May 31, 2012 9:55 AM By Los Angeles Times
Here's a great opinion piece!
Key Quotes:
After the bubble burst, Americans couldn’t keep paying all of that debt and support the economy with retail spending and investments in businesses. They still can’t.
Yet no mainstream politician, Democrat or Republican, embraced the idea of forcing banks and investors to admit reality on their bad loans.
Why? Public opinion was rabidly against it. A commenter to a January 2009 New York Times blog summed up the zeitgeist in asserting that “people who (bought) more house than they can afford … ARE idiots.”
The moral-hazard argument against principal write-downs was always faulty. During the housing boom, the financial and real estate industries and popular culture — TV programs such as “Flip This House” — encouraged Americans to buy a home as a speculative investment.
But when you lose money on an investment, it’s perfectly rational -- and not immoral -- to cut your losses.
Lenders don’t reduce the amount of money they’re owed because they’re nice. They do it because it’s economical. They don’t want to be stuck managing an asset that’s lost value.
Moreover, the more pressing problem is not that mortgage interest rates may be too high someday but that they are too low right now. The government has intervened massively, reducing rates to below 4%. President Obama and Federal Reserve Chairman Ben Bernanke encourage low rates because they want people to flock back to the housing market -- creating artificial demand and keeping house prices from falling further.
That would create a new generation of borrowers who will find themselves underwater in coming years when the government stops propping up prices. That’s moral hazard -- using unwitting new people to bail out the old.
The best way to avoid that risk would be to allow housing prices to find their bottom now. Such an effort is helped by mortgage-principal reductions, as they reduce uncertainty over future foreclosures.
Read the full article at Mortgage do-over time.
A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga
Here's a great opinion piece!
Key Quotes:
After the bubble burst, Americans couldn’t keep paying all of that debt and support the economy with retail spending and investments in businesses. They still can’t.
Yet no mainstream politician, Democrat or Republican, embraced the idea of forcing banks and investors to admit reality on their bad loans.
Why? Public opinion was rabidly against it. A commenter to a January 2009 New York Times blog summed up the zeitgeist in asserting that “people who (bought) more house than they can afford … ARE idiots.”
The moral-hazard argument against principal write-downs was always faulty. During the housing boom, the financial and real estate industries and popular culture — TV programs such as “Flip This House” — encouraged Americans to buy a home as a speculative investment.
But when you lose money on an investment, it’s perfectly rational -- and not immoral -- to cut your losses.
Lenders don’t reduce the amount of money they’re owed because they’re nice. They do it because it’s economical. They don’t want to be stuck managing an asset that’s lost value.
Moreover, the more pressing problem is not that mortgage interest rates may be too high someday but that they are too low right now. The government has intervened massively, reducing rates to below 4%. President Obama and Federal Reserve Chairman Ben Bernanke encourage low rates because they want people to flock back to the housing market -- creating artificial demand and keeping house prices from falling further.
That would create a new generation of borrowers who will find themselves underwater in coming years when the government stops propping up prices. That’s moral hazard -- using unwitting new people to bail out the old.
The best way to avoid that risk would be to allow housing prices to find their bottom now. Such an effort is helped by mortgage-principal reductions, as they reduce uncertainty over future foreclosures.
Read the full article at Mortgage do-over time.
A. Joseph Marshall
Coldwell Banker Commercial
Commercial Real Estate Advisor
Savannah, Ga
