Cover Story

Commanding the waves to recede

"Commanding the waves to recede" Continued...

Issue: "Ghost streets," Feb. 27, 2010

Later, I looked around one area, the Brookshire development in south Fort Myers, that hasn't been hit as hard as others. A resident there, Duane Clairmore, 72, does not fit the stereotype of "deadbeat" homeowners who put almost nothing down, lied about their income, and received loans (and lived in homes) much larger than they could afford. Clairmore, a retired Western Union manager from Wisconsin, was married for 36 years. His wife died six years ago. A year later he used much of his life's savings for a $75,000 down payment on a $200,000, two-bedroom (1,114 square feet) stucco and cement Brookshire home. Asphalt roof. Attached garage. Well-maintained. Nothing fancy.

In short, Clairmore wasn't reckless or extravagant. He did things right-except that he bought at the wrong time and signed onto an adjustable rate mortgage (ARM) that he says he did not fully understand. Clairmore's immediate financial problem is that he has $2,000 of income per month and pays $830 for his mortgage-but he fears a May reset in the adjustable rate that he says would increase his monthly payment by $200 or so. That's beyond what he says he can afford. He'd prefer to sell his home, but it is now appraised for only $121,000. The average Brookshire sale price is $94 per square foot, according to Zillow.com, so by that measure the house may be worth only $104,000.

At this point Clairmore's $75,000 down payment is completely lost, and he owes more than the house is worth. He says he can't afford to stay, but he hasn't been able to sell his home at a price that would pay off the mortgage. He is underwater, but because of his large down payment he's better off than many others: Industry experts predict that by June one of every 10 American homeowners will be in a property worth less than 75 percent of its outstanding mortgage. Some can hang on and hope values will bounce back, but those who lose their jobs or have health problems, etc., have little choice. The number of homes lost through foreclosure and related means was 1.7 million in 2008 and 2 million last year, according to economy.com-with 2.4 million expected this year.

The result for Americans is an ethical, political, and financial problem. Should the federal government rescue Duane Clairmore, whose house lost half its value? What about others whose homes have lost two-thirds? Does Clairmore's 37.5 percent down payment make him more worthy of aid than those who put 0 percent or 3 percent down? Does his signing onto an ARM make him less worthy? If he is bailed out, does that create for other homeowners a "moral hazard," an enticement to make bad deals with the expectation that Washington will offer a new deal?

The Obama administration, siding with the mice while trying not to scare the elephants, keeps fine-tuning its requirements for lenders. Since last April the administration has released new requirements nine times and made 90 clarifications, according to the Mortgage Bankers Association (MBA). On Jan. 27, as Fort Myers residents were lining up for help, the MBA pleaded with the administration to refrain from "endless incremental program changes," since every change "forced mortgage companies to implement new procedures and retrain employees, taking away time that could be spent helping borrowers."

That may be blather, but last month Valparaiso law professor Alan White published research showing that the Obama administration's housing program is producing 33,000 permanent mortgage modifications per month, but "a year ago, the industry was voluntarily and permanently modifying more than 100,000 mortgages per month." White wants the administration to get tougher on lenders, but at this point the Obama program merely seems to have entangled banks and other groups with new yards of red tape. And a larger question looms: Does imposing standardized regulations, instead of allowing variations according to local needs and borrower credit ratings, make things worse rather than better?

Economist Thomas Sowell has described four stages in Washington aggrandizement: Crisis, big government action, failure of government action, bigger government action. In January and early February left-of-center trumpeters were at stage three and demanding stage four, heatedly criticizing the Obama administration for not putting more pressure on lending institutions. ProPublica attacked Bank of America, JPMorgan Chase, CitiMortgage, and Wells Fargo. The Center for Independent Media reported that "a year ago hopes were high that a big push by the government to stop fore­closures would be a great success"-but those hopes have now been dashed. Public Citizen's Consumer Justice Project posted headlines such as "Banks Holding Out" and proposed new government programs to force them into writing down mortgage amounts and monthly payments.

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