Posted on 03/04/2008 2:52:07 PM PST by hripka
Federal Reserve Chairman Ben Bernanke, in a speech this morning in Orlando, FL on "Reducing Preventable Mortgage Foreclosures," reportedly urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting, according to mainstream media reports. That's one way to look at it, but it actually misses the entire point of his speech.
In the speech Bernanke outlines the grim path ahead for individuals besieged by declining home values and rising mortgage payment resets. This year about 1.5 million loans, representing more than 40 percent of the outstanding stock of subprime Adjustable Rate Mortgages, are scheduled to reset. According to the Federal Reserve, the estimated payment adjustments upon reset will result in an average monthly payment of $1,500, a 10% increase. The fear, a very real fear, is a cascade of defaults that puts additional downward pressure on home prices and forces continued risk aversion on the part of mortgage lenders.
"This situation calls for a vigorous response," Bernanke said. "With low or negative equity, as I have mentioned, a stressed borrower has less ability (because there is no home equity to tap) and less financial incentive to try to remain in the home."
Consequently, according to Bernanke, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure. In other words, adjust the mortgage principal downward to reflect the declining home value.
Wait a minute, wouldn't that put yet more pressure on home prices in areas where a significant number of homeowners seek and receive principal writedowns? It sure would. Moreover, as Bernanke notes, "Lenders tell us that they are reluctant to write down principal. They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again." And of course, on the off chance home prices rise the lender would not share in the gains.
So what is this speech about? Is it really about urging principal writedowns that even Bernanke himself admits probably won't work, or is something else going on? We're going to go out on a limb and say, "something else." The real conclusion is reached at the very end of Bernanke's speech:
"The government-sponsored enterprises (GSEs), Fannie Mae (FNM) and Freddie Mac (FRE), likewise could do a great deal to address the current problems in housing and the mortgage market," Bernanke said. "New capital-raising by the GSEs, together with congressional action to strengthen the supervision of these companies, would allow Fannie and Freddie to expand significantly the number of new mortgages that they securitize."
That almost sounds like it would be a good thing. In at least one sense, it would be a good thing, but only by default. Bernanke concludes; "With few alternative mortgage channels available today, such action would be highly beneficial to the economy." That's certainly true, but only in a grimly ironic sense. It's government-enabled expansion of Fannie Mae and Freddie Mac that led to a situation where there are "few alternative mortgage channels available today" in the first place.
So Bernanke's ultimate conclusion is this: "I urge the Congress and the GSEs to take the steps necessary to allow more potential homebuyers access to mortgage credit at reasonable terms. " It takes either a massive degree of denial or a broad imagination to accept that sentence at face value. What Bernanke is really urging is the full-scale nationalization of the GSE's.
We can continue to pretend that these companies are going to be just fine, but the reality is it is impossible to fit together the pieces - raising massive amounts of new capital in the face of a yet-to-peak-wave of mortgage resets and housing price declines while simultaneously expanding their mortgage securitizations - without taking what Bernanke calls "congressional action to strengthen the supervision of these companies" to mean,essentially, nationalization of the housing market.
Fannie and Freddie stocks are down about 6% so far today. Perhaps the reality is now setting in that nationalization doesn't benefit shareholders.
Sow the wind, and reap the whirlwind!
or even simpler......you rent it from the government.
What a sad decline from the vision of the founders, where our rights were endowed upon us at the moment of our individual creation, and that the government is only legitimate if it recognizes and respects those natural rights.
So, after a few hundred year experiment, the net result is that we basically got rid of the swords and watery maidens.
I think you’re right, unfortunately, HD. It’s only a matter of time.
Whereas I agree with the above comments, disgust, distrust, etc., perhaps there is a point of practicality we should look at.
If a mortgage holder would look realistically at what the property will be worth 6 or 8 months after foreclosure (it takes a while to foreclose, take possession, advertise for sale and complete the sale), put that number on the value of the property and reduce the principal of the loan to that number, here would be the advantages.
First, the mortgage holder will not get any more than that number after foreclosure.
Second, the mortgage holder does not have to take possession, which has legal expenses.
Third, the property will not go to ruin as it will during a 6 months or more standing empty.
Third, the mortgage holder would still be collecting interest on something, rather than a negative cash flow (expensed involved in protecting, advertising, selling, etc.)
The comments made by the posters above certainly are correct in theory in a properly functioning economic system but that is not where we are today.
It is called cutting your losses. So what is the best way to do that? Reduce the principal or have thousands of empty decaying properties on your hands?
I believe the banks should reduce the principal on the loans for their own benefit, the hell with the debtor. Neither of them deserve any sympathy, but the banks and other mortgage holders need to do what is best for their stockholders and depositors.
CSSJR
If we do not wish to lose our freedom, we must learn to tolerate our
neighbor’s right to freedom even though he might express that freedom
in a manner we consider to be eccentric.
So why is this a crisis that I, Joe Taxpayer, should pay for, just because some people bought homes where a measly 10% increase in their house payment sends them over the cliff?!!!
Sounds like we are going to use popular socialism to fix business scoialism....yikes...
Be patient. Wait a few months and reality will begin to set in. Right now, lenders are just reeling with processing the volume of foreclosures. Soon they will have to get serious about getting them off the books. I'm currently negotiating a price of 95K on a property that appraised at 550K three years ago and I think I have a 60% chance of getting it because the lender has 6,000 properties now and it's just the beginning.
It's not just the payment. The widespread loss of equity as a result of this problem is affecting everyone. I don't think the gov't should intervene. I'm just pointing out that the problem is wide reaching and affects the entire economy and everyone
One problem is all of the mortgages signed at higher prices. Another problem, comes from all the people who drained their home of equity through mortgage equity extraction, and are upside-down on their loans, now that house values have gone back down.
The point stands. Either property is yours — with no strings attached — or it is not yours.
I own a stapler. So long as I can keep from being robbed and having it stolen, I own the stapler. But if you stop paying government required fees on your land and home, they will take it away from you.
It is a simple issue of property rights. By paying taxes, the government ALLOWS you some control over a piece of property that you have purchased. That is all.
Oh, you are so correct, and, hopefully, here on FR, you are preaching to the choir. But I fear not.
‘Taxes are necessary’ That is the mantra. Taxes are evil, a neccessary evil, but evil none the less. The Boston Tea Party, as far as I know, was held because of a 5% tax rate.
WHERE ARE WE NOW?????
It is defensible that we give back 50% of what we earn to Gov’t. Fed, State, County, Local. 50%? Where is the Tea?
Our current condition goes back to FDR and the ‘National Emergency’ still in effect. We have a Gov’t that pays lip service to the Constitution to keep us in line long enough to steal all that should be ours. Including our homes.
How are Freddie Mac and Fannie Mae not already nationalized?
Exactly my point.
Welllll
I think the author here is stretching it a little....
(but some of us agree with the substance)
Okay......as of now it’s a “stretch.”
The we know the end game is going in this direction.
Don’t get too focused on the technicalities, lol!
j/k
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