I know that a) this idea is WRONG, b) it is terrible for the long run rule of law, and c) it is EVIL and UNFAIR. It's also one of the few suggested economic remedies that might have worked or maybe could still work.
How so? It limits value-destroying foreclosures. It gives homeowners the right marginal incentive to keep on making payments and maintain the value of the home and to maintain their credit capabilities. It gives the housing market a fresh start rather than this waiting/coordination game where we wait for everyone to move on down a notch in house quality, thereby freezing parts of the housing market and choking off required recalculations. (How can you have a well-functioning housing market when so many people have negative equity? I've read estimates of twenty percent of the U.S. population.) It also limits the problem of future ARM resets, once interest rates rise in the future.
It's all about long-run vs. short-run and I usually side with the long run. But the short run modification of property rights has so many defenders in other contexts, so why not here? Call it "clearing up financial logjams" if you wish.
Is it a better marginal incentive than suddenly increasing the taxes on banks?
Bernanke himself once suggested the idea.
I might add that by fostering an actual recovery, writing off the principal on mortgage loans might limit some of the other bad interventions that we will try or have ended up trying.
I don't think it's particularly evil. But I'm also not sure that it's a good idea.
Let's think about why principal write-downs work, at least in theory. As I see it, there are three reasons:
It increases the willingness of homeowners to work hard and sacrifice to keep their house current
It lowers the mortgage payment
It allows people to sell rather than go through foreclosure if they have an income shock, or need to move
Together, these substantially reduce the likelihood of foreclosure, which theoretically makes both consumers and banks better off. However, there are some reasons to worry that this wouldn't make a huge difference right now:
We don't have the mortgage problem that we initially thought. We expected that foreclosures would be driven by resetting adjustable rate mortgages, i.e. higher payments. But with interest rates so low, the problems are on the income side. Either people took on more mortgage than they could afford, or their income has fallen, so they can't afford the mortgage they have. This is why most modifications are failing.
That means that people don't necessarily have the resources to pay even a reduced mortgage. Say you had a house that was worth $280,000 with a $250,000 mortgage, but whose value has now fallen to about $200,000. We write down your mortgage principal to the home's new value, handing the bank a 20% loss. What is your new payment? Assuming the interest rate stays the same (or were we also going to force them to take an additional interest rate loss?), it's probably fallen by about $300. For the typical person with a $1400 house payment, $300 a month is not the difference between solvency and bankruptcy.
They won't be able to refinance, either Bank's aren't doing refis at 100% LTV with property values still falling, unless they own the mortgage and think you're about to default.
It does allow them to sell--if they can There's not a huge amount of demand out there. It doesn't help the economy if we switch from foreclosure sales to underwater owners dumping the houses on the market. It does reduce the legal transaction costs--maybe.
As far as I can tell, the only problem this really fixes is that people are more willing to pay when they're not underwater. But is the notion that housing is a gamble, and mortgages are some sort of a call option on the future value of the home, actually something we want our legal system to encourage? This starts looking less like a macroeconomic fix, and more like a way to transfer substantial money from banks to homeowners because we like homeowners better.
In doing so, we'll further impair the balance sheets of anyone who put capital into the real estate sector, and also create political outrage from the legions of homebuyers who didn't overstretch themselves on real estate. This has both economic and civic costs.
Moreover, I think that at least in the American legal system, a principal write-down program is going to be way more complicated than anyone thinks. I can see three ways to do it:
Pass a law forcing banks or servicers to write down the principal on underwater loans
Pass a law paying banks or servivers to do same
Allow cram-downs in bankruptcy.
My sense from reading, and talking to people in the administration, is that they gave up on the first because it was insanely more complicated than people thought, was going to trigger years of legal challenges, and was obviously going to drop a nuclear bomb on mortgage investments that were already in big trouble; if you forced them to write down the principal on any underwater loan, then to a first approximation, every single underwater homeowner was going to apply for a modification. The next step would be bank failures, contracting credit, and further downward pressure on the housing market as loan volume dried up, and modified homeowners tried to sell. That, of course, would push more homeowners underwater.
Which brings us to the second problem with option one: how do you value the houses? Writing down the principal on things like auto loans takes place in a very liquid market where prices are well established, and cover only a few thousand models of cars. Housing is not liquid at the best of times, each house is a highly specialized product, and with prices falling, historical comps no longer act as a safe floor.
The problem with paying banks is that all the losses you've forced onto the banks, instead end up on the government, with the added wrinkle that no one has much of an incentive to fight ludicrously low appraisals. This was never politically feasible--reward profligate homeowners without punishing banks? Ha! But it's not even on the horizon in an era of deficit panic.
That brings us to the third option, by far the most realistic. But it's far from the panacea that some people seem to think. It's not clear to me that all the pundits in favor of this solution understand that mortgage cramdowns only happen in Chapter 13 bankruptcies, not Chapter 7. Homeowners are not going to be able to walk into court and have the excess balance on their mortgage cleared, then walk away. You can reaffirm debts in Chapter 7 (and my understanding is that prior to this crisis, that's what most people did with their mortgage). But you have to pay the whole payment. The only way to get a write-down of the principal balance is to enter a Chapter 13 payment plan, which lasts years and as I understand it, usually requires that creditors get at least as much as they would have out of a liquidation. In other words, while bankruptcy judges are generally pro-debtor, they are not in the business of allowing people to stiff their creditors without penalty to themselves. if you have enough (non-exempt) assets or income to pay off the underwater balance, the judge is not going to help you reallocate that money towards other consumption. Chapter 13 plans are far from draconian, but they are generally set at levels that require considerable spending discipline.
Chapter 13 plans have fairly high administrative costs, requiring court oversight of debtor and creditor relations for the term of the payment plan; that means that the administrative savings on avoiding foreclosure will be considerably attenuated. They also fail more often than not; either the debtor reconsiders and converts to Chapter 7, the filing is dismissed, or the debtor can't keep to the plan. When these plans fail, debtors with "crammed down" loans are often worse off than if they had never filed, because if you don't complete the plan, you owe the banks all the money you haven't paid them, plus interest and possibly penalties.
Moreover, a Chapter 13 cram-down law would not have the sort of sweeping benefits that some of its proponents envision. Somewhere north of 10 million homes in America are underwater right now. At their very peak, the courts handled slightly over 2 million filings in one year (2005), but that was an anomaly driven by the 2005 reform bill; a more normal load is about what they handle now, 1.5 million. Even if the courts worked flat out, it would take years to process even a fraction of the underwater homes through Chapter 13.
That's not necessarily an argument that we shouldn't allow cram-down in bankruptcy--though as with the 2005 reform, I'm deeply uncomfortable with rewriting the rules covering loans that have already been issued, so I'd rather see us change the rules for newly issued mortgages. It's essentially a social choice: do we want to make loans cheaper for the majority of people who don't declare bankruptcy, or do we want to make things easier for the minority of people who do? I'm generally pro-easier-bankruptcy, but I'm also aware that more expensive mortgages would further damage an already hurting real estate market.
Which brings us back to the immediate topic at hand; how much would this help the economy? As we've seen, I'm skeptical that it would do as much as its proponents claim to relieve the financial distress of hurting families. If the write-downs are accomplished through bankruptcy, as I expect they would be, we would save less than promised on the legal and administrative costs. And the theoretical economic benefits--increasing labor mobility, easing the downward pressure on the housing market--would be at least partially mitigated by reduced loan availability for new purchases, selling pressure from those whose mortgages have been written down, and general lack of housing demand. Plus the haphazard nature of the housing valuation process would create windfalls and tragedies that would continue to be politically corrosive.
It's easy to see the appeal of cram-downs--they seem like a relatively simple solution that instantly sweeps away a lot of the problems we've had. But when you start considering the actual problems of execution, they start looking--to me, at least--considerably less appealing. I'm not saying we shouldn't do them--as I say, I can see the arguments on both sides. But even if we did go this route, the benefits would be at best small and mixed.
Hillary Clinton once tweeted that “every survivor of sexual assault deserves to be heard, believed, and supported.” What about Juanita Broaddrick?
If the ground beneath your feet feels cold, it’s because hell froze over the other day. It happened at 8:02 p.m. on Monday, when The New York Times published an op-ed called “I Believe Juanita.”
Written by Michelle Goldberg, it was a piece that, 20 years ago, likely would have inflamed the readership of the paper and scandalized its editors. Reviewing the credibility of Broaddrick’s claim, Goldberg wrote that “five witnesses said she confided in them about the assault right after it happened,” an important standard in reviewing the veracity of claims of past sex crimes.
But Goldberg’s was not a single snowflake of truth; rather it was part of an avalanche of honesty in the elite press, following a seemingly innocuous tweet by the MSNBC host Chris Hayes. “As gross and cynical and hypocritical as the right’s ‘what about Bill Clinton’ stuff is,” he wrote, “it’s also true that Democrats and the center left are overdue for a real reckoning with the allegations against him.”
A No. 1 bestseller by a respected physician argues that gluten and carbohydrates are at the root of Alzheimer's disease, anxiety, depression, and ADHD. What to make of the controversial theory?
“If you could make just three simple changes in your life to prevent, or even reverse, memory loss and other brain disorders, wouldn’t you?”
So asks Dr. David Perlmutter, in promotion of his PBS special Brain Change, coming soon to your regional affiliate. Three changes. Simple ones. Wouldn’t you?
The 90-minute special is a companion to Perlmutter’s blockbuster book on how gluten and carbs are destroying our brains. In November it became a New York Times number one bestseller. Since its September release, as Perlmutter told me, “It’s never not been on the bestseller list, frankly.”
“Is it still number one?” I asked. A pause over the phone as he checked. In modern interview style, we were both also on our computers.
From Eve to Aristotle to Sarah Huckabee Sanders, a brief history of looking at half the population and assuming the worst
The picture was striking. The military airplane. The sleeping woman. The outstretched hands. The mischievous smile. The look what I’m getting away with impishness directed at the camera.
On Thursday, Leeann Tweeden, a radio host and former model, came forward with the accusation that Senator Al Franken, of Minnesota, had kissed her against her will during a 2006 USO trip to Kuwait, Iraq, and Afghanistan. In a story posted to the website of Los Angeles’s KABC station, Tweeden shared her experience with Franken. She also shared that photo. “I couldn’t believe it,” she wrote. “He groped me, without my consent, while I was asleep.”
I felt violated all over again. Embarrassed. Belittled. Humiliated.
How dare anyone grab my breasts like this and think it’s funny?
I told my husband everything that happened and showed him the picture.
I wanted to shout my story to the world with a megaphone to anyone who would listen, but even as angry as I was, I was worried about the potential backlash and damage going public might have on my career as a broadcaster.
But that was then, this is now. I’m no longer afraid.
How did Andrew Anglin go from being an antiracist vegan to the alt-right’s most vicious troll and propagandist—and how might he be stopped?
On December 16, 2016, Tanya Gersh answered her phone and heard gunshots. Startled, she hung up. Gersh, a real-estate agent who lives in Whitefish, Montana, assumed it was a prank call. But the phone rang again. More gunshots. Again, she hung up. Another call. This time, she heard a man’s voice: “This is how we can keep the Holocaust alive,” he said. “We can bury you without touching you.”
When Gersh put down the phone, her hands were shaking. She was one of only about 100 Jews in Whitefish and the surrounding Flathead Valley, and she knew there were white nationalists and “sovereign citizens” in the area. But Gersh had lived in Whitefish for more than 20 years, since just after college, and had always considered the scenic ski town an idyllic place. She didn’t even have a key to her house—she’d never felt the need to lock her door. Now that sense of security was about to be shattered.
The nation wants to eradicate all invasive mammal predators by 2050. Gene-editing technology could help—or it could trigger an ecological disaster of global proportions.
The first thing that hit me about Zealandia was the noise.
I was a 15-minute drive from the center of Wellington, New Zealand’s capital city, but instead of the honks of horns or the bustle of passersby, all I could hear was birdsong. It came in every flavor—resonant coos, high-pitched cheeps, and alien notes that seemed to come from otherworldly instruments.
Much of New Zealand, including national parks that supposedly epitomize the concept of wilderness, has been so denuded of birds that their melodies feel like a rare gift—a fleeting thing to make note of before it disappears. But Zealandia is a unique 225-hectare urban sanctuary into which many of the nation’s most critically endangered species have been relocated. There, they are thriving—and singing. There, their tunes are not a scarce treasure, but part of the world’s background hum. There, I realized how the nation must have sounded before it was invaded by mammals.
For years, Republican politicians have attacked the mainstream press. With Roy Moore’s Senate bid, they’re facing the consequences.
All news is “fake news”—at least if you’re a diehard Roy Moore supporter.
With sexual misconduct allegations continuing to mount against the Republican Senate candidate in Alabama, Moore has defied calls to drop out of the race by advancing an audacious conspiracy theory—that partisan fabulists in the mainstream media are working with his enemies in the political establishment to wage a nefarious smear campaign against him. Not long ago, such claims likely would have backfired. But in the Trump era, anti-press sentiment has reached a fever pitch on the right—something candidates like Moore are eagerly exploiting.
Moore has not directly denied many of the specific allegations. Instead, he has sought to cast himself as the victim of a witch hunt and sow just enough doubt in the stories to muddy the waters in voters’ minds.
The president’s jab at the Democratic senator for sexual harassment calls attention to his silence about Roy Moore—and his own past behavior.
President Trump jabbed at Senator Al Franken in a pair of late-night tweets Thursday, poking at a Democrat whose career is in danger over past sexual harassment, but calling attention to his silence about Alabama U.S. Senate candidate Roy Moore—and, moreover, to his own history, including his boasts about sexual assault.
On Thursday, radio host Leeann Tweeden wrote about two incidents during a 2006 USO tour to Iraq, Kuwait, and Afghanistan. In one case, she said Franken—a Saturday Night Live alumnus and comedian who was not yet a senator—forcibly kissed Tweeden against her will during a rehearsal for a skit. And after returning home from the trip, Tweeden received a CD of photos that included Franken either groping or pretending to grope her over a flak jacket as she slept.
Writing in The Atlantic this week, Kurt Andersen praises members of the Church of Jesus Christ of Latter-day Saints or Mormons for their “sincere commitment to leading virtuous lives” while simultaneously snickering at their “extreme and strange” beliefs.
There is, of course, a long and rather ignoble tradition of simultaneously praising and mocking Mormons. In the throes of World War II, President Franklin Roosevelt sent off a friendly missive to Winston Churchill and his wife. Roosevelt noted his “very high opinion of the Mormons” while also taking the opportunity to poke fun at Mormon polygamy, which had officially ended in 1890.
Second Life was supposed to be the future of the internet, but then Facebook came along. Yet many people still spend hours each day inhabiting this virtual realm. Their stories—and the world they’ve built—illuminate the promise and limitations of online life.
Gidge Uriza lives in an elegant wooden house with large glass windows overlooking a glittering creek, fringed by weeping willows and meadows twinkling with fireflies. She keeps buying new swimming pools because she keeps falling in love with different ones. The current specimen is a teal lozenge with a waterfall cascading from its archway of stones. Gidge spends her days lounging in a swimsuit on her poolside patio, or else tucked under a lacy comforter, wearing nothing but a bra and bathrobe, with a chocolate-glazed donut perched on the pile of books beside her. “Good morning girls,” she writes on her blog one day. “I’m slow moving, trying to get out of bed this morning, but when I’m surrounded by my pretty pink bed it’s difficult to get out and away like I should.”
Want to become a florist in Louisiana? A home-entertainment installer in Connecticut? Or a barber anywhere? You’re going to need a license for that—and it’s going to cost you.
In most states, a person who desires to install home-entertainment systems for a living, or as a part-time gig for extra cash, faces relatively few barriers to entry. This is work teenagers routinely do for grandparents after they make a technology purchase. But in Connecticut, a home-entertainment installer is required to obtain a license from the state before serving customers. It costs applicants $185. To qualify, they must have a 12th-grade education, complete a test, and accumulate one year of apprenticeship experience in the field. A typical aspirant can expect the licensing process to delay them 575 days.
These figures are drawn from License to Work, a report released this week by the Institute for Justice, a public-interest law firm that has sued state governments on behalf of numerous small-business owners and members of the working class who’ve faced unduly onerous obstacles while trying to earn a living.