Let Market, Not Government, Deal With Subprime Mortgage Problem

Thread starter #1
Let Market, Not Government, Deal With Subprime Mortgage Problem
BY DICK ARMEY


Posted 8/15/2007

For many, the American dream starts with homeownership. Purchasing a home is usually a family's largest financial commitment. A home is not just a personal investment. It is an investment in the community and an affirmation of our fundamental value of private property.

Since we are all touched by the housing market, any turmoil in the housing sector grabs attention and emotions, as evidenced by the recent coverage of the subprime mortgage meltdown and "crisis." But should we be preparing for the next Great Depression, and do we need the federal government to save us?

Unfortunately, the media have a tendency to sensationalize stories, and, by nature, politicians will attempt to get in front of any issue to promote themselves.

When you go beyond the demagoguery and look at the economics, it is clear the mortgage market is correcting itself and that a government bailout would only make matters worse.


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Standard home loans (85% of all mortgages) are made after a thorough evaluation of an individual's credit and job history. Traditionally, only those with high credit scores and a stable job history were eligible for these "prime" home loans. But since 2000, lenders have increasingly offered home loans to folks with weaker credit and less consistent job histories who would not qualify for standard mortgages.

Subprime loans have expanded homeownership by introducing new, risk-laden borrowers to the market. As in any market, the price of a loan reflects this added risk by the lender. Even in the best of times, subprime loans are much more likely to go into default, given their greater inherent risk.

Home loans today are typically bundled into mortgage-backed securities and sold to investors. These securities help manage risk for a given pool of mortgages, but they can't identify the specific risk of default for any individual mortgage in the pool.

In the wake of the housing market correction, some subprime mortgages are falling into foreclosure.

Given the slowdown, Wall Street and other investors in mortgage-backed securities are re-evaluating their willingness to buy housing-backed instruments, and uncertainty still exists with respect to the full scope of the problem. Many holders of these securities do not know how many of the subprime loans they own will actually end up in foreclosure, and the market is having difficultly pricing this uncertainty.

Let's put this in perspective. For all of the media's hysteria, less than 15% of the 44 million mortgages in America are in the subprime sector. As a total of all mortgages, foreclosure rates are 0.6%, up slightly from 0.5% last year.

While these foreclosures are often individually difficult, this hardly has the potential for wholesale economic catastrophe. Losses are estimated to be $35 billion at most — equivalent to a stock market decline of 0.2%, according to Stephen Cecchetti of Brandeis University.

The real estate and mortgage markets are a textbook example of a market imbalance and its inevitable correction. Lenders overexposed to subprime loans, such as New Century, lost their bets and are now in bankruptcy. While the subprime market will be painful in the short term, it will inevitably lead to a healthier economy in the long run.

The real threat to the economy is not the foreclosure rate, but that government will overreact, especially if the motives are driven by impulsive populist politics. Chances are, by the time hearings are held and legislation is passed, the market correction will be over. Unfortunately the new regulations would be permanent. A short-term market correction could lead to long-term anti-competitive regulations and slower economic growth.

On the campaign trail, Sen. Hillary Clinton has already proposed a $2 billion federal intervention, and went as far as to actually propose the federal government build more rental housing. This would depress housing prices by expanding the already burgeoning housing stock in a market recovering from the last housing boom.

Plus, a federal bailout with taxpayer guarantees creates what economists call a moral hazard, which would only encourage more risky loans, paving the way for the next financial crisis.

Sen. Chuck Schumer is also going beyond rhetoric and actually authoring anti-competitive legislation to increase regulation of the mortgage market. With this bill's vague language calling for "good faith" and "reasonable diligence," trial lawyers would be the only winners in this piece of "consumer" legislation.

Sentimentality cannot replace the disciplining effects of profit and loss in the marketplace. Lenders, for fear of being exposed to lawsuits, would abandon the subprime lending market entirely, again restricting the chance of homeownership for many individuals.

The Census Bureau shows that homeownership rates stagnated at approximately 60% from the 1960s to the 1990s. Subprime loans opened up homeownership to a segment of the population that did not normally qualify for mortgages, and homeownership rates jumped to nearly 70%. Most subprime borrowers are in fine shape, and we should applaud this massive expansion in homeownership.

One of my axioms is the market is rational and the government is dumb. Let the market find a rational solution to the subprime mortgage correction on its own.

It is not the proper place for government to bail out lenders who made wrong bets or homeowners who made investments they could not maintain.
 
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60Grit

Guest
My american dream was not to own two of them, unless one was a vacation home.

Someone needs to get this market straight.
 
Thread starter #3
they've already injected funds at least twice haven't they.

sounds like a bailout to me already, but what do i know?
Actually they were smart this time Woods. By buying up mortgage backed securities, they put liquidity into the system at precisely the point it was needed.

The fact Bernanke said to day no cut in the discount rate until after the Open Market Committee meeting in Sept. says they think they have the waterfront covered and anybody that goes belly up has just got "tough darts".
 

dixie

Senior Member
the socialist will have a field day with this, protect the people from making dumb choices, the tip off should have been lending up to 115% of the home's value and the buyer knowing they couldn't make the adjusted rates when they kicked in
 

jimbo4116

Retired Moderator
At 14,000 the "market" was looking for a pull back and the subprime credit fiasco was the catylist to get it started.

It is the large numbers that scare people who only see the Market report on the 6:30 news. 100 and 200 point moves are not what they used to be. Now down 1300 point in a few weeks we have had the 10% retracement that market watchers have been expecting.

This had to happen with people attaining loans with little or no down payments and entry level rates of 2 or 3 % or interest only payments on second (speculative) residential properties they could not afford. The cooling of the real estate market caused panic selling of properties and reduced pricing power bringing on a buyers market.

I think everybody who follows markets and real estate saw this coming, but like every other boom fueled by greed
the less knowlegable got in last and lost the most.
Get rich schemes seldom work out for everyone, at some point there must be a loser.
 

jj4301

Senior Member
At 14,000 the "market" was looking for a pull back and the subprime credit fiasco was the catylist to get it started.

It is the large numbers that scare people who only see the Market report on the 6:30 news. 100 and 200 point moves are not what they used to be. Now down 1300 point in a few weeks we have had the 10% retracement that market watchers have been expecting.

This had to happen with people attaining loans with little or no down payments and entry level rates of 2 or 3 % or interest only payments on second (speculative) residential properties they could not afford. The cooling of the real estate market caused panic selling of properties and reduced pricing power bringing on a buyers market.

I think everybody who follows markets and real estate saw this coming, but like every other boom fueled by greed
the less knowlegable got in last and lost the most.
Get rich schemes seldom work out for everyone, at some point there must be a loser.
Well said Jimbo!;)
 
Thread starter #7
On the money jimbo. As a friend of mine likes to say - All that's going on right now is they are shaking the flies off the meat.
 

drhunter1

Senior Member
Yep but a bad move in my opinion. Let the lenders take their medicine!! If they want to continue to loan ill advised money to people who cant afford housing then let them suffer the consequences. I have no sympathy for them.

There is a neighborhood that went up right up the road from me about 5 years ago that filled up quick. Now over HALF the houses are under forclusure and are empty becuase they were interest only loans for a time. Now that the morgage has come due, well you know what happened next. By the way it was a KB homes neighborhood.


The ugly little truth is that only certain demographics are eligible for those loans. That wasn't very PC to point that out, but who cares?
 
Wonder how many

immigrants have defaulted on mortgage loans in the last two years.
Forclosures were a dime a dozen two years ago. And still going strong today.

When you loan money at high risk, sometimes you wind up with an empty parachute.
 
6

60Grit

Guest
immigrants have defaulted on mortgage loans in the last two years.
Forclosures were a dime a dozen two years ago. And still going strong today.

When you loan money at high risk, sometimes you wind up with an empty parachute.
As much as it is popular now days to lay everything wrong with this country at the feet of the illegal immigrants, this issue does not apply.

Living and working in the Atlanta market bears forth quite another truth on the problem, if you wish to blame a specific sector of demographics.
 

drhunter1

Senior Member
An old saying comes to mind here. I don't know why it is applicable here but it just seems like it does.

"Give a man a fish and he can eat for a day. Teach a man to fish and he can eat for a lifetime."

They gave those loans out like entitlements. Now they are getting what they diserve.
 
6

60Grit

Guest
An old saying comes to mind here. I don't know why it is applicable here but it just seems like it does.

"Give a man a fish and he can eat for a day. Teach a man to fish and he can eat for a lifetime."

They gave those loans out like entitlements. Now they are getting what they diserve.

Yes they are, unfortunately those of us that are resposible with our finances are suffering in this adjustment as well.

I still don't understand why the Feds can't adjust prime rate or offer tax incentives to the qualified responsible buyers to stimulate the market.
 

drhunter1

Senior Member
Yes they are, unfortunately those of us that are resposible with our finances are suffering in this adjustment as well.

I still don't understand why the Feds can't adjust prime rate or offer tax incentives to the qualified responsible buyers to stimulate the market.
Fair Tax!:cool:

All will be right with the world if that happens.
 

jimbo4116

Retired Moderator
Fair Tax!:cool:

All will be right with the world if that happens.
dr,

Fair Tax may resolve some issues, but as far as spending, and fiscal responsibility it will have no effect. The same Politicians and Political mindset will remain.

That mindset, Republican and Democrat, has become remain in office and power at all cost. Earmarks and Pork Barrel politics, I am afraid, will continue to drag our Country down.

It is not the amount of the debt that worries me, it is to who we owe it.

As for this subprime credit problem, yes it should work itself out and part of that process is our Central Banking system which is not under the control of politicians.

The worst case scenario is the Congress trying to "fix" it.
 
Thread starter #17
dr,

Fair Tax may resolve some issues, but as far as spending, and fiscal responsibility it will have no effect. The same Politicians and Political mindset will remain.

That mindset, Republican and Democrat, has become remain in office and power at all cost. Earmarks and Pork Barrel politics, I am afraid, will continue to drag our Country down.

It is not the amount of the debt that worries me, it is to who we owe it.

As for this subprime credit problem, yes it should work itself out and part of that process is our Central Banking system which is not under the control of politicians.

The worst case scenario is the Congress trying to "fix" it.
In baseball, they call that a "bottom of the ninth, walk off grand slam to win the game".

Good post jimbo and on the money too.

In the final analysis, the "sub prime" defaults will be a blip. Nobody will talk about them in 6 months.

The credit crunch will continue because of lending in other areas such as corporate acquisitions and corporate debt.
 

drhunter1

Senior Member
In baseball, they call that a "bottom of the ninth, walk off grand slam to win the game".

Good post jimbo and on the money too.

In the final analysis, the "sub prime" defaults will be a blip. Nobody will talk about them in 6 months.

The credit crunch will continue because of lending in other areas such as corporate acquisitions and corporate debt.

To be more clear, I wasn't trying to assert that the fair tax would solve the political mentality of over spending, but I do believe that the institution of the fair tax will infuse the American tax payer with confidence and perhaps, just perhaps, they will hold their politicians accountable for the money they do spend, though I doubt it.

I believe so strongly that the Fair tax will reveal to even "non believers" exactly how much they have been paying in taxes that it could wake everyone up. Once everyone has an oppertunity to feel the positive effects of the fair tax, many will be converted. Thats really all I was trying to say.
 
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