The House of Cards
Posted by
tgirsch
As if we needed any more evidence that the housing bubble is bursting, today we get this report:
The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2006 and jumped 36 percent from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes amid a national housing slump.
A total of 243,947 foreclosure filings were reported in August, up 115 percent from 113,300 in the same month a year ago, Irvine, Calif.-based RealtyTrac Inc. said Tuesday.
There were 179,599 foreclosure filings reported in July.
…snip…
The national foreclosure rate last month was one filing for every 510 households, the company said.
[Bold mine.]
I’ve blogged about this before, and it’s only getting worse. But what I wonder is, does this really surprise anyone? Further, is it really a good idea for the Fed to cut interest rates at this time, thereby encouraging even more borrowing in an economy that’s already too heavily loaded with debt? (Yes, I know that the prime interest rate doesn’t directly impact consumer interest rates, but it does indirectly, and a great deal of consumer debt is tied to it.)
In the absence of strict regulation, this is what laissez-faire economics gets you: irresponsible borrowers and predatory lenders potentially taking the entire economy down, all in the interests of short-term profits. There will doubtless be Libertarians who object that this is simply one of the risks of free-market capitalism, and that the borrowers and lenders should have known the job was dangerous when they took it. But with the whole economy potentially at risk, I fail to see how that’s supposed to be any comfort. In fact, I’m beginning to believe that this sort of Libertarianism is utterly incapable of concerning itself with anything other than short-term profit; anything beyond next quarter is irrelevant. Is that really good for the long-term health of our economy and our society? I don’t think so.
I stand by my previous remarks. A sizable chunk of the lending industry is just shy of a criminal enterprise, making a few billion quick bucks at the low, low cost of ruined lives and a ruined economy. But hey, that’s what “freedom” is all about, right?
U.S. home foreclosures soar in August…
The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2…
Trackback 9/18/2007
Perhaps the Fed should raise interest rates, which would eventually cause mortgage rates to rise, which would jump more ARMS up further, and force more existing subprime holders into foreclosure…
Of course discouraging people from borrowing, or attempting to control foreclosure rates is not within the purview of the Fed, so both of our observations are silly.
And it’s not the housing bubble bursting, it’s the subprime mortgage market bursting. The housing market is being adversely impacted by the same forces that have crunched the subprime mortgage market, but the two are distinct markets.
Nit picks aside, I agree with your main point - our economy in general and a lot of subprime borrowers in particular would have benefited from some regulation in this area. I’m not up to speed on the history here - did the subprime market evolve so quickly because of the removal or expiration of existing regulations (a la the S&L fiasco) or was it just recently discovered (a la derivative trading). If it was a case of the later, then I suppose the problem was inevitable, given most regulations are created in reaction to a problem and not to preempt one that as yet does not exist.
Comment 9/18/2007
While there were 243,947 foreclosure filings, there were only 42,789 reposessions, which would suggest most filings don’t actually lead to the owner losing their house (i.e. the two parters work out some other arrangement prior to the foreclosure being completed).
And in either case, while these foreclosures are no doubt excruciating for the families involved, I find it rather incredible to suggest that something affecting less than two tenths of one percent of the households in the US is going to crash the entire national economy.
I’m starting to think the housing bubble is this year’s ’summer of the shark’ story.
Comment 9/18/2007
Tgirsch
If people are in debt, a lower interest rate can help them get out faster. Once this market shakes out, free enterprise will have learned a valuable lesson about sub-prime loans and lending to those with shaky credit histories. I am actually buying another house right now and keeping cash on the sidelines to pick up more real-estate if the market declines further. I don’t need government regulation, just good timing.
By the way, the mess we are in right now is actually Bill Clinton’s fault. “Today’s sub-prime mortgage market was the result of innovative yet high stakes political decisions by President Bill Clinton and Housing and Urban Development Secretary Henry Cisneros to push homeownership to record levels. Homeownership gains were not to be made on the backs of conventional borrowers but rather through emerging market penetration of black, Latino, and Asian immigrant/first-time home buyers and through HUD’s instruction of the Government Sponsored Enterprises of Fannie Mae and Freddie Mac to employ strategies to fund more loans by providing more credit primarily to credit-blemished borrowers. Wall Street was guided by Federal Reserve Chairman Alan Greenspan, whose economic wizardry spurred unprecedented loan performance. There was more money, more credit, more homes, and more wealth.” http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/07/22/subprime_lending_misconceptions/
Comment 9/18/2007
And the executive director of the Massachusetts Mortgage Bankers Association is an unbiased source…
Comment 9/18/2007
Ted,
How about the New York Times?
“For years, the homeownership rate in the United States ranged from 60 to 65 percent of the total population. But in 1995, President Bill Clinton directed Henry G. Cisneros, then the secretary of the Department of Housing and Urban Development, to work with the housing industry, nonprofit groups and other government officials to develop the National Homeownership Strategy, “an unprecedented public-private partnership to increase homeownership to a record-high level over the next six years,” as described in an Urban Policy Brief in August of that year.
Citing studies showing that high rates of homeownership generate financial wealth for borrowers, reduce crime and stimulate economic growth, the group agreed to a list of initiatives. One was to make financing arrangements for borrowers more affordable and flexible.” http://select.nytimes.com/2007/04/08/business/yourmoney/08gret.html?_r=1&oref=slogin
John Edwards is making tons of money from subprime loans. “Fortress hired Edwards as an adviser in October 2005, nearly a year after his losing campaign as Democratic vice presidential candidate. At the time, it owned a major stake in Green Tree Servicing LLC, which rose to prominence in the 1990s selling subprime loans to mobile-home owners and now services subprime loans originated by others.” http://www.washingtonpost.com/wp-dyn/content/article/2007/05/10/AR2007051002277.html
Comment 9/19/2007
Ted:
You raise some valid points about distinct markets, but from where I sit, it’s all inter-related in a feedback loop. The subprime mortgage market allowed people to buy beyond their means, which drove demand for housing, which in turn drove up prices. That’s the house of cards that I’m referring to.
Stormy:
“Crash” might be a bit much, but it certainly has the potential to have a serious detrimental impact. One need only look at the market over the past couple of months to see that. Remember, too, that a lot of this is voodoo: it’s as much about people’s perceptions as it is about reality. There’s plenty of both here to cause a serious downswing.
Truth:
If people are in debt, a lower interest rate can help them get out faster.
Only if they have a variable rate, and only if their bank passes along the rate savings. If you lowered the rate for people in debt and blocked them from borrowing more, then yes, this would be true. But I doubt that’s what you’re advocating here.
By the way, the mess we are in right now is actually Bill Clinton’s fault.
In part, actually, yes it is. But it’s silly to blame this on any one person or party. In truth, the problem traces back for decades, and both Republicans and Democrats hold some responsibility. As Ted correctly surmises, it traces back to the S&L scandal and even before. If there were two top public enemies in this story, they would be Reagan and probably LBJ.
Comment 9/19/2007
Re the National Homeownership Strategy, here is a policy paper from 1995 on the subject.
www.huduser.org/publications/txt/hdbrf2.txt
Read it and them please show me where it advocates deceptive loan practices, high origination fees or high prepayment penalties.
Looking back at the Strategy now, it does seem a bit naive, but its intent was never to create a market where lenders made big bucks up front by loaning money to people who could not afford the loans.
Comment 9/19/2007
>Remember, too, that a lot of this is voodoo: it’s as much about
>people’s perceptions as it is about reality. There’s plenty of
>both here to cause a serious downswing.
Agreed, that’s kind of what I meant with the ’summer of the shark’ reference. I think there’s more risk to economy in various media personalities making a buck selling ‘OH MY GOD, WE’RE ALL GOING TO DIE!’ stories related to the subprime financing bubble than there is from the subprime financing bubbles itself.
Comment 9/19/2007
I think the whole thing is a lot less political than some want to make it. Yes, some lenders are giving out loans that they shouldn’t. Yes some borrowers are taking loans they they shouldn’t. Heck, I’ll even say that there should be tighter regulation on borrowing practices on the basis that the broad economy can be hurt by this kind of knuckleheadism. But it ain’t Bush’s fault, it ain’t Clinton’s fault, and it ain’t congress’ fault either. It’s the ups and downs of capitalism. Regulation and education would help some, but some lenders and some borrowers are just going to do things they shouldn’t.
Comment 9/19/2007
Just curious. If the lending rules were tightened a bit and alot of the people were told they don’t qualify because of their credit/income/etc., how long would it be before lawsuits showed up against the lenders for discrimination?
Comment 9/20/2007
Big U:
You seem to be assuming that only minority borrowers are affected by subprime mortgages, and this simply isn’t the case. It’s true that minority borrowers were disproportionately targeted by many such lenders in marketing, but that’s a separate issue.
In any case, the possibility of a discrimination lawsuit exists even today, because the banks that are giving the subprime loans generally aren’t the same ones that are giving the prime loans — so the “discriminated against” borrowers would still be suing the prime lenders, even today, if that were a realistic option.
Comment 9/20/2007
Yeah, I investigated housing discrimination for a living while in college.
My best deduction as to what went on (I’m not fully in the know because I played the control white renter/buyer and didn’t communicate with my counterpart) was that it wasn’t like, “there’s no homes available.” It was more like, “Let show you something in shitty neighborhood X.”
The studies that I was involved in didn’t get into the financial aspects of things, and we weren’t allowed to have credit checks run, etc (we didn’t have valid info). But, I assume the problem there is similar. Not, “no lone for you,” but, “here’s your outlandish interest rate.”
Comment 9/20/2007
Look at that, I used the wrong “loan.” How quaint…
Comment 9/20/2007
As Marx said, freedom in capitalist society is the free market, i.e. the freedom of capitalists to exploit workers
Comment 9/30/2007
[…] Commenter Stormy Dragon on 2007-09-18: And in either case, while these foreclosures are no doubt excruciating for the families involved, I find it rather incredible to suggest that something affecting less than two tenths of one percent of the households in the US is going to crash the entire national economy. […]
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