Back in May I wrote a column about potential circumstances that could stem the housing market’s decline. The bulk of the article dealt with the many and varied ways that the federal government could attempt to keep home prices propped up. My opinion hasn’t changed much since then, so to avoid rehashing the entire thing here I recommend that those with hazy memories check out the original piece. (I know I had to — I can’t remember what happened a week ago, let alone seven months ago, as all my memory cells are apparenty filled to capacity with a knowledge of early-1980s television that is as vast as it is useless. I don’t think I’ve been able to form a long-term memory since Manimal was cancelled).
Well, not even a year has passed and the government has jumped with both feet onto the bailout bandwagon. The Federal Reserve, those guys and gals who are ostensibly charged with maintaining the soundness of our currency, have slashed interest rates despite serious weakness in the dollar. In so doing they’ve demonstrated that preserving price stability is lower on the priority list than giving a boost to the housing market. How well it will work is another question, considering that higher inflation would bring a new set of challenges, but they’re going for it nonetheless.
Fed head Ben Bernanke then proposed that government-sponsored mortgage securitization giants Fannie Mae and Freddie Mac should have their debt explicitly guaranteed by the taxpayers and that they should be able to make loans up to $1,000,000 instead of the current limit of $417,000. Many other people have proposed raising Fannie’s and Freddie’s loan size limit, in fairness, though few have been bold enough to suggest that someone buying a $1,000,000 house should be entitled to what is effectively a government subsidy.
The big news of late, however, is that Treasury Secretary Hank Paulson is putting together a plan in which some borrowers who took out adjustable-rate loans will have their rates frozen at the initial "teaser rate" so that they can continue to stay in the homes that, strictly speaking, they could never actually afford in the first place.
You don’t need to get
You don’t need to get anywhere close to “strictly speaking” about many of these people not being qualified to make these purchases. Straight up – most of them lied to close these deals. With few exceptions, you can’t cheat an honest man.
“Strictly speaking” they are criminals and deserve more than a mere blemish on their credit reports. IMO
I call this debacle “The
I call this debacle “The Poorman’s Enron”. Like Enron, there were many players involved in this fraud. Most were “regular” people who turned a blind eye to what was going on because everyone along the chain was getting richer. What’s infuriating is that if you were responsible by not buying a home you aren’t being rewarded. It feels like punishment to bail others out who made bad deals.
elle
What this shows is that
What this shows is that honesty and integrity are not part of this country’s way of doing things. Being a scumbag is the name of the game in the US…it’s that simple.
I just want to say that you
I just want to say that you have talent, man.
Really well written. Scathing and undeniable.
Note to self: add “Manimal” to the list of wierd Rich references, which currently includes “Doug Henning.”
Rich, thanks for all your
Rich, thanks for all your great analysis!!!
One thing you had not mentioned in your article is the effect of Paulson’s plan on the mortgage status of recourse vs. non-recourse loans. This has been mentioned a few times in the forums, do you know any details?
Good point on people who
Good point on people who from the beginning may have planned to move out after their rates reset.
I heard somewhere that Paulson’s plan would be optional – can the Government legally force lenders to lock rates despite a borrower-signed loan for a limited term low rate?
What an incredibly short-sighted solution to increase the purchasing limit of the GSE lenders. Increasing the money available to borrow is not the answer. In fact it was a main part of the problem to begin with.
Manimal!!!
I almost fell out
Manimal!!!
I almost fell out of chair laughing so hard. I was crushed when “V” was cancelled.
“End of line.”
Rich,
I, as well, am quite
Rich,
I, as well, am quite impressed. I have been cynical as to the size of any potential correction for the very reasons you reviewed. I think any rational person expected the Fed to take some action to try to minimize the impact of the correction. However, I cannot believe they threw the dollar out with the bathwater. Just crushed it. I am in absolute disbelief with the size and scope of the proposed government intervention. What is with this new “let the government fix everything” mentality. Forget contract law? What!!!? Print money with reckless abandon. What!!!!? This is absolute insanity. If I may, (and in all honesty, just to insite outrage) Here’s my humbe opinion. Let those scumbag lenders go broke, screw all the morons that bought the worthless derivitives,(especially the Chinese) and hey, how about prosectuing all the fraud that obviously went along with the liar loans. Lets see the head of Country wide indited instead of bailed out. You know he knew exactely what they were doing. How about a little personal responsibility thrown in for good measure. I wish you good luck in attaining a positive outcome to the rest of your predictions. I honesty hope that all this government interventions garbage doesn’t amount to much, and you turn out to be dead on right. I know you have been hesitant to pick a bottom, but just for fun, could you update your original assesments and put your best argument together with percentages. You know 10% chance of 50% drop, 20% change of 40% drop, ect…. Based on Toll brothers big land sale at 60% off book vaule (WOW), one could expect to see some of those big disounts work there way to the general public in the near future. Congratulations to all you patient belevers.
You left out FHA. They have
You left out FHA. They have already changed their underwriting to allow delinquent borrowers to refinance into the FHA program, and they are pushing for legislation to allow people to refinance into FHA who can’t even get an appraiser to say they have 3% equity (if that isn’t a low bar, what is?). They are also pushing for legislation to substantially increase the FHA loan ceiling. So someone in trouble with a loan that isn’t guaranteed by the taxpayer can now swap it for a loan that is guaranteed by the taxpayer. FHA’s volume, both new and refi, are already way up.
Oh, despite Paulsen’s claim that no taxpayer money would be used for a bailout, they are now talking about expanding tax exempt mortgage revenue bonds to finance bail outs, which could represent a significant tax expenditure.
You guys may want to read
You guys may want to read Bernanke’s view on depression prevention and Japanese style stagnation. Bernanke’s View.
I can’t wait until we trade on par with the yen.
“They would not listen,
“They would not listen, they’re not listening still. Perhaps they never will.” Don Maclean, Vincent (aka, Starry Starry Night)
Do you see now? How much more of this must we take before we realize that we are not living in a true capitalistic society; but rather a socialistic one that uses capitalism as a moniker. The differences between the US and other countries like China, Russia, Cuba, Venezuela and others is becoming more and more blurry as time goes on.
I implore you all to take a closer look at our leaders and consider Ron Paul (http://www.ronpaul2008.com/). I hate to come across as a political pimp, but I really have no other choice. Don’t take my word for it. Read about his stance on the issues, see how he’s voted (it’s one thing to to talk and another to vote), and watch some of his videos on YouTube. And come to your own conclusions. If you are like me, you’ll find that we have veered way too far from what made this nation great and need to get back to the basics.
rankandfile
This country has a long
This country has a long history of bailouts, starting with various relief, recovery and reforms of the New Deal. Why should we expect anything different. Some examples below from FDRs days. I think Hoover probably called all of these socialistic meddling (and some of them are/were) … but I think now we probably are OK with FDIC insurance, among other things.
FAIR LABOR STANDARDS ACT — provided minimum wage for workers.
CIVILIAN CONSERVATION CORPS — provided work for jobless males between 18 & 25 in reforestation, road construction, prevention of forest erosion. Ended in 1941.
AGRICULTURAL ADJUSTMENT ACT — established principle of government price support for farmers and guaranteed farm purchasing power.
TENNESSEE VALLEY AUTHORITY ACT — federal construction and ownership of power plants regional development of Tennessee Valley (7 State Area)
FEDERAL SECURITIES ACT — required full disclosure of information related to new stock issues.
NATIONAL EMPLOYMENT SYSTEM ACT — created US employment service.
HOME OWNERS REFINANCING ACT — use of government bonds to guarantee mortgages.
BANKING ACT OF 1933 — created Federal Deposit Insurance Corp., guaranteeing the safety of bank deposits.
NATIONAL INDUSTRIAL RECOVERY ACT — minimum wages and self regulation of industry — ended in 1935.
PUBLIC WORKS ADMINISTRATION — appropriated funds to construct roads and other federal projects.
SECURITY AND EXCHANGE ACT — federal regulation of the operation of stock exchange.
NATIONAL HOUSING ACT — federal housing administration insured loans of private banks and trust companies for construction of homes.
COMMUNICATIONS ACT — federal housing administration insured loans of private banks and trust companies for construction of homes.
HOME OWNERS LOAN ACT — government financing of home mortgages.
NATIONAL HOUSING ACT — construction of low cost public housing and slum clearance.
SOIL CONSERVATION ACT — established federal soil conservation services.
RESETTLEMENT ADMINISTRATION — built new model communities for low income city workers
RURAL ELECTRIFICATION ADMINISTRATION — created and administered program of bringing electricity to rural areas.
NATIONAL YOUTH ADMINISTRATION — federal work relief and employment for young people.
NATIONAL LABOR RELATIONS ACT — encouraged collective bargaining and formation of unions to be supervised by the National Labor Relations Board.
SOCIAL SECURITY ACT — created Social Security System — old age and survivors insurance; aid to dependent children etc.
So add to the
So add to the list…
FIVE-YEAR MORTGAGE RATE FREEZE – Temporarily provided reflief to irresponsible borrowers who bought more house than they could afford, while punishing future generations with propped-up over-priced housing.
This is beyond a government sponsored program. While maybe equally socialist as a few of the above, it has no benefit for society as a whole, little to no long term benefit for the few affected, or any positive outcome at all. For most it delays the inevitable.
This plan is only for people who have been paying on time, and in 5 years homes will be worth less than they are today. When rates reset then chances are people will have to sell at a bigger loss. Some will be able to afford the reset, but I wonder if this plan applies to interest only loans that even if rates don’t go up, will require principal, albeit small at the beginning.
What a joke.
Is this a neg-am freeze?
Is this a neg-am freeze? People who use this plan will be so upside down in 5 years that when they walk away their tax implications will be worst than if they had walked as soon as they couldn’t afford their payments. On the investor side, are investors suppose to loose their homes because the return on a
triple A rated investment has now been modified by the government? What about the pension funds and municipalities invested in this junk.
Also which investors will be fornicated,
these investment vehicles have tranches and to my understanding the people in the top tier get paid no matter what. I wonder who are in the top tier’s of these tranches? I guest someone will have to petition the Cayman Island government to find out since thats where most of these fund originate.
I’m in law school so when I see the things like this I just feel very secure in my new career path.
Well…current buyers should
Well…current buyers should not buy then. But being as stupid as people are, they will.
You guys should look on the
You guys should look on the bright side of the Rate Freeze. This pretty much kills all ARMs. It’s another Nail in the coffin for the mortgage industry. They’re running out of customers and now running out of products to sell.
What a crock–but it is an
What a crock–but it is an election year, after all.
This might actually have
This might actually have some benefits for those waiting out the market. While the best option is of course to have the government stay out, there is too much pressure for politicians to do something. A second best is to act in a way that looks important, but which really has very little effect.
The research says that it is housing prices (and their first difference) that drive foreclosures, not interest rates (or resets). Suppose instead that the White House had gotten this message and stepped in directly to prop up house prices. The appearance of doing something, without actually doing anything, is a very nice alternative.
It will take at least 6 months, if not a year, for people to figure out that this is not working. There will be lots of delays in figuring out who is qualified, who can still pay, etc. All of those under-employed mortgage brokers can have something to do! Lots of lawsuits and stalling from investors who have money in these things, and from lenders. There will also be a further pullback by investors, since they don’t really know what they are buying.
All of this means that the bad news will continue to accumulate, as it has since August. Remember, in this situation, we _want_ the government to fiddle while the market burns. So, the current policy is a place holder for something that could, in fact, prop up prices.
Rational expectations
I’ve refrained from comment
I’ve refrained from comment on this subject because I didn’t want to over-react until I could understand it better. The best analysis of it is on Calculated Risk.
RE, I agree with your basic premise. It won’t make much difference.