Blog Commentators Make More Sense than Our Politicians

Every now and then, I'm reminded that your average citizen is not as dumb as some would take him/her for.

A government committee is now proposing to have holders of subprime mortgages compromise with their mortgagors, in order to get our housing boom/bust situation solved and avoid painful foreclosures.


[This illustration is called "Select committee" for some reason. Buy this poster and other beautiful ones from allposters. com.]

All this political posturing is nothing more than grandstanding. First of all, a mortgage is a contract, just in case no one is noticing. You cannot simply wave a wand and renegotiate the terms of a contract because you find it convenient.

Second of all, the mortgagees who are sitting around a table with Treasury Secretary Paulson, going "Yes of course, good idea," have got their fingers crossed behind their back. They are going along with the show but probably have no intention of making any great effort to see that the government's wishes are carried out. In other words, they know that this is grandstanding.

I've read a lot of commentary about this latest federal plan to solve the crisis, among them today's post at the LAland blog at the LA Times website. The suggestion is, in a nutshell, to freeze the introductory rate of the ARMs so that they don't reset higher for several more years.

I had to go no further than the seventh out of 57 comments to find Tim K., Nov. 30, 8:02 a.m., making great sense and explaining in clear English why you can't just change the terms of these contracts--a problem that very few experts (other than gadfly me) have mentioned to date, to my great chagrin. Here is Tim K's simple explanation:

"This will not have any appreciable effect, because the number of loans that will be allowed to [freeze] at introductory rates will be astonishingly small.

"The reason is this - most of the volume of the loans which were made are no longer held by the banks themselves. They have been bundled into SIVs that are held in retirement accounts and pension funds. An example:

"Suppose you bought into Tim's Super Fund, which yields 7% interest over 10 years. This fund was made up of loans which were purchased from hundreds of banks. You, as an investor, bought $5000 of this, expecting to get your $5000 back plus interest after a few years. Now, imagine, that someone from the government orders that these homeowners don't have to pay the expected rate. What happens to your 7% rate? Right, it goes WAY DOWN. Maybe even NEGATIVE. Who would buy into that fund in the future? What value does it have now?

"That's precisely why this will not happen. The naive folks putting together this bill will come to this realization, and like Arnold S, will find out that in fact, this affects less than a few percentage of the total distressed homeowners. But [these few have] already made waves, so for political reasons, [the politicians] will announce it anyway showing 'we care, we're doing something' when in fact, this will have almost no effect at all."

Must I say more?

It's so gratifying to see that the "common mortal" is still out in that misleadingly silent void we sometimes mistake for a black hole of common sense. Thanks, Tim K. You make me realize I'm not spouting off in a vacuum.

And another thing: Why is no one trying to round up those mortgage brokers who filled out all those fraudulent applications? And don't tell me we have to pass a law saying it is illegal to fill out fraudulent mortgage applications. It may not be illegal to sell too much house to someone who can't afford it, and maybe we can't prove that these people lied outright; but it's surely gross negligence not to verify someone's credit and income. (Is anyone out there a legal expert who can comment on this?)

Come on, all you ambulance chasers. Stop chasing ambulances and start hunting for mortgage hucksters and those who hired them. Let's clean up the mortgage business from the ground up, instead of asking the government to do everything for us.

Another Real Estate Disaster in the Making?

I took a little walk today near Marina Del Rey, the yacht harbor of Los Angeles. I started at one corner of a block that's about two streets east of Lincoln Boulevard and one street south of Washington Boulevard. Here is some running commentary with the photos I took. (Click on the photo for a larger version.)

Photo 1



Hey, look. Let's go see what this is all about. You'd think that with the real estate market tanking in California, these might sit on the shelves a bit; but then again, sales of high-end units are still holding value here, even though the inventory is piling up.

Photo 2



Oh, looks like a series of loft-style units. Oh yeah, I remember. This is technically Culver City. They've been doing a lot of rethinking about their city planning over the last ten years. Hmm. Don't know if the timing of this was well thought out.

Photo 3



Hm. More lofts. I don't really get this loft thing. I do get the cost of construction savings, though.
Photo 4



More of same. Not very attractive. Reminds me of the projects. Well, I guess the City was thinking about the potential tax revenue. Just goes to show why city bureaucrats shouldn't go into the housing development business.

Photo 5



Gosh, more lofts. What about parks? What about the view out your window?

Photo 6



Guess this answers that question.

Photo 7



Another good living room view, and it looks like the units go all the way across the block width.

Photo 8



Oh. I see they got their "mixed use" in. But a body shop, I would have thought that stinks up the neighborhood. (It does.)

Photo 9



Another building, even better vis-a-vis. Ugh.

Photo 10



Now I've come around the edge of the block and I'm walking down the street at the "back" side. More of same, but maybe not lofts, at least.

Photo 11



Oh yes, these seem nicer, but ... they're also almost completed, which helps. But still, the views....

Photo 12



Looks like they've calculated a huge demand for these apartments. And I hear they're priced at around, e.g., $700,000, for 1,200 sq.ft. or so., two bedrooms. Someone's going to make a killing, right?

Photo 13



Another mixed use. I suppose it could be nice to be able to get your oil changed right out of bed.

Photo 14



Another new one. Gosh, that makes about twenty huge new buildings or so. There must be 1,000 new apartments going in on this block alone. I hope they can sell them when the time comes. Maybe they're trying to empty out the Inner Empire.

Photo 15



Last shot, another mixed use.... looks like a punch line.... I guess the Arabs did well to go elsewhere with their petrodollars. (See previous post.) They didn't have to do anything to cause this future fiasco. I wonder if it's happening all over the USA--or even all over the world. Good grief, what a thought.

Who Is At Fault? The Central Banks

Will Hutton, in this article from the Observer of London, appearing at the Gold Anti-Trust Action Committee website, is on a rampage. And I sympathize with his emotions, if not entirely with his recommendations.

Excerpts:

"While obeisant governments bail out dodgy plutocrats, it's ordinary people who foot the bill."

"One of the most inequitable and amoral acts in modern times is happening in front of our eyes...."

"The multi-billion dollar bailout of global finance after one of the most reckless periods of lending and deal-making since the late 1920s is extraordinarily one-sided. Little people's taxes are underwriting the mistakes of big people, who in the process have made riches beyond the dreams of avarice. Globalisation, it is now clear, is run in the interests of a global financial class which has Western governments in its thrall. This class does not give a fig for the interests of savers, clients or wider workforces. The rules of the game are set up solely to benefit the financiers whether in London, New York, or Hong Kong."

"Interpol should make arrests in New York, London, Tokyo, Beijing, Frankfurt, and Paris, starting with all the executives in the credit-rating agencies who blithely ranked the debt as creditworthy in exchange for fat fees and freebies from the very banks who were making the absurd loans. Governments should bring suits against the executives involved, the repositories of vast personal wealth, to help repair the hole in private and public balance sheets."

" It is as though Europe and America had announced an amnesty to the world's criminal gangs after they had gone on a killing spree because they feared the killing would get worse."

* * * * *

These are harsh words, and one can't help but identify with his ire. But I believe his call for hanging the culprits is a little over the top, because like Robespierre, he's got the wrong defendants.


[Thanks to Robolove3000 for this great tatoo.]

Everyone is forgetting the most important element in all of this: The identity of those who allowed all of this to happen. Why does everyone forget that it is Greenspan's Federal Reserve Board that decided to lower the target interest rate from 6.50% to 1.75%, i.e. almost five whole percent, in the space of one year from January 1, 2001 to January 1, 2002? And who continued to lower that rate to 1.00% up to July of 2003? Who is it who didn't start to retract until July 1 of 2004, slowly lifting rates back up to 5.25% in July of 2006?

Housing was already taking off worldwide, but the US Fed chose to ignore it, even publishing papers to the effect that the housing boom was not a monetary phenomenon. (See my previous post and my cartoon on the subject. I wrote an economic analysis of one ridiculous paper, but no one cared to publish it.)

I thoroughly admire the Fed's latest efforts at transparency and their desire to act in a predictable fashion from 2004 to 2006, raising the rates only by .25% at each announcement; but what I deplore is the Fed's conviction that they can produce anything positive by their manipulations, fast or slow.

The Fed is useful in times of panic as a kind of overseeing clearinghouse, i.e. when it can influence the day-to-day machinery of banking operations and issue temporary emergency credit to avoid useless trauma to the system. However beyond that, the Fed is helpless--indeed harmful--when, in addressing its government-appointed mission, it attempts to influence the business cycle, employment, prices, and the general economy.

Why are their attempts so futile? There are several well-known but forgotten reasons.

1. Their methodology is in direct conflict with their mission. They act upon statistics, and statistics by nature are a molasses-in-winter, after-the-fact phenomenon, whereas their idea of management of the economy requires preemptive measures.

2. Their powers of intervention are in direct conflict with the mission of all market players. As Hayek said in The Road to Serfdom, "If the individuals are to be able to use their knowledge effectively in making plans, they must be able to predict actions of the state which may affect their plans." This implies that any arbitrary or unpredictable actions on the part of the Fed throw a wrench into the plans of those whose goal is to succeed within the "invisible hand" marketplace. If everyone has one eye on the profit line and the other on the Fed, obviously they are focusing only half of their attention where it should be; and they must include in their plans sufficient reserves to cover the unpredictability of the Fed's actions. Surely this is an expensive and unnecessary handicap.

3. The Fed's interference in the marketplace creates a whole new profession: That of outguessing the Fed. Every bank and financial institution in the world, and even some whole companies, are devoted to analyzing global markets as they gyrate around central bank intervention.

4. Fed interference creates imbalances in business cycles that encourage otherwise useful market players to become reckless and spendthrift. Hedge funds, credit derivatives, and those bank departments that trade in them have created the problems we are experiencing today, based on the latest ballooning of credit made available by the world's central bankers in 2001. Thus the Fed, with the collaboration of these risk-players, is directly responsible for the euphoria of today's boom/bust situation.

5. Fed interference creates moral hazard. It is reliance upon the Fed's capacity to bail out financial crises--powers well over and above their clearinghouse duties--that encourages risk-takers to assume too much risk at the expense of the taxpayers.

* * * * *

Why has everyone forgotten these self-evident characteristics of centralized monetary control? [Sigh]

So if we're looking for someone to hang, let's look at ourselves. We are the ones responsible for centralizing our government and allowing legislators to create and empower a Federal Reserve in the first place. Let the taxpayers pay for this one; but let them also rise up in anger against the central banks to prevent another such credit cycle.

Roller Coaster Real Estate Graphic Fun

Here's a fun ride to give you an idea of how the real prices of real estate in the US have fluctuated over the years since 1890.

Roller Coaster Ride

Underneath the video you have the actual graph, in case you don't get it.

Thanks to Seeking Alpha for this reference.


Have a great ride!


[Thanks to australianamusementfanatics.com for the image.]

Don't You Just Love the "Don't Worry, Be Happy" Real Estate Headlines?

All is hunky-dory and prices are stabilizing, if you read the Mortgage Bankers Association's latest weekly survey.


[Thanks to zbrzeznys.com for the picture.]

But what they're not telling you is this:

There are 24 mortgage providers that are rumored to be in trouble, according to implode.com, and they are relisted in an article at seekingalpha.com entitled "Latest Count of Major US Mortgage Lenders That Have Croaked Since about Dec 2006" as follows, with their commentary in brackets:

"1) Wells Fargo
2) HSBC Household Finance [rumored to be up for sale]
3) New Century [restating '06 earnings downwards; major shareholder lawsuits]
4) Countrywide [reportedly in talks with Bank of America (may not be credible)]
5)Fremont
6) Option One [H&R Block; up for sale]
7) Ameriquest [owned by ACC; shut most offices, settled with 30 states over predatory lending]
8) WMC [subsidiary of GE Money]
9) Washington Mutual [closed 80 branches in late 2006]
10) CitiFinancial
11) First Franklin [acquired by Merrill Lynch from National City for $1.3bln]
12) GMAC [Major layoffs in ResCap]
13) Accredited Home
14) BNC [Lehman bros. subsidiary]
15) ChaseHome Finance
16) Novastar
17) OwnIt, 2006-12-07 [partially-owned by Merrill and BofA]
18) Aegis [recently closed two subprime operations centers]
19) MLN, 2006-12-29 [reportedly bought out by Lehman]
20) EMC
21) ResMAE,2007-02-13 [in bankruptcy; being funded by Credit Suisse]
22) FirstNLC 22) Decision One [owned by HSBC; rumored to be up for sale]
23) Encore [being acquired by Bear-Stearns]
24) Fieldstone [closing 7 of 16 ops centers, debt renegotiated through 2007-01-31]"

Do you see your lender among them?

And what I see is also this:

Those people who have enough money to play around in hedge funds and in the stock market and elsewhere, or who have pensions that are being managed by persons who have control over trillions of our money, may not be terribly affected by the news that thousands of households are now in bankruptcy or foreclosure.

But I, ever the "bleeding heart libertarian" as Tim Worstall calls us, think it is a crime.

This is not entirely the fault of that poor fool who will be parted from his money no matter what we do. This is the fault of those who have furnished the means for this liquidity bubble, and of those who abuse the credit leveraging systems now in place. Together, they have created the wherewithal for the mortgage industry to give these poor fools the credit that got them so far up Foreclosure Creek.

These poor victims should never have been offered a mortgage. And I'm not blaming the mortgage industry entirely, because the mortgage industry is a group of enterprises that do what comes naturally, i.e. they lend money. And the money is just sitting there waiting to be lent. These companies go about their business of making a profit, as indeed they should; so if the money is there, there is no reason they should not take advantage of it to make even more profit. And there is so much money available, that they let their guard down along with their pants and their lending parameters. (One caveat: I'm not including in this excused group those companies who have not obeyed the rules regarding reserves, like New Century and perhaps others.)

How can the plight of thousands of wage earners who got sucked into this housing maelstrom go unnoticed? How can we stand by and watch the smarty-pants of this world deprive the little guy of his very livelihood, because of artificially lowered credit criteria and unsafe loans? It's a crime, and someone must take the blame.

The last of the superfluous bucks stops at the door of the Federal Reserve, and at that of other global central bankers like those of Japan and China, who can't leave their money supply alone but rather insist on experimenting with interest rates and other credit-creating instruments in a futile effort to save us from THEMselves [sic.] I mean by this that they got their (our) economies into these tight spots in the first place, and now they want to get us out by making things worse. (For a more detailed discussion of how they do this, see my earlier posts here and here and here.)

Another buck or two stop at the portals of our legislative branches, at the feet of the spendthrift government officials who are so eager to buy votes that they can't even balance our budget, preferring to spend us into debt. We've been lucky enough as a nation to have a reprieve for as long as it lasts -- we're still the least bad investment choice, for the moment -- but at some point we'll have to pay the piper or go out as the latest, largest, and most powerful nation in history to have followed all the others down into ignominy.

(As you can see, my feathers are a bit ruffled today.)