Boston Fed: Obama's efforts toward housing "misdirected"

It isn't hard to find news articles claiming that the bottom in housing is in.

Harney notes that “even the most bearish researchers” are saying that home prices are almost at bottom

The problem is when you look at the actual numbers they show something entirely different. For instance, just today, the PMI Mortgage Insurance Company predicts that housing prices will continue to fall for the next two years. These guys aren't exactly a group that likes to spread doom and gloom.

So who is right? Well, let's take a look at today's news.

Delinquencies on home-equity loans have reached a record high.

“The number one driver of delinquencies is job losses, which we’ve seen build and build,” James Chessen, the group’s chief economist, said in a telephone interview. “Delinquencies won’t come down without a dramatic improvement in the economy and businesses will have to start hiring again.”

Also noted in the article is that delinquent bank-card accounts jumped to a record as borrowers use cards for daily expenses after losing jobs.

The rating companies were busy today.
S&P downgraded a range of mortgage-backed securities issued since 2005.

Loss severities, which include the costs to foreclose and liquidate a home and declines in property value, are expected to rise to 70 percent for 2006 and 2007 subprime bonds and 60 percent for Alt-A bonds issued in those years, S&P added. Some severities have already exceeded 100 percent, it said.

Moody's also got into the act and downgraded billions of dollars worth of jumbo mortgages.

Office vacancies hit a 4-year high, and effective rents dropped 6.9% from a year ago.

However, the most interesting development of the day had to be the report the Boston Federal Reserve released.
It seems that mortgage lenders aren't interested in reworking home loans by borrowers facing foreclosure because they would lose money.

The Fed’s study found that only 3 percent of seriously delinquent borrowers - those more than 60 days behind - had their loans modified to lower monthly payments; about 5.5 percent received loan modifications that did not result in lower payments.

But that isn't the most interesting tidbit of this report. The really juicy part talks about Obama's mortgage plan.

The Boston Fed’s findings suggest the Obama administration’s major effort to solve the foreclosure crisis by giving the lending industry $75 billion to rewrite delinquent loans to more affordable levels is not likely to work.

One of the study’s coauthors, Boston Fed senior economist Paul S. Willen, said the government would be better off giving the money directly to struggling borrowers to help them with their payments, rather than to lenders that are averse to working out the troubled loans.

“Loan modification is not profitable for lenders,” Willen said. “If it were profitable, they would go out and hire staff.”

What an amazing concept - directly helping out American workers rather subsidizing banks to do it.
Stan Liebowitz of the WSJ goes into more detail.

What is really behind the mushrooming rate of mortgage foreclosures since 2007? The evidence from a huge national database containing millions of individual loans strongly suggests that the single most important factor is whether the homeowner has negative equity in a house — that is, the balance of the mortgage is greater than the value of the house. This means that most government policies being discussed to remedy woes in the housing market are misdirected.

Let's take that idea to the next level. What if the government had directed the $10.5 Trillion in bailouts to American households rather than to Wall Street? Wouldn't it have been more effective?

Meta: 

Comments

fundamental question

so much of this is still "trickle upon" in so many words and in order to work, including Keynesian stimulus, it has to be "bottom up". That's the fundamental problem here.

But what to do about people in houses when the actual price of a home was/is so out of alignment with wages, what people can afford is another question.

Here's another thing that drives me nuts. Where were all of these people before policies were enacted. Why do we read about policy follies after the fact....

I mean we are officially a layperson's blog yet we all know this was bad policy from the get go...

You must have Javascript enabled to use this form.

You want a true Public-Private Partnership

Instead of PPIF for financial conglomerates use the money from treasury and private investors to purchase all distressed mortgages at current market rates (ie. pennies on the dollar). Then truly restructure the mortgage loans to a point where loan to income ratios are more in line with old industry standards.

This public-private fund, if it can purchase these loans for pennies on the dollar, can afford to restructure the loans because of the margins/spreads.

It will mean reduction in principal but there is no way to avoid it. As for "moral hazard" problem for borrowers - doesn't exist. Borrowers are already feeling the pain/stress from losing their home and credit histories probably already damaged.

You must have Javascript enabled to use this form.

PPIF for distressed mortgages?

What about mortgages "under water" but not yet distressed. Systemic abuses by originators and real estate industry, as well as rosy comments by Bernanke created a market where home buyers were forces to compete with speculators, and are now trapped in overpriced houses. Worse, they are stranded if asked to relocate, and must make choices that are unfair. Since government policies contributed to the mess, let the Fed buy mortgages based on fair appraisal, at rates a percentage point above the 10 year treasury. This would introduce competition into the mortgage market and banks would have to choose whether they really want to be in the lending business.

You must have Javascript enabled to use this form.

One in Ten

Right back to the theme of this song from UB40 way back in 1981 (when the unemployment rate in England was 10%)

-------------------------------------
Maximum jobs, not maximum profits.

You must have Javascript enabled to use this form.

-------------------------------------
Maximum jobs, not maximum profits.

I am feeling vindicated after arguing with economists

for twenty years over the faults in the "global economy" theory. Economists would never accept my theory on declining human capital and its eventual negative effect on society. Such strict numbers people as they were/ are, seemed to think erasing the expense of human capital would, in their minds, always continue to increase profits. They never considered the theory of an economy of people without capital and using debt financial for their daily lives would have a bad end.

In my theory there is a point that wringing out human capital for higher efficiency starts to create inefficacy in the societies economic system. As economists try to reach the impossible efficiency of 100% (human capital) capital there would be less and less capital in the hands of the human capital. They have tried to reach a higher efficency by moving the labor to a lower cost labor market. But that again creates unemployed people. Creating people that lost their jobs in the USA to have less capital.

I like to call them people.

You must have Javascript enabled to use this form.

Rating agencies

S&P and Moody's? Are those guys still in business? Where is the Justice Department and the SEC?

You must have Javascript enabled to use this form.

Where is the bailout for the American People?

On July 19, 2008 I produced the following video:

Where is the bailout for the American People?
http://www.youtube.com/watch?v=5j57qdQi8Qg

Then on October 8, 2009 I produced this video:

Don't Vote for Traitors Obama or McCain
http://www.youtube.com/watch?v=HzZ1N1Mm4Dg

In this 2nd video I said that we should give a $150,000 bailout to all adults over 20 which would have to pay off all debt: mortgage, credit, student loans etc. Only after these debts are paid would the citizen get to keep any remaining money. Based on 200 million Americans I concluded that this would cost 30 Trillion dollars and would be quite a hard sell.

Well fast forward to July 2009. The Fed has now spent of earmarked nearly 15 Trillion dollars and not one red cent is going to the American People. Instead it is going to the Global Elite, Foriegn Banks and goodness knows where else since they won't tell us anything about where the money is going.

So it turns out my advice was spot on. My bailout would have stabilized housing prices by essentially taking all of the housing supply off the market and made safe from the greedy foriegners that are now buying up our homes. It would have made American citizens secure in thier homes.

It is not too late. We need to demand that every cent given to the Fed is returned to the people and my plan enacted.

Obama is betraying us. And it is time we did something about it.

The future of your children is at stake. And your future as well.

Let's start calling Obamna what he really is: a traitor to the Anerican people and a shill for the New World Order.

Perhaps in 2012 you will think about electing someone like me to the White House?

Yours in Peace and Freedom,

Bruce W. Cain

You must have Javascript enabled to use this form.