"The mod squad
- Posted by:
- Economist.com | WASHINGTON
- Housing markets
So effectively, the borrower gets a teaser that over time adjusts to a fixed rate mortgage at current (low) interest rates.
Let's think this through a second. The borrower is still under water (of course, Bernanke & Co. regard this as temporary misvaluation resulting from irrational pessimism, but the more data driven crowd sees housing prices as having moves way out of line with incomes. And the outlook for incomes isn't exactly rosy either). The borrower therefore has no reason to invest in the house, including routine maintenance (assuming he can somehow scare up the dough). If the boiler goes, the roof leaks, he has no incentive to fix it. Similarly, if he were to sell the house (let's say he got a good job elsewhere), he's still faced with either negotiating a short sale or walking and leaving the bank with the property. Thus for the bank all this does is kick the can down the road, unless we assume a recovery from these levels.
Let's do think this through a second. I'm tired of these assertions, with regard to housing values and troubled securities held by banks, that Federal Reserve and Treasury officials are not aware that housing prices are not depressed by pessimism and that asset prices aren't merely depressed by illiquidity. They know this. It's a shame, I suppose, that they're not sending out colourful daily messages about how cruddy the state of everything is, but then they're not econobloggers. They're government officials with political and confidence concerns to think about. I'm not sure it reflects well on bloggers to call Ben Bernanke stupid for not acting like a blogger.
On the substance of the plan, I would say that a programme which keeps a mortgage paying homeowner in his or her home for the next five years is a damn good one. Yes, a homeowner with no expectation of retaining his home may well underinvest in the property, or trash it. But that does not apply to any and all underwater borrowers. Someone making payments on a home is, notably, making payments on his home, which will ultimately wind up reducing the amount owed. Someone making payments on a home as an interest in seeing that home appreciate, or at least depreciate as little as possible. Given that it is unlikely that housing prices will continue to fall for an additional five years, it strikes me as probable that many of the affected borrowers will move into positive equity situations within that time. Not all of them, of course, but many of them.
Those who see themselves as having a chance to eventually move into positive equity territory may well invest more heavily in their homes' upkeep, given the expectation that the property will not be sold within the near term. And just because a homeowner is underwater at the time of sale doesn't mean that a short sale or foreclosure is a certainty. The seller might just write a cheque. It's no fun, but it's not unheard of, and it won't impact credit scores.
In a nutshell, Ms Smith's arguments assume that an underwater homeowner immediately becomes indistinguishable from a homeowner in default. But that's not at all the case. That, actually, is precisely what this plan is seeking to avoid. The possibility of ownership and of positive equity is a crucial factor in assessing borrower behaviour."Me: