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.
Conservatives once warned that Obamacare would produce the Democratic Waterloo. Their inability to accept the principle of universal coverage has, instead, led to their own defeat.
Seven years and three days ago, the House of Representatives grumblingly voted to approve the Senate’s version of the Affordable Care Act. Democrats in the House were displeased by many of the changes introduced by Senate Democrats. But in the interval after Senate passage, the Republicans had gained a 41st seat in the Senate. Any further tinkering with the law could trigger a Republican filibuster. Rather than lose the whole thing, the House swallowed hard and accepted a bill that liberals regarded as a giveaway to insurance companies and other interest groups. The finished law proceeded to President Obama for signature on March 23, 2010.
A few minutes after the House vote, I wrote a short blog post for the website I edited in those days. The site had been founded early in 2009 to argue for a more modern and more moderate form of Republicanism. The timing could not have been worse. At precisely the moment we were urging the GOP to march in one direction, the great mass of conservatives and Republicans had turned on the double in the other, toward an ever more wild and even paranoid extremism. Those were the days of Glenn Beck’s 5 o’clock Fox News conspiracy rants, of Sarah Palin’s “death panels,” of Orly Taitz and her fellow Birthers, of Tea Party rallies at which men openly brandished assault rifles.
A project begun after 9/11 assumes new urgency after the 2016 election—creating a more sensible plan for what happens when a chief executive steps aside.
American politics is deep into the theater of the absurd—but unfortunately, it is a deadly absurdity, like being in a horror funhouse where the creatures leaping out at you have real knives and chainsaws. Americans now have to face at least the possibility, a tangible one, that the election itself was subverted by a hostile foreign power in league with the winning presidential campaign, with implications all the way down the ballot.
What to do if that proves to be the case? It is a question I have been asked a lot; my stock answer begins with, “The Constitution does not have a do-over clause.” But I am now rethinking the response: Maybe it needs a do-over clause. And it does not have to require a constitutional amendment.
The Obama years left Republicans with excellent ratings from the Heritage Foundation, and no idea how to whip a vote.
The Republican Party’s marquee legislative initiative had just imploded in spectacular, and humiliating, fashion Friday afternoon when Paul Ryan stepped up to a podium on Capitol Hill. The beleaguered house speaker wasted no time in diagnosing the failure of his caucus. “Moving from an opposition party to a governing party comes with some growing pains,” he said. “And, well, we’re feeling those growing pains today.”
Ryan wasn’t wrong. The GOP’s inability to maneuver a health-care bill through the House this week—after seven years of promising to repeal and replace Obamacare—is, indeed, emblematic of a deeper dysfunction that grips his party. But that dysfunction may not be as easy to cure as Ryan and other GOP leaders believe.
Walk into the offices of Memac Ogilvy Advize, an advertising firm on the third floor of a car rental building in a business district of West Amman, Jordan, and you’ll be greeted with an immense black-and-white photo of Donald Trump’s face. The red cursive text printed across it reads: “We Trumped the awards.”
The sign sits behind a reception counter boasting a large trophy won at the Dubai Lynx 2017, an annual advertising competition where Memac Ogilvy won the Grand Prix for PR (a first for any Jordanian agency) along with four other silver and gold prizes, for trolling Trump in their ads on behalf of Royal Jordanian Airlines.
The College Board earns over half of all its revenues from the courses—and, in an uncertain environment, students keep being suckered.
Fraudulent schemes come in all shapes and sizes. To work, they typically wear a patina of respectability. That's the case with Advanced Placement courses, one of the great frauds currently perpetrated on American high-school students.
That's a pretty strong claim, right? You bet. But why not be straightforward when discussing a scam the scale and audacity of which would raise Bernie Madoff's eyebrows?
The miscellany of AP courses offered in U.S. high schools under the imprimatur of the College Board probably started with good intentions. The idea, going back to the 1950s, was to offer college-level courses and exams to high-school students. The courses allegedly provide students the kind of rigorous academic experience they will encounter in college as well as an opportunity to earn college credit for the work.
The divide sometimes has devastating consequences.
Doctors are doctors, and dentists are dentists, and never the twain shall meet. Whether you have health insurance is one thing, whether you have dental insurance is another. Your doctor doesn’t ask you if you’re flossing, and your dentist doesn’t ask you if you’re exercising. In America, we treat the mouth separately from the rest of the body, a bizarre situation that Mary Otto explores in her new book, Teeth: The Story of Beauty, Inequality, and the Struggle for Oral Health in America.
Specializing in one part of the body isn’t what’s weird—it would be one thing if dentists were like dermatologists or cardiologists. The weird thing is that oral care is divorced from medicine’s education system, physician networks, medical records, and payment systems, so that a dentist is not just a special kind of doctor, but another profession entirely.
The two-hour work, written and directed by Happy Valley’s Sally Wainwright, is a vibrant dramatization of how three sheltered women became such extraordinary novelists.
When it comes to the Brontë sisters, questions—and mythology—abound. How did three such relatively sheltered women, the daughters of a priest living in rural Yorkshire, write some of the most passionate and proto-feminist novels of the 19th century? To Walk Invisible, a two-hour drama airing on PBS on Sunday, touches on the fascinating contradictions of the Brontës, focusing on the three-year period when the sisters determined to publish their writing as a means of self-preservation. Aware of how they would be judged as women entering a man’s realm, they elected to use gender-neutral pseudonyms, so they could, as Charlotte explained in a letter, “walk invisible.”
To Walk Invisible is written and directed by Sally Wainwright, the creative force behind the BBC’s Last Tango in Halifax and Happy Valley. Like Happy Valley, a gritty drama about a forceful female police sergeant that’s developed an ardent American fanbase on Netflix,it draws much of its mood from the sullen bleakness of the Yorkshire landscape, suggesting a hostile, imposing environment that fosters strength in some and despair in others. In both dramas, Wainwright explores women forced to endure familial hardship: In the Brontë family, the burden is their brother, Branwell, whose descent into alcohol and drug addiction coincides with—and possibly spurs—the literary success of his sisters.
Supporters of Trump’s budget are eager to restore the central role of faith-based organizations in serving the poor—but it’s not clear they can be an adequate substitute for government.
President Trump’s initial budget proposal would end aid for poor families to pay their heating bills, defund after-school programs at public schools, and make fewer grants available to college students. Community block grants that provide disaster relief, aid neighborhoods affected by foreclosure, and help rural communities access water, sewer systems, and safe housing would be eliminated. Mick Mulvaney, the director of the White House Office of Management and Budget, suggested recently that even small amounts of federal funding for programs like Meals on Wheels, which delivers food to house-bound seniors, may not be justified.
With billions of dollars worth of cuts to federal social services likely ahead, the wars of religion have begun. Bible verses about poverty have suddenly become popular on Twitter, with Republicans and Democrats each claiming to better know how Jesus would think about entitlement spending. While conservatives tend to bring religion into public-policy conversations more than liberals, the valence is often switched when it comes to the budget: Liberals eagerly quote the Sermon on the Mount in support of government spending, while conservatives bristle at the suggestion that good Christians would never want cuts.
"Where people are desperate, it is still America they count on, whether they love or scorn it, and America they blame when aid does not come."
After Donald Trump’s victory in the U.S. presidential election in November, a foreign ambassador accosted one of my deputies at the State Department, where from 2014 to early this year I served as theassistant secretary of state for democracy, human rights, and labor. “You must be so sad!” the man, a representative of a Central Asian government, said, grinning widely. “All this talk of elections being important, of democracy being important, and now look at you! Now even your new president says there were 3 million illegal votes in your election! … You must all feel so stupid these days.”
Since then, the global club of autocrats has been crowing about Trump. Sudan’s dictator Omar al Bashir praised him for focusing “on the interests of the American citizen, as opposed to those who talk about democracy, human rights, and transparency.” Iran’s Supreme Leader Ayatollah Khamenei thanked him for showing “America’s true face” by trying to ban Muslim immigration. The Cambodian government justified attacks on journalists by saying Trump, too, recognizes that “news published by [international] media institutions does not reflect the real situation.”
After a high-speed crash in Arizona, the ride-hailing giant grounds its autonomous fleet.
In the era of self-driving cars, a scary but otherwise uneventful car crash can be huge news. This was the case in Tempe, Arizona, on Friday, when an Uber self-driving car was hit so hard that it rolled onto its side. There were no serious injuries reported.
Uber has grounded its fleet of self-driving cars in Arizona as a result, a spokeswoman for the company told me. “We are continuing to look into this incident, and can confirm we had no backseat passengers in the vehicle,” an Uber spokesperson said in a statement provided to The Atlantic. Uber also suspended testing of its self-driving vehicles in Pittsburgh and San Francisco “for the day, and possibly longer,” The New York Timesreported. In addition to its global ride-hailing service, Uber has been testing its self-driving car technology on public roads in Arizona, Pennsylvania, and California for several months.