Humpty Dumpty Housing

nospam@example.com (Brian Gaither) — Tue, 12 Feb 2008 09:35:21 -0700

So, the federal government has strong-armed some banks into postponing foreclosures, all foreclosures for qualified borrowers, for 30 days.

It will always bother me that politicians can be elected with scarcely more than a modicum of education in macroeconomics. However, their ignorance is a reflection of our own; so I reiterate here that we deserve the representation we elect.

If people were smart enough to read their loan documents, explore their obligations, and inquire of disinterested parties (i.e. their own accountants) then we wouldn't be in this mess. Instead, a wholesale belief in the financial stability of homeownership encouraged bad government policies and predatory lending practices. Add to this mix the loose money tendencies of the Fed and you have a recipe for disaster.

The government created the primary purchasers of mortgages in the secondary market --namely Fannie Mae/Freddie Mac-- and provided them the liquidity for tranching of mortgages. The government encouraged increased housing demand by offering mortgage interest tax deductions. The government failed in its banking oversight role. The government failed in its SEC oversight of the securitized mortgages.

The way the market should work is as follows: Banks foreclose. The available supply of properties increases, at lower average prices. More informed entrants enter the market for fixed-rate mortgages to buy properties at the lower prices. The demand rises to meet the available supply at the new market clearing price.

Rather than let the market clear itself out, the government is jumping back into the fray. It is indirectly creating a price floor which will eventually give way and prices will plummet further.

I understand the government's rationale. It feels the need to uphold the promise of homeownership it has made. It feels the need to rescue banks from their poor lending policies. It feels the need to support local tax rolls. It feels the need to shelter people from eviction.

However, I personally am offended that the government would rescue people (borrowers, banks, and local governments) from the consequences of their unfortunate decisions. Where will be my bailout? I have a car loan that needs to be paid off. I think someone took advantage of me. How about my student loans? I was promised by the government that education was a good thing, but boy I could eat out more often if I answered that letter in my mailbox promising lower student loan payments. Golly, if they snooker me, shouldn't the government help me out?

For anyone curious to know how this will end, review the economic history of Japan from 1990-2005.

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Humpty Dumpty Housing