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.
The ways some “healthy voice hearers” cope might be able to help people with psychotic disorders.
Jessica Dorner was lying in bed at her cousin’s house when her grandmother, a “pushy lady” in an apron who had been dead for several years, appeared in front of her. “I know you can see me,” Jessica heard her say, “and you need to do something about it.”
It was a lonely time in Jessica’s life. She was living away from home for the first time, and she thinks her grandmother was drawn by some sense of that. She eventually told her parents what happened, and according to her they were concerned, but not overly panicked. “My parents are probably the least judgmental people I know,” she said.
As Jessica tells it, over the next two years, spirits visited her every now and again. Her brother-in-law’s deceased father began forming before her, ghostlike, just as her grandmother did. And while the experiences were intense and at times made her feel “crazy,” she said, they were infrequent, and insists that they were never a real source of suffering.
In 2004, people in the U.K. consumed more alcohol than ever before. How did they get there?
I first met alcohol in the late 1980s. It was the morning after one of my parents’ parties. My sister and I, aged 9 or 10, were up alone. We trawled the lounge for abandoned cans. I remember being methodical: Pick one up, give it a shake to see if there’s anything inside, and if there is, drink! I can still taste the stale, warm metallic tang of Heineken (lager; 5 percent alcohol by volume) on my tongue. Just mind the ones with cigarette butts in them.
Other times we’d sneak a sip of Dad’s Rémy Martin VSOP (cognac; 40 percent) when he wasn’t looking, even though we didn’t like the taste. It came in a heavy glass bottle that he kept in the sideboard. He’d pour himself a glass at night, the ice cubes clinking as he walked to his small office to make phone calls. On special occasions—family birthdays, Christmas lunch—we even got to drink legitimately: usually half a glass of Asti Spumanti (sparkling wine; around 7.5 percent), served in the best glasses.
In Trinity v. Comer, there was no remaining dispute between the actual parties—and both the majority opinion and the leading dissent got the issue wrong.
Trinity Lutheran Church v. Comer, the church-state case decided by the Supreme Court Monday, is a truly hard case. I can think of good arguments for either side, and even better arguments why—since there was no remaining dispute between the actual parties—the court should have stayed out altogether.
The court waded in, alas. And the majority opinion, by Chief Justice John Roberts, and the dissent, by Justice Sonia Sotomayor, got the issue wrong.
In Trinity Lutheran, a church challenged the state of Missouri’s refusal to fund safety improvements at its daycare playground. In April 2017, however, the newly elected governor of Missouri ordered the state to grant the funding and not to enforce its no-churches funding rule. The church won what it wanted because the state decided to give it—this being, for any judges unclear on the concept, what is wistfully called “the political process” courts are supposed to support, not supplant.
There could still be a vote soon on Senate GOP legislation to dismantle the Affordable Care Act, Democrats warned on Tuesday.
Republicans backed off a plan to vote this week on legislation rolling back much of President Obama’s signature healthcare law, the Affordable Care Act. But Democrats don’t think this is the end of Trumpcare.
“It’s far from over. McConnell said he’s going to come back to it soon,” Democratic Senator Dick Durbin of Illinois said in an interview at the Capitol. “We’re not taking anything for granted.”
Senate Majority Leader Mitch McConnell announced on Tuesday afternoon that the Senate would “not be on the bill this week,” as Republican Senators continue “discussions within our conference on the differences that we have.” But he added that “we’re still working toward getting at least 50 people in a comfortable place.” McConnell only needs 50 Republican senators to pass the legislation—assuming Vice President Pence breaks a tie —because Republicans are using a process known as budget reconciliation to evade a Democratic filibuster.
And other tales from the intersection of science and airport security
When Martin Cohn passed through airport security at Ronald Reagan Airport, he figured that he’d probably get some questions about the 3-D-printed model of a mouse penis in his bag.
The model is 15 centimeters long, made of clear translucent plastic, and indisputably phallic— like the dismembered member of some monstrous, transparent, 11-foot rodent. One of Cohn’s colleagues had already been questioned about it when she carried it on an outward flight from Gainesville to Washington D.C. She put it through the security scanner, and the bag got pulled. A TSA official looked inside, winked at her, and let her go. She was amused but embarrassed, so Cohn offered to take the model home on the return flight.
Majority Leader Mitch McConnell told reporters after meeting with Republican senators on Tuesday that he would put off a vote until after a weeklong July 4 recess. The move is an abrupt retreat for McConnell, who had been pushing to pass the bill this week just days after releasing it to the public.
“We're going to continue the discussions within our conference on the differences that we have, that we're continuing to try to litigate,” the majority leader said. “Consequently, we will not be on the bill this week, but we’re still toward getting at least 50 people in a comfortable place.”
In dismantling Obamacare and slashing Medicaid, Republicans would strike a blow against signature victories for racial equality in America.
It was a cold March night when Dr. Martin Luther King, Jr. turned his pulpit towards health care. Speaking to a packed, mixed-race crowd of physicians and health-care workers in Chicago, King gave one of his most influential late-career speeches, blasting the American Medical Association and other organizations for a “conspiracy of inaction” in the maintenance of a medical apartheid that persisted even then in 1966.
There, King spoke words that have since become a maxim: “Of all the inequalities that exist, the injustice in health care is the most shocking and inhuman.” In the moment, it reflected the work that King and that organization, the Medical Committee for Human Rights (MCHR), were doing to advance one of the since-forgotten pillars of the civil-rights movement: the idea that health care is a right. To those heroes of the civil-rights movement, it was clear that the demons of inequality that have always haunted America could not be vanquished without the establishment and protection of that right.
The National Geographic Travel Photographer of the Year Contest is open to submissions until the end of this week, June 30. The grand-prize winner will receive a 10-day trip for two to the Galápagos Archipelago with National Geographic Expeditions. National Geographic was again kind enough to allow me to share more of the entries with you here, gathered from three categories: Nature, Cities, and People. The photos and captions were written by the photographers, and lightly edited for style.
The former acting solicitor general said that the Republican blockade against the onetime Supreme Court nominee represented a breakdown of checks and balances.
In March of last year, then-President Barack Obama nominated the federal appeals-court judge Merrick Garland to the Supreme Court. Spring passed. Summer passed. Fall passed. Senate Republicans, under the leadership of Majority Leader Mitch McConnell, refused to hold a hearing to consider him, let alone schedule a vote. In November, Donald Trump was elected president and in short order named his own nominee. Within three months of Trump’s inauguration, the Senate confirmed Neil Gorsuch to the Court.
Speaking Tuesday at the Aspen Ideas Festival, which is co-hosted by the Aspen Institute and The Atlantic, the Supreme Court attorney and former Acting Solicitor General Neal Katyal sharply criticized this sequence of events, calling the GOP’s Garland blockade “unforgivable.” Katyal said:
A new study found that people who identify as Slytherins may be measurably different from the Hufflepuffs of the world.
I’m not particularly proud of this fact, but here it is: Pottermore, the Harry Potter-themed website unveiled by J.K. Rowling in 2012, has peered deep into my soul, evaluated its findings, and pronounced me a Hufflepuff.
Fans of the series will know why this is upsetting. For all the non-Harry Potter buffs reading this, though, here are three quick points of explanation. One: At Hogwarts, the wizards’ academy that serves as the backdrop for most of the series, students are sorted into one of four houses, each with its own distinctive character. Two: On Pottermore, fans can take a personality quiz to do the same. Three: Hufflepuff’s defining trait is “nice.” Its mascot is a badger. Its members, if Hogwarts were an American high-school cafeteria, would be the ones in the corner, frantically combing the trash for their retainers.