Tuesday, March 4, 2008

Tough Talk from Treasury

Treasury Secretary Henry Paulson had some harsh words for homeowners. If you can afford to make your mortgage payments but default because you owe more than your house is worth, you are a "speculator" who is "not honoring his obligations" and undeserving of government assistance. "Let me be clear," he said. "I oppose any bailout." The Bush administration opposes a taxpayer funded bailout for homeowners caught with high interest rates and flat or falling home value. "I believe our efforts are best focused on helping homeowners who want to stay in their homes."
Read the rest of this post . . . .

The efforts Paulson and the Bush administration support is the voluntary consortium of lenders, the Hope Now Alliance, which has implemented a protocol for assisting borrowers refinance or restructure their home loans. The reports on how the Hope Now Alliance is doing in assisting homeowners facing foreclosure are mixed. In January 2008, Hope Now reported assisting homeowners in 167,000 loan workouts, up 11% from December 2007. During the same period, foreclosure starts increased by 5%. The problem which has Paulson and others stumped is the large number of homeowners (estimated 800,000) in danger of losing their homes to foreclosure that have failed to respond to overtures from Hope Now lenders. Paulson's view-- tough noogies. "If borrowers don't ask for help, they will have to bear the consequences."

Congressional Democrats assert that assistance for homeowners in refinancing their home loans is not enough and have proposed their own plans, including the Foreclosure Prevention Act of 2008 (S. 2636) which, among other things, would amend the Bankruptcy Code to permit homeowners to strip down the principal balance of their home mortgage to its current value in a bankruptcy case. Under current bankruptcy law, a debtor can "strip down" only mortgages for investment properties, vacation homes and farms, not principal residences. Lenders lobbied against the bill arguing that allowing strip down of home mortgages in bankruptcy would cause a rise in home mortgage rates unfairly borne by all mortgage borrowers. Senate Republicans blocked the bill last week. Paulson noted that proposals like these "would do more harm than good."

Home values are falling at record speed. The S&P Case/Shiller Home Price index showed its largest annual drop in its 20-year history, 9.1% in a single year (2007). By comparison, during the 1990-91 recession, home prices fell 2.8%.


Alison M. Kilmartin said...

Professor Reilly ~

Are there any reports on what is happening to the value of undeveloped residential lots, as opposed to homes?

~ Alison

Josh Fershee said...

Somehow allowing strip down for a vacation home is good policy, but not for principle residences? Not exactly supporting those pursuing the American dream, unless that dream is multiple homes.

I believe people should honor their debts and honor the liabilities they choose to undertake, so I, too, oppose a bailout. However, I fail to see why we should have a problem with people opting for the efficient breach (permitting foreclosure) when they are wildly upside down on their mortgage. We allow corporations to walk away from debt all the time, with limited liability protection, too.

With corporations we usually argue that limited liability protection is need to provide incentives for investment. And that is usually true. But if people are willing to take the risk of buying a home, and then face the significant personal consequences of foreclosure, I think we need to take our lumps. The real estate market flies high when people participate. If there is downside, too, that’s life, and we all need to deal with it.

I fully support holding people accountable for their choices, but labeling someone a “speculator” for their choice of primary residence, when we allow the strip-down option for vacation properties seems completely inconsistent to me.