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The Housing Bubble and Bailout

The past few weeks I have been chronicling how Europe is fast catching up to the United States in terms of the magnitude of the housing bust and its effects on its economies. I’d like to turn back to the United States and Northern California, which has been hit hard by the bust.

Below are the audio files from a two-part documentary series from the BBC reporter Michael Robinson called “The Trouble With Money” chronicling the housing bust as seen on the street in Stockton, California.

Part One
In the first past, the reporter talks to (real) estate agents and home owners about how the market has changed in the year since he last visited. Needless to say, the market is depressed and foreclosures and abandoned properties are dotted everywhere.

What makes this documentary interesting is that it gives a first hand view into people’s motivations. Why are they walking away? One answer from a borrower: in California, the lender has no recourse to pursue the borrower for unpaid mortgage funds. Why did they sign the papers in the first place? What do communities look like in areas with heavy foreclosures and what does it mean for housing values?

Nouriel Roubini also makes an appearance on the documentary, giving his perspective
on were things are headed going forward. He notes that waking away will be a big problem.

Audio available here

The BBC describes the Podcast like this:

With the world’s economy now threatened by what some believe is the most dangerous crisis since the depression of the 1930s, Michael Robinson looks at the deepening international financial turmoil.

Part 1: Walking Away from Debt

Michael Robinson returns to America to examine the aftermath of the sub-prime mortgage disaster that is at the heart of the present crisis.

He finds the cautious optimism of earlier this year has been well and truly dashed.

U.S. policymakers have been struggling to avoid a further meltdown of their housing market and a flood of new sub-prime losses hitting an already crippled banking system.

Michael talks to people who have had tough choices to make.

He meets disillusioned borrower Karen Trainer who, after choosing to stop paying her mortgage, asks ‘What is the benefit to me of staying in something like this?’

And she is not the only one deciding to cut her losses.

More and more people are simply walking away from their mortgage obligations, effectively handing the debt over to the lender.

The greater the number of individuals taking this action, the great the tidal wave of unplanned debt for lenders.

Michael also revisits a house that, on his last trip, was on the market at $200,000.

On this trip, he finds the price has dropped dramatically to $69,900 and its still on the market.

First broadcast on 30th July 2008

BBC World Service, The Trouble with Money

Part Two
In the second part, the documentary goes back to Stockton after the housing bailout package has been passed to get an on-the-ground perspective from one of the hardest hit areas as to whether the bailout will work. The short answer is no.

The bill requires lenders to refinance mortgages at prevailing market prices (say 70-90 cents on the dollar). They will be hard pressed to do so because they will have to write down the mortgages and book losses when they are reluctant to do so given their weak capital position.

As far as homeowners are concerned, listen to what the people in Stockton tell the reporter. In order to refinance the No-doc loans people took out (50% of all loans during the bubble days), the borrower must attest that one did not lie abut any aspect of the mortgage application in the original loan, effectively opening oneself to prosecution for fraud. We all know that there was a lot of fraud — from the broker, lender and mortgage applicant perspective. Even so, why would one make oneself vulnerable to prosecution when walking away is so simple as we saw in part one?

Part Two also has some audio from The Great Depression as Roosevelt signed similar legislation into existence in 1933, giving this particular audio an eery feel of déjà vu.

Audio available here

(corresponding webpage is here)

The BBC Describes it like this:

With the world’s economy now threatened by what some believe is the most dangerous crisis since the depression of the 1930s, Michael Robinson looks at the deepening international financial turmoil.
Part 2: A new initiative

Following Michael Robinson’s first report on the collapse of the American housing market, and the growing number of people simply walking away from their mortgage obligations, programme two looks at fresh government plans to avoid further turmoil.

He looks into a brand new multi-billion dollar initiative to help America’s hard pressed home owners and compares this current solution to previous government assistance plans once employed to remedy the effects of the Great Depression of the 1930s.

Michael again visits Stockton in California, one of the hardest hit areas in whole of the US, and finds out what residents think of the new initiative.

The sticking point for many seems to be in the detail. To benefit from the new initiative, borrowers need to swear in writing that their mortgage agreement was based on an honest account of their earnings.

Since exaggerating earnings to secure a loan seemed to be common practice a few years ago, many will find it impossible to sign on the dotted line and receive help.

First broadcast on 6th August 2008

BBC World Service, The Trouble with Money

Overall, it is a worthy two-part series of on-the-ground reporting. The audio in both parts runs just over 20 minutes.

Source
BBC Documentary Audio Podcast (subscribe to the series. it has a wide range of other good topics)

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.