The Collected Works of Author and Blogger Larry Roberts

Archive for June, 2012

As a renter, I find the behavior of lenders, loan owners, and politicians galling. Lenders and loan owners inflated a massive housing bubble and priced me out of home ownership for over a decade. To make matters worse, politicians decided my tax dollars should go toward bailing out both parties and subsidizing this atrocious behavior. Politicians are compelling me to pay money to the very people whose avarice made it impractical for me to obtain a family home. True homeowners, responsible buyers with equity, should also be incensed by this foolishness, but since the housing bubble folly served to increase the value of their holdings, homeowners have said very little. In fact, most homeowners applaud the efforts to prop up…[READ MORE]

I have written extensively on strategic default. I have been an advocate of strategic default because it is generally the best financial decision for a family. When a loan owner is underwater and making payments far larger than the cost of a comparable rental, they are throwing their money away on mortgage interest to support a depreciating asset. That's pretty stupid. One reason millions of underwater loan owners don't strategically default is because they perceive it as immoral. We have debated this issue at length in the astute observations of this blog, but it comes down to a simple choice between competing values. Is a borrowers promise to repay their debt a greater moral obligation than their need to provide…[READ MORE]

Low house prices are good for the economy because low house prices make for low loan balances and less debt-service. When borrowers have excessive home debt, the excess comes directly out of disposable income. Since consumer spending is such an important component of the economy, the excess interest payments are a direct financial drain. As long as the debt on real estate is excessive and capital is tied up in non-performing assets, the economy will suffer. It’s really that simple. The solution is equally simple: foreclose on delinquent borrowers, wipe out the debt, and extract the remaining capital value. With the excess debt removed, borrowers can use their wage income to buy goods and services rather than giving it to…[READ MORE]

Quite predictably, pending home sales have declined precipitously due to the lack of available inventory. Lenders have a variety of reasons for withholding inventory right now, but among the biggest reasons is their desire to cause house prices to bottom. Lenders make the false assumption that supply and demand controls all pricing. It does not. Withholding supply may help buoy prices in the short term, but affordability puts a cap on prices stopping them from rising. Lenders hope active buyers raise their bids and push prices higher. After all, that's what buyers did during most of the housing bubble. Buyers have some ability to raise their bids by substituting to inferior housing stock, and some buyers do raise their bids…[READ MORE]

FHA has always been the lender of last resort. It was started in 1934 during the depths of the Great Depression to provide mortgage lending at a time when private money wouldn't do it. Of course, by then the housing market had bottomed, so the FHA loans from the Great Depression didn't cause huge losses, and since there was almost no other mortgage lending during that period, it was a welcome jump start to a beleaguered housing market. That isn't the function the FHA played in the collapse of the Great Housing Bubble. FHA was loaning money when nobody else would, and it did serve as a lender of last resort. However, since housing prices were just beginning their decline,…[READ MORE]

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