Mortgages, et al

Final decision to be made on the weekend travel plans over chicken fingers tonight:-) I think I am leaning towards New York right now, but that could change after I walk around outside for a bit.

But before I go, I have promised to continue the discussion I started earlier this week. And it turns out that waiting has its benefits, as the President announced a plan to freeze adjustable rates this afternoon. OK, so he is not that bright, and could be considered somewhere between slightly and wildly incompetent...but isn't he just as cute as a button? The best looking first family we have had in....um...maybe ever?

Anyway...my response to this plan, and other ideas that have been floated is...What the fuck?!?! How do I sign up? Since when do you buy a house you can't afford with a loan that you know you can't pay back, and then get the rules changed to make it so that you can afford it? How does that make any sense?

First, I take issue with the idea that this is a "crisis" at all. At least not nationally. There are some areas (more on that in a bit) where foreclosure rates are truly alarming, but in the majority of the country, prices are soft but stable and foreclosures are not way out of the norm. The overall numbers of foreclosures are up, but the acute pain is restricted mostly to places with either deep economic problems (Ohio, Michigan) or massive speculative bubbles (Phoenix, Las Vegas, Florida, Southern California). [This is why I was glad to get comments from Michigan and Florida the other day]

Second, the downside is that home prices fall as foreclosures are worked out. Is that such a bad thing? How many people do you know that want to buy a house but can't afford to pay the recently-run up prices for one? Well, now it turns out that the price run up was fueled by rampant speculation of people who couldn't afford to keep the homes. So, if the prices fall, all of a sudden, many of the people that were priced out two years ago (maybe because they were unwilling to take on a loan they couldn't pay back, duh!) will find that they can afford to buy a home. Why would the government be interested in freezing them out in favor of the people who ran recklessly into homes in the first place?

Third, let's think about who the government is really bailing out? Sure, on the surface, they are allowing people to keep their homes. However, by definition, the people who need bailing out have limited or no (often negative) equity in their homes. Is losing a home traumatic? Of course it is...and this is not an entirely a financial issue, there are huge social issues around housing. But taking a home from someone who has no equity (often because they put no money down, had an interest only mortgage, etc.) doesn't actually cost the homeowner. There are some moving costs, and a stigma...but the homes that get taken generally aren't worth any money to the person losing the home.

Mostly, this is a borderline-collusive effort to keep the mortgage holders from having to sell off a whole bunch of foreclosures at once, which would drive down the prices they sell at and force them to take large losses. And force them to acknowledge exactly how big those losses are instead of hiding them in some "estimates". So the benefits go not to innocent homeowners, but to sophisticated buyers of Collateralized debt who are supposed to know, value, and absorb the risks they take. That is the thing about risk...it means that sometimes you lose!

Fourth, this is so clearly politically motivated, it must almost certainly be a bad idea. Take a look at the places that will be helped by this, and it reads almost exactly like a list of all the key electoral swing states. Ohio, Michigan, Florida, Arizona, Nevada. Why has the government taken a keen interest in what is a pretty normal economic event (an asset bubble of sorts)? Because it allows them to directly buy a lot of really key votes. What the President offered today is pretty similar to what Hillary Clinton (and some others) were touting last week. But you can be sure that, by tomorrow, she will rant about how wrong he is today...she can't agree with him, after all. Who cares about what is good when there are soundbites to be had!

Last, how does this solve the problem? Housing clearly costs more than it reasonably should in many places, and this will serve to artificially prop those prices up for a while longer. So non-owners will remain priced out until this band-aid passes, at which time we can go through the same exact problem again. Actually, maybe worse since many parties will assume another bailout will save them from anything too catastrophic. You either have to let a market function, or regulate it centrally...but it is really hard to do both with any positive results.

OK, that is a lengthy rant, complete with long sentences...please chime in with any thoughts. I am not pretending to be a complete expert on this, so I could have some facts wrong. And it is kind of a brain dump, too...so let me have it! I will approve comments as best I can all weekend.