Thursday, February 5, 2009

How Mortgage Jubilee Works

Take home values right now. Values are back at pre-bubble prices, the same level as they were in early 2004. A rational correction would end here. But that is not possible in our current market. Half of all borrowers are upsidedown on their mortgages, meaning they can't sell their homes to buy a new one, there is a huge inventory already on the market, over half of which are distressed sales, and a huge new wave of adjustable mortgages are about to reset into higher monthly payments, AND millions of people are losing their jobs every month.

People are being forced out into the streets at a time when there are millions of homes sitting empty, unable to be sold. This is the very definition of irrational behavior caused by the false value of debt. And it will only get worse, as anyone can see. What happens where everyone, literally, everyone, is upsidedown on their mortgage? When no sale can even occur that covers the cost of the mortgage? No one even wants to make a purchase in this market, because prices are falling! That is the black hole of deflation, which feeds itself by slowing down economic activity.

The solution is plain: mortgage Jubilee. Cancel mortgage debt. Let everyone keep the home they are in, a homestead Jubilee. For bank-owned homes, give them away to renters, on a lottery basis. All leases voided too, and declare a three-month moratorium on rents.

This would immediately get to the ground floor of the real estate market and allow real-estate transactions to begin again. Social stability would be achieved, as well as widespread homeownership. Citizens would become wealthier overnight. A gift to the common folk of America, a true Jubilee.

Then, imagine the stimulus effect. Hundreds of millions of people suddenly have thousands of extra dollars a month to spend.

Banks take a hit on their bottom line... yeah, so what? Tell me how that hurts the economy at all? A plain fact, it doesn't. In fact, it revitalizes the banking sector. By ending the housing deflation and liquidating all bad real estate loans, banks can start lending again and get back to being banks, rather than property owners. Many banks would close, you say? Good! It is inevitable in our debt deflation Depression, anyway.

Footnote: As for investment (non-residential) homes: Jubilee for those mortgages only applies if their title is given to the government for lottery dispersal.

Here are the facts on the ground, as of a report today:
The U.S. had 130.8 million housing units in the fourth quarter, including 2.23 million empty homes that were for sale, the Census report said. The vacancy rate was 3.5 percent in urban areas and 2.6 percent in suburbs, the report said. In addition, the report counted 4.1 million vacant homes for rent and 4.8 million seasonal properties.

Most foreclosures are contained in the report’s “other” category, which includes homes tied up in legal proceedings as well as properties that are empty because the owner is renovating and living somewhere else, according to the Census Web site. There were 7.8 million homes in that category in the fourth quarter, up from 7.3 million a year earlier, the report said.

There were 2.22 million new foreclosures in 2008, an average of 6,090 a day, according to Washington-based Hope Now Alliance. Those resulted in 917,000 property sales, according to the group that represents 27 mortgage lenders and servicers.

U.S. banks owned $11.5 billion of homes they seized from delinquent borrowers at the end of the third quarter, according to the Federal Deposit Insurance Corp. in Washington. That’s up from $5.4 billion a year ago.

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession, said in a report today. About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said.

The median estimated home price declined 11.6 percent in 2008 to $192,119 and homeowners lost $1.4 trillion in value in the fourth quarter alone, the Seattle-based real estate data service said.

The number of homeowners with negative equity, or those who owed more on their homes than the property was worth, rose to 17.6 percent from 14.3 percent in the third quarter, Zillow said. The company began its quarterly reports in 2006. “Negative equity will trigger new foreclosures, and that will add to inventory and depress prices,” Humphries said.

Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time, he notes.

By the time the crash ends, Talbott predicts, homeowners will have lost as much as $10 trillion, with investors and banks worldwide losing almost $2 trillion. And just as the U.S. starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption), he says.

So how far will the price of your home on the range fall? Citing historical data and trends, Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation. Why 1997? A 120-year historical graph shows that real home prices in the U.S. stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.

A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006 in which banks were lending large amounts of money under poor supervision and aggressive terms.”

There are about 55 million single-family mortgages in the U.S., and the FHA has about 4.8 million covered. Fannie and Freddie guarantee another 31 million mortgages between them. So, in total, U.S. taxpayers now stand behind about 65% of all home mortgages in the U.S. But because ever since the credit crisis began, over 80% of all new mortgages generated have been “conforming” in order to go onto the books of a government agency.


David A. Smith said...

Thanks, very interesting. And I think I buy your basic argument that this is the best way "out" of the mess we're in. One question, if there are 130 million homes and only 55 million mortgages, what's with the other 75 million? Certainly that many people don't outright own their homes, or do they? Or am I missing something else?

Justin said...

Good question, David. There are 130 million "housing units", but I suspect that includes apartments. The 55 million is specifically single family homes. It would be nice to find out how many homes are paid for, free and clear of mortgage.

Anonymous said...

So I have worked over ten years to develop my small set of rental propoerties, upon which my family relies for income and hoped for retirement, and you will take away three months of rent and throw me into bankruptcy? Interesting moral hazard you create for the future, too... why pay a mortgage, make investments, or maintain a property or grow a rental business when sooner or later the government will take it away through intervention?