Feb
23
Concepts That Escape Crapperty File Fans: Economics and Grammar
Filed Under Uncategorized | 1 Comment
This afternoon the Crapperty File asked his horde of idiots if today’s economic challenges are “worse than the great depression.” While a mountain of statistics clearly shout “no”, a reader named “Odessa,” chimed in with the usual profundity of Cafferty’s readers:
February 23rd, 2009 1:38 pm ET
it means that all people need a serious wake up call..rich folks in this country has been taken advantage by the poor and middle classes too long..everyone was been hacked by wall street, big banks are getting greedier, subprime loans bamboolzed working people, too much deregulation in businsses and etc..both classes are suffering because no one hasn’t looked out for them and they are tired of being screwed while fat cats continue to get rich..being rich isn’t a crime but i think that everyone needs a morality check once in a while when it comes to investing money and watching the banks too..retail stores aren’t making money because people don’t have money..people are saving money or paying the main bills to survive..things will get better but it will take time to overcome and what our president will make the right decisions thinking about our country so it can get back on track..
Clearly, things began to unravel when “everyone was been hacked by wall street.” The best line, in my opinion.
Feb
23
Because It Worked So Well Last Time…
Filed Under Economics | 2 Comments
This week President Obama introduced his plan to use the resources of the federal government to attempt to stabilize the housing markets and, hopefully, the economy at large. The plan uses two strategies: allow homeowners who are current but have negative equity to refinance into a lower-rate loan under Fannie Mae and Freddie Mac, and to use incentives to “encourage” mortgage holders to modify loans where the borrowers are already behind on their payments. Why did I put “encourage” in quotes, you ask?
But the administration is also wielding a big stick. It will work with Congress to amend bankruptcy laws to allow judges to modify mortgages, a step community advocates say is badly needed but that the financial industry abhors.
If lenders don’t do what the government “encourages,” they could be in for some nasty surprises.
In bankruptcy cases, President Obama favors judges having leeway to reduce or “cramdown” the principle of the mortgage or rewrite the terms unilaterally. This blatant disregard for the rule of law will not only void agreements made volutarily by the the lender and borrower, it will greatly discourage banks from wanting to enter the mortgage market if they know that a contract can be voided at the will of a bankruptcy judge. Then again, that may not be a problem when all of the banks are owned by the government.
When Communism Now! covered the plan, they were glad to see that the bankruptcy courts would now be extorting lenders. Said guest Josh Zinner (emphasis mine):
So many people are underwater. They owe more on their mortgage than their house is actually worth. And this plan right now would do little for them. In bankruptcy, what a judge could do is cram down the amount owed down to the value of the property, and then a judge would be able to modify the terms of the mortgage—reduce interest rates, freeze interest rates on adjustable mortgages, adjustable-rate mortgages, extend the terms of loans.
…
The reason it’s critical is that right now there’s really no stick to mortgage servicers. There’s nothing to force them to do these modifications that are in everybody’s best interest, and they’re not doing them. If they’re facing an impending bankruptcy filing, that’s going to change dramatically, and it will cause them to do a lot more modifications within the parameters of the plan. So these changes are really critical for this plan to work.
Those on the left excuse such actions by being in ‘everybody’s best interest’. The CNN article quoted Obama in his speech in Arizona:
“In the end, all of us are paying a price for this home mortgage crisis,” Obama said. “And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit.”
The question I pose is, if such actions really are in “everybody’s best interest,” then why the hell aren’t they doing them in the first place?
First of all, I realize that banks cannot profitably foreclose on every loan that falls behind and that voluntary loan modification is indeed in their best interest. If banks are failing to do so in these cases, its probably because they know they can wait for a plan like the one listed above to pay off their poor lending decisions.
However, in many cases it is not in their best interest. Its important to remember that, save a select minority of cases, these mortgages were agreed to voluntarily by the lender and borrower, and that the lender is the one that paid for the house. Borrowers have no right to demand that the bank or anyone else pay for their decisions. Whether a mortgage modification is in the best interest of the lender is the decision of - the lender! Not a borrower, a judge, or a politician.
The first part of Obama’s plan will have Fannie Mae and Freddie Mac take on even more loans, that, by definition, are significant credit risks because the program targets loans that exceed the actual value of the home. Not only is this taking on a risk in gross dollar terms, but a homeowner will have less incentive to keep up payments on a home that has no or negative equity rather than in a home that they do have equity. As we have seen, over the last decade especially, is that not only are Freddie Mac and Fannie Mae inept at assessing credit worthiness, their sheer size makes any problems they have for the reasons stated above particularly harmful.
In an article entitled How US mortgage debt could cause a global financial crisis, Dan Denning states:
In the US, Fannie Mae (FNMA) and Freddie Mac are Government Sponsored Enterprises (GSEs) which buy residential mortgages and repackage them to sell on as mortgage-backed bonds.
Denning then reviewed statements from former Treasure Secretary Henry Paulson:
The large size of GSE mortgage portfolios (about US$1.5 trillion), coupled with the lack of market discipline at correctly pricing the risk of GSE debt, multiplied by the interconnectivity of the world’s financial institutions has led to a possibility ‘without precedent.’ Henry adds that ‘Financial markets across the board would likely become very illiquid and volatile as firms with significant losses attempted to unwind their positions.’
Paulson is later quoted as saying:
“Has it been so long that we have forgotten Fannie Mae’s significant financial troubles in the late 1970s and early 1980s? During this time period, Fannie Mae’s balance sheet looked a lot like a savings and loan. As interest rates rose, Fannie Mae’s cost of funds rose above the interest rate it was earning on its long-term, fixed-rate mortgages. Like many S&Ls, Fannie Mae became insolvent on a mark-to-market basis. It lost hundreds of millions of dollars.”
So the risks of Fannie Mae and Freddie Mac taking on loans that are inherently dangerous could have lare-scale effects throughout the American and global economy. But what is so interesting about the above article?
It was written in July of 2006.
The current conundrum we are in was not only foreseen and preventable, but directly attributable to the overleveraging of government sponsored enterprises (GSE’s) Freddie Mac and Fannie Mae. I thought the Obama administration was all about ‘change’ and not repeating the mistakes of the Bush administration. Please. Obama is Bush on steroids. In addition, having the government refinance such loans is just a ‘bailout’ for the ’speculators’ who own the mortgages. Didn’t Obama vow not to protect these evildoers?
The following well-circulated video from 2004 is an example of the kind of big-government, Democrat-Party-style policies that led to this mess.
Obama’s plan would only increase an unsustainable, government-fueled housing bubble.
I’ll close with Dan Denning’s last line, in response to Paulson’s remarking of the hundreds of millions of dollars lost by Fannie Mae in the 1980’s:
If the same thing happens today, you can replace ‘hundreds of millions’ with ‘trillions.’
