So Obama comes out with his "plan" to try to halt foreclosures.
It won't do it, but it sure sounds good.
I will give him an "F" for substance but an "A" for effort.
Why an "F" for substance? Because what he's trying to do fundamentally cannot be done.
Here's the outline, in condensed form from Bloomberg:
Feb. 18 (Bloomberg) -- U.S. President Barack Obama pledged $275 billion to a program that will cut mortgage payments for as many as 9 million struggling homeowners and expand the role of Fannie Mae and Freddie Mac in curbing record foreclosures.
The plan also will help as many as 5 million homeowners refinance loans owned or guaranteed by Fannie and Freddie, according to a White House fact sheet. Treasury will buy as much as $200 billion of preferred stock in the two mortgage companies, twice as much as previously promised, the announcement said.
Obama said he will support revamping U.S. bankruptcy rules to let judges reduce mortgages on primary residences to fair- market value as long as borrowers pay their debts under a court- ordered plan.
The Obama plan will use $75 billion from the $700 billion financial bailout fund to match reductions lenders make in interest payments that lower borrowers’ payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent.
Treasury will share the cost when lenders reduce monthly payments by forgiving a portion of the borrower’s mortgage balance, the government said. The program may help as many as 4 million borrowers, the administration said. The average borrower’s home value could be stabilized against a price decline by up to $6,000, the White House fact sheet said.
The bold line is the "money quote."
But let's dissect the other pieces, because the big numbers being thrown around sound good. $200 billion for Fannie and Freddie, for example.
Uh, that's not part of "some new initiative" folks. That money is necessary right here and now because, as I've noted repeatedly, Fannie and Freddie are levered at some two hundred to one (depending on which assumptions you use.)
They have five trillion in "assets" between them. With just a one percent loss they would consume $50 billion! $200 billion will cover about four percent in losses on that book. Oh, that's $200 billion on top of the $100 billion that we've already put in (I think - its not quite clear).
The fundamental problem is that everything got levered up to the gills during the bubble years. Now all these "upside down" assets are a huge millstone around everyone's neck - a problem from which we cannot realistically escape by any means other than realizing the losses.
Why not? Because for nearly 20 years one of the fundamental requirements for sound lending - that is, the sharing of risk by the borrower and provision of a buffer against asset value declines (this is commonly known as a "down payment") was systematically removed from our financial system across all asset classes.
See, assets do not always rise in price. It doesn't matter whether the asset is a stock, a bond, a piece of real estate or anything else. This is especially true when one "pumps" asset prices through the provision of nearly-unlimited credit without regard for ability to pay.
The government has, for nearly two years now, been concerned about "stabilizing housing prices." This is not only wrong-headed it is dangerous; there has been several trillion dollars in residential real estate "value" wiped out and there is more to come; in order to "stop it" you'd have to replace the money somehow. Then you'd get to do it again with commercial real estate, and again with credit cards, and......
This goal is not possible to achieve, but admitting the truth means admitting that a lot of our financial institutions that "ate their own cooking" are in fact bankrupt, and that just won't do. Never mind that some darned inconvenient questions might get asked about Washington DC's role as "enabler in chief" for all the fraud of the last couple of decades - and perhaps more than a bit of personal complicity.
I understand that at least a couple of sitting Senators might be able to provide tips on vacations in Antigua (Stanford Financial), as just one example of the outrageous "sleeping with thy sister" campaign that lay at the root of the faux prosperity of the last decade. Senator Bill Nelson is reported to have received nearly $46,000 in campaign bribes, er, "donations", along with Pete Sessions of Texas ($41,375). Even more outrageous is the fact that Stanford apparently gave $800,000 (!) to the Democratic Senatorial Campaign Committee during the year that Senator Nelson was vice-chairman - 2002, specifically.
What's important about 2002? It was a year in which Stanford was lobbying furiously against anti-fraud legislation for the securities industry.
How'd that turn out?
The bill was killed in Senate committee.
The best government money can buy, compliments of Senators Nelson and others.
I can hear the laughter in The Hamptons, echoing all the way to Antigua: "Thanks for letting us rip off millions of Americans, compliments of The United States CONgress."
Bankrupting Americans not through bets gone bad but rather through blatant fraud and theft seems to be just fine for our political class, while "we the people" sit idly by arguing that our neighbor should be "saved" so our home price doesn't decline as much as it will if he is foreclosed upon.
Literally trillions has been stolen from Americans of all stripes right under our noses, and the people doing the stealing are wearing $5,000 Armani suits instead of ski masks!
Where among the so-called "Fourth Estate" - the group that is supposed to guard our freedoms and keep everyone on the straight and narrow through applying the disinfectant called "sunlight" - have we seen this responsibility discharged? Why are so-called "reporters" not digging into every single Congressional staffer and Senator at this point? Are the Bob Woodward's of this age found behind the blogs of America, being the only members of The Press who are more interested in discovery of the truth than they are in getting access to the next White House press conference - where we will discuss the color and texture of the Presidential Dog's hair?
$6,000, the amount put forward in this "plan" per family, will do nothing more than trying to use a garden hose on a forest fire. We will eventually realize this (probably when we can no longer borrow money to keep up this sort of stupid nonsense) but in the meantime Americans will continue to suffer from both sides of this idiotic policy - first as a consequence of being unable to afford to buy a house, and second, from the destruction in our equity and credit markets that will continue so long as the government continues to lead people to believe that something which is worth $5 may get bought for $10, thereby destroying the market for those items and trashing the stocks of those firms that hold these assets at the same time.
Everyone wishes to wring their hands over this "problem" and yet the problem is and has been, at its root, fraud. "Animal spirits" only go so far - you might want a Lexus (animal spirits) but if you don't have any money the only way to acquire one is to steal it. We are then reduced to arguing over whether your theft will be "the old fashioned way" (boost the keys) or through "creative" means (misrepresenting your ability to pay, thereby conning the dealer out of the car when you don't have a prayer in hell of being able to cover the payments.)
The solution, paradoxically, is to force the foreclosures - throughout the economy, not just in housing - to take place. Those who are upside down and cannot (or don't want to) pay should foreclose, establishing a true market price for these homes. Those home-debtors (and others) who got in over their heads will have their credit trashed for seven years and will be renters; there is no shortage of homes for them to rent now, nor will there be. Those firms that bought this paper, thinking it could "never lose value" will have to realize their losses as well.
While this will lead to great pain in the short term, it is nonetheless the right thing to do, because it will lead to sustainable long term home ownership - which should be the goal of everyone involved.
How many people want to pay for their neighbors mortgage - the house with an extra bathroom - when they got in over their heads by misrepresenting their ability to pay, helped along by bankers who were more than happy to skim off a few percent per loan while enabling the artifice and helping it along?
This entire "crisis" is not an accident - in any way, shape or form. We will not get out of this mess until we recognize that we are here as a consequence of a massive, financial-system-wide campaign of fraud and theft that became pervasive through Washington DC and Wall Street, and when the punch bowl threatened to run dry the prime actors came back to the well in DC demanding - and got - the ability to "lever it up" even more!
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