Friday, March 28, 2008

McCain's Clear-Eyed Observations on Mortgage Madness

Rising home prices led lenders to lower their standards, McCain said. “Some Americans bought homes they couldn't afford,” he added, “betting that rising prices would make it easier to refinance later at more affordable rates."...Wall Street helped inflate the housing bubble, McCain argued, by betting big on mortgage-backed securities. When housing prices started to decline and foreclosures started to rise, a widely dispersed network of investors found themselves owning a lot of questionable mortgage debt, which sent investors into a panic...In McCain’s formulation, irresponsible lending and borrowing created the problem, and uncertainty is at the root of its spread throughout the financial community. If accurate, this diagnosis demonstrates the folly of the Democrats’ proposed cures, which would reward irresponsibility and increase uncertainty among investors....Thumbs Up, Editorial, National Review Online, 3/28/2008

If you listened carefully to the plan offered by the junior Senator from New York, Clinton's prescription for the mortgage panic, simply and honestly described by the Senator John McCain, was a promise to alleviate the panic by stimulating more of it. What, you say?

If a debt market is running scared because there are widely distributed doubts about repayment of mortgages, a policy where the government guarantees that people with mortgages don't have to pay will instead guarantee that the debt market will panic even more. Such a policy would entirely undercut the mortgage security business, sending it into a depression. That's Senator Clinton's plan. Carefully denying the truth so artlessly expressed by Senator McCain, she proposes a policy that will make the truth even worse. Why? Let's lay it out point by point:

1) Securities based on mortgages have strong prices when people pay back their loans, making for a) happy investors, and b) more mortgages, and c) more houses built, and d) more happy owners.

2) Holders of securities based on mortgages panic when the word gets out that people are not paying back (or have been relieved from paying back) their loans. What happens?

a. Prices of securities based on loans plunge.
b. In response, banks and mortgage brokers re-introduce high standards for getting loans.
c. Following that, credit tightens;
d. Fewer mortgages are granted;
e. Foreclosures rise;
f. The homebuilding industry starts to shrink;
g. Existing home sales go south;
h. Then, constituents for both parties become unhappy.
i. Politicians start to spitzer.
j. If politicians succeed in spitzering, market collapses, later described as the popping of a "bubble" in real estate.
k. If politicians fail in their efforts to spitzer, market corrects, credit conditions improve, people are happier, especially home buyers, banks, mortgage brokers, and taxpayers.

It isn't very complicated. Just look at the fiscal history of any bank.

How long are we going to keep voting for people who think without the bother of checking against the facts? Don't listen when politicians spitzer about mortgages. The better idea is to sort out your problems, negotiate with your bank or mortgage broker, cut expenses where possible, work out an agreement, and change your expectations to meet real conditions, not false hopes. The latter are the specialty of prostitutes and look at who has to pay!


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