We thought there were problems in the mortgage market, but now we are guaranteed long-term ramifications of this dramatic correction–the politicians have made it their issue.
Let’s take a look at what they are proposing and hypothesize what the long-term effect might become.
The Federal Reserve
Federal Reserve Chairman Ben Bernanke issues his assurance that The Fed stands ready to assist the mortgage market "as needed," an obvious sound bite intended to inject stabilizing confidence into the market. But is the Federal Reserve equipped to manage this crisis?
“The reason there isn’t a market for these credits is that people don’t know what price they should be trading at,” said Edward E. Leamer, professor of management at the University of California, Los Angeles, who presented a paper during the weekend at the Federal Reserve’s symposium in Jackson Hole, Wyo. “That’s not going to be affected by a small change in the federal funds rate.”
All indication are that the Federal Reserve will follow it’s lowering of the benchmark fed funds rate on overnight loans between banks with a lowering of the fed funds rate on September 18th, more directly affecting the consumer debt market.
The White House
Bush thus far has emphasized a classic conservative response to economic market dynamics, moderation and natural market forces.
Both Bernanke and Bush emphasized that their actions were not aimed at bailing out investors who had made bad decisions.
"It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford," Bush said in the Rose Garden. "Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders or a little help from their government."
Bush’s proposal includes the use of the FHA to absorb some of the risk of refinancing borrowers who are beginning to struggle as the result of resetting ARMs.
Bush’s proposals unveiled Friday are designed to help combat those defaults. They would make it easier for borrowers now holding adjustable rate mortgages that are resetting to higher monthly payments to refinance those loans using the resources of the Federal Housing Administration. The FHA is a Depression-era agency created to help low and moderate-income Americans afford homes.
Under the Bush proposal, which FHA officials said would take effect immediately, an estimated 60,000 homeowners who have fallen behind on payments because their mortgages have reset would be able to refinance with FHA-insured loans. That marks a significant change because FHA does not now insure refinanced loans from borrowers who are currently delinquent.
The President’s proposal also includes support for, across the aisle, Senator Debbie Stabenow’s (D-MI) sponsored bill for tax relief on forgiven debt.
As another part of his mortgage package, Bush said he would support legislation pending in Congress that would temporarily change tax law to let homeowners avoid paying taxes on forgiven debt in loans being restructured by financial institutions. Sen. Debbie Stabenow, a Democrat from Michigan, a state particularly hardhit by foreclosures because of auto industry layoffs, is sponsoring that legislation.
Democratic Presidential Hopefuls
The most dangerous proposals are probably coming from the field of Democrats that are willing to appeal to emotions to gain favor and votes. Unhampered by a need for execution and immediacy several are flinging around dramatic responses.
Senator Clinton (D-NY) proposes "clamping down on lending abuses" and a $1 billion fund to aid state agencies helping borrowers catch up on late payments.
Meanwhile, Senator Obama (D-IL) goes hard-charging under his own pen in the Financial Times calling for more regulation and enforcement.
Mr Obama said the government needed to "stop the unlicensed, unregulated, fly-by-night mortgage brokers who are hoodwinking low-income borrowers into loans they can’t afford".
He added that "Washington needs to stop acting like an industry advocate and start acting like a public advocate".
It gives me cold chills thinking what the tax-payer price tag might be on that solution, not to mention how little effect I think it will probably bring.
Then there is John Edwards who keeps waving his hands and saying they are not doing enough and I am glad they are following my lead???
The campaign for former Sen. John Edwards, who is third in polls of the Democratic race, quickly countered that Clinton’s plan failed to go far enough and he has already offered "a real plan to punish predatory lenders and protect homeowners, and we’re glad Senator Clinton has chosen to follow his lead."
As for me, I think that letting the market work is always the best solution. Think about it:
- The bad brokers and lenders are already being punished–back to the used car lots and bankruptcy
- The investors get more conservative–pulling back investments and credit
- The borrowers finances get reset–bankruptcy protection
- And it doesn’t last forever. The markets can’t hold off their voracious appetite for high-quality, long-term, secured debt.
This is a dramatic example of a free market economy at work. Let it work!
Tags: mortgage, mortgage implosion, bush, obama, clinton, bernanke, politics
