Q: Mark, When I moved to Florida back in 86 my escrows was approximately 6 percent of my total mortgate payment. I don't know what percentage of new mortgages is being allocated for insurance and taxes but I suspect it's much more than when I arrived here. My question is this; how much of a part is this going to play in housing affordibility particularly here in South Florida.

Submitted by Hugh Gordon from Pembroke Pines, FL

A: It is a very important factor limiting housing affordability throughout Florida and is the key reason why the Florida housing market will be one of the last to recover from the current downturn. It is not only the very high insurance and tax bills, but it is also the uncertainty with regard to how high they will be in the future. We are certainly reminded of this now as storms traverse the Atlantic and move up the peninsula.

Answered 08/21/08 15:37:59 by Mark Zandi

Q: What Roll did Phil Gramm and the Congress play in this crisis?

Submitted by Charles Yaker from Pensacola, Fl

A: While there is plenty of blame to go around for the current financial shock, I wouldn't put much of it at the feet of Congress or former Senator Phil Gramm. I suppose it could be argued that the deregulatory fervor among some in Congress contributed to the lack of regulatory oversight which was important in contributing to the shock, but this would be secondary to the many other factors at work.

Answered 08/21/08 15:33:33 by Mark Zandi

Q: Prof. Robini has stated that the government ultimately must either nationalize the mortgages or the banks. Considering that Fannie and Freddie will collapse and that the prediction that 1,000 banks will be insolvent, including either a major commercial bank or investment bank, which of the two strategies would work best for the housing industry in the U.S., nationalization of the banks or the mortgages?

Submitted by James from Chgo, Il.

A: Given the ongoing financial turmoil, it is clear that the federal government will indeed effectively nationalize a substantial amount of the nation's mortgage loans. This will occur as financial institutions fail. The recent failure of California-based IndyMac bank is a good example of this. The FDIC has taken control of IndyMac and is now working through all its problem mortgage loans. Fannie Mae and Freddie Mac are also teetering on the edge of failure and may very well be nationalized. If so, then more than three-quarters of the nation's residential mortgages will be owned or insured by the federal government. While a real possibility, it would be more desirable if the federal government were able to avoid nationalizing Fannie and Freddie. This would almost certainly cost taxpayers much more and it is very unclear how these companies or their activities would ever be privatized again.

Answered 08/21/08 15:29:02 by Mark Zandi

Q: In my opinion, residential real estate is a derivative that derives its value from the cash flow streams of wages and savings, which are both researched and published by government organizations. However, the government failed to utilize the information and allowed entrepreneurs to develop and finance real estate assets at a value greater than its cash flow streams. Taking into consideration Census Tract wages and savings data, do you believe that employers will increase wages by 15 to 20 percent over the next couple of years, so that the cash flow streams can pay for the current value of residential real estate, or will real estate decrease in value by 15 to 20 percent?

Submitted by John doe from Miami

A: You are correct that house prices are very closely tied to household incomes. Wages are the largest component on income. Indeed, over the historical period for which data is available back into the late 1960s, house prices have tracked incomes closely. The logic for this is straightforward in that households will spend as much on housing as their incomes will allow given prevailing mortgage interest rates and other mortgage credit terms. When rates are low and credit terms are easy, for example, house prices will rise relatively to incomes. When credit terms are tight, as they are now, house prices will weaken relative to incomes. Given the decline in house prices over the past two years, house prices have fallen back close to their long-run relationship with incomes. This by itself would suggest that prices should grow at the rate of incomes going forward. With household incomes expected to rise between 3-5% per annum, house prices should increase 3-5%. This is unlikely to be the case over the next year or two, however, as given the tight credit conditions and still ample amount of vacant housing inventory created during the housing boom, house prices will very likely fall further into next year. All of this varies substantially across the country. In Miami, for example, house prices are still very high relative to incomes, arguing for continued substantial price declines in your metro area.

Answered 08/20/08 13:05:36 by Mark Zandi

Q: Mark, walk us through briefly what were the biggest mistakes made that led to the housing crisis.

Submitted by Jim from Rockville, MD

A: Most fundamentally, the housing crisis was the result of hubris, a breakdown in the process of financing mortgage loans, and a lack of regulatory oversight. Hubris in that homeowners, lenders, Wall Street, investors, regulators and policymakers thought that house prices would never fall, at least not significantly for very long in many parts of the country. Even if house prices had simply gone flat and not declined as they have, then there would have been no crisis. Most of the risky mortgage loans that are now defaulting were financed through the process of mortgage securitization. Securitization simply involves distributing the interest and principal payments on a number of mortgage loans to investors who purchased bonds backed by those payments. The securitization process was such that nobody took responsibility for making sure the loans that were being made were good loans. No one involved in the securitization process from the mortgage lender to the Wall Street investment bank to the investor had enough at risk to spend the time and energy to do the due diligence necessary. Regulators should have been carefully watching over all of this and ensuring that some one was making sure good loans were being made. After all at the end of the day U.S. taxpayers will be footing the bill for the bad lending decisions that were being made. Regulators were neutered by the Byzantine regulatory framework which has been in place in the U.S. since the Great Depression and also the quarter century move to deregulation that reached its apex at the peak of the housing boom.

Answered 08/20/08 10:46:51 by Mark Zandi

Q: Talk a bit about your proposal to allow a more gradual process to marking losses and how that might help things turn around.

Submitted by Jim from Rockville, MD

A: Financial institutions are required to quickly value their assets (such as a residential mortgage loan or security) at current market prices. In most times when asset markets are working well and there is plenty of buying and selling it is straightforward to get prices for their asset. In very troubled times, like today, when markets aren't working well and there is little or no buying and selling it is very difficult to get a price, or at least a price that makes any sense. When institutions value or mark their assets to these very low prices they report big losses which cuts into their capital. Capital is the financial cushion they are required to hold aside just in case they do suffer losses. If their capital cushion becomes too small they are forced to sell assets causing prices to fall even further. A vicious self reinforcing cycle develops, exacerbating the bad times. At some point the financial institution may even not be able to sell assets or raise capital and they quickly go out of business. I'm proposing that the so-called mark-to-market rules be modified so that financial institutions aren't forced to mark their assets to current market prices but an average of market prices over a period of time, say one year. This will help short-circuit the negative cycle that can turn a modest financial problem into a major financial shock.

Answered 08/20/08 08:49:00 by Mark Zandi