This little diatribe is about an economic fact of life that’s been bugging me for some time now as a result of the mortgage crisis. Let me describe this a bit and see if it might bug you too…right where it hurts, in your wallet…
Here’s the simple logic, step by step: (a) the mortgage boom (which happened for whatever reasons, however nefarious) caused housing prices to rise to unforeseen heights during the Nineties and into the first years of the 21st century, causing (b) an asset bubble. This meant that many (most?) homes purchased in this period were at (historically) inflated prices. (It made no difference why the home was bought, for speculation or occupation, of course.) However, (c) the boom ultimately crashes due to the financial crisis, initiating the biggest recession since the Great Depression (which has a long time to yet play out), with consequent unemployment, causing (d) a wide and prolonged rise in foreclosures across the country, more intensely in some areas than others, resulting in, of course, (e) the asset bubble to finally burst, resulting in the current dramatic devaluation of housing market prices, again more intensely in some areas than others.
Now why should this bug me, you’re thinking? Because I’m one of those people who bought a home in this period, who is now unemployed (due to cutbacks in federal funding for scientific research by NIH, thank you very much George W. et al), and struggling to hang on to my home.
What is bugging me is how much I paid for my home, how much it is worth now, and just how little I expect Wells Fargo, my mortgage bank, to care; but I’m trying! I have an application in to them for a “mortgage loan modification” as we speak. And here’s the reason: I paid $143,000 for my two bedroom condo is a nice, but definitely middle class, neighbor in Lafayette, a suburb between Boulder and Denver in 2003 — probably at the height of housing boom. With hindsight, yes, it was not a smart time to buy; but at the time, I had been renting all my adult life, I’d just graduated from CU-Boulder with a graduate degree, the economy was still in the final overheated phase of the financial boom, and I needed a place to live — it was the time in my life to buy. Boy, was I in the wrong place at the wrong time…
Last week I received my 2008 assessed value for my home: as of June 30, 2008 it was $133,100. Which means a decrease in value of $9,900 in the last five years, or a drop of 6.9%. Acutally, I doubt I could get $120,000 for it now, a drop of 16%. This on top of being unemployed since the end of last year. I’m barely making my mortgage payments with my unemployment benefits.
But does any of this make a difference to Wells Fargo? Not a bit; all they’re worried about is foreclosure, which would stick them with this now-lower-value property — and a lot less bucks to them over the life of the loan. So of course they send me a weekly barrage of mail warning me about being late with mortgage payments (gee, sorry I’m late, my cash flow is totally dependent on my unemployment benefits now), where to seek “credit counseling” and even warnings about how “short sales” of foreclosed homes dumped on the market work. Hey, do I need this? I’m a little late with my mortgage payment each month, and WF starts acting like a paranoid grandmother — give me a break. (I called them to ask if they would change the date my monthly payment was due; no way, they said, because it’s “fixed by my mortgage.” Aww, give me a friggin’ break…)
No, what is really bugging me about this is what happens when you take my situation, which is all too common in the country right now, and scale it up to the macroeconomic level. Observed from that perspective, the situation begins to look like a massive wealth transfer from the low to middle class to the financial institutions who own the mortgages (and, of course, to the higher level management that runs them. ) Because few, if any, of the mortgage banks are reducing the principle on the loans of these homes that were purchased during that time, meaning that the homeowners who are stuck with the bill will be paying back much more than the home is worth now, or probably ever will be worth again. Which is why I feel like my mortgage bank is blindly stealing from me. Of course, they will claim they can’t be blamed for how housing prices rise and fall (or can they?), and it’s not their fault that the balance I still owe on my place ($127,554.63) is probably more than the price at which it would currently sell.
No, I suppose not. This is all just as legal as it gets. But it’s still unfair, and it’s still a massive wealth transfer, and it’s also beginning to be noticed by others. In the July 5, 2009 issue of the Sunday New York Times, reporter Gretchen Mortgenson aptly pointed out that “Foreclosures remain one of the great financial ills for the economy.” And as one of her sources describes just the point that’s bugging me: how few mortgages are being “modified” and how few loans have had any
reduction in principal…and how irrational this action is on the part of the big mortgage banks; let me quote at length:
Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.
And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”1
And there you have it: the mortage banks stealing from the middle class, claiming that this is just blind economic forces at work…or are they? I think it’s only fair that the mortgage banks be forced to share in the economic pain of readjustment, and be given fair, transparent, national standard guidelines — and be required by force of law to obey them — by how to reduce principal balances on any mortgages purchased during this bubble in housing prices, until housing payments are brought back in line with income levels in this country. I think this in only fair particularly since the mortgage banks were so complicit in creating this situation; but that’s another story…1Gretchen Morgenson, So Many Foreclosures, So Little Logic, New York Times, June 5, 2009, page BU 1.