Conservative Logic

An economic guide to politics, designed for post-Baby Boomers

Archive for the ‘Housing’ Category

Getting at the Roots of the Mortgage Crisis

Posted by A Hamilton on March 31, 2009

This excellent, detailed article suggests a rational approach to addressing the mortgage crisis (and with it, helping to get the broader economy on track) in such a way that the American taxpayer isn’t left holding the bag.

The economic logic of the piece is unassailable. It’s approach also carries merit because it remains consistent with traditional principles of corporate finance and governance. Sadly, our government’s plan takes a different, riskier, more expensive approach.

For all our sakes, let’s hope the Geithner plan works. But I am not optimistic. It fundamentally misdiagnoses the problem as a liquidity issues, rather than a capitalization issue. Nobel prize winning economist Joseph Stiglitz agrees.


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Samuelson’s Spot-on Take on the Housing Bailout

Posted by A Hamilton on April 2, 2008

In this article, Robert Samuelson hits the nail on the head, describing exactly why a housing bailout is not only unfair, but bad for America.

“About 50 million homeowners have mortgages. Who wouldn’t like the government to cut their monthly payments by 20 percent or 30 percent? But Frank’s plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other “needy” homeowners.

The justification is to prevent an uncontrolled collapse of home prices that would inflict more losses on lenders — aggravating the “credit crunch” — and postpone a revival in home buying and building. This gets the economics backwards. From 2000 to 2006, home prices rose by 50 percent or more by various measures. Housing affordability deteriorated, with home buying sustained only by a parallel deterioration of lending standards. With credit standards now tightened, home prices should fall to bring buyers back into the market and to reassure lenders that they’re not lending on inflated properties.

If rescuing distressed homeowners delays this process, the aid and comfort that government gives some individuals will be offset by the adverse effects on would-be homebuyers and overall housing construction. Of course, there are other ways for the economy to come to terms with today’s high housing prices: a general inflation, which would lift nominal (but not “real”) incomes; or mass subsidies for home buying. Neither is desirable.”

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Democratic Attacks on the Economic Interests of Younger Generations Continue

Posted by A Hamilton on March 28, 2008

By now, pretty much everyone is aware of the crisis in the housing market. Here’s a link to a short, somewhat cynical PowerPoint cartoon slide show that does a pretty good job explaining the roots of the crisis.

At a microeconomic level, the root of the problem is that lenders offered and people took mortgages loans that those people ultimately couldn’t afford. Once those loans were securitized, the fundamental unhealthiness of individual mortgages was transmitted into the broader US financial system.

(Some people claim that individual borrowers shouldn’t have responsibility for their loans because they didn’t understand the terms they were signing up for. I’m not buying this argument. What ever happened to individual responsibility? Personally, I don’t sign contracts I don’t understand (e.g. they are written in Dutch). If I’m being presented with a contract for the single biggest transaction of my life (new home purchase), you can be damned sure if I don’t understand something in it I am going to find someone who I can rely on to explain it to me.)

There are a few things that need to happen before the problem corrects itself. Most important, the housing market itself needs to correct. But housing prices generally are only down a fraction of the huge gains they realized as the housing bubble expanded. The market needs to readjust – and fast, so buyers can move back into the market with confidence, and the huge housing development segment of our economy can start working again. Unfortunately, Democrats in Congress are trying to slow the inevitable market adjustment.

“Congress is weighing measures sponsored by Rep. Barney Frank, D-Mass., and Sen. Christopher Dodd, D-Conn., to interrupt this process. The idea is that in exchange for voluntarily writing down a mortgage by some fraction, qualifying lenders would get a guarantee from the Federal Housing Administration on the new balance.It is a smart idea, in that lenders have to take a hit (the write-down) in return for their subsidy (which is what the guarantee really is). It would also help to stabilize the housing market, because it would reduce the number of foreclosures and it would give lenders more confidence. On the other hand, it rewards people who borrowed more than they could afford. Their mortgages get reduced for free, with the cost shared between lenders and the government. That is a bad message to send. It takes two parties to create a stupid mortgage. Also, the guarantees would pose a new, unknown, and potentially very large risk to taxpayers. If house prices keep falling anyway, the FHA could end up with huge losses.”

Why is this a bad plan for younger generations? Simple: First, expensive homes are bad for younger people who are not already in the housing market. By stabilizing the housing market at an artificially high level, the government basically delivers a windfall from people who don’t own homes to those who do – another transfer of wealth from young to old. Second, it bails out older generations who made bad mortgage decisions. Basically, they get to keep homes that are nicer homes than they could have afforded had they been fiscally responsible – and does it by financing the difference at taxpayer expense. And guess who those taxpayers are? You guessed it – you and me.

On the flip side, McCain has stated that he is against rewarding financial irresponsibility.

“Drawing a sharp distinction between himself and the two Democratic presidential candidates, Senator John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” Mr. McCain’s comments came a day after Senator Hillary Rodham Clinton of New York called for direct federal intervention to help affected homeowners, including a $30 billion fund for states and communities to assist those at risk of foreclosure. Mrs. Clinton’s Democratic opponent, Senator Barack Obama of Illinois, has similarly called for greater federal involvement, including creation of a $10 billion relief package to prevent foreclosures.”

Once again, the Republican party seems better aligned with the economic interests of American youth.

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