So a few days ago The House finally passed housing bill
. I guess disappearance of Presidential veto (taken out at the very last minute) encouraged Congressmen to rush forward to "the most important piece of housing legislation in a generation
". Since bill is expected to sail through Senate without any headwinds we can safely assume this piece of paper will become law very soon.
Personally I'm very disappointed to say the least. The whole idea of government putting a floor under collapsing GSEs
and real estate (RE) speculators by using my tax dollars makes me so sick it's not even funny. Yes, I know they told us GSEs are too important for national housing market (read: jobs and economy) and their failure would wreck havoc, destabilization, blah blah blah. But would it? We're not in the 30's any more when these monsters were created. Financial markets are deeper (despite the current crunch), global and more advanced. Special types of securities
are traded on open markets, which among other things provide capital and risk hedging for parties involved. Other innovations are too numerous to list. Though markets are largely chaotic and swing from one extreme to the next as a pendulum, I believe they'll provide needed capital and keep a check on prices, but they won't work their magic overnight. If shareholders are displeased with management's performance they show them to the door, so why are Freddie and Fannie, despite their extremely poor track record, given unlimited support from US government? It is unlikely that this assistance can be financed (depending on how bad things will keep going) by means of taxation alone. We're already running large budget deficit and trade imbalance, not to mention ever increasing explicit and implied liabilities for various entitlement programs. Thus if housing keeps going down the tubes I suspect "strong" dollar policy will largely remain a rhetoric and government will resort to printing press a.k.a FED
. Inflation is a great way out of many problems, eh...
So all over sudden our elected officials rush to "stabilize the housing and credit markets
". I hardly recall anybody trying to do anything when many risk averse, potential home buyers (including myself) were sitting on the side lines being priced out. Nobody cared. Bankers and Wall Streeters were too busy counting profits. Local politicians credited massive wealth (on paper) creation to themselves and tax revenues were through the roof. Federal government was eagerly selling "American Dream" (home ownership) to its electorate. GSEs were instrumental in that. Speculation and even fraud in some places was rampant. Everybody, and your neighbor's mother were "certain" that RE never goes down, hence it's a good investment. Many were brainwashed by numerous "experts" and books. Some couldn't do a basic arithmetic, let alone read the fine print on those contracts. Financially literate ones, those who understood power of leverage via 5%(0%) down payment, were too busy taking money out of their 401Ks to load up on as many properties as they can get their hands on. Times were good I tell you.
Well everything comes to the end eventually. I say let those prices correct, the faster the better. Those who cannot afford to own should rent. End of story. Affordability will ultimately restore housing market and bring order. Trying to artificially maintain overvalued assets will only prolong the pain. Why should I care or feel sorry for Joe Shmoe who has to return keys for recently "purchased" home and move back to that place he rented not that long ago, while I wasn't looking for a flier and stayed in my rented apartment? Turns out Joe will actually be better off with such move. No wonder many do walk away. Let them go Uncle Sam. Better spend our tax money on educating those poor souls who has trouble reading financial contracts and difficulty understanding ARMs
. Increase punishment for fraud by brokers, appraisers and others, up to permanent license revocation. Make the whole system more transparent and data easily available to consumers. Let those greedy individuals and institutions learn a lesson via their loses. Bankers will know not to lend 100% of inflated home price next time. Investors who buy those mortgages on open markets, as bonds, will learn to demand better guarantees and will greatly discount future cash flows otherwise. System will heal itself eventually. It won't occur over night, but it would be a positive systemic shift. Bailing out GSEs will further encourage wild speculation and mismanagement a.k.a moral hazard
. It will further decrease faith in our financial markets and possibly put more pressure on devaluation of a dollar.
Additionally they increased "so-called conforming-loan limit, which typically qualifies mortgages for discounted rates, to $625,000 in the nation's most expensive housing markets
". Give me a break. Why not make it a million? How this number came to exist? Is there some sort of coefficient which determines by how much prices in NYC should measure up to those in Ohio? And why nobody gives me a tax break for living in "most expensive housing market
". Jumbo rates are at least 100 basis points higher and for a good reason. Market demands higher premium for riskier loans, but congressmen don't seem to care. It's your tax dollars after all, which will now go towards supporting astronomical prices in NYC, LA and such.
Being a believer of free markets and capitalism with minimal governmental oversight (yes we need some as pure capitalism won't work either) I say let those GSEs fail if they're insolvent. There are better usages for our tax dollars. US economic might will prevail and "bad" times will remain in rear view mirror. Be patient.
P.S."US Housing Crash Continues It's Still A Terrible Time To Buy
" is a great article providing some common sense for those who can't face reality.