Victims of Bush’s ‘Ownership Society’ Walking Away from Bad Mortgages

We’re creating… an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.
- President George W. Bush, October 2004


h/t Think Progress

As economist Paul Krugman once explained, “[B]orrowing to buy a home is like buying stocks on margin: if the market value of the house falls, the buyer can easily lose his or her entire stake.” And that’s just what happened after the financial sector collapsed during the Bush administration. The housing bubble deflated. Real estate prices are down an average 30 percent nationwide. More homeowners now owe more money than their homes are actually worth.

Wall Street billionaires and real estate moguls go into default when they want to cut their losses on a business deal gone bad. Why not home buyers? When a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

Help is not on the way. The Obama administration isn’t able to subsidize the real estate market– by one estimate, it would cost $745 billion. Also, Senate Democrats failed to pass “cramdown” legislation that would have enabled bankruptcy judges to allow homeowners to renegotiate mortgages.

Victims of the “ownership society” can keep up with the payments, even though there may be better uses for that money, or they can mail the keys to the bank.

Of course, the financial powers that be are counting on Americans to honor their bad mortgage deals. Some people have an emotional attachment to their homes. Others actually believe “personal responsibility” is more than a slogan, and refuse to adopt Wall Street style amorality. Others can’t afford to have a bad credit score. But more and more are walking out. Some who lost their jobs in Bush’s Great Recession have no choice.

  1. #1 by Uncle Rico on February 3, 2010 - 9:48 am

    What I would find laughable if it wasn’t so offensive is the notion being fostered and perpetuated by large financial institutions and investment houses that borrowers are morally obligated to continue making payments on a bad investment. Meanwhile, those same financial institutions and investment houses think it perfectly permissible for them to breach contractual obligations when breaching makes the most economic sense. This is not a moral issue despite what the banks and their cronies are saying. It is an economic issue.

  2. #2 by brewski on February 3, 2010 - 10:19 am

    Richard, why is your indignation so selective? Where is your rage for the Democrats who fueled the fire? Why only GOP? Is your post about the housing bubble, or is you post just that you don’t like Republicans?

    Read some more:
    http://www.usnews.com/blogs/barone/2008/10/06/democrats-were-wrong-on-fannie-mae-and-freddie-mac.html

  3. #3 by Richard Warnick on February 3, 2010 - 10:44 am

    brewski–

    The point of the post is that if Wall Streeters can default on their obligations, home buyers who got taken by Bush’s “ownership society” can walk away too.

    As for Fannie Mae and Freddie Mac, is it really necessary to remind you that Republicans controlled Congress and the White House from 2001-2006? Any needed reforms could have been instituted before it was too late.

    Anyhow, Fannie and Freddie were hardly the cause of the subprime mortgage crisis. It was predatory lenders in the private sector. The full details are in this report (PDF).

    The Bush administration did more to cause the crisis than simply deregulate the financial markets and stand back. No, they actively intervened to stop state governments from protecting consumers from subprime loans.

  4. #4 by brewski on February 3, 2010 - 11:57 am

    I did not say that the GOP is blameless. I said you are only wagging your finger at the GOP as though the “Roll the Dice” Democrats are innocent bystanders.

    You also need to stop calling it “the subprime crisis”. You seem to be unware that the housing bubble and subsequent crash affected all homes and not just those homes financed by subprime loans.

    The bubble was not caused by subprime loans alone. It was caused by direct and indirect subsidies for mortgages for ALL borrowers, not just subprime borrowers. The lower cost of funds of both Fannie and Freddie was one of the larger subsidies. Far too easy FOMC policy was another.

    Fannie and Freddie did buy prime loans and a subsidized rate, they bought Alt-A loans and they even began to but subprime loans after the subprime market had started to deteriorate (which doesn’t say much for the decisionmaking).

  5. #5 by Richard Warnick on February 3, 2010 - 12:15 pm

    I prefer to draw a bright line between the people who caused the collapse of the financial sector and damned near took us into Great Depression 2.0, and those who are not responsible. Did you watch the Bush campaign ad?

    If we are talking about the origin of the mortgage meltdown, it was subprime lending and securitization of bad loans. Now we are in a second phase, in which Bush’s Great Recession continues to depress real estate values as a result of massive job losses.

  6. #6 by brewski on February 3, 2010 - 2:12 pm

    The asset bubble started in 1995. It was identified on December 5, 1996. The first asset crash was in 2000. Going to blame that on Bush when he was Governor of Texas?

    http://www.federalreserve.gov/boardDocs/speeches/1996/19961205.htm

    http://en.wikipedia.org/wiki/File:Shiller_IE2_Fig_2-1.png

    Start making sense.

  7. #7 by brewski on February 3, 2010 - 2:13 pm

    You keep focusing on the timing and causes of the meltdown. There would have been no meltdown had there been no bubble. You need to look at the timing and causes of the bubble. You are about 10 years too late.

  8. #8 by shane on February 3, 2010 - 2:27 pm

    One thing is for sure, we don’t want any of those lame infrastructure spending programs to try and avoid future collapse. Those things never help.

    In yet another analysis of the causes behind the current financial crisis, it turns out that vehicle ownership and a lack of access to public transportation may be just as predictive of mortgage foreclosure rates as low credit scores and high debt-to-income ratios.

    Read More http://www.wired.com/autopia/2010/02/could-cars-have-caused-the-mortgage-meltdown/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wired%2Findex+%28Wired%3A+Index+3+%28Top+Stories+2%29%29#ixzz0eVgM9rLV

    Not important though…

    You keep focusing on the timing and causes of the meltdown. There would have been no meltdown had there been no bubble.

    That is true.

    There also would have been no meltdown if we had no society, and lived in caves. Or maybe trees are better.

    Another approach could have been to carefully manage the bubble, and have only a minor slowdown, but that would have involved Bush a) having a monetary policy b) not buying into the ignorant “cutting taxes solves everything” paradigm, c) not trying to destroy the government by starvation, d) actually regulating banks, e) not stopping others from regulating banks, f) not following through on his campaign promise.

    Whats that? What campaign promise?

    Why the one where he promised to run the country like a business. He just forgot to mention that he had destroyed every company he had ever touched…

  9. #9 by cav on February 3, 2010 - 2:45 pm

    Shane: APPLAUSE!

  10. #10 by Richard Warnick on February 3, 2010 - 2:46 pm

    brewski wrote:

    The asset bubble started in 1995.

    What else happened that year? It’s all coming back to me…

  11. #11 by shane on February 3, 2010 - 2:51 pm

    Rich, is that somehow linked to the famous “contract out on America”?

    Shame about that. Republicans taking out a hit on their own country…

  12. #12 by RedLedger on February 3, 2010 - 3:00 pm

    Not everyone was irresponsible, but it sure seemed like it. No matter if you were smart or dumb, let’s hope we all learned a lesson from the recession.

  13. #13 by brewski on February 3, 2010 - 3:07 pm

    Alan Greenspan made a deal with Clinton that if he would be soft on interest rates if Clinton became more of a deficit hawk. Clinton went along with it, so Greenspan obliged with accommodating monetary policy. Neither understood the long term impact of this deal.

    Greenspan’s advice to Clinton came with an implied promise and threat. If Clinton cut the deficit, Greenspan would reduce interest rates and allow the economy to expand briskly. This would make the “latter part of the 1990s . . . look awfully good”, thereby improving the odds of Clinton’s re-election. But if Clinton failed to cut the deficit adequately, Greenspan would not reduce interest rates, and the economy would continue to limp along, perhaps threatening Clinton’s re-election. Greenspan admits he was “not oblivious to the fact that 1996 would be a presidential election year”. He was, in short, engaging in political extortion. The choice was Clinton’s, but Greenspan held a gun at his head. “Either he could opt for a package of spending programs that would fulfill some of his campaign promises, or he could opt for a deficit-cutting plan . . . there was no in-between – we couldn’t afford both.” Several of Clinton’s advisers, of whom I was one, did not believe the budget needed to be cut as much as Greenspan wanted, or that so much of Clinton’s campaign had to be abandoned. As Greenspan puts it, “the conflict extended to within the White House, where key people were still pushing for an agenda less compatible with Wall Street”. But only Greenspan had a gun. So he and Wall Street won.
    The ensuing boom seemed to validate the choice Clinton made, but in reality it only validated Greenspan’s power. Lower interest rates had the desired effect, at least in the short term.

    - Robert Reich (that well known rightwingnut)

  14. #14 by Richard Warnick on February 3, 2010 - 3:19 pm

    After Reagan and the first Bush tripled the National Debt, did President Clinton have a choice? Democratic presidents now get stuck cleaning up after the Republicans (you know, the “party of fiscal responsibility”).

    Only after expending most of their political capital on unpopular budget cuts and tax increases do Democrats even get to think about trying some progressive policies. The Republicans’ worst nightmare is a government that actually works– delivering prosperity and a better quality of life for all Americans.

    President Obama should have ditched Bernanke. We need another Paul Volcker.

  15. #15 by brewski on February 3, 2010 - 3:45 pm

    Yes we do need another Paul Volcker. I had the honor of meeting him at Princeton many years ago. A friend of mine was an econ prof there. Very smart guy and very personable. I am not faulting Clinton at all for being a deficit hawk. I am a bigger hawk than he is. It is the GOP’s drunken sailor behavior which has alienated a lot of true conservatives. So my comment was not a criticism of Clinton at all. It was Greenspan’s accommodating monetary policy starting around 1995 or so which led to the irrational exuberance, the bubble of the late 90′s and then the crash of 2000. Which were quickly followed by more easy monetary policy, 9/11, and further easy policy and then the next bubble of 2003-2006 and the chaos of today. So I am pinning it more on Greenspan (and Bernanke and Geithner as accomplices) and not Clinton. I would just criticize Clinton for taking credit for the 90′s when I am not sure it is a good idea to take credit for a bubble. He also was only able to be a budget hawk with the help of the GOP and not by his own party. He had to piss off the Regressives to get it done.

  16. #16 by Kevin Owens on February 3, 2010 - 3:54 pm

    It might be a good thing if the federal government got out of the mortgage business altogether. If the mortgage interest tax deduction, the FHA backed loans, and other mortgage affordability programs were to disappear, house prices would consequently fall and thus be naturally be more affordable.

  17. #17 by Richard Warnick on February 3, 2010 - 4:08 pm

    brewski–

    I think your take on Greenspan is absolutely right. While he did warn about “irrational exuberance” in the stock market, he didn’t realize how dangerous the housing bubble had become until it was too late.

    I guess that blindness was a function of the fact the bubble kept the economy afloat past the point where Bush might otherwise have sunk it. It was like the water-tight compartments on the Titanic, that postponed the inevitable for a couple of hours.

    You’re right about Clinton too, he invented (or Dick Morris invented) “triangulation” and progressives never forgave him. Now Obama is trying the same trick and progressives are threatening to boycott the next election.

    Kevin–

    The value of my house already went down 40 percent in the last year, according to the tax assessor. I’m guessing you don’t have a mortgage! :-(

  18. #18 by Kevin Owens on February 3, 2010 - 4:10 pm

    Richard – I do have a mortgage, but I think Americans generally would be better off if houses cost less.

  19. #19 by brewski on February 3, 2010 - 4:20 pm

    Kevin,
    That is a key insight which 99.9% of people especially politicians don’t undestand.

    The mortgage deduction was, ostensibly, to “help” people be able to afford a home. But this is perverse since any subsidy like this results in the price of homes rising, making homes less affordable. So, like virtually all subsidies, it doesn’t work.

    Also, since it subsidizes mortgages and not the house itself, it is really an incentive of debt over equity. So it encouraged people to lever up, even if they had more money to put down as equity. Also, since it is tied to your income taxes, it is no subsidy at all for people with low incomes who either pay no taxes or can only use the standard deduction, and it is a bigger subsidy the higher marginal bracket you are in.

    In fact, the more I think about it and the more I write the more I conclude that anyone who thought of the mortgage deduction in the first place must be a sociopath.

  20. #20 by James Farmer on February 3, 2010 - 5:29 pm

    brew:

    Are you advocating elimination of the mortgage deduction? The more I consider your comment, the more it appears you are pissing on the grave of Ronald Reagan. What’s with that?

  21. #21 by Richard Warnick on February 3, 2010 - 5:55 pm

    I guess we could start with eliminating the mortgage interest deduction for second homes. How about that?

  22. #22 by brewski on February 3, 2010 - 6:14 pm

    In the world of me being Czar there would be no deductions at all. One large 0% bracket so that there is no tax until $20K or so. The only deduction which has any defense is the charitable contribution deduction. All the rest are group politics.

    Also, all employer provided benefits would be taxable. There would be no special tax deals and tax “incentives” for pretty much anything.

    Eliminate the marriage penalty. Abolish the AMT.

    No junk food subsidy.

    I would fully tax dividends received by a taxpayer, but make dividends deductible to corporations so that the dividend is taxed once and not twice and that equity is on the same footing as debt for the corporation. I would tax all GHG including CO2 and Methane pretty heavily, and the non-cullinary use of water.

    No payroll taxes.

    The mortgage interest deduction makes about as much sense as the Hummer deduction.

  23. #23 by Larry Bergan on February 5, 2010 - 2:40 pm

    When I financed my condo, I sensed enough not to get an adjustable mortgage rate, but other then that, I don’t know beans about any of this stuff.

    Interesting thread though!

    There is a soundbite somewhere that has Bush, even more explicitly, telling lower income people to buy a house, so it disgusted me that the republicans were blaming it all on Clinton when the problem became undeniable.

  24. #24 by brewski on February 6, 2010 - 5:15 pm

    Larry, like I said before, there is a lot of blame to go around. No one has any moral high ground to stand on. Except for a handful of pretty smart and un-powerful people like Brooksley Born. Her warning was in May of 1998. 1998! for God’s sake. It was ignored by everyone. Greenspan, Rubin, GOP, Dems. It didn’t matter. There was no ideological divide. They were all on the same team and the one team was Wall Street.

    People like Richard rant on and on about Bush’s Recession and Bush’s crash. Such statements just defy historical fact. Yes Bush was oblivious, but so was Clinton (remember the crash of 2000?), so was Greenspan, so was Bernanke, so was Geithner, so was Summers, so was pretty much everyone.

  25. #25 by Larry Bergan on February 6, 2010 - 11:27 pm

    but brewski, did you see Obama being asked questions at the Republican gathering. They were blaming him for the entire meltdown when he had only been in office for a month and none of his policies were even enacted yet.

    I just can’t see giving the Republicans any breaks. The biggest thing that stands out to me about the Clinton years is that the Republicans were doing exactly what they’re doing now; obstruction without a cause. It’s like a bunch of babies who don’t want to help our country because it’s not their idea. As usual, they only care about looking good and winning, no matter what happens to us.

  26. #26 by brewski on February 7, 2010 - 12:28 am

    Wow, Republicans blaming Democrats for everything. That is about as shocking as Democrats blaming Republicans for everything. I am shocked shocked shocked to learn that gampbling is going in in this establishment Mr. Rick.

    Helping our country? Which part about taking a $150MM bribe from the drug companies was helping our country? I guss you’ll need to explain that part to me about “helping our country”.

  27. #27 by Larry Bergan on February 7, 2010 - 6:40 am

    I prod a response from brewski with:

    but brewski, did you see Obama being asked questions at the Republican gathering. They were blaming him for the entire meltdown when he had only been in office for a month and none of his policies were even enacted yet.

    and his answer is:

    Wow, Republicans blaming Democrats for everything. That is about as shocking as Democrats blaming Republicans for everything. I am shocked shocked shocked to learn that gampbling is going in in this establishment Mr. Rick.

    Helping our country? Which part about taking a $150MM bribe from the drug companies was helping our country? I guss you’ll need to explain that part to me about “helping our country”.

    Wow?

    Republicans blaming Democrats for everything?

    Is water wet?
    do broken clocks give the right time twice a day?

    You decide.

  28. #28 by cav on February 7, 2010 - 9:01 am

    Tea or Kool-aid?

    Decisions decisions.

  29. #29 by Dwight Sheldon Adams on February 10, 2010 - 11:33 am

    Kool-aid has made “iced tea” flavors in the past. Yummy.

  30. #30 by Bowl 'O Jello on February 11, 2010 - 8:29 am

    Larry, you are a progressive and live in a condo?

    I’m calling National Geographic, liberal chameleon lives in purchased yuppie warren, photo shoot of Larry and his signs in the parking lot.

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