All those supposedly irresponsible consumers who “recklessly” borrowed too much money to buy homes they couldn’t afford are bad enough. But now, we’re told, people who can afford to make their mortgage payments are walking away, simply because they now owe more than their homes, located in depressed real estate markets, are worth.
When former baseball star Jose Conseco abandoned his $2.5 million mansion and moved into a less costly dwelling, the media reported the event as evidence of a widespread and growing trend. Pundits decried the trend as more evidence that the nation’s moral fiber is decaying; analysts have even coined a new term to describe it – “jingle mail” – defined as the sound of the house keys that walk-away borrowers return to their lenders. There’s only one problem with this disturbing trend – it appears to be more apocryphal than real.
Freddie Mac estimates that a scant 0.14 percent of the delinquencies in its portfolio involve borrowers who are “ruthlessly defaulting” on loans they could afford to repay. That may describe the behavior of speculators who find themselves upside down on properties they’ve acquired, but analysts say it is unlikely to be true of borrowers who purchased homes in which they live.
“Investors are going to default right away because they have negative equity,” Robert Van Order, an adjunct professor of finance at the University of Michigan and former chief economist for Freddie Mac, told the Wall Street Journal. But most homeowners will default only when “there is an intersection of two events – they don’t have equity in their houses and they run into trouble.” Today, as in the past, most economists agree, it is the loss of income, a divorce, illness or some other financial crisis that pushes homeowners into foreclosure, not a financial calculation suggesting that they would be better off walking away.
“You’ll look at the Jose Canseco issue and say that it’s a walkaway, but he is probably the only person on his block that did that,” Robert Padgett, director of loss mitigation for Freddie Mac, told WSJ. “These types of stories garner a lot of attention,” he acknowledged, but they remain “isolated occurrences.”
BENEFITS AND COSTS EXAGGERATED
The good news is, the housing rescue package the House of Representatives approved recently won’t cost nearly as much have critics have predicted – only about $1.7 billion, according to the Congressional Budget Office (CBO). The bad news : The plan will help only about 325,000 struggling borrowers avoid foreclosure, according to the CBO’s estimates, far fewer than the 1 million homeowners the bill’s supporters say the assistance package could help and nowhere near the 2 million homeowners who are expected to face foreclosure over the next two years.
The legislation, crafted by Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, would allocate $300 billion for the FHA to refinance underwater adjustable rate loans with lower-rate fixed-rate instruments. As part of that deal, lenders would have to reduce the outstanding balance to create loans the borrowers could afford. But the CBO estimates that the FHA will tap less than 30 percent of that $300 billion, because many borrowers who need the assistance won’t be eligible for it, barred by obstacles that include:
Second mortgages held by entities that won’t approve the refinancing
Financial limitations that make it impossible for them to afford the payments on a restructured loan.
Program costs – including required FHA insurance premiums – they can’t afford. The bill’s supporters say the CBO’s estimates are overly conservative, but even if the projections are accurate, Steve Adamske, press secretary for the Financial Services Committee, told CNNMoney, more than 300,000 borrowers saved from foreclosure “is an economically significant number.”
Although the House approved the legislation by a significant margin – with support from more than 30 Republicans – supporters and critics continue to spar over both the projected costs and the underlying philosophy: Whether the plan helps people who need assistance (and prevents broader damage to the economy) or “bails out” lenders and home buyers, who should suffer the consequences of the mistakes they made.
President Bush, in the latter category, has threatened to veto the measure if it, or anything like it, is ultimately approved by the House and Senate. The legislation“would force the FHA and taxpayers to take on excessive risk and jeopardize FHA’s financial solvency,” a White House statement said. “The $1.7 billion price tag would be passed on to taxpayers who are not participating in this new FHA program,” the statement continued, and that attempt “to shift costs to taxpayers constitutes a bailout.”
LIVE LONG AND WORK LONGER!
Baby boomers, who are said to be far behind in retirement planning, have a plan for their retirement after all — they’re going to delay it. Recent studies underscore the good news and the bad news for aging boomers: They’re in better health, more affluent, and likely to live longer after retiring than prior generations. But they are also less likely to be married and have fewer children, which means they will have less support available to them as they age.
Analysts say that is one reason the trend toward earlier retirement has begun to reverse direction. A recent Associated Press article reported that 19 percent of men over the age of 65 are still in the labor force. That’s up from less than 16 percent in the 1990s and likely to continue climbing, analysts predict. A new report published by the Taskforce on the Aging of the American Workforce predicts that the number of seniors working will increase by 74 percent by 2014. “Some will continue working by choice,” the AP story notes, “[but] others will have to stay on the job as fewer companies offer health insurance to retirees and an alarming number of private pensions fail.” Longer life expectancies, inflation, and rising medical costs will also push workers to remain on-the-job well past the “standard” retirement age, the task force report notes.
Senators Herb Kohl (D-WI) and Gordon Smith (R-OR), chairman and ranking member, respectively of the U.S. Senate Special Committee on Aging, spearheaded the creation of the task force, to deal with the related challenges of a shrinking population of younger workers and an increasing number of older workers who want or need to remain in the work force.
Labor force growth is expected to slow to about 20 percent of the current rate, Sen. Smith said in a press statement announcing the publication of the task force report. “The goal of the task force,” he explained, “is to prevent this dramatic decline through strategies that encourage extended work life and remove barriers that hinder seniors from working longer.”
THRIFT IS IN
Greed may have been “good” in the 1980s, but thrift is in today. A weak economy, the subprime debacle, declining home values and rising gas prices have combined to force many consumers to scale back their expenditures and rethink their reliance on debt. That’s good news for the economists who have long been warning about the dangers of the nation’s negative savings rate. “The long collapse in the United Sates savings rate is over,” Ethan Harris, chief United States economist for Lehman Brothers, told the New York Times recently. “People are going to start saving the old-fashioned way, rather than letting the stock market and risking home values do it for them.”
Some analysts predict this new (for many consumers) attitude will last only until the economy and the housing market rebound. But a newly formed coalition of consumer advocacy organizations – the Commission on Thrift – wants to make the change in financial behavior permanent, combating the nation’s “debt culture” with a renewed commitment to saving and living within the boundaries created by current income.
“In recent decades, new predatory lending institutions have moved into the malls and main streets of America,” said David Blankenhorn, president of the Institute for American Values – a charter member of the new coalition. These “anti-thrift” institutions “promise ‘fast cash’ and ‘free money’ at usurious interest rates and trap may Americans in a cycle of debt,” Blankenhorn asserted, and the public sector, he said, has an anti-thrift institution of its own – “the state-owned and operated lottery.” Other members of the coalition include the Consumer Federation of America, Demos, the Institute for Advanced Studies in Culture, and the National Federation of Community Development Credit Unions.
In a 68-page report, the coalition recommends a number of steps to create a “pro-thrift” environment that stimulates savings and wealth accumulation. Among the suggestions:
- Promote the use of credit unions. And community development financial institutions that provide low-interest loans and savings vehicles, as alternatives to payday lenders.
- Develop a public education campaign encouraging thrift, modeled on the campaigns to reduce smoking and drunk driving.
- “Repurpose” the state lottery to include a savings feature.
- Restore usury rate capes on small loans.
- Establish matched savings accounts for children.
- Expand and improve school savings programs.
OBJECTIONABLE BUT NOT ILLEGAL
Judges in several states have halted foreclosure proceedings, citing procedural flaws or abusive practices by the lenders or servicers involved. But a New York judge decided to let one recent foreclosure proceed, despite evidence that the borrower could not afford the loan and should not have received it in the first place.
In a written decision (Alliance v. Dobkin), Nassau County Justice Daniel Palmieri said he was “not without sympathy” for the borrower, Jo-Anne Dobkin, and others like her, who can’t meet their mortgage obligations. But neither the state law barring predatory practices, nor the federal Home Ownership Equity Protection Act, applies to Dobkin’s loan, because it was not a “high-priced” mortgage covered by those statutes. Finding fault on both sides, Judge Dobkin said the lender (Alliance Mortgage Banking Company should never have offered the loans and Dobkin should never have accepted them. “But absent the violation of some statute or other relevant legal principle,” the judge wrote, “the law does not permit judges to simply ignore payment obligations voluntarily taken on by mortgagors, even if it should have been evident to both lender and borrower that the loan was likely beyond the borrower’s ability to repay.” The applicable laws, he said, do not allow borrowers “to escape their legal obligations simply because they have borrowed too much.”
