Monday, October 27, 2008

Comparative Mortgage Confusion

Photo by juria yoshikawa

Even very smart analysts seem to have a tough time understanding the most basic elements of the current crisis. The Economist for this week contains an "Economic Focus" section (Oct. 25th, p. 92) that discusses several plans for providing aid to homeowners to try to stem the tide of foreclosures and finally put an end to the basic problem at the heart of this financial mess. A key question is how to keep people in their homes and avoid mortgagees suffering 40% and higher losses on the increasingly depressed foreclosure market.

The premise of the introduction to the Economist's discussion is that declining house prices are getting in the way of this effort by undercutting mortgagors' (homeowners') incentive to work something out, keep making their payments, and stay put. While Alan White has convincingly and repeatedly pointed out that it is irrational resistance by lenders (and servicers) that is to blame here (see, e.g., here and here), not hesitancy by homeowners, the Economist perspective intrigued me . . . until I saw this catchy line: "Two features of housing finance make the crisis hard to resolve. The first is so-called 'no-recourse' home loans, which are standard in America (though not elsewhere)." [emphasis added] The second feature, by the way, is securitization and the problem of getting consensus from the pool investors for a workout, a problem that FDIC chairperson Sheila Bair seems to have largely disproved.

This observation from the non-U.S. Economist writers on American home finance seems to me patently false. Lesson for comparative researchers: if you discover that fundamental financing practices in a major region (like the U.S.) are different from "elsewhere," best check again. Non-recourse home mortgage loans (where the borrower is not legally indebted on the loan if the home value upon foreclosure does not retire the loan) are decidedly not standard in the U.S. (or anywhere else, so far as I know). While some states, like California and Arizona, make purchase-money loans for residential home mortgages non-recourse as a matter of law, these exceptional statutory impositions don't come close, it seems to me, to making non-recourse lending "standard" in the U.S.

Yes, many (but not all) U.S. home loans are secured by purchase-money residential mortgages, many (but not even most) of those loans are in California, and many (perhaps most) of the most troubled loans are in California, too, so the non-recourse issue has major relevance to the crisis. But let's not overdo it. Anecdotal evidence suggests that many of the troubled mortgages in California are investor properties--not residences--so these loans are most likely recourse in California, too. As for the practice of "jingle mail," where people just walk away from their hideously depressed-value homes and say "come get me" (or bettter yet, "ha, ha, you can't come get me") to the lender, I have yet to see any credible evidence that this is at all common, especially for residential mortgages (as opposed to investment units). It seems to me that, if the American Bankers' Association had hard, credible evidence of a high incidence of jingle mail, it would make serious political hay by sharing that evidence and decrying the sorry state of mortgagor morality in America. The fact that the ABA has remained mum on this issue (so far as I know) strongly suggests there's no "there" there.

So while ideas for getting folks to stay in their homes should be at the heart of a real solution to this crisis, such solutions should be neither explained in terms of nor based on the incorrect notion that most (or even many) home loans in the U.S. are non-recourse, and it's homeowners who need to be convinced to cooperate in workouts. If we can get lenders and servicers on board with the FDIC's IndyMac approach to mortgage modifications, we'll be moving in the right direction . . . and we don't need to worry about homeowners following.

No comments: