Stop The Mixed Signals

"The only way to build a thriving economy is to set and enforce firm rules of the road."
- President Obama upon signing the Stimulus Bill.

Hard to argue with that from almost any aspect one could conjure up. Unless of course you are not actually setting and enforcing such firm rules of the road that is. (Well, it is and is not).

50 billion big ones is slowly making its way to troubled foreclosures - and that’s a good thing; no one wants to be put out on the street. It is the history that is important, the banks, the lenders, and the sub-prime loan beneficiaries that should not have signed on the dotted line.

All the hairs in the world can be split on this (and I am sure they will) but once you take a look into a neighborhood you get a better idea of what is happening.

I have a friend who is a teacher in Phoenix (no, not you Heather! LOL!). She is a single mother who lives both responsibly and within her means. Not rich, not poor. She drives an Accord, not the newest or nicest but it suites the needs of both her and her daughter. When the time was right she bought her first house. ($310,000.00). In time she had a neighbor move in who bought his house for slightly more but was paying less per month - an ARM. He drove a brand new Acura TL and had a taste for the more expensive. As expected his mortgage went up putting him in a position where he could no longer afford his payments. Being sub-prime he had no equity and no means to refinance. He was stuck and foreclosure proceedings started - and then stopped in light of the 50 billion heading his way. He is seemingly saved.

His house is being "revalued" to a range where he can afford to keep up the payments and his interest rate is dropping. On the surface that is all fine, but what happens to the value of the surrounding homes that are not in danger of foreclosure - you guessed it, they drop. His school teacher neighbor who maintains a 750 credit score gets no such benefits because she has acted in prudence. His house was revalued at $210,000 which means the upstanding and responsible people in the neighborhood take a huge equity hit. She will never be able to move or she must lug that six figure monkey onto her next loan meaning she will have to step way down in value to maintain the same payments.

Forcing market conditions detrimentally impacts naturally occurring market conditions; the buyers and sellers markets that fluctuate roughly on supply and demand. The more people with the freedom to buy homes versus the more people with the freedom to sell homes given the sub-quotient of homes available. An example; in this same neighborhood a person is selling a house for $285K. Competing sellers would be foolish to try to sell at 350K; at the same time if homes are selling at 375K it would be foolish to leave so much money on the table and sell at 300K.

Here, what we are doing is driving the value down by force to accommodate those least worthy while victimizing those most worthy. This forced depreciation will economically hinder those who know how to manage their income and their credit.

I am not just bitching here so hear me out. Does anyone find it odd that government backed lenders (Freddie Mac and Fannie Mae) have opted in many cases to not foreclose but instead to revoke the loan and RENT the house to the current occupant? The government is looking at the cost of depreciation and its impact on their loans but it is okay for the private sector can take the hit on their loans on a Bill signed by the president. (So much for free enterprise as we push towards economic socialism).

How can banks stabilize "fair market value" as to not rob upstanding taxpayers and not send hundreds of thousands to the streets and save 37.5 billion doing it? Simple, revoke the loan and move to long term leases. "I am sorry Mr and Mrs Smith, but you are no longer home owners. You can sign this four years lease now or you can move out in 90 days." Just that simple. The government did it, why can’t everyone else? Opps! Or wait, did everyone know the government was doing that?! My bad! Did not mean to let that slip! Either way, 25% is what we are talking here. Drop the rent 25% and use 25% of the bailout to maintain market value on the loans to stabilize the housing market. Investors would relax, home owners in good standing would relax and those who should not be in the house in the first place have the security of a long term lease to figure out how to re-establish themselves. You don’t just randomly drop home values to accommodate sub-prime borrowers; that’s just asinine!

The reason it bothers me is that these steps do not help the majority, they hinder the majority! 60% of Americans have a credit score of 700 plus. Obviously this means 40% of Americans are 699 and below and sub-prime, but it is not the entire 40% we are dealing with when it comes to the revalue issue. It is only 27%! Those that are roughly 520 to 619. In translation, the vast majority of Americans do not have sub-prime mortgages - listening to the news and you would think it was 85%. It is the majority that will lose equity because we are failing to "set and enforce firm rules of the road." We are cursing the masses to save arguably undeserving few.

And of course there is more (there always is with me; you all know that by now). Another friend of mine is a loan officer who left his company when this was beginning to happen. The reason he left was because he knew the inevitable would eventual take place and wanted no part of it. Some numbers for you on sub-prime loans his company was putting through. Credit scores of 550 to 650 with a combined late payment rate of 82%! (Surprisingly consistent with the national average). If you combine that with little and no proof of income you can not select the 18% that would pay; nor can you identify those could afford it. To overcome the price objection (an initial payment the would be home owner could definitely not afford) they suggested an Adjustable Rate Mortgage that would give them initial payments they were more comfortable with. The new home owners were not concerned what was to happen when the rate went up even though they well knew they would not be able to afford it - instead, they signed their name on the dotted line, took their keys and have consequently helped cripple a nation. Seeing them out of this is not the top 5%; it’s the average Joe who works hard to get theirs. It’s that hard working teacher with a mid and low 700 credit score that is taking the bust in lost equity as their neighborhood home values plummet to accommodate people such as these.

What about that guy who just got laid off and can no longer afford him home? Well, what about him? If Hyundia can develop a program that a laid off person can bring a car back to the dealership, then a lender can develop a program to revoke a loan and rent the property - or if need be, move the loan to Freddie Mac and have them do it.

We are needlessly wasting huge, huge dollars and not weighing the aspects and variables of this. 50 billion now and there are no numbers put forth reflecting the lost equity for those indirectly effected. That’s not just bad math; that’s irresponsible math!

What we are doing is lowering the acceptable standard and expecting favorable results. It does not work like that. People in hard positions are to be pushed hard. You do not lower the standards of public schools and expect smarter graduates. You do not lower the punishment for criminal behavior and expect less crime. You do not lower value to accept sub-prime standards and expect economic stabilization. Unless of course you are an idiot.

They continually say that it will get worse before it gets better, and they are right. In the worsening you will not be able to tell what is and is not working. You will not be able to see how one insurgence of money passively effects another market. It all gets mixed in the jumble. In the first bailout they said they could not track a single dollar nor what did and did not work. 700 billion dollars with no favorable outcomes. You simply can not force market shifts. Consumer confidence forces market shifts; not blind dollars. The president was saying in an interview some weeks ago that more banks were destined to go under; the very article below it read "More Americans are saving and growing their savings accounts." More Americans putting money into their savings and the president saying more banks will fail at the same time. (Yeah, that does wonders for consumer confidence). Kinda makes me understand why old people would die with a mattress full of money.

Many compare today to the Great Depression. First off, things were far worse off then. Secondly the very fabric of America was different - its people. Their faith in nation was far superior to that of what we see today. Aiding in the recovery was confidence the nation WOULD recover. Consumer confidence is lacking, recovery will not begin until the very people with the dollar bills in their wallets feel comfortable letting them go. Comfort meaning that every purchase they make is not a waste. We tabloid automakers products as junk. We aggressively move to devalue a home in the name of those with poor credit. We portray every worker of Wall Street as a crook. Who in their right mind would have any confidence in a nation dedicated solely to painting dark pictures of everything it gets its hands on? We can dump 20 trillion dollars into the economy but if your president is saying banks are going to fail how free will people be to spend, to borrow and to invest? The attack must be made on the people, not the programs in mass. You tell the people what you are going to do, then do it; industry by industry so they can actually see positive results. That builds confidence. Singing a bill with a glorified speech followed be the market plunging is not the way to do it. The mixed signals must stop.

-T