I am sickened by Paulson and Bush’s bailout plans. On the other hand, I know that this subprime/negative ARM mortgage problem is a bigger hole than anyone can imagine. Florida, orange county in California, Montana, and more pension funds and money market funds will be hit one after another. The cover-up and blow-up will only come at the last minute, which is too late for you or anyone to do anything about it.
In any case, let’s look at some details of the plan from the available news from Bloomberg:
- The covering period is origination from Jan 1st 2005 to July of 2007, and resets in Jan 2008 to July 2010. This will cover majority of the mortgages, except the early adopters in 2004. It even covers the people who have already reset, for example with a 2-year ARM reset between Jan/Jul 2007.
- To be eligible, borrowers must be less than 60 days behind the payment, and have LESS than 3 percent equity in their property. Also, the borrower must have a FICO score of 660 or below. Now everyone is going to go out and start defaulting on every credit card to lower their FICO score. And take out a home equity loan to go below 3% LTV, putting that cash elsewhere. How smart the plan is! Talk about moral hazards.
- The result of the bailout is a freeze on rates (I’m still not clear on whether it’s payment or interest rate or both), or refinancing into another mortgage, possibly (or I should say most likely) back by Federal Housing Administration loans. Certainly FHA will pick up many of the junks from big banks and write them off through taxpayer’s money.
Now the biggest issues with the bailout as I see it is best put forth by Scott Simon, head of mortgage and asset-backed bond investing at Pacific Investment Management:
“The things that make the U.S. mortgage market the capital-market success that it is are property rights and the sanctity of contracts, so they have to be careful to not damage either one of those.”
And Republican Mike Castle of Delaware was daring enough to propse to offer a safe harbor clause from legal liability to mortgage servicers.
Based on the details that I gather, it appears that the bailout will be done by mortgage servicers probably through brute force, without even gaining consents from the mortgage bond investors. That is just NOT good. That is violating property rights and contract laws. The US government (especially the head of FDIC) is debasing the very foundation of this country (not to mention a debasing US dollar). How can government intervene into a private contract, and decide who is going to be benefited, and who (all the renters, conservative home buyers, and mortgage bond investors) will be hurt, or have their rights/properties taken away?
Certainly, this bailout plan is really intended for banks and financial institutions, so that they can keep valuing their mortgage holdings at a higher artificial unreal price. In the meantime, all the $US dollar holders and majority of the citizens will get screwed by even higher inflation to come, so that the housing prices can be stabilized at a nominal inflation-non-adjusted prices. Basically, US government is trying to prevent a normal deflationary cycle after an abnormal inflationary housing cycle (created by Greenspan’s ultra-low interest rates). Of course, such inflationary actions will simply exhibit itself later in more inflation later in whatever hot money decides to chase afterwards.
The whole bailout plan and most of Greenspan’s past actions are MORAL HAZARD. That is the reason that our capitalistic society is getting more and more speculative year after year, and that the speculation fireworks are rising to ever higher height, and also dropping to ever deeper abyss. Capitalism with moral hazards created by government bailouts is no longer a free enterprise market. When a risky bet no longer has the risks because of government bailouts, everyone becomes (and wants to become) a speculator. This is the society that we lives in. And the caution from fiscal conservatives is always penalized by the lost gain (due to inflation).
As I have said earlier, the real loser when the housing bubble bursts is really everyone. And our losses are not just financial due to loss of purchasing power because of higher inflation, or reduced benefits or credit interest rates in our pension or bank accounts. Our biggest loss for a society as a whole throughout the bubble process is that we have all become speculators in the long term. And when everyone becomes a speculator, nobody can gain from speculation.
P.S. Thanks to Keith at HousingPanic, I vicariously release all of my resentment through reading his blog. I wouldn’t want to go that far like in his blog at least verbally here on my blog. But I certainly agree with him on many of his well-made points.