Saturday, March 29, 2008

Federal Bailout of Housing?

The Washington Post reported today that Bush looks to be changing his position and supporting a Federal bailout of housing by having the FHA work with lenders to forgive a portion of their loans to home buyers. From the Post:

"The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds, government officials said.

The proposal is aimed at assisting borrowers who owe their banks more than their homes are worth because of plummeting prices, an issue at the heart of the nation's housing crisis. Under the plan, the Federal Housing Administration would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government."

"If enacted, the plan would mark the first time the White House has committed federal dollars to help the most hard-pressed borrowers, people struggling to repay loans that are huge relative to their incomes and the diminished value of their homes. That may offer encouragement to the banking industry and help silence Democrats, who have accused the White House of rescuing Wall Street investment banks while ignoring distressed homeowners. But it could agitate conservatives, who are likely to view the FHA plan as yet another government bailout."

My take:

Well it looks like Bush saw the economic data this week and realized he has to support a bailout. I had previously supported the idea of the FHA reducing the loan amounts of problem mortgages and making the banks realize this loss as the most logical way to get out of this mess. The problem that I have with this new legislation is the Federal backing of reducing the loan amounts. The details have not been released but it sounds like the Fed is going to bailout the banks by covering the balance of the loan that was reduced.

If this is true then Wall St. gets saved by the Fed and the taxpayers get screwed by having to pay for their fraudulent behaviour. This also bails out the home buyers who made poor decisions by buying houses they couldn't afford.

If this happens then how does anyone learn from their mistakes? What about the moral hazard?

Also, I believe this will totally freeze the housing market. Why would anyone buy a house as the Feds starts reducing loan amounts? The banks win in the short term, but going forward they will lose because housing will not be nearly as profitable for them. Paulson came out today saying the whole mortgage industry will be regulated going forward. The housing game will then be officially be over!

The fact that we may possibly have to pay for this greed is disgusting. However, if it saves the financial system then it may be worth it. If this goes through then housing will become very affordable again very quickly.

Your take home pay however will drop due to higher taxes as we pay for Wall St.'s greed. The stock market would still suffer IMO because Wall St.'s most profitable game would officially end. With new mortgage regulations we would most likely go back to old school lending of 20% down, excellent credit, and buyers qualifying for houses that are about 3x their income. This will not be good for the investment banks profits.

Stay tuned for the final details of this bill. Expect a rally in the financials Monday with the discussion of these bank bailouts. The rally will be short lived in my opinion as the reality of new mortgage regulations sets in. This will hurt the financials in the future because the ponzi game is over. The securitization of loans will be smaller and the ratings agencies most likely will not be paid by Wall St. This will result in more conservative CDO ratings and AAA rated bonds will actually be AAA bonds instead of being junk!!

The housing time bomb will explode even faster if this legislation passes. It would result in an automatic reset of all housing prices. The fact that we may have to pay for it instead of Wall St. is very dissapointing.


MomInTraining3 said...

Well said. It is disgusting to see the greediest among us bailed out by the Feds which is really us, the taxpayers, while people are losing their homes. Unfortunatly though, you are right, there may not be a better option at this point.

Jeff said...

Hi Mom

Thanks. Its amazing how Wall St. is allowed to keep making the same mistakes over and over. Bad debt put us in the Great Depression in '29 and junk bonds did the same thing in the late 80's.

I still don't know what the answer is. Hopefully we get out of this without destroying the financial system.