Monday, March 2, 2009

Reverse Run on Banks

Time Magazine | Wall Street Journal


During the Great Depression, the danger was people's lack of confidence in banks, and their fear translated to runs on bank deposits. Their very action to save their own deposits was the cause of the collapse and failure of many banks. The decisive action of Franklin D. Roosevelt to stop this run caused by fear, by declaring bank holidays in the very beginning of his administration was what saved the day, and gave the economy room to breath and recover.

President Obama promised to temporarily forestall the foreclosures on homes. As portrayed in the Time article, foreclosures are the reverse run on banks of this Great Recession, when banks lost confidence on their homeowners, and began a run on foreclosures at the slightest excuse. Ironically, it is this very action which is precipitating the credit crisis. The same bank holiday that saved the banks from a run on deposits will help stop the avalanche of foreclosures.

It's time to declare that moratorium on foreclosures. Using different innovative approaches to allow existing mortgages to be modified, the value of the real estate market can be preserved from the erosive slide towards an abyss that spells disaster for everyone, not just the banks and homeowners.


Jeff Wagoner is a bankruptcy attorney in Kansas City, Mo., with the brush-cut hair and clear eyes of a former Navy aviator. From his office in a tower on a hill, he can see miles of prairie and a world of hurt. Wagoner's clients (and he has plenty these days) range from folks who had no business ever buying a house to folks freshly fired from executive suites. Based on his survey of the economic wreckage, Wagoner's conclusion is that even the slightest miscalculation or change in circumstances could send another customer through his door: "There are not a lot of second chances out there right now."

We have entered the one-strike-and-you're-out era. One lost job. One medical emergency. One bad risk or misjudgment of the heart. "I've seen more people lose their houses in the past year than in the previous nine years put together," Wagoner said one recent afternoon, as gray skies hung low over the vast horizon. "It sounds crazy," he continued, "but I'd say unless you're making over $350,000 a year, the more you're paid, the more vulnerable you are. If you lose a job, you're going to have a hard time finding another that pays as much. Or maybe you need to move to find that new job, but you're stuck with a house you can't sell. Or maybe your marriage breaks up, and you have to liquidate your assets at today's prices." (Special Report: "25 People to Blame for the Financial Crisis")

In the one-strike economy, it's not just the subprime suckers going down. Trouble stretches beyond the province of liar loans, condo-flipping and the collateralized debt obligations that no one fully understands. A hard rain now falls on the just as well as the unjust. Consumers have stopped spending, factories have stopped operating, employers have stopped hiring — and home values continue to fall. For millions of people, the margin between getting by and getting buried is becoming as thin and as bloody as a razor blade.

The number of homeowners headed toward foreclosure is rising so quickly that "you need somebody to project what the projections will be — because they're just changing so fast," said Lindley Higgins, the applied-research manager at NeighborWorks America, an urban revitalization project created by Congress. A decade ago, Higgins said, 400,000 foreclosures nationwide was a busy year. America may see 2.5 million in 2009.

"The other day," Wagoner says, "I had a visit from a corporate executive who moved to town and bought a house." Which should be fine; a big wheel need not fear a big mortgage. But this guy's one strike was moving from Florida, where the real estate market is so screwed up that judges in one county are hearing nearly 1,000 foreclosure cases a day. Mr. Exec was stuck with his old house too, and that one was dragging him down, down — until there was nothing left to do but pay a visit to the bankruptcy attorney. " I would bet a majority of people are only a few paychecks away from being in this office," says Brent Westbrook, a partner in Wagoner's firm.

President Barack Obama described this stark reality in his recent speech rolling out an expensive plan to keep the housing market from sinking further. Picture "a young family," he suggested. "They save up. They search. They choose a home that feels like the perfect place to start a life. They secure a fixed-rate mortgage at a reasonable rate, make a down payment, and make their mortgage payments each month. They are as responsible as anyone could ask them to be."

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