What we now call “The Great Recession” might only have been a “regular” recession, had the federal government focused more on aiding homeowners with the reduction of mortgage debt, rather than staying hyper-focused on the preservation of the financial system.
That’s according to a new book, “House of Debt,” penned by two University of Chicago economic professors Amir Sufi and Atif Mian.
Miami foreclosure lawyers know that in the end, former Federal Reserve Chairman Ben Bernake and former Treasury Secretary Timothy Geithner were successful in their goal of saving the banks. But what Sufi and Mian argue is that the goal was short-sited and came at a terrible price, as both the U.S. and Europe suffered severe downturns, from which we are still working to emerge.
Almost five years after the recession formally ended, we still have millions of Americans out of work with millions more still underwater on their mortgages and living paycheck-to-paycheck.
It’s not that the professors think that it was an entirely bad idea to aid the banks. The problem, they say, is that approach was not paired with an effective housing plan.
Using reams of data culled from Equifax (without identifying information) starting in 2006, the professors began to formulate a hypothesis on the evolution of the boom, bust and beyond. There was evidence that lenders who had a lot of money were extending loans that grew riskier and riskier. In fact, some of those regions in which incomes were rapidly declining are the same areas in which lending volumes increased the fastest.
This trajectory continued until borrowers began defaulting at lightning speed. It wasn’t until then that the loans began to dry up, housing prices plummeted, people lost their equity and accrued more debt. People stopped buying, and a recession was soon underway. The economists determined that for every $10,000 decrease in home values, average monthly household spending fell by $300.
When the Obama administration stepped in, there was talk of a number of relief measures, including allowing bankruptcy courts to forgive more debts, buying up loans or paying lenders directly. However, what the administration ultimately adopted was a narrow aid program that was predicated on the belief that helping the banks would help everyone.
Except, what we found was that the banks still exhibited greed, deceit and even more fraud. There was the robo-signing scandal. There was the independent foreclosure review scandal. There were numerous settlements reached where banks promised to provide relief to homeowners, only to turn around and engage in dual-tracking, pushing cases closer to foreclosure even as borrowers sought loan modifications.
What’s perhaps worse, the professors posit that the current rules of debt are moving in a direction that is not beneficial to either borrowers or society. The people who are taking the greatest risks are those who have the least financial ability to handle setbacks. Normally, this would mean interest rates will fall, so others would spend more, too. But in today’s economic climate, it’s virtually impossible to get those rates low enough to establish enough incentive. So we either need to forgive those debts (mostly mortgage-related), or impose some of the losses onto creditors.
The two say that if lenders agreed to ease debts during times of economic downturns, they could then expect to obtain a percentage of gains from any eventual sale of that home. The process would be known as “shared-responsibility mortgage.”
Unfortunately, the theory has yet to gain steam in the mainstream.
If you’re battling foreclosure in Miami or the surrounding areas contact Jacobs Keeley for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Debt Warriors with Bruce Jacobs,” discussing foreclosure topics that matter to YOU.
The Case Against the Bernanke-Obama Financial Rescue, May 16, 2014, By Binyamin Appelbaum, The New York Times
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Ted Kaufman: Trust in Equal Justice Eroded With Mortgage Crisis Failures, May 18, 2014, Miami Foreclosure Lawyer Blog