Sunday, May 24, 2009
TheAffordableMortgageDepression.com
The Affordable Mortgage Depression is published at TheAffordableMortgageDepression.com
Friday, April 3, 2009
The Coming Federal Housing Administration (FHA) Disaster
The FHA is a Government entity which was created in 1934 during the Great Depression. It was formed to improve housing standards, provide adequate home financing by insuring mortgages and stabilize the mortgage market. If these mission statement sounds familiar it is because they closely resemble the rationale behind the existence of other Government entities including Fannie Mae, Freddie Mac, Ginnie Mae, HUD, etc…
These entities directly intervene in the Housing Market by providing mortgages and subsidizing interest rates to borrowers who would not otherwise be qualified to receive such loans.
As a group the Government Sponsored Entities (GSEs) operate with the intent to increase homeownership, improve home affordability and provide mortgage market stability. Obviously they have failed miserably in each and every one of these stated goals. Amusingly, the only achievement which appears to be viable in the near term is the prospect of affordable housing, but the Government continues to misuse the GSE’s in a desperate attempt to prop up housing values and prevent that desired affordability.
Both Fannie and Freddie collapsed in 2008 because their role in the mortgage market had been expanded dramatically by the Government which used these entities as a means to achieve the social goal of greater homeownership. When the Housing Bubble inevitably deflated so did the viability of Fannie and Freddie. The Government then foolishly “doubled down” on its ill-advised housing gamble by using the entities to fill the gap in the mortgage market left by fleeing private capital. This disastrous directive only accelerated the collapse of the Fannie and Freddie and in turn further damaged the mortgage and housing markets.
Instead of learning from their mistakes, the Government has decided to execute the same playbook but this time through a manipulation of the FHA.
According to a recent WSJ report:
“Since the collapse of the subprime mortgage market in 2007, most home loans for people who can't afford a sizable down payment are flowing to the FHA. The agency, which is part of the U.S. Department of Housing and Urban Development, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. FHA-insured loans are available on loans with down payments as small as 3.5% of the home's value.
The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in last year's fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA's reserves prove inadequate to cover default losses.”
The Government has directed the FHA to rapidly grow its operations. It now underwrites and/or purchases thirty-something percent of all mortgages issued. The FHA guarantees losses associated with these mortgages which have been extended to uncreditworthy borrowers and secured with marginal down payments. The FHA has undertaken this extraordinary expansion in the midst of the most rapid decline in housing prices in U.S. history. By definition, virtually all of the mortgages the FHA has underwritten during its three year expansion are already underwater. It is a certainty that large numbers of these mortgages will end up in foreclosure and expose taxpayers to massive financial loss.
This inevitability has already begun to materialize:
“Defaults on home mortgages insured by the Federal Housing Administration in February increased from a year earlier. A spokesman for the FHA said 7.5% of FHA loans were "seriously delinquent" at the end of February, up from 6.2% a year earlier.”
There is only one possible outcome of the Government’s unsustainable actions. The FHA will fail as massive foreclosures trigger insured liabilities which overwhelm its capital reserves. Of course I expect the Government to cry foul, incite populist furor, shift the blame to an expedient target and cavalierly allocate a few hundred billion dollars from the Federal Reserve, the Treasury or a Stimulus Bill to bail out the FHA. This is the playbook the Government has consistently relied upon to evade culpability for unconscionable abuses of its fiduciary responsibility to taxpayers.
These entities directly intervene in the Housing Market by providing mortgages and subsidizing interest rates to borrowers who would not otherwise be qualified to receive such loans.
As a group the Government Sponsored Entities (GSEs) operate with the intent to increase homeownership, improve home affordability and provide mortgage market stability. Obviously they have failed miserably in each and every one of these stated goals. Amusingly, the only achievement which appears to be viable in the near term is the prospect of affordable housing, but the Government continues to misuse the GSE’s in a desperate attempt to prop up housing values and prevent that desired affordability.
Both Fannie and Freddie collapsed in 2008 because their role in the mortgage market had been expanded dramatically by the Government which used these entities as a means to achieve the social goal of greater homeownership. When the Housing Bubble inevitably deflated so did the viability of Fannie and Freddie. The Government then foolishly “doubled down” on its ill-advised housing gamble by using the entities to fill the gap in the mortgage market left by fleeing private capital. This disastrous directive only accelerated the collapse of the Fannie and Freddie and in turn further damaged the mortgage and housing markets.
Instead of learning from their mistakes, the Government has decided to execute the same playbook but this time through a manipulation of the FHA.
According to a recent WSJ report:
“Since the collapse of the subprime mortgage market in 2007, most home loans for people who can't afford a sizable down payment are flowing to the FHA. The agency, which is part of the U.S. Department of Housing and Urban Development, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. FHA-insured loans are available on loans with down payments as small as 3.5% of the home's value.
The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in last year's fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA's reserves prove inadequate to cover default losses.”
The Government has directed the FHA to rapidly grow its operations. It now underwrites and/or purchases thirty-something percent of all mortgages issued. The FHA guarantees losses associated with these mortgages which have been extended to uncreditworthy borrowers and secured with marginal down payments. The FHA has undertaken this extraordinary expansion in the midst of the most rapid decline in housing prices in U.S. history. By definition, virtually all of the mortgages the FHA has underwritten during its three year expansion are already underwater. It is a certainty that large numbers of these mortgages will end up in foreclosure and expose taxpayers to massive financial loss.
This inevitability has already begun to materialize:
“Defaults on home mortgages insured by the Federal Housing Administration in February increased from a year earlier. A spokesman for the FHA said 7.5% of FHA loans were "seriously delinquent" at the end of February, up from 6.2% a year earlier.”
There is only one possible outcome of the Government’s unsustainable actions. The FHA will fail as massive foreclosures trigger insured liabilities which overwhelm its capital reserves. Of course I expect the Government to cry foul, incite populist furor, shift the blame to an expedient target and cavalierly allocate a few hundred billion dollars from the Federal Reserve, the Treasury or a Stimulus Bill to bail out the FHA. This is the playbook the Government has consistently relied upon to evade culpability for unconscionable abuses of its fiduciary responsibility to taxpayers.
Tuesday, March 31, 2009
Attention Housing Optimists
Today’s S&P / Case Shiller update is all you need to know about present and near term prospects for the housing market.
March 31 (Bloomberg) -- Home prices in 20 U.S. cities fell 19 percent in January from a year earlier, the fastest drop on record, as demand plummeted and foreclosures rose.
Home price declines continue to accelerate. House values are falling at the fastest pace in U.S. history. Inventories are extraordinarily high. Foreclosure volumes are at record highs and increasing.
Despite month-to-month volatility in the market data and the inevitability that house transaction volumes will eventually increase, there is no possibility that housing prices will stabilize in the near future. Buying a house in this environment is a conscious decision to lose money.
Ignore the media’s coverage of house transaction volumes unless they materially reduce inventories of for-sale properties. Understand that foreclosures continue to expand as a percentage of sale volumes. This is not a positive development for housing prices.
My advice is to ignore any source of housing market analysis that does not incorporate an integrated understanding of these trends in their prognostications.
March 31 (Bloomberg) -- Home prices in 20 U.S. cities fell 19 percent in January from a year earlier, the fastest drop on record, as demand plummeted and foreclosures rose.
Home price declines continue to accelerate. House values are falling at the fastest pace in U.S. history. Inventories are extraordinarily high. Foreclosure volumes are at record highs and increasing.
Despite month-to-month volatility in the market data and the inevitability that house transaction volumes will eventually increase, there is no possibility that housing prices will stabilize in the near future. Buying a house in this environment is a conscious decision to lose money.
Ignore the media’s coverage of house transaction volumes unless they materially reduce inventories of for-sale properties. Understand that foreclosures continue to expand as a percentage of sale volumes. This is not a positive development for housing prices.
My advice is to ignore any source of housing market analysis that does not incorporate an integrated understanding of these trends in their prognostications.
Alan Greenspan's Irrational Exuberance
For those of you still paying attention to the awkward, self-serving denials of Alan Greenspan ponder this.
Mr. Greenspan’s primary defense for the Housing Bubble “not being his fault” is that foreign savers flooded the U.S. market with capital to finance mortgages. Supposedly this capital kept mortgage rates low and eliminated the Federal Reserve’s influence over those rates. It was these foreign-financed, cheap mortgages that caused the Housing Bubble.
Since when did the free flow of capital become a bad thing?
The Housing Bubble had been steadily developing since the mid-nineties. Prices, transaction volumes, leverage ratios, affordable mortgage usage, HUD directed Fannie/Freddie subprime expansion, etc… had already reached unsustainable levels when Mr. Greenspan started slashing interest rates. Of course, Mr. Greenspan can’t cite this as a defense because he would be admitting to having missed, ignored or tolerated the existence of a Housing Bubble prior to 2001 and having contributed to the mania portion of the event with his interest rate policies serving as an inflection point.
Mr. Greenspan’s attempt to attribute the source of the Housing Bubble to foreign-financed, low mortgage rates ignores the actual forces which distorted the market and inflated prices. In fact, mortgage rates are presently at the lowest levels in U.S. history. These rates are materially lower than those that existed from 2001-2005. If Mr. Greenspan’s obtuse explanation were in any way credible housing prices should be soaring. Instead, values are collapsing at the fastest rate in history.
Despite Mr. Greenspan’s protestations, traditional mortgage rates were largely irrelevant from 1995-2005 with respect to housing price appreciation. The Housing Bubble was perpetuated by the abusive availability and the unsustainable terms of Affordable Mortgages. People who should never have had access to mortgages received them. There was almost no financial impediment to buying a house thanks to no down-payment, interest-only, adjustable-rate mortgages.
Today, despite record low mortgage interest rates, credit availability is greatly reduced and marginal, effective mortgage interest rates are dramatically higher as rationality has returned to the market. Once upon a time Mr. Greenspan would have hailed a return to market rationality, now he seems singularly focused on concocting a fictional narrative about his role in Housing Bubble.
Mr. Greenspan’s primary defense for the Housing Bubble “not being his fault” is that foreign savers flooded the U.S. market with capital to finance mortgages. Supposedly this capital kept mortgage rates low and eliminated the Federal Reserve’s influence over those rates. It was these foreign-financed, cheap mortgages that caused the Housing Bubble.
Since when did the free flow of capital become a bad thing?
The Housing Bubble had been steadily developing since the mid-nineties. Prices, transaction volumes, leverage ratios, affordable mortgage usage, HUD directed Fannie/Freddie subprime expansion, etc… had already reached unsustainable levels when Mr. Greenspan started slashing interest rates. Of course, Mr. Greenspan can’t cite this as a defense because he would be admitting to having missed, ignored or tolerated the existence of a Housing Bubble prior to 2001 and having contributed to the mania portion of the event with his interest rate policies serving as an inflection point.
Mr. Greenspan’s attempt to attribute the source of the Housing Bubble to foreign-financed, low mortgage rates ignores the actual forces which distorted the market and inflated prices. In fact, mortgage rates are presently at the lowest levels in U.S. history. These rates are materially lower than those that existed from 2001-2005. If Mr. Greenspan’s obtuse explanation were in any way credible housing prices should be soaring. Instead, values are collapsing at the fastest rate in history.
Despite Mr. Greenspan’s protestations, traditional mortgage rates were largely irrelevant from 1995-2005 with respect to housing price appreciation. The Housing Bubble was perpetuated by the abusive availability and the unsustainable terms of Affordable Mortgages. People who should never have had access to mortgages received them. There was almost no financial impediment to buying a house thanks to no down-payment, interest-only, adjustable-rate mortgages.
Today, despite record low mortgage interest rates, credit availability is greatly reduced and marginal, effective mortgage interest rates are dramatically higher as rationality has returned to the market. Once upon a time Mr. Greenspan would have hailed a return to market rationality, now he seems singularly focused on concocting a fictional narrative about his role in Housing Bubble.
Saturday, March 28, 2009
Enlightening New York Times Article on the Housing Bubble’s Origins Written During September of 1999
The attached article brilliantly illustrates the real time forces driving the Housing Bubble as documented by the New York Times in 1999. It reads like a slow motion train wreck. The article clearly establishes that the Housing Bubble and the roots of the Affordable Mortgage Depression were percolating during the mid-1990s.
Of particular interest are Peter Wallison’s prescient insights into Fannie Mae’s actions in paragraph 8 and the HUD’s stated goals for both Fannie and Freddie for 2001.
I have included the entire article and highlighted the extraordinary content (paragraphs 1-8 and 15).
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: Thursday, September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html?sec=&spon=&pagewanted=all
Of particular interest are Peter Wallison’s prescient insights into Fannie Mae’s actions in paragraph 8 and the HUD’s stated goals for both Fannie and Freddie for 2001.
I have included the entire article and highlighted the extraordinary content (paragraphs 1-8 and 15).
Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: Thursday, September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.
In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.
''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.
Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.
Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.
Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.
In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.
Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.
In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.
http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html?sec=&spon=&pagewanted=all
Friday, March 27, 2009
A Textbook Illustration of Failed Government Invervention in the Housing Market
HOPE prevents 1 foreclosure
HOPE for Homeowners has been a failure. But Congress thinks some tweaks will revive it.
By Les Christie, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- If HOPE for Homeowners, the foreclosure-prevention plan passed last summer, was a soft drink, it would be New Coke. If it was an automobile, it would be an Edsel. A movie? Howard the Duck.
In the five months since it has been in effect, HOPE has helped exactly one homeowner to avoid foreclosure. This despite Congress having made $300 billion available to back these loans and estimating that the program would benefit as many as 400,000 families.
"As it stands now, we've only gotten 752 applications," said Federal Housing Authority spokesman Brian Sullivan. "And only insured one loan. Needless to say, the program isn't working terribly well."
Rep. Michael Castle (R - Del.), who sits on the House Financial Services Committee, agreed, calling HOPE "one of the most failed programs we've had in a long time."
Nonetheless, the House of Representatives recently approved an updated version of HOPE as part of the bankruptcy-reform bill that is a keystone to President Obama's Homeowner Affordability and Stabilization Plan. But it was no overhaul to the program; the changes are very subtle.
Castle is concerned that the new program will also be a waste of time and money. But Sen. Chris Dodd (D - Conn.), one of the chief architects of the earlier version of HOPE, supports keeping it in the bankruptcy bill, according to a source close to the negotiations. He hopes the changes will help convince more servicers to use the program.
The Senate is expected to vote on the bill in the next few weeks.
Dashed expectations
The original program called for lenders to voluntarily refinance delinquent mortgages by reducing the principal balance on loans to 90% of a home's current market value. The new 30-year, fixed-rate loans would then be backed by the FHA. Under the new plan, lenders would only have to write it down to 93%.
Borrowers who owed $220,000 on a house valued at $200,000, for example, would need their mortgage balances reduced to $180,000 to qualify for an original HOPE for Homeowners refi. That's a $40,000 write-off. Under the new plan, lenders would have to forgive $34,000.
Lenders simply won't do that very often. They prefer to use term extensions or interest rate reductions to help make mortgage payments affordable for at-risk homeowners. As a result, most of the big lenders refused to participate in the program, which was strictly voluntary though heavily encouraged by the Bush and Obama administrations.
"Writing down principal is the last thing you want to do because you have to realize the loss immediately," said Paul Leonard, a spokesman for the Housing Policy Council, a coalition of mortgage lenders.
No volunteers
The program has also failed, Leonard added, because of the conditions and limits the program imposed. Borrowers, for example, had to agree to pay the government 50% of any future profits they made from selling the property. Under the new version of HOPE, borrowers would no longer have to split any earnings with Uncle Sam.
Other changes include incentive payments to servicers of $1,000 to induce them to participate.
The Congressional Budget Office now projects that HOPE for Homeowners could help just 25,000 mortgage borrowers over the next 10 years at a cost of $675 million.
Despite those modest numbers, Leonard said that the members of Housing Policy Council want to keep HOPE for Homeowners on the table even though the administration's Homeowner Affordability and Stabilization Plan does much more than HOPE.
Besides reducing mortgage payments through interest rate reductions or term extensions, HASP provides for lowering mortgage principals - the only thing that HOPE offers.
Still, the tool would be in the box even if "the administration's plan would be the first thing [lenders] look at," Leonard said.
HOPE for Homeowners has been a failure. But Congress thinks some tweaks will revive it.
By Les Christie, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- If HOPE for Homeowners, the foreclosure-prevention plan passed last summer, was a soft drink, it would be New Coke. If it was an automobile, it would be an Edsel. A movie? Howard the Duck.
In the five months since it has been in effect, HOPE has helped exactly one homeowner to avoid foreclosure. This despite Congress having made $300 billion available to back these loans and estimating that the program would benefit as many as 400,000 families.
"As it stands now, we've only gotten 752 applications," said Federal Housing Authority spokesman Brian Sullivan. "And only insured one loan. Needless to say, the program isn't working terribly well."
Rep. Michael Castle (R - Del.), who sits on the House Financial Services Committee, agreed, calling HOPE "one of the most failed programs we've had in a long time."
Nonetheless, the House of Representatives recently approved an updated version of HOPE as part of the bankruptcy-reform bill that is a keystone to President Obama's Homeowner Affordability and Stabilization Plan. But it was no overhaul to the program; the changes are very subtle.
Castle is concerned that the new program will also be a waste of time and money. But Sen. Chris Dodd (D - Conn.), one of the chief architects of the earlier version of HOPE, supports keeping it in the bankruptcy bill, according to a source close to the negotiations. He hopes the changes will help convince more servicers to use the program.
The Senate is expected to vote on the bill in the next few weeks.
Dashed expectations
The original program called for lenders to voluntarily refinance delinquent mortgages by reducing the principal balance on loans to 90% of a home's current market value. The new 30-year, fixed-rate loans would then be backed by the FHA. Under the new plan, lenders would only have to write it down to 93%.
Borrowers who owed $220,000 on a house valued at $200,000, for example, would need their mortgage balances reduced to $180,000 to qualify for an original HOPE for Homeowners refi. That's a $40,000 write-off. Under the new plan, lenders would have to forgive $34,000.
Lenders simply won't do that very often. They prefer to use term extensions or interest rate reductions to help make mortgage payments affordable for at-risk homeowners. As a result, most of the big lenders refused to participate in the program, which was strictly voluntary though heavily encouraged by the Bush and Obama administrations.
"Writing down principal is the last thing you want to do because you have to realize the loss immediately," said Paul Leonard, a spokesman for the Housing Policy Council, a coalition of mortgage lenders.
No volunteers
The program has also failed, Leonard added, because of the conditions and limits the program imposed. Borrowers, for example, had to agree to pay the government 50% of any future profits they made from selling the property. Under the new version of HOPE, borrowers would no longer have to split any earnings with Uncle Sam.
Other changes include incentive payments to servicers of $1,000 to induce them to participate.
The Congressional Budget Office now projects that HOPE for Homeowners could help just 25,000 mortgage borrowers over the next 10 years at a cost of $675 million.
Despite those modest numbers, Leonard said that the members of Housing Policy Council want to keep HOPE for Homeowners on the table even though the administration's Homeowner Affordability and Stabilization Plan does much more than HOPE.
Besides reducing mortgage payments through interest rate reductions or term extensions, HASP provides for lowering mortgage principals - the only thing that HOPE offers.
Still, the tool would be in the box even if "the administration's plan would be the first thing [lenders] look at," Leonard said.
Thursday, March 26, 2009
South Park's Take on Economic Policy
An irreverent perspective on the Treasury Department's economic policy.
http://www.youtube.com/watch?v=Zbnd0jJWc54
http://www.youtube.com/watch?v=Zbnd0jJWc54
Geithner’s Toxic Asset Purchase Plan is a Scam
This week the Treasury announced its latest plan to defuse the Affordable Mortgage Depression. The new scheme would allow institutional investors the opportunity to buy Toxic Assets from hobbled banks under absurdly favorable terms offered by the U.S. Government. The generosity of the purchase financing conditions would make a subprime mortgage broker blush. Institutional investors will be required to put up 7% of the capital used to buy bad assets. The remainder of the financing will be provided by the Government which will contribute 7% of the purchase price in equity and 86% in the form of a low interest rate federal loan. The plan is another misguided attempt by the Government to prop up the collapsing economy at extraordinary taxpayer expense.
Why didn't the Treasury use the original $700 billion of TARP money, which was intended to purchase Toxic Assets, for this very purpose six months ago? Given that the Government is now willing to finance 93% of the purchase price of Toxic Assets, why doesn’t the Treasury just buy the distressed securities outright? Why have they proposed the notion of partnering with private institutional investors but only require that these “partners” put up 7% of the capital?
The problem with the TARP plan was the question of how much the Government should pay for the distressed assets? A rational solution would have been restoring liquidity to the system by paying the current market value for the securities. The problem is that banks don’t want to sell their bad loans at 30 cents on the dollar. They are still pretending that the Toxic Assets are worth 60 cents on the dollar. In fact, if these loans were sold to the Government or anyone else at market prices many more banks would fail. The distressed sellers would be recognizing huge and previously unrecorded losses. Such transactions would also establish irrefutable market prices for the entire pool of Toxic Assets. Banks with no intention of selling their distressed holdings would be required to revalue them. In doing so, many banks currently pretending to be healthy would be forced to recognize that they are insolvent. The Government couldn’t buy the Toxic Assets at their market value with TARP money without destroying this illusion.
The Government needed a solution that would allow the bad banks to sell and/or value their Toxic Assets at a substantial premium to the current market value. As such, the Treasury overtly considered buying the loans at prices well above the illiquid market values. This option was deemed politically unfeasible as it amounted to rewarding irresponsible banks for their failures and consciously overpaying for bad assets with taxpayer money. Such action wouldn’t have flown well politically six months ago. Now that politicians have whipped the public into a populist furor over the Government’s mismanagement of AIG, it is unlikely that policy makers have the backbone to attempt such direct and costly corporate welfare.
Treasury Secretary Geithner was entrusted with the responsibility of generating a scheme to bail-out the bad banks with taxpayer money while adequately obscuring the real intent, effect and financial cost of this sleight of hand.
The subsidized Toxic Asset Purchase Plan creates the impression of free markets, private transactions and a mechanism to capture fair market prices in a competitive process. In reality it is welfare for bad banks and a sweetheart deal for institutional investors which distorts the value of the problemed securities through subsidized purchases at considerable taxpayer expense.
The original rationale against valuing Toxic Assets at current market prices was that the market itself wasn’t functioning. The idea was advanced that a lack of market liquidity meant that current prices were not reflective of actual value. Banks argued that the value of these assets would rise when liquidity returned. Of course this theory was advanced 18 months ago when the credit disruption originally emerged in August of 2007. In fact, the value of Toxic Assets has continued to fall as the economy deteriorated, housing prices collapsed and the financial crises went global. At some point these perpetually optimistic fantasists need to recognize that current markets are the reality and things in fact can get worse.
This brings us to the Treasury Secretary’s proposed scam. The government is consciously structuring a rigged transaction process with the intent to create a Toxic Asset bubble by providing investors with favorable access to credit, subsidizing the rate of interest on the debt and allowing investors to lever their capital dramatically to magnify investment returns. This is virtually the exact scenario that created and perpetuated the Housing Bubble. Once again the Government has decided to solve the economy’s problems caused by excessive debt and overvalued assets with easy credit, cheap money and extreme leverage.
The scam continues as so-called “buyers” will receive the upside of any asset price gains, but the tax-payers will be on the hook for virtually all losses should the economy continue to deteriorate and the value of troubled loans fall.
By extending extraordinary leverage to investors and guaranteeing them protection against material losses, Geithner has dramatically increased the amount of money institutions will be willing to pay for these Toxic Assets. Amazingly the Government thinks that getting investors to overpay for distressed securities at taxpayer expense is a good idea. Taxpayers are directly liable for losses associated with bad asset purchases. The higher the valuations paid in the subsidized transactions, the greater the likelihood and size of Government financed losses.
The Government doesn’t appear concerned about its liability in the scheme. That is not the intent of the design. What the scam does is solve the Treasury’s political problem. The Government can’t overpay for Toxic Assets directly because they would be responsible for the valuations paid. Knowingly overpaying for distressed securities would insight public outrage. By introducing the gimmick of private investors, the Government generates political cover for itself by creating the impression of a market transaction while still subsidizing the incompetent banks.
There is no possibility that the prices paid for distressed assets will be reflective of actual value. The Government has rigged the process, manipulated the risks and rewards, and materially distorted the values at which the securities will be purchased. This is a direct transfer of wealth from taxpayers to the incompetent banks selling Toxic Assets and to institutional investors who are only willing to buy the securities because they are being directly compensated to do so
Why didn't the Treasury use the original $700 billion of TARP money, which was intended to purchase Toxic Assets, for this very purpose six months ago? Given that the Government is now willing to finance 93% of the purchase price of Toxic Assets, why doesn’t the Treasury just buy the distressed securities outright? Why have they proposed the notion of partnering with private institutional investors but only require that these “partners” put up 7% of the capital?
The problem with the TARP plan was the question of how much the Government should pay for the distressed assets? A rational solution would have been restoring liquidity to the system by paying the current market value for the securities. The problem is that banks don’t want to sell their bad loans at 30 cents on the dollar. They are still pretending that the Toxic Assets are worth 60 cents on the dollar. In fact, if these loans were sold to the Government or anyone else at market prices many more banks would fail. The distressed sellers would be recognizing huge and previously unrecorded losses. Such transactions would also establish irrefutable market prices for the entire pool of Toxic Assets. Banks with no intention of selling their distressed holdings would be required to revalue them. In doing so, many banks currently pretending to be healthy would be forced to recognize that they are insolvent. The Government couldn’t buy the Toxic Assets at their market value with TARP money without destroying this illusion.
The Government needed a solution that would allow the bad banks to sell and/or value their Toxic Assets at a substantial premium to the current market value. As such, the Treasury overtly considered buying the loans at prices well above the illiquid market values. This option was deemed politically unfeasible as it amounted to rewarding irresponsible banks for their failures and consciously overpaying for bad assets with taxpayer money. Such action wouldn’t have flown well politically six months ago. Now that politicians have whipped the public into a populist furor over the Government’s mismanagement of AIG, it is unlikely that policy makers have the backbone to attempt such direct and costly corporate welfare.
Treasury Secretary Geithner was entrusted with the responsibility of generating a scheme to bail-out the bad banks with taxpayer money while adequately obscuring the real intent, effect and financial cost of this sleight of hand.
The subsidized Toxic Asset Purchase Plan creates the impression of free markets, private transactions and a mechanism to capture fair market prices in a competitive process. In reality it is welfare for bad banks and a sweetheart deal for institutional investors which distorts the value of the problemed securities through subsidized purchases at considerable taxpayer expense.
The original rationale against valuing Toxic Assets at current market prices was that the market itself wasn’t functioning. The idea was advanced that a lack of market liquidity meant that current prices were not reflective of actual value. Banks argued that the value of these assets would rise when liquidity returned. Of course this theory was advanced 18 months ago when the credit disruption originally emerged in August of 2007. In fact, the value of Toxic Assets has continued to fall as the economy deteriorated, housing prices collapsed and the financial crises went global. At some point these perpetually optimistic fantasists need to recognize that current markets are the reality and things in fact can get worse.
This brings us to the Treasury Secretary’s proposed scam. The government is consciously structuring a rigged transaction process with the intent to create a Toxic Asset bubble by providing investors with favorable access to credit, subsidizing the rate of interest on the debt and allowing investors to lever their capital dramatically to magnify investment returns. This is virtually the exact scenario that created and perpetuated the Housing Bubble. Once again the Government has decided to solve the economy’s problems caused by excessive debt and overvalued assets with easy credit, cheap money and extreme leverage.
The scam continues as so-called “buyers” will receive the upside of any asset price gains, but the tax-payers will be on the hook for virtually all losses should the economy continue to deteriorate and the value of troubled loans fall.
By extending extraordinary leverage to investors and guaranteeing them protection against material losses, Geithner has dramatically increased the amount of money institutions will be willing to pay for these Toxic Assets. Amazingly the Government thinks that getting investors to overpay for distressed securities at taxpayer expense is a good idea. Taxpayers are directly liable for losses associated with bad asset purchases. The higher the valuations paid in the subsidized transactions, the greater the likelihood and size of Government financed losses.
The Government doesn’t appear concerned about its liability in the scheme. That is not the intent of the design. What the scam does is solve the Treasury’s political problem. The Government can’t overpay for Toxic Assets directly because they would be responsible for the valuations paid. Knowingly overpaying for distressed securities would insight public outrage. By introducing the gimmick of private investors, the Government generates political cover for itself by creating the impression of a market transaction while still subsidizing the incompetent banks.
There is no possibility that the prices paid for distressed assets will be reflective of actual value. The Government has rigged the process, manipulated the risks and rewards, and materially distorted the values at which the securities will be purchased. This is a direct transfer of wealth from taxpayers to the incompetent banks selling Toxic Assets and to institutional investors who are only willing to buy the securities because they are being directly compensated to do so
Tuesday, March 24, 2009
Rising Home Sales Are Not Overtly Positive
Yesterday the housing cheerleaders were expressing their jubilation over the unexpected 5.1% rise in existing home sales during February. Of course, the median house price slumped 15.5% year-over-year, the second-biggest drop on record, and distressed properties accounted for 45% of all sales. These perpetual optimists do not understand the housing market, refuse to analyze housing data in context and consistently focus only on the information that they can spin in some positive way.
Housing sales volumes rose for two reasons, neither of which was unexpected. When prices decline, sales rise. This is the magic of supply and demand. Since prices fell 15.5% it isn’t that difficult to imagine that sales volumes might increase modestly from sluggish levels.
The single most important piece of information contained in the release was the mix of distressed properties. Almost half of all sales came from foreclosures or other forced sales.
This may be shocking to many self-described housing analysts, but as foreclosures rise, the volume of foreclosure sales also increases. Lenders do not want to own homes. They price these properties at a discount well below prevailing market values precisely so they will sell quickly. Since the number of foreclosures is growing it is inevitable that the volume of distressed sales will also rise.
Sales volumes could rise 50% based on increasing numbers of defaults, but it wouldn’t be an overtly positive story for housing stabilization. The existence of massive numbers of foreclosed properties and the extraordinarily high mix of forced sales ensures that housing prices will continue to collapse. The rising transaction volumes are a positive only in that the market is clearing and prices are falling towards sustainable levels.
The housing market will stabilize when non-forced transactions are rising, the inventory of houses for sale is both falling and near normal levels, and prices are no longer declining. At present, no data trend exists which would indicate near-term, housing market stabilization.
Housing sales volumes rose for two reasons, neither of which was unexpected. When prices decline, sales rise. This is the magic of supply and demand. Since prices fell 15.5% it isn’t that difficult to imagine that sales volumes might increase modestly from sluggish levels.
The single most important piece of information contained in the release was the mix of distressed properties. Almost half of all sales came from foreclosures or other forced sales.
This may be shocking to many self-described housing analysts, but as foreclosures rise, the volume of foreclosure sales also increases. Lenders do not want to own homes. They price these properties at a discount well below prevailing market values precisely so they will sell quickly. Since the number of foreclosures is growing it is inevitable that the volume of distressed sales will also rise.
Sales volumes could rise 50% based on increasing numbers of defaults, but it wouldn’t be an overtly positive story for housing stabilization. The existence of massive numbers of foreclosed properties and the extraordinarily high mix of forced sales ensures that housing prices will continue to collapse. The rising transaction volumes are a positive only in that the market is clearing and prices are falling towards sustainable levels.
The housing market will stabilize when non-forced transactions are rising, the inventory of houses for sale is both falling and near normal levels, and prices are no longer declining. At present, no data trend exists which would indicate near-term, housing market stabilization.
Thursday, March 19, 2009
The Beginnings of American Economic Fascism
Americans continue to be outraged by AIG’s $150 million of contractually obligated bonuses and retention compensation. How is it possible for such volatile populism to be misdirected at such a trivial matter while ignoring that AIG exists solely because the Government wasted $150 billion propping it up? AIG employees would not have jobs, much less be paid bonuses, but for the Federal Government wasting extraordinary amounts of money to bail-out the failed business.
The outrage further flies in the face of the facts. Congress and the Treasury initiated and were solely responsible for the AIG bailout. The Federal Government wrote the terms and conditions of the agreement. Senator Chris Dodd and Treasury Secretary Geithner understood exactly what conditions were placed on AIG. To paraphrase the Senator on the subject the “Treasury forced him to add language to the stimulus bill last month that specifically excluded executive bonuses included in contracts signed before the bill's passage". The Obama administration read every single word of the stimulus bill before the President signed it. Furthermore, every member of the House or Senate who voted for or against the stimulus bill had an obligation to have read, or at least understood, what was in the legislation. In effect, all of the parties presently in an uproar knew, or should have known, that existing contracts would be honored and that AIG would be acting in its perceived best interest in an attempt to turn the business around.
Given the circumstances, the prospect of our Government arbitrarily confiscating the contractually specified compensation of AIG executives and employees represents an unconscionable abuse of power, a frightening attack on private citizens and a new salvo in the war against capitalism. Anyone who is of the opinion that it is a good idea for the Government to arbitrarily tax a small group of American citizens at a confiscatory rate simply because a political lynch mob has deemed the practices of that group to be immoral should consider the prospect of having this abusive, unconstitutional power directed at them.
Do you really think that once the witch-hunting, profit-hating members of Congress get a taste for confiscating the “immoral” bonuses of the undeserving rich that they will just stop with AIG? The Government has proposed to change the tax code specifically to target and punish a group of private citizens. If Congress can use this power to punish one group, they can do it to any as long as there is political support.
Imagine the implications? Since we are in the business of breaking contract law and retroactively confiscating immoral compensation, lets tax the gun, alcohol, fast food, oil, gambling and pornography industries at 95%. Their actions are obviously immoral and each should be punished for earning a profit. Why not retroactively confiscate the profits of successful hedge fund managers like John Paulson. They made billions off of the decline of the housing industry and the collapsing economy. These profiteers should be punished. So what, that they worked hard, risked their personal capital, and only succeeded because they were smarter, more creative and dynamic than their competition.
Why not retroactively tax into oblivion all “windfall profits”? Of course there is no such thing as a windfall profit. Profit is profit and serves a vital role in our free market economy as capital is attracted to investment opportunities where risk adjusted returns may be earned.
The implications of this misguided proposal are staggering. Would you accept a job offer from AIG today contingent upon you receiving a contractually obligated bonus? If you are a current employee of AIG in a job that typically earns a material annual bonus, why would you stay with the firm? Any bonus you earn will be vilified by the media and potentially confiscated by the Government. Rational people will conclude that there will be no bonuses for employees, regardless of individual performance, while AIG as a whole is underperforming and a ward of the Government.
If we are going to eviscerate AIG, shouldn’t we do the same to Fannie Mae and Freddie Mac who have their own retention pay and executive bonus obligations? Shouldn’t we demonize all company’s that received bail-out funds? Handcuffing the attempts of managers to turn these businesses around, retain or attract talent and become profitable is a disastrous policy mistake. These entities have no chance of survival other than as government owned, money losing, zombies unless they can behave like independent, profit-seeking entities. Political hacks are in the process of destroying the very entities they argued were too important to our financial system to allow to fail. Either put a bullet in these institutions, nationalize them or get the hell out of their way.
On the positive side, the Government’s irresponsible and abusive behavior towards AIG should serve as a stark example to any company that might consider taking bail-out assistance going forward. Once again, the government has manufactured a solution that is worse than the original problem.
The outrage further flies in the face of the facts. Congress and the Treasury initiated and were solely responsible for the AIG bailout. The Federal Government wrote the terms and conditions of the agreement. Senator Chris Dodd and Treasury Secretary Geithner understood exactly what conditions were placed on AIG. To paraphrase the Senator on the subject the “Treasury forced him to add language to the stimulus bill last month that specifically excluded executive bonuses included in contracts signed before the bill's passage". The Obama administration read every single word of the stimulus bill before the President signed it. Furthermore, every member of the House or Senate who voted for or against the stimulus bill had an obligation to have read, or at least understood, what was in the legislation. In effect, all of the parties presently in an uproar knew, or should have known, that existing contracts would be honored and that AIG would be acting in its perceived best interest in an attempt to turn the business around.
Given the circumstances, the prospect of our Government arbitrarily confiscating the contractually specified compensation of AIG executives and employees represents an unconscionable abuse of power, a frightening attack on private citizens and a new salvo in the war against capitalism. Anyone who is of the opinion that it is a good idea for the Government to arbitrarily tax a small group of American citizens at a confiscatory rate simply because a political lynch mob has deemed the practices of that group to be immoral should consider the prospect of having this abusive, unconstitutional power directed at them.
Do you really think that once the witch-hunting, profit-hating members of Congress get a taste for confiscating the “immoral” bonuses of the undeserving rich that they will just stop with AIG? The Government has proposed to change the tax code specifically to target and punish a group of private citizens. If Congress can use this power to punish one group, they can do it to any as long as there is political support.
Imagine the implications? Since we are in the business of breaking contract law and retroactively confiscating immoral compensation, lets tax the gun, alcohol, fast food, oil, gambling and pornography industries at 95%. Their actions are obviously immoral and each should be punished for earning a profit. Why not retroactively confiscate the profits of successful hedge fund managers like John Paulson. They made billions off of the decline of the housing industry and the collapsing economy. These profiteers should be punished. So what, that they worked hard, risked their personal capital, and only succeeded because they were smarter, more creative and dynamic than their competition.
Why not retroactively tax into oblivion all “windfall profits”? Of course there is no such thing as a windfall profit. Profit is profit and serves a vital role in our free market economy as capital is attracted to investment opportunities where risk adjusted returns may be earned.
The implications of this misguided proposal are staggering. Would you accept a job offer from AIG today contingent upon you receiving a contractually obligated bonus? If you are a current employee of AIG in a job that typically earns a material annual bonus, why would you stay with the firm? Any bonus you earn will be vilified by the media and potentially confiscated by the Government. Rational people will conclude that there will be no bonuses for employees, regardless of individual performance, while AIG as a whole is underperforming and a ward of the Government.
If we are going to eviscerate AIG, shouldn’t we do the same to Fannie Mae and Freddie Mac who have their own retention pay and executive bonus obligations? Shouldn’t we demonize all company’s that received bail-out funds? Handcuffing the attempts of managers to turn these businesses around, retain or attract talent and become profitable is a disastrous policy mistake. These entities have no chance of survival other than as government owned, money losing, zombies unless they can behave like independent, profit-seeking entities. Political hacks are in the process of destroying the very entities they argued were too important to our financial system to allow to fail. Either put a bullet in these institutions, nationalize them or get the hell out of their way.
On the positive side, the Government’s irresponsible and abusive behavior towards AIG should serve as a stark example to any company that might consider taking bail-out assistance going forward. Once again, the government has manufactured a solution that is worse than the original problem.
Tuesday, March 17, 2009
More Politically Expedient, Progressive, Populism
Obama, the Treasury, Congress, the media and most of literate America are morally indignant at the bonuses being paid to the AIG managers and financial engineers largely responsible for the company’s failure. The appalled have even advanced one credible argument for their indignation. Had AIG been allowed to fail none of the boobs either managing the company or responsible for its financial distress would presently have jobs or be in line for contractually assured bonuses. Those claims would have been dissolved in an orderly bankruptcy. It is only because Congress and the Treasury committed huge sums of taxpayer dollars to saving AIG that these people maintain their extraordinarily gainful employment.
This is EXACTLY, PRECISELY the reason why you don’t do bailouts. And who is responsible for the decision to preserve these jobs and bonuses? How about Congress and the Treasury who agreed both to write the check and to the terms of the capital infusion?
The national anger over AIG bonuses is misdirected. The problem is not that a bailed-out AIG is spending $150 million to fulfill its contractual obligations and retain employees. The crime is that the Government has spent $150 billion of our money on a string of AIG bail-outs which continue to prop up a failed entity. The lesson is that bail-outs, past and future, don't work. And as the company continues to demonstrate its inability to survive without endless taxpayer capital infusions, pitchfork wielding populists should focus their anger on pressuring the Government to allow AIG to fail, not perpetually criticizing an endless string of corporate actions.
The Government’s Options as Companies Continue to Fail
None of the laundry list of companies propped up by the government should have been overtly bailed out. These companies failed. There should be severe consequences attached to such failure. If the Government decided that these were important institutions and couldn’t just cease operating, Congress and the Treasury could have structured an orderly dissolution supported by federal backing and guarantees.
Those companies with business models that didn’t work would have been broken up, sold off or shut down. Other businesses with better models would have been in the position to buy the surviving pieces and/or grow organically to meet demand. New companies would form with potentially better business plans and compete on equal footing to serve market demand.
If the Government decided that a company was “too big to fail” it should be nationalized with the goal of being broken up and returned to the private sector as quickly as possible. Nationalized companies should be completely insulated from the influences of politicians seeking to use the entities to pursue their social agendas. Since this condition is unlikely to be enforced in the politically expedient morass we presently find ourselves, nationalization should be avoided at all cost.
In the case of a direct bail-out, the exact terms and conditions of Government funds must be precisely articulated in advance. Companies must know what they are getting into by accepting taxpayer dollars. Only then can a distressed company make an informed and efficient decision about its future.
Our Government’s Incompetence Knows No Bounds
As usual, our politicians have done the wrong thing and selected the worst possible solution. They have foolishly bailed out companies, perpetuating the bad behavior of failed institutions. Then, they have retroactively and arbitrarily placed “moral” restrictions on bailed-out entities. Now our politicians have decided to express indignation and launch a public inquisition each time activity is exposed within a bailed-out entity that isn’t politically correct.
If Congress wanted bail-out recipients to put their employees up at Best Western, conduct business lunches at McDonalds and ride their bikes to work to achieve Carbon harmony, they should have specified those conditions in the terms of the agreement. A company can not run itself if every decision it makes is second guessed by the President, every member of Congress, the Treasury and every news organization in America.
How much money is morally acceptable to pay a manager? How does a company politically justify having a corporate jet? Should bail-out recipients serve meat in their cafeterias? Why can’t these companies use only electric cars? They should be forced to hire only minorities and single mothers?
They whole thing is ridiculous. When AIG received bail-out money, authorized by the Congress and Treasury, their agreement specified that all of AIG’s contracts would be legally enforced. Now, after the fact, to arbitrarily attempt to violate contract law every time the political lynch mob gets lathered up is a joke.
Get Government out of our way. Let the markets do their work. Pain is unavoidable and the Government is consistently making this crisis worse.
This is EXACTLY, PRECISELY the reason why you don’t do bailouts. And who is responsible for the decision to preserve these jobs and bonuses? How about Congress and the Treasury who agreed both to write the check and to the terms of the capital infusion?
The national anger over AIG bonuses is misdirected. The problem is not that a bailed-out AIG is spending $150 million to fulfill its contractual obligations and retain employees. The crime is that the Government has spent $150 billion of our money on a string of AIG bail-outs which continue to prop up a failed entity. The lesson is that bail-outs, past and future, don't work. And as the company continues to demonstrate its inability to survive without endless taxpayer capital infusions, pitchfork wielding populists should focus their anger on pressuring the Government to allow AIG to fail, not perpetually criticizing an endless string of corporate actions.
The Government’s Options as Companies Continue to Fail
None of the laundry list of companies propped up by the government should have been overtly bailed out. These companies failed. There should be severe consequences attached to such failure. If the Government decided that these were important institutions and couldn’t just cease operating, Congress and the Treasury could have structured an orderly dissolution supported by federal backing and guarantees.
Those companies with business models that didn’t work would have been broken up, sold off or shut down. Other businesses with better models would have been in the position to buy the surviving pieces and/or grow organically to meet demand. New companies would form with potentially better business plans and compete on equal footing to serve market demand.
If the Government decided that a company was “too big to fail” it should be nationalized with the goal of being broken up and returned to the private sector as quickly as possible. Nationalized companies should be completely insulated from the influences of politicians seeking to use the entities to pursue their social agendas. Since this condition is unlikely to be enforced in the politically expedient morass we presently find ourselves, nationalization should be avoided at all cost.
In the case of a direct bail-out, the exact terms and conditions of Government funds must be precisely articulated in advance. Companies must know what they are getting into by accepting taxpayer dollars. Only then can a distressed company make an informed and efficient decision about its future.
Our Government’s Incompetence Knows No Bounds
As usual, our politicians have done the wrong thing and selected the worst possible solution. They have foolishly bailed out companies, perpetuating the bad behavior of failed institutions. Then, they have retroactively and arbitrarily placed “moral” restrictions on bailed-out entities. Now our politicians have decided to express indignation and launch a public inquisition each time activity is exposed within a bailed-out entity that isn’t politically correct.
If Congress wanted bail-out recipients to put their employees up at Best Western, conduct business lunches at McDonalds and ride their bikes to work to achieve Carbon harmony, they should have specified those conditions in the terms of the agreement. A company can not run itself if every decision it makes is second guessed by the President, every member of Congress, the Treasury and every news organization in America.
How much money is morally acceptable to pay a manager? How does a company politically justify having a corporate jet? Should bail-out recipients serve meat in their cafeterias? Why can’t these companies use only electric cars? They should be forced to hire only minorities and single mothers?
They whole thing is ridiculous. When AIG received bail-out money, authorized by the Congress and Treasury, their agreement specified that all of AIG’s contracts would be legally enforced. Now, after the fact, to arbitrarily attempt to violate contract law every time the political lynch mob gets lathered up is a joke.
Get Government out of our way. Let the markets do their work. Pain is unavoidable and the Government is consistently making this crisis worse.
Monday, March 16, 2009
Doomsday Scenarios: Could Condo Prices Fall to Zero?
Why not? Certainly condo prices aren’t going to approach $0 in most markets or on a national basis. But given the right set of local conditions, it is entirely possible that some condo prices could fall to a nominal value functionally equivalent to nothing.
Free condos huh? Does it sound too good to be true? That’s because it is. Costless condo purchases would be far from free, which is exactly what creates the possibility that prices could fall so low.
The first myth of homeownership in the United States is that you actually “own” your house or condo. U.S. homeowners have residual rights to their properties as long as the more senior claimants receive their recurring pound of flesh.
This concept is an obvious one for mortgage holders. “Owners” borrow a sum of money from a lender and are allowed to continue to “own” their property as long as the mortgage debt is serviced and repaid according to the terms of the borrowing agreement. We presently see large numbers of people losing houses that they supposedly “owned” because they can’t pay their mortgages. The question is why these people with little, no or negative equity actually believed that they “owned” the houses in which they lived?
Now let’s assume that a homeowner paid off his mortgage or bought his house with cash. That homeowner would truly “own” his house right? True, except that most houses are subject to property taxes. In such markets, homeowners supposedly own their houses, yet are required to cut a check to the government for the right to stay in it. And unlike a mortgage payment, this is a perpetual liability. Even worse, fickle governments can decide to increase your perpetual homeowner liability at their leisure. (As an aside, how safe is the residual equity value of your home if a government can raise taxes to a confiscatory level at their discretion?)
One of many disadvantages that condo owners have to home owners is that they are also junior in ownership rights to their condo owner associations. Condo owners must pay monthly dues for maintenance, insurance, security, etc… These fees are perpetual and contractually required.
If you don’t believe that condo owners have only residual equity rights and are fourth in line in terms of seniority, imagine what would happen if such an individual decided not to pay their mortgage, condo association fees or property taxes? How long would this owner continue to have a legal claim to the property? Not long.
How do you actually own something that can be legally taken away from you if you don’t perpetually pay for the right to keep it? In reality, homeowners more closely resemble serfs beholding to the government, condo associations and lenders who will kick them off of their land if sufficient tribute is not paid.
Additionally, houses generally have a price floor relative to condo values for a variety of reasons. Houses tend to be more heterogeneous than condos. Homeowners have exclusive property rights to their land and thus the opportunity to use the house or land for alternative purposes. A house is a single ownership unit, so if an owner wanted to sell the property to a developer or develop it himself, the process would be relatively simple.
A condo owner has rights only to a few hundred or thousand square feet of space within a building. Condo ownership doesn’t come with any claim to land, and all control of the remaining facilities are owned and controlled by the condo association. It is for this reason that, until the Housing Bubble began, condos always traded at relative discounts to equivalent houses.
This brings us to the question at hand. Could condo prices fall to zero? Given the right conditions such values could indeed fall to nothing. This does not mean that the condos would be free. Owning a condo comes with the laundry list of financial obligations and liabilities which we discussed above.
Imagine a condo with $1,000 a month in condo fees and $6,000 in annual property taxes? (these are hypothetical numbers designed to illustrate a point) If you were to purchase such a condo for $1, ownership of the unit would still be costly. The free unit would cost $1,500 a month.
Now what happens in markets with the following conditions that may come to exist in places like Miami:
- The supply of condo units dramatically outstrips demand
- A large backlog of units for sale exists
- Credit terms are tight or relatively expensive
- Property values have been falling for years, are presently falling and are expected to continue to fall
In such a market, what would happen if the cost of renting an equivalent unit falls below the $1,500 a month necessary to service condo ownership expenses? What if real estate prices are expected to continue to fall, people refuse to buy assets or borrow money due to rampant price deflation, or unemployment rises so high that there are insufficient potential buyers to assume ownership of all for sale units? Why would anyone pay for the right to purchase a condo only to be required to pay monthly taxes/maintenance expenses in excess of what it would cost to rent the same unit across the hall?
With this framework of understanding, it becomes hypothetically possible that condo prices could actually fall to less than zero. Negative real estate prices!
A potential buyer may decide that perpetually paying condo fees and taxes that are in excess of the market price of comparable rental units isn’t a good idea. Theoretically an owner might be willing to pay a potential “buyer” to take a condo off his hands simply to remove the perpetual liabilities attached to the unit. In such a case, the buyer would require compensation to assume the perpetual liabilities.
This is obviously a highly theoretical potentiality. I am not arguing that it is likely. Furthermore, there are numerous factors, such as the availability of distressed asset investors, which would likely put a floor on condo prices above $0. But if the economy gets bad enough, house prices continue to collapse, deflation becomes prevalent, unemployment expands and financing for investors dries up, the potential for condo prices to fall to previously unimaginable lows will materialize.
Sunday, March 15, 2009
Chart: Portrait of a Burgeoning Counter-Revolution
I find it encouraging that more copies of Atlas Shrugged were sold during 2008 than in any year other than 1957, the year when the novel was originally released. Thus far during 2009, the rate of book sales has tripled that of 2008’s pace.
Thursday, March 12, 2009
Doomsday Scenarios: Could Americans Stop Paying Their Bills?
What if Americans in large numbers simply stop paying their mortgages and credit card bills? Most people will dismiss this prospect because it is both unlikely and has never happened before. But is it possible? I would argue that every day it becomes more possible if not likely.
Two years ago experts dismissed the prospect of homeowners walking away from their mortgages when they could still afford to service them. But this phenomenon has manifested itself and is growing rapidly. It makes basic economic sense to default on an underwater mortgage at some point, and many borrowers are choosing that very option. As house prices continue to fall, this trend will only increase.
As if this weren’t enough of a problem, each day politicians and policy makers come up with new and exciting ways to reward people who don’t pay their mortgages. You can’t listen to the radio, turn on the TV or perform an internet search without encountering advertisements for services that will reduce your mortgage debt or eliminate credit card balances.
The point is we are creating an environment where defaulting on your debt is no big deal. The Government is actually incentivizing you to default, while reducing the cultural stigma of doing so. People who pay their bills are expected to continue paying them, while also bearing the costs of those who default. But those who default are rewarded with a reduced debt burden, lower interest rates and favorably restructured loan terms.
Sure, not servicing your debt supposedly reduces your credit score, but this is small potatoes relative to the real, immediate and quantifiable financial gain captured by default or restructuring. Furthermore, bad credit has not been an impediment to borrowing for the past decade. (See the Housing Bubble, subprime debt, NINJA loans, the credit card industry) With as many people defaulting on debts as we see today, there is no chance these people will be ignored, ostracized or denied access to credit in the future. The political class won’t allow it and defaulters will represent too large a portion of the market for lenders to ignore.
And from an economic perspective, it is increasingly advantageous to default on credit card debt while prices are deflating. If you thought 16% credit card interest rates were difficult to service during the boom times with inflation running at 3%, try servicing 19% credit card interest rates while prices are deflating and unemployment is rising.
Why would the majority of people continue to pay their mortgages and credit card bills in this political, cultural and deflationary environment?
Throw in the peculiarity of our non-recourse borrowing system and you at least create the possibility of such a scenario. In the United States if you don’t pay your mortgage or credit card bill nothing really bad happens to you. It isn’t a criminal act for which you are punished. Your other assets aren’t confiscated. The lenders only recourse is to harass you for a while before they write off the balance and then disparage your credit.
The Government has effectively incentivized homeowners to default on their mortgages, and anyone who finds themselves in a situation where this possibility is financially beneficial will take advantage of the opportunity. Those people who retain equity in their houses will continue to service mortgages, as long as they have the ability to do so.
But credit cards are different. No one has equity in their credit card. There is, in fact, an immediate and material benefit to not paying your monthly bill. This observation may not have been apparent, or represent a good option during good times, but during a Depression what happens when millions of Americans reach this conclusion? I believe that we will see a massive increase in the number of people who will shamelessly choose to stop paying their credit card bills. And when they do so, politicians will line up in an attempt to reward them.
Two years ago experts dismissed the prospect of homeowners walking away from their mortgages when they could still afford to service them. But this phenomenon has manifested itself and is growing rapidly. It makes basic economic sense to default on an underwater mortgage at some point, and many borrowers are choosing that very option. As house prices continue to fall, this trend will only increase.
As if this weren’t enough of a problem, each day politicians and policy makers come up with new and exciting ways to reward people who don’t pay their mortgages. You can’t listen to the radio, turn on the TV or perform an internet search without encountering advertisements for services that will reduce your mortgage debt or eliminate credit card balances.
The point is we are creating an environment where defaulting on your debt is no big deal. The Government is actually incentivizing you to default, while reducing the cultural stigma of doing so. People who pay their bills are expected to continue paying them, while also bearing the costs of those who default. But those who default are rewarded with a reduced debt burden, lower interest rates and favorably restructured loan terms.
Sure, not servicing your debt supposedly reduces your credit score, but this is small potatoes relative to the real, immediate and quantifiable financial gain captured by default or restructuring. Furthermore, bad credit has not been an impediment to borrowing for the past decade. (See the Housing Bubble, subprime debt, NINJA loans, the credit card industry) With as many people defaulting on debts as we see today, there is no chance these people will be ignored, ostracized or denied access to credit in the future. The political class won’t allow it and defaulters will represent too large a portion of the market for lenders to ignore.
And from an economic perspective, it is increasingly advantageous to default on credit card debt while prices are deflating. If you thought 16% credit card interest rates were difficult to service during the boom times with inflation running at 3%, try servicing 19% credit card interest rates while prices are deflating and unemployment is rising.
Why would the majority of people continue to pay their mortgages and credit card bills in this political, cultural and deflationary environment?
Throw in the peculiarity of our non-recourse borrowing system and you at least create the possibility of such a scenario. In the United States if you don’t pay your mortgage or credit card bill nothing really bad happens to you. It isn’t a criminal act for which you are punished. Your other assets aren’t confiscated. The lenders only recourse is to harass you for a while before they write off the balance and then disparage your credit.
The Government has effectively incentivized homeowners to default on their mortgages, and anyone who finds themselves in a situation where this possibility is financially beneficial will take advantage of the opportunity. Those people who retain equity in their houses will continue to service mortgages, as long as they have the ability to do so.
But credit cards are different. No one has equity in their credit card. There is, in fact, an immediate and material benefit to not paying your monthly bill. This observation may not have been apparent, or represent a good option during good times, but during a Depression what happens when millions of Americans reach this conclusion? I believe that we will see a massive increase in the number of people who will shamelessly choose to stop paying their credit card bills. And when they do so, politicians will line up in an attempt to reward them.
Tuesday, March 10, 2009
Revisiting the Defining Chart of “The Affordable Mortgage Depression”
In 2007 CSFB released a chart that in my opinion represents the single best piece of research to date which clearly demonstrated the impact of Affordable Mortgages on the economy. What this analysis did is reveal the overwhelming influence of ARMs on the future of housing prices, and in doing so, served as catalyzing event for objective analysts interested in understanding the economic origins of the Housing Bubble. Individuals and news sources continue to rediscover this chart and discuss its implications. 
It has been two years since the chart’s release and yet few people seem to grasp the reality that Affordable Mortgages represent an institutionalized impediment to housing price stabilization or an economic recovery.
To briefly review their historical impact, Affordable Mortgages were the mechanism by which homeownership rates expanded rapidly. They fueled unsustainable property appreciation by dramatically increasing demand and removing all sensitivity to price. Affordable Mortgages allowed prices to decouple from the fundamentals of value and rise to extraordinary levels. They enabled buyers to put extreme amounts of debt on overvalued housing, both in gross and percentage terms. Finally, they enabled “owners” to refinance mortgages, monetize theoretical equity gains and dramatically distort consumer consumption for a decade.
CSFB’s chart was about the future though. The chart demonstrated that Affordable Mortgages, as damaging as they had been, would also act like economic time bombs strewn out through 2012. These financial land mines would explode by the thousands every day for years to come. Mortgage resets would inevitably trigger a steady, growing and unavoidable source of defaults and foreclosures. This overwhelming source of foreclosures would cause collateral damage throughout the global economy and make the prospect of housing price stability impossible.
Maybe these economists, politicians and prognosticators should revisit this prescient chart and reassess their perceptions of the future. This one piece of research could be more valuable in productively shaping economic policy than the demonstrated wherewithal of the Federal Reserve, U.S. Treasury, FDIC, Congress and Two Presidents combined.
It has been two years since the chart’s release and yet few people seem to grasp the reality that Affordable Mortgages represent an institutionalized impediment to housing price stabilization or an economic recovery.
To briefly review their historical impact, Affordable Mortgages were the mechanism by which homeownership rates expanded rapidly. They fueled unsustainable property appreciation by dramatically increasing demand and removing all sensitivity to price. Affordable Mortgages allowed prices to decouple from the fundamentals of value and rise to extraordinary levels. They enabled buyers to put extreme amounts of debt on overvalued housing, both in gross and percentage terms. Finally, they enabled “owners” to refinance mortgages, monetize theoretical equity gains and dramatically distort consumer consumption for a decade.
CSFB’s chart was about the future though. The chart demonstrated that Affordable Mortgages, as damaging as they had been, would also act like economic time bombs strewn out through 2012. These financial land mines would explode by the thousands every day for years to come. Mortgage resets would inevitably trigger a steady, growing and unavoidable source of defaults and foreclosures. This overwhelming source of foreclosures would cause collateral damage throughout the global economy and make the prospect of housing price stability impossible.
Economists, politicians and prognosticators continue predict a rapid economic recovery. Policy makers appear willing to gamble our financial viability on the prospect of a quick turnaround. According to reports, there are no credible economists presently predicting that the recession will still be with us on January 1st, 2011. Since the day I saw this chart I understood that there was no prospect of the housing market stabilizing or a broad based economic recovery occurring until at least 2012.
Maybe these economists, politicians and prognosticators should revisit this prescient chart and reassess their perceptions of the future. This one piece of research could be more valuable in productively shaping economic policy than the demonstrated wherewithal of the Federal Reserve, U.S. Treasury, FDIC, Congress and Two Presidents combined.
Monday, March 9, 2009
Sheila Bair is Incompetent
The Queen/Jester of the FDIC has launched her latest act of idiocy and economic immolation. She is attempting to impose an emergency assessment on the country’s banks in the range of $25 billion and to permanently increase the bank’s annual insurance fees. This proposal is ridiculous, counter-productive and defies any understanding of the current economic crises, how the banking industry operates or the well-defined role of the FDIC. The only justification for levying this charge is to preserve and perpetuate Sheila’s ego and influence as a “player” in housing policy matters.
Sheila has dismissed both the reaction to her announcement (a near-revolt by the banking industry) and a proposal to excuse the fees for smaller banks. Bair says that the FDIC does not discriminate based on the size of the bank, large or small. How progressive.
It is absurd that Sheila would sound an alarm that the FDIC is now insolvent. The government entity has been staring in the face of insolvency for years. This reality was predictable and inevitable. A wave of bank failures has been steadily building and will quickly overwhelm any emergency charges she foolishly imposes on our banking system.
In keeping with Sheila’s twisted perspective on the world, this emergency charge would directly punish good banks to prop up the bad. The charge would punish small banks in support of the few large bank failures which have consumed the majority of the FDIC’s insurance funds. Her confiscatory policy steals assets from banks in the 40 states without serious foreclosure issues to subsidize a small number of bad players in the other 10.
The FDIC, like Fannie Mae and Freddie Mac (and now most of the financial sector) are underwritten and implicitly guaranteed by the Federal Government. There is not a chance in hell that the Government would allow one cent of qualified bank deposits to go uninsured regardless of the FDIC’s woeful financial condition. The FDIC will be bailed out irrespective the status of its insurance fund.
Furthermore, the hypocrisy of the proposal is mind boggling. The Government consistently argues that banks should be lending more. Recipients of bail-out funds have been lambasted for not increasing lending despite the fact that this was not the intent of the TARP funds. This may come as a surprise to Sheila, but banks lend money based on a multiple of their deposits and shareholder equity. By confiscating $25 billion the FDIC has effectively reduced the lending capacity of banks by several hundred billion dollars. Brilliant!
The parallel isn’t perfect but imagine hurricane victims being assessed ten years of insurance premiums immediately after a storm hits. People and banks pay insurance premiums to receive the benefits of that insurance during the crisis. When the crisis actually hits the victims shouldn’t be robbed at gun point for their own benefit. In fact, there is no worse time to confiscate their assets.
The FDIC, the banking system and the U.S. economy deserves better than Shelia Bair.
Sheila Bair's Horrifying Visage
Sheila has dismissed both the reaction to her announcement (a near-revolt by the banking industry) and a proposal to excuse the fees for smaller banks. Bair says that the FDIC does not discriminate based on the size of the bank, large or small. How progressive.
It is absurd that Sheila would sound an alarm that the FDIC is now insolvent. The government entity has been staring in the face of insolvency for years. This reality was predictable and inevitable. A wave of bank failures has been steadily building and will quickly overwhelm any emergency charges she foolishly imposes on our banking system.
In keeping with Sheila’s twisted perspective on the world, this emergency charge would directly punish good banks to prop up the bad. The charge would punish small banks in support of the few large bank failures which have consumed the majority of the FDIC’s insurance funds. Her confiscatory policy steals assets from banks in the 40 states without serious foreclosure issues to subsidize a small number of bad players in the other 10.
The FDIC, like Fannie Mae and Freddie Mac (and now most of the financial sector) are underwritten and implicitly guaranteed by the Federal Government. There is not a chance in hell that the Government would allow one cent of qualified bank deposits to go uninsured regardless of the FDIC’s woeful financial condition. The FDIC will be bailed out irrespective the status of its insurance fund.
Furthermore, the hypocrisy of the proposal is mind boggling. The Government consistently argues that banks should be lending more. Recipients of bail-out funds have been lambasted for not increasing lending despite the fact that this was not the intent of the TARP funds. This may come as a surprise to Sheila, but banks lend money based on a multiple of their deposits and shareholder equity. By confiscating $25 billion the FDIC has effectively reduced the lending capacity of banks by several hundred billion dollars. Brilliant!
The parallel isn’t perfect but imagine hurricane victims being assessed ten years of insurance premiums immediately after a storm hits. People and banks pay insurance premiums to receive the benefits of that insurance during the crisis. When the crisis actually hits the victims shouldn’t be robbed at gun point for their own benefit. In fact, there is no worse time to confiscate their assets.
As of today there are various proposals to change Sheila’s idiotic proposal and reduce or remove this burden on the banking system. Sadly, the amendments being discussed by Congress do not change the fact that Sheila Bair, the head of the FDIC, is dangerously incompetent. Additionally, should Congress provide the FDIC with a larger credit-line (the current proposal would provide the FDIC with a $500 billion line of credit) Sheila would be given expanded influence which she would inevitably use to further damage the economy and for personal self-aggrandizement.
The FDIC, the banking system and the U.S. economy deserves better than Shelia Bair.
Thursday, March 5, 2009
Obama's Foreclosure-Prevention Plan Will Lengthen the Depression by Years
There are two primary reasons why the economic collapse we are presently experiencing represents an “Affordable Mortgage Depression”. These mortgage affordability products were the keystone to creating and perpetuating the Housing Bubble and are now and for the next several years the primary constraint to housing prices stabilizing or recovering.
(For a full explanation see the 10 sequential articles beginning with "Analyzing Economic Distortions that Caused the Housing Bubble" posted November 17th 2008.)
The mania portion of the Housing Bubble could not have taken place nor persisted without the presence of hybrid-affordability mortgages. Lending products that eliminated down payments and temporarily reduced mortgage payments effectively removed all barriers to homeownership and dramatically reduced a buyer’s sensitivity to price. Once the built in price regulating mechanisms of down payments and mortgage payments were eliminated, there were no constraints on how high prices would rise other than the market running out of buyers or house prices increasing to the point that buyers were unable to service teaser mortgage payments. In doing so, affordable mortgages created the distortions that allowed housing prices to decouple from the fundamentals of value and rise to unsustainable levels.
These ARMs, Option ARMs, Alt-A loans, Sub-prime loans and their brethren still exist. They represent an unresolvable, institutionalized barrier to housing price stabilization. These mortgages, which are a known source of inevitable foreclosures, are spread out through 2012 like daily economic land mines. Every day thousands reset setting off foreclosures. Foreclosed properties are liquidated through price discounts relative to prevailing market prices. As long as lenders take possession of a steady stream of foreclosed properties, prices will continue to fall.
Now the Obama administration has proposed an attempt to save the housing industry, prevent foreclosures and prop up housing prices by refinancing ARMs with new government ARMs. Inevitable foreclosures will be delayed by handing out 100%+ loan-to-value, resetting-interest rate mortgages that will result in inevitable foreclosures.
The only real effect of the proposed foreclosure prevention policy is to slow down but not prevent price declines, delay inevitable foreclosures, lengthen the economic downturn, extend institutionalized barriers to a housing recovery by several years, and expose taxpayers to horrific losses as prices continue to fall, defaults accelerate and refinanced mortgages fail.
The following are concepts that do not work! Price fixing, borrowing more money to get one’s self out of debt, rewarding bad behavior and punishing good, and confiscating the property of productive people to redistribute it to unproductive. None of these ideas work in theory or in historical practice.
The proposed foreclosure prevention plan might be politically expedient but it will result in a longer and deeper economic depression that will make our current, painful but healthy correction seem quaint.
(For a full explanation see the 10 sequential articles beginning with "Analyzing Economic Distortions that Caused the Housing Bubble" posted November 17th 2008.)
The mania portion of the Housing Bubble could not have taken place nor persisted without the presence of hybrid-affordability mortgages. Lending products that eliminated down payments and temporarily reduced mortgage payments effectively removed all barriers to homeownership and dramatically reduced a buyer’s sensitivity to price. Once the built in price regulating mechanisms of down payments and mortgage payments were eliminated, there were no constraints on how high prices would rise other than the market running out of buyers or house prices increasing to the point that buyers were unable to service teaser mortgage payments. In doing so, affordable mortgages created the distortions that allowed housing prices to decouple from the fundamentals of value and rise to unsustainable levels.
These ARMs, Option ARMs, Alt-A loans, Sub-prime loans and their brethren still exist. They represent an unresolvable, institutionalized barrier to housing price stabilization. These mortgages, which are a known source of inevitable foreclosures, are spread out through 2012 like daily economic land mines. Every day thousands reset setting off foreclosures. Foreclosed properties are liquidated through price discounts relative to prevailing market prices. As long as lenders take possession of a steady stream of foreclosed properties, prices will continue to fall.
Now the Obama administration has proposed an attempt to save the housing industry, prevent foreclosures and prop up housing prices by refinancing ARMs with new government ARMs. Inevitable foreclosures will be delayed by handing out 100%+ loan-to-value, resetting-interest rate mortgages that will result in inevitable foreclosures.
The only real effect of the proposed foreclosure prevention policy is to slow down but not prevent price declines, delay inevitable foreclosures, lengthen the economic downturn, extend institutionalized barriers to a housing recovery by several years, and expose taxpayers to horrific losses as prices continue to fall, defaults accelerate and refinanced mortgages fail.
The following are concepts that do not work! Price fixing, borrowing more money to get one’s self out of debt, rewarding bad behavior and punishing good, and confiscating the property of productive people to redistribute it to unproductive. None of these ideas work in theory or in historical practice.
The proposed foreclosure prevention plan might be politically expedient but it will result in a longer and deeper economic depression that will make our current, painful but healthy correction seem quaint.
Wednesday, March 4, 2009
The "New" Great Depression Era Propaganda
On November 7th I observed the potential that politicians would resurrect Great Depression Era propaganda, slogans and logos as a way to perpetuate government spending and brand efforts to achieve social agendas.
Three months later the Obama administration has unveiled its “Stimulus” brand.
“The logo – with a three-leafed sprig for green jobs, a set of gears for infrastructure, and “recovery.gov” beside a field of stars – will be used to brand projects as well as raise the visibility of the White House’s economic initiatives and try to dramatize their impact.”
The link to the article is included below:
http://theaffordablemortgagedepression.com/2008/11/07/depression-era-slogan-electricity-for-all.aspx
Three months later the Obama administration has unveiled its “Stimulus” brand.
“The logo – with a three-leafed sprig for green jobs, a set of gears for infrastructure, and “recovery.gov” beside a field of stars – will be used to brand projects as well as raise the visibility of the White House’s economic initiatives and try to dramatize their impact.”
This is an excerpt from FDR’s playbook in defiance of the fact that Depression Era spending did nothing to solve the economic crisis. The logo smacks of political expediency and appears to be part of a concerted effort to take advantage of an economic crisis to expand government and enhance the influence of the Democratic Party.
Companies That are "Too Big to Fail" are Too Big
The US government just bailed out AIG for the 4th time since September. The stated price tag to date is $160 billion but the Feds have effectively chosen to underwrite all AIG losses, regardless of size, going forward. This will not be the last AIG bail-out and little good has come from the first four.
This policy of perpetual bail-outs is underwritten by the Government’s assertion that AIG and its compatriots, including Bear Stearns, Fannie Mae, Freddie Mac, Citigroup, Bank of America, GM, Chrysler, et al, are “Too Big to Fail” (“TBTF”).
There is little reason to believe that this idea of Too Big to Fail is valid. There are far too many politically expedient reasons for bailing out union dominated industries and partially nationalizing the housing, lending and banking industries to believe that our politicians are acting in the economy’s long term best interest.
Irrespective of the net benefit or damage of such policy, it is abundantly clear that the government should terminate this practice after our current crisis is resolved and act to prevent the necessity of such interference.
If a company is Too Big to Fail, then it is simply too big! The overt understanding that companies, regardless of size and influence, will be allowed to fail will produce immense benefit, remove intended and unintended economic distortions and re-impose market discipline on its participants.
In most cases of companies deemed worthy of the offending moniker, the government has overtly allowed the entity to reach TBTF status.
For example, the government reviews all mergers and acquisitions of size to determine whether the transactions would be anticompetitive. Obviously if a merger results in a company that is TBTF, the result is not only anticompetitive but risks economic disaster and puts taxpayers directly on the hook should the company run into trouble. All such transactions should bluntly be prevented going forward. The acquisitions executed by Citigroup and Bank of America, which were assembled by piecing together hundreds of companies, should be rejected by regulators.
Furthermore, many of these TBTF entities were directly controlled, influenced or regulated by the US Government. No commercial bank, lender or GSE operated, raised capital, grew, increased its leverage ratios or expanded its product offerings without direct and indirect government approval. Regulators control leverage ratios, approve capital raises, review business practices, etc…
This is especially evident in the case of the GSEs. The argument has credibly been advanced that Fannie and Freddie should never have existed. Once created, they should have been meticulously limited in size and scope. By affording the GSE’s a government guarantee and allowing each to raise capital at preferential rates backed by the full faith and credit of the US government, it was inevitable that both would eventually grow to monopolize the house lending industry. The government inappropriately used Fannie and Freddie as policy tools to effect social change, dramatically distorted the housing market through this interference, are presently using the nationalized entities in a disastrous attempt to prop up housing prices and continue to expose taxpayers to previously unimaginable losses. I presume all in the name of Too Big to Fail.
It is irresponsible, disortionary, inefficient and costly to continue to allow, and in many cases promote, the development of companies that are so important to the economy that their failure would destabilize the global economic system, yet are so fragile that these companies can not endure inevitable downturns in their respective industries.
This policy of perpetual bail-outs is underwritten by the Government’s assertion that AIG and its compatriots, including Bear Stearns, Fannie Mae, Freddie Mac, Citigroup, Bank of America, GM, Chrysler, et al, are “Too Big to Fail” (“TBTF”).
There is little reason to believe that this idea of Too Big to Fail is valid. There are far too many politically expedient reasons for bailing out union dominated industries and partially nationalizing the housing, lending and banking industries to believe that our politicians are acting in the economy’s long term best interest.
Irrespective of the net benefit or damage of such policy, it is abundantly clear that the government should terminate this practice after our current crisis is resolved and act to prevent the necessity of such interference.
If a company is Too Big to Fail, then it is simply too big! The overt understanding that companies, regardless of size and influence, will be allowed to fail will produce immense benefit, remove intended and unintended economic distortions and re-impose market discipline on its participants.
In most cases of companies deemed worthy of the offending moniker, the government has overtly allowed the entity to reach TBTF status.
For example, the government reviews all mergers and acquisitions of size to determine whether the transactions would be anticompetitive. Obviously if a merger results in a company that is TBTF, the result is not only anticompetitive but risks economic disaster and puts taxpayers directly on the hook should the company run into trouble. All such transactions should bluntly be prevented going forward. The acquisitions executed by Citigroup and Bank of America, which were assembled by piecing together hundreds of companies, should be rejected by regulators.
Furthermore, many of these TBTF entities were directly controlled, influenced or regulated by the US Government. No commercial bank, lender or GSE operated, raised capital, grew, increased its leverage ratios or expanded its product offerings without direct and indirect government approval. Regulators control leverage ratios, approve capital raises, review business practices, etc…
This is especially evident in the case of the GSEs. The argument has credibly been advanced that Fannie and Freddie should never have existed. Once created, they should have been meticulously limited in size and scope. By affording the GSE’s a government guarantee and allowing each to raise capital at preferential rates backed by the full faith and credit of the US government, it was inevitable that both would eventually grow to monopolize the house lending industry. The government inappropriately used Fannie and Freddie as policy tools to effect social change, dramatically distorted the housing market through this interference, are presently using the nationalized entities in a disastrous attempt to prop up housing prices and continue to expose taxpayers to previously unimaginable losses. I presume all in the name of Too Big to Fail.
It is irresponsible, disortionary, inefficient and costly to continue to allow, and in many cases promote, the development of companies that are so important to the economy that their failure would destabilize the global economic system, yet are so fragile that these companies can not endure inevitable downturns in their respective industries.
Monday, March 2, 2009
Another Way the Government is Stealing From Us
With the Dow down 50% to 6,900 and back at levels last seen in 1997, it is a perfect time to highlight another way that the Government is stealing from us.
The Government, in an ever-expanding effort to fund its growth and confiscate private property, taxes capital gains. There are numerous reasons why this is a terrible idea in that it punishes savers, investors and risk takers. This tax discourages the actions and activities that produce economic benefit, create jobs and raise living standards.
In what is an unconscionable and grossly incompetent oversight by the US government, capital gains taxes are not indexed for inflation. Anyone with a grasp of basic math understands that inflation erodes the buying power of a dollar. Since 1997 inflation has risen by more than 30%. (As an aside, this is an appalling failure of the Federal Reserve as its defining role is to encourage price stability and preserve the value of the dollar.)
Had you invested in the Dow back in 1997 at 6,900 the value of your holdings on a dollar denominated basis would not have changed. Yet the real value of those dollars would have declined by in excess of 30%. The government, whose job it is to preserve the value of those dollars, seems blissfully unaware of this phenomenon.
Now imagine that you had started a company or purchased a stock in 1997 and the value of that investment had risen by 30% over the last 12 years. In real terms, the increase in value would have only offset the corresponding rise in prices. You have made no profit but have successfully preserved the value of your investment. But when you sell your investment, the US government arbitrarily decides that you have made a 30% profit. This is absurd and factually in error, but no matter. The government will confiscate its share of your imaginary profits leaving you, the investor, who saved your money and risked your capital, with less value in real terms than you started with 12 years ago.
In real terms, an investor could lose money on an investment yet be required to pay the Government capital gains taxes. Ignoring inflation when calculating taxable capital gains is confiscatory, immoral, discourages savings and punishes risk taking.
The Government, in an ever-expanding effort to fund its growth and confiscate private property, taxes capital gains. There are numerous reasons why this is a terrible idea in that it punishes savers, investors and risk takers. This tax discourages the actions and activities that produce economic benefit, create jobs and raise living standards.
In what is an unconscionable and grossly incompetent oversight by the US government, capital gains taxes are not indexed for inflation. Anyone with a grasp of basic math understands that inflation erodes the buying power of a dollar. Since 1997 inflation has risen by more than 30%. (As an aside, this is an appalling failure of the Federal Reserve as its defining role is to encourage price stability and preserve the value of the dollar.)
Had you invested in the Dow back in 1997 at 6,900 the value of your holdings on a dollar denominated basis would not have changed. Yet the real value of those dollars would have declined by in excess of 30%. The government, whose job it is to preserve the value of those dollars, seems blissfully unaware of this phenomenon.
Now imagine that you had started a company or purchased a stock in 1997 and the value of that investment had risen by 30% over the last 12 years. In real terms, the increase in value would have only offset the corresponding rise in prices. You have made no profit but have successfully preserved the value of your investment. But when you sell your investment, the US government arbitrarily decides that you have made a 30% profit. This is absurd and factually in error, but no matter. The government will confiscate its share of your imaginary profits leaving you, the investor, who saved your money and risked your capital, with less value in real terms than you started with 12 years ago.
In real terms, an investor could lose money on an investment yet be required to pay the Government capital gains taxes. Ignoring inflation when calculating taxable capital gains is confiscatory, immoral, discourages savings and punishes risk taking.
Thursday, February 26, 2009
Email Rant February 2009
The danger of "we need to do something" is the assumption that we will do the right thing. Worse still is the assumption that Government will do the right thing. Government will never do the right thing because it is not in the best interest of politicians to do so. The motivations of politicians are completely disparate from individuals, companies, free markets and capitalism. Politicians/government focus on short-term, self-interested and politically expedient "solutions" to problems that invariable create bigger problems. Politicians can not actively claim credit for the benefits created by free markets. They can only claim credit when they "do something" regardless of the inevitable damage of such action.
The US has prospered in spite of a growing federal government over the past 100 years because capitalism, despite being restrained by government interaction, produced surplus economic benefit faster than they could confiscate it, redistribute it or destroy it. This is not inevitable and doesn't even appear particularly likely given our federal debt, proposed deficits, unfunded future liabilities, growing government intervention and institutionalized social programs.
Government can not be trusted and should be chained to the basement floor and beaten regularly.
The US has prospered in spite of a growing federal government over the past 100 years because capitalism, despite being restrained by government interaction, produced surplus economic benefit faster than they could confiscate it, redistribute it or destroy it. This is not inevitable and doesn't even appear particularly likely given our federal debt, proposed deficits, unfunded future liabilities, growing government intervention and institutionalized social programs.
Government can not be trusted and should be chained to the basement floor and beaten regularly.
Tuesday, February 24, 2009
Members of Our Government Are Propogating Self-Serving Lies
I am neither a Republican nor a Democrat. I revile the political class and despise the bloated Federal Government which both parties have created for their own enrichment. That said, I find myself especially disgusted by a self-serving fiction currently being manufactured by the Democrats in defiance of reality and the facts. Even worse, this fantasy is being used to attack the freedoms and economic system that made the United States the envy of the World.
Today the uninformed and the politically expedient, including our current President, are weaving a self-serving narrative that bluntly ignores the facts. One can not attribute responsibility for the Housing Bubble without understanding what actually caused the crisis. The first order of business in making such a determination is to assess when the Housing Bubble actually began. The data necessary to isolate the economic distortions that contributed to the Housing Bubble are readily available.
While a detailed analysis of the predictable and inevitable excesses of capitalism during the latter years of the mania is interesting, an analysis of the root cause of the phenomenon is necessary to gain a real understanding of the Housing Bubble.
The Relevant Questions:
The conclusion is simple. The U.S. economy structurally supports sustainable homeownership rates of approximately 64% to 65%.
So what happened in 1994 that caused homeownership rates to skyrocket from 64% to 69% over an 11 year period? Was it evil President Bush who was sworn into office in 2001? Was it his evil tax cuts for the rich? Was it even a bumbling Alan Greenspan who slashed interest rates during 2001? I attribute fault to both Bush and Greenspan, but the fact is that the Housing Bubble began in the early 1990s and was 7 years old by the time Bush became President. So if it wasn’t the soulless Republicans and greedy investment bankers who caused it, what did?
By 1996, HUD was directing Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. In addition, HUD required Freddie and Fannie to provide 12% of their portfolio to “special affordable” loans. Those are loans to borrowers with less than 60% of their area’s median income. These government-directed expenditures represented a huge sum of money allocated to subprime lending and presented an extraordinary profit opportunity to mortgage originators with fee-based revenue models.
With artificially increased availability of and demand for mortgages, housing prices began to rise.
Those individuals who focus solely on the abuses and excesses at the tail-end of the Housing Bubble are missing the point. Analysis of the mania-portion of the bubble ignores the forces that created it. Those people who want to blame free-markets or capitalism for our woes are misguided.
Neither capitalism, nor George Bush, nor tax cuts caused our economic calamity. Congress created the Housing Bubble while pursuing the politically expedient, but disastrously misguided social agenda of increased homeownership for minorities and the poor during the 1990s. By overtly manipulating the lending industry, Congress proactively extended mortgage availability to people with poor credit, little capital and insufficient cash flow. It was a recipe for creating an inevitable economic disaster.
Today the uninformed and the politically expedient, including our current President, are weaving a self-serving narrative that bluntly ignores the facts. One can not attribute responsibility for the Housing Bubble without understanding what actually caused the crisis. The first order of business in making such a determination is to assess when the Housing Bubble actually began. The data necessary to isolate the economic distortions that contributed to the Housing Bubble are readily available.
While a detailed analysis of the predictable and inevitable excesses of capitalism during the latter years of the mania is interesting, an analysis of the root cause of the phenomenon is necessary to gain a real understanding of the Housing Bubble.
The Relevant Questions:
Why did subprime lending become so prominent?
When did subprime lending become material, begin to grow and why?
When did homeownership rates start to climb rapidly and set all-time records?
When did housing prices in bubble cities begin to appreciate more rapidly than inflation, more rapidly than the rate of income growth and begin to consistently accelerate?
For 30 years preceding the Housing Bubble homeownership rates had fluctuated within a band of 2% ranging between 63.5% and 65.5%. From 1985 through 1993 there was little variation in homeownership rates with the exception of annual seasonality.
The conclusion is simple. The U.S. economy structurally supports sustainable homeownership rates of approximately 64% to 65%.
So what happened in 1994 that caused homeownership rates to skyrocket from 64% to 69% over an 11 year period? Was it evil President Bush who was sworn into office in 2001? Was it his evil tax cuts for the rich? Was it even a bumbling Alan Greenspan who slashed interest rates during 2001? I attribute fault to both Bush and Greenspan, but the fact is that the Housing Bubble began in the early 1990s and was 7 years old by the time Bush became President. So if it wasn’t the soulless Republicans and greedy investment bankers who caused it, what did?
In 1994 the government began to aggressively implement social policy designed to provide mortgage availability to people who could not access homeownership which dramatically altered the market forces and inevitably influenced prices.
Congress through revisions to the Community Reinvestment Act forced lenders to make loans to uncreditworthy borrowers, minorities and in inner-cities. Congress further and inappropriately used its influence over the supposedly independent GSEs, Fannie Mae and Freddie Mac, to proliferate subprime lending. Fannie and Freddie were and are functional monopolies within the mortgage market. Any major lender or mortgage originator must have a relationship with the GSEs and is dependent upon Fannie and Freddie to exist and succeed. When Fannie and Freddie require lenders to make subprime loans, even when unprofitable to do so, lenders engaged in the activity as a cost of doing business.
Congress through revisions to the Community Reinvestment Act forced lenders to make loans to uncreditworthy borrowers, minorities and in inner-cities. Congress further and inappropriately used its influence over the supposedly independent GSEs, Fannie Mae and Freddie Mac, to proliferate subprime lending. Fannie and Freddie were and are functional monopolies within the mortgage market. Any major lender or mortgage originator must have a relationship with the GSEs and is dependent upon Fannie and Freddie to exist and succeed. When Fannie and Freddie require lenders to make subprime loans, even when unprofitable to do so, lenders engaged in the activity as a cost of doing business.
By 1996, HUD was directing Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. In addition, HUD required Freddie and Fannie to provide 12% of their portfolio to “special affordable” loans. Those are loans to borrowers with less than 60% of their area’s median income. These government-directed expenditures represented a huge sum of money allocated to subprime lending and presented an extraordinary profit opportunity to mortgage originators with fee-based revenue models.
With artificially increased availability of and demand for mortgages, housing prices began to rise.
Unsustainable, inflation-adjusted housing appreciation began around 1996, accelerated consistently and persisted until 2005.
The housing industry is a slow moving market. Price moves lag changes in market conditions, sales volumes and other price determining forces. Sales volumes and homeownership rates had been rising for two years before prices started to move dramatically. This lag closely parallels what we have seen since the peak in 1995. Sales transaction volumes crashed in 2005 and 2006 but house prices didn’t begin to collapse until the end of 2007 and 2008.
The Case-Shiller Home Price Index and Annualized Appreciation charts above demonstrate that prices began to rise broadly and unsustainably on an inflation-adjusted basis in 1997.
Any genuine analysis of national housing appreciation rates or of most local markets which defined the Housing Bubble definitively demonstrates that the phenomenon manifested itself between 1994 and 1997. National and city-specific prices began to rise during this period after having stagnated for years. Price appreciation began to outpace inflation and accelerated uniformly until the Housing Bubble hit the wall in 2005 and 2006.
Those individuals who focus solely on the abuses and excesses at the tail-end of the Housing Bubble are missing the point. Analysis of the mania-portion of the bubble ignores the forces that created it. Those people who want to blame free-markets or capitalism for our woes are misguided.
Capitalism and the free markets do not operate with an agenda. They simply exist within and react to the environment. The United States consists of hundreds of millions of self-interested individuals and companies making trillions of daily decisions about how best to utilize scare time, capital and resources. And in doing so our economy as a whole functions as efficiently as any system ever has. There is nothing immoral or nefarious about this process and it doesn’t inevitably lead to the excesses we witnessed during the mania.
The immoral, abusive and excessive activities were predictable given the environment that the Government created within the housing industry. The Housing Bubble was not created by capitalism, greed, President Bush or tax cuts but was in fact the inevitable result of efforts to achieve a social agenda through government manipulation within the economy.
Sadly, the Democrats are being allowed to divert responsibility for our Global Economic Depression to the free-markets as a justification for even greater government intervention, regulation and manipulation. It is once again inevitable that the result will be disastrous.
Email Sent November 24, 2008
You consistently demonstrate far more insight into the crisis than any of our policy makers. Capitalism, free markets, market determined prices and Libertarianism are about the only things you can depend on in the world of economics and politics.
The car companies were destroyed by the government. Unions created unfunded pension liabilities that add thousands of dollars to every car. Union workers earn $75 an hour versus the Japs in the South who pay $48 an hour. Then the fuel restrictions and Green aspirations of the Congress have created an environment where they don't have a chance. There is no reason why we need 3 or even 2 car companies in this country. Not to mention if there is a need more will spring up. Saturn.
All the Wall Street prosperity of the last 5 years was a false house of cards, yet lots of people made lots of blood money. Plenty of bonuses will still be paid, but no where near the zenith.
You mention that the car companies can barely operate in good times. Our entire economy has been geared over the past decade to operate in an expanding credit environment and an economic bubble. Entire industries have been built to only work during "great" times. 10 years ago there wasn't a single $1 billion casino in Vegas. Today around 10. Restaurants have proliferated as people had money to eat out. Malls have grown at an unbelievable rate as cheap, easy money and aggressive developers built them everywhere. Condos, houses. The car companies have sold to everyone who might have ever wanted a car with Zero percent down offers. etc.... All of this will reverse itself. 2009 will be a year of massive bankruptcies in anything to do with retail or consumer.
Every sizeable action taken to date by the government has accomplished nothing and likely made things worse. The primary reasons:
Govmt. refuses to recognize that it was their intervention which caused the bubble and has triggered the catyclism. If you don't understand the cause how can you fix it?
Govmt. does not understand the law of unintended consequences. The Bear bail-out caused Lehman to not raise money because they thought access to govmt funds was enough. Private equity wouldn't invest in Fannie/Freddie because they didn't know the terms of a govmt bail-out. TARP has every city, state, company, industry, etc... lining up for handouts. Insurance companies are buying banks to get free money. Healthy companies are accepting money because they don't want to appear too weak to qualify. AmEx turned into a bank. Govmt actions simply distort the market and make thigs worse because the free market way is always best.
Govmt can't do nothing. It isn't in there nature and it isn't politically viable. We would be better off with nothing, but the politicians need to appear to be trying to help.
The stimulus checks did nothing as employers recognize that they are one-time events and that things will get worse. And who benefitted from the checks? The Chinese who made the goods.
Obamas giant 2 and 1/2 year stimulus plan resembles FDR. Unfortunately building bridges accomplishes nothing. As you know WWII got us out of the great depression as the entire manufacturing industry started to supply the allies in a massive way. Then 11 million men were pulled out of the economy but still needed to be supplied.
The ONLY thing that will work is unfettered capitalism. Let the markets clear. And slash taxes on EVERYTHING. Sustainable opportunities to form capital, make investments, build businesses are the key, not govmt direction.
The really scary one is that govmt appears intent on trying to prop up housing prices or delay inevitable foreclosures, which will drag this thing out.
The car companies were destroyed by the government. Unions created unfunded pension liabilities that add thousands of dollars to every car. Union workers earn $75 an hour versus the Japs in the South who pay $48 an hour. Then the fuel restrictions and Green aspirations of the Congress have created an environment where they don't have a chance. There is no reason why we need 3 or even 2 car companies in this country. Not to mention if there is a need more will spring up. Saturn.
All the Wall Street prosperity of the last 5 years was a false house of cards, yet lots of people made lots of blood money. Plenty of bonuses will still be paid, but no where near the zenith.
You mention that the car companies can barely operate in good times. Our entire economy has been geared over the past decade to operate in an expanding credit environment and an economic bubble. Entire industries have been built to only work during "great" times. 10 years ago there wasn't a single $1 billion casino in Vegas. Today around 10. Restaurants have proliferated as people had money to eat out. Malls have grown at an unbelievable rate as cheap, easy money and aggressive developers built them everywhere. Condos, houses. The car companies have sold to everyone who might have ever wanted a car with Zero percent down offers. etc.... All of this will reverse itself. 2009 will be a year of massive bankruptcies in anything to do with retail or consumer.
Every sizeable action taken to date by the government has accomplished nothing and likely made things worse. The primary reasons:
Govmt. refuses to recognize that it was their intervention which caused the bubble and has triggered the catyclism. If you don't understand the cause how can you fix it?
Govmt. does not understand the law of unintended consequences. The Bear bail-out caused Lehman to not raise money because they thought access to govmt funds was enough. Private equity wouldn't invest in Fannie/Freddie because they didn't know the terms of a govmt bail-out. TARP has every city, state, company, industry, etc... lining up for handouts. Insurance companies are buying banks to get free money. Healthy companies are accepting money because they don't want to appear too weak to qualify. AmEx turned into a bank. Govmt actions simply distort the market and make thigs worse because the free market way is always best.
Govmt can't do nothing. It isn't in there nature and it isn't politically viable. We would be better off with nothing, but the politicians need to appear to be trying to help.
The stimulus checks did nothing as employers recognize that they are one-time events and that things will get worse. And who benefitted from the checks? The Chinese who made the goods.
Obamas giant 2 and 1/2 year stimulus plan resembles FDR. Unfortunately building bridges accomplishes nothing. As you know WWII got us out of the great depression as the entire manufacturing industry started to supply the allies in a massive way. Then 11 million men were pulled out of the economy but still needed to be supplied.
The ONLY thing that will work is unfettered capitalism. Let the markets clear. And slash taxes on EVERYTHING. Sustainable opportunities to form capital, make investments, build businesses are the key, not govmt direction.
The really scary one is that govmt appears intent on trying to prop up housing prices or delay inevitable foreclosures, which will drag this thing out.
Monday, February 23, 2009
Foreclosures Are Not the Problem
The Obama administration appears to have focused on promoting a single idea as their justification for overt efforts to avert foreclosures through government intervention, homeowner bailouts and direct mortgage subsidies. This stated rationale is that foreclosures should be prevented at all cost because when they occur these transactions injure all Americans by lowering the value of neighboring properties. The argument is that good citizens, who are paying their mortgages, didn’t borrow more than they could afford, didn’t buy overvalued houses and didn’t take out home equity loans, should be forced to bail-out bad citizens who did because it is actually in their best interest to do so.
This is a pathetic proposition. This same logic could be applied to price moves within all markets that have ever existed. Each time a seller accepts a low bid in any market transaction every other owner of that particular stock, bond, commodity or other asset is injured as the market price has dropped.
The stock market is presently down close to 50%. Why doesn’t the President’s administration bail out the stock market and actively attempt to prop up prices? Recent stock sales have been forced by similar themes as are driving foreclosures. Positions are being liquidated over fears about the future, concerns about risk, liquidity requirements, the damage of already realized losses, collapsing portfolio values, job losses, bankruptcies, worries over adequate retirement funds, 401k losses, margin calls and liquidating hedge funds. Yet each time Citigroup’s stock ticks lower by a penny, driven by a single transaction which lowers the bid, tens of millions of Americans are directly injured. How is it that we understand that it is ridiculous to attempt to set prices in financial markets, yet we are willing to overtly meddle in the housing market in an attempt to prop up values?
Beyond the flawed logic, it is laughable that these same sanctimonious politicians did not decry the identical, and equally damaging, phenomenon while prices were rising. Every time some fool, dullard, speculator, optimist, con-artist or little old lady purchased a home at a higher than market price, the valuations of all comparable and neighboring houses increased in value. This phenomenon was extraordinarily dangerous as it created a Housing Bubble, dramatically distorted economic activity and gestated the conditions necessary to collapse our economy, yet none of the government entities that were contributing to the problem and are now attempting to prop up housing values complained or protested as prices rose dramatically and homeownership rates increased. It is morbidly amusing how quiet the political class is when unsustainable economic phenomenon serves their purposes by increasing tax receipts and perpetuating the impression of false prosperity. By their stated logic and deafening silence, I conclude that the government’s position is that the housing market should only be allowed to go up. When housing prices rise everyone benefits, which is great, but when prices fall everyone gets hurt which must be resisted with government intrusion and price fixing?
And while it is convenient to argue for the greater good in justifying the manipulation of prices, I argue that “everyone” is not injured by falling prices. In fact lots of people were directly injured by rising prices and are only now benefiting by a return to rationality. Think about the 35% of Americans who don’t own homes? As prices fall these people directly benefit from the availability of increasingly affordable housing. What about the children of 100% of Americans who will directly benefit from reasonably priced housing? I personally have never owned a house because the value proposition never made sense and the financing mechanisms being employed to purchase overvalued houses were the equivalent of gambling at best and financial suicide at worst. I am thrilled by falling house prices. Now I am being forced to subsidize an effort to prop up housing prices, which will fail but be extraordinarily costly, in an effort to keep housing prices unaffordable?
As real estate transactions go, the fact is that foreclosures are the hero of our story. These transactions rapidly force housing prices towards sustainable valuations based on new market fundamentals. They force the market to clear. Before foreclosures proliferated housing transaction volumes had collapsed because sellers had not come to terms with changed market conditions. Foreclosures extricate owners from bloated mortgages they can’t afford and allow lenders to resolve non-performing loans. Anyone who can afford a mortgage on an overvalued house can, by definition, afford rent on an equivalent property while saving money in the process. Those people who could never have afforded their mortgages, should never have been able to buy a house, and will be better off renting something they can afford. The government’s efforts to postpone inevitable foreclosures are not doing anyone any good.
The villainous transactions in this ongoing narrative are numerous and include house purchases which were consummated due solely to the government-mandated availability of subprime mortgages, transactions funded with little or no down payment, transactions which were affordable only due to introductory teaser rates which would adjust over time, transactions affordable using negative amortization mortgages, transactions which were purely speculative and transactions which were frauds executed to steal money from lenders. These are the transactions which should be demonized.
Whether the current administration wants to become self-aware or not, the market will solve this problem regardless of the interests of the political class. Housing prices will eventually reflect the reality of market conditions despite attempts to delay foreclosures and prop up housing values.
This is a pathetic proposition. This same logic could be applied to price moves within all markets that have ever existed. Each time a seller accepts a low bid in any market transaction every other owner of that particular stock, bond, commodity or other asset is injured as the market price has dropped.
The stock market is presently down close to 50%. Why doesn’t the President’s administration bail out the stock market and actively attempt to prop up prices? Recent stock sales have been forced by similar themes as are driving foreclosures. Positions are being liquidated over fears about the future, concerns about risk, liquidity requirements, the damage of already realized losses, collapsing portfolio values, job losses, bankruptcies, worries over adequate retirement funds, 401k losses, margin calls and liquidating hedge funds. Yet each time Citigroup’s stock ticks lower by a penny, driven by a single transaction which lowers the bid, tens of millions of Americans are directly injured. How is it that we understand that it is ridiculous to attempt to set prices in financial markets, yet we are willing to overtly meddle in the housing market in an attempt to prop up values?
Beyond the flawed logic, it is laughable that these same sanctimonious politicians did not decry the identical, and equally damaging, phenomenon while prices were rising. Every time some fool, dullard, speculator, optimist, con-artist or little old lady purchased a home at a higher than market price, the valuations of all comparable and neighboring houses increased in value. This phenomenon was extraordinarily dangerous as it created a Housing Bubble, dramatically distorted economic activity and gestated the conditions necessary to collapse our economy, yet none of the government entities that were contributing to the problem and are now attempting to prop up housing values complained or protested as prices rose dramatically and homeownership rates increased. It is morbidly amusing how quiet the political class is when unsustainable economic phenomenon serves their purposes by increasing tax receipts and perpetuating the impression of false prosperity. By their stated logic and deafening silence, I conclude that the government’s position is that the housing market should only be allowed to go up. When housing prices rise everyone benefits, which is great, but when prices fall everyone gets hurt which must be resisted with government intrusion and price fixing?
And while it is convenient to argue for the greater good in justifying the manipulation of prices, I argue that “everyone” is not injured by falling prices. In fact lots of people were directly injured by rising prices and are only now benefiting by a return to rationality. Think about the 35% of Americans who don’t own homes? As prices fall these people directly benefit from the availability of increasingly affordable housing. What about the children of 100% of Americans who will directly benefit from reasonably priced housing? I personally have never owned a house because the value proposition never made sense and the financing mechanisms being employed to purchase overvalued houses were the equivalent of gambling at best and financial suicide at worst. I am thrilled by falling house prices. Now I am being forced to subsidize an effort to prop up housing prices, which will fail but be extraordinarily costly, in an effort to keep housing prices unaffordable?
As real estate transactions go, the fact is that foreclosures are the hero of our story. These transactions rapidly force housing prices towards sustainable valuations based on new market fundamentals. They force the market to clear. Before foreclosures proliferated housing transaction volumes had collapsed because sellers had not come to terms with changed market conditions. Foreclosures extricate owners from bloated mortgages they can’t afford and allow lenders to resolve non-performing loans. Anyone who can afford a mortgage on an overvalued house can, by definition, afford rent on an equivalent property while saving money in the process. Those people who could never have afforded their mortgages, should never have been able to buy a house, and will be better off renting something they can afford. The government’s efforts to postpone inevitable foreclosures are not doing anyone any good.
The villainous transactions in this ongoing narrative are numerous and include house purchases which were consummated due solely to the government-mandated availability of subprime mortgages, transactions funded with little or no down payment, transactions which were affordable only due to introductory teaser rates which would adjust over time, transactions affordable using negative amortization mortgages, transactions which were purely speculative and transactions which were frauds executed to steal money from lenders. These are the transactions which should be demonized.
Whether the current administration wants to become self-aware or not, the market will solve this problem regardless of the interests of the political class. Housing prices will eventually reflect the reality of market conditions despite attempts to delay foreclosures and prop up housing values.
Monday, February 16, 2009
And the Insanity Continues…
We have a new entrant in the competition for most insane and economically devastating event perpetuated by the Government in what is a Government-created, global economic disaster.
A quick review of a few of the other nominees includes:
A quick review of a few of the other nominees includes:
- Banning shortselling
- Blaming speculators for the Federal Reserve created oil bubble
- Forcing Fannie and Freddie, while on the verge of collapse, to increase lending in an absurd and suicidal attempt to prop up housing
- Pressuring banks to increase lending in an environment that any sane, profit-seeking entity would be tightening lending standards
- Believing that Stimulus Checks would stop the economic collapse
Christopher Dodd’s last minute addition to the “Stimulus” Bill of retroactive compensation limits on bailout recipients is truly unconscionable and will have devastating effects. This proposal is immoral, unconstitutional, smacks of command economy aspirations and should be a stark warning to every entity beholding to the Federal Government.
Would these companies have accepted money from the Treasury if they knew that Congress could arbitrarily change the terms of the agreement and dictate to recipients how they ran their businesses? Why would any company going forward take a dime from the U.S. government if Congress can arbitrarily change the terms of that arrangement and burden the recipient with any debilitating restriction it feels is politically expedient? Only failed entities, that should cease to exist, will be willing to accept such partial-nationalization.
This is a warning to every State in line to receive Stimulus or Federal assistance. Why couldn’t the government 9 months from now order each state to close its coal power plants, cease off-shore drilling, provide universal healthcare or any other preposterous and economically disastrous policy.
What about all those people who received Stimulus Checks last year. Why can’t the government place unreasonable burdens on those recipients? Why not mandate that each buy an electric car, join a union or register as Democrats? Think of all the people receiving foreclosure assistance. I recommend that Senator Dodd confiscate/nationalize each and every one of these homes as a lesson to these sycophants.
Senator Dodd demonstrates a complete lack of understanding of how our finance industry functions and how executives are compensated. He also exhibits a fantastical disconnection with reality. Dodd’s proposal will accomplish nothing positive. Companies will figure out ways around the limits. Should the government prevent this and until Congress freezes all pay and locks employees into their present positions, (which once seemed far fetched) good executives will simply depart their jobs for private sector destinations not beholding to the Government.
Tuesday, February 10, 2009
The Stimulus Bill Will Fail... Again
The Stimulus Bill will not work because it can not work. Anyone who truly understands what is transpiring in the economy will recognize that this is the largest, single instance of waste in the history of the World.
An economic overview:
The argument being advanced is that we MUST pass the Stimulus Bill NOW or we face DISASTER. They have it backwards. Every major government initiative to date has made things worse not better. Yet, even though each program has failed, policy makers advance the factually incorrect and cowardly explanation that “Things Would Have Been Worse” without government action.
An economic overview:
- Overvalued assets are returning to equilibrium prices based on dramatically different market conditions.
- Dramatically excessive and inappropriate leverage attached to individuals, corporations and government entities is being resolved through lengthy pay-downs or restructured through bankruptcies and foreclosures.
- Consumer spending, which was distorted by excess liquidity, credit availability and a Housing Bubble, has collapsed because it was unsustainable.
- The Savings Rate, which was also unsustainable, is returning to some reasonable level. Increased savings, while positive for the long term, will continue to crush an economy overly dependent on consumer spending and geared for unsustainable growth.
The argument being advanced is that we MUST pass the Stimulus Bill NOW or we face DISASTER. They have it backwards. Every major government initiative to date has made things worse not better. Yet, even though each program has failed, policy makers advance the factually incorrect and cowardly explanation that “Things Would Have Been Worse” without government action.
- The Federal Reserve slashed interest rates in an uncoordinated fashion causing massive volatility, devaluing the dollar and creating an oil bubble that undermined consumer confidence. The economy imploded anyway, yet policy makers argue that “things would have been worse”.
- Congress mailed out Stimulus Checks to low income Americans arguing that this was EXACTLY what the economy needed. This was the stimulus which would stop the slide and lead to a rapid recovery. The initiative was a total failure, accomplished nothing but to increase the deficit yet backers argue that “things would have been worse”.
- The Treasury argues that without a $700 Billion TARP plan to buy up toxic assets IMMEDIATELY the global financial system would collapse. Congress didn’t pass it immediately and the Treasury wasted the money on a totally different boondoggle. The global economy has continued to worsen.
- The government has instituted a myriad of misguided programs designed to forestall foreclosures. Each is designed to help homeowners and stabilize the housing industry. All have failed dramatically but in doing so have slowed down the inevitable collapse of housing prices.
- Now the Stimulus Bill is the “right size” and “exactly what we need” to stabilize the economy. When it fails policy makers will argue that “things would have been worse”. They can always argue that things would have been worse! This is an intellectually vacant argument based on faith not fact.
There are a number of smart people who predicted the current financial disaster. These people have credibility. The policy makers who created our troubles and were oblivious to their impending manifestation have none. Prognosticators who understand what is transpiring have consistently pointed out that the government’s initiatives would fail and make things worse. These people have correctly predicted the future based on a dynamic understanding of the facts, and yet they are ignored. The politicians who have only been consistent in being wrong are allowed to continue to make extraordinary policy errors, are not held accountable for their mistakes and every time they are proven to be wrong they argue their own self-importance by advancing the notion that “things would have been worse”.
Things will get worse. This is inevitable. No government initiative designed to distort economic activity, prop up prices or encourage a return to unsustainability amongst consumers will work.
Sunday, February 8, 2009
Congress Just Stopped Housing Sales
The senate just passed a version of the so-called Stimulus Bill that includes a $15,000 tax credit for anyone who buys a house. The House version includes a different but compelling incentive for home purchasers. The final form of the Bill will be ironed out by misguided politicians in the weeks to come.
These kinds of attempts at price fixing are always disastrous. The government continues to overtly attempt to prop up housing values at levels that are above equilibrium rates given market conditions. Such efforts will fail and inevitably result in unintended consequences and distortions, but that is another analysis.
I feel badly for Americans who do not possess the wherewithal to understand that a $15,000 tax credit isn’t worth much when you lose $100,000 on a home purchase. Caveat Emptor!
The important thing to understand is that housing sales just stopped. Anyone who can read a newspaper, watch TV or has internet access and is considering a home purchase just put their ambitions on hold. A $15,000 tax credit has value. It is certainly worth waiting for. If you buy a house today you might not qualify for this advantageous treatment. By creating the expectation of a tax savings in the future, Congress just canceled or delayed all pending and contemplated home sales until such a time as the Stimulus Bill is completed.
These kinds of attempts at price fixing are always disastrous. The government continues to overtly attempt to prop up housing values at levels that are above equilibrium rates given market conditions. Such efforts will fail and inevitably result in unintended consequences and distortions, but that is another analysis.
I feel badly for Americans who do not possess the wherewithal to understand that a $15,000 tax credit isn’t worth much when you lose $100,000 on a home purchase. Caveat Emptor!
The important thing to understand is that housing sales just stopped. Anyone who can read a newspaper, watch TV or has internet access and is considering a home purchase just put their ambitions on hold. A $15,000 tax credit has value. It is certainly worth waiting for. If you buy a house today you might not qualify for this advantageous treatment. By creating the expectation of a tax savings in the future, Congress just canceled or delayed all pending and contemplated home sales until such a time as the Stimulus Bill is completed.
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