Tag: housing

This morning, while reading electoralvote, I saw the line: “the housing crisis is an issue that really provides a bright line between the parties. The Democrats want to bail out the greedy little guys who bought homes they couldn’t afford. The Republicans want to bail out the greedy banks who loaned money to people who had no chance of ever repaying it.”

I think statements like that are misguided and pejorative. If any bailouts occur, in my opinion, they are not specifically to help out the dumb homeowners or the greedy banks. They are to prevent the collateral damage. Let me explain.

We’ve all heard about the homeowners who accepted loans they didn’t understand or couldn’t afford at the time. We all have little sympathy for those folks. We’ve all heard about the banks that are greedy, trying to get every nickle out of folks. We have no sympathy for them. We’re hearing little about the other folks affected.

Consider the homeowner who bought a house in the last 3-5 years, just to find more space for their family. They have good credit ratings, but due to rates or other economic uncertainty did a variable rate loan (either for their main mortgage, or a home equity line to renovate a room). If they have a variable rate loan, it isn’t one of the exotic option ARMs, but a more conventional variable or 5/25. Right now, they are seeing equity plummit (making future loans more difficult to obtain), and rates remain stable (not dropping) due to bank fears. They are being hurt in this crisis through no fault of their own.

Consider your local theatre, museum, city, or state. They need to issue bonds to improve roads, infrastructure, schools. They need to issue bonds to expand their facilities. Because banks are running scared about anyone being able to pay them back, they are raising interest rates on these bonds. In turn, the bond money is costing your theatre, non-profit, or city more, limiting what they can do and destroying their budget. They are being hurt in this crisis through no fault of their own (and in turn, we the patrons or taxpayers are hurt).

Consider the financial markets as a whole. When large institutions teeter or fail, others get scared. There starts to be market panic, and investors or institutions start trying to pull their money out. This reduces stock prices, which leads to more people pulling their money out. It also hurts the folks who aren’t panicing, who were depending on those funds for college educations or retirement. If the institutions fail, it hurts the employees of the organization, the folks who the failing institution holds funds, as well as creating more fear in other organizations, making the spiral downward worse.

Consider trade. Panics and failing economies reduce the value of the dollar, making imported items more expensive. This affects fuel costs to some extent (although those are calculated in dollars), but it also affects the raw goods used to make things. This means the prices rise, hurting individuals more.

We’ve seen the effect of major panics before — look at the late 1920s and early 1930s. They hurt society as a whole. At that time, regulations were put in place that prevented panic on the consumer banking side (and that side, other than incredibly high credit card rates, isn’t panicing). We haven’t had as much regulation on the commercial banking side, or on some newer aspects of the market… and thus they have the potential for free-fall.

When bailouts occur (and they have in the past), they should not be to bailout the dumb, but to prevent the collateral damage from spreading and hurting the country as a whole. Thus, I see some of the fed moves, such as providing additional loan guarantees, adjusting conforming limits, etc, as reasonable actions… and I see the purchase of Bear Stearns as a reasonable action. I see other proposals, such as notions to protect people already in foreclosure, as too late and ineffective for the economy as a whole. For the latter case, we need to provide opportunities to restructure debt so that it can be confidently repaid (not written off), or clever ways to defer debt down the line until the crisis is past and folks are more likely in better financial positions. We need confidence, not panic.

Many folks are talking about the proposed economic stimulus package, and the rebate checks. For those playing ostrich, here’s what the LA Times says:

Details were still being finalized but it appeared likely that the rebates — $300 to $600 per filer — would go to taxpayers who earn $75,000 a year or less. Couples who file jointly would receive as much as $1,200 as long as they earned less than a total of $150,000 a year. The size of the rebates would be phased out at income levels above those limits.

In addition, families eligible for the rebates would receive an additional $300 per child. Roughly 117 million households would get a check, the leaders said.

That’s a short term stimulus — yes, we can use $1,500, but that won’t be a significant boost.

However, there is one thing in the package of real significance, if I’m reading it right: “The package also includes a provision to make refinancing mortgages easier by raising the limit to $625,500 for most government-backed housing loans.” Specifically:

Currently, the government’s mortgage guarantors, Fannie Mae and Freddie Mac, can purchase mortgages only up to $417,000, and funds have largely dried up for homeowners who want to refinance mortgages above that limit.

The legislation would temporarily raise that limit to $625,500, making it easier for banks to make loans to homeowners who owe more than $417,000 on their mortgage. It would also raise the limit on loans guaranteed by the Federal Housing Administration to $729,000.

I read this as raising the conforming loan limits, meaning that many folks in Southern California that are now in Jumbo mortgages can refinance into 30-year conventional conforming mortgages. That’s significant: according to my loan broker, right now there is almost a 1% difference between conforming and jumbo loans. Combine that with the ¾% drop by the fed (which should trickle down in a few weeks to the mortgage market), and you’re going to see an uptick in folks being able to qualify for fixed loans at terms they can afford. That will help stabilize the whole forclosure mess, as well as providing people (possibly) with more cash, every month, for 30 years.

I hope the raising of conforming limits remains in the package. Wonder if I should write my congress critters (Feinstein, Boxer, and Waxman)?