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« How To Win Allies and Influence Governments | Main | Old New Deal »

Sen. Salazar on Mortgages

U.S. Senator Ken Salazar seems to believe that you can create wealth by moving it around, so it's only fitting that the current Democratic leadership would put him on the Finance Committee.

The Senator's office sent out a press release about the mortgage problem, and the legislation he's backing to "solve" the "crisis."

The housing crisis has hit Colorado especially hard. The rising number of foreclosures have had a direct impact on home values in the state; according the Case-Shiller home price index, housing prices in the Denver area are down 5 percent from their peak in August 2006, and further declines may be on the horizon. In 2007, Colorado ranked 5th in the nation in foreclosures and in Colorado in 2007 foreclosures were up 30 percent over 2006 and 140 percent over 2005. During September of last year, 1 in every 376 houses in Colorado was in some stage of foreclosure.

The same Case-Shiller Index shows prices down only 1.8% year-over-year, with inventory on the market among the lowest in the country, and barely any increase in inventory. It's almost impossible to interpret these numbers: 5th in foreclosure rate, or 5th in number of houses? Certainly more than doubling the number of foreclosures isn't good; but given that the number of houses owned has increased considerably since 2005, an increase of the foreclosure rate to less than 0.3% of homes from about 0.2% in 2005 is hardly cause for panic.

. The National Association of Home Builders estimates that, in 2002, 6.77% of Colorado’s Gross State Product (GSP) was directly accountable to home building, and another 12.71% was accountable to housing services, for a total housing contribution of 19.48% of GSP.

Let's stipulate that the NAHB has an incentive to pump that number up as high as possible. Let's also recall that from 2002 to 2003, according to the Bureau of Economic Analysis, construction fell from 6.33% of Colorado's GDP to 5.79%, yet there was little if any actual panic then. Given that the actual recession was over by late 2001, it's fair to characterize housing activity as dependent on broader credit markets, and that it's a trailing industry.

In fact, the problems in the credit markets may have started with subprime mortgages, but have since spread far beyond them. Given that, most of the proposed, "help" is worse than useless. It's closing the barn door after the horses have already hopped a freight train and are designing silks for the races at Aqueduct. Other bits constitute a shell game. And a few make some sense, but those are the ones that belie most Democratic rhetoric about taxes and business.

Increase pre-foreclosure counseling funds ($200 million) - This additional funding will help housing counselors continue their outreach to families at risk of foreclosure. These added funds should assist as many as 500,000 additional families connect with their mortgage servicer or lender to explore options that will keep them in their homes.

Probably a worthy endeavor. Certainly not the Federal government's job. And you can bet that the non-profit recipients of this "aid" will suddenly find themselves bound by all sorts of equal-protection rules that they had never considered. And doesn't $4000 per family seem like a lot of money? At a very generous $100/hour, that's a week's worth of work per family.

Allow Housing Finance Agencies (HFAs) to Issue Bonds for Refinancings (increase current cap by $10 billion) - This provision will allow housing finance agencies to use proceeds from mortgage revenue bonds to refinance subprime loans...

So they're going to refinance subprime loans with mortgage revenue bonds. But the underlying loan isn't a better risk just because the Federal government is refinancing it. If, as with most FHA loans, the Federal government is guaranteeing the loan, the family may get a better rate, and it may have a better chance of staying in the house. But FHA default rates are significantly higher than mortgages overall. There's no particular reason to think that this is much more than throwing good money after bad.

Change Bankruptcy Code to Allow Judge to Modify Mortgage of Debtor - This title could help more than 600,000 financially-troubled families keep their homes by allowing them to modify their mortgages in bankruptcy. It eliminates a provision of the bankruptcy law that prohibits modifications to mortgage loans on the debtor’s principal residence for homeowners who meet strict income and expense criteria. With this change, primary mortgages are treated the same as vacation homes and family farms.

Again, this is basically taking money from the lender and giving it to the borrower. Note that this isn't a renegotiation of the terms between the borrower and the lender. It's a condition imposed on the lender by a judge. The potential for socio-financial engineering here by activist bankruptcy judges should be apparent. And it keeps houses off the market, artificially supporting prices. If we are headed into a recession, or even a plod-along economy, it's only going to keep houses out of the hands of people who could otherwise afford them.

CDBG Money for Purchase and Rehab of Foreclosed Properties ($4 billion) - Homes that have been foreclosed and are sitting unoccupied on the market can sap neighboring homes of their value. This provision allows localities with the highest foreclosure numbers and rates access CDBG funds to use toward purchasing these properties, rehabilitate them if necessary and rent or re-sell them. Productive occupancy of foreclosed homes will help stimulate economic activity and help prevent further loss of home equity in struggling neighborhoods.

Why are these houses a better investment for municipalities than for auction bidders?

Net Operating Loss Carry Back from Finance Stimulus Package - For companies losing money in this economic downturn, this proposal extends a provision that allows corporations to apply (or “carry back”) their net operating losses to tax returns from prior years in which they were profitable, and receive any applicable tax refunds. Under current law, companies are allowed to carry their losses back only two years – this proposal would extend that period to five years for losses incurred in 2006, 2007, and 2008, effectively allowing companies to average out their good years and their bad years for tax purposes. This is particularly helpful for “boom-and-bust” industries such as the home construction industry.

This proposal actually makes some sense. It would be nice to see Democrats apply it to other cyclical industries. Oil and gas are classic boom-and-bust industries, and they've grown from 1% of Colorado's economy in 1999 to 5.5% in 2006. But the Senator never misses a chance to hobble their in-state development through regulation and EPA actions.

On the other hand, loss carry-forwards are usually intended to help startup companies and companies and rapidly expanding industries. Housing was never conceived of as a growth industry, and probably wouldn't have been without the financial innovation that made it possible. Tech companies didn't get this sort of help in 2001, and it's possible that this sort of tax break will encourage over-investment, and actually help produce the sort of bubbles we're working through now.

Simplified Disclosure on Mortgages Documents -This provision would amend the Truth-in-Lending Act and improve the loan disclosures given to homebuyers not only when they apply for a home purchase loan, but also when they refinance their home. The measure would require: (i) firm disclosure of the terms of the mortgage loan within 3 days of application (and not later than 7 days before closing); and (ii) the maximum loan payment be disclosed, not only at application, but also seven days before closing. Finally, this provision would clarify that lenders are subject to statutory damages for violations of Truth-in-Lending disclosure provisions and increase the damages for mortgage violations.

This provision also makes sense. A free market needs to be an informed market. If your maximum payment turns out to be several times your current income, maybe you ought to think about putting away a little more for a down payment and going conventional. Then, too, maybe the mortgage lender will look at that number, and stop putting people with $90,000 incomes into $500,000 homes.

So there you have it. One-and-a-half provisions that make sense. A lot of other money shifting economic risk

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