Debt: Can’t put it off forever
TERRY SAVAGE firstname.lastname@example.org March 5, 2012 10:04AM
A protester chants slogans in front of a blocked ticket machine with a banner that reads "Occupation" placed on it at the Syntagma Metro station during a protest against austerity measures in Athens on Sat. March 3 2012. The ratings agency Moody's downgraded Greece to the lowest rating on its bond scale late Friday, following a deal with private investors that would see them ultimately lose an estimated 70 percent of their holdings in Greek debt. (AP Photo/Kostas Tsironis)
Updated: May 3, 2013 12:15PM
What do we do about the debt? It’s making headlines — whether we’re talking about Greek debt, or our national debt, or America’s mortgage debt. There’s just too much debt — and some bad ideas about what to do with it.
A Greek tragedy
Let’s start farthest away from home, where it is easier to see things from a dispassionate point of view. Greece needs to refinance an estimated 400 billion (euros) of outstanding debt as it comes due, not to mention borrowing more to keep its government afloat.
The European banks that hold the debt — and the European Central Bank — are demanding tough measures before lending Greece more money. But remember, the banks are on the hook for all that money. If they must write off the loans in a default, they too might be in a dire financial situation.
In effect, there is a standoff. The borrowers can’t afford to repay, and the lenders can’t afford to foreclose.
Shakespeare wisely said: “Neither a borrower nor a lender be.” Could Shakespeare possibly have anticipated the current situation, with both sides caught in the trap of bad debt?
Europe’s solution has been to demand that Greece put into effect ever-tougher austerity programs — to slow government spending and raise taxes so at least some of the money can be repaid. As a result, Greece is in a depression.
There is chaos in government and on the streets of Greece, as the citizenry rebels against paying back the debts their banks and government incurred, while they enjoyed life.
An American tragedy
A very similar scenario is unfolding here at home, with our mortgage debt. It’s a problem that remains unresolved, and it threatens America’s future much as the future of Greece is threatened by its debt.
What should we do about the mortgage debt?
The answers depend on which side of the deal you’re on — the borrower, or the lender — or just a homeowner who is struggling, but managing to pay the mortgage, only to watch others demand — and get — a better deal.
A new report shows that housing prices in 20 major cities are still at the lowest levels since the crisis started. There are calls for the government to “do something” about loan forgiveness. It’s a cry that politicians certainly understand.
In fact, we might trace the start of the current housing debt mess right back to Congress, which as part of a social agenda encouraged the banks to make loans in communities they might otherwise have avoided. How did that positive policy initiative, extending home ownership and the American dream, go wrong?
Was it the push from Congress to have Fannie and Freddie guarantee loans (with taxpayer dollars) to even more borrowers (voters) who were even less creditworthy? Or was it the profit motive on the part of lenders who could charge higher fees and rates on these loans? Or the blind greed of homebuyers who walked into the trap?
There is plenty of blame to go around. The question now before us is what to do about it.
The acting head of the Federal Housing Finance Agency (FHFA), which is supervising mortgage giants Fannie Mae and Freddie Mac (now in conservatorship and supported by taxpayer dollars), has been asked by politicians to create a program of loan forgiveness.
Some see it as a better alternative to ending the housing collapse than the current unworkable plan for refinancing underwater homeowners at lower rates, and deferring principal payments.
But to actually “write off” the loans, to forgive them, would threaten the very solvency of Fannie and Freddie — the owners or guarantors of more than 60 percent of outstanding mortgages! And would that really help the housing market — or just force mortgage rates higher as lenders take that risk into account?
Now do you see comparison? Just as the Europeans want to stretch out the process of dealing with the Greek loans to avoid having to acknowledge a default, our Federal housing authority wants to avoid actually declaring a default on the part of millions of homeowners who are unable to pay their mortgages.
Just as lenders to Greece keep coming up with creative solutions to delay the day of reckoning, there is pressure in America to “do something” creative to avoid recognizing the mortgage disaster for what it is: Money lost, and dreams lost.
Until everyone can agree that “the emperor has no clothes” and the debt can’t be repaid, we’re just fooling ourselves in a very expensive way. And that’s The Savage Truth.
Terry Savage is the Chicago Sun-Times’ nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at TerrySavage.com and blogs.suntimes.com/savage.