How to Fix Bad Mortgage Securities - Assume the Bubble Has Not Burst
Giving a blood transfusion to a dying economic patient, jump starting the dead battery of the economy, and providing a federal backstop to prevent wild financial baseballs from injuring spectators have all had one goal so far: propping up housing prices.
This is also known as stabilizing the housing market, and is designed to help the banks.
In fact, everything the government has done so far to "fix the economy" has been for the benefit of the banks.
From the Federal Reserve (actually not a part of the government but close enough) providing new "windows" at which banks can trade bad assets for good, to the Treasury shoveling $350 billion at various banks, all of it has helped financial institutions.
The problem, according to the banks, is that mortgage securities have fallen in value.
If the value of these securities' underlying assets, mortgages on residential homes, could be propped up, then the problem would disappear, regardless of the fact that the people who own the properties would still be unable to pay them.
The problem is not the fact that so many people were sold mortgages that they would never be able to pay back.
The problem is that the prices of homes collapsed from the artificially high levels of 2005-2006.
Mortgage companies were unable to flip the homes that went into foreclosure as a result of poor lending decisions.
If the banks could only get home values back to levels seen during the bubble, the mortgage securities would not be underwater anymore.
In fact, the Ponzi scheme could pick up steam again, if home values would just go back up to levels that were grossly inflated to begin with.
Then more securities could be sold to more unsuspecting investors.
This strategy of helping the banks applies to President Obama's foreclosure bailout package, recently unleashed upon the housing market.
The plan is designed to help homeowners reduce their monthly mortgage payments to avoid foreclosure, as well as hide the steep declines in home prices across the country.
In effect, people are being asked to ignore the fact that their property has fallen in price in exchange for the government stepping in and helping lower their monthly housing bill.
No foreclosure, no forced sale of the property, and no inconvenient sheriff sale or appraisal to determine the value of the home will help hide the true value of a house.
The question no one seems to be asking is if homeowners will be willing to keep paying anything every month for a home that is deeply into negative equity, even with government assistance.
Of course, some will, but others will be willing to let the house go through foreclosure and rent for a few years.
This might, in fact, be a better way to dispose of a truly inflated house -- fight the foreclosure, get a short sale or a deed in lieu, and rent for a few years while saving money for a down payment on a vastly cheaper home.
President Obama's mortgage plan attempts to convince people to accept being locked into a lower payment while still overpaying for their home.
It is unfortunate but not very surprising to see another foreclosure relief plan put forward by the government where the primary purpose is to hide a much-needed correction in home values.
Instead of addressing the problem and lowering mortgage balances, the plan tries to solve the symptom of the problem and hide a true valuation of home prices.
This is also known as stabilizing the housing market, and is designed to help the banks.
In fact, everything the government has done so far to "fix the economy" has been for the benefit of the banks.
From the Federal Reserve (actually not a part of the government but close enough) providing new "windows" at which banks can trade bad assets for good, to the Treasury shoveling $350 billion at various banks, all of it has helped financial institutions.
The problem, according to the banks, is that mortgage securities have fallen in value.
If the value of these securities' underlying assets, mortgages on residential homes, could be propped up, then the problem would disappear, regardless of the fact that the people who own the properties would still be unable to pay them.
The problem is not the fact that so many people were sold mortgages that they would never be able to pay back.
The problem is that the prices of homes collapsed from the artificially high levels of 2005-2006.
Mortgage companies were unable to flip the homes that went into foreclosure as a result of poor lending decisions.
If the banks could only get home values back to levels seen during the bubble, the mortgage securities would not be underwater anymore.
In fact, the Ponzi scheme could pick up steam again, if home values would just go back up to levels that were grossly inflated to begin with.
Then more securities could be sold to more unsuspecting investors.
This strategy of helping the banks applies to President Obama's foreclosure bailout package, recently unleashed upon the housing market.
The plan is designed to help homeowners reduce their monthly mortgage payments to avoid foreclosure, as well as hide the steep declines in home prices across the country.
In effect, people are being asked to ignore the fact that their property has fallen in price in exchange for the government stepping in and helping lower their monthly housing bill.
No foreclosure, no forced sale of the property, and no inconvenient sheriff sale or appraisal to determine the value of the home will help hide the true value of a house.
The question no one seems to be asking is if homeowners will be willing to keep paying anything every month for a home that is deeply into negative equity, even with government assistance.
Of course, some will, but others will be willing to let the house go through foreclosure and rent for a few years.
This might, in fact, be a better way to dispose of a truly inflated house -- fight the foreclosure, get a short sale or a deed in lieu, and rent for a few years while saving money for a down payment on a vastly cheaper home.
President Obama's mortgage plan attempts to convince people to accept being locked into a lower payment while still overpaying for their home.
It is unfortunate but not very surprising to see another foreclosure relief plan put forward by the government where the primary purpose is to hide a much-needed correction in home values.
Instead of addressing the problem and lowering mortgage balances, the plan tries to solve the symptom of the problem and hide a true valuation of home prices.