Tuesday, March 03, 2009
This Is Literal Insanity
From Obama's new housing plan, Stan:
3. Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac:The plan is to get Fannie & Freddie to buy and underwrite a bunch of mortgages which will be terrible investments and will produce losses for investors. Realizing that, Treasury is going to buy the bad debt. Plus, the agencies are going to get 200 billion a piece to do a whole lot of this, and then the agencies are supposed to hold 900 billion, close to a trillion, of bad mortgages.
• Ensuring Strength and Security of the Mortgage Market: Today, using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability.
Provide Forward-Looking Confidence: The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.
Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.
• Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.
• Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.
There is no possible exit strategy from this. Forget about zombie banks. You are talking about zombie federal agencies which provide liquidity and funding for a huge segment of the American economy - housing.
The losses will come for at least ten years, and each quarter, they will be in the tens of billions. How will the government ever be able to get out of this? It is true banks can and will write bad mortgages if the agencies will buy them, but the taxpayer can't afford to buy them.
Because the plan is to buy bad mortgages and underwrite bad mortgages at rates which no rational investor would buy. So the total cost is going to be astronomical - probably 800 billion or so when it's all done, though it will take years to realize all the losses.
And for what? If the bad mortgages foreclose now, the houses will cycle back into the economy. Why a borrower should pay on a house for which he or she is so underwater is beyond me. What's the long-term benefit to the economy? If the borrower is foreclosed upon, within 4-5 years the borrower will be able to buy another house having rebuilt credit. In the meantime, the borrower has probably saved an awful lot of money in the difference between rent and the overblown mortgage payments.
The whole idea that homeownership should be encouraged grew out of the observation that people who bought homes ended up with considerably higher net worth over the course of their lifetimes. The effect is largely due to the enforced savings aspect of carrying a mortgage. But most people don't stay in the same home for their lifetime. Most people turn over homes 3 or 4 times during their lives. Having someone pay on a home for ten years to break even after the decade (walk away with nothing) isn't going to help the economy. It's going to produce a Japanese-style depression.
For what it's worth, many people who overbought and have lost their homes are now getting a huge effective raise in spendable/saveable income from the difference between their mortgage payments and their new rental payments. That's a stimulus to the economy.
What's the point of even trying to keep people in homes when staying in those homes will sap the household's ability to save, consume and prepare for the future? Why should the taxpayers pay for this? It doesn't help anybody but the investors and banks who made or bought the loans. Why should the federal government assume 800 billion in losses?
This won't engender confidence in the mortgage market. It will completely destroy the mortgage market.
I can't take this any more. I need to go do something hard and technical to reassure myself that I am not wandering with Alice, having tea with the Mad Hatter. I have been thinking about writing a loan calculator gizmo that also calculates default probability and recommends interest rate adjustments, as well as doing a few other things. I may just take a few days and do that.
This is too crazy for me. It's like being on drugs or drunk. What in God's name is this? A reprise of the Summer of Love in Haight-Ashbury? This smells like one of those hippie commune things, and boy did they stink.