Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

A Strategic Proposal to Combat Strategic Residential Housing Market Mortgage Defaults

Housing-Market / US Housing May 20, 2010 - 01:06 AM GMT

By: Paul_L_Kasriel

Housing-Market

More and more we are hearing that occupants of residential real estate with mortgages far in excess of the current market value of the real estate are choosing to default on those mortgages. It is not that they do not have the income to keep current on their principal and interest payments. Rather, they have made a calculation that it would take many years for the value of their properties to rise back to the amount outstanding on the mortgages of these properties.


So, some have simply stopped sending in their monthly P&I payments and will just wait until the sheriff arrives with a foreclosure notice from the lender. This is not entirely irrational from an economic perspective, especially if one can rent a similar abode for less than the after-tax cost of home ownership.

From the lender's perspective, what might be the strategy to minimize his loss? Make no mistake, there is a loss. The value of the collateral is less than the outstanding amount of the mortgage. Several years ago, when the housing bust was still in its relative infancy, a regulator, of all people, came up with a strategic proposal to deal with strategic mortgage defaults. The strategy is for the lender to write down the principal on the mortgage outstanding to an amount closer to the current actual market value of the property.

Residential real estate has an important difference from, say a pickup truck. Unless that pickup truck becomes a classic or unless there is rampant inflation, the value of that pickup truck will continue to go down. Residential real estate is a different animal. Although the actual structure that sits on the land may be a depreciating asset, over time, the land itself tends to appreciate. As a result of the likely future appreciation of the land component of residential real estate, this clever regulator (if that is not an oxymoron) proposed that if the lender wrote down the principal on an underwater mortgage, he, along with the occupant of the house, would agree to split any future appreciation of the property.

Again, the lender takes a loss today. But the lender has the opportunity to recoup some of his loss by sharing in the likely future appreciation of the value of the property. Moreover, because the current occupant of the property also has the opportunity to share in the future appreciation of the value of the property, she has the incentive to maintain the property. But wait. Doesn't this reward bad behavior on the part of the borrower? It doesn't have to. The deal could be for the lender to reduce the principal amount outstanding on the mortgage, but not all the way down to the current market value. Thus, the mortgage still would be "under water," just not as much so.

This seems like, if not a win - win situation, at least a minimize loss - minimize loss situation to me. The lender does not have to throw a piece of distressed property on the market. He has someone continuing to mow the lawn. The borrower does not have to go through the hassle of moving. And, as an added benefit, there is no need to create the deadweight loss of a government bureaucracy to oversee such a resolution.

Why Not Graduated Capital Ratios?

Most observers recognize that part of what made the recent financial crack-up so severe was the lack of capital by some big players. As financial institutions get bigger, their failure can bring down the system. How big is too big? I don't know. But why not require an institution that is getting bigger and bigger to hold higher and higher capital relative to its assets? This would provide more cushion against actual losses, thereby mitigating taxpayer liability. Moreover, graduated capital ratios would provide a market-based governor on institutions getting too big. After all, if your capital ratio goes up with the value of your asset base, then, unless those assets are exceptionally profitable, your return on equity will be adversely affected by your relatively reduced leverage. Yes, the trick is to figure out the optimal "progressivity" of the capital ratios. Perhaps the regulator who came up with the strategic solution to strategic defaults also could come up with a rational approach to the progressivity of capital ratios. If not him, then someone at the U. of C. business school could.

by Paul Kasriel

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

by Paul Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2010 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

alan west
29 May 10, 20:50
american housing

i predict that we will see knees knocking over the falling value of housing, still being paid for by mortages.

i predict that we will see panic over this spreading to a run on the american banks, and the beginning og the second-dip recession, that, coupled with the domino fall og spain, portugal, italy, and possibly ireland, will herald in a major world-wide depression. i think that merkel's decisions are and will be political, not economic, leading to europe's version of the lehman collapse in america.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in