Freitag, März 26, 2010

Economic Ignorance...

Let's see if I have this right.

People bought houses they couldn't afford, or took out second mortgages so that they could expand on what they had.

That was their decision, certainly made simpler by lax lending standards and by very low interest rates.

Now, as they are under water and their loans are turning delinquent, do the owners of the mortgage do what they are supposed to do? Which is to repossess after repayment efforts fail, sell the object and prosecute for the difference between sale price and balance due?

Why, goodness no: that'd be ... unfair.

Instead, we get this.

The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday.

And this solves the problem ... how?

All this does is punish the lenders.

The administration's new push also seeks to more aggressively help borrowers who owe more on their mortgages than their properties are worth, offering financial incentives for the first time to lenders to cut the loan balances of such distressed homeowners. Those who are still current on their mortgages could get the chance to refinance on better terms into loans backed by the Federal Housing Administration.

And this solves the problem ... how?

In other words, the government is now going to pay lenders not to foreclose. You heard that right: taxpayer money is going to bail out those who make really, really, really bad financial decisions.

That works out just great for the lender, the borrower, but not the taxpayer...

In addition to mortgage relief for unemployed borrowers, the program features four other key elements, including several steps to address the growing population of borrowers who owe significantly more than their home is worth, according to officials who spoke on the condition of anonymity because the official announcement had not been made. Underwater borrowers now make up about a quarter of all homeowners, according to First American CoreLogic. Economists consider these homeowners at higher risk of default because they cannot sell or refinance their home when they run into financial troubles.

And this solves the problem ... how?

In other words, the government is going to spend billions so that homeowners won't lose out as long as prices are down. Ye gods.

The first key element is that the government will provide financial incentives to lenders that cut the balance of a borrower's mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.

Until recently, administration officials had been reluctant to encourage lenders to cut the principal balance, worrying that this would encourage borrowers to become delinquent. But as federal regulators have struggled to make an impact on the foreclosure crisis, those qualms have weakened.

"We would prefer to see a required principal forgiveness program. But this is helpful," said David Berenbaum, chief program officer for the National Community Reinvestment Coalition, a nonprofit housing group. "This is another tool that will help consumers weather the crisis."

And this solves the problem ... how?

First of all, the NCRC are complete and total economic idiots: a required principal forgiveness program is nothing less than having taxpayers give borrowers their houses for free.

The only government incentive that cuts the balance of a borrower's mortgage is one that makes up that difference to the bank, either in full (even the government isn't that stupid...well, let's assume that at least for now) or discounted. If prices are 15% less than the home is "worth" - this is gonna be real easy, since it's based on a house assessment, and the banks, if they can get their money, are gonna be happy to give that one - then the bank sucks it down over three years.

And the incentive to become delinquent just went up astronomically.

Second, the government will double the amount it pays to lenders that help modify second mortgages, such as piggyback loans, which enabled home buyers to put little or no money down, and home equity lines of credit.

These second mortgages are an added burden on struggling homeowners, especially when their total debt, as a result, is greater than their home value.

Federal officials have estimated that about half of all troubled homeowners have a second mortgage and last year launched a program to encourage lenders to restructure them. That effort has struggled to get off the ground.

And this solves the problem ... how?

If you took out a second mortgage, you got a chunk of money from the lender based on what your house was "worth". If you were so foolish as to then take that money and go out and buy stuff, then you are an financial idiot. Well, guess what: if you are, the government is here to help you. If you aren't, live within your means, then you get to pay for your idiot neighbor who took out a second mortgage, bought a new car, took a vacation, and pointedly talks about how great it is to watch Leno in HD on his huge TV while you drive your car into the ground, spend vacations at home, and are still watching electrons dance across phosphorous coatings in a vacuum tube.

Feels all nice, warm and fuzzy, doesn't it?

Third, the new effort also increases the incentives paid to those lenders that find a way to avoid foreclosing on delinquent borrowers even if they can't qualify for mortgage relief. For example, the administration is scheduled to launch a program next month encouraging lenders to have borrowers sell their homes for less than the mortgage balance in what is known as a short sale.

And this solves the problem ... how?

Instead of foreclosing, sell the sucker. Right: like that makes a difference?

Fourth, the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan. The FHA will offer incentives to lenders that reduce the amount borrowers owe on their primary mortgages by at least 10 percent.

For those borrowers who have more than one mortgage on their house, the FHA will allow refinancing of the first loan only. The new loan and any second mortgage could not exceed 15 percent of the home's value. This approach is meant to benefit not only borrowers but also lenders by allowing them to offload mortgages that might otherwise fail.

And this solves the problem ... how?

Sorry: none of these "solutions" deals with the original problem. That people bought too much house. It's not that people have the wrong kind of mortgage, that's something easily dealt with between borrower and lender.

Having too much house means that the borrower can never pay the damn thing back. Those who lose their jobs and can't pay their mortgages are unlucky: if there's going to be a federal bailout of being unlucky, then I want some serious cash for my love life in the 1970s and 1980s, folks, serious cash.

This is nothing less than economic ignorance.

If you want the problems solved, it's easy, but hard: fail to pay your mortgage, and you lose your house and any equity involved. The house belongs to the bank: it has always belonged to the bank until you pay off the last red cent you owe. The banks can become landlords and start charging your rent: it's a cash flow for them, and cash flow is everything for a bank.

Do we see that as a solution? Of course not: the banks don't want to become landlords with repairs and all the other fun stuff being a landlord represents. If the government were serious about this, they'd realize that there is no way in hell that any of these plans will make a difference to the fundamental problem.

To use the vernacular, letting a shit sandwich sit out in the sun for a nice, long period of time will not make it more palatable.

The government policies that led to the subprime crisis caused this. It's up to the government to find an actual solution to the problem. They are not: they are part of the problem, not the solution. Right now the only thing they are doing is postponing the inevitable.

And it is inevitable: see this. Actually, if the government were honest, they'd report that the situation is even worse, since the government guarantees over $6bn of SGE liabilities that aren't currently included in that debt figure of 90% of GDP: if they did include that - and anyone except economic idiots would - because it is an uninsured liability, then debt goes well north of 100% of GDP, and that, my friends and readers, means that the government has taken on so much debt that its debt will be downgraded by the rating agencies. This is economic ignorance of the very worst kind: of knowing it and doing it nonetheless because if you don't, you can't give everyone unicorns.

Bluntly put: this Administration is, in terms of economic and fiscal policies, easily the worst administration since the days of the Great Depression. They are actively driving the government deficit to the point where it will take, literally, generations to get out of the hole the Obama Administration is now digging.

This is economic ignorance. Get used to it.

You'll get it from the House for at least another seven months, from the Senate for longer, and with any luck President Obama will be a one-term President. The path that the Democrats have placed this country on is not sustainable.

I'll repeat this: I know I sound like a broken record, but we simply need to demand a higher quality of work from our government.

Because we most certainly are not getting it now.

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