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Economist Who Foretold First Housing Bubble Says, 'Beware'
CEPR Statement on Obama Administration's Housing Initiative
WASHINGTON - Dean Baker released the following statement today regarding the Obama Administration's overhaul of its foreclosure prevention program:
Dean Baker: "The biggest winners are likely once again to be the banks." (photo by flickr user TheTruthAbout...) The latest Obama Administration initiative aimed at easing the nation's foreclosure crisis may be well-intentioned, but fails to give proper consideration to the state of the housing market. The biggest winners are likely once again to be the banks. In particular, holders of second mortgages are likely to see this program as a huge bonanza.
The program provides a substantial incentive for holders of first mortgages to reduce principal by having the Federal Housing Authority (FHA) guarantee a new loan at 97.75 percent of the current market value. In many cases this would be far more than the holder of the first mortgage would collect if the loan went through a foreclosure process. However, the payment on the second mortgage would be unaffected.
By substantially reducing the required payment on the first mortgage, the program will be creating a situation in which the second mortgage - which would be worth little or nothing in foreclosure - will suddenly again hold considerable value. This will be a huge windfall for second mortgage holders. It is worth noting that the major banks have vast portfolios of second mortgages.
In the current market, the newly guaranteed FHA loans are likely to incur substantial losses. Nationwide home prices remain about 15 percent above their long-term trend. There is an enormous oversupply of housing at present as indicated by falling rents and a record nationwide vacancy rate. In addition, there will be an obvious problem of adverse selection as lenders will be most likely to take advantage of this principal write-down process in markets where prices are expected to fall further.
If the purpose of this modification program is to help homeowners, then any policy must ask two simple questions.
- Is the homeowner paying less in ownership costs than they would to rent a comparable unit?
- Is the homeowner likely to end up with equity in their home if they sell it in the next 3-5 years?
For some reason there is an enormous reluctance to ask these basic questions about the housing market. The failure to ask these questions in the years 2002-2006 provided the basis for the housing bubble. The government still failed to ask these questions last year as the FHA hugely expanded its role in the housing market. The result was that the FHA lost tens of billions of dollars and fell below its minimal capital requirements. The continuing failure to consider the state of the housing market when designing policy can only lead to further losses to taxpayers in ways that provide no benefit to homeowners.
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45 Comments so far
Show AllMr. Baker has done an excellent job reporting on the persistent inability of the Obama administration to implement the mortgage modification program it touted as a way out of this mess. So far only a fraction of mortgageholders eligible have complete the paperwork necessary and gotten approval from their banks.
Actually, some banks may have a perverse incentive not to renegotiate. As the thinkbigworksmall.com guys pointed out, some banks who've purchased failing banks--like OneWest's purchase of IndyMac--stand to write-off huge chunks of deliquent mortgages, but only if the properties are foreclosed. In other words, our government's sweetheart deal between the FDIC and acquiring banks actually incentivizes the banks NOT to renegotiate. If the amount of foreclosure-related losses climbs high enough ($1.5 billion in OneWest's case), they can receive big time compensation from the FDIC.
In a public statement, the FDIC publicly attacked the premise that it had made sweetheart deals with acquiring banks, but instead demurred to the need to make the acquisitions of the failed lenders juicy enough, by backstopping the newly acquired mortgages.
Sounds a lot more complicated than it is, and check out the thinkbigworksmall website and my blog post on this for more. http://jbpeebles.blogspot.com/2010/02/goldman-execs-stand-to-profit-in-fdic.html
Less then one half of one percent of Canadian Mortgage payments are in arrears.
12 percent of US Mortgage payments are in arrears.
The rate of home ownership in Canada is about 3 percentage points higher then in the US. Canadian Bankers in concert asked for the Government to tighten regulations on new home loans so as to ensure what happened in the USA is not repeated in Canada.
At the same time the Bankers and Financial wizards in the USA say that they need FREEDOM from regulation to ensure that they can CONTINUE to remain "Innovative" in developing new "wealth".
While this not to say that the Canadian housing market is immune from a meltdown it DOES beg the question.
In what way is the US system of LESS regulation superior?
Do the Ron Paul Libertarians have an answer?
Until Americans realize that the US banksters' innovations of the past thirty years (since New Deal regulation dismantling began)have made 1% of the population enormously wealthy at the expense of and with no benefit to the other 99%, Obama and the rest of the Dems and Repugs will continue to pander to the banksters.
If you vote for any incumbants (in the primaries or general election) you are exacerbating this problem.
ANTI-INCUMBANT FEVER EPIDEMIC IN 2010 OR BUST !
GwNorth
Without the oversight and reguilation it is not.
Something you forgot to mention are the sane underwriting standards of Canadian loans. You cannot buy a house in Canada if you can't afford it and if you don't havbe money for a down paymment.
"While this not to say that the Canadian housing market is immune from a meltdown it DOES beg the question."
Of course it doesn't, but you would agree that anyone would rather have a real loan system rather than a political one, which makes yours far, far safer?
One thing the Obama administration can be counted on is looking out for the welfare of banks (among other affluent entities). They do their job well. Not so well is their treatment of the citizens. But the citizens aren't able to approach our leaders bearing gifts.
When the people fear their government there is tyranny,
when the government fears the people there is liberty.
~ Thomas Jefferson
Damned if he does and damned if he don't.
If you are constrained by politics (by that I mean a rabid right wing), and believe in the capitalist system as Obama does-- and I hate to break the news to you, but capitalism ain't going away in our lifetimes-- than this is the kind of stuff you need to do make ameliorate some of the pain of ordinary folks. Like the new HC bill, it's far from ideal. But it's about time something was done.
What would you do?
Damned if he does and damned if he doesn't? Try again. Since his election to the presidency Obama has not delivered anything he said he would do. Single payer--off the table. Bush/Cheney war crimes--let's look forward. End the endless wars--he escalated them.
Something was done all right--unfortunately, what he did was continuously cave to the fascist business interests that financed his campaign.
Endless 'defense' spending, social cutbacks, government secrecy, Bank bailouts, no re-regulation. It goes on and on. This guy is more dangerous than Bush... He is Bush, in sheep's wording.
Stop the Wars, Restore the Safety net to what it was intended to be, Medicare and Retirement Security for all, Disband Congress, Cut the Pork, the Run Like Hell!!! as everybody'd want to kill me then!
President Barry advocating legislation that would help his pals who own the banks and also own his cronies (Democrats and Republicans) in the Congress? Say it ain't so, Joe!
Dean, how about the basic question of why Wall Street and the Ratings agencies ignored risk, selling their securitized shit around the world and onto the backs of taxpayers, yet no one has gone to jail, and their is no indication that any serious financial reform is on the way.
Would you be fired and thrown out of your Foundation if you began to bite the hands of the ruling class? Part of the problem with our experiment in Democracy is so-called nonpartisan think tanks in DC, funded entirely by corporate interests, that offer more cover for organized crime, and market an inexplicable reputation as being "progressive." Imagine Hitler managing his Concentration Camps with the powerful tools of information technology and a bought off, compliant 4th estate, how far would he have soared as a "Business Leader"? Would he be able to convince the prisoners that they belong in the situation that they are in?
Underwater mortgages, bank failures, climbing unemployment, skyrocketing debt, peak oil...pick any one, and it's bad. We're facing all of these, and perhaps more. Then there is global warming and water shortages.
We are in a time of rolling recessions, where each may be worse than the last. At the same time, there are pockets of long droughts and islands that have already sunk below the sea.
It seems rational that we should now focus on our immediate future. What was done was done. Our bed is on fire. What are we going to do?
"There is an enormous oversupply of housing at present as indicated by falling rents and a record nationwide vacancy rate"
Probably because so many people have lost their jobs, cannot afford rent, and are living in the street.
"Oversupply" my ass!
Yet another Obama program designed to help the banksters.
Join the Green Party ...
How can a Party call itself Green when it is not for life?
The Green Party is pro-choice ....
I guess you know what's best for all women, everywhere, all the time ...
Please don't join the Green Party ... we don't need you ...
Green life only ;)
I think we might speculate as to which parts of you are made of stone.....
Very sane statement on mortgages.
All these problems began with the Clinton Creature called Nafta, a deal that outsourced our industrial base to China.
If that was not bad enough, it was Hillary who was outsourcing jobs to India. Her daughter Chelsea's first job was for McKinsey the outsourcing specialist to India. Take a good look at the Clintons. When they left the White House they were broke,now they are worth over $100 million dollars, yet neither one hardly worked a day in the private sector.
The NY Times and the Boston Globe do not allow any information about the Clinton Circus detriment to the Clintons.
Who will tell the people?
Nope.
Property bubbles have long existed, and inflating a property bubble as an economic strategy has long been used by governments. Other countries, countries outside NAFTA, do it too. The UK does it, Spain's and Greece's economic problems are to some extent the fault of the property bubbles their governments inflated. Heck, China is the trying to apply the brakes right now, because the government is concerned that the bubble it inflated in the wake of the global recession might get out of control.
The economic strategy of favouring home owners over renters, in the US, has been used continuously since the Reagan.
rfloh: Do you think it started with Reagan? Fannie Mae dates to the New Deal. Sometimes I think what Reagan did was step on the accelerator. Regarding favoring home owners over renters, as you point out this is part of the problem in other countries too. This is a role I don't believe gov't should be playing at all.
Rents have not fallen out in California, not enough to write home about. Property prices, sure. Rents no.
Mr. Baker writes, "The latest Obama Administration initiative ...may be well-intentioned, but...[t]he biggest winners are likely once again to be the banks. In particular, holders of second mortgages are likely to see this program as a huge bonanza." Then he says, "It is worth noting that the major banks have vast portfolios of second mortgages."
"Well intentioned" is an unearned courtesy. This administration has so far calculated everything to benefit its core base, banksters, insurers, and military contractors, carrying corporate welfare and wealthcare to an art form. We can be sure the bonanza for investors is caluculated to the nearest shekel.
Finally, from Baker, "For some reason there is an enormous reluctance to ask these basic questions about the housing market." Again, Mr. Baker is too kind. This is yet another cold wealth transfer from taxpayers and workers to the financial elite. This administration is not innocent by reason of ignorance: it is purposefully continuing the crimes of the last.
How is it that as the value of my property goes down in the market, the property taxes don't?
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Probably because said taxes are generally only evaluated when the home is sold or remortgaged. One might request a reevaluation from the local government.
Put a pencil to it & you'll find those Bush "tax cuts" were actually a monstrous tax shift which reduced income taxes, mainly for the wealthy. The revenue shortfall was then deducted from funds previously redistributed to the states to support local programs and services. The local and state governments then had to raise local taxes to compensate for some of the cuts and still slash services like Medicaid and school budgets. Those local taxes on sales and property are regressive - they take a larger percentage of disposable income from the poor and middle class than they do from the rich. In Memphis we pay 9% sales tax on all purchases - including food and medicine - no exemptions for the minimum wage mother buying baloney and aspirin for her and her kids.
Consider a high-income guy who got a $50,000 cut in his income taxes but only saw an increase in his property and sales taxes of $20,000. He's got a net gain of $30k. Meanwhile, a middle income guy sees his income tax go down by $1,000 and he's happy too - until he finds that his property and sales taxes have gone up by $1,200 for the same period. GOTCHA!
And stand by: it ain't over yet. Those off-budget special appropriations for Iraq Nam and Afghanistan Nam? Those bills are unpayable so they're financed with I.O.U.s (Treasury Bonds) sold to best friends like China. Likewise, your Social Security taxes collected from each paycheck have actually exceeded current expenses for many years so the surplus has been deposited in a "trust fund" to cushion future shortfalls. What's in that "trust fund"? Those same I.O.U.s. Who pays those I.O.U.s? Your kids, even as their prospects for real net income shrink.
These are a few slices of a much bigger picture. For a wider scope, look up "GINI Coefficient" and see where the U.S. stands among industrialized nations in terms of distribution of income. Although this is complex, the gross values indicate that the U.S. now ranks among many 3rd world dictatorships in terms of income concentration.
According to the mainstream media, the popular response to this in the U.S. is predominantly from those who sport wet tea bags for brains. They sense they're being hoodwinked but know not how or by whom.
So what do we do? Now in my seventh decade, I have revised my long-range plans. I'm now preparing to finance my kids' emigration to a rational, socially coherent nation. Don't bother turning out the lights - they'll burn out by themselves.
perfect synopsis skeptimist... thanks... and can you post a little on which country(s) you may be considering... seem you do your homework...
if i may... add one technical point for the original question... property taxes have many components... or "taxing authorities"... they're broken down on your "TRIM" notice... at least that's what they're called in florida...
fire, schools, water managment, local city, local county each year sets the rates... and skeptimist has very succintly and eloquently laid out "why" property taxes go up...
also in florida... practically all real property tax increases are basically limited to 3% a year... (consitutional ammendments... regardless of the increase (if any) in property value... so... during the bubble... people's properties were rising at double digits year over year... but taxes were limited to plus 3% a year... except... if you bought "during" the bubble... tax rates "catch up" with change in ownership... so you had people with identical houses next door to each other... the long term owner paying low-modest taxes... the new buyer... maybe many multiples of his neighbor... but this led to not being able to move... because new purchase taxes would kill you...
in florida... we got a little ahead of the crash due to the '04, '05 hurricanes and tax increases on resales from the property price bubbles... so in 2006 we actually saw a slowdown in the property market about a year before it hit the country as a whole...
for me... my taxes dropped almost 50% based on the 2009 "appraised or fair market" value... dropping also 50%... hardly a consolation... to save serval hundred dollars a year in taxes by virtue of losing 50% of the property's value... 10's of thousands of dollars...
i'm lucky... i bought what i could afford... fixed... 30Y... no hiddean anything and have been paying ahead on the original note... but i bought near the height...
another topic Dean Baker and other have written on - all the "fixes" are based on refinancing... no matter what they come up with... and read the new S.896 seant bill... there's all kinds of provisions protecting the investors in these collateralized debt obligations.... BEFORE... they get into the individual programs...
if goldman sachs can be made whole on govenment bailout of aig to make good on it's obligations to GS at 100 cents on the dollar... then so can the govt. make me whole....
this "too big to fail" is baloney... as the treasury was ready to backstop the commercial lenders at about the same time TARP was proposed... TARP just allowed direct bailouts...
how about "too little to fail"... heard on thom hartmann friday... wwii - reagan - we were a "WE" society - since reagan - we're a "ME" society - and since dubbya's ownership society - we're a "ON YOU OWN" society -
skeptimist... is right - wish i could pack and move... me... still considering costa rica...
In my area anyway, property evaluations are changed every year, but they typically are quite conservative in the amounts they change in any one year, either up or down.
Perhaps it's time that Americans lived in wigwams like the indigenous people once did before they were massacred by the white invaders (who are still invading and massacring).
Think of the benefits: you just move when you want to, you can camp in parks and on government land, you get closer to nature, you don't have to worry about market forces or bank managers or foreclosures, maintenance is virtually nil, you have no lawns to mow, etc.
Please consider this proposal seriously.
www.dangerouscreation.com
David G
"Perhaps it's time that Americans lived in wigwams like the indigenous people once did before they were massacred by the white invaders (who are still invading and massacring)."
"indigenous people" lived in Cliff Dwelling, Longhouses and any number of dwelling that weren't easy to move or couldn't be moved at all. You speak only of the Plains indians of a certain time.
Few people would care to retun to a time of short life, little medical help and periods of starvation, constant warfare, etc. Do you suggest this seriously?
There was better medicine, not constant warfare unlke now, better food, better use of resourses, clean air,water,earth and more democratic government with no corporations.
Keep in mind before the invention of modern farming( or some may say farming at all) humans were subject to the will of nature. Infact when populations would grow too large starvation would occur until enough people died to match food supply . And the average life expectancy was around, say 40 years.
Not to mention if you broke your arm there wasn't a magic x-ray machine to see the multiple fractures. So the natives would just tie your arm down the best they could...
Plus a simple infection could kill.
A little too much Howard Zinn right now, the myth of the world being in total harmony until the evil American capitalist showed up, needs to end.
Most of you can work for a wage, with a guarantee of pay at the end of a days work. Your not wardering with your tribe looking for food, or hunting( with out modern weapons this is very hard to do.) Keep in mind the spread of Capitalism world wide has DECREASED infant mortality and RAISED life spans . Unless you want to re-write history , ( i had a debate with a fellow who claimed the USSR was a socialist utopia the other day, I guess my friends who fled the USSR to seek a better life here are Capitalist propaganda too.) you must admit that were currently living in the most advance state of human civilization. Globalization and trade reduce the motivation for war, Capitalism is the only system compatible with any type of democracy ( no one can just starve political dissidents, like Stalin did).
Any change that needs to happen should come from people deciding to help people. Donate some time to help someone in need, change has to come from US.
Or if you want to try Socialism we could set up a committee to force assign you a few roommates( USSR style)
Obama is operating in the depths of deceit. His war against the middle class is disguised to appear benign, yet continues to loot. This is a form of criminality. He appears to be a sociopath. His external likability belies his cold calculating internal self. He is every bit as dangerous as Bush.
But David G---
In your scenario how could we communicate here?
I sense that you are a bit desperate.
Please do not give up against the dying of the Light.
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Just as with Bush, everything Obama touches turns to shit for regular Americans. The American people need to wake up and quit electing these pro corporate assholes. Remember, if the main stream media likes them, you need to vote for someone else.
Seems the only way to do that would be to invoke Reagans; pre-inditmant policy that he wanted that says that we should arrest and lockup anyone showing criminal tendancies
Like wanting to run for High Office. (Off with their heads) before they can mess anything up.
Pick our leaders out of the phonebook maybe! :)
Dean Baker says that IF current housing prices are overvalued (he mentions by 15%), then the Obama program will assist homeowners to pay banks for a losing investment for the homeowner. (This is what Baker's closing two criteria express.) Baker feigns shock that aid to debtors (homeowners) would end up aiding their creditors (banks and security holders).
Quite so. But did anybody else notice that Baker fails to specify his homeowner-friendly solution? Does he propose to have the Feds pump up the overvalued home prices so that the homeowner can realize the American Dream ("more")? If not, i.e., if home prices need to fall, then the homeowner is guaranteed a losing investment. The only question is whether the Feds help maintain the losing investment.
It is therefore no surprise that Baker ends on a nebulous note: "For some reason there is an enormous reluctance to ask these basic questions about the housing market. The failure to ask these questions in the years 2002-2006 provided the basis for the housing bubble." Alas, the consensus of the financial reporting is that "the" basic question about the housing market--whether prices would continue to rise--was indeed asked and answered, albeit falsely. (Expectations of rising prices are a feature of any asset bubble; the other constant is easy credit.)
In the upshot, we are left in the dark concerning Dean Baker's attitude toward today's housing prices (pump them up or not?) but we now know that Baker's "explanation" of the original bubble (questions not raised) is false.
No wonder economics was nicknamed "the dismal science."
I think there needs to be a day of reckoning. Much of what is seen and measured is WEALTH in the United States of America, and in all countries that follow that same model is ILLUSORY.
It is not real. It reflects nothing of real VALUE. It is perceived. It is like the "Real Value" of a 1910s baseball card of Honus Wagner.
The paper it printed on worth less then pennies. The "market value" is 2.5 million dollars.
Take an area of land in the United States with a house on it, acreage enough to grow and raise your own food, a source of water and a wood lot. Add to it the flowers that grow in the woods and the wilds, the plants and wildlife that make it their home and I am sure you can do this all for "2.5 million" of those dollars.
Which more closely resembles a TRUE Value? Which of the two can produce GOODS of real and tangible value? Yet the market sees them as WORTH the same.
All Of Wall Street and all those financial institutions which cost trillions to bail out are like that Honus Wagner baseball card. They have no REAL Value. They produce nothing OF value but Government is willing to prop them up with taxpayer dollars.
It is one great big scam.
When all the trees have been cut down,
when all the animals have been hunted,
when all the waters are polluted,
when all the air is unsafe to breathe,
only then will you discover you cannot eat money.
~ Cree Prophecy ~
If the market for baseball cards collapsed, should it be propped up?
And where are the Cree today?
Kinda like worring about 2012 because the now extinct Mayans had a proffecy that for them was totally too late.
The Cree are hardly extinct. They are the most populous of Aboriginal tribes in Canada.
Which more closely resembles a TRUE Value?
see... that's the conundrum...
is it what people "believe" it to be?
but what's that belief based on?
other's beliefs?
do "I" believe" some thing has "value" because "others" "believe" some thing has "value"?
you are right though... i can't live in a baseball card... or wear it... or eat it... regardless of anyone's beliefs... that plot of land DOES have value...
maybe it's our "values" that needs to be thought through...
we're bored... as a society... we long ago achieved maslow's basic needs hierarchy a 100 times over... even for the poorest of the poorest... a person retrieving food from a dumpster will have a greater chance of survival than say a refugee in the sudan desert... and that dumpster diver will likely get treated at a hospital emergency room for acute illness... and if all else fails... and they turn to stealing food... the local sheriff will provide a roof... food.. clothes... and basic hygiene...
we're bored... or why else would a husband of healthy children... able bodied... stage a publicity stunt about a runaway balloon...
does that reflect our "values"?
You're correct that Baker does not describe a better form of aid to homeowners. Beyond that, your logic falls apart. In other articles, he makes it clear that he does NOT advocate propping up the inflated values of houses. That would merely perpetuate the problem. Perhaps he will suggest better ways of helping homeowners in future articles. One thing he HAS suggested is turning them into renters: that is, forbidding evictions of foreclosed homeowners; instead,they would be allowed to rent the house at a rent set by bankruptcy courts. The evictions are the most harmful element of the crisis.
You completely miss Baker's point about the "basis for the bubble." Don't forget that he was one of very, very few economists who detected the bubble and publicly predicted the collapse. He is naming the underlying conditions that tipped him off, which most "financial reporting" chose to ignore. They are the reasons those "Expectations of rising prices" were false. That's why he was right and they were in denial.
If those conditions still exist, we're still in deep shit. His point here is that the latest Obama program funnels a lot of money to the big banks, once again, but doesn't help much, either homeowners or the economy. In particular, ordinary people shouldn't be tricked into making yet another bad bet.
I would just like to say stumbling onto this site is like a breath of fresh air. I can see the diversity of view points and not the simple minded accusation of the "other side". Just wanted to let you all know that this type of forum for discussion is exactly what I've been looking for. The closest I've found is on a Peak Oil discussion site, but this trumps it.
rvrwalker---
Correct. On Dean Baker's predictions and prescriptions.
See also Michael Hudson on the more complex relationship between property taxes and the artificial inflation of "value."
In a culture in which "property" is "owned," land would have more value than baseball cards. But on the other hand, in a culture that has a sense of aesthetics, a Picasso can be worth more than the farm.
How to "financialize" an idea, or the stroke of a brush?
What Gorbachev saw! The false premise of Materialism.
To see beauty requires a Beholder. We are really stupid hominids, so far saved from near extinction by language and writing. Nothing innate in our individuality can save us. To suggest otherwise is a dangerous myth.
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