Big Beef with Subprime

"We have sort of become a nation of whiners." — Phil Gramm on Americans concerned about the economy, quoted in Washington Times, July 10, 2008

Eight consecutive quarters of falling average U.S. home prices – according to the December 15 CNNMoney.com, almost $2 trillion of aggregate value loss to American homeowners. 2008 alone showed that the first three quarters fell 8.4% from the same period in 2007. 11.7 million American homeowners’ mortgages exceed the value of the homes.

By now, notes real estate site Zillow.com, the bulk of the subprime failures are either in foreclosure or in default. But other factors make the timing of the bottoming out of the housing market problematical – the impact of excess inventory from too many foreclosures (still rising) tends to keep prices for average and lower-priced homes low, the short term adjustable rate mortgages (ARMs) are about to hit their end term with a big balloon payment that either has to be refinanced or, all too often, join the ranks of failed mortgages, and the rising jobless figures suggest that an increasing number of families will simply not be able to afford even solid and normal mortgages.

As credit begins to filter slowly back into the markets, creditworthiness – which is based on assets and earning power – seems to be leaving the marketplace even faster. Our government waited so long, preferring to shore up institutions at the expense of the “people,” that even when money is available, no one qualifies for the loans that might be available. It is a vicious cycle.

The ARM situation can easily be addressed by the regulators (maybe with some Congressional help) by allowing homeowners who have maintained good credit either to extend the existing term or to apply for a predetermined new loan (with a government interest cap) through their originating lenders. I have already described in detail what I believe to be an equally viable federal plan to support homeowners who are able to make payments and are not in serious default by affording the issuing banks with a payment equal to the amount that the loan is above the home value in exchange for a modest percentage of future upside.

There is no benefit to the United States to allow additional massive foreclosures. Abandoned properties create blight, crime and further deterioration of neighborhoods. I am slightly heartened that Fannie Mae and Freddy Mac are considering allowing renters living in foreclosed homes to remain in those houses, but so much more must be done. Strong positive short-term action is required to stop this foreclosure rate as the government grapples with the issue of stopping the rise in unemployment that is all but certain to increase.

Business and consumer confidence, along with retail sales, will rise when home prices and unemployment stabilize. The stock market will track those sentiments.

I’m Peter Dekom, and I approve this message.