Mortgage Refinance Program: Part II


The current economic condition was brought about by housing.   Housing costs and a housing bubble.  The result is that we find an enormous problem with hundreds of thousands of people facing foreclosure. And until that problem is cured, we may never truly begin to see a real path to recovery.

These people are suffering.  They’re going to bed at night with that pit i their stomach wondering how they’re gonna make the next payment.  How they’re gonna avoid having the phone shut off.  How they’re gonna make winter.  There is fear and apprehension and stress.  I get it.  And I don’t wanna diminish it.   But those feelings are never, ever, really gonna go away until they’re addressed.  Not just contained, but addressed.

I went to school in Marshall, MN, home of Schwanna’s Ice Cream and Red Barron pizza.

I met Mr. Schwann by the way.  He dropped out of school in the eighth grade before founding his company.  I tended bar at the hotel he liked to have his Christmas Parties at.  His favorite thing was to tell me to watch how his executives would “run on the bar” in an effort to drink what he was drinking.  The worst was when he landed on CC and water with a rind of lemon.  I never cut so many lemon rinds in my life!

My major was Mathematics.  Not math, but Mathematics.  In calc I found myself in class with a bunch of non-math majors.  And they were struggling.  Some just wanted to pass and get the req out of the way.  Others were earnestly interested in learning calculus.  I gravitated towards those kids.

We would study forever.  I’ve found that math is learned in a series of ramps and plateaus.  That is, forward progress is made steadily until such a time as a specific concept is hit that prevents further and deeper understanding.  And until that plateau is addressed, not contained, further learning can not occur.  The gifted teachers have a grasp of plateau identification and remediation.  Anyway, the same process holds true in other aspects of life.

And home finances are one of them.  Which is my very long way of saying that just giving someone the answers to the calc exam isn’t going to help them understand calculus.  And neither is forgiving mortgages going to help people address their home finance situation:

WASHINGTON — The federal government’s expansion of a mortgage refinancing program could reduce the monthly payments of up to one million homeowners, but analysts said the modest scope of the plan meant it would probably do little to heal the housing market or help the broader economy.

The effort, built on sweeping voluntary agreements with the mortgage industry to let people refinance even if their homes have declined in value, reflects a new White House emphasis on economic measures that do not require Congress to overcome its bitter partisan divisions.

It also maintains a choice President Obama made in the early days of his administration to focus on reducing monthly payments rather than on the amounts that borrowers owe, the latter being what a growing number of liberal and conservative economists consider necessary to resolve the problem.

I resonate with the plight.  I get the desire to help.  But this isn’t helping.  This is enabling.  And until true and serious lessons are learned, nothing will change:

Treasury has publicly estimated that the redefault rate on HAMP permanent mods will be 40% over five year. Now, just one year into permanent mods, we have already reached a 21% redefault rate. There is no indication that the redefault rate is plateauing, and no reason to think that it will.

In other words, the default rate on refinanced mortgages is very high.  If you are failing to meet the payments of your current mortgage, there is little reason to believe that you will suddenly be able to make the payments on a restructured mortgage.

Not only does this program fail to help the problem it sets out to fix, the secondary impact is that it artificially keeps the home market from clearing.  The price of a home remains artificially high.  And this prevents true recovery.

Let the market work.  Accept the pain and allow these homes that are over leveraged to go into foreclosure and the market will heal.  It always does.

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3 comments
  1. Henry said:

    Not everyone wants the housing mess to be fixed. Spend a Saturday morning at a county feed store, and you are likely to hear farmers joking about winning the current battle against urban sprawl. Some families in the township have lost their homes to foreclosure, but most of us that remain are benefiting from the flat housing market. Lower land values translates into lower property taxes.

    Hopefully this housing situation drags on for at least another ten years.

  2. Could you look at Greece a lot like this too? A lot of effort to avoid what may be an inevitable defautl??

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