Here's a question I don't believe many people have discussed yet: home values in relation to current mortgages, in the event of a depression after Y2K. During the Great Depression, home values were "able" to fall significantly because mortgages were not as prevalent then as now. What happens if next year we see the beginning of drastic deflation and the majority of Americans are stuck with mortgages that will soon be far above their means? Does everyone loose their house to the bank? Or do home prices remain high in relationship to the rest of the economy because the banks can't allow so many of their investments to fail at once?

-- CD (CDOKeefe@aol.com), July 30, 1999

Answers

Why do you assume there will be BANKS?

-- Les (leslie.leblanc@gte.net), July 30, 1999.

whats wrong with a tent ? & permaculture.

-- simplerway. (dogs@zianet.com), July 30, 1999.

hmmm, good questions, i hadn't thought about the housing market.... y2k might have infinite facets.....has any 1 person really thought of ALL the possible effects? could you fill up a notebook with it?

interesting

-- SprLrkr (Slfsl@yahoo.com), July 30, 1999.

Good one, Les!

My guess is if the banks make it there will be a collapse in real estate, especially urban. Then in the months after 2000, if we don't go devolutionary, then the central bankers in league with the gov't will try to reflate the economy. Probably big increase in Federal spending and work programs like FDR's. That's assuming that the Feds make it, of course. The big problem is going to be regionalism. If some regions become "rich" overnight and some regions become "poor" overnight you will see tensions in the U.S. similar to 1840-1859. That may cause regions or even states to think more of less Washington and more autonomy (think Kosovo). When the people in general care nothing of what happens in D.C., the end of the U.S. as 50 states is very close.

-- Jim the Window Washer (Rational@man.com), July 30, 1999.

>> What happens if next year we see the beginning of drastic deflation and the majority of Americans are stuck with mortgages that will soon be far above their means? Does everyone lose their house to the bank? <<

When people have an outstanding mortgage balance that far exceeds the market value of a house, and they have problems meeting their mortgage payments (for example, they lost their job/income), there is a strong tendency to walk away from the mortgage and forfeit the house to the bank.

Banks do not want the house on those terms, but they will only seek to renegotiate terms if they think that approach will make them "wholer" than repossesion. The important thing for them is to clear non-performing loans from their books as soon as possible. They have to meet regulatory requirements on such matters. If money becomes scarce, banks will be in the same boat as everyone else - they will do everything in their power to raise money and stay profitable. That includes foreclosures. If it comes down to them biting the bullet or you, they'll choose you. Every time.

>> Or do home prices remain high in relationship to the rest of the economy because the banks can't allow so many of their investments to fail at once? <<

Banks do not have the power to hold home prices high if the housing market heads south. They will not even try. Rather, they will drive the market prices down with a wave of foreclosure sales.

If the system breaks down sufficiently badly, it isn't out of the question to think that some kind of government intervention will be contemplated. Voters vote their pocketbooks, after all.

But essentially, such intervention is only as good as the credit of the government that undertakes it. Right now, the US government is in a position where a Great Depression could balloon the *annual* deficeit into the trillions of dollars, just to cover the programs that are already in place, like FDIC deposit insurance. This will certainly exhaust the credit of the government rapidly.

Austerity or hyperinflation are the only options when the credit runs out. Of the two, austerity is more sensible, but that is no guarantee it will be preferred to hyperinflation. Austerity will appear as heartlessness. Debtors are more often in favor of inflating away their debts. All inflation does is bring everyone down in a cloud of dust and rubble. Often it brings governments down, too.

This doesn't augur well for a tidy Keynesian solution, as so many Americans seem to expect can be pulled out a hat, like a magic trick. The piper must be paid when the dance is over.

-- Brian McLaughlin (brianm@ims.com), July 30, 1999.

Banks do not control the price of houses. The price of a house is based on what individuals will agree to pay for a house. This is called the free market. If there is a derth of buyers for what ever reason, such as loss of jobs and income, then the price of homes will drop. The price will drop untill some one with money steps in to buy. Things could drop a long way.

It ain't pretty, keep the faith.

-- helium (heliumavid@yahoo.com), July 30, 1999.

where does this scenario, leave DEBT-COLLECTORS????

-- sharks??? (dogs@zianet.com), July 30, 1999.

al-d,

It leaves them unemployed and hungry like everyone else, since they can't collect from people who have nothing.

-- Prometheus (fire@for.man), July 30, 1999.

I was talking to my attorney yesterday and he mentioned that when sudden devaluation happened post the last large SF earthquake, it resulted in mortgages in excess of the market value of the homes. The Court ruled, in such cases, to maintain the pre-earthquake mortgage/market value ratio. Such rulings were called 'Cramming." The mortgage owed was reduced accordingly and the bank was stuck along with the homeowner eating the devaluation.

-- marsh (armstrng@sisqtel.net), July 30, 1999.

>> The Court ruled, in such cases, to maintain the pre-earthquake mortgage/market value ratio. Such rulings were called 'Cramming." <<

Very interesting! Thanks for the info. Do you happen to know what law(s) or what legal theory these rulings were based on?

I am very curious to know whether a structure in law already exists for applying this "cramming" solution across the whole USA, or if it's just a California thing, or even if it was a one-shot emergency relief that only applied to that earthquake.

Anyone care to pipe in with more info on cramming?

-- Brian McLaughlin (brianm@ims.com), July 30, 1999.

Actually, we had this discussion a couple months ago but I can't find it in the archives.

If the PO is down, how do you mail your check as most mortgage companies are not where the mortgagee is located? I was thinking that there might be a moratorium on payments if the PO goes down. In the '30's, most mortgages were held by the local banks, but it is my understanding that most homes/farms were lost due to an inablilty to pay the taxes.

If the home prices fall way below the value of the mortgage, wouldn't you think the mortgage companies would refinance to allow for the drop in prices? It would seem logical (of course, that is probably not in a banker's vocabulary at this point) that they would refinance as opposed to a total write off of an existing mortgage and then the selling expense at a much lower rate...how in the world would they sell all those repo's if no one has a job/money to pay? Massive refinancing would only take place if we go to a 9 or 10 I would expect. Then refinancing good paying mortgage holders would make sense, otherwise the mortgage companies would not have enough income to survive. Anything else would probably go to a regional type assessment of the situation.

All in all it is kind of a scary situation, especially for those of us who have fairly hefty mortages because of the high real estate values in our areas. And, I don't even want to think about paying the taxes next year if our house is only worth half of what it is today.

Of course, they are compliant so we don't have to worry - right?

-- Valkyrie (anon@please.net), July 30, 1999.

If Federal Reserve Notes lose most or all of their value, as I expect they will, then paying off the mortgage will be very cheap in terms of precious metals. Of course, this assumes that the banks survive; otherwise, the mortgages will evaporate along with the creditors.

-- Steve Heller (stheller@koyote.com), July 30, 1999.

Property devaluation is one thing I expect and am preparing for. No mortage on the farm, but there is adjacent property we'd like. One 40 acre lot with road access only through a 1 acre easement through our place particularly interests me. It's worth over $40,000 now and they aren't selling at that. Next year I'm betting it will be under $10,000 and they'll be eager to sell.

-- Gus (y2kk@usa.net), July 30, 1999.

Aw, Gus, you've got a heart of gold......

-- (nobody@nowhere.com), July 30, 1999.

Uh, Valkyrie? By definition if its a 10 there won't be any mortgage companies. And there'll be enough abandoned houses that anyone who wants a house will be able to just take one.

-- biker (y2kbiker@worldnet.att.net), July 30, 1999.

>> If the home prices fall way below the value of the mortgage, wouldn't you think the mortgage companies would refinance to allow for the drop in prices? <<

Er, uh. I think you are misusing the term "refinance" here. Take this example:

Assume you borrowed $200K from the bank at 7.50% interest over 30 years. A "refinance" might change the interest rate to 5.50% or change the repayment period to 15 years, but you still have to repay the full $200K, one way or another. That is a refinance.

If the market value of your house drops to $50K, and your bank decides that, although it loaned you $200K, all you need to pay back is $50K, then that is a completely different deal, a "renogiate" rather than a "refinance". The bank gets back $150K less than it loaned you! A bank is *not* inclined to renogiate that kind of a deal! Generally, a bank prefers to seize your house and reap the $50K *now*, rather than wait and get the $50K in dribs and drabs over 30 years.

By the same token, you might feel it is unreasonable to repay the full $200K you borrowed (with X% interest!), in order to fully own a $50K asset. And you will probably be inclined to let the bank seize your house, rather than repay your loan, then use the first $50K that comes your way to buy a comparable home, rather than expend the first $200K in your pocket for essentially the same outcome.

Under these kinds of conditions, no one really wins. You lose your home and any equity you had. The bank loses it's $200K loan. But the rules remain in force. The bank usually prefers the rules to stay predictable! And, if your bank decides it wants to change the rules, the *other* banks get pretty upset. Breaking contracts at will is not considered a good solution in most mercantile/capitalist countries.

-- Brian McLaughlin (bmclaughlin@bigplanet.com), July 30, 1999.

One thing that has not been discussed yet is that you may have to deal with real estate appraisers. Unfortunately, the only thing that they recognize is recent sales and if there are no sales, they assume that the market value is static. Most appraisers hold a brokers license in many states. Did you ever see an appraisal that recognized that values have declined? Extremely rare. You may have to ask for the appraisal and point out to the bank that the appraisal is faulty and that there are no sales that support the rediculous value in the appraisal. A sale at a lower price is better than no sale and no income. Most appraisers do not have the sense to recognize what will happen. If the payments system breaks down, incomes fall and the ability to pay declines, values drop accordingly but it will take a while for sales to reflect the new reality. They all "know" that land values never decline. How low will they go? If people are afraid to buy, they could drop drastically. Look at gold prices now. A 20 year low and people are afraid to buy because they might go lower. The public tends to buy at the top and sell at the bottom.

-- Tom (Tom@notstupid.gom), July 30, 1999.

This seems to be a repeat of the S&L crisis that hit Texas and Louisiana particularly hard in early 1980s. Following the collapse of the price of oil, the switch from the Carter inflation to Reganomic supply side economics; many homes and lenders especially in south central US were faced with outstanding mortgages that exceeded the value of homes. As I recall (without checking) the situation was resolved by the formation of federal government regional holding company to sell off the non performing mortgage companies at deep discounts like $0.25/$1.00 or something similar - for this the stronger S&L/bank got both the nonperforming and mortgages that were current in accounts. Much of the real estate was sold and many did walk away from one home to buy another at a much lower price usually for cash as they had difficulty qualifying for any loan. Those that had the assets were able to pickup bargains. I remember visiting Lousiana and seeing vast tracts of mostly newer homes where well over 50% were for sale.

Typically the recovery period for any disaster takes about 10-12 times longer than the actual period of the disaster. This is born out in floods, serious snow/ice storms, hurricanes and I believe in Ed Yourdon's essay 1 year of disruption and 10 years of recovery scenario.

As to Tom's comments on gold, it is my understanding that current gold prices are below the actual cost to win and refine the metal from the ground. I do not believe that this situation will last too much longer. Gold under $270/oz could be the buying opportunity of a lifetime.

-- Bill P (porterwn@one.net), July 30, 1999.

I recall reading a post from a banker in which he stated that during during the oil patch crunch in Houston in the early 80s,the banks went after mortgages with low balances remaining to be paid.Those with little equity and high balances were generally left alone.In other words, if your mortgage is nearly paid off and you have lots of equity,watch out! They'll come after you first.

-- Ralph Kramden (and@awaywego.com), July 30, 1999.

Brian -- your answers sound closest to what may happen,

"Banks ... will only seek to renegotiate terms if they think that approach will make them "wholer" than repossesion. The important thing for them is to clear non-performing loans from their books as soon as possible. They have to meet regulatory requirements on such matters. If money becomes scarce, banks will be in the same boat as everyone else - they will do everything in their power to raise money and stay profitable. That includes foreclosures."

But for the $200,000 mortgage on the now-$50,000 house, what if _you_ can offer the bank the $50,000 that they would get from a repo? That could either be from your own y2k-prepared assets, or from another bank lending to you (probably with a 25-50% down payment). Why should your first bank kick you out just to make a point, and have to go through the expense of a sale and end up with less? (Any friend or relative or maybe even you yourself could bid for the repo anyway, so you could stay in.)

The bank might exact a bit more out of you for a negotiated release from the old contract in order to let you go without a default on your credit record. (I wonder if credit card banks, or their receivers, will do the same?)

On a very real level, we are "renting" our houses from the banks, with the option to "buy" (pay off) at any time. If the market price has dropped and we have the cash or credit to pay it, why should anyone be stuck on the old $200,000 figure? The value of hard cash (and paid-off debts even 25 cents to the dollar) will be appreciated more than we now experience.

An interesting parallel question is how money "frozen" in bank accounts will be treated if checks on it are written to make mortgage payments. Will there be a de facto rejection of money that can only be transferred between banks and never taken out in cash? Or will they just trade at two different levels? (A bank dollar, once the electronic records have been straightened out, trading for less than a cashed-out currency dollar?)

The likely reality is that -- then as now -- those with more purchasing power have the option to end up with more real estate, whatever the price level or representation of money used.

-- Mr Gresham (wh@t.century.is.this), July 31, 1999.