A Proposal for stabilizing home ownership during difficult economic times


You already know my views that I do not expect jobs to grow in any significant numbers between now and 2016/2017 at the earliest.

By significant I mean that I do not expect the U-3 unemployment level to drop below 8%, or the U-6 rate to drop below 14%. For this to occur would require that jobs grow at the rate of 225,000 per month for almost three years.

I also believe that salaries and wages will remain largely stagnant or decrease for most Americans.

This is neither good nor bad at the macro level. It is an economic correction that is bringing us into alignment with our competitiveness costs with the rest of the world. It will be a continuing process for the next 20-30 years. Once you hear people complaining about ‘cheap Ethiopian/Bolivian/Russian’ quality goods, instead of ‘cheap Chinese goods’, then you will know that we have exploited the last remaining cheap labor pools.

At the micro or personal level, this economic correction is certainly most ungood.

This correction is undermining the basis for much of our society’s general wealth, stability, and sense of well being and general welfare.

People have a right to be angry and to want a solution. Getting cheap products in return for losing their jobs is not a deal. It is the hand that has been dealt to them — and many, many Americans eagerly accept the deal in their purchasing habits — but it is a deal that is destabilizing our country.

MY PROPOSAL

Since economic gravity or inertia currently has a unique hold on the ability of Americans to find or to create jobs then we should seek to assure some level of stability as our economy evolves.

Core to that is making sure that Americans do not lose their homes due to losing their jobs and not being able to replace their jobs, or to replace their income at levels sufficient to maintaining ownership of their homes.

As a free market believer — true free markets not the rigged marketplace that pushes risk on people and seeks to protect corporations and banks — then we need a solution for both assuring stability of our fellow citizens and a solution that asks the free market to be a responsive market that does not undermine our society.

Important Terms: U-3 and U-6 are the two major categories by which the unemployed are counted by the Bureau of Labor Statistics (BLS.gov). Category U-3 are the short-term unemployed and they are generally eligible for unemployment benefits. Category U-6 are those that have been unemployed so long that they are no longer considered part of the work force; they are generally known as the ninety-niners because they have often exceeded their eligibility to collect unemployment benefits.

My proposal is that all future mortgages which are ensured by the federal government include the following clauses:

>>If 8% Unemployed:  When U-3 unemployment reaches 8% for six months in a row, or within any six month period within 12 months, within a metropolitan statistical area (MSA) then mortgage rates on existing mortgages will be dropped to two percent plus prime rate if that rate is lower than the current mortgage rate. Any lost interest will not be recouped from the borrower at some later date. The loaning financial institution will write off any lost interest on the loan as a loss. This rate will remain in effect for up to six months past the date when U-3 unemployment drops below 8%.

>> If 10% Unemployed: When U-3 unemployment reaches 10% for six months in a row, or within any six month period within 12 months, within a metropolitan statistical area (MSA) then the mortgage rate for those unemployed more than 90 days will be dropped to 0%.The loaning financial institution will write off any lost interest on the loan as a loss. This rate will remain in effect for up to six months past the date when U-3 unemployment drops below 8%.

What say ye?

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8 Comments

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8 responses to “A Proposal for stabilizing home ownership during difficult economic times

  1. George S. Harris

    It might help if you explained what U-3 and U-6 are. I think your formula is way too complicated for the average person to understand–and that certainly includes me. I recently read another idea that involves home mortgages be reduced to whatever the current value of the home is. The lenders take it in the shorts but if the home sells for more that the reasessed value then the bank would regain some of its loss. In either instance, the lenders are going to have to be willing to get hit , which I think may be better than losing a mortgage payor altogether.

    • George, thanks for the suggestion.

      I have added a clarification to the original blog item:

      Important Terms: U-3 and U-6 are the two major categories by which the unemployed are counted by the Bureau of Labor Statistics (BLS.gov). Category U-3 are the short-term unemployed and they are generally eligible for unemployment benefits. Category U-6 are those that have been unemployed so long that they are no longer considered part of the work force; they are generally known as the ninety-niners because they have often exceeded their eligibility to collect unemployment benefits.

      =========

      As for my formula, I consider it rather simple and the data are readily available within the financial community. The challenge is that the free market crowd will argue that the mortgage is between a lender and the borrower — which it is, of course. Since the banking community is loath to renegotiate mortgages then they will need a carrot if we want them to do the right thing: help people out with no where else to turn.

  2. You’re right when you point out that the mortgage is between a lender and the borrower. Banks are in no position to take on more forclosed homes. They are, in many cases when the math works, making free market decisions to renegotiate loans in a variety of ways (reduce interest rates, devalue home, change terms, etc.).

    I’m assuming you are proposing Government policy. The unintended consequences of various Government “tinkering” (which varies from administration to administration) got us into this mess. It’s time to back out and let the market self-correct. Just because people are angry doesn’t mean the Government has to do something (or, put another way, we are a Republic… Not a Democracy).

    The simple fact is Government has no role in keeping anyone in a home they may no longer afford. We need to quit tinkering with things we really don’t inderstand (and if anyone really understood the economics involved we wouldn’t be in this mess) and get to the “new normal”.

    • I predicated my proposal to cover only those loans guaranteed by the federal government.

      What private industry does with money that is 100% wholly its own is not my business, nor that of the government.

      Our financial crisis was not caused by home owners not being able to pay their mortgages. So blaming home owners is only a misdirection of the real conversation. The financial crisis was caused by financial institutions that played roulette with their investments. As their investments went sour they started pulling in lines-of-credit and pushing ARM mortgages to such high interest rates that in many cases the the monthly payment doubled.

      As for working with their customers, they didn’t. As of March 2010 Bank of America, the largest mortgage underwriter, had allowed less than 1% of bad mortgages to renegotiate the terms of their defaulting mortgage rather than work out a deal. That deal was usually a ‘short sale’ which booted the home owner out, ruined their credit and still left them saddled with the difference between the shortsale value of usually less than 50% of the principle and the value of the original home.

      Since almost 80% of all defaulted mortgages were for loans made between 2005-2008 then the difference between a short sale and the original value of a home purchase was immense.

      The new normal, once we reach it, will be economic serfdom for many Americans.

  3. March 2010 is really old data. I could link several more current examples to the contrary. Here’s a very recent one.

    http://abclocal.go.com/ktrk/story?section=news/local&id=8418580

    If you haven’t read Hayak’s “The road to serfdom”, now would be a good time… Although it may be too late.

    • March 2010 data old? The point is that 3 years after the recession started the financial institutions had done NOTHING to help their customers … and only began assisting once it was clear that there would be no further bailouts.

      The number of foreclosures are still running in the millions per year.

      2010 had 2.9 million foreclosures. 2011 has kept pace with 2010 and foreclosures increased 30% in August 2011.

      There are so many foreclosures in late 2011 that Lawyers.com http://tinyurl.com/3eqfjzx is already predicting a record-breaking 2012 year because there is a backlog of one million-plus foreclosures carrying over into 2012 because the banks can’t process them fast enough.

      =======

      The video link doesn’t work. Would be interested if you had an alternate one.

  4. George S. Harris

    “The challenge is that the free market crowd will argue that the mortgage is between a lender and the borrower — which it is, of course. Since the banking community is loath to renegotiate mortgages then they will need a carrot if we want them to do the right thing: help people out with no where else to turn.”

    I think this is only somewhat true. If I am not mistaken, most mortgages are sold off to FreddyMac and FannyMae–the banks simply serve as the servicing agency. I am not certain who you REALLY go to get relief.

    • The loan remains between the borrower and the bank.

      FreddyMac and FannieMae guarantee only aspects of the loan, not the whole loan itself.

      One of the things that has come about as Freddy and Fannie put more pressure on the banks to research their borrowers better before lending is that the average downpayment has gone from 0% in 2007 to 20% in 2011.

      Freddy and Fannie are not demanding the 20%, the banks are. The banks are strangling the market because Freddy and Fannie have tightened their criteria so that if banks do stupid stuff then Freddy and Fannie no longer cover the bank’s loss as in prior situations. Banks have pushed up the downpayment to create larger reserves, or that was the plan. What it has really done is depress the mortgage market as very few people have 20% of a $300,000 home in the Prince William area.

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