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Someone Please Show Bair the Exit

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October 23, 2008 – Comments (4)

This woman has lost it. We're already pumping hundreds of billions into banks to take crappy loans of their hands and otherwise fluff up their balance sheets, and now she wants to submit a "treasury" funded plan to have the FDIC guarantee mortgages?

The government may start guaranteeing the mortgages of some homeowners who are heading for default, under a plan meant to convince more lenders to renegotiate the terms of troubled loans and avoid more foreclosures, Federal Deposit Insurance Corp. chairman Sheila C. Bair said today in Congressional testimony.

Bair told the Senate Banking Committee that the recently approved economic bailout package included authority for the Treasury Department to offer government loan guarantees and other incentives as a way to encourage banks and mortgage lenders "to prevent avoidable foreclosures."

On taking over failing banks, Bair has already stopped and slowed foreclosure processes, which makes zero sense because it's the only way to fix the root problem facing banks, lenders, and the entire housing industry. It might make her feel better, and if you believe in fairy tales ("I'm just a little behind, honest," it might sound like good economic sense. Stop a few foreclosures, stop the downward spiral in house prices right?

No way.

Ready Sheila? Here's the problem: House prices are still too high.

That means too many people can't service their mortgages no matter how much you try to "help" them. Of course, most of them never ever planned to be able to service those mortgages in the first place (which is why they bought with little or nothing down). They thought they were stepping onto a free equity escalator with upper limit. Unfortunately, it did have a hard stop, and the first step down is a doozy. As the government's previous loan modification attempts have proven, trying to keep greedy or ignorant borrowers in underwater mortgages simply doesn't work. Lowering the water until it's below their chin (from above their eyeballs) is only a temporary reprieve, and it's little incentive to stay in a home that has zero equity. People who risked nothing are not victims, anyway. 

Strangely enough, there is an alternative. It's called "the real estate market." In places like California and Florida, where they let the flippers, speculators, and the plain old irresponsible go hang, prices have dropped 30-50% or more in a matter of months, and capital is flowing back in to mop up the mess. This is the way things are supposed to work.

What Bair is proposing is a bleeding-heart socialistic core, wrapped in a specious minimal-market-meddling wrapper, but it will probably amount to a good, old-fashioned, Japonese-style death of one-thousand-bad-debt cuts. Until the bubble prices adjust, the entire housing market will be screwed up, and loan performance will be a crapshoot. That'll mean pricey lending, and all buyers "standing on the sidelines" as the contemptible RE mouthpieces prefer to characterize markets where buyers are simply laughing at the desperate sellers from across town.

Why would anyone pay X for a house, knowing that the neighbors, who paid X+10%, recently had their principal dropped to X-?% There's no upside for people who buy now and pay their bills responsibly. The only financial incentives offered these days go to deadbeats big and small.

If Bair can't wrap her head around this, she shouldn't be regulating lending. Hopefully she'll make her exit in January, though she deserves to be shown the door right now. Because this plan will ultimately cost the rest of us -- who didn't speculate on overpriced housing -- at the expense of thousands who did.

Sj

4 Comments – Post Your Own

#1) On October 23, 2008 at 12:08 PM, TDRH (99.76) wrote:

I don't like the plan, please do not intrepret this as an arguement in support of her position.   That said, I think it makes more sense to address the root cause of the loss in value of the assets created and held by the financial institutions, than to make cash available for these asssets that have no current market value.   For the US government to invest billions into these securities is ridiculous.   Instead of taking their losses and negotiating settlements with the individual mortgage holders the financial sector is turning them over to the goverment which is just socializing the losses.   This way  every american gets their fair share whether they own a home or not.

The most efficient, albeit brutal plan would let the market correct.  It is going to anyway. 

 Glad you posted- missed your insight.

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#2) On October 23, 2008 at 12:57 PM, eldemonio (98.70) wrote:

The only financial incentives offered these days go to deadbeats big and small.

Thanks for putting it so succinctly.  I tried to mix it up with a little sarcasm yesterday in a blog post with little success. 

I happen to live in an area with a high number of foreclosures.  My home's value has dropped significantly.  The quickest way I can see that improve is to get those homes foreclosed, back on the market, and sold to people who will then fix them up.  I understand that in order for that to happen, home prices must continue to come down to realistic levels. 

I am OK with that.  Now that I can afford a bigger house, I will look at renting the house that I currently own.  I have excellent credit and  I'll have a down payment for my second house. 

Watching $50,000 in equity disappear is a tough pill to swallow, but bailing out irresponsible institutions and homeowners is a veritable donkey punch to those of us caught in the middle.

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#3) On October 23, 2008 at 1:25 PM, mysoftballcoach (60.50) wrote:

I believe your view of Bair's motives are a bit narrow.  I suspect she is looking at this as a way to avoid a crisis for smaller banks and not necessarily as a way to prop up borrowers.

Let's find a few points we can probably agree on.

1) Government is expensive and highly inefficient.  Therefore, should the FDIC have to takeover a failed bank, the cost will be high and the resolution of assets inefficient

2)  It wouldn't take very many mortgage foreclosures to create a capital crisis for smaller banks.

By guaranteeing certain troubled mortgages, it makes it possible for the FDIC to assume specific troubled mortgages and it helps keep smaller banks solvent and reduces the overall exposure to the market and to the FDIC.  

It appears this method of guarantee could subsequently place many troubled mortgages with the FDIC, but keeps the FDIC from having to assume receivership responsibilities for all assets of a failed bank.

The trick would be to keep this on a relatively small and targeted scale so that it positively affects troubled banks, but does not turn into the dumping ground for every troubled loan across the country.

Coach 

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#4) On October 23, 2008 at 1:43 PM, dinodelaurentis (67.97) wrote:

dude,

the Death of A Thousand Cuts was Chinese. (pretty f#@%!^g horrific too!)

so was The Wire Suit. (used that on the British envoys in 1861.)

the Japanese are known for burning bamboo slivers under the fingernails and vicious beatings combined with starvation. and the occasional beheading.

BTW electrical shocks to the genitals are for the perverted.(some countries just can't contain themselves.) Ivan the Terrible just beat your feet.

USA - "Waterboarding since 2003."

i know it's nitpicking but please try to get your cultural torture biases right, okay?

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