The further to the left or the right you move, the more your lens on life distorts.

Friday, February 10, 2012

No Money Down

Two years before the great crash of 2008, my son decided it was time to buy a condo in the Los Angeles area. Prices were dramatically inflated and rising higher by the month. The bubble was inflating rapidly, but on the ground (and without hindsight) it was hard to see it.

Since this was the first residence he would purchase, he asked if I might advise. Of course, I agreed. I told him that it was a good idea to put at least 20% down, to structure his mortgage payments so that they were less than 33 percent of his monthly take home income, and to look for fixed, low rates rather than a balloon mortgage.

He contacted a number of mortgage brokers and banks and learned quickly that my advice was archaic. He was offered a number of low-interest balloon mortgages with no money down, was advised to borrow more than he needed so that he could purchase furniture, redo the kitchen, and maybe buy a car, was given the most cursory credit check, and was asked to sign on the dotted line.

That’s when I got my first inkling of the economic debacle to come. On the phone, I insisted that the mortgage brokers were wrong, and that although my advice might be old school, it was solid. Luckily, he listened, and although his condo has lost value, he has equity, and continues to pay his mortgage faithfully. But millions in California took another path and the vast majority of them are now underwater with a significant number being foreclosed.

Enter President Obama, who yesterday announced a $26 billion bailout program, supposedly funded by big banks, that would save 1 million mortgage holders who are being foreclosed. It’s an election year, and President Obama needs to buy votes. What better way than to be perceived as punishing the large banks while at the same time being perceived as helping much beleaguered homeowners who are now in default on their mortgages. Unfortunately, like many things associated with the President, perception is not reality.

Charles Gasparino comments:
… the [big] banks will cough up $26 billion for various abuses, including illegal foreclosures. Many “victimized” homeowners will get relief, mostly in the form of refinancing of underwater mortgages. So, they can stay in their homes, at least for a while.

It’s such a win-win, the administration is boasting, that even those people not part of the specific victimized class will benefit because the deal creates a stronger housing market. If banks can’t foreclose on properties, the theory goes, they can’t depress housing prices more by selling these properties on the cheap.

Problem is, almost all of the “logic” behind the deal isn’t logic, but a combination of half truths and outright lies. Even worse, the settlement will likely prolong the housing slump and set the stage for it to happen again.

Take the “victims,” who faced eviction from their homes because of the banks’ supposedly corrupt foreclosure practices. These homeowners didn’t really own their homes; many, in fact, barely plunked down a downpayment for a mortgage.

By borrowing far more heavily than what they could afford, they were also gambling that housing would keep rising in value, defying basic rules of economics.

Now they’re being rewarded for their mistakes. Ironically, even the government officials who were part of the deal have privately conceded that, with few exceptions, more than 95 percent of the so-called victims weren’t victims at all; they faced imminent foreclosure because they were delinquent on their mortgage payments — often for a year or more.

Unfortunately, the MSM would have us believe that nafarious paperwork errors made by the banks are the real problem. They are not. The real problem is that homeowners didn’t pay their mortgages for 12 to 24 months and then declared the bank’s attempts to foreclose as null and void because proper signatures on foreclosure documents were not developed.

Now, if it was only the banks that suffered, I say ‘good on em.’ After all, their actions in allowing people to take out loans that they couldn’t afford to pay back were irresponsible (albeit that they were under pressure by the government agencies and activist groups to do so).

But at the end of the day, this administration’s blatant political attempt to do something to fix the problem will, in fact, make matters worse for the vast majority of responsible homeowners who pay their mortgages on time and who have also suffered a significant reduction in their home’s value over the past four years. Why? Gasparino answers that question:
All of [this] sounds harmless — until you realize that foreclosures are a necessary ingredient to the housing market’s recovery, because they allow prices to hit bottom and entice people who can afford homes to buy them and bid up prices again.

So, the bailout does little more than delay the pain because housing prices at some point must reflect the market, with its glut of inventory in many areas.

We’re also teaching a generation of homeowners that there are no risks to their decisions because the government will bail them out. If there are no consequences to risk, why not just roll the dice again and again?

It’s tempting to see the mortgage settlement in the broader context of the bailout mania that has swept the country since the 2008 financial crisis. The auto companies and the big banks got bailouts, so why shouldn’t homeowners?

But when will it end? Probably when it isn’t an election year.

This is still another example of President Obama’s continuing series of bailout programs that may give the appearance of lessening short-term economic pain when, in fact, these bailouts do nothing more than prolong it.