Thursday, December 4, 2008

Here Comes the Foreclosure Cavalry

I thought this would wait until January and Obama was in office but it appears that effectively Obama/Geithner are now pushing the strings. The cavalry is now approaching and it is stampeding. I could write multiple pieces about the moral hazard involved, about the crowding out of private market initiatives, the potential for people who are now making payments on mortgages to stop doing so, so that they too can be part of the "rescue", and how we are ever going to wean the nation off government and back to private initiatives after what we are about to embark upon. All government "solutions" will create unintended consequences, but here are some previews of plans being considered and what awaits us in 2009. As I have already said the type of bailout you saw in 2008 will in fact be a pittance versus what we will be doing in the housing market in 2009; Fannie and Freddie I believe will be the tools. The course of the nation in terms of "free markets" is going to take an even more dramatic change in the year ahead. Below are 4 "solutions", I would not rule out a 5th - the direct purchases of homes by the U.S. government to reduce inventory.

Housing stocks are of course rocketing up on this intervention even though in theory all these initiatives should be focused on current housing stock and not new homes.
  • Federal Reserve Chairman Ben S. Bernanke urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.
  • The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure” where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.
  • Each option would require “some commitment of public funds,” Bernanke said, underscoring his position that the central bank alone can’t revive the economy through its interest-rate cuts and emergency lending programs.
  • The government could buy “delinquent or at-risk mortgages in bulk,” then refinance them through the federal Hope for Homeowners program, Bernanke said. Congress could also help reduce loan rates and lender insurance premiums, he said.
  • Another option is to have the government share costs when a loan servicer reduces a borrower’s monthly payment, Bernanke said.
  • Lawmakers should also consider reducing borrowers’ interest rate. That could be accomplished by having the Treasury buy Ginnie Mae securities, or having Congress directly subsidize the rate, Bernanke said.
The message this will send to those who play by the rules is bad behavior is rewarded and those that did not partake have to subsidize those that did. It will also cause a subset of those in the good behavior crowd to move over to the bad behavior crowd so they can get the freebies handed out.

Again, much of this could of been stopped by enforcement of regulation - to cut hair in the United States you need a license. To sell a mortgage? Nothing. We have embraced an ideaology here that is showing to be a complete hoax. The whole lobbying system in the US has simply corrupted everything and we have these repeated national meltdowns as certain subsets of society make off in our "reverse Robin Hood" mantra (steal from the poor to give to the rich) Now, those same people will pay many times more to subsidize the fallout.

Anyhow, when I listen to Fox News I am informed it is all ACORN's fault....

CNNMoney: Government Warned of Mortgage Meltdown
  • The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown
  • "Expect fallout, expect foreclosures, expect horror stories," California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
  • Bowing to aggressive lobbying -- along with assurances from banks that the troubled mortgages were OK -- regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
  • "These mortgages have been considered more safe and sound for portfolio lenders than many fixed-rate mortgages," David Schneider, home loan president of Washington Mutual, told federal regulators in early 2006. Two years later, WaMu became the largest bank failure in U.S. history.
  • "An open market will mean that different institutions will develop different methodologies for achieving this goal," Joseph Polizzotto, counsel to now-bankrupt Lehman Brothers, told U.S. regulators in a March 2006.
  • Countrywide Financial Corp., at the time the nation's largest mortgage lender, agreed. The proposal "appears excessive and will inhibit future innovation in the marketplace," said Mary Jane Seebach, managing director of public affairs.
  • California-based IndyMac also criticized regulators for not recognizing the track record of interest-only loans and option ARMs, which accounted for 70% of IndyMac's 2005 mortgage portfolio. This summer, the government seized IndyMac and will pay an estimated $9 billion to ensure customers don't lose their deposits.
  • The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s. (yes, talk about IRONY!)
  • Many of the banks that fought to undermine the proposals by some regulators are now either out of business or accepting billions in federal aid to recover from a mortgage crisis they insisted would never come. Many executives remain in high-paying jobs, even after their assurances were proved false. (why people are not in the streets protesting this sort of action is beyond me - it seems to be accepted as a way of life)
Cramerica, for the corporation - by the corporation

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