Sat, 04 Oct 2008

A Failure to Plan for Failures

As the nation continues to reel from the ongoing financial crisis, the boom and bust that we're suffering, it's worth stopping to ask how it is that we got to this place.

Everyone knows that foreclosures are driving the economic crisis, but does everyone know that people falling behind in their payments isn't the big story? According to HUD statistics, in 1986, about 5.5% of all mortgages were in arrears, and about one in 21 of those went into foreclosure. In the first quarter of this year, 6.35% of all mortgages were behind in their payments, but foreclosure proceedings had begun on one in six of those. In the subprime markets, the delinquency rates are much higher (22% for variable rate mortgages), but the foreclosure rates are higher still (almost one in three). As late as 2002, the delinquency rates for this kind of mortgage were almost 15%, but only about one-sixth of the delinquent loans began foreclosures.

In other words, these are tough economic times, but at the ground level, we're not so far from other economic slowdowns. What's different now is that foreclosure is a far more likely outcome of falling behind in your mortgage payments than it has been at any time since HUD started tracking these numbers in 1986.

Why? Well, one reason might be that so many loans are held by speculators. National statistics from late 2007 (presented to Congress in January by the Mortgage Bankers Association) show that as many as a fifth of foreclosures are from investors -- people who have bought property not for its rental income, but simply to resell it for a profit.

When the mortgage broker doesn't require much of a down payment, and borrowing costs are low, then anyone with persistence can make money borrowing and investing. The stakes are low and the profits high. But with the stakes so low, there is little downside to abandoning a bad buy without trying to work out terms. Even in the high-flying and now-crashing world of high finance, this has been well-known for decades, even if the rules became easy to evade in recent years.

Practically speaking, the effect of the boom in housing speculation was to annihilate what little affordable housing we have in this state. Flipping properties is not perfectly compatible with having tenants (and rents didn't keep up with sale prices anyway) so lots of housing was withdrawn from the rental market. And because the poor neighborhoods in our state are where investors could find the best bargains, those are the places now suffering most from the continuing crunch in affordable housing. (Housing Works, an affordable housing advocacy group, just released their 2008 fact book, documenting how hard it is for a couple earning $74,000 a year to find affordable housing in Rhode Island.)

But even when you discount foreclosures to investors, the foreclosure rate is high. Why? Loans sold to investors as part of mortgage-backed bonds separated the lender and borrower by thousands of miles. When the borrower gets in trouble, there's no one to appeal to for a workout. Distant companies may have all the incentive in the world to work something out, but without a local contact people can talk to, they effectively have no ability to do anything but foreclose. Democrats in Washington have been calling for a year for action to help borrowers get workout terms where it's possible, but they've received nothing but a deaf ear until last week. Seems now like it would have been a good idea, doesn't it?

But this isn't all. Lots of households are, in fact, in trouble with their mortgages, but why? If you said that they took on mortgages they couldn't afford, you'd obviously be right, but perhaps only partly right. And what do you know? The HUD statistics show an increase in foreclosures in 2006 -- *preceding* the rise in delinquency -- but just after the Republican Congress passed bankruptcy "reform." The reform bill made it harder to go bankrupt, so that route out of financial trouble was shut down for millions of people, increasing the likelihood that people with troubled finances might just accept the trouble and walk away. The bill was pushed by the credit-card industry -- Barack Obama voted no and is on record wanting to overturn it, John McCain voted yes, even voting against an amedment to exempt bankruptcies due to medical bills. (And yes, Joe Biden voted for it.)

We're in a slowdown that began like others, but the legal and banking deck has been stacked against individual homeowners. That's what makes me want to throw my calculator at people who say this whole crisis is to be blamed on irresponsible borrowers. There's little or no evidence they've been more irresponsible than in the past, but the screws have been so tightened that more of them fail.

A hallmark of horrible public policy is a lack of concern for the failures. You see this all the time: we should close failing schools, flunk failing students, dump people off welfare who can't get a job, deny health care to immigrants (even legal immigrants). All these tough-talking policies are proposed by people who apparently imagine that the people, schools, whatever, will simply disappear. Proponents routinely deride those of us who want to accommodate the failures as softies. But here's news: they don't disappear. The people without health care overcrowd our emergency rooms, the failing students become unemployable adults, and apparently failed debtors can bring down our financial system. (Abetted, of course, by the geniuses of Wall Street.) A little more concern for the failures isn't evidence of a soft heart, but of practical minds.

15:06 - 04 Oct 2008 [/y8/cols] link

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