Surfers know you have to catch a wave before it breaks. Yet American legislators are now tossing around policies to surf out of the subprime mortgage collapse long after the wave has broken.
Banks in the US are howling and, when that happens, Congress responds. Unfortunately the current economic minefield isn't as neat and tidy as the Savings & Loan collapse of the early '90s. This time no one's really sure just how bad the problem is, much less what might work. From the New York Times:
"Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody's Economy.com.
The housing slumps of the mid-1970s and late 1980s were confined to the coasts. The current bust, while leaving some cities relatively unscathed, has cut a far wider path and it comes just when home debt is at its highest level since World War II.
In Washington, it will be difficult to engineer a bailout similar to the one for savings and loan companies in the early 1990s, because Democrats and Republicans alike cringe at the very word bailout and fear a backlash by people who never became overextended.
But with millions of homeowners already underwater and the prospect that millions more may face the same situation, Democrats and Republicans alike are scrambling for ideas to keep people from simply walking away from their homes and to help those struggling to pay their bills.
John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies [has a] plan, still in rough form, that would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.
It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher."
The collapse in housing prices is having a variety of negative effects. One is mobility. An underwater homeowner is tied to his unsaleable property and that makes it very hard to move to secure better employment.
Then there is the phenomenon of people unwilling to sell at a loss in a steadily declining market. Rather than cut their losses, they hope against hope and hang on while the market declines and their losses soar. I know from my experience in my former bankrutpcy practice how common and powerful that emotional inertia can be.
The worst part, however, may be a matter of timing. This is 2008 and it's turning out to be the biggest election year America has faced in decades. Eventually the presidential nominees from both parties will have to lock horns on this issue and you can bet it'll be their political fortunes, not the plight of imprudent homeowners, that will shape their policies.
Banks in the US are howling and, when that happens, Congress responds. Unfortunately the current economic minefield isn't as neat and tidy as the Savings & Loan collapse of the early '90s. This time no one's really sure just how bad the problem is, much less what might work. From the New York Times:
"Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody's Economy.com.
The housing slumps of the mid-1970s and late 1980s were confined to the coasts. The current bust, while leaving some cities relatively unscathed, has cut a far wider path and it comes just when home debt is at its highest level since World War II.
In Washington, it will be difficult to engineer a bailout similar to the one for savings and loan companies in the early 1990s, because Democrats and Republicans alike cringe at the very word bailout and fear a backlash by people who never became overextended.
But with millions of homeowners already underwater and the prospect that millions more may face the same situation, Democrats and Republicans alike are scrambling for ideas to keep people from simply walking away from their homes and to help those struggling to pay their bills.
John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies [has a] plan, still in rough form, that would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.
It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher."
The collapse in housing prices is having a variety of negative effects. One is mobility. An underwater homeowner is tied to his unsaleable property and that makes it very hard to move to secure better employment.
Then there is the phenomenon of people unwilling to sell at a loss in a steadily declining market. Rather than cut their losses, they hope against hope and hang on while the market declines and their losses soar. I know from my experience in my former bankrutpcy practice how common and powerful that emotional inertia can be.
The worst part, however, may be a matter of timing. This is 2008 and it's turning out to be the biggest election year America has faced in decades. Eventually the presidential nominees from both parties will have to lock horns on this issue and you can bet it'll be their political fortunes, not the plight of imprudent homeowners, that will shape their policies.
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