Housing Bailout Passes

From the text of the new law:

19 REQUESTS.- Upon any request arising under existing in-
20 vestment contracts, the Secretary shall consent, where ap-
21 propriate, and considering net present value to the tax
22 payer, to reasonable requests for loss mitigation measures,
23 including term extensions, rate reductions, principal write
24 downs, increases in the proportion of loans within a trust

the Federal property manager shall
16 implement a plan that seeks to maximize assistance
17 for homeowners and use its authority to encourage
18 the servicers of the underlying mortgages, and con
19 sidering net present value to the taxpayer, to take
20 advantage of the HOPE for Homeowners Program
21 under section 257 of the National Housing Act or
22 other available programs to minimize foreclosures.
23 (2) MODIFICATIONS.—In the case of a residen
24 tial mortgage loan, modifications made under para
25 graph (1) may include—
1 (A) reduction in interest rates;
2 (B) reduction of loan principal; and
3 (C) other similar modifications.

...In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.

Disgusting. Here is my government doing all it can to keep me from buying a home. Who wins and who loses? Winners:

1) Banks and owners of mortgage-based derivatives. The Government is going to buy their assets for more than the market price, to the expense of the taxpayer. The claims that they will get current market price is nonsense. Banks et al. can get market price for these assets now, on the market. The whole point of the legislation is to give them something better than that.

2) People who got in over their heads. This includes speculators, deadbeats, and the financially irresponsible. Oh yea, the "preyed upon" as well. The Government will be providing them relief for their debts. That part highlighted above is key. Once the Government buys a mortgage, it can (and will) simply waive the debt. Jubilee! The Democrats will be buying votes in this way for a generation. Oh, and there are bits in the law to prevent the IRS from taxing these waived obligations. After all, why should these people have to pay their fair share of taxes?

3) Homeowners. This is yet more legislation aimed at propping up home prices beyond what the free market would dictate.

Who loses? One group comes to mind...

1) Renters. No property? No mortgage? No benefit. Just more taxation to pay for it all. Who is generally more wealthy: people who rent, or people who own a home? Isn't this legislation stealing from the poor to give to the rich?

Note that bit about "In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures." Is the Federal Government going to directly guarantee home loans? Can we expect the effect on housing prices to be similar to the effect the Federal Student Loan program has had on college tuition?

In short, the Government has decided to risk 700 billion tax dollars playing the real estate market. It thinks it knows better than the experts who actually work in that investment field. Keep your fingers crossed.

Ann says: Here are some of my questions:

1) Will this suddenly make non-performing loans perform? (Answer: No, but the taxpayer will pay the mortgage instead of the person actually living in the home.)

2) Will this allow/force even one bank which deserves to close, which should close, to close? Or are bad banks going to be propped up?

3) A recession is likely with us right now, will this make us get to the other side of it faster? Or just drag it out over more years--which is exactly what happened in Japan in the 1990's for the exact same reason (real estate bubble, which the government tried desperately to stop from popping).

4) Will this do one thing to stop the same cycle from happening in the future? Will it reduce the push that the government induced for no-money-down loans? Or, when this all blows over, will they go right back to using the same loan methods?

5) Will this allow the natural mechanisms built into the capitalist/recession cycles to enforce market discipline? For example:
  • Will the weak companies close?
  • Will new innovations come along to take their place?
  • Will capital flow out of unstable companies to more stable and productive ones?
  • Will this allow overpriced assets to fall to more realistic values? (Absolutely not, since this legislation is designed and intended to prop up housing values.)
6) If people and banks who were burned this time around know that they will get bailed out in the future, will they be encouraged towards greater prudence?

7) Will people and banks which did display prudence and did not get in over their heads, decide that they won't be taken for suckers next time. They might as well get their piece of the next bailout and dive in to risk with their eyes shut tight.

8) Is this really the best solution to this problem?

9) Will we spend the next 100 years regretting this legislation? and how many bail-outs will we have in the century ahead?

10) Finally, is the cure worse than the disease?