Pres. Bush just had his news conference to announce his mortgage rate freeze plan and he insists that it
"...does not represent the imposition of a government solution to the mortgage crisis.
"We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could not afford," Bush said after meeting with industry leaders at the White House. "But there are some responsible homeowners who could avoid foreclosure with some assistance."
This is a very bad idea with far-ranging consequences that probably haven't been fully explored by this administration.
Join me below the fold.
Why is the Bush Administration getting involved? The government should not be in the business of propping up the housing market. Housing prices have completely outpaced wages in the last 5 years. As prices climbed beyond what conventional lending requirements allowed, the lenders decided to loosen up lending requirements so everyone could still buy a house. Which was great, if you took advantage of the looser requirements. Sure, your DTI (debt to income) ratio was over 50%. Don't worry, prices will keep rising. Sure, your LTV (loan to value) was over 100%. Don't worry, prices will keep rising. And they did as long as there was someone else with money to buy you home with some absurd NINA (no income/no asset disclosure) option ARM mortgage.
But the mortgage merry-go-round has stopped and some very rich investors are left holding the bag filled with SIV's and CDO's (these are financial instruments that lenders use to sell your mortgages in bulk). This bag is supposed to be worth a whole lot more than it currently is valued. This is a big problem for them. And you.
Because if the loans contained in the SIV's and CDO's are actually perform much worse than what was sold to the investors, guess what, they won't buy them anymore. The credit markets are going to tighten up dramatically if they think the government is going to jeopardize their returns on mortgage investments.
Think about this. Lenders offered ARM's at artificially low teaser rates knowing that the initial rate bump would more than make up for the low starter rate. And investors were happy. Until GWB decided that those low rates will actually been in force for an additional FIVE years longer than the lenders initially planned for. What do you think the investors reaction will be? Joy? They are now locked into guaranteed lower returns thanks to this agreement.
Going forward, any investor in mortgages will require a higher rate of return which will translate into higher lending costs. And the lenders will have much tighter rules over who to lend money to. As a result, the price of housing must decline since there are now going to be a lot fewer qualified borrowers and a whole lot of inventory. The US is going to go through a painful correction in the housing market. Many people will lose their homes. Some of them were taken advantage of by the lenders and brokers (these are the people that should be getting helped). But many of these borrowers looked at how much home they could buy with a fixed rate and compared it with how much MORE home they could buy with an ARM, and choose the ARM. They got greedy. Now they cannot afford to stay and GWB wants to force the lenders to let them stay. This is not how a free market works. The lenders agree to either get monthly payments or they take the property back. Bush is now saying they cannot have their full monthly payments and they cannot take the house. Financial investors really love these deals. And the next one will be priced accordingly.
The housing market is a game of supply and demand. Currently there is way too much supply of homes for sale. The way to sell the homes is to lower the price. Period. Until the supply gets out of the market, the US economy is in trouble. And today's mortgage freeze announcement does nothing but delay the coming crisis in the housing market. And thanks to the global financial economy, it looks like many markets outside housing will also be negatively affected. Everyone cannot always make a profit on selling their house. Let the market work. Do not artificially inflate the housing market.