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Our Boneheaded Congress

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December 13, 2007 – Comments (6)

Trying to come up with yet another way to buy votes by screwing around with the housing market.

"We are in the midst of a crisis -- and one that is deepening," said Rep. Steve Chabot, R-Ohio, the lone Republican to support the bill, adding that he was "worried about keeping the residents of my district and in the state of Ohio in their own homes."

Uhh, Stevie, if they're not paying their mortgage, it ain't their home. It's the bank's home.

But enough on pointing out the obvious. What these boneheads don't realize is that they are going to make things worse on the people they purport to be helping. Pass this law and the capital to lend to low-income people will dry up entirely, or come at such a price that none of them will be able to borrow. The investors who provide that capital will demand huge payments to offset the risk that the borrowers will just toss up their hands and file the BK.

Here's hoping the Senate is smart enough to kill this legislation. But with Schumer running amok in there, I doubt it.

6 Comments – Post Your Own

#1) On December 13, 2007 at 12:36 PM, Hudarios (< 20) wrote:

Thanks for that interesting post, TMFBent. What investments would you recommend then, based on the Senate either passing or killing the bill? Would this make the difference between going long or short on housing, for instance?

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#2) On December 13, 2007 at 1:32 PM, Allstar13913 (99.82) wrote:

This is just an example of Congress taking money out of investors pockets and putting in the hands of people who obviously couldn't control their spending and debt to begin with.

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#3) On December 13, 2007 at 3:08 PM, GS751 (27.34) wrote:

oh its the banks home until they have 51% equity.  We could just have the ratings services subject to Full Disclose so people would see that these MBS's and CDO's are full of junk.  That would be sooooo bad though wouldn't it because Moodys and S & P would lose a couple million in fees while others would lose tens of billions. (hint my sarcasm).  O yes take into the fact that risker mortuguage packaged the higher the fee the rating service takes.  The idea of having peolple know what they are buying before they buy it? I guess to some people it is ok to spend 100 million on something and have no idea what they are buying, I'm just not one of them.  Stay away from things you don't understand.

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#4) On December 13, 2007 at 7:30 PM, dwot (64.94) wrote:

I am not agreeing with you on this one. 

Capital lending to low income people should have been really dry in the first place.

I just did a six part look at various aspects of this and the 1st or 2nd post is a ratio of M2 to M1 money supply.  That line should be horizontal, or alternatively, the spread on loans should have been increasing to reflect the enormous increasing risk.

Instead you had a rating company rating the stuff as AAA.  You had mortgage companies dumping it on investors who ought to have been able to trust the rating.  Without the AAA rating and without being able to just dump the mortgages to unsuspecting investors the borrowers would have never gotten the money.

The lending market would have never been as crazy as it was and as such, those low-income people would have had problems qualifying.  This law makes little difference here other than people who can't afford a loan are never helped by getting one.

 "The bill passed by the House Judiciary Committee would let judges reduce what's owed on a mortgage if the market value of a property falls below the outstanding loan balance. It would also give judges the ability to reduce interest rates owed on loans."  This is exactly what needs to happen.  The buyer should be risking his own money for at least the first 10% and they way you make lenders to this is you make them liable for declines in home value below the mortgage.  And you make them have to put up reserves or adequate insurance in order to sell them as AAA.

The debt that investors bought was not adequately priced for the risk, nor was it rated for the risk.  

This was never about helping these people, it was about making a fast buck and selling the problem to someone else and having a highly conflict of interest rating agency instead of responsible law is dumb and what created this mess.

I have a link on my blog to a report on the differences in mortgage risk between Canada and the US.  This is the difference you get with responsible lending laws, and even Canada is too easy in some areas.  We used to require 10% down and it goes back and forth between 5 and 10% down.  It should be 10%. 

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#5) On December 14, 2007 at 9:56 PM, AntiRL (< 20) wrote:

Nice point Seth.  Funny how they make it seem to the unknowing 3rd party (the ingnorant Masses for example my Aunt) that they want to establish these legislations to help poor helpless victims of this bubble but in reality it helps wallstreet.  By the way, LOVE your article in the Investor's Guide 2008 of Fortune.  It is one of the few magazines I look foward in the year for my Investment needs and forsights.  They really have great stock Picks / Mutual Fund recommendations.  Never actually based my portfolio on it though but won't let that happen this year. 

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#6) On December 14, 2007 at 10:06 PM, TDRH (99.68) wrote:

Not sure that I can add any intelligent commentary to this post, other than to say the old lending standards that required 20% down payment seem to be logical.   A person with 20% equity is not going to walk away or abandon the property.   If they did for some reason, the lender is fairly certain of recovering their balance.  

What we are dealing with is a credit hangover from a lack of responsible lending and borrowing.  Unfortunately a return to "old time hockey" or mortgage lending standards will lead to a massive drop in property values and none of the players want to deal with that.  

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