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April 20, 2014

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j. patrick coolican:

Romney may sound callous, but he may also be right

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Steve Marcus

Former Massachusetts Gov. Mitt Romney responds to a question during an interview in Las Vegas Monday, Oct. 17, 2011.

J. Patrick Coolican

J. Patrick Coolican

Sun Topics

Early this week, Mitt Romney, in town for the Republican presidential debate, had this to say to Las Vegas residents who have thrown their money into the black hole of the real estate market: Tough luck.

That’s a paraphrase, but his quote to the Las Vegas Review-Journal means just about the same thing: “Don’t try and stop the foreclosure process. Let it run its course and hit the bottom, allow investors to buy homes, put renters in them, fix the homes up and let it turn around and come back up.”

Hard as it is to hear for Las Vegas residents, Romney might be right, according to real estate experts and economists from across the spectrum.

Preventing the bubble by raising interest rates and enforcing tougher lending standards was the proper policy. Once the bubble inflated, however, it had to deflate and prices had to reach equilibrium before there could be any recovery.

The government could have given money to homeowners instead of banks in 2008, but the bubble hadn’t deflated yet, so those homeowners would have again been deep underwater within a year or two, and the banks would be in crisis because they’d still be holding bad assets.

The federal government’s Home Affordable Modification Program, or HAMP, has been useless to Nevadans because to tap the program the homeowner can only be 10 percent underwater, whereas the average home in Clark County is 27 percent underwater, according to Nasser Daneshvary, director of the Lied Institute for Real Estate Studies at UNLV.

Nevada’s mandatory mediation program, which puts at-risk homeowners and lenders in front of a mediator to try to work out new terms, was passed by then-Assembly Speaker Barbara Buckley and is now championed by Republican Gov. Brian Sandoval as a national model. But in the face of mass unemployment and so many Nevadans happily choosing to walk away from their mortgages, the program is a soldier on horseback fighting a column of tanks.

Dean Baker, co-director of the Center for Economic and Policy Research who predicted the crash, says the federal government’s response has been “crazy” because it never acknowledged the bubble and was too focused on reinflating it. Bottom line, according to Baker: The bubble must deflate, and although it’s deflated here and in Phoenix, he thinks there’s a ways to go in markets such as Los Angeles and San Diego.

But the feds never properly distinguished between markets where loan modifications made sense because they were near the bottom, and others where a loan modification was just a short-term fix because prices were bound to fall much further. And of course banks haven’t been helpful, often refusing to consider modifications for homeowners able and willing to continue making mortgage payments.

Mike Calabria, of the libertarian Cato Institute, calls the wandering approach — which he noted has been tried by both parties — “building a bridge to the next bubble.”

The good news, here in Las Vegas: “We’re moving to clear the market,” says Robert Lang, the director of Brookings West and a real estate expert and consultant. In other words, stuff is selling, including 4,700 existing homes in August, the second-most ever.

(Other states with more sluggish foreclosure processes are moving slower.)

Even though prices in the valley were down 8.9 percent in September compared to a year earlier, 8.9 percent of nothing is much smaller than 8.9 percent of a lot, and price stability can’t be far behind this high velocity of sales.

By one way of thinking, the faster we get people out who can’t or won’t pay their mortgage and replace them with new owners, the faster we get to stability.

Another upside of the collapse in prices: Las Vegas real estate — both residential and commercial — is suddenly very affordable for retirees and business owners, giving us a competitive advantage.

A do-nothing policy is not without risk or collateral damage, however.

Neighborhood blight — empty homes, absent owners, ne’er-do-well renters — is a problem. Baker advocates a “right-to-rent” program wherein the homeowner would give up the home but be entitled to rent it from the bank or new owner at a fair market price determined by an assessor. This would give neighborhoods continuity.

There’s also the risk that the same mass psychology that gave rise to the bubble will work in reverse: As prices continue to decline, people who bought in 2009 and 2010 and aren’t that far underwater grow hopeless and still walk away from their property, which in turn pushes up supply and forces down prices still further.

According to a University of Chicago study, 35 percent of mortgage defaults are “strategic,” meaning the homeowner could pay but decides not to because the investment has become worthless.

Once people stop believing this is the rational choice, we’ll know we’ve reached some stability.

One way to stop it: Massive principal reduction — reduce what the borrower owes to something closer to market reality. Former Reagan administration economist Martin Feldstein called for this in a recent New York Times Op-Ed.

His proposal would reduce principal to no more than 10 percent above the current market price for the property; in exchange the borrower would agree that the bank could chase him down for the balance were he to walk away.

Daneshvary agrees with this thinking. “I can let the forest burn, but it will take years for the seeds to come up.” Put the fire out now, and the rebuilding can begin.

Of course, someone has to pay for principal reduction: Either the banks, or the taxpayers, or some combination of the two.

As Lang says, “Where’s the money come from?” The politics are brutal, as Wall Street has a solid grip on both parties, and taxpayers are loath to pay down someone else’s mortgage.

For whatever you think of Romney and his callous message to Nevadans, the lesson here is this: Once you’ve fallen for the scam — be it Tulips in 1630, Pets.com in 1999, or Las Vegas houses in 2005 — you shouldn’t expect to get repaid. The money wasn’t there in the first place.

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  1. Phil Gramm was the lead author of the Gramm-Leach-Bliley Act -- what you call the "Financial Services Modernization Act" of 1999.

    It is very clear you want to hide Republican authorship and design for repealing the Glass-Steagall Act of 1933 because your agenda is to paint the innocent as guilty.

    The Republicans want to remove the entire New Deal from the books and removing Glass-Steagall was among the first because it kept Americans safe for almost 70 years.

    Romney doesn't want Government protection from the Wall Street thieves - he wants Main Street to be personally responsible for bad debts of the Banks. He wants the working class of America to pay back the losses caused by bankers who got rich on their commissions by making bad loans. The bankers of course, keep their commissions. That's the true Romney plan.

    Romney however, does not want to re-instate any regulation on Wall Street banks and insurance companies. He wants to keep the Gramm-Leach-Bliley Act in place. Phil Gramm is Romney's hero.

    Romney is also coming after Social Security and Medicare to "make it more efficient", i.e. put the retirement funds in the hands of unregulated banks and insurance companies. Not only is he callous but unrepentant and ready to follow the same paths that created this recession in the first place.

    When 40 million people loose their retirement due to risky investments, the US Army may not be able to keep order, and may God Bless the ensuing demonstrations and upheaval as they will create a new Government out of the ashes to come.

  2. Damn, for the first time I agree with the author. Maybe I'm turning into a closet lib! Oh no!

  3. For every home that sells in foreclosure or becomes a rental property the value of the other homes in the area drops. Why are we not looking at ways to keep people in their homes rather than looking for ways to increase the wealth of Real Estate speculators? I may not agree with giving someone who bought a home they couldn't afford a free ride but if it is going to cost me thousands in the lost value of my home I am not going to stand on principle.

  4. I didn't think Coolican had it in him to agree with a Republicrat, well, sort of. Of course Romney is right - let the market decide - and I say this having a home "underwater - having seen its "value" drop $195,000 in 3 years. The bureaucratic drones in Washington D.C. have no magical insights, as a matter of fact they are the ones who put us all, home owners or not, into the economic mess we find ourselves in today and this is a nonpartisan view since both Dumbocrats & Republicrats screwed us. Both the Occupy Wall Street & TEA Party activists are on the right track when it comes to opposing bailouts, crony capitalism and goverment interference in our lives. They, along with many other American's, are waking up to the fact that we, on both sides of the political spectrum, have been bamboozled for decades by venal self-serving politicians and their cronies. Let's not fight each other but rid ourselves of any crooks, liars and thieves in office, regardless of party affiliation.

  5. Enjoyed the article, Mr. Coolican.

    Back in 2007-2008 (roughly), America, due to greed, lost approximately 20 percent of its worth. Nothing happened to the people who directly and indirectly caused this. And there is absolutely nothing set in place to prevent this from happening again.

    So, now, because all this happened, the American people are told, oh, it's unfortunate you lost your equity, you lost savings, but, hey, you need to suck it up, so sorry, build up your money again, this is America, damnit, build up that money for savings....SO WE CAN DO IT TO YOU AGAIN!

    It is this type of thinking that basically tries to reduce the general American populace to sheep. We are told to be good and follow. Even if the people who run things are incompetent.

    It's simple. We were lied to.

    And people wonder why the Occupy Wall Street movement started? And why it has spread nationally? Even internationally?

    It's like a famous man said once: It's better to live standing on two feet rather than dying on your knees.

    The American people are tired of the continual deflection, propaganda and blatant lies. We're not taking this anymore.

    We go after the people who wrecked this country and we will never stop trying to introduce legislation to prevent this crap from happening again to future generations of Americans. Non-stop. We OWE it to the next generations of Americans to fix this crap RIGHT NOW. We CANNOT and WILL NOT be denied.

    We take the money out of politics. That's the first step. It's getting us nowhere.

    We bust apart these too big to fail institutions. It's time to start paying attention to the people who are too numerous to ignore.

    I'm sure there's other things we can do, but hell, lets start with those two first.

    And if a politician provides cover for the ones who caused this? They are going to be totally and completely destroyed at the voting booths come election time. And I predict that is probably going to be the entire Republican Party. Because they have exhibited they side only with them, and reject even common sense. You plead jobs with them, and they turn to introducing legislation about female body parts. Really dumb.

    Drastic times call for over-the-top drastic measures. Time for people out here and get angry.

    We're not sheep, Mr. Romney. Looks like you're in the way and you represent a small minority of predatory Americans who have no sense of fair play at all.

    You're gone from the political landscape, ignored, Mr. Romney. Because that same ole same ole way of thinking will sink us common folk even further. Your stupid ideas on how to fix things are rejected. Go back to corporations. Because you suck at politics.

  6. Mr Romney is clearly out of touch with the working class. He views a home as an investment vehicle who's value can rise and fall and be manipulated by the whims of wall street. To the working class, our home is our home. It is ridiculous that banks were allowed to knowingly give bad loans, package them into securities, get those securities AAA rated, then sell them off across the financial markets. There were so many failures of the system in that process caused by lack of or unenforced regulation, it makes my head spin. I bought a house that I COULD afford, that is now worth half what I paid for it through no fault of my own.

    If it obvious with whom your interest lies when you say tough luck. It obviously isn't with me.

    Tough luck you say Mr Romney? Good luck in 2012. I'll say the same when you ask for my vote.

  7. There are a wide range of options beyond: "do nothing and wait for the pain to stop."

    The accounting value of underwater mortgages could be legislatively decreased to perhaps 30% of their excess value -- so that banks can not claim that a $200K mortgage on a $100K house is actually worth $200K, but maybe only $130K. That would motivate the banks to renegotiate the mortgages.

    Banks could be legislatively required to offer refinancing on any mortgages that they hold, regardless of how underwater a given house is. That way the same $200K mortgage at 6% could be changed to maybe 4.5%, assuming the owner is current on payments and has good credit.

    Both of the above would result in decreased household debt (or debt service in the latter case) and would be of marked economic value in Las Vegas.

    The banks are materially complicit in the artificial demand that created this bubble, and they should be on the hook for deflating it in a manner less painful than foreclosures and short sales.

  8. What "reversible mittens" said earlier in the week will change early next week. He flips and flops more than any politician in history

  9. The Greedy OLD Party RepubliCON Romney will FAIL in 2012. Tough Luck!

  10. By wizardofOz - you hit the nail on the head!
    Beginning with a the work of Presidents George H.R. Bush, and Bill Clinton, George W. Bush initiated the Coup De Grace when he signed the bi-partisan "AMERICAN DREAM DOWN PAYMENT ACT" into law on Decenber 16, 2003.

    In 2002, Bush said: "This Act will tear down the barriers to home ownership that stand in the way of our nation's African-Americans, Hispanic, and other minority families by providing down-payment assistance." President Bush and the Democrat and Republican Congress felt that NO ONE should be denied the opportunity to own a home.

    HUD Secretary, Mel Martinez said - "This program is not focused on Blacks or Hispanics, but we will sell it that way because we want minority buyers for these homes."

    On October 15, 2003, Bush proclaimed: "I set out a goal. I said over the next decade, we want there to be 5.5 MILLION new MINORITY homeowners; as of last year, there's 809,000 new minority homeowners in America."

    Meanwhile, the HUD Inspector General warned that the DEFAULT RATE on mortgages from the largest down-payment-assistance organization (Nehemiah Corp), was 25 TIMES HIGHER than the nationwide mortgage delinquency rate; and had quadrupled between 1999 and 2002.

    The percentage of Americans who own homes rose in 2003, but the FORECLOSURE RATE was rising much FASTER than the home ownership rate. And under this American Dream ... Act, banks were FORCED to write over 51% of their loans to minorities, or be fined.

    In January 2004, Federal Housing Commissioner, John Weicher, said: "the WHITE HOUSE doesn't think those who CAN afford the MONTHLY payment, but have been unable to SAVE for a down payment - should be DEPRIVED from owning a home." Further, Weicher said: "while zero-down-payment mortgages have long been considered PROFOUNDLY UNSAFE (especially for borrowers with dubious credit history), WE DO NOT ANTICIPATE ANY COST TO TAXPAYERS."

    Well, we know what happened NEXT. Greed set in along with the high volume home sales, and mortgage-backed securities packaged and sold to investors in the U.S. and overseas. While the buying frenzy was going on, investors WERE NOT LOOKING AT WHAT they were buying. They also IGNORED THE POTENTIAL RISK - just to make money.

    So who do we blame for this depression? Blame the SEC (for not examining packing of mixed AAA securities with lesser rated ones; blame Congress and the White House for pushing this Act too far; blame WALL STREET for allowing AAA securities to be mixed and sold as AAA grade. blame Fannie Mae and Freddie Mac for not checking the quality of mortgages being sent to WALL STREET; and blame INVESTORS who just got deliriously greedy.

    Now, we have to climb out of this mess, and I will listen to ANYONE who can make that happen. May God help our country recover, and millions of Americans find jobs. (Major Source: http://www.lewrockwell.com/bovard/bovard...)

  11. I never want to see the suffering that an economic collapse brings, especially for our children and elderly. One is too young to prevent it and the other too old to recover. That said, our housing crash was of our own doing.

    I hear a lot of folks blaming this or that politician or bank, etc. What I don't hear too often are folks admitting that they ignored common sense and too many large and clear signs that residential real estate was overpriced, in a rising bubble and bound to crash. It was clear that it was only a question of when, not if.

    For the folks who lost income and that started the ball rolling, it may be one thing. For those who are still employed at relatively the same level as when they bought, there is no excuse. Regardless, it was easy to see coming for those who practiced some common sense, careful consideration and did a little research.

    Now its time to let the other side of the equation work and the broken pieces will be filtered.

  12. It was recently reported that various factions of tea bagheads all went on record that they will choose who is the Republican candidate for President in 2012, NOT the mainstream Republicans.

    It will shape up to be the same as what we saw locally here in Nevada in November 2010 with the Sharron Angle/Senator Reid debacle.

    So Romney don't have a chance anyways.

    That, plus the fact he flip flops so much on not one issue, but EVERY issue. One pundit on television said that if he was addressing a crowd of cannibal Republicans, he would vow to provide a missionary for every cooking pot. He's a chameleon that is looking for someway, anyway, somehow to get in there.

    Anyways, Republicans are so brain dead they will reject him and go for crazy.

    Limbaugh/Hannity 2012!