Mittwoch, Dezember 03, 2008

Are They Insane II

Yikes. Yet another "Are They Insane" post!

This is indeed insane.

Barney Frank is furious at the FDIC because they can't prevent foreclosures.

Duh. People took out loans that they could not repay, encouraged by politicians like Barney Frank, who somehow have yet to understand that if you take out a mortgage that you can't repay, you will default on it and the bank will foreclose on your ass.

Of course he doesn't like it: it is the result of his and the Democratic Party's abysmally failed politics that have gotten us into this mess. It is the consequences of his actions.

Now the FDIC chair is riding to his rescue: she wants to stop 1.5mn foreclosures by spending ... $24bn. That's $16k per foreclosure. Actually, it's 2 mn loans that are being worked on, so that's "only" $12k per loan.

This is based on what has been happening at IndyMac, one of the failed banks. Basically they've refinanced the system (5 400 loans involved), but the people who took out the mortgages still will be paying no less than 38% of pre-tax income (that's an important distinction: that's more like 50%+ post-tax income!). Given that the classic rule is no more than 28% of pre-tax income, it sounds like just a tad more than the classic rule: the problem is that this breaks the bank, so to speak. The marginal increase makes it extremely difficult for those already so deep in the hole to get out. It moves the burden from unbearable to onerous, from a situation where people literally couldn't pay to a situation where they can't afford to pay and have a life that has even a semblance of being normal.

To repeat, these are mortgages that should never have been granted in the first place. What are the expected default rates?

According to the FDIC, 40% are expected to re-default. Private estimates place the default rate at over 50%. There will be an incentive program for private refinancing, but taxpayers still pay when those loans default.

Sorry. This is throwing good money after bad. Rather than refinancing everything, why aren't the obviously bad loans being terminated? If the 40% that the FDIC expect to go bad are factored out, that's $9.6bn.

Close enough for government work, I suppose.

Seriously, are they insane? Loans were made to those who cannot afford them, could not afford them, and will never be able to afford them. Default rates of 40%-60% mean that these loans are the ultimate junk, the ultimate scrap. They are throwing away at least $10bn just to try to save the other 60%: this is nothing more than white-washing the problem, of desperately hoping that 60% of the loans won't go tits-up and devolve entirely to the taxpayer.

There is also an enormous moral hazard here (like Congress has any idea of what moral hazard even is, let alone an inkling of what it means): why should those who committed fraud (misreporting income is fraud when you are applying for a loan) be aided by the taxpayer? Further, if such policies take root, there is a positive incentive for marginal home-owners, those who are in far above their pay scale but not directly at risk of default, to cease payments with the sure knowledge that the taxpayer will pick up refinancing costs. This encourages exactly the kind of behavior that got us into the trouble to begin with.

Are they insane?

Well, not really. What they are is completely and totally ignorant of any of the basics of accounting and economics.

This is the problem that the Democratic Party and their policies have created: it's a problem that they are completely and totally incapable of handing, since it also means abandoning those policies and admitting that they were wrong. Too many careers and too many reputations have been built on this facade of fraud and deception. Nothing will change as long as people like Barney Frank remain where they are.

And what they are: the lunatics are indeed running the asylum.


Pasadena Closet Conservative hat gesagt…

Are they insane? I presume that is a rhetorical question...

John F. Opie hat gesagt…

Hi -

Of course it's a rhetorical question... :-)