You go to a city you've never been to before and get into a cab. The fares listed next to the meter are the highest you've ever seen. "Why are cab fares so high?" you ask the driver. "Because", he says, "we have so many costly accidents and resulting lawsuits that our insurance is expensive and it increases the fares."
"Are you doing anything to reduce the accidents?" you ask. "No.", he says, "We're trying to make it harder for people to sue us."
Similarly, doctors complain that malpractice insurance is too expensive and lawsuits should be limited. There seems to be no recognition that they need to reduce medical accidents, which will only be possible when the medical profession turns its attention to accident prevention instead of so-called "malpractice reform".
Friday, January 7, 2011
The Rain Dance
There's been a long drought, so you do a rain dance. It doesn't rain but you are told that you need to do another rain dance. You do another rain dance but it still doesn't rain. Your advisors insist that more rain dances are needed. After a few more rain dances it hasn't rained, but after many more rain dances it does rain. This proves that you just needed to do enough rain dances.
A large government stimulus bill didn't fix the economy, nor did the Federal Reserve printing money. Some insist that more stimulus is needed, which is being provided by an extension of the Bush tax cuts and of unemployment insurance; and the Federal Reserve is printing more money ("Quantitative Easing"). Perhaps there will be even more stimulus and Quantitative Easing and eventually the economy will recover. This proves...
A large government stimulus bill didn't fix the economy, nor did the Federal Reserve printing money. Some insist that more stimulus is needed, which is being provided by an extension of the Bush tax cuts and of unemployment insurance; and the Federal Reserve is printing more money ("Quantitative Easing"). Perhaps there will be even more stimulus and Quantitative Easing and eventually the economy will recover. This proves...
Monday, December 6, 2010
The Ant and the Grasshoppper
Once upon a time there were an ant and a grasshopper. All summer long the ant worked diligently, gathering food and storing it for the long winter. The grasshopper, on the other hand, ate his fill of the summer abundance, spending the rest of his time playing. When winter came the ant retreated underground to his ample food stores. The grasshopper remained aboveground, in the now barren fields, cold and hungry. So Congress passed the Grasshopper Relief Act, paid for by a tax on ants. The End.
Tuesday, November 30, 2010
How not to sell a foreclosure
As previously noted, banks don't know how to complete the paperwork necessary to foreclose on a house. They also don't know how to sell a house.
It is already well-known that banks take forever to respond to short sale offers, which discourages offers from being made, resulting in more foreclosures. When banks try to sell a foreclosed house the traditional terms are pretty much guaranteed to discourage buyers or at least insure lower offers. Sellers make no repairs unless they feel like it and take no responsibility for how the repairs look. If the repairs make a mess, that's too bad. Potential buyers are prohibited from contacting government agencies to inspect the house and must inspect the house at their own risk and expense after making an offer but before the offer has been formally accepted. If an offer is ultimately accepted, the buyer will get a second rate deed, and, in the event of a dispute, among other things the buyer waives the right to a jury trial.
A new issue has arisen. Buyers of foreclosures sometimes have their own buyers already lined up at a higher price, so buyers are now often prohibited from reselling the house for a number of months at more than a modestly higher price. Of course this may reduce the number of buyers, since they were looking to make a profit. Perhaps they intended to make repairs, even cosmetic repairs. Perhaps they were going to offer their buyers a standard residential real estate contract, instead of the one-sided contract forced on them. Perhaps repairs and a fair contract would make the houses worth a lot more and even banks could get more for the houses.
It is already well-known that banks take forever to respond to short sale offers, which discourages offers from being made, resulting in more foreclosures. When banks try to sell a foreclosed house the traditional terms are pretty much guaranteed to discourage buyers or at least insure lower offers. Sellers make no repairs unless they feel like it and take no responsibility for how the repairs look. If the repairs make a mess, that's too bad. Potential buyers are prohibited from contacting government agencies to inspect the house and must inspect the house at their own risk and expense after making an offer but before the offer has been formally accepted. If an offer is ultimately accepted, the buyer will get a second rate deed, and, in the event of a dispute, among other things the buyer waives the right to a jury trial.
A new issue has arisen. Buyers of foreclosures sometimes have their own buyers already lined up at a higher price, so buyers are now often prohibited from reselling the house for a number of months at more than a modestly higher price. Of course this may reduce the number of buyers, since they were looking to make a profit. Perhaps they intended to make repairs, even cosmetic repairs. Perhaps they were going to offer their buyers a standard residential real estate contract, instead of the one-sided contract forced on them. Perhaps repairs and a fair contract would make the houses worth a lot more and even banks could get more for the houses.
Friday, October 29, 2010
Mortgage Paradigms
Ten years ago the tech bubble burst and a huge amount of money that had been invested in tech stocks disappeared. This had a modest negative effect on the economy. More recently the housing bubble burst and a huge amount of money that had been invested in real estate disappeared. This devasted the economy. Why the difference?
When the housing market first began to crack it wasn't expected to have such a large impact. The paradigm was of a poor family who had been sold a house they couldn't afford with a subprime mortgage. This couldn't destroy the broader economy. The money they borrowed to buy the house, as well as whatever mortgage payments they did make, was tied up in real estate, and not available to the broader economy, the same as the money that had been tied up in tech stocks a decade earlier.
Later, problems spread far beyond the poor and far beyond subprime mortgages. Now the paradigm seems to be a homeowner who can't pay his mortgage because he lost his job. But there have always been people who lost their houses because they lost their jobs and if there are more of these people today, they are the victims of the bad economy, not its cause.
The reason the bursting of the housing bubble devasted the economy is the virtual disappearance of home equity loans(and cash-out refinancing). As housing prices dropped, the collateral that had supported home equity loans evaporated and so did the loans. The money from these loans that had poured into the broader economy from real estate has now disappeared, and with it the much broader economic bubble that it had inflated. Just like living well off money borrowed from credit cards which ends at the cards' credit limit, the party stopped when homeowners couldn't borrow any more money on their homes. The most meaningful paradigm is that of a homeowner who was on the PBS Newshour. She once had an $86,000 mortgage that she ran up to $240,000 through home equity loans or refinancing. She is now in danger of foreclosure and hopeful of "repurchasing" her home from the lender for $80,000 on the theory that this is all the lender could get through a foreclosure and resale. Cases like this are what have caused the economy to unravel.
When the housing market first began to crack it wasn't expected to have such a large impact. The paradigm was of a poor family who had been sold a house they couldn't afford with a subprime mortgage. This couldn't destroy the broader economy. The money they borrowed to buy the house, as well as whatever mortgage payments they did make, was tied up in real estate, and not available to the broader economy, the same as the money that had been tied up in tech stocks a decade earlier.
Later, problems spread far beyond the poor and far beyond subprime mortgages. Now the paradigm seems to be a homeowner who can't pay his mortgage because he lost his job. But there have always been people who lost their houses because they lost their jobs and if there are more of these people today, they are the victims of the bad economy, not its cause.
The reason the bursting of the housing bubble devasted the economy is the virtual disappearance of home equity loans(and cash-out refinancing). As housing prices dropped, the collateral that had supported home equity loans evaporated and so did the loans. The money from these loans that had poured into the broader economy from real estate has now disappeared, and with it the much broader economic bubble that it had inflated. Just like living well off money borrowed from credit cards which ends at the cards' credit limit, the party stopped when homeowners couldn't borrow any more money on their homes. The most meaningful paradigm is that of a homeowner who was on the PBS Newshour. She once had an $86,000 mortgage that she ran up to $240,000 through home equity loans or refinancing. She is now in danger of foreclosure and hopeful of "repurchasing" her home from the lender for $80,000 on the theory that this is all the lender could get through a foreclosure and resale. Cases like this are what have caused the economy to unravel.
Friday, October 22, 2010
Mortgage Parables
Case #1
Mr. A buys a house for $400,000 when home prices are rising. Two years later the house is worth $500,000. Mr. A, feeling flush, buys a Mercedes, financing it through the dealer. This purchase is a stretch, but Mr. A thinks that if he has trouble making the payments, he can always refinance his house to pay off the car. As it turns out, sometime later Mr. A can't make the car payments but his house is again worth $400,000 and refinancing won't help. Is it fair to repossess his car?
Case #2
Mr. A buys a house for $400,000. Two years later he refinances it for $500,000, spending the $100,000 on a Mercedes. Now his house is only worth $400,000 and Mr. A can't pay his mortgage. Is it fair to foreclose on his house?
Case #3
Mr. A buys a house for $400,000 and two years later sells it to Mr. B for $500,000, financing it himself. Now the house is only worth $400,000 and Mr. B can't make the payments to Mr. A. Mr. A was going to buy a Mercedes but instead reduces the house price and the loan to $400,000. Is this fair?
Case #4
Same as Case #3 except that Mr. A had already bought the Mercedes and would have to sell it to reduce the house price. Is this fair?
Case #5
Mr. A buys a house for $400,000 and two years later sells it to Mr. B for $500,000, who finances it through a bank. Now the house is only worth $400,000 and Mr. B can't make the mortgage payments. The bank threatens to foreclose. Mr. B writes to Mr. A: "You're the only one who made money on this. If you give back your $100,000 profit, you'll still be even and I won't lose my house." Is this fair?
Case #6
Same as Case #5. Mr. A replies: "Sorry, but I already used the money to buy a Mercedes." Is this fair?
Mr. A buys a house for $400,000 when home prices are rising. Two years later the house is worth $500,000. Mr. A, feeling flush, buys a Mercedes, financing it through the dealer. This purchase is a stretch, but Mr. A thinks that if he has trouble making the payments, he can always refinance his house to pay off the car. As it turns out, sometime later Mr. A can't make the car payments but his house is again worth $400,000 and refinancing won't help. Is it fair to repossess his car?
Case #2
Mr. A buys a house for $400,000. Two years later he refinances it for $500,000, spending the $100,000 on a Mercedes. Now his house is only worth $400,000 and Mr. A can't pay his mortgage. Is it fair to foreclose on his house?
Case #3
Mr. A buys a house for $400,000 and two years later sells it to Mr. B for $500,000, financing it himself. Now the house is only worth $400,000 and Mr. B can't make the payments to Mr. A. Mr. A was going to buy a Mercedes but instead reduces the house price and the loan to $400,000. Is this fair?
Case #4
Same as Case #3 except that Mr. A had already bought the Mercedes and would have to sell it to reduce the house price. Is this fair?
Case #5
Mr. A buys a house for $400,000 and two years later sells it to Mr. B for $500,000, who finances it through a bank. Now the house is only worth $400,000 and Mr. B can't make the mortgage payments. The bank threatens to foreclose. Mr. B writes to Mr. A: "You're the only one who made money on this. If you give back your $100,000 profit, you'll still be even and I won't lose my house." Is this fair?
Case #6
Same as Case #5. Mr. A replies: "Sorry, but I already used the money to buy a Mercedes." Is this fair?
Friday, October 15, 2010
Foreclosures
The conventional wisdom is that a slowdown in foreclosures will delay a recovery in the housing market. According to the banks, employees who sign affidavits in foreclosure proceedings swearing to the truth of the facts legally necessary to evict a soon to be former homeowner shouldn't have to read what they sign, let alone actually know that what they're signing is true. In fact, the banks even hint that the states who require court proceedings for foreclosures are to blame for putting the banks to the trouble.
In the first place, the "robo-signing" fiasco is the banks' own fault. They have lawyers, they have staff, they have both the knowledge and the means to file carefully prepared, lawful affidavits.
Second, before taking someone's home, they have a moral and a legal obligation to check the facts. It is hard to believe that 100% of these homes would have been foreclosed upon anyway. You can't be both sloppy and accurate.
Third, a slowdown in foreclosures is not necessarily a bad thing. If speeding foreclosures is good, why not foreclose on all the delinquent mortgages ASAP and dump the homes on the market at once? Of course this would cause home prices to fall off (another) cliff, more homeowners would be underwater, nearly all sales would be foreclosures, and there would be more delinquencies and more foreclosures in an ever-worsening cycle. Slowing foreclosures would reduce the downward pressure on home prices, improve the prospects for ordinary home sellers, allow the slowly recovering economy to generate more buyers, and avoid increasing the number of underwater homeowners and foreclosures.
In the first place, the "robo-signing" fiasco is the banks' own fault. They have lawyers, they have staff, they have both the knowledge and the means to file carefully prepared, lawful affidavits.
Second, before taking someone's home, they have a moral and a legal obligation to check the facts. It is hard to believe that 100% of these homes would have been foreclosed upon anyway. You can't be both sloppy and accurate.
Third, a slowdown in foreclosures is not necessarily a bad thing. If speeding foreclosures is good, why not foreclose on all the delinquent mortgages ASAP and dump the homes on the market at once? Of course this would cause home prices to fall off (another) cliff, more homeowners would be underwater, nearly all sales would be foreclosures, and there would be more delinquencies and more foreclosures in an ever-worsening cycle. Slowing foreclosures would reduce the downward pressure on home prices, improve the prospects for ordinary home sellers, allow the slowly recovering economy to generate more buyers, and avoid increasing the number of underwater homeowners and foreclosures.
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