Tuesday, November 11, 2008
US Unveils Idiotic Mortgage Plan
In another stupid move, the US government outlined a plan to help borrowers get better terms on their mortgages. The basic gist of the solution is that through Fannie and Freddie, the US government will encourage loan modifications. They won't allow for an outright reduction in the amount owed, but they are willing to allow the mortgage to be extended say from 30 years to 40 years, and they will allow the interest rate to be lowered, which will temporarily make payments more affordable. Before I go criticize this plan, because I will, there are some things that are not all that horrible.
First off, I have no real problem with private institutions making loan modifications that actually reduce the amount owed on the mortgage. While I tend to think all homeowners who took out a loan for an overpriced home are responsible for the full amount, I have absolutely no issue if two private parties want to sit down and negotiate new terms. If it is in the best interest of both parties to keep the person in the house, and one side is willing to take a loss in the deal, then so be it. A lot of private banks are deciding to do this, and I'm all for it as long as they do not do it with my tax dollars.
So that being said, I also have no problem with what the government is doing here. They are extending the length of the deal and the interest rate temporarily, but the overall deal remains the same. Now, I'm sure they are taking a small hit in profitability here since the term is longer and the terms of the deal probably favor the homeowner, but overall, the deal is still a net positive (assuming the borrower doesn't eventually default which is probably a bad assumption). Further, the government is not putting any tax payer money directly in the hands of borrowers. Something I am sure that will eventually happen but at least not with this plan.
But of course this plan has its problems as well. And, like the GM situation it comes down to one fundamental problem. You can not, over the long haul, create demand for a product at an artifically high price. This is exactly why we have a housing bubble. Houses are STILL overpriced. Just look at some of the statistics in the Los Angeles market. The median sale price is around $375,000 (look at the average listing price for a good chuckle). While that may sound like a bargain compared to prices before, this is still way overinflated. The median sales price in 2000 was just around $160,000. Are you trying to tell me that given all the turmoil we have seen recently, that prices deserve to be double what they were just 8 years ago considering that salaries are relatively flat? A family making $50,000 a year, which is the California average (the Los Angeles average is even lower) can nowhere near afford a mortgage to buy a $375,000 house.
There is nothing the government can do to fix this fundamental affordability problem. In fact, the government is actually making things worse with every action they take. If the market doesn't just correct, and wipe out this fake equity, the market will languish for years. No doubt, a lot of people will be hurt, but how many more will be hurt if we just stay like we are over the next decade? We will have an entire generation which won't be able to buy affordable housing while we prop up an overinflated market. The vast majority of people who own their homes did not buy them in the last 5 years and have mortgages they can afford. Should all of us suffer because of the small minority that did and can't?