I still say all of this “activity” on the part of the Fed and Congress is just rearranging the deck chairs.
The Fed lowered rates and mortgage rates haven’t gone down. And if they lower rates again, mortgage rates probably still aren’t going to move down much. Mortgage investors now have a better understanding of the risks involved in the current environment. They are wary of most mortgage paper and the Fed can’t change really change that too much. (Until mortgage investors believe that prices have stopped falling they’re going to be gun shy, regardless of what the Fed does.)
All of this hooplah about raising the conforming mortgage limits is much ado about nothing. Even if the conforming limit gets raised, in order to participate the borrowers will still have to go full doc and cough up a 20% down payment or 10% with PMI (or something of that ilk). Does this really help things a whole lot? Maybe a little bit for some borrowers, but for the majority in trouble it doesn’t help much.
So maybe all of this activity will reduce the ultimate price declines by 5% relative to whatever they would have been otherwise, and perhaps this mess gets spread out over an additional year or two. But, ultimately, the end of the story isn’t going to change much.
Here’s the problem: The loans have already been made and nothing can be done about that. They were made to crappy borrowers at artificially inflated prices and nothing can be done about that. The goose is already cooked. Now it’s just a matter of dealing with this reality and managing the damage. But the gross amount of the damage is going to be hard to manipulate, other than to just spread out the effects a bit. I think when you dig deeper into the various Congressional proposals, etc. you’ll see that they’re not going to help many borrowers very much.
Ultimately, the market’s going to end up sorting most of this mess out, despite the Fed’s and Congress’ intentions. It’s too late. Again, the bad loans are already out there in too great a number for our central planners to change the outcome by much.
