

America’s housing market

Not waving but drowning

A radical plan to help “underwater” homeowners makes a comeback

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Here's the clause of the 5th Amendment to the US Constitution that applies to eminent domain: "...nor shall private property be taken for public use, without just compensation." I assume that the governments are proposing to pay market value to the bank for whatever the value of the home is. Here are some issues: 1) Can the (underwater) home owner who couldn’t pay the bank now pay the city and isn’t the bank in a better position to determine creditworthiness than a city? 2) What if the city – or that part of the city – is in decline? If the city acquires the property, the remaining citizens are taking responsibility for an asset – and possibly many assets (e.g. Detroit) which are declining in value. If the city is borrowing money to do these acquisitions, is it not really entering a similar situation as the one it is trying to relieve? 3) I grew up on the Near North Side of Minneapolis and saw many abandoned homes acquired by the city and demolished, later to be replaced by new homes. So, it seems like this strategy can help.


This idea has risks but I love it anyway. The point is to keep homeowners in their homes and communities strong. With all the bailouts for the banks very little has trickled down. At the top, the bankers get bonuses. At the bottom, homeowners get foreclosed. This is an idea to stabilize communities and it just so happens to push the pain back up the ladder where all the bailout money went.

The real distortion here is the insurance companies like AIG that pay investors to take unrealistic risks. Eminent domain is the only way communities can save themselves from the perverse financial mechanics that pushes people from their homes instead of facilitating a settlement that would otherwise be best for both parties.

Yes, Mortgage Resolution Partners is another bank with another scheme. But it would profit by undoing the damage done by the others-- and save communities in the process.

Clastics in reply to ArtyPants

Is the "homeowner" really the person living in the house at this time? The value of their interest is 0%, as subordinated by the true "homeowner"- the bank or mortgage-holder. The only reason that they still have any say is (usually) their poor economic decision to sustain a negative cash flow position to support an asset with a negative net equity position.

ArtyPants in reply to Clastics

Where do you come up with the value of the homeowner's interest being 0%? Doesn't having a roof over your head count for something? Doesn't the community in which they live have value? Also, from a purely financial standpoint, unlike businesses, individuals with sunk costs are often not in a position to walk away from their position since for most homeowners their home represents their only substantial investment other than retirement. So walking away from their underwater home means walking away from homeownership and the credit market place entirely.

So I find your statement that they have 0% interest both materially and qualitatively untrue and so morally insensitive that I cannot consider any of your other arguments.


I'm not sure the risk of raising mortgage rates is really the bigger issue here. One can make the case that if we find ourselves in this prolonged situation of depressed values, banks sitting on the mortgages (and only able to do so without bringing down the entire system because our government bailed them out), the mortgage rates have been too low for too long. Now, with real, happening-today knockdown costs hitting municipalities and no one going to step up to help them, I don't see the net problem with their pursuit of eminent-domain solutions.


I really don't care about towns clawing back mortgages from banks, but I still don't like this idea.

At its core, this is a plan for the government to issue new debt and elevate the price of housing, to the obvious benefit of the current owners of houses. As a young person, I will (A) have to pay off that debt and (B) pay more for my house.

F*ck that.

guest-saaeoem in reply to shubrook

In the words of the great Helen Lovejoy


Seriously though your right, kind of screws the youth pretty bad. On the other hand if the politically active soon-to-retire retain some of their wealth in inflated housing they might not notice when we inflate away all that artificially high housing wealth...to cover the debt level.

The only way we'll be able to pay for this debt is significant economic growth, good immigration, and matching education/skill with the evolving new economy...and the the easiest way to make the first thing appear to happen is to forget about doing the rest and let inflation rip for a spell.


I am trapped in an underwater house. My loan was erroneously classified as a "jumbo" by Countrywide, which makes it ineligible for the "home affordable refinance program". I have been working with senator Feinstein's office to try and have Fannie Mae correct this. It has been 2 years of emails and frustration.

Clastics in reply to guest-woaaisi

From an economic standpoint... Walk! Don't complain.

You were given the chance at owning the equity of a highly leveraged asset. This asset depreciated and your equity is worthless. Say thank you to the bank (or current debt holder) for granting you such a generous and (demonstrated to be) underpriced call option on this real-estate. Allow the debt holder, who had exposure to none of your upside gains due to appreciation, to absorb a significant portion of your losses.

If only I could find such affordably priced (cough, underpriced) hedges in teh equity markets.


I'm puzzled by the couple's mortgage payments. At monthly installments of $1,845 for a $132,000 home on an assumed 30-year mortgage, such that 14 years later they still owe $115,000 in principal, we are looking at annual interest rates of about 16.6%. Is this normal?

Hindumuninc in reply to Ajax09

I just looked up historical mortgage rates and they should have been in the 8-9% range for the average borrower (according to HSH.com, I don't know how reliable their info is, though). I think this couple probably took out a large second mortgage (which is today called a 'home equity loan') to increase the amount of principle they owe.

If you watch old movies/tv shows made in the 70s and early 80s you occasionally hear a character mention that they took out a second mortgage on their house, which is seen as synonymous with financial desperation in the show. This is kind of a sign of the social stigma associate with risking your house by borrowing additional money against it. But today, simply by calling them 'home equity loans' they have lost this social stigma and are viewed as a viable means of borrowing even for people who aren't desperate. Now lots of people yank what little equity they have right out of their house, increasing their mortgage payment and reducing any positive saving effect from owning a home. I for one think we should just go back to calling them what they are: a second mortgage on your home.

teacup775 in reply to Hindumuninc

It might be nice to undo the decades of loose credit lobbied for by the banks. They are the ones that have profited the most by blunting the desirability of savings to debt in their customers.

Ages ago workers owed their soul to the company store, now that function is a company in its own right.

TakeResponsibilityNow in reply to Ajax09

I'm puzzled by the entire article. The figures about the mortgage are incorrect, and if they are correct, they are omitting something. Two earners lose their jobs and can't find work since 2008? Strange. However, they have pensions and an income from a rental. Seems like they're ok and the point of the article is that their investment went down in value. That's life. Take responsibility. Move on. The Economist chose the wrong subjects for this article as I'm sure there are people who have been the victims of misrepresentation and even fraud. Again, take responsibility and move on. We've become a nation of "blamers." Stop blaming (and suing) others for your misfortune and take responsibility.

A. Andros

Simply theft.

The lender is owed money. It is the obligation of mortgagee to repay that money. If I buy stock on margin and the price of that stock plummets and I am subject to a margin call should I expect the government to acquire that stock at present market value, relieve me of my margin obligations and thus stiff the lender?

I know Irvington and Clifton (the two towns you mention) well. Clifton is not a "hard-scrabble" community. It i a rather pleasant mixed blue/white collar town. Irvington is a pit of social pathology -- and was for many decades prior to the bursting of the housing bubble. Irvington's problems are due to the people of Irvington -- not foreclosures.

Foreclosure in unpleasant for the party foreclosed (and for the lender.) But, without the discipline of knowing your collateralized property is liable to foreclosure if you do not honor your contractual obligations then what impetus is there to do so if you can just work out a cozy deal with the crooks that govern your town in order to screw the lender?

ColoradoJack in reply to A. Andros

So a semi fraudulent mortgage by an unscrupulous lender misrepresenting facts to unsuspecting borrowers is a sacred contractual obligation, but dumping a workers pension plan after he has given 30 or more hears of his life inservice to the company is just fine.

A. Andros in reply to ColoradoJack

If the mortgage is fraudulent that it cannot be enforced. The courts have pretty consistently ruled that the mortgages are valid.

If the borrower is "unsuspecting" then he has just learned a valuable lesson: think things through before you sign a contract.

If the lender is "unscrupulous" then he should be prosecuted if he has violated statute. Being smarter than the debtor is not a violation of statute.

"Dumping a workers pension plan" is difficult to do under COBRA. It can be amended from guaranteed benefits to guaranteed contribution but, in my case, that worked just fine.

You borrow money, you pay it back. It is as simple as that.

teacup775 in reply to A. Andros

Tell that to United Airline employees. Most corp pensions have been pilfered to boost quarterly profits, but as ceo you're not the regular guy who gets shafted.

Pensions were a part of a contract and are reneged upon.

Loans are a two way street. Banks didn't give a fig and skipped due diligence as the loans are sold off into the derivatives market. They have/had all the incentive in the world to flip them.

You live in the social strata where things work out for you. Most don't have access to that.

A. Andros in reply to teacup775

What United Airlines does with its pensions has zero to do with financing a house purchase in Irvington.

Yes, bankers do sell their loans. How does this relieve the borrower of his obligation to repay the loan? As for "due diligence," that is as much a duty of the borrower --"Can I afford this?" --as the lender.

I don't live in a social strata "where things work out for you." I live in a social strata where WE worked things out for ourselves over five decades.

I don't think being "under water" is a rationale for stealing. I'm "underwater" on some stocks. So what?

pjhawk95 in reply to A. Andros

First of all the mortgagee is the bank (or person) making a loan. And that loan is secured by the property of the person (mortgagor) getting the loan.

Secondly your attempted analogy of a margin account with a mortgage is not applicable. If you fail to deliver on a margin call your brokerage followed by the exchange are liable for the margin obligation and thus no one is "stiffed".

pjhawk95 in reply to A. Andros

"What does the remainder of your comment have to do with repaying debts one has freely contracted?"

Nothing which is why your analogy was not applicable. As for the point at hand - it's a business contract with debt secured by the home, default on the lien and the home is recovered as collateral. Revising the terms of the mortgage is just another business transaction as well.

A. Andros in reply to pjhawk95

Revising the mortgage is not "just another business transaction" if it is done via eminent domain. If the bank and debtor voluntarily agree to revised terms, well and fine. If the state, with its implied threat of the use of force, intervenes then this is not negotiation.

pjhawk95 in reply to A. Andros

No but eminent domain first and foremost has to be done for a "public use" which in this case is enhanced economic stability of blighted property or neighborhoods. That concept transcends interest from the parties of the mortgage or deed.

teacup775 in reply to A. Andros

This is your comment. It seems odd think that if something works out for you that therefore the situation is 'good'. And in light of the comment, my own comment points out that corps reneged on people all the time.
As for banks, -they- are the ones loaning money. When banks held the loans they actually cared about the buyer being able to pay the loan. They cared about due diligence. When they started only being a conduit for the derivatives market, passing on the debt, the motivation for due diligence disappeared to be replaced by a vested interest in the volume of loans they could sell off.

John Eh in reply to pjhawk95

M. Hawk,

I've moved around a bit and thus have dealt with a number of brokers.

In the contracts I signed there was a paragraph - admittedly in 6 point or smaller type - that said that if I failed to deliver a margin call, the broker could sell whatever he wanted to sell from my account to make up the difference. Thus I never bought on margin, since if I failed to deliver on a call my broker got a hunk of my other stock and the commission for selling it out from under me. Do all the other brokers in the world simply swallow a margin loss? I always thought my brokers were pretty nice folks.

pjhawk95 in reply to John Eh

"Do all the other brokers in the world simply swallow a margin loss?"

I'm not sure you understand how this works. In the liability of a margin call it's going to be your account first, followed by the brokerage, then the exchange and finally depending on the asset being traded an organization like the Options Clearing Corporation. In all cases the counter party of the trade from the margin call will be made whole through the succession of liability (if need be) and thus as I said no one is "stiffed".

MacroMac in reply to pjhawk95

Andros seems to have made valid free market points in the aforementioned arguments. The rest of the respondents seem to feel that something is "owed" to homeowners whom were willing participants in a bilateral contract. I'm not sure what spurs this feeling? When one enters into a legally binding agreement, one should see it to fruition. This is typically called breach of contract and usually warrants litigation.

Moreover, it's Clear these folks had taken seconds or HELOC's out on their property, stripping out all equity and adding additional debt service during boom times. This is proven by simple math: using their estimated monthly payments and original purchase price this works out to an effective rate in excess of 16% (aptly pointed out above) - there was clearly equity stripping going on here. Should this also be forgiven? These folks used their home as an on-demand ATM and you all feel that they should get a pass? And here comes the gov't demanding a 20% haircut under the threat of eminent domain. Everyone cheer! Most don't realize that such treatment is a huge disincentive for banks to lend. Guess what that does to rates in order to offset this risk? Guess what then happens to home values? I urge you people to think in macro terms.

And for the person comparing pension pilfering to forced concessions under the threat of eminent domain, wise up. You clearly subscribe to a quality publication. Act like you belong here and make more correlated arguments.

A. Andros in reply to teacup775

Like it or not, your financial future is now largely your own responsibility. Do corporations "renege?" Not where there is an enforceable contract. But . . . they can weasel like hell so I see your point.

Unless you do business with Jimmy Stewart and Thomas Mitchell, it has been a long time since lending institutions kept loans on their books. A generation ago we had S & Ls that might have been operated by Benjamin Franklin but those days are gone and aren't coming back. Anyway, assessing and hedging risk is a perfectly valid business model (I did it for a living.)

There used to be a good rule of thumb -- if you think you can't afford it, you probably are right. Anyone with even a skim coat of sophistication knows that taking out a mortgage more than about three times your gross annual income is risky. This rule is so fundamental, so proven by time and so easy to calculate (unless one cannot multiply by three) that the banks cannot be blamed if the mortgages went south.

I simply cannot believe that any party that took out a mortgage four, five, six times -- and even more! -- their annual gross income didn't know they were walking a tight-rope over a lion's den.

eroteme in reply to A. Andros

Its the lenders should have been let go bankrupt and instead they got bailed out with taxpayers money. Instead the lenders are now sitting pretty making record profits while ordinary citizens got shafted.



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