I read a really interesting article today, “An Autopsy of a Dead Social Network”. It referred to Friendster. “What’s that?”, I hear you say. Yes, Friendster…it was a social network that preceded Facebook. Founded in 2002 – a time when cell phones didn’t have cameras (it’s true!) – it preceded MySpace by one year and Facebook by two years. (Yes, MySpace is still around and owned, in part, by Justin Timberlake.) It was the first “social network”.
The article above is quoted as stating, “In July 2009, following some technical problems and a redesign, the site experienced a catastrophic decline in traffic as users fled to other networks such as Facebook. Friendster, as social network, simply curled up and died.” Hmmm…that kinda sounds like the financial crisis. Doesn’t it?
What does that have to do with the housing crisis? Plenty!
In the article, it spoke about a social network’s resilience. If you have 3 friends and one leaves, then you’re likely to leave too as you have lost 50% of your friends. However, if you have 10 friends and one leaves, then you’ve lost only 10% of the benefit and thus, odds are, you’ll likely stay until that network also gets to a meaningful number of losses – which varies by individual. Thus, the “fabric” of that social network holds. At some point, the authors of that autopsy noted, the work involved in maintaining that [Friendster] social network exceeds its benefits, then people drop out.
Let’s translate this to the housing market. How is it that some areas became blighted and others held better than average? Same principle.
I heard many folks consider (and pursue) strategic foreclosure because they had seen so many others:
- Walk away without consequences (at least in the near term)
- Got some benefit that they didn’t, while they worked hard to do the right thing (Remember when the news was saturated with stories of only folks who DIDN’T PAY were the only ones who got help? Remember when banks said they couldn’t help until you stopped paying?) People resented the less diligent getting a break.
- Were not invested in their neighborhoods emotionally nor their homes emotionally
These, too, are examples of that same mindset as belonging to an online social network. When the incremental effort exceeds the incremental benefit, then people withdraw from it. When people saw the incremental detriment of owning a home overwhelmed the benefit, people walked away.
When a $200,000 home loses 25% ($50,000) of its equity (or more) – which happened in a year or two – and the benefits don’t match, people walk. For example, that $50,000 loss is “meagerly” offset by:
- Just shy of $2,500 a year in principal reduction (assuming a legacy 6% loan),
- Interest paid of $12,000, which results in a positive tax reduction impact of about $5,000 for a single person making $50,000 per year.
- In total, ya’ lose $50,000 (with no end in sight) and gain $7,500 in benefits.
That’s a net loss of $42,500…with the prospect of paying higher taxes that each municipality, state and federal entity cried they needed during this downturn. So, houses crossed that tipping point, just like Friendster, where the work involved in maintaining that social network exceeded its benefits.
Those neighborhoods which saw huge emotional disinvestment also saw people flee like a jailbreak from a maximum security prison – like Friendster. Those who were close knit, long-established and / or somehow invested in them (like low LTV balances) saw the housing downturn minimally affect them.
Given this, it’s amazing that our policy makers didn’t think about policies that kept people invested in their “social (home) network” like:
- Accelerating the mortgage deduction to a dollar-for-dollar deduction against tax liability, not just the income. This would be different than just reducing the AGI, then taxing that.
For example, the $12,000 noted earlier is the deduction against the tax liability, which would have removed the $12,000 from a tax burden of $8,400 (for $50,000 in income) – not just the $5,000 deduction, meaning the remaining $3,300 in taxes would also be refunded to the filer. Could you imagine $3,300 per income earner coming back into the economy for one year? Two years?
- Instead of guaranteeing the ENTIRE LOAN, guarantee just the underwater amount and refinance the balance at the lower prevailing rates.
A quick thumbnail of this idea is to offer a muni-style, tax exempt bond fund where the loans would accrue their original rate, say 6%. So, the $50,000 deferred would accrue a balance at 6% (with no payments) and is due on sale of the home, when values have recovered – a “silent second” lien.
If the $200,000 home (now valued at $150,000) increased at the CPI rate, then this example home would be worth $356,900 (using the $150,000 as a base) in 30 years, in 2043.
A closing in 2039 would look like this:
|Sale in 2043 (Assumes value change between 2013-2043 equals to CPI change 1982-2012; assumes $150,000 base value)||
|Original Underwater Loan Amount (Deferred amount between $200,000 purchase price and $150,000 market value during crisis)||
|Original Underwater Loan Interest (On deferred amount)||
|Non-deferred Reduced Loan Amount ($150,000)||
( —– ) Paid
|Remaining Balance to Borrower Upon Sale||
So, is that $250,000 in 30 years (net) a meaningful enough “emotional and financial investment” enough to keep people from fleeing their neighborhoods like they did Friendster? Is the short-term underwater mortgage relief enough to keep the home social network together? Is it possible to get private sector funds to invest in the long-term underwater mortgages?
We’ll never know. However, we DO KNOW…what was done…was a miserable failure.
To view the article that stimulated my thoughts, go to: http://www.technologyreview.com/view/511846/an-autopsy-of-a-dead-social-network/
- An Autopsy of a Dead Social Network (technologyreview.com)
- The Friendster Autopsy: How a Social Network Dies (wired.com)