Bruce Anderson\’s mortgage story

There\’s a couple of things that don\’t ring true in this story.

One of them is Hank Hardhat\’s. Two years ago, he was a happy man. A good worker, he earned forty grand a year. His wife Kimberly worked part-time in a burger joint, taking the family income up to $50,000.

So they decided to buy their own place and the local bank could not have been more helpful. Hank reckoned that he could just about service a $200,000 mortgage. The bank asked only one question: "Was that enough?"

So Hank buys, loses his construction job and then gets foreclosed and has to go back to the trailer park. Well, yes, but assuming no down his payments on such a (30 year) mortgage would be just under $1,200 a month. That\’s not an extreme level and whatever happened to house prices, assuming he hadn\’t been laid off, he would be able to continue those payments. It\’s unemployment that\’s done for him, not house prices.

Willard Wallstreet would not agree. He too has been fired and he feels very hard done by. Two years ago, he was a master of the universe, profiled in Forbes magazine, boasting that he intended to retire at 45, a billionaire.

Now, he will never be a billionaire. He is unlikely to find another job and he got a measly $5 million payoff.

Eh? Payoffs? On Wall Street? Or in The City, come to that? For managers, directors, perhaps, but traders and brokers are all employed at will. Getting a pay off at all, let alone something more than a couple of weeks wages, seems unlikely.

There\’s also an answer to this question:

Yet even if it is too late to rescue Hank Hardhat\’s dreams, we must ensure that lessons are learned from the recent degringolade. The free market will never enjoy political security if it lets down millions of hardworking families. Credit is the bloodstream of a modern economy; without it, there would be no growth.

Even so, it must be possible to regulate the expansion of credit, to allow steady growth without inflicting regular distress on the little platoons. It must also be possible to restructure bank bonuses, so that future Willards have to think long term, because they can no longer pass on all the pain to the Hardhats.

Yes, we need more speculation. At the moment it\’s almost impossible to gamble upon falling house prices. There\’s no way of going short the residential housing market (well, there is, but it\’s tiny). A decent futures and options market in such house prices would work to limit the next asset bubble.

3 thoughts on “Bruce Anderson\’s mortgage story”

  1. A decent futures and options market in such house prices would work to limit the next asset bubble.

    Could you explain how this would work practically?

    Tim adds: Yes, but not here, not yet. It’s the basic point of Robert Schiller’s new book, my review of which will be appearing soon!

  2. “It’s unemployment that’s done for him, not house prices.”

    Ah, but that’s where Anderson has you. Mr Hardhat worked in construction, building houses. The fall in house prices has destroyed his job security.

    Of all the industries Harry Hardhat could have been in, he just happened to be in the one that allows Bruce Anderson to make his point.

    Whatta the chances of that?

  3. I look forward to it. I don’t see how one would get around the problem that the longs are highly illquid.

    It seems to me the problem with the housing market is that as an investment it is good because it allows enormous leverage.

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