Posted: 30 Aug 2011 03:30 AM PDT
Washington is recycling a dumb idea from 2008 to reduce the interest rate on underwater loan owners. It's an expensive plan that rewards imprudent borrowing.
Irvine Home Address ... 9 GERANIUM Irvine, CA 92618
Government intervention in financial markets is typically a bad idea. The usual result is to shift the consequences (losses) from those who deserve to bear the brunt of their mistakes -- in this case lenders and borrowers -- on to those who don't deserve to pay a price -- in this case renters and ordinary taxpayers. What compelling reason is there to force renters who did not participate in the bubble mania to pay the bills?
The people who benefit from this ripoff will justify their actions by claiming it was necessary to save the broader economy. We need stimulus, right? Perhaps we do, but creating stimulus by giving money to the least deserving isn't my idea of good public policy.
By SHAILA DEWAN and LOUISE STORY
The proposed plan will only help the most indebted (least prudent) borrowers. It wil stimulate the economy, but it will be very costly.
This would be a good thing for the economy; however, the same result happens if the house is foreclosed on and resold at a lower price to a less indebted borrower. In fact, since the debt is even lower, the economic stimulus is much greater. The government solution helps banks keep their bad debts alive.
The foreclosure solution is obviously superior. The reduced debt and associated debt service would be a larger stimulus, and banks will endure more of the losses they deserve.
You think? The cost of this proposal is absorbed entirely by investors in the GSEs which is mostly the US government. This is a tax subsidy to irresponsible loan owners intended to benefit banks who are even less deserving of assistance. That meets my definition of a lose-lose transaction.
Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along — the administration requested ideas for execution from the private sector earlier this month.
The REO rental program is an even worse idea. It delays clearing the market, and makes the government one of the biggest landlords in the country. Government owned housing is typically among the worst managed in the country, and the large projects they already mismanage are easier to manage than hundreds of thousands of individual homes. There is no reason to believe the government could manage this portfolio successfully.
That $85 billion in savings they are touting will be added to the billions of losses the government has already covered since taking over the GSEs. This is not a low-cost program. That $85 billion in revenue would have helped offset losses at the GSEs. Instead it will go to benefit banks and loan owners. That isn't the way I want my tax dollars squandered.
Why would we give this benefit to delinquent mortgage squatters? I find the idea outrageous.
We can only hope they decide to do nothing as they did in 2008.
Nobody wants to be left holding the bag.
Strategic default will be an epidemic caused by the double dip. The 2009 rally gave false hope to many debtors, but as denial turns to acceptance as prices continue to fall, loan owners will give up and walk away from their mortgages. Strategic default has become common and accepted in 2011, and now with more reason to strategically default, many more borrowers will chose to do so.
I am afraid the desire to do something prior to the elections will prompt some stupid actions by the Obama administration. Fortunately, anything requiring congressional approval will be a non-starter.
The chief economist of Freddie Mac has revealed himself a fool. The government does not need to send a clear signal they are supporting the housing market. Any such signal will be recognized by intellegent buyers as a red flag indicating it's a poor time to buy.
Buyers will ask questions. Why does the market need supporting? What happens when the supports are removed? We just went through this in 2010 with the tax subsidies, and when the supports were removed, prices fell again. Why would the next support efforts be any different? Mr. Nothaft has clearly not carefully considered what would happen if his proposals were implemented.
Another economist has revealed himself a fool. If the program is going to save $85 billion dollars, and if the government is directly backing the entity absorbing these losses, that will directly increase the deficit. There is no free lunch.
This proposal is appealing to the administration because they know it would never get through congress. Further, they get to bury the cost in the black hole of losses at the GSEs. When the GSE bailouts get larger, they will feign surprise and blame it on something other than this stupid policy which exacerbated the losses.
If the government is going to give out cheap debt to finance private-sector firms to take over their rentals, I want in. The idea sounds like a crony capitalist handout to me.
No kidding? Banks get to keep bad debts alive and delay the inevitable write downs. Of course they want that.
Little risk? It will directly add to the losses at the GSEs. I suppose there is little risk as risk implies uncertainty about the future. This program will certainly produce large losses at the GSEs. It don't think that semantic difference is what they were trying to sell to policymakers.
I don't know if that concern is legitimate. It reads like the reporters failed to identify the real objections: (1) increasing the GSE losses and the federal deficit and (2) rewarding the least prudent borrowers in the borrower pool, so they came up with some objection to make their reporting seem balanced.
This is nonsense. The GSEs are under direct control of the federal government. They are allowed to maintain the illusion of independence so if they have to do something unpopular, politicians can blame the GSEs and deflect blame from themselves.
That criticism is wrong on many levels. First, the basic premise that foreclosures should be reduced is wrong. Foreclosure are key to the financial recovery. If policymakers continue to define the problem incorrectly, they will continue to come up with solutions to the wrong problem which will inevitably create other problems.
Second, the implication is that prices must increase in order to "solve" the underwater borrower problem and government policy should be focused on that result. This is also wrong. Prices should be allowed to find their natural equilibrium at affordable levels. A stable housing market requires manageable debts requiring a reasonable percentage of a borrowers income. If borrowers become over-extended loan owners who can't sustain ownership, the market is not stable.
The winner, the loser, and the bagholder
Today's featured property was purchased in 2003 and sold in 2006. The owner who had the property for two and a half years during the bubble rally was a big winner. The peak buyer who bought in 2006 was a big loser, and the bank who financed the 2006 purchase ended up the bagholder.
This property was purchased on 9/26/2003 for $350,000. It was then sold on 3/23/2006 for $588,000. Two and a half years ownership provided a $238,000 profit. The bubble was very rewarding for those who sold at the peak -- assuming they didn't plow that money into an even more expensive loser.
The owner who paid $588,000 used a $529,000 first mortgage and a $59,000 down payment. That money is now gone along with her good credit. Perhaps the more than two years of squatting provided some recoup of her loss.
Let's see what lessons borrowers learned here. First, the owner for 2003 to 2006 was very rewarded, so he will be eager to do that again. Second, the borrower from 2006, although she lost her down payment, she still got more than two years of squatting which would have cost her almost as much in a rental. The consequences of that will not turn her off home ownership. Third, the bank probably sold the loan into a ABS pool, so they profited on the origination and servicing. The bank will be ready to do it again.
The only real loser was the investor. If the loan was part of an ABS pool backed by credit default swaps from AIG, then the government is absorbing that loss. If this loan was purchased by the GSEs -- and they were big ABS purchasers at the peak -- then the losses have fallen to them. The GSEs get to pass their losses on to the government, so no lessons are learned there either. The government... well, they never learn anything.
I conclude we will likely repeat this disaster based on the lessons learned.
Irvine House Address ... 9 GERANIUM Irvine, CA 92618
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