The Problem with Loan Modifications

Over the past two years, many policymakers have identified loan modifications as key to fighting the mortgage crisis. The rationale for encouraging modifications appears quite simple: foreclosure is expensive for both the borrowers (who lose their home and their credit worthiness) and lenders (who often recover only a fraction of what they are owed). It would therefore seem that loan modifications — reducing payments so that owners can avoid foreclosure — are a potential win-win for both sides.

From that perspective, the slow pace of modifications appears rather mysterious, with potential causes including (a) stupidity on the part of lenders and servicers, (b) flaws in servicing contracts for securitized mortgages, and (c) borrower reluctance to even speak with their lenders.

Both the Bush and Obama administration have initiated a series of policies to encourage modifications, yet results have not lived up to expectations. The Washington Post has a nice article this morning that walks through one of the reasons for this failure. The basic problem is that the argument in favor of loan modifications focuses on only one kind of borrower: those who would make payments with some help but won’t make payments without that help. However, those borrowers are outnumbered by two other types: those who would pay without help and those who won’t pay even with help.

Foreclosure Continue reading “The Problem with Loan Modifications”

House Prices by Price Tier

The St. Louis Fed has a nice one-pager that illustrates how the housing boom differed across homes in different price tiers.

In each of the four cities they examine (Boston, Cleveland, Phoenix, and Tampa), low-priced houses experienced the biggest boom (a relative concept in Cleveland, to be sure) followed by the biggest bust:

House Prices by Tier

The authors interpret this as evidence that:

Middle- and upper-tier home buyers were more insulated from many of [the factors that drove the boom and bust in the prices of low-price tier homes]. They had less need for the newer mortgage products, as most of these consumers were not first time buyers. As homeowners, they had equity to put toward their purchase, in contrast to most lower-tier first-time home buyers.

The pattern is particularly striking in Phoenix, where the price index for low-price homes has now fallen below the indices for middle- and high-price homes.

(ht: Torsten Slok) 

Step One of a Housing Bottom

Last week’s report on residential construction provided more evidence that housing may be beginning to bottom. The headline evidence, noted by most media and economic pundits, is the rebound in housing starts over the past two months:

Housing Starts (June)

The rebound is from an extremely low level, so it’s hard to get too excited about it. But it does suggest that the plummeting of the past few years may finally be over.

As I noted last month, however, a bottom in housing starts isn’t a bottom in housing. From a macroeconomic point of view, the key thing is the amount of construction activity, which depends on both housing starts and housing completions. Not surprisingly, house completions plummeted along with housing starts, albeit with a lag reflecting the time needed for construction: Continue reading “Step One of a Housing Bottom”

Beyond the $23.7 Trillion Headline

Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (affectionately known as SIGTARP), is making headlines with his estimate that the government has provided “potential support totaling more than $23.7 trillion” in fighting the financial crisis. That estimate will be officially released on Tuesday morning in the SIGTARP’s latest quarterly report (you can find an early copy here – ht WSJ).


As the media are already noting (e.g., WSJ and Yahoo), there are many reasons to believe that the $23.7 trillion figure is overstated. For example, as noted in the footnote to the table above, the figure “may include overlapping agency liabilities … and unfunded initiatives [and] … does not account for collateral pledged.” In other words, there may be double-counting, some of the programs won’t happen or are already winding down, and the estimates assume that any collateral is worthless. For example, to get to $5.5 trillion in potential losses on Fannie Mae and Freddie Mac (part of the $7.2 trillion Other category), you would have to assume that all GSE-backed mortgages default and that all houses backing them are worthless.

In short, the SIGTARP estimate is a way upper-bound on likely Federal support to the financial support. That fact shouldn’t detract, however, from the importance of the rest of this report.

Continue reading “Beyond the $23.7 Trillion Headline”

House Prices and Productivity

Many economists, myself included, refer to the recent boom and bust in house prices as a bubble, whose foundation lay in a combination of credit market excesses and human imperfections. Fundamentals certainly played a role as well, but bubble forces were particularly important.

In a short paper recently published by the New York Federal Reserve, Jim Kahn makes a very different argument: that the boom and bust in house prices can largely be explained by a boom and bust in productivity growth:

The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.

Jim’s argument depends on several related lines of reasoning:

  • First, he notes that productivity drives long-term income growth and that incomes determine how much families can pay for homes. He then argues that the demand and supply for housing are inelastic and, as a result, rising incomes imply rising house prices. Putting these pieces together, he concludes that faster productivity growth implies faster house price appreciation.
  • Second, he notes that productivity growth accelerated in the mid-to-late 1990s and then slowed around 2004. The productivity acceleration thus began shortly before house price took off, and the productivity slowdown began shortly before house prices began to collapse.

Kahn Productivity 1

Continue reading “House Prices and Productivity”

The Subsidies in TARP

How much is TARP costing American taxpayers? We know that Congress originally authorized up to $700 billion in TARP investments. And we know that $439 billion has been committed to various programs. But how much of that money are taxpayers likely to see again? And to what extent will they be compensated for making those investments?

The Congressional Budget Office took a crack at answering those questions in a report released last night. The headline finding is CBO’s estimate that subsidies in the TARP program are $159 billion. Taxpayers put up $439 billion and, in return, now own assets (including recent repayments) worth $280 billion.

The following chart shows the estimated value of the TARP portfolio (dark red) and subsidies (light red) across the major TARP programs:

TARP Subsidies

Key insights from the chart: Continue reading “The Subsidies in TARP”

Has Housing Reached Bottom?

I must confess that I find Jim Cramer entertaining and, on occasion, even illuminating.  The key is to Tivo his show and fast forward through the less-than-illuminating parts.  That can trim an hour show down to ten minutes or less.

The highlight of Tuesday night’s show was Cramer’s declaration that the housing market had reached bottom. His evidence?  Tuesday’s data on housing starts, which came in stronger than expected.  That prompted me to take a closer look at the data. Here’s a chart of single-family housing starts since 1970 (when the data begin):

Housing StartsAs the chart shows, Cramer may be on to something, at least as far as starts are concerned.  Single-family starts bounced around the 360,000 level (at a seasonally-adjusted annual rate) in January through March, rose to 373,000 in April, and hit 401,000 in May.  It’s been more than two years since we’ve seen starts increase that much.

That’s good news, but I think we should still expect further pain in housing.

Continue reading “Has Housing Reached Bottom?”