The horizon is not so far as we can see, but as far as we can imagine

More Notes on How To Help Homeowners

Let’s run through how it has to be done if it’s going to be done right.

1) The face amount of the mortgage needs to be reduced by the long term value of the house, as if the housing bubble hadn’t occurred. This is both to reduce foreclosures and to help reset housing prices where they should be.

2) Payments need to be set at a maximum of about 30% of income. This is the decades old rule of thumb for how much a family should be paying for housing. It’s also important because the more a person is spending on housing, the less they’re spending on anything else, and consumer spending recovering will be important to any lasting recovery.

3) Any government mortgage needs to be senior, with no other debt able to supersede it.

4) Mortgage contracts going forward, sold by anyone, need to be defined by the government as to what the terms can be. Maximum effective interest rates, which must include any possible combination of fees, must have a maximum set by the government (ie. a federal anti-usury law), probably at prime + X, based on prime at the time the mortgage was written. This will limit balloon payments, jumpers and other such traps.

5) A floor needs to be set under housing prices. That floor should be set at either 30% what the median income in a zip code is, or at what prices were in 2002. This is the value the government will buy out a mortgage for, and it means that everyone knows what the least a mortgage (and therefore the securities based on mortgages) are worth.

6) Bernanke wants to lower interest rates, but he wants to do it indirectly, by buying Ginnie Mae securities or having Congress subsidize the loans. This is inefficient, the simplest way is to just use the banks taken over (which should include Citigroup) to make loans at whatever rate the Fed thinks is appropriate and avoid private banks refusal to lend.

7) Since a collapse in housing prices, while overall a good thing because it will increase real non-debt related consumer spending and will make Americans more competitive, will also cause deflationary pressure, some steps should be taken to increase the real economic value of houses. This means:

* Areas that will be eligible for federal aid in the form of mortgage repurchases and rewrites must change their zoning to allow home businesses;* A major broadband build-out must be done, with no usage caps, to allow folks to work from home. The current 5 gig limit that the majors seem to be moving towards is too low;

* As part of the infrastructure stimulus a massive refit of buildings for energy efficiency and generation must take place, to allow people to micro-generate power and make money that way; and,

* The power net must be reconfigured to allow micro-metering so that people can sell the energy they produce and see how much energy is costing at any given time.

All of these things will increase the real economic value of houses, and after the initial suburban shock at the idea of someone working at home, will increase the value of houses, but will do so in a way that makes economic sense. A place you can make money from, and not just live in, is worth more. A place that takes less energy to run is worth more.

This will also set a floor under a significant cause of the financial crisis, allowing firms to have a chance of actually calculating losses. The problem right now is no one knows where the bottom is, so it’s impossible to know how bad a shape anyone is in. Finding that floor, or rather creating one, is essential to “restoring confidence”.


How To Bail Out Ordinary Mortgage Holders And Not Just Banks


Security Theater


  1. Lex

    I find the rezoning very interesting. It seems that the issue is likely to blow up here in Michigan shortly. The reason is that we passed a medical marijuana initiative in Nov. 08. Since the law went into effect on Apr 6, the state claims that 11,517 application have been received. Every business day!

    As written, the law allows a card holder to cultivate 12 plants. Households with multiple card holders can multiply the plant count. Card holders may designate a “primary caregiver”, and such caregivers may cultivate for five card holders plus the caregiver. That’s a total of 72 plants allowed, and there are no six people who can smoke that much weed. (back of the envelope calculations suggest that even a not terribly competent grower could produce well over one pound/month)

    Card holders may conduct marijuana business with other card holders so long as no card holder exceeds his plant count or processed marijuana weight limit. A competent grower with two cards in the house could easily produce a regular surplus and sell it to other card holders. And so long as everyone involved is a card holder, the same distribution model used by black market producers is entirely legitimate.

    So now the state is trying to figure out how to handle all these people running legal businesses out of their homes. The same back of the envelope calculations suggest that even on the low end of production and pricing, a full caregiver in Michigan can easily generate $50,000/year gross income. It’s well beyond “mildly profitable hobby”.

  2. While I agree with all of theses proposals, I think that something else is happening that is preventing the authorities from doing the obvious. The US and world are in the late-stage of a financial cycle, which as Hyman Minsky observed, is dominated by Ponzi finance. Compounding this in the present period is securitization based on consumer credit. A lot of derivatives (MBS, CDO’s) are based on leveraging consumer credit. This is a time bomb that the authorities realize can explode into the type of debt deflation that Irving Fisher originally described and which can still easily lead to Great Depression II if the house of cards crumbles. To put it bluntly, the failure of Bear and then Lehman woke the powers that be up to the fact that Merrill, Morgan Stanley and Goldman were next in line, with Citibank also deeply insolvent, and CDS’s spread all around that couldn’t be backed. As a result, emergency operations were undertaken to stabilize the system first and then to reflate the toxic debt as the only way out.

    It seems to me that the way to account for present policy is the fear that liquidation of any sort would likely blow up the system, which is still a house of cards resting on securitization of consumer debt. This fuse is still burning and the Fed and Treasury are trying to pour water on it with low rates, increased liquidity, and a blind eye to regulation and oversight. It’s anyone’s guess whether this is going to work, and if it doesn’t, then the world is in deep doo-doo. That’s why Geithner just threw Fannie and Freddie another few hundred billion on Christmas Eve. If the mortgage market goes, the US can kiss its ass goodbye, and the world with it. Talk about nuclear bombs.

  3. Lex, how do you think that depressed Northern California has been surviving for years now? I remember driving out back one time and running into a neat coffee shop in the middle of nowhere. Stopped naturally, and was talking to the owner over a cup. My buddy asked him what folks did for money around those parts. He said, nonchalantly, “Grow dope.” Then he thought a minute, and added, “Or work for the government.” Then he quickly corrected himself, “Or, both.” We all had a good laugh. But that’s really how it is.

  4. Lex

    tjfxh, yeah, NorCal is an interesting place in that regard. I’ve known people who moved to Arcadia, land of $6,000 electric bills. And the trouble seems to be that all that cash just sloshes around in the local economy.

    And that’s why it angered me when Obama laughed off the question of economic benefits from marijuana decriminalization. NorCal is a good example of Main Street economic activity because of decriminalization (even if it’s de facto). A hundred square feet and a relatively small infrastructure investment is all that a homeowner would need to produce a substantial part (or all of) a mortgage payment. If the California experience holds true, it would require a huge growth in supply to really push down prices. California still hasn’t reached that point, not to mention the growth in demand if legal repercussions are removed.

  5. Lex, I was living in a town in Mendocino County, where growing up to 99 plants per person was legal. The per capita income was under 20K and the median house price over 500K. When I new in town, I asked a local how this was possible. He quickly explained the economics to me. He then added, “When I need an extra 50K or so, I just grow a few plants.” BTW, folks in these parts have the technology down pat, so they get top dollar. It’s a major industry now.

  6. Lex

    It’s a huge industry based on a plant that does very well in the completely controlled environment of indoor cultivation.

    There’s a telling line in Michael Pollan’s The Botany of Desire after Pollan visits a Dutch grow-op. He quips that the best horticulturists of at least a generation are unknown to the field because they spend their time hiding in attics and basements. And he’s right. Those people are incredibly scientific. If you know horticulture and look through the “indoor gardening” product catalogs, you end up saying, “whoa, wow, holy shit” a lot. The technical proficiency to make a plant do exactly what they want, how they want and when they want it is amazing.

  7. jo6pac

    Thanks for all of the advice on growing it might be my next job since I just received my last check from the corp. store. I was going to take a trip to Emerald Triangle this spring to find some old friends.

    Then back to the subject, I don’t think this group has it in them to save the public only their masters

  8. Lex, what’s the “trouble” with keeping the money local? At least that way the banksters can’t steal it.

  9. Lex

    I agree, lambert. As i understand it, the difficulty is in putting all that cash income to use outside of the very local where everyone’s willing to wink and nod at a grocery bag full of $50 bills. As i understand it, the trouble isn’t that the money stays local, the trouble is that it’s difficult to put the money to use outside of simple consumption without running into the difficulty of laundering large sums of cash.

  10. Lex, I am told that a many foreclosures are being bought up by growers who are converting them into grow houses. Some folks have a dozen houses in production now that RE is so inexpensive. Of course, they will then do very well when prices recover. In fact, with state-wide legalization looking like it will pass in CA in 2010, everyone is rushing to make a killing before the prices drop.

  11. It’s hard for me to understand 1), or rather, hard for me to understand why the banks wouldn’t opt for this in these economic times. At least they get part of their money back this way. If they foreclose, they could lose much more. Only if they assume they won’t lose does that make sense, at least as a long term strategy. Are they assuming the government will always bail them out?

  12. A lot of these banks in NoCal are small local or regional banks and they are happy to get the property off their hands, since they aren’t in a position to maintain it and it would just deteriorate in value if it were not gutted for the copper.

  13. Lex

    The 2010 referendum in California has the potential to blow a lot of issues up. It’s much, much bigger than marijuana. Will the federal government attempt its usual, heavy-handed threat of withholding federal funding? Since CA is broke and only receives $.80 for every $1 it contributes, will it consent to being held hostage? Since it’s a ballot initiative, is there anything the CA legislature can do? (assuming it passes)

    Its passage would mean contravention of federal law, raising interstate commerce issues and 10th amendment issues. Not to mention offering a bipartisan rallying point for all the growing, “fuck the government” sentiment. I would also think that its passage would put the Obama administration in a real bind politically. He’d either need to give or risk losing a lot of support in a state that A. contributes a lot to the Democratic Party and B. is basically necessary for a Democrat to win the presidency.

  14. Ian Welsh

    TJXFH, Yes, I agree that they’re scared of any form of liquidation. The problem is that the losses are happening anyway, they’re just being concealed.

  15. Ian: “The problem is that the losses are happening anyway, they’re just being concealed.”

    This is why I sense that Geithner, Summers, and Bernanke are running scared. And the last thing they want is any transparency or Congressional meddling that would show up all the regulatory forbearance, rigged accounting rules, bogus stress tests, etc.

  16. Lex, the Dems need CA politically, and the US needs the CA to succeed, and CA knows it. There will be deals.

  17. Lex: On the money laundering… That’s fascinating. Maybe small manufacturing startups? Out in the woods? Or possibly a local currency, and then exchange the currency? Assuming those are legal options, of course.

  18. Lex: Then again, it sounds like what they need is a bank. If the tribes could be induced to go into banking instead of gambling, we could have any number of offshore banks right here in the continental United States.

  19. Lori

    What an interesting thread. Marijuana, foreclosures and the California economy.

  20. Lex

    And i feel bad for hijacking it (sorry, Ian). My original point was about zoning, because Ian’s spot on (as usual) that US zoning laws restrict access to the kinds of solutions the country needs.

    I know people who’ve moved out of the “city” (it’s 20,000 plus students) because they just wanted to keep a few chickens for egg production and zoning laws prohibit that. Or all the stories of people running afoul of their city by planting a vegetable garden in the front yard.

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