2010 Economic Crash? Helping Millions Save Homes & Keeping Banks Afloat

I am an optimist by nature, but believe strongly that the U.S. economy will take a significant nosedive beginning in June 2010 and get worse through October 2010 as well as throughout 2011 and 2012.

One of the primary impacts of any further deterioration of the economy is that literally millions of people cannot afford their current mortgages.  Estimates are that millions of  families (already 1 in 6 by late 2008) are underwater on what they owe — they can make the payments but their homes are worth far less than what the mortgage is for.

It may well be in the economic self-interests of these individuals to just walk away: abandon their homes, take a hit to their credit, and move on. This would be what economists call a ‘strategic default’.

In some states people can legally do this with minimal impact to their economic health because one of the things they bought with their mortgage was the equivalent of ‘underwater insurance’, aka a ‘non-recourse loan’.

If your mortgage is a ‘nonrecourse loan’ then you probably paid about $800 per $100K of value when you closed your mortgage financing. In a non-recourse loan a lender legally has ONLY your property as security for their loan; they cannot go after your other assets.

Why People Should Think About Their Options

University of Chicago professors Eric Posner, a law professor, and Luigi Zingales, an economist, see rough times ahead and have a suggestion as to how both individuals and our banking system can make it through these rough times.

These guys are not from the liberal side of thought. They firmly believe in taking responsibility. So when something like their proposal hits the street then I recommend listening.

Both are from the University of Chicago, and Luigi Zingales is from its Chicago School of Economics — considered one of the world’s best economics departments with more  Nobel Prize winners  in economics than any other university.

The Posner-Zingales Proposal as described in the New York Times: “Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it (the bank) would get 50 percent of the average gain in neighborhood prices — if there is one — when the house is eventually sold.”

The Posner-Zingales Proposal is a free market approach that is in the best interests of both the banks and individuals — if you take the long view and do not just focus on quarterly profits.

It is doubtful however that banks will embrace this idea.

Be warned: late 2010 will not be kind. It will be in the self-interest of millions of American families to shed debt and to avoid new debt, however they can. The banks write it off and get bailouts. Your options?




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3 responses to “2010 Economic Crash? Helping Millions Save Homes & Keeping Banks Afloat

  1. Joseph A Cummins

    Excellent post as usual, Bill! Thanks! Here comes the other shoe dropping….and it’s gonna get a lot uglier before it gets better. We have Congress to thank for all this.

    • wdgoldenic

      While Congress AND the president made it possible for there to be more $$ for folks to get home loans throughout the late 1990s and 2000s, the blame is squarely on the banks and other financial instititions (AIG) that gamed the system.

      No one made banks make bad loans. No one.

      And the great majority of failed mortgages behind our Great Recession were made from 2004-2007 during Bush’s “Ownership Society” program push with its “zero-down-payment initiative”. If Congress is to be blamed then it would have to be the Republican-controlled Congress that approved Bush’s “Ownership Society”.

      If there is evidence or statistical forensics pointing elsewhere then I haven’t found it.

  2. Deana Borris

    A 3rd political party will not be victorious. It never has been; study a history book. Dr. Utopia is systematically breaking apart this land piece by piece and we�re out here proposing songs to the dance orchestra? It is absolutely, vitally essential that tea partiers, level-headed conservatives, whatever we wish to call ourselves, TAKE BACK the GOP.

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