The great homeowner equity depression

As economic catastrophe looms, the mortgage industry, with the help of Republicans, fights to stop the government from making a real difference

Published March 6, 2008 9:49PM (EST)

One in ten American homeowners has no equity in their family home. That's the worst percentage since 1945, according to data released Thursday by the Federal Reserve.

Commenting at Credit Slips, Harvard law professor and bankruptcy specialist Elizabeth Warren contributes some absolutely must-read analysis of this disaster in the making that should be read in its entirety. But here are the high points:

The data show that about 15 percent [of homeowners] will be below water if prices continue to slide, owing more than their homes are worth.

So what's the plan here? One in ten homeowners could just walk away right now. Indeed, most of them, if they were the rational maximizers so prominently featured in classical economic analysis, would stop paying now, put the money in a savings account and wait the 90 days or two years or whatever until the lender could force them out by foreclosure....

If they walk, the national -- and world -- economy will seize up. The investors who hold those mortgages can avoid that if they are willing to share the pain and acknowledge that their loans are only partially secured. Like practical lenders have done for thousands of years, they could decide that getting a steady, partial payment is better than no payment at all. So far, however, the investors are holding tight...

The only proposal on the table that would make the investors renegotiate their mortgages and either get people into mortgages they can afford or get them out of the houses is the amendment to the bankruptcy laws [proposed by Democrats.] Last week, the Republicans filibustered the bill in the Senate, and a cloture vote failed. But no one is giving up yet....

The mortgage industry has blocked the bankruptcy amendment, but the question that puzzles me is why anyone is listening to the mortgage industry's herd of lobbyists. These are the people who said the industry didn't need regulation, that high-risk mortgages could be turned into low-risk bonds, and that everything was perfectly safe -- right up until it all came crashing down.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

MORE FROM Andrew Leonard

Related Topics ------------------------------------------

Elizabeth Warren Globalization How The World Works