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Mortgage rates are sliding
below 6% on a stock market fade, that in turn caused by Credit Crunch
reality: fear of big-firm dominoes is past, but credit will be scarce and
expensive for another year or more. No dominoes, but many, many shoes yet
to drop.
$125 oil and resulting
inflation has everybody rattled, blowing ultimate-top forecasts to
$150-$200 (which means nobody knows). Central bankers worldwide are linked
by euphemism: "We are prepared to deal with inflation as necessary."
However, they can't deal with it by issuing rules, enforcing regulation,
passing legislation, or spraying Raid! or Agent Orange.
Only two ways out. The first,
underway: exert monetary restraint and hope to blazes that a gentle global
slowdown leads to a collapse of overshot commodity prices. Despite rate
cuts and lending-of-last-resort, even our Fed is on the tight side. If
that doesn't work, turn to the Grim Reaper of economics: central banks
must "destroy demand." Not since Paul Volcker stood on the brakes from
'79-'82.
A third way: politicians can
undercut the central bankers. A good start: suggest that gasoline prices
are too high. Our leaders may not be willing to tell the people the truth,
but markets will. American energy imports fell by about 2% last year, but
consumption in the China/India/Russia/Middle East bloc (same-size market)
rose by 4%. US coal was $45/ton last year and is now $99; natural gas is
up 45%, and it's spring, not winter.
Congress, federal agencies
including the Fed, and local governments are agreed on the need for a big,
new effort to prevent foreclosures, White House opposition more on fine
points of style than purpose. We fear that these measures -- any measures
-- will fail and distract from effective means to soften the housing
landing.
The elephant in the room, who
cannot be mentioned in polite company: we gave mortgages to a few million
households with deficient long-term financial behaviors, hopelessly
incompatible with home ownership.
That's a hell of a thing to
say about fellow citizens, but it is the case. "Subprime" by definition
meant below the minimum standards of the FHA. Roughly $1.5 trillion will
default: half of subprime and a like amount of the worst of Alt-A.
A year of all-out foreclosure
prevention by traditional means has failed: recasting, forbearing,
capitalizing interest, refinancing, canceling adjustment... all. The new
measures include writing down loans to the level of fallen market value
and refinancing the remainder. Fairness aside (deeply unfair to families
who tough out this cycle), two realities will defy the new efforts. First,
write-down/recast will leave these households still with no equity, no
up-side to defend, and new monthly payments still higher than rent on
equivalent housing. That ownership-rent gap has gaped throughout the
cycle; the good news for a foreclosed family: replacement housing is cheap
and plentiful.
Those in authority demanding
foreclosure rescue, Barney Frank and most of Congress, joined by
compassionate Americans, cannot conceive the financials of a 575 FICO
subprime applicant. A dozen or more late payments, several defaulted
loans, and a large mass of consumer debt outstanding; poor job stability
(temporary, seasonal, intermittent, commissioned sales); also no money, no
savings, retirement or otherwise, often tens of thousands in consumer
debt, huge negative net worth... before purchase.
"But, you bailed out Wall
Street -- why can't you do the same for these people facing foreclosure?"
Bear Stearns was not "bailed out." It was liquidated in an orderly manner.
Wise, tough-love policies would encourage rapid recycling of foreclosures,
enabling quick acceptance of short-sale offers by servicers terrified of
value second-guessing, and above all, making financing available for
strong households to buy the foreclosures. The marketplace can absorb the
volume, but it needs help. Orderly liquidation.
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