Obviously I don't get paid to write the occasional (and in my humble opinion sometimes witty) blog post, so I'm forced to be like most people have have a day job. In my case, I work in the financial services industry and that introduces me to a lot of information relating to the economy. Even though I work for a large company that has tentacles in practically every market sector imaginable, I actually do not have any connection with the mortgage industry.
However, for some strange reason the mortgage industry interests me, so from time to time I will find myself researching various trends, analyzing data, and scouring over the opinions of real experts, self-proclaimed experts, and people who don't have a clue about anything but yet are continually quoted in newspapers and shown on cable news networks.
With that said, a recent Associated Press article caught my eye regarding foreclosure mediation. The actual article written by Oskar Garcia can be found here (or about 110 other websites which have linked to the AP story). The article included a statement attributed to UNLV economics professor Nasser Daneshvary which read that he "recommended that banks consider short-selling homes to current homeowners, and create modifications that include reductions in principal".
I've heard these types of arguments in the past, but I find some serious flaws in this logic. Therefore, rather than rolling my eyes or attempting to speak about the issue to those around me (who would likely not share my interest in economics) I decided to simply respond to Professor Daneshvary directly. A quick search online found me the University faculty listing, and I was able to capture his email address.
The following is the email I sent (I tend to get a little verbose in such communications):
I read with interest your comments in a recent Associated Press article about Nevada's Foreclosure issues. You were quoted as suggesting "that banks consider short-selling homes to current homeowners, and create modifications that include reductions in principal."
At first glace that would appear to be a feasible solution. It would allow families to stay in their homes, reduce the chance for neighborhood blight, stabilize and perhaps even improve the housing market by reducing the steady stream (flood) of foreclosures, and help prevent foreclosures from hitting borrower's credit reports.
However, I believe there are a lot of negatives to this idea as well. First, if banks begin short-selling homes to current homeowners, anyone with an underwater mortgage will soon realize it is in their best interests to miss a few payments. Due to income requirements this won't be feasible for some, but for those people who are renting out rooms or working second jobs or collecting rent from a live-in partner in order to make the mortgage payments it is a distinct possibility. Anyone who has suffered an income loss or a change in financial condition since the loan origination (whether they can afford the mortgage or not) would soon be in line to get what they perceive as "their share".
Second, if you create modifications to reduce principal, who should suffer the loss? Should the bank be forced to modify a $300,000 mortgage down to $220,000 and absorb the gap of $80,000 just to help a homeowner stay in their home? On what level would that type of action be sustainable? The losses to the banks would soon be so high from people purposefully missing payments in order to get into these types of programs that the cost to obtain a new mortgage would need to be increased in order to compensate. That in turn would drive down demand for housing and prolong the economic crisis.
I fail to see this as a moral issue for the banks or investors because when the housing market was booming and people were buying homes only to sell them at twice the price a few years later - do you recall any of these fortunate homeowners splitting the proceeds with the bank? Not likely. If modifications to principal are put in place now and the housing market recovers in a few years, that same $220,000 house could then be $325,000. Do you believe homeowners in this situation will go back to the bank and repay the portion of their original mortgage which was modified? If human history has taught us anything, the answer is a unequivocal no.
I fully realize people question why a bank would foreclose on a property and sell it at auction to recoup less than they would have if the simply modified the mortgage, but it would seem they are willing to accept some short term loss in order to prevent a much longer term wave of losses. Will there be cases of fraud where a friend or family member buys the home and re-sells it to the current homeowner at a reduced price? Yes, but fraud happens in almost ever scenario and can never be totally contained.
I won't claim to have all of the answers, and I understand greed on both the part of the banks as well as homeowners is one of the primary factors that led us down this road, but principle modifications and short sales to current homeowners would like not solve the issue, especially in those cases where a homeowner is able to make a payment but chooses not to because they fear their investment has lost value and may never return.
Like it or not, it would seem the current system of foreclosure and auction may very well be the best possible solution for both parties. One of the biggest mistakes made in this country is when our Federal Government, along with the banks and investment houses, attempted to tell everyone that owning a home is the American Dream. The reality is, some people are more well suited to renting. Unfortunately that is something we forgot during the boom years where low or no down payments were the norm or where interest only mortgages and adjustable rate mortgages seemed to be typical.
Although I tend to lean towards a free market, it would seem in this case that some regulation is most certainly needed. Elimination of 30 year mortgages in favor of 10, 15, and 20 years would be a start, as would banning interest only mortgages and zero down payment options in favor of the older established threshold of requiring 20% down. Will this prevent some people from owning a home? Certainly, but as soon as we get away from the mindset that everyone needs to own a home, the sooner we will be able to sustain a well-balanced home market and economy.
Of course I did send the email with my last name (I've redacted it here because based upon the number of pageviews my blog receives I'd rather keep some sense of anonymity), and I even included a disclaimer message telling Professor Daneshvary that I work in the financial services industry although I clarified I have no connect to the mortgage division and am speaking from my own personal viewpoint rather than that of my employer (it is always wise to be transparent about such things, especially if my employer would ever hear about it).
Now obviously I understand there are differing viewpoints on the issue and not everyone will agree with me. I also agree that a professor from the University of Nevada Las Vegas probably has more important things to do with his time than respond to a random person he has never met (and likely never will) who is not a UNLV alumni, is not a current student, is not a member of the media, and isn't even a fellow economist.
So imagine my surprise when less than 24 hours from me sending my email that I received a response. Below is the response I received from Professor Daneshvary:
Dear Mr. [redacted],
First, thank you for talking time to give me feedback and expressing your opinion. I have to say that I agree almost with all of your points, particularly the recommendations for future corrections (the last paragraph). If we would have followed the “traditional” way of doing business, we would have not been in this situation to begin with.
To start with, the quotation by the Associated Press is not a complete statement that I made. I followed the statement "that banks consider short-selling homes to current homeowners, and create modifications that include reductions in principal" with saying “in return for a share of future price appreciation.” This is one of the points that you raised.
I am an economist with a firm foundation on incentive-based behavior and opportunity costs. My comments and conclusions are based on the fact that, given current situation, what type of solutions may work better. The decline in home values has gotten to the point that individuals doing strategic defaults. Even, professionals with 300K pay check are asking me why I should keep repaying the 800K loan over my life time while the value of my home is only 400K. The traditional stigma that was associated with foreclosure and bankruptcy are not there anymore. Foreclosing a home does not have the long term credit/financial effect that it use to have for homeowners. There are homeowners who believe so many people are defaulting, resulting enough people with bad credit in the near future. Thus, obtaining a loan would not be an issue.
I am not saying these arguments/behaviors are right or moral. I am saying our system (bad policies combined with the lack of appropriate regulations) during the 2000s created a situation that needs to be taken care of before it completely destroys household asset accumulation.
Again, thank you for taking time to communicate with me.
Professor of Economics and Beam Research Fellow
Director of Lied Institute for Real Estate Studies
College of Business
University of Nevada, Las Vegas
4505 Maryland Parkway
Las Vegas, NV 89154
(702) [redacted] (Assistant)
Now it goes without saying that I was somewhat shocked to get a response at all much less one as detailed and informative as what I did. As it seems, the good professor and I actually share many of the same viewpoints, although I initially thought we had opposing views due to nothing other than an incomplete statement which could arguably be considered out of context.
I sent the professor another message shortly before drafting this blog post although it was more of a thank-you rather than a message intended to garner further discussion.
So I have learned several things here. First, always accept statements attributed to people with a certain amount of reservation - especially when they aren't direct quotations. Second, never be afraid to voice your opinion on an issue even if you don't expect a response. Finally, always be polite - you never know when someone might think what you have to say is worthy of their time.
The funny thing is, I have actually sent state level (not federal level mind you) politicians from my local district a couple of emails in the past and never received so much as an acknowledgment, so maybe economists are just more polite and courteous than politicians. That really doesn't seem like much of a stretch, and I doubt it would surprise anyone.
So what is the point of all of this? Who really knows - I just found it all very interesting and exciting at the same time. What can I say... some people get excited when they can provoke a "tweet" from a celebrity or if they can capture the attention of an athlete from the sidelines whereas I get excited simply by a response from an economist from a large and well-respected University.
Nobody ever claimed I was 100% normal.