Strange plan to save housing
QualityPicks offers his plan to get us out of the mess:
1) Form a "bail-out" fund to help pay for mortgages of responsible people that put 20% down, took a 30 yr or less fixed rate mortgage and kept their payment below 33% of their income, in case they get laid off during an economic downturn
2) Offer federally sponsored 3% fixed for 30 years loan for people that can put 20% down, and have a payment to income ratio of 33% or less. The government should fund this program with sanctions to CEOs like Mozilo, and companies that commited fraud.
3) Let the current system work things out. Did people commit fraud, put them in jail. Did banks commit fraud? Sue them, have them take loans back, let them eat the losses, let them go bankrupt. Somebody overextended themselves and can't afford their house? Foreclose, short sale, ruin their credit for 7 years so they learn a lesson. Etc."
It is strange that people fail to see the connection between the bubble and the interest rates. The above proposal boils down to reinflating the bubble to guargantuan proportions, not seen even amidst the exhubernce of 2005. Then, people obtained teaser rates of 3%, but they still had to remember that a reset was only a couple of years away. If 3% mortgages become the norm, prices clearly must double from today's levels. If a homeowner who wants more equity came out with this idea, it would be understandable, but QualityPicks has been positioning himself as a believer in affordable prices and opponent of irrational exhuberance premiums. Remember once again, low mortgage rates don't improve affordability. The lower the rate, the higher mortgage you will have to take at this low rate. As a smart buyer intent on minimizing your frictional costs, you are interested in buying at minimum prices at maximum mortgage rates. Ideally, you want the interest rates to be infinite (in other words, you want no mortgages to be available and all transactions to be 100% cash) because that would minimize or eliminate the cut that goes to the NAR, the mortgage broker, the appraiser, the lawyer, the mortgage originator, the mortgage insurer, and so on. If you're thinking in terms of investment potential, then again, you want to buy when the rates are high because the higher they are, the more appreciation potential you have. Also, point 3 in QualityPick's plan doesn't work because the rising tide of housing prices instigated by point 2 of the same plan justifies all buyers and lenders of the 2005 vintage. So, to say nothing of the moral hazard, the return of speculators and other froth, QualityPick's plan doesn't make housing more affordable, but certainly makes it more "bubbly".