Wednesday, December 05, 2007

Mortgage Bailout!!!

We all saw this coming - the Bush administration is poised to annouce a 5 year rate freeze on subprime mortgages. To appease people like me who don't want to see a bailout, they propose the following

".... (Henry) Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes -- to ensure the break is not given to real estate speculators."

My question: what kind of criteria will they use to determine owner-occupied? It's a federal offense to lie on a loan application and it's well known that many speculators stated 'owner-occupancy' when it really was an investment property. Thus, if the loan application is used as criteria for this program, we've bailed out people who should be bagholders. Yes that's right, WE as in YOU and I as consumers and taxpayers. The favorite economist saying of "There is no such thing as a free lunch" holds here too - consumers will subsidize the lost earnings of the banks through higher fees on credit cards and other loan products.

This plan is like using a band-aid to plug a cut in the jugular. Government intervention is going to worsen the problem and prolong the agony. People who speculated and lost on homes need to suffer the consequences and accept their loss. I would love to default on my credit card. Why doesn't the government subsidize that, because I spent too much. Not any different from someone buying real estate they cannot afford.

Besides, this plan won't do anything to stop the next wave in this real-estate bust: people who can repay loans but choose not to. Let's talk about that - the easy losses have already been cleaned out by the markets. Now we will begin to see many people who have the means and income to repay loans begin to walk away due to the prospect of being underwater for years. For instance, lets use a hypothetical customer paying $1500 a month on an investment condo that is sitting empty. Even if he can pay that with his salary, it's like throwing money away. So he'll just turn in the keys, stop paying, take the hit on his credit, and move on. Chances are any pain will be temporary. In the case of sufficient income, he should go out and buy a new car right now and take the hit on his credit report (foreclosure), because since he's not filing bankruptcy, he won't need to take out a loan for 3-5 more years and by then his score will be substantially recovered. Actually, the way things are looking at that timeframe from today, banks will be begging to have customers who have ability to repay loans.

So you read in here first - the next wave in this bust is people walking who have ability to pay. Looks like this rate freeze won't do much about that. Maybe the bailout can then be "pay for 1 year, free house for life?"