Dan

Calabrese

Read Dan's bio and previous columns here

December 9, 2008

A Successful Recession Needs Failure, So Let’s Foreclose on Some Home ‘Owners’

If we don’t start seeing some failure pretty soon, this economy might never recover. And to start with, a whole lot of people really need to lose the homes they think they own.

A new report from the Office of Thrift Supervision says that more than half the “homeowners” who had their mortgages modified earlier this year – the idea being to make their payments more affordable – are already back in default.

You get that? That’s more than half. And this: They only just had the mortgages adjusted earlier this year.

Granted, the economy has gone into a freefall since the mortgage meltdown in September, but you have to miss several months’ worth of payments to go into default, so these folks couldn’t have all just started falling behind since then.

The failure of the mortgage adjustments to make a difference is prompting new calls for federal action to stop the imminent rush of foreclosures. New Jersey Gov. Jon Corzine has become the latest in a series of politicians to call for a foreclosure moratorium. President-elect Obama says he will take some sort of action to aid troubled “homeowners” as soon as he takes office.

Reality check: These people don’t own anything. They are merely renting beyond their means.

Let’s step back and recall how this whole mess started. Just a few short years ago, there was an unusually large amount of capital available to lenders, and they were looking for new places to lend it in the hope of making a profit on the deals. With lots of money available to fund mortgages, builders came out of the woodwork to build new homes. Many of them were so-called “production builders” who lined streets with homes that all pretty much looked identical to each other – saving on design costs and adding to the building efficiency that was required to serve such a hot market.

If you got a mortgage for a $150,000 house, you came back three years later and found that the assessor now put the value of your home at $200,000, so you suddenly found yourself the proud owner of $50,000 in home equity, against which you borrowed to start a business or buy cars, boats or electronics.

Or, even better, you bought a complete shack for $60,000 or so with the intention of investing $30,000 in repairs and upgrades, then “flipping” it for $150,000 and netting a $60,000 profit. You got that idea from watching some cheeseball named Armando Montelongo doing it on TV.

Around the same time, President Bush was touting the laudable concept of the “ownership society,” which was partially based on the idea that people who owned their homes would take better care of them than those who rented.

It was an orgy of lending, borrowing and buying.

Orgies are always too good to be true. (I’ve been told.) The basic problem here was that you didn’t have enough truly qualified borrowers to borrow all the capital that was out there, so people started coming up with ways to lend it to heretofore unqualified borrowers – people who had not saved for down payments and hadn’t developed the long-term, income-earning habits that would make them good candidates to keep up with their mortgage payments over the long term.

As recently as a generation ago, you didn’t get much of a house – a small starter house, maybe – before you had worked a lot of years and saved a lot of money. You probably didn’t have a really nice house in the suburbs until you were in your late 30s or early 40s in most cases. By that time, you had worked very hard to earn the chance to own such a house, and you appreciated it more as a result.

The people who are now defaulting on their mortgages were basically glorified renters stuck in 30-year leases. Their so-called “home equity” was pyrrhic. The idea that they now must be rescued from losing “their” homes is based on a faulty premise.

They never bought a house. They qualified for a deal. It’s not the same thing.

People who can’t afford their mortgage payments need to move into apartments that charge rents they can afford. Companies who can’t afford their operating costs need to make gigantic changes, or file Chapter 11, or stop operating altogether.

Recessions are useful because they serve as corrections when economies get overheated. But if no one is allowed to fail, there will be no correction – no cleaning out of the gunk that mucks up the works.

We’re trying to have a recession without any failure. It’s not going to work.

© 2008 North Star Writers Group. May not be republished without permission.

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