That’s a lot of money to owe on your house. It might also give us a clue at the depth of the current financial crisis.
“Toxic Assets” have become the new buzzword during this financial crunch, just like “weapons of mass destruction” started rolling off everyone’s tongues in 2003. What are these toxic assets? Most of them are convoluted investment packages that represent a hodge-podge of upside down mortgages from around the country. In other words, big mixed-up sacks of worthless investments that no one wants. The total “value” of these toxic assets is unknown, and probably never will be known. (Part of the whole problem was they were never actually worth what everyone thought they were.)
What can be guessed at, however, is how much money mortgagors were owed in 2008, and how much they are now looking at as potential losses before recouping anything in foreclosure sales. (I.e. the loss these toxic assets might represent on balance sheets). To do so we can use two rather modest assumptions: $200,000 median debt-per-household based on LegalMatch data, and the (low-end) estimated total number of foreclosures in the US in 2008, which was 2 million according to CNN. Putting these numbers together, we get a staggering $400 billion in total outstanding debt in the U.S. housing market. That’s quite a lot of money, and that is probably an estimate on the low end.
However, haven’t we spent something like $10 trillion in bailout money so far? Or at least promised that much? Even if my estimate is off by a magnitude of 5, we’ve still spent more than that already. What if we had spent a few trillion simply paying off overdue mortgages? A “trickle-up” economy, as opposed to the old “$@*# rolls down-hill” approach. Almost every day we are bombarded with news about bailout this, bailout that, trillion dollars here, hundreds of billions of dollars there. I haven’t seen any of this money, have you? (Well maybe if you work for AIG).
Now before someone says that is just rewarding people for their own shoddy financial planning, what are we doing for the banks and firms such as AIG? Banks and their enabling financial partners created an artificial market where risky mortgages not worth the paper they were printed on were sold off as if they were written in gold-ink. How is it somehow more appropriate to reward them for their misdeeds and not the taxpayers who are footing the bill anyway? These are the institutions that invested your 401K in your neighbor’s upside-down $1 million McMansion mortgage. If your neighbor stays in his home for the same inflated price he mortgaged it for, at least your home price won’t plummet due to a cramdown or foreclosure sale.
I’m not a financial expert, but I like to play one online. Where am I going wrong with my populist approach?