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Hi there! Been a reader for some time, but this is my first post.
This occurred to me yesterday while hearing about the AIG bailout. The fundamental issue of the current financial crisis in the US is that the banks have no cash to lend, as it is all currently tied up in defaulted mortgages. With
no money to lend, no one is able to buy houses, so the value of the repossessed property drops. Additionally, there are too many houses on the market, as builders overbuilt during the bubble. More supply than demand, so when the bank repossess a house that was mortgaged for 500K, it can't sell it for that to recoup the cash. Plus, no one is lending, so no one is buying even at discounted rates.
The only way out, it would appear, is for someone with cash to buy the houses, giving the banks the liquidity they need to start lending again and kick start the whole process once more. Enter the government.
Instead of giving massive amounts of taxpayer money to companies whose greed started all of this to begin with, they can do something that will actually have direct and tangible benefit to the people. They start by buying the foreclosed houses at reasonable market value. This gives the banks the money they need to start lending again. Now the government has spent the people's money on houses. So, how do the people get value from this? The government instigates a trade-up program. You trade your current house, wholly owned or with mortgage in good standing, and get a bigger/better (previously foreclosed) house. You keep paying the same mortgage, you just have a better (and more valuable when the market recovers) house.
So everyone trades up, and the government (over time) has a collection of smaller, low end house. Some of them they can sell at market value (remember, the banks have cash to lend again PLUS there is a larger market at the low end of the scale). But they still have too many units (remember, the builders overbuilt). These final units they use to give a helping hand to the homeless. Give a free home to those most in need, instead of bailing out a corporation whose greed started all this to begin with.
Remember, the government is paying anyway (bailouts). At least this way, everyone gets something. The banks can continue to operate because they have the cash they need. Homeowners get a bigger home for the same money. Entry level buyers get a good deal. And deserving families get a helping hand.
(?) Europeans buying up New York (CNN video)
http://edition.cnn....nn?iref=videosearch
Record strength Euro against the Dollar - Manhattan dirt-cheap for Euros [django, Sep 18 2008]
The Big Picture
http://bigpicture.t...egulatory-exem.html
FInancial markets blog for the discerning. This article points out a very particular development which helped the US banking collapse. [DrBob, Sep 22 2008]
[link]
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Well, I don't know enough to see why this
won't work, so [+] |
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So crazy, it just might work. |
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The administrative overhead would be a big, big deal. Houses must be maintained. Trades must be reasonable. Someone holding a mortgage might find that the collateral property on the mortgage has switched to an entirely different piece of property. But this is something only the gov could do, since it would be a money losing deal. |
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1) Who decides what "fair market value" is for the homes the government is buying?
2) What happens if we both want the same house?
3) Why punish non-owners (by not allowing them to "move up")? After all, they didn't contribute to the problem.
4) What are the odds people will "move up" into a home they can't afford the property taxes on (causing a second round of foreclosures)? |
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Why not eliminate the mortgage industry altogether. Make the U.S. government the sole lender, get reasonable fixed rates and remove the incentive to issue loans to those who can't afford them. |
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but you've got government setting prices which distorts the real relationship of property values to the wider economy. |
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so this process could continue the inflation cycle and just delay the bust. |
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i'm basing this comment on the fact that when national productivity curves reach capacity growth in house prices stop, hence stagflation pointing to recession, or saying it another way when our purchasing power becomes inelastic. |
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Another idea is, stop taking resources out the earth and creating crap with them, which would stop the economy inflating, and educate everybody that a 'stagnant' economy is actually a healthier economy than a growing one. |
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The problem with this is that the economy needs an underclass of people whose lives are unbearable to keep the better off afraid to ask for better conditions or wages. If you house the homeless, their lives become more bearable and people become less afraid, so they will ask for those things. It's very important for the economy for there to be people visibly starving on the streets. If they're starving in houses, they're not a visible threat to the not quite so poor. |
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//stop taking resources out the earth and creating crap with them, which would stop the economy inflating, and educate everybody that a 'stagnant' economy is actually a healthier economy than a growing one// |
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Hear hear. The ideal would be an economy which shrinks, with zero economy being the goal, people's needs then being met in ways that do not involve constant manufacture and commerce. |
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In Australia we still have building interest groups bleating about the need for government to increase their profitability so they can tear down existing houses to build larger numbers of crappy inefficient houses, to address a supposed housing shortage. Our bubble is yet to burst. |
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[UnaBubba] - The issue of 'unjust enrichment' is really just a matter of the lesser of two evils. Either the corporations or the people. I chose the people. |
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[phoenix] A good question about who decides 'fair market value'. We could use the last known accurate assessment, previous purchase price', or just the outstanding mortgage value. |
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If multiple people want the same house, I'm sure there are a variety of approaches that could be taken to resolve the issue. Lottery, smallest value gap (ie person whose house is closest in value), etc. This is probably an easy issue to resolve, relative to implementing the idea in the first place! |
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I don't see this as punishing non-owners at all. They get value on two fronts - 1) they once again get access to funds because the banks are lending again. 2) they get access to a wider selection of affordable housing. Perhaps rules around how and at what cost the gov't resells traded houses would clarify this further... |
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As for causing a second round of foreclosure, I think there would have to be some regulation around what you can trade into. Clearly, the additional taxes cannot cause the amount of one's monthly budget to exceed a predetermined percentage. Just like the old days, when you need to qualify for mortgages... :-) |
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[nineteenthly] I'm pretty sure there will still be an underclass to make the working class feel better about themselves.. :-/ Hopefully, it is just a little smaller. |
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There's a lot of middle ground between nationalising (some or all of) the banks and a Soviet command economy, UB. |
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Personally? Property speculation is evil, but I have no concrete suggestion of how to end it. In lieu of such, I'm giving my bun to wuj3888 |
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[UB] Fair enough. On the other hand, I know people who are having a hard time finding rental tenants; I guess it depends on where you are. My comments were a reaction to the maximum growth maxim that seems to be orthodox. I just think there are gentler paths to take. |
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"The US market failed because of oversupply."
I'd say the market failed because greedy mortgage companies issued adjustable rate mortgages to people without the ability to repay when rates went up. Easy money drove up demand, which created an artificial scarcity. When the feeding frenzy peaked, rates were high again, mortgages were defaulting and home sales tanked. I only wish my property taxes reflected what I could actually get for my home. |
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[wuj3888] Non-owners get punished because they don't get to participate in the "trade up". When they buy their house, they're not getting the same bang for their buck as a "trade up" owner, and you're using their tax dollars to help finance the "trade up". |
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[phoenix] I think oversupply is just another factor contributing to the loss in value. The primary cause is as you said - imprudent lending practices. |
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I now understand what are saying about 'punishment'. Perhaps a slight adjustment to this idea would address your concern. Rather than a 'free for all' trade-up system, you credit every tax payer with an amount equal to his/her share of the price paid to purchase the houses. This probably works best if it is a fair share approach, rather than proportional to income (and therefore taxes paid). You can then trade up, within the the limits of your current home value (potentially that value is 0 if you don't own a home) PLUS the value of your credit. This way, everyone gets equal value. Plus, we maintain the mechanism for establishing fair market value for the houses. |
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I like phoenix's idea for government-issued mortgages. I bet that is done in some countries. |
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[wuj3888], this is how i see everything.
Something would be good if it happened.
Therefore it won't. Then you have to work
out why. This would be good, so it can't
happen for some reason. |
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Why don't you simply invite Europeans? |
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I read they are buying up Manhattan, because the dollar is so weak [link]. |
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I'm sure they'd be interested in buying up the rest of the US too, now that housing prices are so low, and the euro still strong too. They could use it as a hedge against weakening stock markets. |
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Once the price is up and the US economy back on track, they sell, cash in, and go home. |
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I was with you up to the "Give a free home to those most in need..." Change it to "Sell a low cost quality home to those most in need..." and you have a pretty good plan. |
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Homes/areas that are unlivable should be bulldozed and cleared for urban green spaces. |
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[Noexit] I think the idea of giving something for free leaves a bad taste for many people. But, as [phoenix] points out, why punish those with no (or very little) money. Everyone in this plan is getting something for nothing. If you trade your $300K house for a $500K house, why is that different than getting a $200K house for free? Plus, the remaining houses that I proposed would be given away are essentially the 'unsellables'. Everyone who could qualify for a loan to purchase a 'low cost quality home' would have done so. Remember, there are more units available than buyers. So, the gov't either keeps the houses (and they remain empty and unmaintained, constantly diminishing in value) or gives them away. There would be no more buyers. Unless they wait for new buyers to enter the market, but I suspect that this might have negative impact on the building industry... |
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Ian, those are what are known as 'features' in real estate. You can't give those away, they're far too valuable! :-) |
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i don't see how moving the pea from one cup to the other fixes the problem. The real problem is debt, the money paid fulfill mortgages was not cash the banks had on hand but leveraged assets at approx 20/1. Good bank standards keep the lever near 10/1. If losses at any given moment exceed the leverage the lender or bank has no cash to service its liabilities and turns over. Homes, families and mortgages have nothing to do with it. Cold truth is that without the steady stream of cash from those "home owners" or the government every lender leveraged unsafely will belly up. Unless demand for existing homes can rise to a level higher than it was at it's peak two years ago companies who made loans on homes are just as upside down on those homes as the people who bought them. This idea fails to recognize the most substantial factor in the value of a home is the price it can demand in an open and functional market. Poor lending policies funneled money to brokers and builders and suppliers who normally "get the crumbs" while the lender and buyer "eat the cake". In this market the builders ate the cake and everyone else is getting the crumbs. The government can buy cake and give it out but holding a "cake party" for people who should go belly up for idiotic banking is just more government pork. All mortgage markets should be put under the temporary management of the government until the crisis passes and, to the extent that they require "free cake" from the government lenders should have to pay it back by agreeing to lend in the future to first time home buyers and other troubled individuals. I say manage the piss out of the thing and keep the borrowers in their own homes paying what they can. |
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actually, the real, real problem is that corporations have to report results every 3 months. The RTC that was intstituted to recover from the Savings & Loan bailout actually made taxpayers money. |
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There is no doubt in my mind that in the end the "taxpayers" will wind up wiping out a significant portion of the deficit by the virtue of this action. Yes, wipe it out because the underlying value, while currently locked up, is enormous -- at least until they start making more land (to paraphrase Lex Luthor) |
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The government may be getting valuable property at rock
bottom prices, but it will retain that rock bottom
valuation untill someone wants to buy it. Waiting for the
population to increase or allowing increased imigration
doesn't seem like the aswer. The only thing that will
repair the situation is an improvement in the economic
outlook. Uncertanty is one reason why workers choose to
remain in high density rental housing rather than buying a
home. If the government by proxy ends up owning
property for which there is very little demand (say -35%
compaired to valuations two years ago) then that
represents a huge blow to the GDP. Also an unocupied
home is like an ice cream cone in the sun, every month it
remains unocupied is a tremendous waste of value even if
the property is maintained (HA!). I say get the government
in on the managment end of things, fix repayment rates to
prevent any more forclosures and, if companies need
propping up make sure that the money comes with terms
to repay it "in kind" by helpin needy borowers and small
buisnesses. A "my risk now for your risk later" type of
deal. And yes the SNL thing was OK. |
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Since the entire economy is only software,
doesn't a major government somewhere
have a "Restore default variables" on their
pull-down menu? |
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//Personally? Property speculation is evil, but I have no concrete suggestion of how to end it// |
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Land Value Tax. Google it. Basically, the value of land goes up while the value of a building goes down. Enough land tax to prevent people profiting from rising land values would mostly prevent property speculation. |
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Land tax also has other virtues, such as the fact that it does not discourage work, as income tax does, is simple to assess and is more or less impossible to dodge. |
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People like Henry George managed to get it implemented in the early 20th century, with property taxes being only assessed on land value. But the rich and powerful hated it and managed to get it reduced to almost nothing. Currently it is far too low to prevent speculation. |
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//Since the entire economy is only software, doesn't a major government somewhere have a "Restore default variables" on their pull-down menu?// |
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Such a feature is possible, but it requires a violent removal of the government responsible for the mess. So don't expect them to select it for you. |
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"...for people who should go belly up for idiotic banking..."
Exactly what I'm saying. And if the government has to step in anyway, why do it to put the same crooks back in business? |
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//Alternatively, pass a law that renders organised religion illegal, then seize the land formerly owned by the churches, etc. That'd help significantly, surely?// |
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Greatly infringes upon peoples rights and the constitution. What is really offensive about them is that they generally don't pay tax. At all. There are religious owned schools that compete against non-religious ones with the aid of tax exemption. Same for TV stations. Businesses sell their land to churches and lease them back cheaper thanks to their newfound tax exemption. |
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Religion doesn't need to be stopped outright. What needs to be stopped is religion getting special treatment. As stated in the constitution. |
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Laissez-faire!! We tax payers are not only backing write-down mortgages, we are expecting to lose money at it. |
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(1) government subsidy gave banks a reason to make shaky loans. We need to prevent; some good changes already made. |
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(2) government should buy foreclosed homes as a 'responsible speculator' and make money at it! Then we could expect to break even or even get a revenue. |
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(3) 'bailouts' are bad: By backing mortgages and companies, the best we can do is hope everyone pays their mortgage- and then we would break even. If these companies made money, the government wouldn't see it directly: our tax payer money is now invested without any possible return. Economic stability perhaps, China credit perhaps. |
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If the Europeans see a buy opportunity, why can't Uncle Sam put his borrowed money into buying marked down assets outright instead of backing loans? |
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Some good ideas here. But two things:
1) Stop blaming the 'corporations' when it is really the greedy slugs who ruined the corporations in the process. |
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2) Any scheme to 'give' housing to the homeless needs to start with why the homeless are homeless to begin with. As a population, the 'homeless' have much higher incidence of psychological or emotional disorders than the general population. Also, if you are trying to end homelessness by redistribution of wealth, good luck. Nobody wnats to say it, but the truth is MOST of the homeless in this society are poor money managers and poor life managers. |
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personally I blame real estate agents. |
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why? they want their 1% sale commission, they will either devalue a property when the market is said to be going down, adjusting to the buyers expectation in a 'buyer's market', and over value it when the market is going up, because this adjusts to the vendors expectation in a sellers market. |
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To them the market condition is irrelevant, turnover of sales is the only thing they care about. and yes they do have a lot of power in setting prices, peoiple listen and are influenced by them. |
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this happens on a domestic scale right up to massive portfolio scale, its the same principles. the end result is a distortion of market value in their particular interest. |
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take them out of the market and let buyers and sellers negotiatiate directly to find their own price, this would remove this market distortion. |
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and before all real estate agents out there jump on me my dad is a real estate agent, so i have been thinking about this for a while! |
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PS. moonguy, you are totally wrong that mental disorders are the cause of homelessness, rather the stress of the social breakdown leading to the homelessness creates or at least excacerbates usually manageable mental conditions. |
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"personally I blame real estate agents."
Sorry, that's just ignorant. Real estate agents are just facilitators. They don't set property prices (or values), they simply coordinate the actions of buyers and sellers to make the transaction go smoothly. They also typically get more than 1%. |
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OK, i admit it. i don't like real estate agents. but we need someone to blame, why not them??????? |
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//The lending institutions knew they were lending to high-risk borrowers...//
Lending institutions often have an obligation to lend to high-risk borrowers because of anti-redlining legislation; if they offer a certain deal in one area of a state or city, they're obliged to offer the same deal in every other area. As usual, the root cause is excessive government interference. |
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//I would lay this one at the feet of the lenders and the wholesale funds managers// - or, arguably, the banking rules which permit financial institutions to shift so much of their risk off-balance-sheet. |
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But any off-balance-sheet asset (or liability) will surely be on some other balance sheet, so it all evens out. No-one's being swindled except the responsible borrowers whose tax money is being used to bail out the irresponsible. |
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//The primary cause is as you said - imprudent lending practices//
Wreckless is the word. And it was exemptions from the regulatory framework for Merrill Lynch, Lehmann Brothers & Bear Sterns, rather than over-regulation that contributed to them going 'tits up' (see link).
Moving away from the causes and back to wuj3888's solution. Personally I don't see a problem here. For years now people have been proclaiming the benefits of and voting for the primacy of the market. I say it's time to count your chickens and stop bailing out incompetent capitalists (that's both bankers and homebuyers) with my taxes. Time for a market re-adjustment if you ask me. |
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//Time for a market re-adjustment if you ask me.// That is exactly what is happening. |
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Indeed. And I'm saying that I have no problem with that. |
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If lenders weren't obliged to offer loans to poor risk borrowers at the same rate as they offer to you, your rate would be significantly lower than it is. (I'm guessing that Australia has a broad equivalent of the CRA.) |
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Which is, of course, exactly how it should be, and if US lenders weren't forced to make financially unsound loans, that's how it would be there too.
Incidentally, both government bail-outs and the alternative offered by this idea are actually prohibited by the Constitution, but that seems to be of little importance these days. As Eric Sheppard said, "The Constitution isn't perfect, but it's better than what we have now". |
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[DrBob] Great, neither do I. My current primary residence, as well as my primary means of transportation, was paid for by the audacity of irresponsible lenders and the stupidity of their risky clients. |
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As to the plan above: This idea would spark a future inflation nightmare. First some background: |
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The banks that gave out these "irresponsible" loans, have themselves borrowed the money. They borrowed according to capital adequacy requirements stipulated by their creditors. The banks' creditors are usually the central banks. Part private and part government. The relaxing of *certain* entities’ capital adequacy requirements is part of what led to this situation. |
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There is an added level. That of "The Book" buyers: An entity that buys another's debtors book, for fair value. Fair value, and relaxed capital adequacy are an explosive combination. |
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Let’s say, because of my <insert reason> relationship with a central bank, I can secure better terms. You can't, but you do have a debtor’s book of some value. You can't lend anymore, due to your capital being tied up securing loans. I say to you (one day on the 14th tee), I will buy your book, for fair value, because of my relaxed capital adequacy requirement. This frees up your capital and so you can do the same again. And so can I. As long as the going is good. At some point you will realise that you have the short end of the stick. Running around, maintaining a workforce and infrastructure, only to sell the majority of your future annuity to me at “fair” value. The value is not strictly fair but you don’t have access to anything better. But it is a secure, risk free income for you. Given our relationship, the shrinking market of credit-worthy individuals and the plethora of available product. You have to make a choice. Supply is up, demand (of the credit-worthy kind) is down. And so, instead of stopping, you write ever more risky debt onto your book. The book is being sold to me anyway. At first I don't mind, as my money, at least the bit that I paid to you can be recouped from the underlying asset. |
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Things are rosy until one day (on the 14th tee) I say to you, "Sorry, I am not buying this period's book". As things go, this is not the end of the world. You will now have to run your bank, well, as a bank. As you did before. The problem is that you have been so removed from the risk, that you have written debt you would not have given a farm animal in the normal course of business. This, at last, makes you stop non(or ill)-secured lending. Now this is the end of the world, as we know it. You can’t recoup your money; the market is suddenly saturated with supply. Worse, I can’t recoup my money. In fact, I now face serious losses. Worse still is the re-insurance (this is the fascinating part). Whilst telling you I was able to buy your debt because of my <insert reason> relationship with the central lenders, this was not the whole story. I had in fact got a group of risk takers together and got them to secure my debt in return for a periodic payment. The further they were away from the risk the smaller the premium I paid. Arbitrating or aggregating this shared risk is where I made my money. It was, in fact, these people that had told me not to buy your next book. |
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And so you crumble, I crumble, and those who cannot be named (OK, insurers and re-insurers) get bailed out, by the very people that made them so powerful in the first place. |
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So why would *this* idea be inflationary? When the market corrects, you will have a large percentage of the population sitting on value that had not been created, merely manufactured. It is accepted that this happens anyway, see above paragraphs. But for “the many” to have un-produced wealth the unit currency devalues (supply and demand again). Ergo, inflationary pressures. |
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But the story is not all doom and gloom. Commodity prices, having enjoyed a stellar rise, are set for some hard times. Economies exhibiting unreasonably low costs based on large volumes and cheap labour are in for hard times (they are over-geared for supply with little internal demand). The market (globally) will return to fundamentals, instead of speculative, over-indulgence. |
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And so the entire process starts again… |
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//US lenders weren't forced to make financially unsound loans// |
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US lenders were lined up, begging to make financially unsound loans. |
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They assumed that housing prices would continue to rise, and most people who were unlikely to be able to pay their mortgages would be able to cash in on the increased value of their home. The lender would be paid, and a long chain of investors and middlemen would make a tidy profit on the higher interest rates paid by risky borrowers. |
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Unfortunately for us, their fundamental assumption (non-bursting housing bubble) was incorrect. |
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I am much angrier that financiers and other "experts" made such a basic mistake than I am that credulous borrowers believed the mortgage lender who said, "Yes you can afford this house!" without explaining the risks. |
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[williamsmatt] I don't mind being criticized for things I do say, but I do mind very much when people put words in my mouth. Before (if) you respond to this, go back and read my posting. I did NOT say homelessness was caused by mental disorders. I said the homeless AS A POPULATION had a much higher incidence of mental disorders etc,. This is verified from statistics to be found in every major american city dealing with the issue. |
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The point with respect to the housing issue, is that just 'giving' a homeless person a house is no guarantee they will be able to handle the responsibility. Obviously, some can. MOST homeless would likely have homes - not neccessarily houses - if there wasn't something internal to them keeping them from it. Blaming 'society', corporations or a particular political party is just a cop-out. |
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"WORK THE PROBLEM PEOPLE!" (Gene Kranz, Apollo Flight Director during Apollo 13 incident) |
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I reckon the banks should be forced to lend at least a bit of their own money with any loan. Say 10-20%. Not just with loans from the central bank or account holders' money. |
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Does anyone else think it rather odd that none of the money they are lending is their own? |
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Sure, reward people who overcommited themselves financially. |
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Makes you wonder what kind of revenues could be generated by issuing the houses as prizes in an open lottery? Use the income from the lotteries to repay the people for the use of their cash. |
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Another thing I note is that large banks and broker-dealers should be split up into smaller ones before they get described as "too big to fail".That way they can feel the consequences if they invest stupidly. |
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Regulations should not be relied upon, because the one thing you can rely on is greedy people in high places rewriting or ignoring the regulation. |
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Naw>>>Too logical! Besides, I've been predicting Armagedon for a long time now and nothing has come of it. I don't want to be wrong for my whole life and die with everyone thinking I was just another nut. I want folks discussing what a great seer I was....If the whole thening crashes to dust before i go...then, I'll be immortalized.....the Great Predictor, they will call me. (sc) |
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just tax structures not land |
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people will strive to create marvellous living environments with minimal taxed materials |
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the land value is a zoning hoax; city size thus value is controlled at the council level to artificially affect valuation |
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AIG would be affected with a new model zoning code |
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// just tax structures not land // |
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I disagree. The economic goal of the government should be to increase the general amount of goods people have. If you tax the mere possession of goods (such as buildings) you encourage people not to have them or even destroy what they do have. In the UK, where property tax includes the building and land, landlords have indeed been pulling down empty buildings after the government decided to take away their tax break on empty buildings. |
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Tax land, and the only way to avoid the tax is sell it. This makes it easier for people who need land to buy it. Most land is owned by the wealthy, who will often do underuse it, creating an unnecessary shortage. This raises land values and gives the rich a big incentive to hold onto the land they aren't using unless it's taxed hard. This applies to land in cities as well as the vast acres of open country, perhaps even moreso. |
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// people will strive to create marvellous living environments with minimal taxed materials // |
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If the builders strive, they will have to be paid for their striving and this will increase the price of the building. Do it yourself and the building value will go up anyway. What you will actually get is cheap buildings. But the land they sit on will be expensive if it is not taxed. |
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With land tax you get taller buildings, housing more people with less space. The 'less space' aspect completely overrides environmental issues regarding building materials. Not to mention that travel is so much quicker and greener because everyone is closer together. |
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// the land value is a zoning hoax // |
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I have to admit there is a lot of craziness regarding land valuation. But there can still be craziness when buildings are valued instead. Valuing land can usually be done by driving around the area. Valuing buildings requires stepping inside. I am 30 years old, living in the UK, and I have never seen a government assessor ask to look around inside my house. Or even walk around the outside and look in through the window. So you can guess how accurately my house is valued. There have been scandals regarding 'second gear valuations' where assessors more or less just drove past in second gear, looked out the window and guessed. See if you can guess whether large corporate buildings are undervalued or overvalued. |
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Don't expect your assessment to magically become fairer just because a different thing is being assessed. Paying close attention to the issue of fairness and basing your vote on it is how you get fairness. |
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