Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
"No problem with bailing out homeowners who were conned by predatory lending practices"

I'm not sure how one could identify conned homeowners from speculators. Some of them (how many?) bought houses during the real estate bubble much like a stockmarket investment; they did their own kind of leveraging, betting (insufficient) ressources against further increase of real estate price. The moment their house's value started down, they sent the keys by mail and walked away, thus bringing their own contribution to the crisis. Is there to blame the subprime customer who took his mortgage at a higher, variable rate, sometimes lying about his income, or those who made that loan available?

IMO the fundamental problem is with America's culture of living on the edge, taking risks in the hope of an income greater than the debt - and this, from individual level to state level, passing through companies and banks.

"No problem providing capital for real businesses producing real goods and services.  But will the world really end if Wall Street is allowed to implode"

Wall Street implosion will produce banks implosion (and not just investment banks), and no banks means business suffocation from lack of financial flows. Everything is so interconnected and fluid today, that a big fall in one place risks shattering other segments, and other countries. This is why derivatives knew such success, and also where the danger come from. Is the solution a compartimented world, both vertically, in terms of segments of economy, and horizontally, between countries? IMO safety and efficiency must be well balanced, instead of rollercoasting between extremes each time a crisis strikes.

My two cents...

Free at last! Free at last! Thank God Almighty, we are free at last! (Martin Luther King)

by ValentinD (walentijn arobase free spot franša) on Fri Sep 26th, 2008 at 08:18:50 PM EST
I'm not sure how one could identify conned homeowners from speculators.

How about we start with the elderly and poor who have either lost their homes or the equity in them through predatory lending practices?  I've yet to meet this apparently elusive "speculator" who blithely lies then sends in the keys.

Maybe we can eventually make language a complete impediment to understanding. -Hobbes

by Izzy (izzy at eurotrib dot com) on Fri Sep 26th, 2008 at 11:13:07 PM EST
[ Parent ]
Indeed a non-toxic mechanism for "Equity Release" is one of the most attractive aspects of the model I've been evolving....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Sep 27th, 2008 at 06:00:17 AM EST
[ Parent ]
I'm not passing any moral judgement, people are in their right to make an investment decision rather than a shelter one, and some did so. When the house price is less than the value of the mortgage, there is a strong incentive to give up a home even if the homeowner is able to pay the mortgage - there were real cases on French TV earlier this year.

Here notes from a FreddieMac webcast :

"For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater - you know we're even seeing it when we try to modify and renegotiate those loans - they are walking away. They're finding it not constructive."

Here's an analysis  of the subprime crisis:

"an increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms.
However, once housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. ...
The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments."

LA Times was once featuring a company promising to help "Unshackle yourself today from a losing investment and use our proven method to Walk Away" - which is quite normal in a society already inclined to stockmarket gambling.

I'm not sure taxpayer money should help bail out speculators of any kind - not without a price. Or in this cases, individuals have their part of responsibility, just like real estate brokers, investment banks and governments (warnings about the real estate bubble explosion in Britain, Spain and the US could be heard from 2006 already, without any one taking any kind of measure. Just like the derivatives market, this one too was supposed to "self-regulate", of course).

Free at last! Free at last! Thank God Almighty, we are free at last! (Martin Luther King)

by ValentinD (walentijn arobase free spot franša) on Sat Sep 27th, 2008 at 07:42:11 AM EST
[ Parent ]
I agree that what is needed is a "wholesale" solution and the state doesn't have the means to conduct a discriminary review of every mortgage transaction.  However it is clear that even basic common sense and banking rules were violated:  there was often no verification of income claims, no stress testing of ability to pay, and everone in the business knew the market was grossly overheated but continued to incentivise salesmen and "securitise" or bundle assets they knew to be toxic.

So whilst obviously there would have been individual instances of home buyers irresponsibly taking on comments they couldn't afford, or not factoring in risks of redundancy etc.,the overall failure was a systemic one.

Thus regulatory reform - includes rules regarding interest rates, miss-selling, income verification and stress testing, and overall transparency of the process are required.

However larger systemic measures are also required to reduce the toxicity of existing assets - which are threatening a depression greater than anybody might have reasonably anticipated (except for a few professional economic doom mongers - mentioning no names!) - and thus measures like interest rate reductions, repayment moratoriums, income tax deductions for interest and other incentives to stabilise house prices and the ability to fund associated costs are required if the market isn't to melt down completely.

This isn't a purely Wall street problem - individual home owners also needed to be bailed out to a degree, and those banks which abused the process need to be reformed, taken over, or shut down and replaced by those that will - as is already beginning to happen.

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 27th, 2008 at 07:17:34 AM EST
[ Parent ]
Buyouts, not bailouts! Lowering interest rates won't prevent house prices from correcting, nor will they stabilise them at sane levels. More likely, they'll just be an invitation to another round of Ponzi scams.

Homeowners that default on their mortgage should have the home taken over by the state and rented back at an affordable rent. The banks should be paid up to a smaller-than-one fraction of the current value of the house - say 80 %. If the bank has loaned out more than 80 % of the current value of the house, they have ipso facto been behaving irresponsibly and get to take the loss. If they have loaned out less (unlikely, since we're talking about people who default on their mortgage, but still), the owner gets what's left of the 80 % of current value.

If and when the current occupants move out, the state can rent out the property to people who are otherwise unable to find a home - whether due to a poverty or other social ills, thus securing that everyone in society has roof over his or her head.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Sep 28th, 2008 at 04:56:52 AM EST
[ Parent ]


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