The federal reserve exists to create moral hazard. Their policies are designed to lessen the impact of the financial cycle, make booms less of an upswing and make busts less of a drag. However, the recessions at the end of a long boom are necessary. Unsustainable Ponzi-based business plans and lending programs must be purged. If these business and lending practices are allowed to continue, the improper allocation of resources becomes an even larger drag on the economy.
Ponzi borrowing from mortgage equity withdrawal is one such lending practice that must be purged from the system. All Ponzi schemes are unsustainable. Eventually, the loan balances become too large for debtors to service, and they quit paying. Once borrowers quit paying, lenders quit loaning. Everyone who is dependent upon Ponzi borrowing then stops paying, and the result is a massive credit crunch and severe economic crash just as we witnessed in 2007-2008.
Unfortunately, nobody at the federal reserve seems to understand this. Their “solutions” to the problems resulting from excessive Ponzi borrowing all revolve around encouraging more Ponzi borrowing. It won’t work. It can’t work. But this doesn’t stop them from promoting it.
Top Federal Reserve officials ramped up their call for more forceful government action to fix the broken housing market, expressing frustration that it is blunting their extraordinary efforts to boost the economy.
The housing market is not broken, and it does not need to be fixed. Prices are low, affordability is excellent, and credit is available to those who are responsible and will repay the debt. I would argue the housing market is more functional now than any time in modern history.
The truth is that prices are too low for the banks who need higher prices to prevent borrowers from strategically defaulting and sticking them with huge loan losses. They ignore the other very tangible benefits lower and more affordable house prices bring.
The three speeches Friday marked the latest moves in an increasingly aggressive campaign by Chairman Ben Bernanke and other Fed officials to push the White House, Congress and regulators to address the problems of the housing market.
“The ongoing weakness in housing has made it more difficult to achieve a vigorous economic recovery,” William Dudley, president of the New York Fed, told a bankers’ group in Iselin, N.J. “With additional housing policy interventions, we could achieve a better set of economic outcomes.“
If it weren’t so predictable, I would be shocked that a man in his position would advocate government intervention in the markets. And think about what he is asking for. He wants higher house prices and the Ponzi borrowing on mortgage equity withdrawal that goes with it. That’s what was stimulating the economy before, and that’s what he is advocating a return to. They cloak it with bullshit about the “wealth effect,” but it’s Ponzi borrowing no matter how they characterize it. Ponzi borrowing has no legitimate place in a stable economy.
The remarks come amid debate within the Fed over whether to add to its own efforts by purchasing more mortgage-backed securities in hopes of lowering long-term interest rates, which could spur more spending and investment.
Some Fed policy makers want to move, but worry another round of bond-buying may not be effective because of the factors preventing many homeowners from refinancing their mortgages and getting new loans. The obstacles include tight lending standards, tough property appraisals and new fees.
Addressing such housing problems could compliment more Fed bond buying if officials deem it necessary.
So how exactly are they going to “address” these problems? Are they going to lower standards, ignore appraisals and eliminate the new fees they are charging to offset the staggering losses? And what would this accomplish other than temporarily reflating the bubble? I guess they are so desperate they will take any short-term measure necessary to delay the Day of Reckoning.
Eric Rosengren, the president of the Boston Fed, renewed his call for additional bond buying during a speech Friday in Hartford, Conn. But he said those actions “would be even more effective if accompanied” by other steps “designed to speed the recovery in housing.”
Moving so aggressively into housing policy risks opening the Fed to criticism that it is exceeding its traditional mandate of keeping unemployment and inflation low.
…Fed officials underscored their policy disagreements with the Federal Housing Finance Agency, the independent regulator charged with overseeing Fannie Mae and Freddie Mac. The government took over the mortgage companies three years ago and the rescue has cost $151 billion and counting.Fed governor Betsy Duke, speaking in Richmond, Va., said policymakers should consider policies that use Fannie and Freddie more aggressively to spur a housing recovery “rather than focusing entirely on minimizing losses” to the firms.
In other words, the $151 billion of losses the banks have already passed on to the US taxpayers is not enough, and they want the taxpayers to absorb more losses so their member banks can be more profitable and earn larger bonuses. Unbelievable!
Mr. Dudley called on Fannie and Freddie to reduce loan balances for homeowners with so-called underwater mortgages, in which they owe more than their properties are worth. Such principal write-downs remain a hot-button political issue. Democrats and some economists say banks and the mortgage giants must begin to cut loan balances, while many Republicans say that would unfairly reward overextended borrowers.
Edward DeMarco, the acting director of the FHFA, told a congressional panel in November that forgiving debt isn’t in the best interest of the firms. “I do not believe I’ve been authorized to use taxpayer money for a general program of principal forgiveness,” he said. A FHFA spokeswoman declined to comment Friday on the Fed officials’ remarks.
Democrats want to buy votes by giving away taxpayer money to loan owners while the Republicans don’t. I guess I side with the Republicans on this one. I am thankful Mr. DeMarco is saving taxpayers from even greater losses.
… Mr. Dudley said that his staff’s analysis “suggests that without a significant turnaround in employment, a substantial portion of those loans that are deeply underwater will ultimately default.” Such defaults could “significantly swell the flow of homes into the foreclosure pipeline.”
Concerns about introducing a “moral hazard” that encourages other borrowers to default to seek favorable treatment had been overstated, he said. “This isn’t a moral hazard issue, this is just the bad luck associated with the timing of the purchase and an exceptionally weak jobs market. Punishing such misfortune accomplishes little.“
Complete and utter bullshit. Moral hazard is at the heart of this problem. The few peak buyers who were victims of bad timing have received loan modifications which will allow them to weather the storm. The rest were speculators, Ponzi borrowers, HELOC abusers, and just plain stupid borrowers who ignored the risks to get free money. Bailing them out is the essence of moral hazard, and it will encourage more reckless borrowing in the future. To suggest otherwise is disingenuous or ignorant.
…”The Fed is trying to communicate that, ‘we’ve done an awful lot, we’re not happy with the results of our efforts and it’s time to kick it up a notch because only extraordinary programs are going to bring about a faster result’,” said Jim Vogel, an analyst at FTN Financial.Write to Nick Timiraos at firstname.lastname@example.org and Luca Di Leo at email@example.com
What the fed is communicating is that their misguided attempts to reflate the housing bubble have failed, and rather than admit they have been pursing the wrong policies, they want to double their efforts to steal from seniors and screw renters.
Let’s not forget, principal forgiveness is the worst policy option.
Lenders and loan owners have problems. Lenders made loans their borrowers can’t repay, and now both parties to the deal are turning to the US taxpayer for a bailout. Somehow, these two groups have convinced themselves they deserve some of my money. I was not a participant in their transaction. I did not sign on to the risks and rewards of the deal they made, yet both groups feel I should be compelled to bail them out. Screw them both. Their problem is not my problem.
There is a problem here: excessive debt. There is also a solution in the system: foreclosure and bankruptcy. Both parties to this private financial transaction want to avoid the consequences of foreclosure and bankruptcy because it will cost banks their money and borrowers their houses and their credit. Moral hazard dictates both parties should endure the consequences of their actions or they will repeat their mistakes.
For more news, market analysis and property profiles, please see the North OC Housing News.
$1,513 down, $359,513 gain
Some people really profited from the housing bubble. The owners going two back timed their ownership period well. They bought on 4/18/2000 for $185,000. They only put $1,513 down, less than many put down to secure apartments with first and last months rent plus a security deposit. They sold on 6/9/2006 for $543,000 making a $359,513 gain.
As you might imagine, they didn’t get a check quite that large at the closing table. They had to pay an agent, and they had to pay off the $310,000 in Ponzi debt they took on during the six years they owned it.
If you believe the jokers at the federal reserve, this is how people are supposed to act. Borrowers are supposed to withdrawal a significant portion of their equity to stimulate the economy. I think that is reckless and irresponsible, but it’s what they seem to want. It worked out for those borrowers who made so much, but the bagholder they sold it to didn’t fair quite so well.
June of 2006 was the peak of the market, and those buyers — who put nothing down — quickly stopped making payments when the Ponzi money didn’t arrive. They were rewarded with nearly three years of squatting before the bank finally auctioned the house.
$250,000 …….. Asking Price
$211,000 ………. Purchase Price
4/18/2000 ………. Purchase Date
$39,000 ………. Gross Gain (Loss)
($16,880) ………… Commissions and Costs at 8%
$22,120 ………. Net Gain (Loss)
18.5% ………. Gross Percent Change
10.5% ………. Net Percent Change
1.4% ………… Annual Appreciation
Cost of Home Ownership
$250,000 …….. Asking Price
$8,750 ………… 3.5% Down FHA Financing
3.92% …………. Mortgage Interest Rate
30 ……………… Number of Years
$241,250 …….. Mortgage
$65,701 ………. Income Requirement
$1,141 ………… Monthly Mortgage Payment
$217 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$63 ………… Homeowners Insurance at 0.3%
$277 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$1,697 ………. Monthly Cash Outlays
($100) ………. Tax Savings
($353) ………. Equity Hidden in Payment
$12 ………….. Lost Income to Down Payment
$83 ………….. Maintenance and Replacement Reserves
$1,338 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,000 ………… Furnishing and Move In at 1% + $1,500
$4,000 ………… Closing Costs at 1% + $1,500
$2,413 ………… Interest Points
$8,750 ………… Down Payment
$19,163 ………. Total Cash Costs
$20,500 ………. Emergency Cash Reserves
$39,663 ………. Total Savings Needed
This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
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