The US mortgage 'crisis' which affects $150-250 Billion worth of mortgages, or about 1 % of the market, needs of course a political rescue. Like good populists, American politicians are creating a crisis where none exists and engaging in Euro-style demagogeury. Politicians can never save anything. They can only destroy. The economy is healthy and no where near a recession. The endless media drum beat of lies and bad news †end of the world; 2 million people will lose their homes and be eating dog food; poverty is racing ahead; only the rich benefit etc. is about as intelligent as the cult members, including the same media, who support globaloney warming. Sorry the end of the world is not nigh, and neither is a mortgage meltdown. Some perspective is necessary. From 1997 when the tax rates on capital gains were first lowered, until 2006, home prices have increased on average across the US by almost 80%, or about 2.5 times faster than historical mean growth in real estate [about 4 % per year]. Clearly thanks to cheap credit, easy money, and relaxed lending standards, as well as lowered capital gains on flipping assets, the housing market had a bull run that was too strong for too long. A correction, or re-pricing was necessary. The current correction is trending towards a 20% price correction. This still leaves the average person with a gain of 60%. And this correction is heavily concentrated in speculative markets †especially Florida and California. A crisis this is not. Speculators and those who bought loans they could not afford are the ones affected. The political circus is started because 1.5-2.0 million people or votes, are at risk. Not to mention the media posturing and the desire to appear compassionate. This is where governments do their worst work. They intervene in situations in which they have no responsibility, no knowledge and no intelligence to offer. They intervene to posture and buy votes. In such a market where a bank or a mortage broker has lent money to someone who can't pay, because say interest rates which are coming down, are maybe too high, the bank has some options. They can seize the property if payments are not made, but this is expensive and if the property is foreclosed it is usually sold at a high discount to market †upwards of 50% of the value is lost. So most likely the lenders would prefer a second option, which is to arbitrate a payment plan, based on the income conditions of the borrower, to have them keep the house †especially if it is an owner-occupied house. In such a market exchange both sides would win, and the bank or lender would still collect most of the loan outstanding. But politicians don't view the world in such a way. The White House, the Democrats, the assorted populist dandies are proposing that the government force lenders to freeze rates for a period of years and decrease immediately mortgage payment amounts. Just think of the stupidity of this concept. Government is mandating a re-pricing of contractual assets for a chosen few. Unbelievable. First, the political action coercing a freeze on rates, breaks contracts. Adult, mature, law abiding states don't break contractual obligations. African and Latin American states do. Second, what is the incentive for people who make their payments on time? Why shouldn't they now stop paying and declare hardship? Third, how will the government implement its plan, the paperwork, the processes and the oversight to ensure that everything is fair? Will more workers be hired for this, and how will the politicians make it 'uniform' or standardized, a concept that apparently troubles them deeply since they have declared that the private market can't solve the situation because the contracts are not uniform ? Fourth, moral hazard. Now US investors will look upon any investment as one that the government will ultimately redeem and domestic and foreign investors will view US contractual law as optional, not obligatory. Well functioning capital markets need contractual law to be upheld, not raped by conniving politicians trying to get their ugly faces on CNN for the latest 'crisis' interview. Fifth as the Wall Street Journal reports, 'Moreover, the evidence suggests that even when troubled borrowers receive a generous reset on their mortgage payments, as many of 40% of those borrowers still eventually default. The refinancing plan might only delay the day of reckoning and lead to bigger losses in a falling market. An analysis by the financial services consulting firm Graham Fisher calls this "the rolling loan gathers no loss" philosophy, and notes its similarity to the strategy that prolonged the "S&L crisis and the Japanese banking crisis."' So in other words, the political bailout will fail anyways. Over 95% of US homeowners make their mortgage payments on time. 95%. So what is the government doing to insert itself into a market repricing phase, to ostensibly help out perhaps 1% or less of the total market? Shouldn't the other 99% start to demand relief as well? This manufactured mortgage crisis is just another example of media and political mendacity. Create a crisis. Declare that the end of the world is nigh. Position government as the messiah to save our souls. Implement a solution which will fail. Ensure that contracts, market pricing, and responsibility are subservient to political whims and cycles. This terrible episode only reinforces the fact that the US is not a free-market, capitalist state.
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