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Bigger Housing Bailout Risks Voter Backlash

On October 24, 2011, in Housing, by Tim

Here’s an interesting take from north of the border on the latest initiative by President Obama to aid an ailing housing market, a move that is already seen as being underwhelming if a speedier recovery is the goal. From this item at the Globe & Mail comes the following conclusion about why the latest plan is not much bolder than the last one:

From the beginning, the biggest barrier to doing something for the many millions of homeowners drowning from the financial crisis is the many more millions who found ways to stay afloat.

At least three times during their call with reporters, Messrs. Donovan and Sperling emphasized that the changes the president was making were targeted at homeowners who “have done all the right things” and have “met their obligations.”

There are a plethora of plans from economists that would more effectively and quickly solve the U.S. housing crisis.

However, heading into an election year, the White House has little incentive to risk a backlash from a large majority of homeowners who are making their payments and might resent the idea of their tax dollars being used to bail out a neighbour who they assume simply took on more house than she could afford.

That might be the right political call. But as a result, housing will continue to be a drag on the U.S. economy in 2013.

Well, anything will be an improvement over HAMP (Home Affordable Modification Program) where borrowers got a lower interest rate and lower payments on their first mortgage but were still saddled with debt loads that clearly set them on a path back into default (median debt-to-income ratios of over 60 percent).

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Doctor Prescribes More Booze for the Drunk

On October 24, 2011, in Economy, Housing, by Tim

Reading Larry Summers’ Washington Post op-ed today about how to fix the housing market provides more evidence of how entrenched (and, very likely, wrong) conventional thinking amongst the dismal set is these days.

While there is an ongoing open revolt in some parts of the economics profession as detailed a week ago in Economics has met the enemy, and it is economics at the Globe & Mail, those economists whose palms have or hope to be greased by government, academia, or the finance industry keep saying the same old things and, in this case, you don’t have to look any further than the first sentence.

The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it can be resolved only with more confidence, borrowing and lending, and spending.

Really? Our economic woes are going to be “resolved” if we could only summon the confidence to borrow more and spend more, akin to an alcoholic summoning the courage to crack open a new bottle of booze after a particularly bad bender. Here’s the cure:

First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and too rigorous. The characteristics of the average successful applicant in 2004 would make that applicant among the most risky today. The pattern should be the opposite, given that the odds of a further 35 percent decline in house prices are much lower than they were at past bubble valuations.

The remaining suggestions – new government efforts to prevent foreclosure, turn foreclosures into rentals, refinance underwater homeowners, and wrap up the robo-signing scandals – are not nearly as offensive as the first, but they really aren’t important.

It is the misguided notion that the “lack of aggregate demand” is the source of our current problems – not that we have to make fundamental changes in how we borrow and spend – that, once again, makes me think we’ll never get out of this mess.

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Hire Me!

On October 21, 2011, in Economy, Our Culture, by Tim

As a follow up to yesterday’s glowing review of the Occupy Wall Street crowd comes an alternative view from somebody almost a thousand miles south of Zuccotti Park.

From the Rick McKee archive at the Augusta Chronicle.

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Mortgage Backed Securities for Fed’s QE3?

On October 21, 2011, in Housing, by Tim

Well, it looks like Bill Gross is going to have a shot at boosting the lagging returns of his huge Pimco Total Return Fund (PTTAX)  during the closing months of the year after having recently added a big stake in mortgage backed securities. It now appears the Federal Reserve will soon be a much bigger buyer of these assets, at least according to this WSJ report($) by the central bank’s mouthpiece, Jon Hilsenrath (I don’t know if there’s any way you can be the main WSJ guy when it comes to the Fed without being called its “mouthpiece”).

Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.

The idea would be to target any new efforts by the central bank at the parts of the economy that are most severely impeding a recovery—the housing and mortgage markets—by working to push down mortgage rates.

Lower mortgage rates, in turn, could encourage more home buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk investments toward riskier investments.

The Fed discussions occur amid broader efforts in the government to find ways to revive housing markets and stir refinancing.

“I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities,” Federal Reserve governor Dan Tarullo said in a speech Thursday at Columbia University.

Combined with an upcoming government program to refinance mortgages that commercial banks won’t – due to the homeowner having too little equity or other reasons – the Fed’s effort to make mortgage rates even more freakishly low is believed to be the best bet at aiding the U.S. housing market.

We’ll see if it helps housing. The bigger impact will likely come for other asset classes when investment banks start talking about the size of QE3. My guess would be $800 billion – bigger than QE2, but not above the $1 trillion mark that would signal panic.

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Two Related Data Points

On October 21, 2011, in Economy, Our Culture, by Tim

The Occupy Wall Street crowd should probably look  more closely at the relationship between these two key data points – rising income inequality (via this item at the Economic Policy Institute) and who Americans blame for their economic woes (via this Gallup survey).

Yes, Occupy Washington would likely be a better approach as many are now suggesting. Also see Occupy DC and, one with real potential – Occupy K Street.

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Jim’s Excellent OWS Adventure

On October 20, 2011, in Banks, Our Culture, by Tim

This story by Jim Quinn about his trip to New York City last weekend to visit the Occupy Wall Street protest was in the links section here the other day, but I just got around to reading it a short time ago. Filled with dozens of pictures like the one below, it’s well worth the time to read in order to get a different perspective of what the protest is all about.

The picture above caught my eye – the juxtaposition of an OWS protester’s cardboard boxes and a Brooks Brothers store along with a Vietnam veteran (who was yelling that this isn’t the country he fought for) and the omnipresent NYPD.

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