For the first time since the Federal Reserve began tracking home equity data in 1945 the amount of equity homeowners hold in their homes fell below 50% in the fourth quarter of 2007 according to the Federal Reserve. More interesting still is the finding by Moody’s Economy.com that approximately 10% of homeowners now have zero or negative equity in their homes. This resulted from a 8.9% drop in U.S. home prices in the fourth quarter of 2007.
And analysts are predicting roughly an equal decline in home prices in the first quarter of 2008. That will put nearly 20% of homeowners at zero or negative equity.
What happens if homeowners are genuinely the rational actors of neoclassical economics? They default on their mortgages the moment they reach zero equity and wait for the up to two years it would take for their lender to force them out by foreclosure. That means large-scale bank failures even with a massive federal bailout. Can we say the magic words “conjunctural crisis of capital”?
The only way out of this crisis is for lenders to recognise that the paper they hold on these homes is only partially secured and that they must renegotiate lower rates of interest with borrowers.
The most advantageous way to do this and still protect lenders is to allow bankruptcy judges to set lower intetest rates on defaulted home loans, as legislation proposed by the Democrats in Congress would permit. But does the mortgage banking industry see the writing on the wall? Most definitely not. Their lobbyists are holding adamant against any modification of bankruptcy law which would not permit them to squeeze blood out of every rockbottom homeowner in America, and doing so with Republican support, despite Fed Chairman Ben Bernanke’s pleas to the mortgage industry to renegotiate these clock-cookooland mortgages. The latest propaganda of the mortgage banking lobbyists projects an immediate two percent rise in all interest rates if the legislation passes. This is errant nonsense, pure scaremongering when they should be terrified at the consequences of their own shortsightedness.
I don’t know what will happen. Part of me hopes that the mortgage banking industry wil continue its shortsighted advocacy of raw greed. It’s been a very long time in America since we’ve had a stark reminder that the ultimate defence of the working man against corporate rapacity is a mob with shotguns and torches, and mass foreclosures on the anticipated scale is likely to rouse such a mob. Perhaps that’s what it will take to get a reasonable regulatory regimen to prevent the sort of madness that engendered this housing bubble in the first place. It was the threat of such mobs which made New Deal regulation palatable to Wall Street in the 1930s. But capital markets have notoriously flat learning curves, particularly it involves foregoing short-term gain for long-term survival.