Finally Support for Principal Reduction for Borrowers

New Orleans For not months but years, we have argued for principal reduction as the only realistic response to the foreclosure and homeowner crises in housing, and I have been clear that the main obstacle has been the collaboration between the banks that don’t want to reduce their balance sheets to reflect reality and the coddling Treasury Department and others in the Obama Administration that are codependent with this ridiculous proposition.  All of which made a smile come to my face reading the editorial and op-ed pages of the Times today, where smiles are few and far between, but there was new columnist, Joe Nocera, citing Laurie Goodman, senior managing director of Amherst Securities, as loud and clear, “data driven” voices now advocating the call for principle reduction of mortgages.

The arguments were clear and concise from Goodman:

  • Of 55 million mortgages more than 10 million she reckons are likely to default, largely because they are underwater…in other words the borrower owes more than the current value of the property.
  • Supply is going to “outstrip demand.”  Goodman estimates a glut as high as 6.2 million properties over the next 6 years, largely because the economy (add changing social mores in my view) are slowing “household formation.”  Young people without jobs are not making commitments backed by real estate.
  • She argues that only principal reduction can save the market because, as we have argued, “A borrower will make a decision to default if it is in his or her best interest.”  Hello!

Line forms in the rear, but let’s move it along before another million or two lose their homes!

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Frontlines in Phoenix Foreclosureville

Phoenix    under-water1 A block away there was one sign still standing that said Holiday Gardens – “covenant restricted” — while the other was nothing but brick since the sign was long gone.  A couple of blocks away an old neighborhood watch sign said this was Heatherbrae or some such neighborhood.  Side by side both areas spoke of in-city subdivisions built in the late 50’s and hard 60’s for working families with solid, lower middle class jobs, and hopes for the future in the City of Phoenix.  Brick bungalows with two and three bedrooms where little was pretentious and improvements might mean paving part of the front to park another service pickup or car.  The kind of area where when asked, people described it as “mainly quiet,” and where you knew a lot of families had been raised here over 50 years.   I lived for 10 years as a boy and teenager in New Orleans in a similar neighborhood in Oak Park that the Levee Board had reclaimed from swamp and sand, just as this land had probably been pulled from the desert.  These are good neighborhoods.  Not for everyone, but they work for a lot of people and a lot of places.

Within 100 yards of either direction of the folks I was visiting, there were perhaps 8 to 10 houses that had been foreclosed; including the house I was being shown.  There were a couple of “for sale” signs, but mainly the houses were dark and abandoned, big 80 gallon garbage cans rolled up in the front yards.

The house I visited had gone underwater and been lost on a “short sale.”  A brother-in-law of a friend had a wife’s cousin who had lost the home and my friends had rented as a favor.  There was talk of buying.  The price was almost ridiculous:  $22000!  The house was laid out nicely with new cabinets in the kitchen, paint only a year or two old in the bedrooms, and tile almost brand new.  The owners had had a notion to close in the back patio, probably as a den or family room, and it was almost finished.  Nothing is perfect.  The air conditioners were shot, so it had been a hot Phoenix late summer.  The water heater was out, so cold showers were the rule, but at $22,000 these were relatively small problems.

In saving neighborhoods this would be a good example of a house that would be a perfect match for people who wanted to love it.  Even at $22000 and a note with taxes and insurance that would be only a shade over $400 per month on the terms being offered, it would still be cheaper than rent, but with no subprime lending market or stated income loans, where would even that small sum be borrowed?

Risk investment pools had been created it seems.  For $6000 down and closing, my friends had been offered a loan at 9% — double the prevailing rate – for 5 years with a balloon payment at the end.  The investors probably didn’t really care what would happen to house or homeowners.  Given the 1 to 1.5% interest out there on money, they stood to recover quickly on such a modest loan at these rates or they could flip the house again and hope that in 5 years when the even the Phoenix housing market might start recovering that reselling would gain more.  The market is so far down now, anything might look like up, and only the families that have already lost their homes or who are begging for modifications along with their bankers have any real memory that 2 years ago the house might have been priced and mortgaged over $150,000.

Here in Foreclosureville it’s hard to see any happy endings yet for families, houses, or neighborhoods, and I don’t see one here yet either.  Banks are clueless and without a plan.  Cities and states are either broke or in Arizona’s case broke and disinterested in anything that might look like a helping hand.  Another 10 houses on this long stretch of block not far from Camelback and this area could be at the tipping point of a horizontal ghetto of broken and abandoned properties.

I don’t even think governments and banks really understand what is happening in Foreclosureville, but having visited once again and spent time here, I can guarantee it won’t  be pretty even with all of the hustle and bustle to try and start something fresh that I found in this one house along a dark stretch under the starlit sky of Phoenix.

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