March 10, 2008

Bernanke, Congress, The NYT and new real estate

The NYT has an op/ed piece congratulating Bernanke for suggesting that Congress act to give Bankruptcy judges the ability to reduce principal balances on outstanding mortgages. It's an interesting idea. It's also completely unnecessary and will cause a lot more harm than good.

First off, the market for housing is a very delicate balance of forces and in that balance lies the value of a property. Part of what's killing people in many neighborhoods is NOT that they've lost equity, it's that their neighbors though bad financial planning and decision making, have been forced to 'give up their homes' creating a foreclosure in the immediate vicinity that, by virtue of being a comparable, ends up decreasing the value for all the homes around it. It's financial collateral damage and Bernanke's plan doesn't really address it. That the NYT can't see it is largely unsurprising given their lackluster reporting on this and the effect it's having.

Second, the market for new originations (buyers who need mortgage financing) will be made vastly more expensive because what's being packaged and sold to investors is no longer a sound and safe instrument, it's a financial timebomb which can be modified (against it's owner) by the government at will. So much for the rule of law and the sanctity of contracts.

What needs to happen and what we've been clamoring for is stabilization. What's driving foreclosures is the ADJUSTMENT of an adjustable rate mortgage. This means that consumers have been able to make a payment at a high interest rate... what they are having problems with is the payment when the rate jumps from 8% to 12%. That's a little tough to take. Reducing them balance still leaves them in a high interest rate loan. Wouldn't it be better to refinance them to a lower interest rate at which they can afford to comfortably make the payment on the full principle balance? Dropping the principle balance will help, but it shorts the investor who owns the loan, which makes it unlikely they'll invest in any more mortgages which will, in turn, drive up borrowing costs for Americans across the board.

Why not a program that saves investors AND homeowners (investors by giving them full value on their securities and homeowners by taking them out of an expensive loan)? We've got it and Congress has, apparently unbeknown to the NYT, already taken the first step...they've increase the FHA loan limits. With guidelines tightening for even loans backed by FNMA and FHLMC, more and more loans will start being originated as FHA insured loans. Currently, in Travis County for example, the loan limit was just enough to take a large chunk of the market. Increasing it by almost 50% will help stabilize the market, keep buyers in and allowing those in trouble to hopefully refinance.

The other is to modify FHA Secure to indemnify lenders and broaden the guidelines to cover the more than 2 million homeowners at risk. Instead of the max of 80k under Bush's retard program.

Finally, the market has not responded to the stimuli pushed through by Congress and the Fed. Bank's are still too scared to act, bond insurers are on the brink of insolvency because of their inability to get ANY capital at ANY price. The market is, quite simply, not working and it's the ultimate weakness of Reagan-/Friedman-/Bush-onomics... fear in a market can become reinforcing and in the end, it's the very thing that kills the entire market and spurs a recession or, worse, a depression. The only way it gets fixed is for the lender of last resort to step up and let even the financial masters of the universe know things will be OK.

Finally, in other news, some new real estate has been 'theorized'.

Posted by mcblogger at March 10, 2008 10:54 AM

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