NEW YORK (CNNMoney.com) — In a sign that more foreclosures could be on the horizon, 23% of people with mortgages owe more than their home is worth, according to a report released Tuesday.

Almost 10.7 million U.S. mortgages were “underwater” as of September, said research firm First American CoreLogic.

Another 2.3 million homeowners are within 5% of negative territory, the report said. The two figures combined comprise almost 28% of all residential properties with mortgages.

Time to send some jingle-mail

I can't quite agree with that. The encouragement included Fannie and Freddie, offloading and implicitly guaranteeing trillions of dollars of mortgages.”

Hello again Dr J, not sure if this topic has fallen off, but I just wanted to add something here. While I don't disagree entirely with this sentiment, I don't think we can separate this from the application lying. There wouldn't have been problems in having Fannie and Freddy guarantee these loans (at least not to anywhere near the same degree) if they had been made using real numbers. The problem here is that the same people who were being encouraged to get these loans were by far the most likely to not understand that their loan applications were full of BS. That probably sounds elitist as all hell, but there is correlation between education and income, and the low-income people were much more likely to have lies all over their applications, and much less likely to have realized what they were signing up for. Of course all of that goes out the window once the economy collapses and half the world loses their job. We know that that phenomenon also disproportionately affected those with less income and education.

“all the free-market proponents I know agree the government has a role to play to keep the markets free. “

They might agree privately, but the lobbying of big business paints a much different picture. Heck, even after all this mess, they're denying that regulation would do the system good, calling it “socialism”.

“Banks lobbied for the change, but it was the government's job to say no, and the government blew it. “

Agreed.

“Regulating well is a super hard job”

Of course it is, but that doesn't mean we just let things ride. We seemed to have done an ok job between the great depression and a decade ago, so I don't actually think it's impossible to do a good job at it.

“we should do no more of it than we absolutely have to.”

Well, we've seen what doing as little as possible has done. It ain't good.

Another case of freedom without responsibility. The really disturbing part with the way they “helped” the low-income buyers with cheap mortgages, is that it hurt them far more than it helped. First, it drove up home prices as more people were encouraged to buy what they couldn't afford, meaning they had to pay more for housing than before; then it encouraged lenders to push the kinds of higher interest loans that the buyers really couldn't afford, since the bank would get the profit and the GSE would suffer any consequences; so the buyers are now defaulting and hurting their credit rating, which was often bad to start with. I'm a big proponent of personal responsibility, but that has to be coupled with a hatred (yes, hatred) of those who prey on the vulnerable.

Encouraging local banks to work with local low-income home buyers was a very small part of this problem.

I can't quite agree with that. The encouragement included Fannie and Freddie, offloading and implicitly guaranteeing trillions of dollars of mortgages. That's not a regulatory nudge, that's a battering ram.

It might sound counter-intuitive, but I honestly believe that capitalism works the best when it’s tempered with correct regulation – that includes monopoly busting, unionization, and many other things that hard-core capitalists dislike.

Maybe I haven't met the hard core, but all the free-market proponents I know agree the government has a role to play to keep the markets free. Monopolies are bad, and the government needs to prevent them. One reason I dislike unions is they are themselves monopolies in the local labor market, with all the ills monopolies tend to bring–high prices, low quality, locked-in buyers, and occasionally pretty aggressive tactics to maintain the monopoly.

Back to banking, it turns out we needed the Glass-Steagall act and shouldn't have repealed it to let bank holding companies grow in 1999. Banks lobbied for the change, but it was the government's job to say no, and the government blew it.

Regulating well is a super hard job, requiring clairvoyance to know where to bend and where to stand firm, and the guts to do so despite lobbying pressure from all over. Government often –maybe even usually–makes big mistakes at it, which is why I often come out against it. Like firing oneself out of a cannon, it's a perilous activity, and we should do no more of it than we absolutely have to.

“made them stop because we wanted more social responsibility, less fiscal responsibility”

This was the one bit I don't agree with. Encouraging local banks to work with local low-income home buyers was a very small part of this problem. And when it comes down to it, the local banks to which these relaxed laws (passed under Clinton) applied have faired relatively better than the large banks to whom these laws didn't apply, if my understanding is correct. A much larger part of the problem, in my estimation, were things like the common practice of lying on loan applications about the customer’s ability to pay back the loan – that was never legal, but was done a million times over for the purpose of the commission. There’s a huge difference between taking the extra effort to work with the real numbers and real financial abilities of local lower-income families to see what can be worked out and going out and trying to dupe lower income people into signing second mortgages or refi’s they can’t afford.

Where I totally agree with you is this:

“Businesses should fold when they take bad risks or stop adding net value to the economy”

This, I think, is where the regulation needs to come in. There should be no business “too big to fail” if we’re going to have capitalism work correctly. It might sound counter-intuitive, but I honestly believe that capitalism works the best when it’s tempered with correct regulation – that includes monopoly busting, unionization, and many other things that hard-core capitalists dislike.

However, what it means to be a “responsible lender” in a broader social sense is too ill-defined for banks to do well. The banks used to deny loans to people they doubted could repay them. It was called “redlining,” and we made them stop because we wanted more social responsibility, less fiscal responsibility. Looks like we got it.

The right division of labor is to let business look after business–that is, selling stuff people want to buy and creating value for shareholders. Government should be responsible for the broader issues of social responsibility and the health of the economy, and should provide regulatory nudges toward those ends.

Businesses should fold when they take bad risks or stop adding net value to the economy. Government unfortunately can't be forced out of business when it makes abysmal regulatory decisions, but it should be held to account and the people responsible sacked.

So, I guess what I'm saying is that I do think that bankers have an obligation to make sure that the 20% who are duped by their BS won't pull the rest of us down with them. Barring their ability to be responsible lenders, the government should regulate them to the point where they don't have a choice. It's not only the gullible who are paying the price here.

Which strikes a nerve going back to the S&L bailout (actually, the deregulation that led to the bailout). Anyone who is preaching freedom should know that it's married to responsibility. They gave the S&Ls complete freedom to invest, but kept the FSLIC insurance on those investments. That's freedom without responsibility, which is always disastrous. Seeing these things play out is like watching a bad movie for the second time: you know what's going to happen, but the actors don't listen to you.

Now big bankers, investors in GSEs, union leaders, and insurance companies have to be saved from the consequences of their bad decisions, and both parties think that it's important to do so (while their followers blame the other party).

No matter how often I disagree with someone here, there's always times to agree. I've always told my kids that I'm not going to let school get in the way of their education.

As it happens, I agree with this statement, but I wonder whether you recognize the implicit elitism in it

In my view of this, the elites are the professionals who were supposed to have accurately accessed risk–and failed. There's nothing implicit in my elitism–it's right out there in the open.

While I don't want to exempt Main Street from blame, I do think Main Street is paying consequences for its failures. Meanwhile, bankers–the elites who have failed us–seem weirdly exempt from consequences, including even the mildest possible consequence of having to own their share of responsibility for this failure.

I hate to seem like I'm avoiding your questions about how we protect ourselves from knuckleheads and about “who” “decides” what's “good” for “them”. (I might have said “us” instead of “them” since I'm as non-elite as anyone.) The easy answer: Better elites. But since I have already agreed with your post about poisoned wells, I admit to feeling mighty pessimistic on that score.

I appreciate your interesting reply to my comment. I hope you feel this, in turn, was responsive.

You've identified the core of the issue, Polimom. It seems clear that given enough rope to hang themselves, 20% will do so, while 80% will get good use out of the rope.

Shall the 80% go without to protect the 20%? Sometimes yes, sometimes no. It needs to be the government that decides. It's not the job of bankers.

DQ, how do you explain the many millions of people — including me — who successfully managed to finance via an ARM without going bottoms' up?

Depends on the person, their financial situation and when they bought their house, People who bought prior to 2000 before the Market went nuts are probably in pretty good shape, those who bought after, not so much…

I bought a house ( 3 Beds 1 Bath 1700 sqft ) in the Northern Suburbs of NYC in 95 for 150K, sold it in 2000 for 235K and saw it hit the market in 2006 for over 490K. It went for the asking price. Who ever bought that house had better have some serious financial resource, they are going to take a bath. Problem, all the other houses in the area were going for similar prices…

That's why professionals are paid to accurately access risk.

WHICH THEY DID NOT DO! PERIOD.

Greenspan says ARMs might be better deal

And here's the Maestro himself telling the American Public to get Adjustable Rate Mortgages…
So the head banker, a man who has been celebrated non-stop in the media, tells you to get an ARM and you're going to blame John Q Public for following his advice…

As it happens, I agree with this statement, but I wonder whether you recognize the implicit elitism in it — and how easily it translates elsewhere? Voting, for instance… Should we then be protecting ourselves from people who are too stupid to vote for what's good for them? And who decides what's good for them, anyway?

I am well aware of the fact that many people aren't smart enough to know what's good for them.

That's why professionals are paid to accurately access risk.

The government, across multiple administrations, pushed easy money to enable home purchases by people who did not meet traditional criteria. Bankers crafted plans under these eased — even pushed — policies. And the people tossed all caution to the winds.

Blaming the bankers is a dead end. Personally, I think the government's policies deserve the lion's share. Furthermore, it's one of the strongest contemporary arguments I can think of against governmental “social engineering”. The long-term ramifications of even the best-intentioned legislation are often self-defeating.