Rethinking the Goals of a National Mortgage Bailout

An already-ugly problem gets worse

By blackhedd Posted in | | | Comments (45) / Email this page » / Leave a comment »

Front and center this week have been the ill fortunes of Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that together own trillions of dollars’ worth of US home mortgages.

At this point in time, there really is no reason to own the stock of either company. The Administration is said to be looking carefully at whether and how to do a government takeover of one or both. The grand 35-plus year experiment in semi-public support for US housing may be coming to an end.

But that’s far from the only problem in the mortgage/housing sector. In fact, it may be the easy problem. The hard problem is what to do about all the homeowners that are falling behind on their payments.

This is a time bomb that continues to tick away, and Congress has been working hard to pass a huge bailout bill (the Dodd-Frank Act). President Bush has vowed to veto it, but he’ll break that promise.

But what are the objectives (both political and economic) of this enormously costly legislation? Can it actually meet those objectives? And are they the right objectives in the first place?

Keep reading.

First, a few words about the GSEs. As you know, they borrow money from investors and use it to buy mortgages. Their cost of capital is uniquely low for privately-owned entities, because they have always benefited from two things: they’re allowed to buy only very safe mortgages that are unlikely to default; and there has always been an unspoken assumption that the Federal government would guarantee their debt. (A third entity, the Government National Mortgage Association, or “Ginnie Mae,” actually does have an explicit government guarantee.)

But the GSEs are now being questioned by investors, and not only because they’ve suffered larger-than-expected losses on their mortgage portfolios. The spread, or difference, between what they must pay on their debt (the so-called “agency bonds”) and what the US Treasury pays on debt of similar duration is now at abnormally high levels.

That means the cost of capital for the GSEs is higher than it should be, considering that the debt is implicitly guaranteed. That tells you that investors are reluctant to be lending money for home mortgages, and it also means that the GSEs’ profit margins are under pressure. Hence the decline and fall of their stock prices.

If this keeps up, there is at least some risk that Fannie, Freddie, or both may start losing money. If they can’t keep borrowing at low enough rates to finance affordable home mortgages, there’s no alternative but for the government to take them over. And you, dear taxpayer, could suddenly be the owner of trillions of dollars’ worth of home mortgages.

What makes all of this worse is several recent Bush Administration initiatives. It turns out that Fannie and Freddie have been called on to temporarily relax the strict standards under which they buy mortgages, and which are a key reason their capital costs have been low. They’re now buying much larger mortgages (the limit was raised from below $500,000 to over $700,000), and other parameters were changed too.

All of this exposes the GSEs to much more credit risk than they (and their bondholders) are used to taking. In essence, Congress and the Administration responded to the extreme stresses in the mortgage market by making Fannie and Freddie something akin to lenders of last resort, a role they were never intended to play.

And that brings us to the Dodd-Frank Act. It’s being reported this morning that the bill will pass the Senate today (with the cooperation of Richard Shelby of Alabama, the Finance Committee’s ranking minority member), and will move to the House next week.

The basic idea of this mammoth legislation is provide relief to people who are having trouble paying their mortgages. It contemplates a $300 billion expansion of the Federal Housing Administration (FHA), which is the New Deal-era agency that insures mortgages against default.

The thinking is that there are a lot of people in danger of losing their homes because they can’t afford their mortgage payments. The details get really complex (and have been fought over in Congress for months now), but the plan is to replace existing mortgages with fixed-rate loans on a somewhat smaller principal amount. (Lenders would need to provide the principal reduction, and in return they would receive some of the upside in case home prices rise in the future.)

And the replaced loans would receive a guarantee from the FHA, and in turn would be shoveled into Fannie Mae or Freddie Mac.

But a lot of the people who benefit from this program probably won’t even be able to afford their replacement mortgages. We the People are going to make up the difference. The legislation provides for $300 billion in taxpayer money to back up the FHA’s guarantees. And even Barney Frank has been muttering that it might not be enough.

Now I’d like you to ask yourself: why the hell do we need a bailout like this? Why should we reward millions of people for making mistakes they shouldn’t have made in the first place?

Because Congress and the Administration deem it unacceptable for a large number of people (perhaps millions) to lose their homes and have to move back to rentals.

This will be one of the largest interventions in free markets in history. But the Administration and Congressional Republicans are going along with it because of the very real fear of an economic collapse if we have millions of foreclosures.

The government is proposing to pin people into homes they can’t afford. It’s the foreclosure that they’re trying to prevent. Foreclosures will lead to widespread reductions in home values, even for homes without distressed mortgages. The value of all residential real estate will adjust massively downward. This will also reduce the value of existing mortgage securities and agency debt, and will probably result in a sharp increase in mortgage rates, which will reduce home values even more.

This potential for an ugly deflationary spiral (sometimes referred to as “Great Depression II”) is what has some very smart bond-market people totally spooked.

What has me spooked is that the bailout may not even work. We may not be able to prevent a downward adjustment in the real-estate market, because the adjustment reflects reality. Housing is overvalued now. By providing a huge bailout that seeks to lock today’s market distortions in place, we may be creating new stresses that will come out some other way. The massive deflation might happen anyway. It just might take years longer to do, and years longer to recover from. And no matter what happens, the US housing market will be permanently federalized.

Is it economically possible for the bailout to actually work? Yes, it’s possible. It would amount to the same kind of medicine as a fiscal stimulus. It’s basically a huge wad of money creation (aka, inflation) that just might result in a sudden stabilization of mortgage values and end the global credit crisis. That would be the grand-slam home run scenario. There are intermediate possible outcomes between the two extremes.

Which outcome is most likely? History is no guide. The only honest answer that anyone can give you (and that includes Barney Frank, Paul Krugman, Bill Gross, and Hank Paulson as well as yours truly), is: We won’t know until we try it.

What should the goal of the bailout program really be? It should be to make it possible for people who can’t afford their mortgages (and who are already behind on their payments) to get eased into foreclosure, out of their homes, and back into rentals with the minimum amount of fuss. If we really are prepared to accept some moral hazard, then let’s give these people a small subsidy to take the deal. But let the adjustments happen and let the market find its level. This plan is where we’ll end up in a year or two, if the current bailout plan lays an egg.

Political reality, however, dictates that some kind of a bailout will happen. We’ll be rolling these dice. Hold on to your hat.

-Francis Cianfrocca

Rethinking the Goals of a National Mortgage Bailout 45 Comments (0 topical, 45 editorial, 0 hidden) Post a comment »

The effect of this bailout would be to Federally guarantee home equity, and real estate becomes a 'can't lose' market. This is supposed to control that market? My word, if there is no downside risk the whole problem becomes worse. So the upside risk will need to be controlled, too.

That's called 'price fixing'.

What if instead of trying to prop up prices or lock people into a depreciating asset we try something like a safety net for forclosure victims. (See, we have to call them victims because no one should be accused of bad judgement -- LOL).

If you are trying to put money back into the system, what about the following:

1) Give people a large tax write off against the losses incured with real estate. Maybe even to the point of a refund.
2) Allow banks to write down debt by backing the loss with Government "give back" for one year.

These kinds of solutions still result in inflation but they can be thought of as trying to pinpoint the inflation instead of just doing a general helocopter drop.

Foreclosure rates are already 4-5 times the average from 10 years ago and there is nothing to stop it from increasing. My parents asked me if home prices were falling in my town. I said no, because nothing is selling. Even people looking to buy can't get loan approvals.

We pushed the idea to allow Federal Bankruptcy Courts modify mortgages in foreclosure by fixing interest rates. Changes in the principle balance can force the value of homes surrounding the foreclosure to decrease. By having home owners go through the Court, we are able to verify affordability, need and the process is supervised by a third party. For families that can not afford even the modified payments, the process becomes an orderly changing of hands. For those on the edge, it may be enough to give them a chance.

From my limited vantage point (Chicago and Madison) prices are down 10-20% and sales are not happening, suggesting prices still have more downward pressure. From reading, it appears that in high demand areas (CA and FL), prices are even lower and still falling.

A reasonable bailout with some hope of succeeding would have to 'fix' either by design or confidence a floor on home prices. A horrible idea, and one likely to actual make many more homes lose value. Not to mention a cost many more hundreds of billions than being suggested.

Federal and state governments could combine and authorize the FHA to simply buy a percentage of houses at the lowest market price they can get. Then resale the homes when the crises is over. Not an optimum plan, but it would be more fair than bailing out bad lenders and stupid borrowers.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

I would have to first reject the premise of many there is an Armageddon in foreclosures on the horizon. Many of these statistics are generally someone trying to divine what will happen. We have all recently seen how well that fortune telling worked out in this market. Plus, some of the reports show a drop in foreclosures during June. While it is unclear if this will be perdurable month to month, the trend is running downward in top states such as California, Nevada and Arizona.

Certainly, foreclosures are and will continue to be of concern, probably into 2009. However, this needs significant counterbalance against existing home, inventory and price (which you have somewhat noted). As prices drop, real estate will become more attractive and affordable. This is ultimately one market mechanism by which the correction will occur. The other important factors are rates and jobless claims (the latter of which amazes me nobody has focused on, if you don’t have a job it is hard to pay a mortgage; and jobless claims are steady).

To intervene by reducing principals (forcing banks to write off that portion of the credit, affecting bonds cash flows, etc.) and even worse providing money for mortgage payments not only forestalls the correction but possibly makes it worse. It artificially inflates market value and therefore prolongs the status quo, which in the end helps no one. How about we teach people to be financially responsible and also shed the accoutrements like expensive cars they leveraged with their home, etc.? Did I miss reading that part of the bill?

Furthermore, this idea to somehow recover value on the reduced principal when home prices rebound, seems like a fleeting gimmick. We all know in this Democratic Congress any attempt to recover that money will be positioned as the evil banks picking on homeowners and therefore carry substantial risk for legislative elimination down the road.

Compounding this further is the impact on downstream instruments issued using relevant mortgages as collateral and overall balance sheet accounting treatment. How can one effectively carry this without an earnings drag, especially under FVA rules? How will we eventually value those instruments (an issue to begin with)?

I am not completely opposed to expanding the FHA programs in a limited and wise fashion since, if done correctly; it would help mitigate the foreclosure rate. But $300 billion plus worth of public assistance? As someone who has been financially responsible, you will have to forgive the fact I find this all extraordinarily beguiling and the motivation politically dubious.

"Nec Aspera Terrent"
bene ambula et redambula
Contributor to The Minority Report

The pain is coming. Do we let it collaspe now and accelerate the process or delay it with bailouts? Lassiez-faire was a second-millenium fad.

Adding 50% to the public debt by nationalizing GSEs is just about a foregone conclusion. What's another $300 Billion on the old plastic?

First, we will wait and see about armageddon, but I am of the opinion more and more that it is coming.

Second, the mortgage market is totally dependent on both Fannie and Freddie. Only mortgage insiders really understand this but fannie and freddie don't merely buy the loans and securitize them, they underwrite them. If you get a conventional loan, a traditional 30 year fixed in other words, it is Fannie Mae underwriting the loan. If those two shut down, the whole industry shuts down because banks don't create standards, Fannie and Freddie do. Without them, there are no loans. This is a looming nightmare of massive proportions.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

Their equity is worthless. (I wrote this piece at 6am EDT. When they opened for trading a few minutes after 9:30am EDT, both of them were down over 40% from yesterday's close.)

But F&F have more than $1 trillion in outstanding debt, and (as you pointed out) about $5 trillion in mortgages that they either securitized or own outright.

That paper isn't going anywhere. The question is whether the implicit government guarantee that it has always enjoyed will need to become explicit.

And to be totally honest, neither entity is in immediate danger. (Even if Hank Paulson sounds ridiculous when he says that.) The claim that Bill Poole made, that Freddie is insolvent, is based on a current-market valuation of their assets. But most debt securities are severely distressed because of the global credit crisis, so this is at best a questionable metric. That's actually a pretty long discussion, so I'll avoid it for now.

This morning, even as the stock prices of F&F were taking gas, their credit-default swaps (both on senior and subordinated debt) are much tighter than they were yesterday. Meanwhile the US Treasury market is trading slightly lower. The market is clearly expecting some kind of a government guarantee of the agency debt.

As I said in my piece, I don't think the F&F situation isn the worst part of the mortgage mess.

however the problem remains. These two entities control the mortgage market. Without them there is no mortgage market. Banks don't even underwrite their loans. Fannie and Freddie do. Without these two, nothing else functions. This crisis exposes the major problem and that is that these two GSE's control the entire market. That leads to massive moral hazards and as their risky behavior proves that moral hazard has a huge price.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

I read many blog comments a year ago by republicans cheering the housing bubble collapse and sneering at all the people make bad loan decisions.

But with all things there is a ying & yang.

The housing industry has been th biggest economic driver in the USA since the Tech & .Com bust and the subsequent shipment of high tech/paying jobs to China and India.

Letting financial system for home buying collapse and this will have terrible consequences for our long term economic health and continue our slide to the #3 economy of the world.

both have collapsed. No bailout is going to change the fact that an enormous amount of bad loans were created. All the bailout will do is leave the tax payers holding on to a bulk of bad loans.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

approach, although commercial properties played a much bigger role in that one.

The pain lingered for over a decade, and I'm not sure it's totally over now.

this story is simply unreported. This bill is one of the most corrupt boondoggles of all time and the media refuses to say anything. Forget the bailout of the borrowers. What everyone should be focusing on is the bailout of the banks, mostly Countrywide and Bank of America. These two banks, along with many others, will have their non performing (meaning loans that borrowers aren't paying back) bought by the government. Why is this happening? It's because Countrywide and BofA have been paying off Chris Dodd for more than a year. BofA wrote much of the bill. If this bill passes we will all sit by while corruption takes place right in front of us. Make no mistake the purpose of Dodd Frank is to pay back the corrupt banks that have been funding Chris Dodd for a while. Here is my analysis of the bill

Was it over when the Germans bombed Pearl Harbor

The Provocateur

You also say upthread that you are of the opinion that armageddon is coming.

So as much as I find this bill galling, I am interested in alternatives to armageddon. Are there any other than this bill? And if not maybe rolling the dice on this bill is a less worse alternative than expected economic armageddon.

just delays it with more serious consequences. Here is the rub.

The problem is that far too many people have mortgages that have no business having mortgages. No bill will solve that. You can transfer their mortgages from one entity to another but it won't change the dynamic that they shouldn't have been approved in the first place. The only way to resolve this is to remove as many of them from their properties as soon as possible. Keeping them in artificial mortgages they would never qualify for in the open market only exacerbates the problem.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

See you in the bread line.

Sometimes, when you do something stupid, you suffer for it.

It really isn't the role of the government to ensure that any stupid mistakes I make bear no consequences.

And, before anyone labels me coldhearted or cruel or uncaring, my family has been dinked over by loan companies on houses and my family has been bankrupt due to mistakes by the Federal Government (specifically the IRS) so I am not speaking out of ignorance, I have been in poverty. For a while we were homeless. We'd have been out on the streets except we had some family in the area that let us sleep there. My parents in the guestroom and me in the basement on a mattress on the floor.

The banks that made stupid loans deserves to suffer for making stupid loans that they knew wouldn't be paid. The people that took the stupid loans also can use this suffering as a chance to drill into their heads that you do not take ARMs when the introductory rate is already busting your budget.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

philosophically, however in the case of these two, they can't fail. The system would fall apart. No one would be able to receive a mortgage. No properties would be bought and sold without them. That is the problem.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

I don't know. As long as there are people wanting to sell and people wanting to buy, there will always be a market for people wanting to lend.

Now, they may have to go back to doing their own underwriting, instead of looking at your credit score and relying on someone else to make the decisions.

There was a time that homes were bought and sold without these two. I don't think the United States of America will grind to a halt if these two end up going under due to bad loans given. Someone else will fill the gap. We're still at least somewhat capitalist.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

Fannie and Freddie don't merely insure and securitize, but they underwrite. Without them, there are no loans for people to get in order to buy. You only have that perspective because you haven't seen mortgages from the inside. Without Fannie and Freddie there is no mortgage market, period. Banks don't make underwriting decisions, Fannie and Freddie do. Without them, banks would have to figure out what sorts of loan programs they would want to have that they wouldn't sell to these two. You would be revolutionizing the system at a time when it is most vulnerable. Believe me, you can't have them fail. The problem is that we have created a system where they wield so much power that they can't fail. That is the problem.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

I work in the commercial mortgage industry.

There are many companies that do underwriting.

That many lenders are lazy and rely on those two does not mean that the end of the world comes.

Banks ought to take responsibility for themselves.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

in residential it is almost exclusively controlled by Fannie Mae and Freddie Mac. There are two totally different markets. In commercial, each bank sets its own rules. In residential, almost esclusively, Fannie and Freddie make the rules.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

If it succeeds in multi-million dollar loans for shopping centers and apartment complexes, it can surely work for single-family residential dwellings.

Again, banks pass the buck to those two groups. That they'd suffer if they suddenly had to do the work for themselves ought not be the deciding factor as to whether we let the government bail them out.

If banks did their own underwriting for themselves (and yes, there are many residential mortgage companies that do their own underwriting) these two wouldn't be as massive and powerful as they are. We survived without them in the past. While there will be a transition period in which people will cry "The sky is falling!" . . . we will survive and banks will take more ownership of their loans, which will result in fewer 'bad loans' given out.

Private Enterprise works.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

however you are speaking hypothetically. In reality, the market is dependent on these two, and what you want is to let them fail and allow the market to figure things out for themselves in the middle of a crisis. That's why I agree that the whole idea of Fannie and freddie was a bad one, but at this point going back and starting over is not something that is feasable.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

Ok, so if we let them fail, there is an unstable period while the free market adjusts to do what it should have done from the beginning.

If we do not let them fail, and we bail them out via taxpayer expense, what are the long term affects of letting the government have even more control?

When is it a good time to convince the government to butt out? (And, for that matter, how does one convince them if things are going well?)

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

unstable. What you want is for the market to go into total chaos so that only the very best folks with all sorts of down payment money available get loans for an indefinite period of time. Furthermore, while the market is spinning out of control, you seem to think that banks will have no problems creating all sorts of loan programs that they can then incorporate into this nightmare market. That's why you are in theory and I am in reality. we are already in the grips of a mortgage crisis and it is near impossible to get a loan done. That is now. You want the entire system to spin out of control and have banks who normally depend on fannie and freddie for underwriting to suddenly create their own programs in the middle of the worst disaster in the market's history. Do you not see the unbelievable unintended consequences of such a move?

Was it over when the Germans bombed Pearl Harbor

The Provocateur

You didn't answer my question.

Though I would note that this 'mortgage crisis' is a touch regional. Regions that had the highest home price increases are now facing the worst problems.

I live in Oklahoma. During the big bubbles, we plodded along with 1 to 4% increases in home values (as compared to 10%+ in other regions)

When everything 'fell' . .. we still plodded along with 1 to 4% increases in home values. There were many local stories done about it, but it didn't really make much national press. Much better press to talk about how everything is in the toilet and the evil bush administration isn't doing anything about it.

Perhaps there is something to be said for the age-old story about the Tortoise and the Hare.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

The oil boom keeps us buoyed up while most of the rest of the country suffers.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Oil may play a part in it, but I still see too much of a match between the states that had HUGE price increases in the last decade and the states that are suffering the most now.

meanwhile, Oklahoma plods along.

Maybe a hybrid plan is in order:

Government bailout of the 2 in question, with a statement that the individual banks need to start their own underwriting and programs, as the 2 will be phased out in 10 years.

That way there's the bailout to keep people from leaping off of skyscrapers, but there's also the return to the free market, with time to adjust.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

No real housing issues here, though the price inflation has slowed largely due to the decrease in Californication of recreational properties and view properties.

Our economy is stable but not booming as it should be since there's little or no leadership from either the Governor or the Legislature in getting historically high oil revenue into the economy. Republcan leadership here is pretty much stuck on stupid about the need to inflate our economy at the wage level to catch up with the rest of the Country after having missed the Nineties due to low oil prices. You just get a bunch of knee-jerk anti-spending cant from people who just can't make themselves accept that the high oil prices are just a tax on our People unless money goes into the economy to offset it.
In Vino Veritas

No real housing issues here, though the price inflation has slowed largely due to the decrease in Californication of recreational properties and view properties.

Our economy is stable but not booming as it should be since there's little or no leadership from either the Governor or the Legislature in getting historically high oil revenue into the economy. Republcan leadership here is pretty much stuck on stupid about the need to inflate our economy at the wage level to catch up with the rest of the Country after having missed the Nineties due to low oil prices. You just get a bunch of knee-jerk anti-spending cant from people who just can't make themselves accept that the high oil prices are just a tax on our People unless money goes into the economy to offset it.
In Vino Veritas

so it has less excess to work off.

The oil helps, and natural gas exploration such as Barnett Shale is also helping.

Texas remains more industry-friendly than much of the US, and is far more diversified than it was during the 70's oil boom and 80's/90's oil/S&L bust. People keep relocating here.

All positives for our real estate market. And I'm enjoying it!

are horrible and not something I want to think about, and I agree with you that this would be as Harvey Keitel's character once replied...

it's bad, is it bad

...

as opposed to good...

However, whatever long term problems we would face, and they are significant, that is a far cry from having no real estate industry entirely. The cat is already out of the bag. We simply cannot go back to a system in which it is decentralized. That won't happen. The system is structured to all flow through these companies. Again, banks just aren't equipped to make underwriting decisions en masse as you would like them to. They are dependent on these two to do it for them.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

How about the compromise I made in the comment above:

Maybe a hybrid plan is in order:

Government bailout of the 2 in question, with a statement that the individual banks need to start their own underwriting and programs, as the 2 will be phased out in 10 years.

That way there's the bailout to keep people from leaping off of skyscrapers, but there's also the return to the free market, with time to adjust.

a 'split the difference' kind of thing.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

it is called Alt A or portfolio, however it is a tiny fraction of the market, and one of the areas that failed. Again, it isn't about whether or not banks can do their own underwriting of course they can. This is essentially like asking a crack addict to quit cold turkey. Banks are used to one structure, and you want that to turn around 180 degrees. That just isn't going to happen. I don't think you can put the genie back in the bottle. I for one would like to see a decentralized system, however I don't see how we can get there.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

No, the compromise I present is like asking a crack addict to quite over 10 years.

You don't have to make the banks do a 180, you just have them turn 18 degrees a year for 10 years.

Will there be problems here and there? Of course. Will it be scary at times? Probably.

But, we can get out of this mess.

----------------------
Dependence is Slavery.

Political Compass
Economic Left/Right: 7.12
Social Libertarian/Authoritarian: 1.85

are used to having most of their portfolios insured by fannie and freddie and a little bit on their own. If you are asking for some sort of government mandated easing away from fannie and freddie I don't know if I could support that either.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

As much as I am against bailing out stupid borrowers or greedy lenders, the harm to the average person of letting these large quasi governmental entities to default would be unimaginable.

Now, it opens up another question, should we even have these things? But that is a separate argument.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

the media won't analyze this properly. This is not about whether or not we should bail them out. We have no choice but to bail out Fannie and Freddie. They control the mortgage market. If they need to be bailed out, we have to. What we should all be debating is whether or not it is wise to have mortgages set up so that these two entities have this much power and if there is an alternative.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

let me point out that Republicans are as much to blame as any group for the way things have worked out. After the savings and loan debacle in the late 1980's we had an opportunity to decentralize mortgage decision making an spread out the risk.

A few good things were don, like allowing non banking entities to make loans. But then we turned around and allowed a huge concentration in the industry from allowing any bank or mortgage company to buy up any number of smaller ones.

Thus we HAD to bail out Bear Sterns because it was too large to fail. Well, it should never have been allowed to get that large.

Opposition to anti monopoly law has been, IMO the biggest failure of the conservative movement in the realm of economics.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

The govt is not there to bail you out of stupid mistakes you make.

But there's a twist here. If you and two million other fools made stupid decisions that in the opinion of at least several of the knowledgable posters here will have a severe negative impact on the economy, than its not just you that suffers the consequences, but also me and the other hundred million plus households who are renting or responsible with their mortgages.

So the question is- does the government have some responsibility to take action in this situation, not to bail out the fools, but to help mitigate the pain that the rest of us suffer because of their actions. I am really offended by this bill, but I will acknowledge that I also don't want the government to sit idly by if the current mortgage mess and credit crisis is dragging all of us into another depression.

This bill may not be the answer, but the government doing nothing may also not be the right answer.

This is going to be a tough nut to crack. I saw a brief bit on the news last night about how much foreclosures were up and how that was flooding the market with more housing that won't move, forcing home prices even lower, which puts more people upside down on their loans, etc., etc. My gut reaction was "Well, is there a way to write off the bad part of the loan, and redo the mortgage at a realistic value on the home?" Which sounds like what the intent of the people backing the bill seems to be. I then set aside the thought.

I understand the moral hazard of making bad decisions needs to stay in place. It seems to me the problem in the current situation is that in the process of doing away with the bad part of the loan, we are also doing away with the good part too. Knowing the current bill was essentially written by Bank of America, I don't want it passed because having read only small portions of it, it pretty much looks to me like their own personal license to print money.

But somehow or another I think we need a better balance on the moral hazard part. The neighbors two doors down went to sell their house for retirement just as the mortgage mess started coming to fruition. They've been in the house for I think more than 5 years, never missed a payment, all the stuff that shows they weren't greedy people who had overextended themselves. Initially they held to their asking price since they were able to afford the mortgage payments on their existing house and their retirement house. They've since dropped their asking price and it is still sitting on the market. A couple weeks ago, the house next to us went up for sale. We've subsequently found out it was foreclosed. Neither of them are selling. Germantown may not be the toniest DC area, but housing market here is always insanely high and insanely tight (I still can't believe my landlord paid almost a quarter million for our townhouse with no land). Those houses shouldn't still be on the market. Well, one of them at least should already be gone.

Of course, the collapsing housing market is going to cause another problem the politicians won't ignore: Collapsing revenue for local governments. But that's another long thread.

State and local government is already under pressure from the credit crisis and the recession. Lower property tax revenues are the icing on the cake.

However, mortgage-distress is geographically very lumpy. The many parts of the country that didn't participate in the boom aren't hurting from the bust either.

And at any rate, the national Democrats understand very clearly that local governments are their farm system. I'm fairly sure that the bailout discussions in Congress included a nice healthy chunk of federal money for distressed local governments. (This was also a feature of every economic proposal Hillary Clinton made. Obama walks on water so he doesn't need anyone, and he didn't bother with this.) I'd have to ask around to find out for sure if that is still in the current bill.

accurate. His support of Dodd/Frank is the centerpiece of his legislative agenda in response to the mortgage crisis. It was one of the things I mentioned in my piece about his own obscene corruption in mortgages and real estate.

Was it over when the Germans bombed Pearl Harbor

The Provocateur

'The Stupid and The Greedy' make up such a large part of our investment community that we'd only punish ourselves by denying "them" a bailout.

 
Redstate Network Login:
(lost password?)


©2008 Eagle Publishing, Inc. All rights reserved. Legal, Copyright, and Terms of Service