Even CNBC cheerleader Jim Cramer came out with an article screaming, honking horns and tweeting odd sounding devices about the need to save housing if we want a recovery in the economy: "Now, as the price of their homes decline, consumers have cut back spending. As the economy gets worse, employers cut jobs. And the government is then forced to rescue business after business to keep the whole system from collapsing."
While I usually find Cramer's view to be a little too bias towards his own portfolio-- on this issue I have to agree.
As homeowners are glued to the TV, in hopes that 'The New Economy' will nationalize the mortgage market-- I have to play the Devil's Advocate and say, 'There is NO housing bailout?'
It is something that needs to be addressed.
Right now, homeowners are all hoping that Obama will lift his finger and change the way you pay your mortgage. People expect that there will be major reform for current loans, reduction of interest and principle and general eutopia for homeowners that possibly should never become homeowners in the 1st place. Even with an announcement on Nov 11th, about streamlined modification programs on FNMA and FDMC mortgages, there are still some major concerns.
So what if the housing bailout never happens? There needs to be an argument put in play that states: 'The loan you are in is NOT going to change... Find a way to deal with it.'
The Government (we will call them the Super G) has already infused tons of capital into the banks. The idea behind this was to create liquidity and support for the banking system, and just maybe create some lending to homeowners. But the problem with the bank infusions is that the credit markets still have no appetite for shitty loans made to borrowers with lousy credit in underwater homes... Oh wait-- would you? This is why I feel there will be NO housing bailout anytime soon. TARP funds are needed to save the shitty auto industry, and Super G already gave most of the money to shitty insurance companies and the supposed strongest banks in the nation. Now the hand-out line forming in D.C. has the likes of Credit Card issuers turned banks (AMEX) and poorly ran consumer finance arms (GE Capitol). There is just not enough money to save Tom and Jane homeowner. And let's admit it-- with the announcement of the TARP funds being pulled away from bad assets, Super G doesn't want, nor know what to do with, these crappy home loans either.
It looks like Super G is again doing the wrong thing with it's endless supply of fiat money. I am now 100% certain that there will be a bail-out of the big auto companies. And I am 100% certain that the bail-out will have little to no positive effect on the economy, but in a matter of months or maybe a year, it will be like adding gas to the fire. What the governement needs to do is look at the poor accounting, the bloated pensions and the union contracts of the Big 3... but they won't. Instead they will give the Big 3 tons of tax payer money, slap their wrists and say, 'now make better cars,' and in another year the money will be gone, the workers will still be overpaid and the cars will still be overpriced, ugly and made poorly. For the same reason you can't fix a drunk by giving him wine instead of beer, you can't fix the Big 3 with giving them more cash with no plan. But still, we will give the auto industry the money and they will do all they know how to do... make cars... fill showrooms... try to create hype... and lastly fail miserably.
So what does this mean for Main Street housing industry U.S.A.-- What does this 'streamlined modification plan' mean for the life blood consumers of the economy??? I'm guessing it will create hype and lastly fail miserably. So here is the basics of this plan. 1) Distressed homeowner has a loan that is either a> adjusting b> underwater c> just too much for them to handle d> all the above 2) They start to default 3) They fall 90 days late 4) The super G gives them a 'modified loan,' by either a> dropping the rate for a period of time b> extending the term c> reducing principle to be paid at a later date d> all the above.
*** WAIT A TRUCKING MINUTE!***
Doesn't this sound like Subprime to you? The majority of subprime loans had teaser rates, extended term loans and interest only payments-- Super G is hoping to fix housing with Suprime modification loans? This is not a rescue, this is just a temporary fix to a long term problem... And this will not fix the housing market.Why is it bad? #1-- it fails to address the negative equity issue. I know that people shouldn't have paid $700,000 for a home in the Inland Empire in CA, but they did. Now the home is worth $400,000. So if the government does ALL 3-- drops you to a 3% loan for five years, extends the term to 50 years and lowers the principle to 400,000 with a 'ghost' 2nd of $300,000-- are you in a 'better' situation? Hell NO you are not-- even though you are paying 3%, you have extended the TERM, which is where you pay MORE INTEREST, and you are still riddled in a mountain of debt that will never be paid off-- let's admit this. If someone is $100,000+ underwater on a home, it will NEVER be paid off! Oh, and to top it off, your credit is totally screwed. #2-- it rewards people for doing the wrong thing. Were you ever told this on owning a home-- 'go buy too much home, finance it at 100% on a teaser loan that has variable payments, cash-out all the money you can on it and then stop paying back the bank. Don't worry, the government will save you.' No... no one told you that, and those are the people that are being rewarded. This program rewards the people who deserve it the least. The person that pulled out all their equity and bought a speed boat, a Tahoe truck and took a $30,000 equity vacation to Greece is getting rewarded? Something about this is not right! #3-- It gives false hope-- instead of just letting these poor people go through foreclosure, we are extending the pain of this process. This plan is wrong on so many levels, and the emotional distress that Americans will burden due to these poorly designed modifications will most likely trickle down for at least one, maybe two generations. It will be a long time until people see the true value in owning a home again, especially in America. #4-- it is only buying time. Like all the other housing 'fixes' that we have tried, this will also fall short. Look at FHA secure, HOPE NOW, and the Bush housing bail-out. All created tons of buzz, but none did anything for the homeowner. Instead, after the hype was created, they failed miserably.
The bottom line is exactly that-- the bottom line. The banks, as well as Super G know that there is no housing bail-out. It is just to large and too out of control. With the securuitization of mortgages it is hard to pin-point the true owner of the loan. And with the number of 'bad' loans written it is near impossible to truly fix the problem. With the latest Case-Shiller numbers putting the housing bottom in 2011-ish with a national decline of 33.7% from peak to bottom, or the average home in America falling $159,908 from the 2005-2006 high, there is not much of a light at the end of the tunnel. If the predictions are correct, this will wipe-out Trillions of dollars of wealth-- and that will be felt by the banks. The banks are the one's that need to brace themselves for the write-offs. Simply put, Super G is just trying to give a little time to the banks between wave after wave of losses-- and if modifying someone for a year keeps that loss off the 2009 books and moves it to 2010, then mission accomplished.
So keep you fingers crossed America, watch the news! Feel the housing bail-out HYPE!... but in the end expect the failure.
Now don't you want to call your realtor!
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