Bailing Out The Banks

Congress passed the "mortgage rescue" bill that will help 400,000 home owners, but is really a benefit for banks and Freddie Mac and Fannie Mae.

Unfortunately the President doesn't have the guts to veto it, due to the bad publicity he'd get for it, and that would go to the GOP during an election cycle.

The bill is definitely a contradiction. On one hand 400,000 "at risk" home owners could get bailed out IF their banks are willing to take a loss on their loans and refinance them through FHA. If everyone takes that deal, taxpayers are on the hook for 300 BILLION dollars in new loan guarantees.

However, the bill also gives nearly 4 billion in grants to banks to rehab foreclosed properties to get them ready to sell. In other words, the bank gets two choices, take a loss and refinance, or get a grant after foreclosure to repair the house and resell it; hopefully at less of a loss.

The block grants, opposed by Bush and the GOP are an issue. Banks generally stay out of the real estate business as much as possible. In most cases, when possible, they'd rather work out a short sale, or refinance instead of foreclosing so they don't have to deal with the inevitable problems associated with holding a home. This bill gives them as much an incentive to foreclose as it does to refinance, possibly more since the government is willing to mitigate part of their loss under the block grant program.

Freddie and Fannie also get sweet deals, with the Federal Reserve being able to loan them basically unlimited amounts of money over the next 18 months to help shore up their poor loan portfolios. Yes, they get some extra oversight (finally), and have to pay for some new programs, but on the whole, it's a big wet kiss for getting in over their heads with risky loans.

Who loses in the bill? The tax payers, that's who. We get put on the hook for hundreds of billions in new loans through FHA, and hundreds more by tossing cash at Freddie and Fannie. While Congress sees this as "doing their job" the truth is both the GOP lead congress and the one run by Democrats fell down on their jobs by not having some of the new protections in place previously. They were too busy rolling around in the cash that was coming in from a housing driven economy to look at how wobbly the foundation was.

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Bottoming Out Too Soon?

The Dow was up 187 yesterday, mostly on news that (existing) home sales went up by 3% in February, and that JP Morgan Chase was looking to up it's Bear Stearns offer from $2 to $10 per share. That in turn lead to a rise in the dollar, and a fall in oil prices, all good things for the economy.

The Bear Stearns news was a psychological boost for investors. If JP Morgan was upping the offer to $10 per share to appease Stearns investors, there had to be an "on paper" reason for it. Let's call the reason sanity. When actual money driven accountants started looking at all that paper Stearns was holding that said "mortgage secured debt" they ran the numbers and found out what's been said for months, the subprime meltdown is only a small fraction of the mortgage industry. A lot of that paper is worth more money that the news would have the emotion driven investors and politicians believing.

The housing number was actually mixed, while sales were up for the first time in 6 months, prices were down. But, as most everyone knows when those occur together you've probably found the bottom of a market.

National Association of Realtors regional figures show that the Northeast seems to be coming out of the slump, with sales up 11% and prices up slightly, while the West coast remains a drag on the overall picture. It's not totally surprising, since the west was where the ridiculous run up in prices began. The South would have done well if not for Florida, another hotbed of speculative buying.

For some folks, finding light at the end of the subprime tunnel isn't good news. If you have another month of homes sales increases, even slight, without Congressional intervention, it will show that the market is capable of correcting itself. That doesn't work well for the folks on the campaign trail telling us more government regulation is the solution to the problem.

It will be harder for Hillary Clinton to sell her fix for the housing crisis, which Barack Obama says looks suspiciously like one he laid out last year, but with more money. It will be harder for the doomsayers to beat up John McCain for not having a plan for the government to fix the problem, if it's fixing itself.

She's also supporting the Barney Frank proposal (written about here) with a few added features, like the feds actually buying foreclosed houses (not held by FHA/VA type loans), and then holding them until the market improves. Something she claims would be "revenue neutral". Since the average price for foreclosed homes is discounted at sale by about 19%, the revenue neutral idea doesn't hold much water.

If month to month foreclosures continue to fall (as they did in February) and houses continue to sell, suddenly a lot of the pessimism in the general public will start to fade. Add to that the fact that if home sales increase again in March the Fed will be less likely to cut interest rates, which will again help the dollar. Suddenly all of the gloomy numbers look better (not great, but better), and selling despair becomes a tougher job.

It must be tough being a politician who hopes that good news doesn't continue, only for self gain.

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