Rescue Me
Matt Welch | July 24, 2008, 10:02am
Now that President George Bush has dropped his veto threat, the gargantuan housing bailout is on the verge of becoming law, pending passage in the Senate. Thus, a housing bubble that has long been artificially inflated by the ever-growing presence of the government (and quasi-government) in the lending market, especially the lower-income segments; will now be artificially re-inflated, especially in the lower-income segments, by a government doubling down on its bad bets. Since Fannie Mae and Freddie Mac already have their federally guaranteed fingers in about half of all U.S. mortgages, what will be their market share at the end of this downturn/re-regulation process? Sixty percent? Eighty?
To see one reason why we got so quickly to this point, look no further than this objective news lede in the Washington Post.
The House yesterday easily approved legislation that seeks to slow the steepest slide in house prices in a generation, rescue hundreds of thousands of homeowners at risk of foreclosure and reassure global markets that mortgage-finance giants Fannie Mae and Freddie Mac will not be allowed to fail.
In other news, Jesus yesterday easily approved legislation that seeks to turn water into wine.
Other Matt | July 24, 2008, 10:29am | #
Matt, you think the housing bubble is going to reinflate as a consequences of this bill?
Really?
Oh, he means it, joe, especially that last sentence part.
Idiots aside, I'm wondering if we'll see some kind of new "mortgage" vehicle come out of this. Rationally, it would make sense for the lenders to write down debt, as that's what they'll end up with anyway at the end of the foreclosure. However, the inequity of this is that they bear the downside risk (especially in no recourse states such as CA), with no corresponding benefit on the upside.
There may be such a hybrid beast out there already which allows a mortgage to become a quasi "equity partner", though I'm not aware of it if so. If it's not, it's a natural growth pattern out of this.
I don't know what form it would take, though. Perhaps you take an 80% mortgage, and pay down based on the original amount, but you pay down to a percentage of that original amount, not a cash value. So, if you pay it down to, say, 75% and sell the house/condo/timeshare whatever flavor for a price, the mortgage company gets 75% of the net sale price after commissions, transfer fees, and whatever else can't be gamed, regardless.
Obviously it would entail a dramatic shift in the secondary market as people would not be buying debt instruments so much as something akin to a REIT, but it's an interesting concept.
Then again, I also hold delusions that we all may walk on water some day, there may actually be "world peace" which doesn't involve totalitarian regimes, DC may actually some day conform to the intent of the Heller ruling, and joe may become an ethical, intelligent, skin color loving, respectful person. So, on second thought, just ignore all the above as pure fantasy.
tarran | July 24, 2008, 12:09pm | #
Actually, Penn, Fannie May and Freddie mac
are a mess because of the government.
Do you think that the shareholders and the board of directors were concerned about risk? From their inception, they taxpayer was on the hook to supply them with an emergency line of credit.
Now, if you cannot lose money, what happens to your willingness to take risk?
In the free market, bad business decisions manifest themselves in losses - losses that are hard to recover from. Businessmen who are afraid of such losses tend to be more conservative and careful in their decisionmaking.
When you have a speculative bubble, invariably you have some entity financing the bubble with newly "created" money (this included things like the King of Mali blowing a whole bunch of gold in egypt while on Hajj).
The U.S. has a central bank called the Federal Reserve which ran the printing presses like crazy since Greenspan took the helm. This supplied newly created money that went to people selling assetts to the federal Reserve. These guys looked for some place to invest their money and settled on the mortgage industry. The new money they invested allowed the banks to offer cheaper and cheaper loans. This allowed people to pay more for limited housing stock. They bid up prices on the houses. The lenders and buyers all thought that these price increases would continue indefinitely and thus encouraged the buyers to buy more than they could afford, on the premise they could sell the house in a few years and make a lot of money.
Eventually, though, panicking at the price increases accross the board from Greenspan's inflation of the U.S. dollar, his successor started slowing the printing presses. And boom. The money available for new loans started to dry up, people stopped buying houses and high prices. The prices started falling, and people who had counted on those high prices found themselves facing financial ruin.
Now, do you know what the secret to solving the problem as quickly and with as little damage to the rest of the economy is?
For the government to do nothing, and allow the bad loans to be liquidated, the bankrupt businesses to be liquidated and release their asetts for use by firms conducting profitable business. The borrowers who lived for a time in houses they couldn't afford to move into properties within their means.
Of course, this won't happen. The federal government extended what should have been a 2 year depression (oh I'm sorry we call them recessions now don't we) into a 18 year one by their desperate attempts to prop up prices and production levels at the 1920 levels, and it looks like it's going to repeat all the mistakes again.
BTW, How exactly will the economy fail completely if a giant mortgage company goes bankrupt?
Will factories be destroyed? Croplands have salt sown on them? The workforce die horribly of plague?
What will happend is that a bunch of people will have their savings wiped out (because they invested unwisely). A bunch of people will have to move into smaller houses or apartments. The price of housing will decline until it is at the level where the number of buyers matches the number of sellers.
And that's it.
