mortgage

Express, a publication of The Washington Post, notes that as a result of a stoppage in mortgage foreclosures: “Prices might stabilize because so many homes are penned up.”

The underlying logic is that:

(1) If there are fewer foreclosures today, then the supply of houses on the market will be reduced.

(2) If supply is reduced, prices will go up (or “stabilize,” i.e., not go down).

Their logic is sound, but they must follow through with the analysis. Yes, the foreclosures are delayed. But we know that they are coming eventually. Therefore in, say a year, we expect prices will decrease once the foreclosure process is re-initiated because those houses then show up on the market.

They [Express] imply that expected future prices are lower than today’s current prices. This won’t do however.

If sellers expect that prices will fall in the future, they will want to sell at today’s relatively higher prices. As a result more people start selling now which increases today’s supply and this brings down today’s prices. This will continue until future prices are equated with today’s prices. Why? Because if expected future prices are low relative to today’s prices more people would like to sell to capture the relatively higher selling prices of today.

A similar effect occurs on the demand side of the market: some potential home buyers expecting prices to fall in a year will wait to buy, until houses become relatively cheaper. Fewer home buyers today mean less demand today, and this entails lower prices today.

The main idea here is that expectations of future prices held by sellers and buyers affects today’s prices, such that future prices and today’s prices move to equality. In this case it means prices go down. The unfortunate take away from this is that the healing period is far from over.

When Obama was elected, he claimed he would “go through our federal budget– page by page, line by line–eliminating those programs we don’t need.” But as president, he seems to have forgotten about this pledge. The Cato Institute reminds him of it in a full-page advertisement in today’s Washington Post and other newspapers, identifying $525 billion he could cut annually from the federal budget by eliminating unnecessary or harmful programs.

For example, it notes that “Federal interference in housing markets has done enormous damage to our cities and the economy at large. HUD subsidies have concentrated poverty and fed urban blight, while Fannie Mae and Freddie Mac stoked the financial crisis by putting millions of people into homes they couldn’t afford. Getting the government out of the housing business will save $45 billion annually.” It also notes that “Federal workers enjoy far greater job security than their private sector counterparts—and far better total compensation: an average of $120,000 a year in wages and benefits. Cut federal compensation by 10 percent to save $20 billion annually.”

In 2008, Obama pledged to implement a “net spending cut,” but he has instead exploded government spending.  Federal domestic spending increased by a record 16 percent in 2010.  In 2010, the Congressional Budget Office concluded that “President Obama’s policies would add more than $9.7 trillion to the national debt over the next decade.”

The Obama administration’s housing spending is particularly wasteful.  It is now using regulations and billions in tax dollars to promote more of the risky lending that led to the financial crisis.  It is ratcheting up affordable-housing mandates that created markets for junk sub-prime mortgages (thus spawning the mortgage meltdown, as even the liberal Village Voice has conceded), and it is increasing regulatory pressure on banks to make risky loans.  A $75 billion federal mortgage bailout program harmed the very real estate markets it was supposed to help.

Economists and real estate experts are saying that a $75 billion mortgage bailout program designed by the Obama administration has backfired and harmed the housing market, reports The New York Times:

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good. . .experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

That “’has the effect of lengthening the crisis,’ said Kevin Katari, managing member of Watershed Asset Management. . . ’We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway,’ and ‘banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books,’” delaying a recovery in the housing market and the construction industry.

The failed mortgage bailout is reminiscent of the government’s attempt to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009, that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

Earlier, the government pushed through billions more in other mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Banks will now be pressured to make even more risky loans. The House has approved Obama’s proposal to create the so-called Consumer Financial Protection Agency. Government pressure on banks to make loans in economically-depressed neighborhoods was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, the Obama Administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

Your hosts Richard Morrison and Cord Blomquist welcome back special guest co-host Michelle Minton for Episode 35 of the LibertyWeek podcast. We begin with a celebration of human achievement and a peek into the realm of secret government documents. We then investigate how the White House is going to waste another $1 trillion of your money and how the British beer tax has managed to kill off 20,000 jobs. Finally we focus on the history of the scandal-addled Sen. Dodd of Connecticut and the future of U.S. Olympic glory.

BONUS BOOK FEATURE: We congratulate our good friend Steve Milloy on the publication of his new book, Green Hell: How Environmentalists Plan to Ruin Your Life and What You Can Do to Stop Them. The book is a one-of-a-kind, comprehensive takedown of the entire environmental movement that will open your eyes to a looming threat to our economy, our civil liberties, and the entire American way of life.

lolprez and the “do-something-anything” Congress is at it again

Welcome back to LibertyWeek, where your hosts Richard Morrison and Cord Blomquist bring you the best in news and views, always from the perspective of free markets and limited government. We start this week’s episode with praise for the new look and feel of OpenMarket.org: the blog you want to read. We then move on to the most delicious edition of Scandal Watch yet — the arrest of Illinois Gov. Rod Blagojevich on federal charges of “staggering” corruption. After that we look at the demise of Rep. William “Freezer Cash” Jefferson, the rise of Rep.-Elect Anh “Joseph” Cao (pictured, right), investigations into the mortgage mess, how taxpayers get trashed by recycling mandates and a debate over the ethics of scalping tickets in Olympic News.

# Special thanks to Josh Barro for the Tweet of the Week.

The Treasury Department wants the federal government to effectively buy up all mortgage loans in America, by selling treasury bonds to buy up mortgage-backed securities. In exchange, lenders would have to charge a ridiculously low interest rate of 4.5% for a 30-year mortgage, which is lower than inflation in many years, and way lower than people with even perfect credit receive now.

The Treasury proposal will put taxpayers on the hook for tremendous potential losses if borrowers default, with little upside, thanks to the low interest rate. It’s the same kind of stupidity that led to the collapse of government-backed mortgage lenders Fannie Mae and Freddie Mac, which followed federal mandates to encourage “affordable housing” and “diversity” by buying up risky subprime mortgages that defaulted, and then had to be bailed out by taxpayers, even though they were already receiving billions of dollars in taxpayer subsidies.

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Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn’t irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution’s short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

As I noted in my paper The Community Reinvestment Act’s Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.

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The stock market sank as the Bush Administration capitulated to liberal demands that its proposed $700 billion bailout of the financial system be expanded to add more costly give-aways, like “systematic” limits on foreclosure, that would allow irresponsible borrowers to remain in their homes at taxpayer expense.   The bailout is so extreme that it is unconstitutional.

Because of rigid federal accounting regulations that require Enron-style “mark-to-market accounting,” the bailout could actually deepen the financial crisis.  The bailout will reduce economic growth over the long run, and is logically inconsistent.

The bailout rips off people who lived within their means to pay their debts.  I can pay my mortgage, because I was frugal, and bought a little two-bedroom house on a fixed rate mortgage.  But reckless people in my region can’t pay their mortgage, because they bought big houses on adjustable interest-rate loans with low teaser rates.  Now that their introductory low rates have expired,  they can’t afford their payments.  The government is going to bail them out, at our expense.  While many defaulting borrowers have been living it up, buying fancy Lexus cars and eating expensive restaurant meals, I’ve been going through recycling bins on weekends searching for coupons.  (I found over $100 in baby food coupons that way).

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The current mortgage crisis came about in large part because of Clinton-era government pressure on lenders to make risky loans in order to make homeownership more affordable for lower-income Americans and those with a poor credit history,” the DC Examiner notes today.   “Those steps encouraged riskier mortgage lending by minimizing the role of credit histories in lending decisions, loosening required debt-to-equity ratios to allow  borrowers to make small or even no down payments at all, and encouraging lenders the use of floating or adjustable interest-rate mortgages, including those with low ‘teasers.’”

The liberal Village Voice previously chronicled how Clinton Administration housing secretary Andrew Cuomo helped spawn the mortgage crisis through his pressure on lenders to promote affordable housing and diversity.   Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments.

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