Here Comes the Foreclosure Cavalry

I thought this would wait until January when Obama will be in office, but it appears that effectively Obama/Geithner are now pulling the strings. The cavalry is now approaching and it is stampeding. I could write multiple pieces about the moral hazard involved, about the crowding out of private market initiatives, the potential for people who are now making payments on mortgages to stop doing so to be part of the "rescue." How are we ever going to wean the nation off government and get back to private initiatives after what we are about to embark upon?

All government "solutions" will create unintended consequences, but here are some previews of plans being considered and what awaits us in 2009. As I have already said, the type of bailout you saw in 2008 will in fact be a pittance versus what we will be doing in the housing market in 2009; Fannie and Freddie I believe will be the tools. The course of the nation in terms of "free markets" is going to take an even more dramatic change in the year ahead. Below are 4 "solutions"; I would not rule out a 5th - the direct purchases of homes by the U.S. government to reduce inventory.

Housing stocks are of course rocketing up on this intervention even though in theory all these initiatives should be focused on current housing stock and not new homes.

• Federal Reserve Chairman Ben S. Bernanke urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.
• The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure” where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.
• Each option would require “some commitment of public funds,” Bernanke said, underscoring his position that the central bank alone can’t revive the economy through its interest-rate cuts and emergency lending programs.
• The government could buy “delinquent or at-risk mortgages in bulk,” then refinance them through the federal Hope for Homeowners program, Bernanke said. Congress could also help reduce loan rates and lender insurance premiums, he said.
• Another option is to have the government share costs when a loan servicer reduces a borrower’s monthly payment, Bernanke said.
• Lawmakers should also consider reducing borrowers’ interest rate. That could be accomplished by having the Treasury buy Ginnie Mae securities, or having Congress directly subsidize the rate, Bernanke said.

The message this will send to those who play by the rules is bad behavior is rewarded and those that did not partake have to subsidize those that did. It will also cause a subset of those in the good behavior crowd to move over to the bad behavior crowd so they can get the freebies handed out.

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

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

CNNMoney: Government Warned of Mortgage Meltdown

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

Cramerica, for the corporation - by the corporation

Comments

[Smalltownba...:]

In short.

The government did not exercise its regulatory authority when it should have so now they are intervening in every way the can and prolonging the mess which they allowed to go unchecked. I am not sure which is worse, the greed which created the problem or the ignorance and incompetence which allowed it and is now perpetuating it.

2008 Dec 05 08:59 AM

[je:]

Mark
I like your articles but it seems you have been in a rant mode for awhile. These guys are going to throw money at the problem and there will be consequences. Don't you think we should spend more time on market reaction.

2008 Dec 05 12:12 PM

[nobull:]

Here's my solution:
LET THE DAMN THING CORRECT!!!
Pouring money into keeping losers into houses they dont belong DOES NOT help anyone. It wont make any new buyers run out and buy. They will only buy when it is AFFORDABLE and they HAVE JOBS.
Shows how stupid our Fed and lawmakers are.

2008 Dec 05 03:05 PM

[JohnAl:]

"The administration's blind eye to the impending crisis is emblematic of its governing philosophy, which trusted market forces and discounted the value of government intervention in the economy. Its belief ironically has ushered in the most massive government intervention since the 1930s. (yes, talk about IRONY!)"

i'm getting tired of correcting this oft repeated falsehood but hey, somebody's gotta do it, so here goes.

The mess was hardly a failure of capitalism. Anything but.

First, everybody's playing with fiat, government created currency, in a play world where the interest rate has been manipulated via fractional reserve banking to be far lower than the reality that lenders would otherwise require in a free market financial system.

Second, the lending came from GSEs that wouldn't exist in a free market, and the money found it's way into housing thanks to various government incentives.

Yes, wall street's creation of the nasty derivatives could be considered capitalist, but in the bizarro world that discounts risk due to the false sense of security caused by over regulation and the accompanying belief that these investments are safe because the government's looking out for us, people actually bought this crap without worrying about the underlying investments. And other people, faked out by the same false sense of security insured the crap.

And so now almost everybody believes that the fix is even more regulation and more intervention into the market until... until what? Until the whole thing implodes because anybody with any sense has moved all of their wealth into gold or tried looking for investment opportunities in less manipulated markets elsewhere.

2008 Dec 07 04:31 AM

[JohnAl:]

Oops, I should have mentioned that I did find the article to be informative. Thx

2008 Dec 07 04:59 AM

[Bill Zielinski:]

There will be foreclosures and mortgage delinquencies until we get to the point where only those with sufficient income to actually service their debt are allowed to borrow money to buy a home.

The government seems to be obsessed with making everyone a homeowner when in fact this is not a desirable for many individuals. By the time this crisis is resolved, we may all decide that we would have been better off as renters!

2008 Dec 08 01:13 AM