Wednesday, February 18, 2009

Goodbye Mortgage Market

You wonder who is advising the President? Having thrown several monkey wrenches in the path of an economic recovery, he now seems embarked on a program to destroy the mortgage lending market. What better way to destroy the mortgage market than to toss out the enforceable contract rights of a mortgage loan? The "judicial cram down" provision of Obama's mortgage plan means that judges can, at their whim, change existing mortgage contracts between borrower and lender. Now all mortgage backed assets are worth less than before Obama's announcement of his new "$ (2)75 billion mortgage rescue plan." In the future, mortgage lending will be much less attractive and much riskier for the lender. Who knows what other arbitrary rule changes the government may see fit to impose between borrower and lender, after the fact.

Other provisions reward homeowners who took on more house then they could afford, knowingly lied on their applications, have mortgages that can be as high as nearly $800,000! Who pays? Howeowners who played by the rules, bought homes they could afford, made their monthly payments and have a mortgage, on average, of barely more than $ 100,000. It is easy to see who gets rewarded and who gets punished. Once again, Obama, rewards the speculator and liar and punishes those who play by the rules.

Imagine two families with the same $ 600,000 house. Both have $ 250,000 mortgages and identical income. Now one family decides to buy a Maserati for $ 250,000, so they refinance to a new $ 500,000 mortgage which payments they cannot afford. One of these families will end up subsidizing the other. Guess who gets subsidized and who pays?

Imagine that both buy a Maserati, but one refinances his home to a $ 500,000 mortgage, but the other uses a jumbo auto loan. Now what? Same ending. One subsidizes the other even though their situation is identical.

The parts of the country that are truly underwater (where mortgages are more than 105 % of home value) nothing happens. The Obama plan is only applicable to neighborhoods that are: 1) stabilizing or should stabilize by this summer without government involvement; 2) have folks that made some very bad decisions. (If you made good decisions this program cannot help you. You are the get to pay for this). Liar loans are encouraged to apply and the kind of mortgages that qualify can be up to $ 785,000 (the average mortgage in America is about $ 110,000).

Meanwhile, the inventory of homes on the market has fallen from 11.2 months (time on the market before sale) to an average to 9.2 months. So, what is the big emergency? The emergency, if it exists, is in markets that are not addressed by the Obama package. This seems to be the hallmark of Obama packages. They are either irrelevant to the real problem or they are counter productive (or both). They do, however, consistently reward bad decisions and punish folks who did not make bad decisions. Is that by design?

The economy is still struggling in the throes of a mild recession. If Obama would take a 12 month vacation with no further pronouncements, the economy, this time next year, would be well on its way to a vibrant economic recovery. But, if Obama succeeds with this mortgage plan and some of the other plans being rumored, we could easily be facing a decade or so of economic stagnation. One thing for certain, the mortgage market will never be the same after Obama. In the future, only the government will loan to low income borrowers or borrowers with less than perfect credit. In the new Obama world, private lenders will no longer be sure that they have title to the collateral in a mortgage loan.

All mortgage borrowers now have a very strong incentive to consider ceasing to pay their mortgage. If your current mortgage is covered in this package, then, in order to qualify, hopefully, you had the foresight to refinance into a subprime loan that you could not afford. (Otherwise you won't qualify). If your current mortgage is not covered, then hang in there, stop making your monthly payments, and the next Obama mortgage proposal will probably include you. In either case, quit making your mortgage payments as soon as possible. The Obama "judidicial cram down" only applies if you go to foreclosure. So, by all means, you need to manage to convince your bank to foreclose. Not paying your mortgage payments is one way to accomplish this. All of this should be good for the banking sector.

Goodbye to contract law. Goodbye to the mortgage market. Goodbye to the commercial banking system. We are in a whole new world with this crowd. Will there be anything left of the private sector when these folks get done?

The market reacted today to the Obama plan. Insurance companies, banks, anyone who owned mortgage backed securities were crushed. What would you expect? Is this what Obama intends?

Perhaps, the government can take over the insurance industry (they have a beginning, they already have AIG). So, once the government has the insurance industry, the commercial banking industry, the auto industry, perhaps it's time to go after the tech sector. Tech companies don't have much debt, but surely there is some way to take them over so that the Obama folks can decide what tech products should be produced, who should buy them, who should not, and precisely how much money senior management should make (and what part of that should be salary and what part bonus). Why not? It seems to be working well in financial services.