One of the things that brought the Great Depression was allowing people to speculate using 90% margin borrowing or more to speculate on stock. Well you know how that went. Well 21st century comes around, and what do we do, allow people to speculate on another trading instrument with 90-100% margin. (housing) And we know how that went, a repeat of 1929. And of course what happens when you let speculators and investors jump in, prices go up. With that in mind, I think the best thing you can do is have something similar to Reg-T for housing. Want to buy a house, you need to put 50% down in order to meet the mortgage margin. What this will do is drive the price of housing rather quickly over time and drive out the high margin speculators out of the market as well. Once you require a 50% down payment you will no longer see 200K homes in places with average salaries of 30K and instead housing will go back to more realistic price points. That 200K home will probably end up selling for 75-80K which makes it more realistic for average salaries. With the Middle class American much less house poor if prices drop to realistic levels, you would see the economy grow as the velocity of money increases due to more money being spend in the community instead of going into a big money sink (ie: big mortgage)
Maybe you missed the memo a few years ago. Any and all "practical" solutions to the debt crisis were not to be considered. But you also missed a few other salient points. ALOT of these middle class families you mention STOPPED paying the mortgage years ago, they are the middle class squatters who have been living mortgage free for years at this point. Once in awhile the press makes mention of it, but they will never reveal the true numbers because (ahem, it might actually encourage more of them to do it). And why do you think that consumer spending held up reasonably well, despite the horrific labor market? What happens when that $2000, $2500, $3000 per month mortgage payment goes into the economy instead? The Fed might act like it saved this economy from the abyss, but years from now when all the smoke clears we'll have discovered that all those strategic defaulters "saved" the economy at the expense of destroying the fictitious marks in the real estate portfolios.
Leverage wasn't the problem (on the first home) it was underwriting. Leverage became the problem for the flippers and multiple home buyers.
The fact that is omitted from most of these discussions is that Greenspan was actively encouraging the housing bubble. Following the "deflationary threat" of the tech collapse, the growth of debt needed a serious kick in the ass to get going again. Of course, with the dollar at record highs, there was plenty of room to ease and let the thing fester for years. It's easy to forget just how "cheap" housing was around 99-00 as stocks were trading at all time highs. Even after this market debacle of the past 4+ years, there are only pockets of locations that have filled in those prices. And God forbid you are the owner of a property in one of those areas as the value of your residence buys you about a quarter of your daily necessities (when factoring in the loss of purchasing power).
I'd say 50% is too little, but obviously 100% is too much since it creates moral hazard. The real problem wasn't the leverage ratio, but the lending standards. There would have been a lot less foreclosures if all borrowers had income and assets consistent with 1980's or 1990's underwriting standards, i.e., DTI no more than 25% and a large downpayment.
I really can't knock the 3% down squatters prolonging the foreclosure process. It's the only way they are going to squeeze out equity and make a profit. Live rent and mortgage free for 2 - 3 years and they come out way ahead compared to any other option. Even on a small $100k mortgage where their nut is $1k a month they pocket/save $24K. $3K down... Pretty impressive return.
Right, we get that, but you're sort of missing the point. The housing bubble was engineered deliberately to "feed" Wall Street, to generate short term job growth and to "stimulate" the economy to counter-act the tech collapse and the post-911 recession. I still contend that the FR shifted its focus to gaming asset prices to counter-act the lack of wage growth from the early 1990's and onwards. Sort of a Pavlovian trick to get people to borrow up to their eyeballs and prolong this paper shuffling economy of ours.
Absolutely. Wasn't that all those repackage loans known as cdo's was all about? Just another way for people to make themselves rich on wall street and DC.
At first I thought you were going to be talking about the unregulated mortgage derivatives that were created by the big cats; these things weighed greatly in bringing the whole shooting match down and are still largely toxic assets with a minimal market. As far as the 50% requirement for the down payment, don't worry, we are effectively headed that way as the only entities that will be able to afford houses are those with the bigger money at the top of the food chain, as they buy housing up and turn everything into rentals. Then, 10 years later when prices stabilize, they can start selling their inventory into pricing strength.
I've been checking the sold properties and it seems to me the problems are in the appraisels.Banks seem to lend on new properties (in certain price ranges) rather than used homes in the same price range. So you could have a new 500k home easier to get a loan than a 750k used home reduced to 500k. In the end the bank may view a 2 yo foreclosed home retaining it's value, as opposed to a 10 -12 yo old with the same default mortgage. ----------------- As far as down payment, banks I'm sure have models to show default vs down payments and I would guess not much has changed over the years even accounting for various external economic conditions, employment, etc. So I'm going to disagree and say hgher down payments are not that much of a factor to improve sales in this market.