Bloomberg is reporting that Treasury Secretary Henry Paulson has a new plan to resuscitate the housing market:

Treasury Secretary Henry Paulson is considering a new plan to reduce mortgage rates in another bid to revive the U.S. housing market, a government official said.

The Treasury, which already has a program to buy mortgage- backed securities issued by Fannie Mae and Freddie Mac, could step up those purchases to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The plan is preliminary and could change.

It seems that almost every bailout plan tends to focus on renegotiating mortgage terms to get borrowers down to low interest rates. These plans assume that high interest rates are the culprit behind the current decline in the housing market. Is that really the case? Will lower interest rates really help the housing market recover? Let’s not forget that we’re officially in a recession; job losses are mounting, and those fortunate enough to have a job not seeing any increase in salary. Last we checked, there are other factors besides interest rates that determine the health of the housing market.

The Bush administration has been faulted by Democrats and consumer advocates for failing to take sufficient steps to stem record home-loan foreclosures this year.

Treasury “keeps nipping at the edges to come up with a wholesale response, but always ends up with a partial response,” said John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington. “Regardless of whatever rhetoric Paulson keeps throwing around, foreclosures continue to go up.”

I bet those complaining didn’t have any issues while home prices were doubling or even tripling over the past decade, allowing many to make a quick fortune. We’ve said it before and we’ll continue to say it; the only way to help the housing market is to allow prices fall. Home prices need to return to a nominal level supported by market fundamentals, which would allow people to afford a home. Foreclosures will continue to go up as people who are living in homes they cannot afford or have extracted too much equity are slowly and painfully removed from the homeowner class. It’s unfortunate in many cases, but had there been some responsibility in the first place this could have been avoided. The only relief for the the market would be for home prices to continue dropping further to a point of affordability.

I think the quote featured on Housing Doom sums it up:

“He who defends everything defends nothing.”

Kool-Aid, Economy, Real Estate | 1 Comment »

It’s been a long time since we’ve provided any updates here at Drinking Is Believing, but much has happened over the past few months. While we tried not to get in the game of making predictions or calling out specific dates, we knew that inevitably the house of cards would come falling down.

We had several T-Shirt designs in the works, hoping to sell on this site, and one of them that comes to mind was particularly interesting: it was a picture of a bear with the words “DOW10K 2008.” While the Dow Jones Industrial Average was at 14,000, this shirt was intended to cheer the market bears and encourage a realistic market drop down to 10,000. Let’s just say our timing was off; not only did the market rapidly drop to 10,000, but dropped even further! Now most people could only dream of the Dow ending up at 10,000. Where will things go from here? With all the government intervention in the markets and corporate bailouts, it’s difficult to predict the direction of the markets. Only time will tell.

The housing market is a different story. Our personal opinion is that no amount of government intervention can rescue the housing market. There is no way to curb the increasing tide of foreclosures because there are too many people who are homeowners living in homes they cannot afford. There are only two options to ’save’ the housing market from falling any further:

1) Offer even more exotic mortgages, maybe something like a 30-year interest only mortgage. While that might not work in the long run, it’ll be good enough for now and for the next few decades it’ll keep the housing market afloat. (realistically, this probably isn’t a good idea!)

2) Let prices drop to an affordable level. This is the ONLY thing that will save the housing market.

With that said, CNN is reporting that the head of the FDIC is asking for more intervention to modify mortgages and help ‘troubled homeowners’ stay in their homes and avoid foreclosure.

The nation’s top banking regulator warned Tuesday that help for troubled homeowners is failing to keep pace with the foreclosure crisis.

“We’re definitely behind the curve, and we fall further behind the curve every day,” FDIC Chairwoman Sheila Bair told an audience at the Fortune 500 Forum in Washington, D.C.

In October 2007, she told lenders that they should start modifying more at-risk mortgages so borrowers could afford to stay in their homes.

Meanwhile, the crisis is growing. Nearly 280,000 struggling homeowners received some kind of foreclosure notice during October, according to RealtyTrac, a 25% increase over October 2007. And nearly 85,000 families actually lost their homes, up 59% year-over-year.

If those 85,000 families who lost their homes had purchased homes that they could truly afford, then we wouldn’t have this problem. If ‘modifying the terms of their mortgage’ would save them from foreclosure, it is probably the case that these families had adjustable rate mortgages and their rates went up, causing their payment to go up unexpectedly. This is part of the agreement you sign when you get a mortgage; you can get an adjustable rate that may be lower initially, but you must understand the risk that the rate may (and most likely will) go up. There is no debate, in fact there’s a simple solution; If you don’t want the possibility of your payment increasing, then you go get a fixed mortgage.

There’s another class of at-risk borrowers which this article fails to mention; those who got more house than they could afford. For these borrowers, no amount of modification could save them from foreclosure. They’re the buyers who took 5 year interest-only loans to buy their homes. Their interest-only payment may have been affordable, however as with any loan you eventually have to repay the principal amount. For a while these loans worked, because after the 5 year interest-only period, many were able to sell for an enormous profit. Now that home prices have significantly fallen, this method fails to work. Now the pool of buyers has virtually disappeared, and even if you could find a buyer they’re not willing to pay what you owe. The solution is to stop all attempts at ’saving the housing market’ and stop thinking about keeping prices artificially high. It will simply take too long for all the fundamentals to catch up with the current level of housing prices, especially in the wake of our current RECESSION that has officially been admitted.

“Attacking the financial problem at its roots is the fiscally responsible and smart thing to do,” she said.

We couldn’t agree more. The root of the problem is high housing prices, and not bad mortgage terms. Let home prices fall to where they should be, and you’ll see the markets stabilize with less foreclosures. A positive side effect of affordable housing is that people may have more money to spend on consumer goods rather than paying down high mortgages, which should help stimulate our economy!

Credit, Kool-Aid, Economy, Real Estate | 1 Comment »