Savior-Based Economics

A truly great read!

The Obama plan is certainly more ambitious and costlier than many expected, especially in its use of Fannie Mae and Freddie Mac to influence the mortgage market. But will it all work? An analysis by IHS Global Insight concludes that it will help prevent some number of “preventable” foreclosures. So that’s something. But between 10 million and 15 million homeowners are underwater and that number is growing. Who knows how many will walk away from their homes and to what extent the Obama plan will help? IHS Global just shrugs. Me, too, especially since the plan, while potentially lowering mortgage interest rates, doesn’t make a clear provision for reduction in the principal. That’s the real killer.

But it is certainly debatable whether we should even be trying a savior-based plan to prevent foreclosures. Do we need Uncle Sam to  “save” homeowners who have sinned against the gods of financial prudence? Here’s how the folks at Weiss Research see things after examining the Obama plan: “Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage. … Delaying and dragging out the downturn by artificially propping up home prices will arguably work against the market healing.”

In the same vein, former Bush economic adviser Lawrence Lindsey has suggested an immigration program that would give a provisional green card to anyone who invested at least $10 million in residential property and held it for five years. And bond guru David Goldman of the Inner Workings blog relates that he’s been getting inquiries from Chinese investors interested in the U.S. housing market. He also highlights what is easily the worst aspect of the Obama plan, the “cramdown” provision which would allow judges to modify mortgages. “Allowing judges to show generosity to homeowners … and keep them in their homes makes the core assets of the banking system uncertain. … Cramdown probably is responsible for the deterioration of subprime AAA’s during the last few days.” That’s what happens when you toss 1,000 years of contract law out the window in the middle of a global financial crisis.

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