A no longer rare underwater house
What do you do if your house is worth less than you owe? What do you do if even if you pay off your mortgage your house is worth less than your paper equity?
You “strategically” default. And Luigi Zingales says that if all the people that rationally should strategically default do, then we are in big big trouble:
How much risk? If the underwater homeowners who currently refuse to default changed their minds and decided to abandon their mortgage commitments, the results could be catastrophic. The more people walk away, the more houses get auctioned off, further depressing real-estate prices. This additional decline would push more homeowners into negative territory, leading to still more defaults. Adding to the deadliness of this cycle would be the fact that as more strategic defaults occurred, the social stigma associated with them would lessen. Such a continued collapse is already a distinct possibility in several states: Nevada (where two-thirds of all homeowners are underwater), Arizona (51 percent), Florida (49 percent), Michigan (48 percent), and California (42 percent).
He suggests a shared appreciation model of mortgage write down where the bank writes down the mortgage enough to keep homeowners interested, but then splits the appreciation from that point forward. That seems like a reasonable approach, BUT I doubt it will pass because politicians will want to specifically benefit the homeowners but not the banks.
April 5th, 2010 at 2:16 pm
Politicians will want to specifically benefit themselves. Collecting more taxes is what they want, always. What better way than eliminating the mortgage interest deduction so you can’t itemize!
A large annual $20,000 mortgage payment might save $3,000 in income taxes. That’s $250 per month on a credit card!
April 5th, 2010 at 2:57 pm
Jumbo mortgages by jumbo borrowers mean large deductions for large tax bracket denizens. Top bracket marginal rate (federal + state) runs 45% in blue states. Politicians aren’t the only ones wanting self-benefit with Smith’s invisible hand.
Collecting more taxes is only a means to the end of satisfying the largest number of voters. Isn’t that what representative government means?
April 5th, 2010 at 8:33 pm
That’s not what our representative government is all about. It’s limited in federal scope to protecting natural rights, providing physical security, and keeping crooks under control (that’s how you promote the general welfare). Besides, confiscating all the weath of the jumbo savers wouldn’t even be an appetizer for all the voter pigs.
April 5th, 2010 at 9:39 pm
A democracy will only last as long as it takes for the people to realize that they can vote themselves generous stipends from the public coffers.
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