A year later, and in hindsight, Tyler reaffirms his position.But I was actually somewhat (not altogether) surprised by your support for the bailout package. So let me ask you again, what would cause you to disagree with yourself? I guess I'm asking because I can't provide good answers to the following questions: What information do policymakers have to get it right? And what incentive do they have to get it right? Therefore, I don't see how they will get it right, and are more likely to do long and short run harm.
I'm not convinced. And I obviously wasn't then. But current conditions in the real estate market, which I have been tracking locally and somewhat regionally, leave me concerned about another wave of bank failures due to real estate foreclosures. (And here.)If another big negative shock comes the government's liability position still could turn out to be much worse. But if we stop and click pause and evaluate the policy today -- the answer to my question is "yes, the bailouts were a good idea."
Ivy Zelman, chief executive of Zelman & Associates, a research firm based in Cleveland, believes three million to four million foreclosed homes will be put up for sale in the next few years. The question is whether the flow of these homes onto the market will resemble "a fire hose or a garden hose or a drip," she says.
Analysts who track the shadow market have focused primarily on the gap between the number of seriously delinquent loans and the number of foreclosed homes for sale by mortgage companies. A loan is considered seriously delinquent, which typically means it is headed to foreclosure, if it is 90 days or more past due.
As of July, mortgage companies hadn't begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn't yet acquired the property. The figures don't include home-equity loans and other second mortgages
Moreover, there were 217,000 loans in July where the borrower hadn't made a payment in at least a year but the lender hadn't begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren't in foreclosure, up from 8% a year earlier.
This shadow inventory further depresses the market. So does the prevalence of half-finished developments, many with higher end larger homes that the median householder cannot afford. As these homes (primarily the shadow inventory) come on the market, the result is that more homeowners are driven under water with their existing mortgages. Consequently, more people are expected to walk away from their homes and mortgage obligations. The Economist adds more.
This is not something that Tyler did not consider; in fact, he was adamant that things could become worse. I believe that it is now a given that things are headed downward, notwithstanding the recent run up in stock prices. But the problem is that banks were not permitted to fail to begin with. Had they been left to stand or fall on their own, there would have been a liquidation of the assets of insolvent banks, a selling off of their outstanding loans, and more banks calling in builder loans and putting more homes into foreclosure sooner. The inevitable had to happen, it was a matter of when.
Like Japan's "lost decade," I am afraid we've forestalled the inevitable. We've permitted insolvent institutions to survive, and consequently exacerbated the financial problems facing the banking sector and the macro economy.
Update: I forgot to add the problems looming from the oversupply of properties in the commercial real estate market. Twenty years ago I was considering leasing retail space in Sterling, Virginia. It was 24 miles outside of Washington, DC, and you had to pass cow farms before you got to the isolated shopping center. It was not as densely populated as it is today, and the median household income was probably 30% of what it is today. Retail space was letting for $17 to $21 in that area. Today in Apex, NC, a twenty minute drive from downtown Raleigh, retail space is letting for $10 per square foot and there is an abundance of empty retail outlets. This puts further pressure on banks that had they not be recapitalized, may have already foreclosed on the developers and found a market-clearing price.
Comments