Rescue Me

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.

Comments

[James Woods]

LOL, Welcome to the new Regime! All heil Dictator Bush! LOL

JT
http://www.Ultimate-Anonymity.com

[joe]

Matt, you think the housing bubble is going to reinflate as a consequences of this bill?

Really?

You think home prices are going to start rising into another bubble?

That's quite a prediction.

[Nigel Watt]

Joe, that's really an extraordinary statement, and as somebody who lived through the housing crisis, I'd ask the troll to retract his remarks.

[Elemenope]

In other news, Jesus yesterday easily approved legislation that seeks to turn water into wine.

Huh. I thought the Sanhedrin slapped that one down on account of sorcery and blasphemy.

[Other Matt]

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.

[TallDave]

Another victory for the welfare state and irresponsible borrowers.

[Reinmoose]

Maybe the House is confused and is worried about their value?

[Warren]

Holy crap. We are so fucked. They're turning a recession into a depression. And they'll use that to expand the reach of the state, thus deepening and lengthening the economic hard times. And even when we come out the other side, the beast's tentacles will still be wrapped around our throat.

[Russ 2000]

Since Fannie Mae and Freddie Mac already have their federally guaranteed fingers in about half of all U.S. mortgages,

It's closer to 84% of all US mortgages.

[P Brooks]

I love the smell of bipartisan consensus in the morning.

Smells like...
money, burning.

[TallDave]

So, now that we're incentivizing incompetence, isn't it time, in that same spirit, to give Congress a pay raise?

[Elemenope]

It's closer to 84% of all US mortgages.

Yikes.

[Don Mynack]

If I understand this bill correctly, it would give lenders an option to write down a present loan to 90% of its present value, and negotiate new terms with the homeowner, rather than foreclosing. How does this help a homeowner who's home is 50% of what it was when they bought at the top of the market? Seems to me that the homeowner is better off to let it go through foreclosure, then negotiate with the lender then to get it at something closer to market value. This delays the consequences of an already bad deal to a year or to in the future, when most of these people will be foreclosed on anyway. This is going to blow up in the government's face, big time. Seriously, people, you bought in a highly speculative market. You got burned. Walk away. Rent for a few years and then buy again when your credit gets better. It's not the end of your life, man.

[T]

So basically I'm just a sucker for paying my mortgage on time every month and not picking up a McMansion on an ARM? I love the fact that I'm going to be called upon, yet again, to bail out the stupid, feckless, and foolish and save them from the consequences of their poor decisions.

Goddamn, but it's mornings like this that make me think Claire Wolfe was wrong: it's not too early.

[Legate Damar]

by a government doubling down on its bad bets.

This is like doubling down a sixteen with a ten showing; it's such a bad idea, casinos won't even let you do it.

[PFJ]

Joe, I don't think this is going to reinflate the bubble, but this is clearly going to slow down the correction of the high prices from the bubble. Agreed?

[Russ 2000]

LMNOP,

I should qualify that as 84% of all first liens. Second mortgages/HELOCs were never bought by Fannie and Freddie if I understand correctly.

[robc]

I guess all those people who were COUNTING on extreme price depreciation in order to be able to buy their first house are fucked.

Oh, and before joe misreads my comments: I think this just means the fall back to normal prices will be slower and more painful. Reinflating a bursted bubble doesnt mean "causing appreciation" its means "work hard to hold in same place". This is a water treading exercise hoping to hold prices in place until the underlying fundamentals improve to support them.

If anyone read anything into Welch's comments other than that, either you or Matt is an idiot. Possibly both. 🙂

[P Brooks]

"Count your change before leaving the window!"

[Elemenope]

So basically I'm just a sucker for paying my mortgage on time every month and not picking up a McMansion on an ARM?

Well, duh. People who play by the rule always lose. People who get caught cheating always lose. You must be feckless AND crafty to win!

[Elemenope]

I should qualify that as 84% of all first liens. Second mortgages/HELOCs were never bought by Fannie and Freddie if I understand correctly.

So, they're Two-face crazy, not Joker crazy.

Phew. I was worried there for a minute.

[R C Dean]

If I understand this bill correctly, it would give lenders an option to write down a present loan to 90% of its present value, and negotiate new terms with the homeowner, rather than foreclosing.

Why can't they do this without the bill? Doesn't the lender always have the option of agreeing to take it in the shorts?

[joe]

Once again, the "reasonoids" show their
inablity to reflect reasonably on their
on their own statements. Perhaps if they
would take a careful look they would see
that it was a lack of government intervention
that caused the housing crisis, not
a surplus of it.

[joe]

robc

I'm sure that you'll love it when house value depreciation and foreclosures blight your neighborhood, raise the crime rate, and destroy your own house's value. But don't worry, you can blame it all on "teh gubmint".

[Naga Sadow]

Stupid, feckless borrowers! Why didn't they get a magic 8ball like I did?

[robc]

joe,

it was a lack of government intervention
that caused the housing crisis

Bullshit. Federal Reserve. Federal Reserve. Federal Reserve. Repeat 4000 more times until you understand. Fucking around with interest rates was the biggest cause. (Much like the civil war, focusing on a single cause is silly)

Personally, Ive never understood how speculators getting screwed (flippers, people buying ARMs counting on price appreciation to grow their way to affordable payments, banks, people who own bank stocks) qualifies as a crisis anyway. Seems like justice to me.

[Nigel Watt]

I'm sure that you'll love it when house value depreciation and foreclosures blight your neighborhood, raise the crime rate, and destroy your own house's value. But don't worry, you can blame it all on "teh gubmint".

Yes, yes you can.

[robc]

joe,

There was only a bubblette in my market. To paraphrase a neighbor or yours "All housing markets are local."

[P Brooks]

Now that the wizards at the Federal Reserve have finally admitted interest rates are too low, the Congress is trying to prevent interest rates from rising in the housing market. Because they just realized they fell down on the job, and didn't meddle enough, previously.

How's the price of gold doing?

[robc]

"neighbor of yours"

typing hard.

[Jaybird]

Joe, is it possible to have the viewpoint that we are not, in fact, in a crisis but merely undergoing a correction?

With that perspective in mind, would it be possible to see that the lack of government intervention allowed for the circumstances for the correction to be necessary, true... but government intervention at this point will only prolong the correction rather than, you know, provide it?

[PR]

Fannie & Freddie got out of the business of writing high risk mortgages earlier this year. Actually, the PMI companies forced them to by refusing to insure those programs any longer. FHA (govt mortgage insurance)has actually lowered their standards and are insuring (with taxpayer guarantees) the highest risk loans now.

How does this help a homeowner who's home is 50% of what it was when they bought at the top of the market?

There's a real estate market that's fallen by half?

[Rich Ard]

that old hand gaius marius has had some interesting, if gloomy posts on this lately.

[joe]

I've only written one comment on this thread.

Somebody sure is confident in his ability to hold up his position in battle of ideas.

[MP]

gaius has been correctly predicting the burst of the housing bubble for years.

This legislation is even worse than the farm bill. I didn't think that was possible.

[robc]

I've only written one comment on this thread.

So, is someone spoofing you or are you a Big 8 football official?

[Matt Welch]

Joe -- I meant re-inflation compared to what would happen without said intervention, more than as a prediction of what will happen to prices short-term compared to recent highs.

I wouldn't be surprised if housing prices reach new highs within five years, but as I've written previously, I almost always predict worse economic outcomes than what actually transpire, and in this case I don't think Fannie/Freddie/Feddie have enough to power to magically convince buyers and sellers to believe in prices that -- even while considerably lower -- would have looked ludicrously high six years ago.

[Elemenope]

Personally, Ive never understood how speculators getting screwed (flippers, people buying ARMs counting on price appreciation to grow their way to affordable payments, banks, people who own bank stocks) qualifies as a crisis anyway. Seems like justice to me.

It isn't a crisis until the effects domino and all of a sudden my savings are worthless and nobody will loan even a good credit risk some credit.

It's like drunk driving; you drink and drive and plow into a tree, It's hard to cry overmuch. (I'm not totally insensitive; I care about the tree.) On the other hand, you drink and drive and plow into my younger brother, I'll kill you.

[Episiarch]

It's The Joker (Professor Chaos) again, joe. I find that I like his work.

[joe]

Jaybird, robc,

When an event as large and dramatic as this housing/financial market plummet occurs, the extent and suddenness of the correction can, themselves, have effects beyond the correction itself. It's analogous to metal which can easily hold its strenght at 120 degrees and 0 degrees, but which would crack if heated and then blasted with a very clod liquid.

It's inarguable that we're going throgh a price correction brought on by a bubble, but that's not the same thing as saying that the movement of prices back to a rational level is the only consequence. One possibility would be mortgage lenders going out of business and other mortgage lenders being so undercapitalized that it becomes very difficult to get a mortgage. Another is a severe economic downturn, particularly in areas like Florida and Vegas that have so much of their economies tied up with home building, that the demand for housing plummets.

In short, not all price drops, particularly in the short term, can be assumed to be a rational (in the aggregate) correction back to a rational level. More likely, we'd be seeing an overcorrection by the market, which could itself cause the market such damage that it takes longer to reach that comfortable equilibrium.

So I'm not quite convinced that any intervention that has the effect of limiting the price drop is, necessarily, delaying the return to a healthy economy.

[joe]

Matt Welch,

Joe -- I meant re-inflation compared to what would happen without said intervention, more than as a prediction of what will happen to prices short-term compared to recent highs. OK, that makes sense. I read that line as your prediction of a new housing bubble.

[Rimfax]

joe's shadow is posting as "joeboyle" rather than "joepboyle".

[Warty]

Excellent, this means I'll be ready to buy a house right at the top of the next bubble.

[joe]

Too big to fail. TOO BIG TO FAIL!

[Warty]

Er, by the time I can afford a house, the next bubble will be inflating nicely. Stupid bad-at-words-ing.

[The Joker]

Whoa, thanks, Rimfax. I missed that "p" entirely.

[Rimfax]

I love how gaius's prescriptions are essentially "we either nationalize this or we nationalize that". I had forgotten about his complete lack of imagination. Does he dream of a federal sandman that tucks him in at night?

[robc]

joe,

It is possible to create a "solution" that merely dampens the oscillations, to stick with the geeky metaphors. Without it, I would expect a negative overshoot, followed by a dead cat bounce, and slowly dampen back to correct. Sure, it is theoretically possible for the government to dampen the oscillations. However, that takes energy, to extend the metaphor. In the governments case, the energy is money.

So, assuming the goverment gets the plan right, it will still cost something. If I put on my pure pragmatists hat, I might find that acceptable. However, the pure pragmatist looks at past government actions and finds it unlikely they will get the plan right. My theorist hat says its possible for the government to get it right, but it shouldnt spend other peoples money on it.

I dont have a hat that likes this idea. My illogic hat is at the cleaners.

BTW, my crazy hat refuses to sell my WaMu stock I somehow forgot I owned until too late (If you read above, this puts me in the idiot speculator who deserves to be screwed category). At this point, I figure I might as well hold and maybe get some benefit out of the government bailoout.

[Episiarch]

Whoa, thanks, Rimfax. I missed that "p" entirely.

I thought you were doing that intentionally, but that didn't really jibe with you doing everyone else's exactly. But that's what The Joker does: create confusion.

[90s Internet Startups that cou]

Where's our checks?

[P Brooks]

I might as well hold and maybe get some benefit out of the government bailoout.

In the old days, you could take physical possession of the beautifully engraved certificates, and wallpaper your bathroom with them.

[robc]

In the old days, you could take physical possession of the beautifully engraved certificates, and wallpaper your bathroom with them.

That would go nicely with the Worldcom papered guest bedroom.

[Rimfax]

Hey, Joker, stop stuffing straw in joe's shirt!! Please.

Unlike the relentlessly insulting gaius marius, joe often provides constructive representations of nonlibertarian viewpoints, and often demonstrates avenues for agreement. Unless you'd like to turn this into even more of a libertarian circle jerk, please cut it out. Or, at least, make it more obvious that you're mocking him.

By the way, "joe's law" was already invented as "Muphry's Law"

[Brian Defferding]

I can't think of a more wrong thing for the federal government to do. The beauty of the free market is when a company makes mistakes, their losses help them learn and avoid it in the future. This bailout removes that incentive. Along with our deficit spending the dollar value decreases even more in the future.

I've been dumbfounded before when I see people supporting solutions that haven't worked in the past, but this one is certainly up there as one of the worst ideas ever.

Let Fannie Mae, Freddie Mac and Indy Mac suffer from their mistakes.

[Libertarianism is Dead, aka Pe]

Treasury Secretary Paulson was on CNBC the other day. He said, "Fannie and Freddie fund 70% of our mortgages."

I don't understand Fannie and Freddie's role in the mortgage market, but I understand they're unfathomably important. From what I gather, banks sell mortgages to them and they in turn peddle the mortgages to America's clientele of bond buyers. They've raked in trillions of dollars in bonds, I'm guessing.

You can't say that Fannie and Freddie are in a mess because of the government. If they hadn't been privatised, they wouldn't be subject to the speculation and vicissitutes of the stock exchange; and regulations would keep them from reckless loaning. But as it is Fannie and Freddie are perfectly beyond any ideology: they are a perfect hybrid of government stupidity and free-market stupidity, and no one - neither Democrat, Republican, nor Libertarian - knows what to do with them. Except try like hell to get the water off the decks with buckets.

There's a good reason we're bailing out these companies. If we don't, the economy will fail. Fail completely.

[Russ 2000]

More likely, we'd be seeing an overcorrection by the market...

I agree with that possibility, but we aren't even CLOSE to an overccorection yet. By overcorrection, I mean falling to standards tighter than traditional.

And by "traditional", I mean 30-year fixed loans at 7.5% - 8%, 20% down, purchase price no greater than 3x annual income, and DTI ratios around 35% or less. Every person who meets these traditional qualifications has ZERO problem getting a mortgage today - and the rates for that type of loan are still below 7%.

The problem here is more apt to be that the definition of "traditional" is much more generous than say 30 years ago. If traditional today means 10% down, DTI ratio of 40%, and purchase price of 4x income, then there is a likelihood of an overcorrection.

But what that means is "overcorrection" is a rather meaningless concept.

[Elemenope]

I can't think of a more wrong thing for the federal government to do. The beauty of the free market is when a company makes mistakes, their losses help them learn die screaming and avoid so be unable to do it in the future. This bailout removes that incentive. Along with our deficit spending the dollar value decreases even more in the future.

Fixed that for ya.

Otherwise, good point.

[Just Sayin\']

This thread is setting new records for hyperbole.

[joe]

robc,

I agree with you about It is possible to create a "solution" that merely dampens the oscillations, to stick with the geeky metaphors. I think that an effort deliberately aimed at "dampening the oscillations," which then looks for ways to accomplish that purpose and sets price goals and whatnot would be a terrible idea..

What I wrote was "...that has the effect of" dampening the oscillations. What I'm saying is, if saving some people's homes and keeping some lenders in business and other actions done to avoid major economic harm has the effect of attenuating the price drop, I'm not just going to assume that any such attenuation moves us father away from a rational recovery.

Russ2000,

I agree with that possibility, but we aren't even CLOSE to an overccorection yet.

True, but 1) we haven't hit the bottom of the housing market, and 2) Big Shitpile hasn't really collapsed yet, in the sense of the big financial houses actually taking their losses rather than delaying the day of reckoning through creating accounting. Not to mention, the mortgage-company responses you describe are going to lag the economic conditions that drive them by some weeks or months.

[Shawn]

I dont have a hat that likes this idea. My illogic hat is at the cleaners.

Awesome.

[iowan]

My house is worth more this year than last year. You can bitch all you want about corn subsidies, but we're not as totally fucking crazy as those "sophisticated" buyers and lenders in the bubble zones.

I say Fuck'em.

[tarran]

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.

[robc]

tarran

A bunch of people will have to move into smaller houses or apartments.

So, are the apt owners who (in my area) were giving away first 3 months free on a 1 year lease pissed at this bailout? This was their chance to profit after getting killed the last decade.

[Brian Defferding]

Libertarianism is Dead, aka Penn (nice username): It's pretty easy to know what to do with Fannie Mae, Freddie Mac and Indy Mac - let them suffer. The borrowers made bad decisions on getting balloon-rate ARM's and the lenders made bad decisions approving them. They need to learn. There is no regulation or bailout that will prevent a future crisis - if anything, an argument can be made it will only prolong the problem and we'll see history repeat itself - but when the companies look at their bottom line after years of bad practices, they'll realize what they did wrong.

I don't think the economy will sink at all without this bailout bill. We'll be fine. This doesn't really affect responsible borrowers much, it only affects the irresponsible ones, as it should be.

[economist]

Damn, tarran, I agree with you, but did your post have to be so long?

[Rich Ard]

I would be with iowan on this one (I bought a house this year which had been foreclosed and vacant since 2006, for half the price most of my neighbors have paid over the last decade) except for my fear that Penn was correct < href="http://www.reason.com/blog/show/127721.html#1041195">above. I'm afeared that my ideology may not be sufficient to outweigh my pragmatism (hey, it's for my kids!)

Mostly I'm just scared about the possibility of a coming depression; OTOH, I already live in Michigan. How could it get any worse?

(answer: I could move to East Michigan).

[P Brooks]

BTW, How exactly will the economy fail completely if a giant mortgage company goes bankrupt?

In the same way that every bettor at the track that day lost money when Big Brown lost.

Right?

[tarran]

economist,

Sorry, but I had to make it long. Lest night Penn revealed that he learned economics from reading Galbraith.

We're not starting with a virgin brain, but one packed with all sorts of misconceptions here.

[robc]

From the Belmont Stakes Chart:

6 (5) Da' Tara 79.00 28.00 14.80
4 (4) Denis of Cork 5.40 4.10
8 (8) Anak Nakal 7.60
9 (7) Ready's Echo 6.20

Daily Double (10-6) $1,574.00
Daily Double (BROOKLYN/BELMONT) 2-6 $550.00
Exacta (6-4) $659.00
Superfecta (6-4-8-9) $48,637.00
Superfecta (6-4-9-8) $47,309.00
Trifecta (6-4-8) $3,703.00
Trifecta (6-4-9) $3,954.00
Consolation Double (BROOKLYN/BELMONT) 2-5 $7.30
Pick 3 5-10-6 (3 correct) $6,475.00
Pick 4 1-5-10-6 (4 correct) $34,287.00
Pick 6 3/7-4-1-5-10-6 (5 correct) $1,106.00

[Kwix]

tarran,
Excellent comment!

That both Fannie Mae and Freddie Mac are by law "Federally Guaranteed" we the taxpayers have always been on the hook for their actions. If they act conservatively, we see no benefit, if they act irrationally we pay the price. Privatized corporation my ass. True privatization would have opened them up to the full brunt of market forces with no safety net.

BTW, the same principal applies to the "privatized" Postal Service and all major US Banks thanks to the resurrection of the FDIC after the S&L bailout. Though the FDIC isn't quite the same, it still amounts to taxpayers footing the bill for stupid moves on the part of companies.

[Rimfax]

Cuz everyone knows that the Hoover and FDR administrations took far too much of a "hands off" approach with their economic crisis.

[Russ 2000]

True privatization would have opened them up to the full brunt of market forces with no safety net.

Well their market share dropped like a rock 5 years ago. Then they decided to get in on the "shitty mortgages" bandwagon which was the perfect cue for all their competitors to get off said bandwagon.

Their shareholders sort of forced them to, but then again their biggest shareholders are government pension schemes like CALPERS, etc. We're just stacking the pyramids.

[highnumber]

My house is worth more this year than last year. You can bitch all you want about corn subsidies, but we're not as totally fucking crazy as those "sophisticated" buyers and lenders in the bubble zones.

Oh, yeah? You must mean your old house, because, unless you bought your house last year and then sold it this year, you have no idea. Appraisers did help inflate the bubble to begin with, ya know.

Other Matt,
I do recall hearing of such a product as you write of. I do not recall the exact terms, and I can't find the article I read about it. Might have been in Newsweek or Time.

[JB]

I can't wait to buy my $10 million house and get bailed out by suckers like Joe. In fact, I can't wait until Obama is in the Whitehouse and waves his magic Obama-wand and gives everyone free money.

No one will have to work anymore! Livin' in a gangster's (ahem, socialist's) paradise!