Although Bank of America has won praise from the news media for offering to reduce the mortgages of tens of thousands of underwater homeowners, Rick’s Picks readers were less kind in their assessment of the new relief program. One reader who posted in the forum saw it as an act of desperation – B of A’s only hope of keeping foreclosed assets from being liquidated at street value. “[The bank is] leveraged so highly that they have no choice but to write down twenty percent rather than take one in the teeth,” wrote Mark L. We ourselves had called mortgage modification the most consumer-oriented idea to come out of the banking sector since the real estate crash began in 2007. We hadn’t intended to sound so kind, since, no matter what kind of rescues are tried, we still expect real estate prices to fall by a further 35 percent before deflation has run its course in perhaps five to seven years.
We also think that by bailing out homeowners directly, the banks have inadvertently made the underlying fallacy of mortgage relief transparent – so much so that even such as Paul Krugman, the aggressively obtuse economics writer at the New York Times, is likely to recognize the plan’s fatal flaw before too long. Krugman and his colleagues have come only halfway in describing the problem, noting the moral dilemma of rescuing homeowners who bit off more than they could chew with the tax dollars of those who were prudent enough to stay out of trouble. What the pundits have failed to point out, however, is that the prudent will pay an even bigger price when their homes drop in value by tens of thousands of dollars overnight after their “rescued” neighbors’ homes have been marked down by lenders.
$250k Markdown Overnight
That is of course the way home prices are established: at the margin. Thus, if there are six homes in a cul de sac valued at $750,000 each, and one owner has to sell for $500,000 because he gets on the ropes, then all the homes in the cul de sac will effectively have been devalued by $250,000. It makes no difference whether the homeowner stays in the house or sells it, either, as everyone but Krugman, the banks, and mainstream pundits will already have figured out. What puzzles, however, is Bernanke’s decision to terminate the Fed’s buying of mortgages at the end of March. It’s one thing for the Fed to spin the lie that the economy is recovering when in actuality the stock market and a handful of companies have merely upticked on $14 trillion worth of direct bailouts, pledges and loan guarantees. But it is quite another to act as though the recovery is real. Can Bernanke and the crackpots who rule our economic lives actually believe that removing the pins now propping up a terminally weakened real estate market will not cause the entire, hollow edifice to collapse? Although that is the only way the housing market can get unstuck , it surely cannot be what Bernanke and the feather merchants he serves intend.
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Hi,
as foreigner I am not familiar with the mortgagebusiness in USA. I wonder what is the problem beeing “under water” as long as I can pay my monthly payments. Even when I cannot, why is it not in the interest of the bank to extend the loan for lower monthly payments.
I would appreciate any comments on that.
Regards Gerhard