“Cash-out” Refinancing and Swimming with the Fishes Underwater

Milwaukee       Anyone running out of things to worry about?  How about housing finance?  Maybe we could party like it was 2007 again and watch it all come crashing down again?

For example, The Wall Street Journal, noted that housing “cash-outs” hit the highest level since the 2007 housing meltdown in the 3rd quarter of 20018, involving 80% of all the borrowers and cashing out $14.6 billion in home equity.  Cash-outs are slang for refinancing home mortgages in order to pull money out of any equity gains.   This post-2007 surge was surprising since normally refinancing is strongest as interest rates are going down and borrowers are looking to lower their monthly payments when they have a higher rated mortgage, while of course also sucking some of their capital out simultaneously.  Driving the truck this time, regardless of rising interest rates, was the return of higher prices for homes, so many struck while they hoped the iron was hot.

Why is this important?

Some economists and researchers still involved in the post-mortem of the Great Recession have more recently argued that cash-out refi’s were a much more significant factor in triggering the crash and busting the bubble than previously acknowledged.  In fact, these cash-out refi’s may have been hyperventilating more air into the housing bubble than new home purchases or broker driven low down payment and marginal credit.

Worth some worry?  Maybe.

Here’s another bit that has emerged, contradicting received wisdom at the time during the Great Recession.  As we all know, millions of homes were underwater, meaning their mortgage obligations were way higher than the value of their homes once the bubble crashed.  Most observers believed that, like the much earlier savings-and-loan meltdown, people would walk away from the now inflated mortgage obligations because it was in their economic self-interest to do so and simply mail the keys back to the bank.   Frankly, in a project between 2008 and 2010 in Phoenix when we were unable to negotiate mortgage modifications, we advised people to stay as long as they could in default, save the money, and use it to start over when they finally had to walk away.

Well in fact the numbers now indicate that most families just put on their scuba gear and swam underwater rather than crawling to the shore.  Researchers have now found that only 3% of mortgage holders walked away.  That’s amazing!  Interviewing many of them, the thinking was varied from “honoring my debts” to not finding any better alternatives to simply hoping for the best.  What the researchers did not evaluate was the fact that many of the “ghost” banks simply allowed people to stay on any terms, including minimal payments, rather than have to devalue the mortgage on their books.  Personally, I would bet many families took our advice and were able to weather the storm underwater because the banks were not in their usual rush to foreclose, having too many nonperforming loans on their books already, and too few new customers in line to buy the foreclosed properties.

What can we learn from all of this?  Don’t’ suffer from “premature certainty” and measure twice or more times before cutting, which is good advice for policy makers as well as carpenters.

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Governments and Housing: Mortgage Reform in the US and Formalization in Quito Norte

housing in Quito Norte

Quito     Housing was on my mind.

I spent hours yesterday in a pickup riding the steep roads and byways of Quito Norte with our team and local barrio leaders in the area, four up front and three in the back.  We traveled more than a dozen kilometers up, down and around the mountain sides, often with breathtaking views of the rest of the city or the airport or forested areas too steep still for squatting.  No matter what my colleague, Marcos Gomez from ACORN Canada, and I had been told about the roughness of the area, the fear of crime that led to constant questioning of our insistent advocacy of a door-to-door (puerta a puerta) program here, within a half hour I found myself whispering an aside in English to Marcos, that this had to be the best constructed – and serviced – major low-income barrio that I might have ever seen in Latin America.

Certainly, rebar stood everywhere reaching to the sky with its usual plaintive hopes for the future of the family struggling underneath, but these were sturdy, concrete and brick houses.  Some of the side streets were unpaved and we had to abandon one steep dirt road stretch even with 4-WD, but in the main, the streets were nicely cobbled with pavement bricks and even curbs.  As always in the slums, the higher reaches with more recent arrivals, squatting as they built, were rougher than those below, and, interestingly, in Quito Norte these areas seemed disproportionately populated with Afro-Ecuadorians than other areas, but they were still a long way removed from cardboard and plywood castoff structures I had seen in so much of the world.

Talking more to the local leaders and later to an interesting membership based organization, Banco Comunitario Atucucho, with block leaders in 174 blocks paying $1 per month, who had reacted to a cutback in municipal funding by creating a self-sustaining revenue source that sold several crops of maize per year, it became clear that the real differences emerged when they kept mentioning that the settlements on the mountain tops were “still informal.”  The City of Quito and it’s Mayor had finally concluded that the way forward in Quito Norte was to finally formalize almost all of the squatted areas, so we were in something of a construction boom and area-wide normalization led by soon-to-be home-and-landowners and a city finally not fighting, but actually moving in to accelerate the support and building of a public works infrastructure.  There were areas without sewerage still, but these were at the top.  Electricity was common.  Potable water was either there or around the corner with water trucks delivering only at the highest ground.  Government was making a difference by helping these tens of thousands of lower income and working families to become homeowners and build some citizen wealth rather than continuing in the gray area of informal and precarious status.

All of which made me read in full the Times editorial today which correctly identifies the bank toadying and inaction of the Treasury Department and other government outfit as the single largest failure of the domestic program of the Obama Administration.  We now have millions of Americans who are living in an “informal” status as well.  Twelve million as the Times cites, that owe $600 Billion more than their homes are worth.  Three million still awaiting foreclosure.  These are big numbers.  They should be able, just as in Quito Norte, to finally get their government to not just help, but do its job.

So much is undone for US homeowners still mired in the housing mess, fashioned on Wall Street and Orange County, and now aided and abetted by a president who knows better and needs to finally at least work his own administration to his and the peoples’ will, that we have to demand that, finally, we see real action, rather than empty rhetoric about foreclosures and homeowners.   The Times is right:

“…the foreclosure crisis, and its damage to homeowners and the economy, is still paramount. In the next term, the focus should be on debt reduction, refinancing, enforcement and true consumer protection.”

talking with folks of Banco Comunitario Atucucho

sign that says essentially that anyone caught burglarizing a home will be burned

 

 

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