bubble and others losing it due to losing jobs later is a probabilistic relationship, not a deterministic one, so thinking about the two together would require discounting the cost of job loss due to the bubble by some amount.
The great majority of people who received "easy mortgages" over the last 15 years, or even the last 5 years, still own their properties and have benefited from gaining access to living conditions or wealth they might not otherwise have achieved, even in cases of notoriously irresponsible sub-prime lending. Of those who don't still own their homes, a large number (perhaps a majority but no analysis has yet been performed that I've seen) still benefited from the transfer of wealth from wealthy investors in mortgage backed securities to them.
As far as I can tell:
1) around 60% of subprimes have been or are in default - while some may wiggle out of foreclosure, surely the majority of these 60% will not own anything at the end of the process;
2) the net equity ownership of their homes by Americans has fallen to a record low in recent years - and as prices go down (and debt doesn't), that proportion is going to go even lower
Generally, using incompressible debt to buy volatile assets is not the way to build wealth... In the long run, we're all dead. John Maynard Keynes
The sub-prime chart you show clearly shows that the majority of sub prime loans result have not resulted in foreclosures. Even if 40% of the present loans are in currently delinquent (that is actually the expected delinquency rate after 5 years for the average sub prime portfolio -- its not a surprise) a very large number of the original loans have already paid off through refinancing (as almost 1/4 do within 3 years) when people's credit characteristics have improved, as they usually do. This means that even in the worse case situation like now when refinancing has dried up, it is likely that most people who have taken out sub-prime loans will still repay them in full.
That, however, is really a transfer of wealth from the poor to the rich, on average. The poor win when they can gain access to wealth and consumption that they would not otherwise have. Foreclosures and bankruptcies are where wealth really gets transferred to commoners more radically, as long as it remains true that most lenders are wealthy and most sub-prime borrowers are of lower income profiles.
Net equity in one's real estate is only one measure of wealth. Consumption is another measure, and if lower income people have been able to enjoy upper-income consumption standards, even if for just a few years and at the expense of the bankers who gave them the money to do it, then the decline of the real estate market may really have been a transfer of wealth from the rich to the not-so-rich. And quite of few of the more entrepreneurial poor, such as many immigrants, have been able to capitalize on the easy lending in true equity-building ways -- maxing out their loan limits on real estate, then using the loan proceeds for other investments or remittances and leaving the bank with the investment properties (a very large share of the sub-prime foreclosures are investment properties previously owned by small-time landlords and slumlords).
Really, it's a way of stealing from the bank, but although considered bad for obvious ethical and practical reasons, bank robbery usually isn't considered anything other than what it is -- a transfer of wealth from rich bankers to usually not-so-rich bank robbers.
Again, we need data to know, but this is still a wide open question: who won and who lost in the housing bubble?
JakeS:
It's not just an investment object. It's a home. There is a tangible, but not monetised, loss in a foreclosure that may easily surpass the "gain" from having the negative equity wiped out.
It should be a home. But buying to 'flip' and buying to let have become all too prevalent. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
There might be less traumatic and less stochastic means of transferring wealth that we can imagine, such as more generous wage and welfare policies, but if those policies are not politically feasibile, then wealth transfer through easy lending can result in greater social justice than restrictive lending policies.
Banking system solvency shouldn't be the standard for determining social justice. If social rules have been set up to be less generous to the poor than they should be, I just don't see how occasional massive bank robberies can be all that bad. It's the same as the jubilee concept that people promote on this site frequently.
In a restrictive lending regime, those policies will have a better prospect of becoming politically feasible. A major point of legalising casino loans and inflating a bubble was to give people fake wealth so they wouldn't notice that their real wealth was being stolen.
wealth transfer through easy lending
Only when failing businesses which are considered systemically important are nationalised is there redistribution of claims favouring the community at large and, vicariously, the poorer members of it who can now share in that nationalised wealth.
But when failing businesses which would otherwise be liquidated or nationalised are bailed out with a gift of public funds, there is even more redistribution than usual towards the creditors, this time not from the borrowers but from the community at large. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
When borrowers go bankrupt, they retain the assets and the lender loses wealth
The lender loses in that the capitalised value of the assets is lower than the amount of the loan, generally. But he's the one to whom the claim on real assets are transferred. He owns what used to be his stuff, plus the stuff that used to belog to the borrower. It's just that what he owns has a smaller capitalised value. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
In a foreclosure, it is true that the bank retains the right to the property, but the net value of the property was transferred, through an exchange of cash during the last sale of the home, to the previous homeowner. The current lender lost and the previous homeowner gained by the exact amount of the present value of the foreclosed home and the last sale price of the home.
bankruptcy almost always protects homeowners' right to retain the property
In most cases, homestead exemptions do not apply to forced sales to satisfy mortgages, mechanics liens, or sales to pay property taxes.
Texas Homestead Exemption also prevents the forced sale of a home to meet the demands of creditors, with the exception of mortgage holders, note holders and tax authorities.
In addition to bankruptcy, there are other, less onerous legal means, such as debt renegotiation, that can also reduce debt to a manageable level and prevent foreclosure.
Nonetheless, many foreclosures obviously occur, and this is because the conditions that allow bankruptcy to save one's home are not available to everyone -- some people lose their jobs as well as their net worth at the same time, so they escape debt by walking away from everything. (This is still a net transfer of wealth from the creditor to the previous homeowner, however -- it harms the creditor as much, if not more, than the debtor.) But I would be surprised, in any industrialized country, if there were ever many cases of individuals filing for personal bankruptcy and also losing their home. I can't find any sources that say otherwise.
The article claims that the number of foreclosed and repossessed homes in the province of Alicante in the first 9 months of 2009 is 2257, 65% higher than the previous year, and that around 6000 more families are "at risk". The population of the province of Alicante is 1.9 million.
Also, in July the governing body of the Spanish Judiciary published a report claiming that the number of foreclosures in the first half of the year had doubled from one year earlier and forecast that in 2009 there would be 160,000 foreclosures nationally. A separate report claimed each additional percentage point of the Euribor would result in 50,000 additional repossessions. The population of Spain is under 47 million.
Even though Euribor is now at historical lows (about 1%) a year ago it was 5% and the resulting wave of repossessions is only now reaching the courts. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
foreclosures are almost always a net transfer of wealth from bankers to homeowners
With the foreclosed person as collateral damage? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
As far as I know, it's still not, at least in the US. The home exemption means that other creditors cannot force you to sell your home as an asset to pay them. Only a certain amount of equity is exempt. The mortgage is a different story -- you can't discharge it in bankruptcy and banks can foreclose and take their asset back, although I think they have to wait until the other debt is discharged before they proceed. Maybe we can eventually make language a complete impediment to understanding. -Hobbes
But when people default on their mortgage they can get foreclosed and repossessed, and they will unless the bank has inexplicably (heh) misplaced the loan documents. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
the new bankruptcy laws in the US which made it more difficult for people to escape credit card debt by filing for bankruptcy
More homeowners are likely to avoid repossession than previously expected during the recession, according to the Council of Mortgage Lenders. But the CML's announcement today that it had overestimated the number of people likely to lose their home this year coincided with data showing the number of actual repossessions in the first three months were 62% higher than a year earlier.The CML has cut its estimate for the number of homeowners facing repossession this year to 65,000, from its previous estimate of 75,000. However, the new figure is still the highest since 1992.
More homeowners are likely to avoid repossession than previously expected during the recession, according to the Council of Mortgage Lenders. But the CML's announcement today that it had overestimated the number of people likely to lose their home this year coincided with data showing the number of actual repossessions in the first three months were 62% higher than a year earlier.
The CML has cut its estimate for the number of homeowners facing repossession this year to 65,000, from its previous estimate of 75,000. However, the new figure is still the highest since 1992.
If your property serves as collateral for a loan, you need to timely pay all monthly payments on these loans in order to keep the property.
An additional point is that filing for bankruptcy has, in the U.S., been made much harder, so people might just be walking away from their homes without filing, while being (informally) bankrupt.
The lender has security over the property which is superior to the claim of the owner. In a bankruptcy, the title in the asset passes to a trustee in bankruptcy (not sure what the US equivalent is called), but the bankrupt may well stay on there as a 'debtor in possession', provided he pays the mortgage.
If he doesn't then he'll be out on his arse.
Debtor in possession financing is a huge business in the US in relation to the financing of assets which are in Chapter 11 - ie corporate insolvency.
If there is no equity in the property, then the bank may well decide to let the borrower stay on in the property, provided he pays the mortgage loan and interest.
But the property does NOT - unless US law is diametrically opposed to UK law - become that of the bankrupt free of mortgage, which appears to be what your are suggesting.
FWIW my first job was as an Examiner in Insolvency - working for the Official Receiver (an officer of the court) - and I've dealt at least a hundred individual bankruptcies, and a few dozen corporate insolvencies, with some interesting wrinkles. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But the problem bankrupts in the UK have (or had - it may have been amended) is that the home belongs not to them, but to their trustee in bankruptcy. I saw cases where the trustee came back years later and sold the house over the (by now) former bankrupt's head, paying off the mortgage loan, and then making a distribution to creditors from the balance.
And of course the former bankrupt had to find somewhere else to live if he could not afford to buy the house back at the market price.
So the bankrupt would normally (if he was financially capable of paying the mortgage) arrange for (say) his wife, or a relative he trusts, to buy out the trustee's interest in the property, which might not cost that much if there is little equity.
It is true that in the UK, bankruptcy - alone - rarely, if ever, precipitates eviction. It is actually beneficial, rather than prejudicial, to the secured creditor.
I am reminded of the Jubilee Debt Campaign, where I was at first surprised to see the banks backing the campaign to relieve heavily indebted nations of debt. It took a little time to realise that if sovereign debt was forgiven, then there would be that much more free income to pay the bank debts.....D'oh...!! "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Rather, easy lending should be seen as a form a welfare in that the government takes over the risk of systemic failure in order to provide more home ownerships rights to lower-income individuals. In a society that values ownership over nominal wages, that might be a superior form of wealth transfer.
If, instead, the already lax lending standards had been further weakened (as they were after the .com crash in the early noughties), it is possible - not certain, but possible - that a new bubble could have been inflated to cover up the wreckage of the Coolidge bull market, the way "Bubbles" Greenspan and baby Bush covered up the .com crash with the subprime bubble.
