Thursday, December 4, 2008

Treasury Working on Another Mortgage Scheme

The Treasury Department tested out another mortgage scheme, concocted in a panic, by leaking it to the press.  The plan is aimed at "revitalizing the US home market."  Details are sketchy, but it has something to do with lowering mortgage rates to 4.5% for buyers who can qualify for a conforming loan from Fannie and Freddie.  Only those who can document their income, and afford the monthly payments will qualify.  The fact that the Treasury has to make the clarification that people who cannot afford a mortgage will be excluded from the plan, gets to the heart of the Treasury's problem.  It is why, so far, no program that lawmakers have initiated has accomplished much more than averting a total collapse of the financial system.  In every speech I have heard Mr. Paulson deliver, he continues to stress that the root of the credit crisis is the correction in the housing market.  Sure, the correction in home values has caused significant damage, but it is merely a symptom of the real disease, which Mr. Paulson has completely misdiagnosed.  The root of the credit crisis was a period of lax lending and stupidity by the credit markets, where standards for lending versus all sorts of assets were lowered to unsustainable levels.  Easy lending led to inflated asset values which were not supportable by fundamentals.  This is precisely why the commercial real estate market is also collapsing, because buying properties for a 2.5% cap rate, which was customary in heated parts of the country, is moronic.  It does not make financial sense when you are borrowing at 6.5% to finance the purchase and putting in little equity.  Asset values are now in a free-fall and they aren't going to stop declining until the fundamentals make sense for buyers.  Sure credit is tight right now, but a credit-worthy person who can put 20% down and can afford the monthly payments can get a mortgage.  Maybe the government should stop trying to prop up housing values with crazy financing schemes, and just start buying houses in bulk at huge discounts from banks's REO departments, do slight renovations, and convert them into housing for veterans, or poor people.  Sounds crazy, but possibly not any crazier than anything else that has been proposed.     

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