Thursday, March 05, 2009

Mortgage bailout to aid 1 mortgagor in 9 

My guess, and it is only a guess, is that some form of federal regulatory intervention and subsidy is necessary to prevent the housing market from driving more bank failures and deepening the contraction of the real economy. Toward that end, the Obama administration has put forth a plan that will, one way or the other, subsidize up to 1 borrower in 9. Whether this plan is better or worse than others is for people smarter than me -- I suggest a regular scroll through the blog Calculated Risk -- but I do wonder at the politics. Has Barack Obama earned the permanent loyalty of 11% of mortgagors (among other constituencies), or has he alienated 89% of them? The answer to that question will turn on the effectiveness and reasonableness of the Republican response and the trajectory of the economy in the next year. I hold out very little hope for the former, and worry about the latter.


By Anonymous Anonymous, at Thu Mar 05, 07:58:00 AM:

It does not gain my support, but then I didn't vote for Obama. Housing prices in California, for example, were ridiculous compared to other states. Let housing prices fall, and they will be more reasonable for less-moneyed people.

Moreover,keeping up housing prices, as has already been mentioned, also keeps rental prices up, which is definitely hurting those even less-moneyed.

This has encouraged me to get an e-mail off to my congressman, a member of the party that shall not be mentioned in polite company.  

By Anonymous Anonymous, at Thu Mar 05, 08:27:00 AM:

The Score: Obama 11, Opposition 89.  

By Anonymous Anonymous, at Thu Mar 05, 08:32:00 AM:

If Obama had done this first, instead of that stupid, oversize stimulus package, it might be better received.
I can see good and bad to this, but it makes more sense that flushing more billions down the drain to banks, AIG, etc. It is, as they say, addressing the "root cause" of the problem.
But it has to be done intelligently. As Mr. Tejano says, the natural equilibrium price (or value) has to be recognized and used, rather than subsidizing an inflated price.


By Blogger Mrs. Davis, at Thu Mar 05, 09:16:00 AM:

I wonder what proportion of mortgagees in Caliphornia, Nevada,
Arizona, Florida and Michigan this applies to. I suspect this will cause a big problem in states other than those five as this program smells like a big wealth transfer from the other 45 states to the fools in those 5.

This move will only prolong the housing price problem in those five states as housing prices are artificially supported above their true value. This is the same idiocy as AIG or GM. Let the losers die if that is their destiny. Stop the extraordinary life support measures. We are penalizing prudence and supporting profligacy.  

By Blogger Fritz, at Thu Mar 05, 11:47:00 AM:

"Let the losers die if that is their destiny. Stop the extraordinary life support measures. We are penalizing prudence and supporting profligacy."

You must be one of those compassionate conservatives I keep reading about...

On a more serious note, my understanding is that (and please someone correct me if I'm wrong) if widespread waves of foreclosures hit those states, it would lead to bank failures, which would kill the economy for everyone. To prevent that you can either bail out the banks or bail out the homeowners. You might favor bailing out the only the banks, but a large segment of the population is (justly) angry at them for being the greedy enablers of the recent housing bubble that has caused so much hardship. So, democracy works its magic, and your money is taken both to support irresponsible bankers and irresponsible homeowners.

I think there's a problem with our democracy in the context of free market capitalism. You want there to be a system in place that rewards people who are prudent and punishes those who buy things they can't afford. So far, so good. But if a majority of people delude themselves into thinking the good times will last forever, and a minority is prudent, the minority will inevitably be screwed over when the bubble collapses, because the majority will vote to transfer the wealth to bail themselves out.

How is such a problem to be avoided without recourse to radical libertarianism, or much more government regulation so that bubbles don't arise in the first place?  

By Blogger Viking Kaj, at Thu Mar 05, 11:50:00 AM:

The goal of this thing is to keep people from defaulting so that extra supply does not come on the market, further forcing prices down. It doesn't help people get out from under excess debt, it insures that they will be slaves to this debt for longer periods.

Until we get a real price correction that is based on market conditions, there is going to continue to be uncertainty about the value of assets on banks balance sheets.

So, in a lot of ways, this exacerbates the problems we are in. While they may have a socialist agenda, there is no way markets are not going to work. The only thing government can do is gum them up for a while.

This policy will most likely ensure that we have a prolonged recession and a slow recovery, which the Obama probably wants.

Again, a total failure of political leadership on both sides of the aisle. Cheap money from the fed, hidden inflation, and low real returns on savings caused this mess. We are tryting to cure it with more of the same. It won't work, but it will certainly delay the recovery and leave us in a weakened position when we do recover.  

By Blogger Elise, at Thu Mar 05, 12:17:00 PM:

I agree with David that bailing out homeowners would have been a better idea than the stimulus package but I go further. Back in September I said that if the bedrock problem with the financial system is mortgages it seemed to me the best way to address the problem was to address mortgages. That made more sense to me logically and if my tax dollars were going to go to those who were stupid and/or greedy, I’d rather they’d gone to individuals who were than to large financial institutions that were. In other words, I think we should have forgone the original $700 billion TARP and used some of that money to stabilize mortgages.

Obama’s plan seems like a sop to those who are angry about bailing out big companies rather than a serious attempt to help the economy. It doesn’t reduce principal (which would provide a soft landing for home prices without keeping them artifically high); doesn’t cast a wide enough net to help systemically; doesn’t force the lenders to eat some of the cost (which puts us right back in the hands of institutions that won’t sell their toxic assets). Plus it has no requirement that people who are helped by the government pay back that help.

It’s interesting that in the article TH linked to, institutions that hold the mortgages or hold securites tied to the mortgages may resist the government plan because it violates their contracts. I know this would also be a problem with the part of my plan that required lenders to eat some of the cost and I gather that’s because the Constitution forbids the government to interfere in contracts. I’m a little confused about that because it seems to me the government interferes in contracts all the time. What am I missing?  

By Blogger Viking Kaj, at Thu Mar 05, 12:51:00 PM:

Some more details, if you are more that 105% under water, or if you loose your job, you won't qualify.

Since there are an awful lot of mortgages that are underwater big time, and we are heading for 10-11% unemployment, this is going to be Hans Brinker's middle finger trying to hold back the Zuider Zee.

Get ready for life underwater.  

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