Posted on 12/06/2007 9:36:35 AM PST by goldstategop
It is easy to call yourself a supporter of economic freedom and the rule of law amidst a rapidly rising economy. Now with dark clouds of the recent rise in mortgage foreclosures—and more expected on the horizon—political expediency has eroded the support for free markets in some of its perceived champions.
Even self-proclaimed devotees of the late Milton Friedman, President George W. Bush and California Governor Arnold Schwarzenegger, sound more like critics than Friedman supporters.
In the wake of a perceived mortgage crisis both have attempted to use the coercive power of government to solve the problem. Both plans center on agreements with the largest mortgage servicing companies to “voluntarily” freeze interest rates on adjustable rate mortgages for a set period of time.
Upon Friedman’s death, President Bush remarked that “Milton Friedman has shown us that when government attempts to substitute its own judgments for the judgments of free people, the results are usually disastrous. In contrast to the free market's invisible hand, which improves the lives of people, the government's invisible foot tramples on people's hopes and destroys their dreams.” Perhaps the President should re-read his talking points and share a set with the Governor.
There are several flaws in the approach to “voluntarily” freeze rates. First, it is disingenuous to call the plan completely voluntary. When a government seeks a “voluntary” commitment in one hand, you can be sure that the hammer of regulation is hidden behind the back in the other hand.
Moreover, such a freeze is tantamount to a moral bailout. While it may not necessarily be a financial bailout of the S&L magnitude, it bails out lenders and borrowers from bad decisions and forces someone else to shoulder the cost. Behind each mortgage is a pool of investors that make life decisions, such as retirement planning, based on an expected return of those investments. Forcing these investors to eat a loss by government fiat is fundamentally unfair. Moreover, this tramples the rule of law and the sanctity of a contract. And, of course, as the regulatory feeding frenzy grows, you will no doubt see a host of new efforts to clamp down on lending practices and in doing so eliminate the access to capital that so many families depend upon.
Equally troubling, the proposals seem to try to encourage responsible borrowing by only applying to people that are current on their notes but who can’t afford the rate adjustment. It doesn’t take a Nobel Prize Economist to figure out that thousands of families that actually can afford the rate adjustment, and who made those decisions willingly, will nonetheless seek relief by claiming that they will not be able to afford it. And what constitutes not being able to afford it? Does a family that goes out and finances tens of thousands of dollars worth of home entertainment equipment and luxury automobiles and whose monthly debt obligations have increased dramatically qualify for relief?
Perhaps most troubling of all is that this move to freeze rates and ratchet down the industry with new, tougher regulation completely misses one fundamental reason that so many Californians have turned to adjustable rate mortgages and other exotic loans. The price of housing in California is simply too high.
Is it any surprise that five of the ten areas with the highest foreclosure rates nationally are in California, or that in some markets there are more foreclosures than new homes for sale?
If Schwarzenegger and Bush want to stay true to their philosophical allegiances to Friedman, they could start by tackling the root causes of the affordability crisis that has driven so many families to secure loans that are a poor fit for their unique conditions.
According to statistics from the California Building Industry Association, California homes were on par with national prices as late as the 1970s. As development became more difficult in California, prices relative to the nation began to shoot upward. Now, California home ownership rates are 10% lower than the nation.
If California really wants to ensure that people have a home to live in, we need to make housing more affordable. New regulations on mortgages or short term freezes will not do that.
The price of regulation—both in hard dollar fees and in the costs of time—can easily add $50,000 to the cost of each home. That can account for $300 or more in each monthly payment. In many jurisdictions, the cost of regulation is much higher than that.
At the same time the costs of regulation are increasing, anti-growth activists have become experts at utilizing the California Environmental Quality Act (CEQA) and other well-intended laws to stop development or force substantial delays which also results in significant costs. The longer a home takes to build, the more it costs in interest and construction expenses. On top of that, finding land that is suitable for development is increasingly difficult, and when land is found, political pressures typically mount against “affordable housing.” While such conditions exist in varying degrees around the nation, there is a uniform need to address them.
While it may seem politically appealing for government to directly help people keep their homes, as Friedman said of government intervention, the results are usually disastrous. Both Schwarzenegger and Bush would do well to focus, instead, on underlying cost drivers of the housing market that are truly governmental in origin.
People, faced with home prices they simply cannot afford, have far too often found refuge in loans that probably don’t fit their personal economic conditions. While no amount of intervention can eliminate the obligation that anyone has to fully understand and honor the terms of the contract they sign, it would nonetheless be helpful for government to eliminate or reduce some of the cost drivers that they developed and which have helped fuel this perfect storm.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
It is not a bail out. It is an agreement that is in the best interest of all parties involved. Banks are the biggest loser in a foreclosure. In the end this is best for the economy and best for existing homeowners.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
LOL...Congratulations on your effortless transition from:
There is no Housing Bubble !!
There is no Housing Bubble !!
There is no Housing Bubble !!
TO
This is not a Bailout!
This is not a Bailout!
I never said housing would not decline. I fully expected about a 5% decline and a slow down. What I objected to was the constant sky is falling, houses are gonna decline 40% in the next 6 months BS. And yes, this is in no way shape or form a bailout.
Much of Calif housing is hyperinflated.
Our $145k house now a $600k house.
Small wonder housing is making our area unaffordable for young couples with kids, jamming them into small apartments in unsafe parts of town.
Best thing that could happen for everyone but the speculators and those who use their houses as cash machines, is to see Calif housing prices fall at least 50% to bring them closer to a rational price.
rh, calif
I agree with you. If I were one of these investors, I would rather see a rate of return at 7-8% with maybe a 10% forclosure rate than keeping a 11-12% return with a 50-60% forclosure rate. I am not in favor of government bailouts, but I don’t have any major issues with this solution. It is not like these homeowner’s are going to have a 1% rate freezed for 5 years. They were already paying more than a conventional loan. When I bought my house in 2003, I took out a 30yr fixed and refinanced in 2005 with another 30yr fixed at 5.25%. The mortgage broker BEGGED me to take out equity and get an ARM, but I stuck to my principles and now I am sitting pretty. There is already almost a dozen homes in my neigborhood up for sale or already owned by the banks. If this move keeps another dozen from being forclosed and keeping my house value somewhat stable, I am all for it.
The lending institutions and the scum that signed the loans should eat it 100%.
They are legal contracts, live up to them or lose!
It is most definitely a bailout, it is just that the banks are bailing people out, not the government.
The banks are modifying the terms of their mortgages in order to keep them affordable enough to keep the homeowners out of bankruptcy. The homeowners are getting off with paying less then they had agreed to pay.
That's a bailout.
If two parties to the contract agree to change the terms, why do you care?
???? No it isn't. If the banks accept less in return for the improve prospects that they won't have to foreclose. That is called renegotiating a contract. It is not a bailout. There is no government money involved. Two parties to a contract can change the terms. There is no moral or ethical rule against that. It happens everyday.
Actually, providing more hope for investors to get their money back. If these funds go bankrupt, the investors will be big losers.
“It isn’t a bailout.”
I suppose that depends on what your definition of “isn’t” is. Welcome to wonderland.
The problem isn’t necessarilly that the housing was too expensive, people took out loans with very low Down payments and very high payments monthly. They also used ARMs and other riskier prospects without understanding what they were. The other day while I was at Sears buying a battery the 12 year old child of a Hispanic woman was having too explain in english how the pro-rate on the warranty worked, the woman kept getting madder at the store employee because she wanted a new battery. The funny thing was it was an Interstate battery, not a Sears battery.
This is the same as the housing problem in that, now because everyone wants to not address the single language barrier. People that can’t even understand how a warranty works, now want to understanad why their house price is unstable. Sometimes you have to get off the high horse of knowledge and realize that the lack of a cohesive education based on real life is needed, instead of the warm fuzzy education, that passes people along today.
Understanding how much a house, or warranty, or car is worth takes understanding.
They sold the loans and don’t own them.
I hope the current owners of the loans take the banks to the cleaners and the people that signed the loans wind up on the street.
The government’s interest in this is to keep property taxes from resetting at a lower level.
It is pretty obvious isnt it?
The banks and financial institution that agreed to this, do own the loans or run the funds that do own the loans. Now if they did something that is not in the best interest of the investors who invested in those funds, those investors might have the issue. But I can't see how getting the most money back possible is not in their best interest.
Bush doesn't care about that. The reason Bush is doing this is so the economy does not tank on his watch.
Raise rates and asset prices go down.
Lower rates and asset prices go up.
Although our centrally managed economy is not micro-managed as with the old Soviet Union because rates are a blunt instrument.
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