Thursday, December 6, 2007
The Housing "Plan"
The Just One story is easy for me today. The Bush administration announced a plan which would essentially freeze interest rates in hopes of stemming the tide in an otherwise rising wave of home foreclosures.
It would essentially classify homeowners into a few different buckets. To make a very complicated story short, homeowners who have mortgages that have rates which will reset in the next two years and can not afford the reset, will get a reprieve from the rising interest rate they would have otherwise had to pay. Those who can afford it won't get it (how this is determined is beyond me) and those who could have never afford even the lower rate won't get it.
Another sticking point is to figure out a way to get investors who bought these securities to just bend over and take this. Imagine if someone promised to give you $10 a month for a year and then $30 a month every month after that. Then, when it comes time to start the $30 month payment they say, "Just kidding!". Well that is what this plan is doing.
What about all those homeowners who complain they didn't know what they were getting themselves into? Well I don't feel a lot of pity for them. This was the biggest purchase they will ever have, and they didn't try and understand what they were buying? People like me, who were careful with my money and didn't buy when everyone else was going crazy now have to pay for this (yes we all pay for it). Doesn't seem really fair to me. Further, the economist in me knows this plan will cause Moral Hazard going forward. Basically future homeowners will know that the government will bail them out, causing more people to take on riskier loans. Moreover, investors will suspect the same thing, and demand higher interest rates, thus making mortgages for all more expensive.
So how do you play this in the market? Still wouldn't touch financials or stocks related to housing here. In fact, I would wait for them to bounce, and they will bounce, and then short into strength. Names like Toll Brothers were up 13% today, I think you let them go a little higher, and then short them. This mess isn't anywhere close to over.
What do you think? Do you think this is a good plan that the government should support? If not, what would you let happen?
Details of Plan
Pimco Manager criticizes plan.
Six Quick Thoughts