Obama Mortgage Plan Brings No Relief
The Obama administration's latest proposal to help 'underwater' homeowners shows how little has been learned from the crisis
Alan Greenspan, Ben Bernanke, and the rest of the
crew running economic policy somehow could
not see the housing bubble as it grew to more than $8tn. It really
should have been hard to miss. Nationwide house prices had just tracked
overall inflation for 100 years from 1895 to 1995. Suddenly in 1995,
coinciding with the stock bubble, house prices began to hugely outpace
the overall rate of inflation.
There was no explanation for this
run-up in house prices on either the supply or demand side of the
housing market. Furthermore, there was no unusual increase in rents,
providing further confirmation that fundamentals were not behind the
increase in house prices. Finally, in contrast to a story of housing
shortages driving up house prices, vacancy rates were at record levels.
But
the super-sleuths at the Fed, Treasury and other centres of
decision-making just could not see the bubble. They couldn't even see
the flood of bogus mortgages being spit out by the millions and packaged
into mortgage-backed
securities and more complex instruments.
As a result of this
astounding incompetence, we are now living through the worst downturn
since the Great Depression. Because Greenspan and Bernanke and the rest
messed up, tens of millions of workers are unemployed. Close to one in
four mortgages
are underwater and the baby boom cohort has seen much of its wealth
destroyed as they reach the edge of retirement. In short, as
Joe Biden might say, this was a big fucking mistake.
Remarkably,
the folks in charge seem to have learned zip. They still have no clue
about the housing bubble. How else can anyone explain the Obama
administration's latest proposal for helping out underwater
homeowners?
If the point is to help homeowners then there are
two incredibly simple questions that must be asked:
1. Are
homeowners paying less under the plan than they would to rent the same
place?
2. Are homeowners going to end up with equity in their
home?
These are the key questions, because if we can't answer yes
to at least one of them, then we are not helping homeowners. If we can't
answer yes to at least one of these questions, then taxpayer dollars
being put into the programme are helping banks, not homeowners.
Unfortunately,
it seems no one in the Obama administration
has yet been told about the housing bubble. There is no evidence that
they ever considered these questions in designing the latest policy to
"help" homeowners.
The programme will potentially pay banks and
loan servicers up to $12bn to write off principle on mortgages. In
exchange, the government will guarantee new mortgages through the
Federal Housing Authority (FHA). Those familiar with the housing market
will note that house prices are still falling and must fall by close to
15% to get back to their long-term trend. If house prices continue to
fall, then the vast majority of the homeowners that take part in this
programme are likely to never accrue any equity in their home.
Furthermore,
the FHA is likely to incur substantial losses on these loan guarantees,
as homeowners will again find themselves underwater and many will be
unable to pay off their mortgages when they sell their home. Because the
FHA hugely expanded its role in the housing market in the last two
years, without paying attention to falling prices, it now is below its
minimum capital requirement. It will suffer additional losses and fall
further below its capital requirements as a result of this programme. By
the way, the losses to the FHA and the taxpayers are money in the
pockets of the banks, but no reason to mention that detail.
For
anyone who can see an $8tn housing bubble, this is all as clear as day.
There is nothing complex about a story in which the government buys
banks out of bad mortgages. But the Washington policymakers could not
see an $8tn housing bubble before it wrecked the economy and apparently
still haven't noticed it even after the fact.
It's great to know
that there are good paying jobs for people with no discernible skills.
But do those jobs have to involve running the economy?
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Alan Greenspan, Ben Bernanke, and the rest of the
crew running economic policy somehow could
not see the housing bubble as it grew to more than $8tn. It really
should have been hard to miss. Nationwide house prices had just tracked
overall inflation for 100 years from 1895 to 1995. Suddenly in 1995,
coinciding with the stock bubble, house prices began to hugely outpace
the overall rate of inflation.
There was no explanation for this
run-up in house prices on either the supply or demand side of the
housing market. Furthermore, there was no unusual increase in rents,
providing further confirmation that fundamentals were not behind the
increase in house prices. Finally, in contrast to a story of housing
shortages driving up house prices, vacancy rates were at record levels.
But
the super-sleuths at the Fed, Treasury and other centres of
decision-making just could not see the bubble. They couldn't even see
the flood of bogus mortgages being spit out by the millions and packaged
into mortgage-backed
securities and more complex instruments.
As a result of this
astounding incompetence, we are now living through the worst downturn
since the Great Depression. Because Greenspan and Bernanke and the rest
messed up, tens of millions of workers are unemployed. Close to one in
four mortgages
are underwater and the baby boom cohort has seen much of its wealth
destroyed as they reach the edge of retirement. In short, as
Joe Biden might say, this was a big fucking mistake.
Remarkably,
the folks in charge seem to have learned zip. They still have no clue
about the housing bubble. How else can anyone explain the Obama
administration's latest proposal for helping out underwater
homeowners?
If the point is to help homeowners then there are
two incredibly simple questions that must be asked:
1. Are
homeowners paying less under the plan than they would to rent the same
place?
2. Are homeowners going to end up with equity in their
home?
These are the key questions, because if we can't answer yes
to at least one of them, then we are not helping homeowners. If we can't
answer yes to at least one of these questions, then taxpayer dollars
being put into the programme are helping banks, not homeowners.
Unfortunately,
it seems no one in the Obama administration
has yet been told about the housing bubble. There is no evidence that
they ever considered these questions in designing the latest policy to
"help" homeowners.
The programme will potentially pay banks and
loan servicers up to $12bn to write off principle on mortgages. In
exchange, the government will guarantee new mortgages through the
Federal Housing Authority (FHA). Those familiar with the housing market
will note that house prices are still falling and must fall by close to
15% to get back to their long-term trend. If house prices continue to
fall, then the vast majority of the homeowners that take part in this
programme are likely to never accrue any equity in their home.
Furthermore,
the FHA is likely to incur substantial losses on these loan guarantees,
as homeowners will again find themselves underwater and many will be
unable to pay off their mortgages when they sell their home. Because the
FHA hugely expanded its role in the housing market in the last two
years, without paying attention to falling prices, it now is below its
minimum capital requirement. It will suffer additional losses and fall
further below its capital requirements as a result of this programme. By
the way, the losses to the FHA and the taxpayers are money in the
pockets of the banks, but no reason to mention that detail.
For
anyone who can see an $8tn housing bubble, this is all as clear as day.
There is nothing complex about a story in which the government buys
banks out of bad mortgages. But the Washington policymakers could not
see an $8tn housing bubble before it wrecked the economy and apparently
still haven't noticed it even after the fact.
It's great to know
that there are good paying jobs for people with no discernible skills.
But do those jobs have to involve running the economy?
Alan Greenspan, Ben Bernanke, and the rest of the
crew running economic policy somehow could
not see the housing bubble as it grew to more than $8tn. It really
should have been hard to miss. Nationwide house prices had just tracked
overall inflation for 100 years from 1895 to 1995. Suddenly in 1995,
coinciding with the stock bubble, house prices began to hugely outpace
the overall rate of inflation.
There was no explanation for this
run-up in house prices on either the supply or demand side of the
housing market. Furthermore, there was no unusual increase in rents,
providing further confirmation that fundamentals were not behind the
increase in house prices. Finally, in contrast to a story of housing
shortages driving up house prices, vacancy rates were at record levels.
But
the super-sleuths at the Fed, Treasury and other centres of
decision-making just could not see the bubble. They couldn't even see
the flood of bogus mortgages being spit out by the millions and packaged
into mortgage-backed
securities and more complex instruments.
As a result of this
astounding incompetence, we are now living through the worst downturn
since the Great Depression. Because Greenspan and Bernanke and the rest
messed up, tens of millions of workers are unemployed. Close to one in
four mortgages
are underwater and the baby boom cohort has seen much of its wealth
destroyed as they reach the edge of retirement. In short, as
Joe Biden might say, this was a big fucking mistake.
Remarkably,
the folks in charge seem to have learned zip. They still have no clue
about the housing bubble. How else can anyone explain the Obama
administration's latest proposal for helping out underwater
homeowners?
If the point is to help homeowners then there are
two incredibly simple questions that must be asked:
1. Are
homeowners paying less under the plan than they would to rent the same
place?
2. Are homeowners going to end up with equity in their
home?
These are the key questions, because if we can't answer yes
to at least one of them, then we are not helping homeowners. If we can't
answer yes to at least one of these questions, then taxpayer dollars
being put into the programme are helping banks, not homeowners.
Unfortunately,
it seems no one in the Obama administration
has yet been told about the housing bubble. There is no evidence that
they ever considered these questions in designing the latest policy to
"help" homeowners.
The programme will potentially pay banks and
loan servicers up to $12bn to write off principle on mortgages. In
exchange, the government will guarantee new mortgages through the
Federal Housing Authority (FHA). Those familiar with the housing market
will note that house prices are still falling and must fall by close to
15% to get back to their long-term trend. If house prices continue to
fall, then the vast majority of the homeowners that take part in this
programme are likely to never accrue any equity in their home.
Furthermore,
the FHA is likely to incur substantial losses on these loan guarantees,
as homeowners will again find themselves underwater and many will be
unable to pay off their mortgages when they sell their home. Because the
FHA hugely expanded its role in the housing market in the last two
years, without paying attention to falling prices, it now is below its
minimum capital requirement. It will suffer additional losses and fall
further below its capital requirements as a result of this programme. By
the way, the losses to the FHA and the taxpayers are money in the
pockets of the banks, but no reason to mention that detail.
For
anyone who can see an $8tn housing bubble, this is all as clear as day.
There is nothing complex about a story in which the government buys
banks out of bad mortgages. But the Washington policymakers could not
see an $8tn housing bubble before it wrecked the economy and apparently
still haven't noticed it even after the fact.
It's great to know
that there are good paying jobs for people with no discernible skills.
But do those jobs have to involve running the economy?