Bernanke’s creative solution: Let’s do it again

According to an AP article dated August 29, Federal Reserve Chairman Ben Bernanke proposed the most creative solution to the foreclosure crisis to date: "Let's do it all over again." Of course those are not his words, God forbid a Fed Chairman to speak clearly! Instead, he "suggested that policymakers look for ways to encourage a wider range of mortgages geared for low income and other borrowers who have been hard hit by the housing slump and credit crunch."

Hey! That's such a great idea! Let's create some even more creative mortgages. After all, when the new bomb explodes it is going to explode in the face of a new administration and the borrowers will not know what on earth hit them. At least you can tell that, unlike most politicians from both sides of the aisle, he understands the financial intricacies of the current financial crisis. His solution to the credit crunch is to create more liquidity by ways of creating new borrowing instruments.

"The Congress might wish to consider FHA reforms that allow the agency more flexibility to design new products and to collaborate with the private sector in facilitating the refinancing of creditworthy subprime borrowers facing large resets," Bernanke said.

This is helicopter Ben at its finest. His solution (if you haven't had your second cup of coffee yet) is to use this crossroads to force new legislation that will allow for even riskier loans. This liquidity, however, will come at the price of inflation in the future (can you say new housing bubble?). This throwing of money from a helicopter may solve the issue on the short run, at the price of producing one of the most destructive effects on the economy, namely, the destruction of the value of money.

This devaluation, transfers money from savers to spenders, at a national level, this may mean that those whit fixed rate loans will see that the value of their loan relative to the price of their home will shrink dramatically (which sound like a good thing, right), however, the price of their home relative to other goods will be the same or lower. As an example, if your home is now worth 300,000 lead painted Chinese toys, after the effect of inflation it will still be worth the same amount of Chinese toys, however, you will only owe the value of those toys in the past, when you signed off your fixed rate loan.

The creative measures of Mr. Bernanke, however, seem to point to the creation of "perpetual loans." These perpetual loans are not called such, however when you lease a vehicle instead of buying it, for instance, you are agreeing to enter into a perpetual loan for as long as you need the vehicle or you decide to buy one. Although leasing may be a reasonable alternative in the case of depreciating goods, in the case of homes it creates the illusion of ownership and brings with it all the responsibilities of ownership without any of its benefits. In a way, the former owner becomes a caretaker of the hose belonging to the financial institution. The funny thing is that they will not pay you for taking care of their real estate, but will actually charge you hefty fees and interest for doing it.

If you think that's ridiculous or impossible, just take a look at the social structure of most of Latin America, where the ownership of land and the relationship of tenants and owners is much similar to Feudal Lordship than to modern individual ownership.

You can read the whole article here.

Your comments are appreciated.

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Subprime Mortgage Crisis Spreading to High-End Housing Market

For those who have not been following my reasoning on this matter here is an introduction:

• Since the 90s banks get liquidity for providing loans by packaging the loans into securities and selling those securities to 3rd parties (real estate is not real any longer from the point of view of the banks)


• As the banks were giving more and more loans with lower requirements (higher risk) they were lobbying the congress to change the bankruptcy laws to make more difficult for consumers to protect their homes by declaring bankruptcy


• As the loans started to default, the Asset Backed Securities (ABS) started to lose value and it became hard to find buyers (liquidity crisis of the past few weeks) (check the previous article)


• What banks need now to reestablish adequate levels of liquidity is to transfer the risky loans to investors with pools of real estate to back the loans (i.e., they don't back the loan with only the property mortgaged but with other assets as well)


• If they manage to do that, their ABSs will have investment grade again and they will be able to sell those to raise money

I asked yesterday "Are you ready to live as a renter in the cul-de-sac you used to own". I repeat the question today, because this drive to concentrate real estate is not aimed only to the working class and the poor but to the middle class as well.

Enjoy the AP story

AP
Subprime Mortgage Woes Spreading
Wednesday August 29, 2:07 am ET





Subprime Mortgage Crisis Spreading to High-End Housing Market

NEW YORK (AP) -- The subprime mortgage crisis is spreading to a somewhat unexpected place: homes costing more than $500,000.As lending has rapidly gotten more restrictive for borrowers taking out large loans, sales of expensive homes have fallen sharply around the country during what should be one of the busiest seasons for buyers and sellers, mortgage bankers and real estate agents say.


To some degree the change is due to difficulty getting financing, as borrowers are finding fewer lenders willing or able to fund "jumbo" mortgages, loans for amounts greater than $417,000. Such loans are too big to be guaranteed by government-sponsored housing finance agencies Fannie Mae, Freddie Mac or Ginnie Mae.

Given the troubles in the subprime sector, investor appetite for all types of mortgage loans not guaranteed by housing finance agencies has nose-dived.

Banks until recently were able to offload the risk of many jumbo mortgages by selling the loans to investors. But now, as investors burned by the subprime debacle have become extremely picky about what they will buy, banks are having to keep more of these loans on their own books and as a result are charging higher rates.

Some lenders -- such as Countrywide Financial Corp. -- have made a point of saying they're now most focused on making loans that can be guaranteed by Fannie and Freddie.

Other lenders have simply tightened up their lending standards, for example by no longer making jumbo loans to lenders who can't fully document their income, even if they make large down payments and have stellar credit histories.

The banks that are still making jumbo loans are charging substantially higher rates to compensate for the lack of investor demand. Borrowers who could have gotten rates as low as 6.5 percent in June are now having to pay as much as 9 percent.

But aside from the financial impact of higher rates, in certain high-priced real estate markets, the effect of the suddenly tighter lending environment is more psychological, mortgage bankers and real estate agents say, as buyers and sellers alike don't want to plunge into an uncertain future.

"Showings are down, contracts written are down, and sellers are just as backed away as buyers are," said Lou Barnes, a partner in mortgage bank and brokerage Boulder West Financial Services in Boulder, Colo. The company arranges for financing on many higher-priced condominiums and houses in the state.

"I think the psychological damage is worse than the financial damage" which is already bad enough, he said. Even for buyers who have plenty of cash or can easily afford higher mortgage rates, the sudden change in the financing environment reduces "the ardor to buy a house unless you have to," he adds.

With numerous buyers and sellers sidelined, the higher cost of big mortgages is bound to put downward pressure on home prices should the lending environment stay tight for a long period of time, said Ellen Bitton, president of Park Avenue Mortgage, a mortgage bank and brokerage that does business in several states, including New York, Florida and Utah.

In New York, the most pronounced effect so far has been at the very top end of the market, for properties priced $25 million and above, said Dolly Lenz, vice chairman with Prudential Douglas Elliman.

"Every single person I have at the highest end is on hold. They're going to wait and see what happens," she said. "It has nothing to do with them being able to afford" properties or not, Lenz added. "It's a confidence thing. They somehow feel poorer, whether they are or not."

In California, where the median home price is well above $500,000, jumbo mortgages are as much as 44 percent of all mortgages issued in certain metro areas, according to data from First American LoanPerformance.

In and around San Francisco, where the median home price is about $1.1 million, the tougher financing environment has created a "hesitancy" and has led to some canceled escrows for buyers around the $1 million range, said Rick Turley, president of the San Francisco and Peninsula Region for Coldwell Banker Residential Brokerage.

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