The Absurd Report

The Mortgage Mess

The Federal Reserve in 2002 offered the same remedy for an economic slump as they do today, they slashed interest rates to record lows which created an overheated housing market, The Fed was wrong then and they are about to repeat the same mistake again but this time it is more significant because they are fueling inflation.

The Housing Market is unique because it varies by location to location so it is hard to generalize when speaking about it. What happened to the housing market in Florida, Arizona and Las Vegas which saw unbelievably high growth in the value of homes and is not comparable to the Mid West or other areas which saw average growth. Over the past ten years just about every homeowner has seen the value of their house increase by a National Average of 10% per year. (Value has doubled in ten years.)

Nationally housing prices have fallen by an average of 10% and we may see more decline yet this year until the mortgage mess is corrected. In real terms that house you own for the past ten years may only be worth ¾ of increased value and not double. Mortgages are based on the LTV (Loan-to-value) and presently the average mortgage balance is 47% of the original loan on a National Average. This indicates that most Americans have substantial equity in their homes.

Home mortgages are a commodity they are brought and sold in bundles in the free market just like stocks on the exchanges by large institutions. Rarely does the originator of a loan hold it through its term. Just like all free markets from time to time go through a period of corrections, this is where the housing market is today. The market is telling us that prices rose to fast and to high and it is time for an adjustment.

Owning a home is still one of the best investments that an American family can make.

The latest numbers show 83 out of 10,000 mortgages are in foreclosure (less than 1%) and 5.2 % are delinquent which means that 94% of Americans are meeting their obligations.

But what has added chaos to the present mortgage crises is what I call the Enron Syndrome, Walk-a-ways and an incompetent Federal Reserve headed by Ben Bernanke. And to this you can add politicians who have ‘no clue’ what they are talking about but see the mortgage crises as a vote buying scheme.

The Enron Syndrome – The top dogs in the large institutions are nervous because what happened at Enron where the chiefs in charge went to jail because they OVER valued their holdings. So what we have today is caution and to be sure the large institutions are now UNDER valuing their assets which has added to the stock market slump.

Walk-a-Ways – I don’t have any exact numbers just yet but what is happening in Florida, Arizona and Las Vegas is people who speculated on Condos/Homes are putting the keys in the mail box and simply walking away. These are not poor people who need help they are investor who put 10% down (nominally speaking) looking to make a profit on a heated market and have seen value of their units decline beyond their investment and decided to minimize their loss.

So when everyone assumes that the foreclosure problem is totally among poor people they are wrong.

Ben Bernanke and The Fed – The more I have watched him and listened to what he has to say before Congress I have come to the conclusion that he no more sure of what he is doing than the man in the moon. I see a man struggling with his words and this leads to no confidence vote in my mind.

His latest suggestion that Lenders should renegotiate terms with borrowers in foreclosure borders on rank amateurism from an economist to pure insanity. He has suggested that lenders discount the principle amount of these loans to a point where borrower can afford the payment. His reasoning is that it will be cheaper for the lenders than foreclosing which is costly.

So for those in the 94% group of Americans who are making their mortgage payments on time I would say… I want a PRINCIPLE REDUCTION too and I deserve it just as much as anyone else! The idea that we could discount every mortgage in this country is beyond ridiculous because at that point we would have an economic collapse.

But the idea that we should help a few who made bad investments in the housing market is just as insane as to say we should help investors in the stock market whose stocks have gone down.

At this point we will have total chaos in our economic system, and you can see why I say the Fed chairman’s proposal is insane, especially coming from a man in his position.

Beyond that it breaks the basic contractual principles of law whereby lenders can not depend on the sanctity of a contract. Mortgages would become an endangered species.

What McCain has to do is come out for protecting the 94%’s home equity against deflation and guarding against inflation is a must. If you have to choose sides I would rather be on the 94% side. If need be he can call for changes in the Federal Reserve System.

Part III – Oil and Energy Policy (Tomorrow)