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Friday, April 11, 2008

Misreading the Politics of Mortgage Bailouts?

By now everyone is all too familiar with the on going mortgage and real estate crisis, however it is very important that we put some numbers into perspective. For instance let's take a look at this startling statistic...

Approximately, one out of five (19 percent) subprime mortgages originated in the last two years will end in foreclosure

Let's take a look at another startling statistic...

Nearly 60 percent more U.S. homes faced foreclosure in February than in the same month last year, with Nevada, California and Florida showing the highest foreclosure rates, a research firm said Wednesday.

A total of 223,651 homes across the nation received at least one notice from lenders last month related to overdue payments, up 59.8 percent from 139,922 a year earlier, according to Irvine, Calif.-based RealtyTrac Inc.

Now, while all of this sounds gloomy, there is one thing that everyone needs to keep in mind from looking at these numbers and others. That is that the overwhelming majority of American families are not about to be foreclosed on. Even at its peak, sub prime only accounted for roughly 30% of all loans. Furthermore, about two thirds of all American families own homes at all. I am one that sees the mortgage crisis as extremely gloomy and I predict that foreclosures will reach over ten percent total before we bottom out. If I am right (and I am quite pessimistic), that means that only about seven percent of Americans will face foreclosure.

Why are all of these numbers important? It's because any bailout will help out a tiny minority at the expense of the overwhelming majority.

Let's take a look at another number of note...

The level will remain above $30 billion a month through September 2008. In all, the interest rates on about $1 trillion worth of mortgages, or 12 percent of the nation’s total, will reset for the first time this year or next.

These are the bulk of the mortgages that some politicians want to artificially freeze. So what does this mean? It means that once again the politicians are taking on extraordinary help for the few at the expense of the many. Imagine if you are in the other 88% and you took on a higher rate and payment for the security of a fixed rate. Now, you hear that politicians will reward those that didn't act as responsibly as you with artificially low rates that will likely still be lower than yours. I don't believe that you would take too kindly to those types of politicians.

If you put all of these numbers together what it really means is that politicians are trying to implement pseudo socialist policies to benefit the few. Now, I for one believe that Americans are not that stupid. They understand that if someone else is getting a boondoggle then it must mean that they themselves must pay for the boondoggle.

Michelle Malkin has been a leading voice against these bailouts however I firmly believe that she is speaking for the majority. That's because the majority will be the ones paying for the minority. Furthermore, the majority will for the most part feel they are paying for the irresponsibility of the minority. I think the politicians have completely misread the politics on bailouts, rate freezes, and any other artificial help for the mortgage crisis. While the mortgage crisis is unprecendented, the reality is it still only affects a small minority of people. The majority is not dumb. They don't believe that most of these folks were hoodwinked. They believe that most of these folks took on more than they could handle. I don't believe for one second they will be at all pleased with the federal government stepping in to save these folks on their dime.

I firmly believe the right politics on this matter is also the right policy. Let the free market eliminate the waste. Let those that acted irresponsibly get hurt, and allow those that are responsible to profit as a result. I think that most folks would welcome trying to buy foreclosed properties at significantly reduced values. I don't think they want to government to artificially set mortgage payments that are suddenly affordable for someone that would lose their home otherwise. I think they would rather have an opportunity to buy that home at reduced prices. To me the politicians have totally misread the politics of mortgage bailouts. A wise and courageous politician would have taken the stance that McCain originally took and told all those that acted irresponsibly tough luck. In my opinion, the right policy is also the right politics, let the free market shake things out and stand out of the way.


Anonymous said...

Another aspect of the bailout proposals is that (as its promoters note) it will have a "stabilizing" influence on housing values. Who is served by stabilizing values at record highs, while at the same time decrying that home ownership is out of reach of many, especially younger people. This certainly seems like a very misguided manner to manipulate the market.

mike volpe said...

That is an economic rather than policy observation however I will tackle it. First, you are essentially correct, but more than that, prices aren't going to be stabilized if people who have no business owning a home are kept in said home through artificial means. This is more lunacy. Housing prices aren't going to be stabilized but rather kept artificially high as you indicate until those same people default on their new loans as they would have without the help.