Thursday, April 15, 2010

The Housing Crisis is Over

The US mortgage crisis is effectively over. We'll be cleaning up loose ends for another year or two, but mechanisms are in place to ensure that neither delinquent debtors nor their lenders are at risk of any systemically damaging losses. Housing prices have bottomed and will soon follow the stock market's V shaped recovery. Average Americans will, once again, be able to buy a home on a zero down, four percent FHA guaranteed mortgage with assurance that they can sell it two weeks later at a profit. The media will continue to focus considerable attention on this issue, in their fashion of looking backward instead of ahead, but the recovery's a done deal.

How can I be so sure? Reading articles like this one makes it sound as if the problem is still acute.

"Bank of America is considering temporary payment-reduction periods of up to nine months for the unemployed. In March, the Treasury ordered a three-month reduction for those receiving unemployment benefits. The period could be extended to six months.

Almost 500,000 struggling loan customers have not supplied information or taken other basic steps to qualify for mortgage help. About half of them have not made a payment for more than a year, or owe more than 50 percent of the value of their homes. Fully 1.44 million of its mortgage customers are 60 days or more delinquent - nearly 14 percent of the 10.4 million first mortgages the company services."

But these problems have all been addressed by the government. Let's break it down.

Problem #1: Housing prices have dropped and homeowners are underwater.
Solution: Flood the economy with money, hold interest rates at zero. Drive investors out of money markets and into risky assets like stocks. Wealth effect kicks in (Ben loves this part). Investors search for other assets that look cheap. Hey, houses have been beaten down, maybe they're cheap. Let's trade up to a better house, it's a good investment. Or just take out a home equity loan to pay for that new boat. 4.8% 30 yr fixed is hard to beat. Heck put the money into the stock market. It returns 5% every month.

Problem #2: Potential homebuyers already have too much debt.
Solution: Have the US government take over the home mortgage market. Fannie and Freddie and FHA. They can keep lending standards low, low down payments. Don't worry about your FICO score, the government knows that housing is important social policy. Also, have the government subsidize new homebuyers using deficit spending (this program will not end any time soon).

Problem #3: Lenders are wary of getting burned again by home borrowers.
Solution: As noted above, we don't need private lenders. The government is in charge now. But for the few remaining private lenders, put a government guarantee behind practically every mortgage they write.

Problem #4: Mortgage rates are at historically low levels, what if they begin to rise. Won't that hurt housing sales and drive prices back down?
Solution: Mortgage rates won't be allowed to rise. Bernanke has already spent $1.5 trillion of brand new money to keep rates low. He'll spend more as necessary. Plus, now that the government controls the mortgage market, we're no longer dependent on market pricing.

Problem #5: Couldn't the government lose lots of money if it underwrites mortgages at low rates, same as the lenders who made bad loans during the last housing bubble?
Solution: This has already been anticipated and addressed. On Christmas eve 2009, the Obama administration announced that Fannie and Freddie were being given a blank check from the US government to cover future losses. Home mortgage losses will certainly be massive, but the US government has a printing press. There won't be any need for unpleasant Congressional votes when the hundreds of billions of red ink start to roll in. Probably at some point, Fannie and Freddie will cease filing SEC reports and the public won't even have to concern themselves with government losses on our mortgage portfolio.

Problem #6: Banks have already taken a huge blow to their capital due to mortgage blowups. They're impaired even though the government has allowed them to hide their impairment via accounting whitewash. How can banks expand our credit card limits if they're capital constrained?
Solution: Have Ben Bernanke lend banks hundreds of billions of taxpayer dollars at zero percent, then turn around and borrow it back from them at 4%. Banks balance sheets will heal quickly. Allow banks to use their prop trading arms to game the stock market using their unlimited free funds. It's a profitable game if you have the right software. If a small bank fails, have Sheila Bair basically give the assets to a larger bank while the government absorbs the excess liabilities. These are all very effective ways to make the banks very profitable again.

Problem #7: Banks still have bad mortgage risk on their books due to high unemployment and underwater mortgages at high risk of defaulting.
Solution: Design a mortgage modification program that allows lenders to take a small principal writedown (about 10%) on at-risk mortgages, and in return give them an FHA guarantee on the remainder of the loan. If the borrower defaults anyway in the future (most of them do), government will pick up the tab.

Problem #8: What if all this doesn't work and home prices continue to fall?
Solution: That's why we have the world's pre-eminent expert on deflation running our central bank. The solution involves a helicopter (hovering over Wall Street) and a shovel.

As you can see, our government has been quite ingenious in addressing every potential problem that the housing crisis could pose in the future. The crisis is over.

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