Housing Doom

1:27:42 No, might go wrong. - Allan Meltzer

Doom Transcripts: Index & Guide

Almost 19 months later, Doomers may enjoy putting some of these opinions up against what actually took place.

Housing Doom is pleased to present a complete unauthorized annotated transcript for the American Enterprise Institute’s April 28, 2008 event "What Lies Beyond the Credit Crunch? Part II".¹ The event site has a variety of resources including a summary and both an audio and a video of the proceedings. There is an official transcript, but the link to it does not seem to be currently working.

Table of Contents

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1. 0:00:00 - Peter Wallison Intro
2. 0:07:43 - Charles Calomiris presentation
3. 0:24:33 - Kevin Hassett presentation
4. 0:36:53 - (interruption for computer problems)
5. 0:39:20 - Desmond Lachman presentation
6. 0:55:22 - John Makin presentation
7. 1:15:02 - Allan Metzer presentation
8. 1:36:04 - Vincent Reinhart presentation
9. 1:55:20 - Panel discussion
   1. 1:55:36 - Calomiris discussion
   2. 2:00:18 - Hassett discussion
   3. 2:01:55 - Lachman discussion
   4. 2:03:41 - Makin discussion
   5. 2:06:49 - Meltzer discussion
   6. 2:10:30 - Reinhart discussion
10. 2:12:34 - Q&A
    1. 2:12:59 - Jeff Wrase question
       1. 2:13:28 - Makin response
       2. 2:13:39 - Wallison digression
          • 2:14:33 - Calomiris response
          • 2:15:47 - Lachman response
       3. 2:16:26 - Lachman response
       4. 2:17:06 - Makin (with Wallison) response
    2. 2:18:34 - Bert Ely question
       1. 2:19:21 - Calomiris response
    3. 2:20:38 - Pieter Bottelier question
       1. 2:21:11 - Meltzer response
       2. 2:23:52 - Makin response
    4. 2:25:00 - Steve Entin question
       1. 2:26:05 - Meltzer reply
       2. 2:27:39 - Lachman reply
    5. 2:28:18 Wallison brief wrap-up
11. 2:28:54 (end)
    • Notes and References

Peter Wallison: [0:00:00] OK, I think we’ll get started. Everyone take his or her seat. I want to welcome you all on a pretty raining and nasty day. I’m delighted that all of you came out. This should be one of the more interesting conferences of the year, and I can understand why you’re all here.

This is the 2nd conference on exactly the same subject. The last time these esteemed AEI economists got together to discuss the future of the credit crunch and the US economy was in December of 2007. At that conference there was sharp disagreement at to whether the US, as a result of that housing meltdown, the credit crunch and other factors was headed for a deep recession, a shallow recession, or merely a slowdown for a quarter or two.

The data presented at that conference showed a serious breakdown in trading in the credit markets, and major losses in housing values. These factors would suggest a serious recession. But at that point there was no clear evidence of a recession, during the 4th quarter of 2007, at least. The Dow, which opened at 13,339 that morning, was down from its high of 14,000, but certainly was not signaling a serious recession.

All the participants in the December conference thought that their predictions would be proved correct when several months of additional data was available, so we scheduled this conference to see [laughs] whether in fact their positions have changed, and whether things have become any clearer to our AEI economists.

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In the ongoing debate about whether one should walk away from an underwater mortgage or not, one University of Arizona professor speaks out strongly in favor of taking a hike. According to Brent T. White, an associate professor of law at the University of Arizona:

A failure to grasp the true economics of the situation is holding back many Americans whose home values have dropped far below the amount they owe and who would be better off renting, Mr. White says. Fear, shame and guilt also are preventing rational decisions, he believes. And, he says, those “emotional constraints” are encouraged by politicians and bankers, who ruthlessly and amorally follow their own economic interests while telling Joe Soggy Homeowner he has a moral duty to pay his debt so long as he possibly can.

I was sent the above article by Doom friend M.R., and highly recommend reading the comments section.  There are a number of intelligent comments taking up both sides of the walking debate.  The article discusses White’s paper Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.

White says that he is not amazed by the number of folks walking away from their mortgage- he’s amazed by the number that don’t.  He repeatedly refers to walkers as "rational homeowners".  We often hear how you might as well hang on and sit tight- markets are cyclical and values will come back in a few years.  Besides, you don’t want a black mark on your credit rating.  Here’s why White refers to walkers as "rational" though:

White gives the hypothetical situation of "Sam and Chris".  Sam and Chris purchased a typical home in Salinas, CA for $585K in January 2006.  They have a monthly payment of $4,300/mo., slightly less than 31% of their income.  The couple just break even every month.

Unfortunately for Sam and Chris, the housing market began to collapse in 2007. Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.

Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity – assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.

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I posted yesterday on the Wall Street Journal article Report Sheds Light on Why Homeowners Walk Away.  A couple of commenters on the WSJ article said why they were walking away from their mortgage, and I thought their comments were interesting enough to repeat.  The first walker says that as a good borrower he is unable to have his loan modified, the second blames bank policies:

The banks (my lender is CITI) are unwilling to modify mortgages for the people able to pay. I suspect if the people underwater, but with money and good credit - you know, responsible people - were able to secure a more reasonable APR that made their monthly payments less painful, they’d more easily tolerate paying on that over-valued house.

I have no outstanding debt other than my mortgage. No credit debt, no student loan, no car note - nothing. I can afford my house. But the 6.9 APR irks me. I’ve tried for months to get a MODIFIED better rate - something in the mid 4s. But because of no hardship and being underwater, the banks refuse. After 10 months of trying for a better rate I HAVE NO QUALMS walking away in a non-recourse state. For what - keeping an 800 FICO score? Screw that!

The wife’s credit and our cash will secure the new home - a better house, larger, with a better APR - and the bank can bite me. H***, when our old house goes up for auction maybe I’ll convince my brother to buy it for half its current cost. If banks like CITI, who egregiously borrowed tax payer money, are unwilling to help those same taxpayers who are their customers they deserve to get screwed- especially by people in non-recourse states.

Here’s number two:

I’m walking away because of the absurd policy of the bank. Let me explain:

Because of the economy, my income took a hit and I now make about two thirds less than what was the norm a few years ago. After exhausting a large safety net of savings, I declared bankruptcy. I have NEVER been late on my mortgage, it was always the first thing I paid but the bank now refuses to report my payment history to the credit bureaus after my bankruptcy. They cite it is their prerogative to do so, but if I was to reaffirm the debt, they would be happy to report my timely payments to the credit bureau, which would help me, rebuild my credit.

So I call an appraiser I know to get a feel as to what my home is worth and I find out that I am $160K upside down. So I basically can keep my home but not get any credit for never being late in payments or for continuing to be an on time customer, or I can walk away since after all the bankruptcy did discharge the debt. Also, after looking at a few rental homes, I can rent the same home for half what my mortgage payment is.

So let’s see, I can put a roof over my head for half the price monthly, walk away from $160K of negative equity, and the bank thinks they are doing me a favor by offering me a deal to start reporting to the bureaus in exchange for reaffirming the debt. Yea right!

The bank can keep the house and the loan is held by Fannie so they can sustain the loss. I will restore my credit by other methods. By the way, one of my cars was financed and I was also upside down in that and they tried the same tactic. I gave them back the car.

Whatever excuses these walkers might have, I can’t help but get the feeling that the real problem is they can get a better deal elsewhere.  Number one says The wife’s credit and our cash will secure the new home - a better house, larger, with a better APR… Number two says I can put a roof over my head for half the price monthly, [and] walk away from $160K of negative equity.

There was a great quote in John’s post today by Vincent Reinhart.  He said:

I think the American Dream is not homeownership, it’s getting rich quick. And if you can make levered bets on an asset class, government will encourage you to do so, you’ll do it, when you think that you’ll get double digit returns.

I wonder how many people would have been willing to pay the bubble prices that they did if they hadn’t expected not just a place to live, but a healthy ROI as well.  When the American Dream of easy money disappears, the American Dream of homeownership can quickly loose its appeal.

How’s this for shocking news?  The Wall Street Journal has discovered that underwater borrowers are more likely to walk in non-recourse states: [Thanks L!]

A new study shows that mortgage defaults are higher in states where banks can’t pursue a defaulted borrowers’ assets in court, suggesting that such non-recourse states may have greater numbers of borrowers who default “strategically” by dumping homes that are worth far less than what they owe even though they might be able to afford their current mortgage payments.

A borrower with negative equity is 20% more likely to default in a non-recourse state than in a state that allows recourse, according to this paper from the Federal Reserve Bank of Richmond. The research follows another paper that suggested that “strategic” defaults, where borrowers stop paying their mortgage because they owe far more than their home is now worth, may account for as many as one in four defaults.

The research, by Andra Ghent of Baruch College and Marianna Kudlyak of the Richmond Fed, raises the possibility that strategic defaults may be more of a problem than believed by some analysts and economists. The authors conclude that “a non-negligible portion of U.S. mortgage default is in fact strategic.” It’s not that borrowers can’t pay—they just decide it’s no long worth it.

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Five months ago, we published an article on Arizona’s anti-deficiency statute to explain our state’s law on the potential liability a homeowner may face if their home is sold for less than they owe.
…

As quickly as it passed, Senator Pierce asked that his own bill be repealed. Did anyone read the bill?

There is another bill at the governor’s office (HB 2008) awaiting signature to repeal the original bill and add some protection for people who are renting homes that go into foreclosure. 8/25 Payson Roundup¹

Thanks to Doomer AZSALUKI for alerting us to this story.  He adds, "I just saw that they did repeal that bill passed back in july….the one that would allow banks to go after borrowers, even on their residence, for the difference between the loan and the sale amount on a foreclosure."

I didn’t immediately see anything to nail down the confirmation beyond this cryptic note² from Thursday.

PENDING
…

• GENERAL GOVERNMENT (HB2008): Scraps plan to build $7.5 million emergency operations center. Reduce deposit to Military Installation Fund by $2.8 million. Eliminates $25 million advance appropriation for 21st Century Fund. Allows Commerce Department to use money from lottery, bond and economic development fund for operations. Requires lawful proof of presence in the United States to receive state and local benefits, with some exceptions. Allows counties to furlough workers for budget reasons without appeals. With exceptions, prohibits agencies from adopting rules that hike costs for other agencies, local governments or citizens. Puts two-year cap on local impact fees and prohibits adoption of new ones.

Well, it’s obviously an Omnibus Bill …

I’ll try e-mailing Sen. Steve Pierce (not Russell Pearce, hopefully I’ve got the right guy now) shortly, but in the meanwhile, any other Doomers out there have a link or further confirmation that AZ recourse is dead?

LATER: Oh, well, "two heads are better than one, even if one’s a sheep’s head".  AZSALUKI’s finally got through to me the message that the AZ Republic’s Catherine Reagor really did definitively report³ that recourse mortgages died yesterday (see below — comment stream):

Foreclosure law

Some lenders held off on foreclosures during August to see if a controversial new law that would have allowed them to go after some borrowers’ assets survived the current Legislative session.

Arizona legislation passed in July would have made some homeowners in foreclosure liable for the difference between their mortgage and the resale price of the house starting Oct. 1. In the current housing market, the difference is generally more than $100,000 on the typical Valley home.

Real-estate lobbyists fought the legislation, and it was repealed Friday. Real-estate attorneys say there were lenders waiting to foreclose on properties until October, in case the law went into affect.

…

UPDATE 9/10: Thanks go to Sen. Pierce’s office for this definitive word …

————————————–

From: Steve Pierce
Date: Thu, Sep 10, 2009 at 12:12 PM
Subject: RE: Clarification Requested — HB2008: Arizona May Have Backed Off Recourse Mortgages
To: John M <john@housingdoom.com>

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But the impact of the change is much larger. It makes some homeowners in foreclosure liable for the difference between their mortgage and what their lender can recoup from reselling the house. In the current housing market, the difference is generally more than $100,000 on the typical Valley foreclosure. [1]

Twist and I have made something like a career out of harassing the Arizona real estate industry and the Arizona Republic’s Catherine Reagor in particular, but I don’t see too much separation between us on this one. [Update 7/27: however, see comment #4 below -- thanks again to Ms Reagor for breaking a story that was threatening to fall through the cracks]

Doom readers will know my opinion that American lawmakers shouldn’t touch recourse mortgages with a barge pole, but it looks like the Arizona Legislature wants to dive right in.

Guys, they tried this in Old Testament times.  It didn’t work then, and it won’t work now.

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Here’s thoughts on Danish-style mortgages that expand on what I wrote in note [7] to Saturday’s AEI Subprime Danish: (nearly) Complete Annotated Transcript. I originally drafted a version of the following for some private correspondence, but on reflection thought I’d stretch a point on my "retirement" from active comment to share it with Doomers generally.

In the March 26th seminar, George Soros associate Alan Boyce described (from appoximately minute :06 to :36 in the transcript) his ongoing efforts to introduce Danish mortgage practice into Mexico, and outlined how it might be applied to the United States. Discussants describe with relish (e.g. around 1:36) how under the Danish system defaulting homeowners can have a deficiency judgment on their failed mortgage pursue them for the rest of their lives. One Danish bank president is described (around 1:31) as presently pursuing borrowers who defaulted in the Danish housing bust of 1991.

Strategies for implementing this in the US are also discussed (e.g. around :43, 1:36). The panelists think State level mortgage oversight would never allow for recourse mortgages, but that in the current crisis, federal standards could be forced through. Obviously a revolution in how the US Constitution works as profound as the currents that preceded the events of 1860-4.

The World Bank’s Olivier Hassler speaks (about 1:05 - 1:16) on his experience introducing Danish mortgage practice into Chile, and Boyce describes how his Danish / Soros joint venture is working to penetrate a variety of emerging-economy nations with the idea (around 1:49).

To sum up, it would seem that a lot of banks are looking at intensified control and exploitation of their middle-class customers in the US and beyond as a way to recover some of their recent losses. I find this very disturbing.

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0:43:04 … If we’re going to offer this new advantage to the homeowner, and allow him to borrow at today’s current market rates, but only because the government’s going to guarantee it, we should have full recourse to every borrower. - Alan Boyce

Doom Transcripts: Index & Guide

Housing Doom is pleased present an almost¹² complete unauthorized annotated transcript for the American Enterprise Institute’s disturbing⁷ March 26, 2009 event "Can Elements of the Danish Mortgage System Fix Mortgage Securitization in the United States?"¹ The event site has a variety of resources including a summary and both an audio and a video of the proceedings. There is as yet no official transcript.

UPDATE 6/24 2009: I’ve added a short summary and some comment here.

Table of Contents

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1. 0:00:00 Peter Wallison intro
2. 0:07:20 Alan Boyce presentation
   1. 0:46:08 Wallison & Boyce dialog
3. 0:48:18 Bert Ely discussion
   1. 0:59:23 Boyce response
4. 1:04:31 Olivier Hassler discussion
   1. 1:16:30 Boyce response
5. 1:19:50 Alex Pollock discussion
   1. 1:31:30 Boyce response
6. 1:33:52 Panel discussion
   1. 1:33:54 Wallison & Boyce dialog
   2. 1:40:01 Ely question
      1. 1:41:22 Boyce response
   3. 1:42:20 Pollock question
      1. 1:42:53 Boyce response
7. 1:45:22 Q&A
   1. 1:45:43 Brian Brooks question
      1. 1:47:23 Boyce response
   2. 1:49:08 Bertrand Renaud question
      1. 1:52:44 Boyce response
      2. 1:54:06 Ely response
   3. 1:54:56 Steve Adler question
      1. 1:55:47 Wallison response & brief wrap-up
8. 1:56:14 (end)
   • Notes and References

Peter Wallison: [0:00:00] We have a really interesting program today, and one [crosstalk] … That’s right. I’m sure you’re going to "tax" us up here.

We really have an interesting program today, and let me tell you how we’re going to work this. We’ll have a presentation by Alan Boyce about his plan, and then we’ll have each of the people on the panel here comment, and then some crosstalk in the panel, and then some questions from the audience.

So if things come up in the course of Alan’s presentation or elsewhere, please make a note so you’re able to ask some questions when the time comes.

I’ll start with a small introduction and then … I’ll introduce Alan, and then the members of the panel before they get started with their commentary.

Although members of Congress and the Obama Administration have sweeping ideas for how to regulate the US economy in the future, few of them, apparently have thought very deeply about how we finance mortgages. Yet at the root of the country’s current financial crisis is a dysfunctional mortgage system.

The central actors in that system are two bankrupt companies, Fannie and Freddie. And they are likely cost taxpayers $400 billion by the time all their losses are toted up, and their conservatorship brought to an end. Their lack of adequate regulation and their domination of housing finance were, more than any other factor, responsible for the financial crisis we now confront.

In light of this, one would think that, rather than planning to extend regulation to the farthest reaches of the financial system — regulation, incidentally, that has not worked, as we can see particularly well with the banking industry — policymakers would spend a little time thinking about how to reform a mortgage finance system that has obviously got major problems.

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1:33:27 Now as Chris was about to say, the regulators are doing the opposite. They’re stopping the creation of new banks, because they want to force your capital to solve their problem of the old banks. That’s exactly wrong in my view, and there are a couple of interesting historical examples, which I won’t go into, but where the United States created whole new systems of banks in times of crisis. And that’s what we ought to be doing now. - Alex Pollock

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a complete unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months."¹ The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

Table of Contents

[link navigation works best when full article displayed]

1. 0:00:00 Pollock intro (original version)
2. 0:10:18 Lachman presentation (original version)
3. 0:24:33 Zimmerman presentation (original version)
4. 0:42:44 Whalen presentation (original version)
5. 1:00:16 Makin presentation (original version)
6. 1:15:34 Panel discussion (original version)
   1. 1:15:48 Pollock intro
   2. 1:20:49 Whalen question
      1. 1:21:23 Lachman response
      2. 1:24:26 Makin response
   3. 1:26:35 Whalen response
7. 1:27:17 Q&A (original version)
   1. 1:27:36 Bert Ely question
      1. 1:28:36 Whalen / Pollock response
   2. 1:30:05 Raghubir Goyal question
      1. 1:30:33 Makin response
      2. 1:32:30 Pollock response
      3. 1:34:05 Zimmerman response
      4. 1:35:05 Whalen response
   3. 1:35:35 Jonathan Horgan question
      1. 1:36:12 Zimmerman response
      2. 1:37:41 Lachman response
      3. 1:38:45 Pollock response
   4. 1:39:38 John Serrapere question
      1. 1:41:03 Whalen response
      2. 1:41:41 Lachman response
   5. 1:43:43 Mark Lazerson question
      1. 1:43:59 Makin response
      2. 1:47:01 Lachman response
   6. 1:47:47 Cha Chen[ph] question
      1. 1:48:30 Whalen response
      2. 1:49:17 Makin response
   7. 1:50:09 Nick Smyth question
      1. 1:51:27 Zimmerman response
      2. 1:52:57 Whalen response
   8. 1:54:04 Bob Long question
      1. 1:54:23 Whalen response
   9. 1:55:26 Steven Lee question
      1. 1:56:26 Makin response
      2. 1:56:58 Whalen response
      3. 1:57:33 Zimmerman response
      4. 1:57:46 Lachman response
   10. 1:58:01 Pollock brief wrap-up
8. 1:58:32 (end)
   • Notes and References

[0:00:00] Alex Pollock: Welcome ladies and gentlemen to our conference on the deflating bubble part V. The subtitle "Forecast and Policy Recommendations for the Next 6 Months."

We have an outstanding panel that I’m sure you will find most interesting to listen to. But before that I want to wish you all a happy Saint Patrick’s Day, and it’s being Saint Patrick’s Day, we’re going to start with some Irish music.

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… And the only point I’d make is that in Europe, you’ve got banks in Europe have loans, something like $1.5 trillion to Eastern Europe. If you don’t solve that problem, you’re just going to have another subprime sort of problem in the global banking system, which is going to be the implosion of East Europe. … - Desmond Lachman

Housing Doom is pleased to present the seventh and final installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the Q&A session. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

back to AEI Subprime V transcript links

PREVIOUS: Panel Discussion

Alex Pollock [1:26:56]: … May I remind you you need to wait for the microphone. Tell us your name and affiliation please, and then ask your question. And we’ll go first to Bert, because the … look at this, the … Karen is right there with the microphone.

Bert Ely: Because she knew I’d ask the first question. Bert Ely, Banking consultant.

This a question, I guess for the entire panel, maybe primarily for Chris and John. We talk about dealing with big institutions, shutting them down. But these are huge complex financial institutions — 10s of thousands, several 100s of thousand employees, … [mic off, several seconds of dead air] … FDIC is ….

Chris Whalen: … going back to my …

Bert Ely: … if I could just add — in doing so without committing economic arson. I mean I realize that we kind of just … shut this thing down …

Chris Whalen: I know … you’re making Larry’s [refers Obama advisor Larry Summers?] …

Alex Pollock: Let — this long question be finished, and then we’ll get your answer.

Bert Ely: … but doing it in a way that minimizes damage to the economy and to the taxpayer.

Chris Whalen: Bert, look. Imagine if criminals, unbeknownst to you, secretly hired a dirty lawyer to put a lien on your house. And then a whole bunch of other people came, and they put a lien on your house, too. So one morning you wake up, and there are 10 collateral liens on your house that have been registered and validated by the court, and they say, "Oh, Bert, you can’t blow these things up, you do that and the whole community’s going to collapse. I’m sorry, you’ve just got to subsidize this."

That’s what the over-the-counter derivatives community is saying to the rest of us. "Oh me, oh my! You can’t do this, you can’t pull the plug. Bad things are going to happen." Well I put it the other way. If we don’t put AIG into receivership and pull the plug on the credit default swaps market for good, which is exactly what that means, then we are in big trouble.

We don’t go back if we make this decision.

Alex Pollock: You don’t mean pull the plug as a metaphor, you mean retrade these contracts.

Chris Whalen: … I mean …

Alex Pollock: … give people a haircut on contracts! …

Chris Whalen: … I mean give it to the Trustee in the Southern District of New York …

Alex Pollock: … and that’s what happens …

Chris Whalen: … and just like Lehman Brothers, exactly. The Lehman liquidation is your model.

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