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Keep Them in Their Homes

From today’s New York Times, on the latest recovery plan:

The mortgage markets were electrified by the Fed’s announcement that it would swoop in and buy up to $600 billion in debt tied to mortgages guaranteed by Fannie Mae and Freddie Mac. Interest rates on 30-year fixed-rate mortgages fell almost a full percentage point, to 5.5 percent, from 6.3 percent.

But analysts said the program would do little to reduce the tidal wave of foreclosures. That is because most of the foreclosures are on subprime mortgages and other high-risk loans that were not bought or guaranteed by government-sponsored finance companies like Fannie Mae

We’ve heard a great deal about Keynesianism lately (ah, if it referred to a new method of prolonging orgasm or something more fun than what it is). As I mentioned in earlier entries in this here blog, Keynes himself was in contact with Franklin Roosevelt during the Depression (should we be numbering that now? “Depression I?”), expounding his ideas, offering his advice. One of the first things he said–I paraphrase–was, “If you want to fix this, keep steps to end foreclosures and keep people in their houses.”

You don’t need to be any kind of economic genius to see why this would be good advice: homeless people make really poor consumers. When you’re worried about basic things like shelter, you don’t buy refrigerators or power tools or DVDs. The thing I struggle to get my head around is how you fix the basic flaw in the subprime system, which is that there are homeowners (that seems like too generous a term, given the circumstances) who knowingly or unknowingly ended up in houses they couldn’t afford and I would guess won’t be able to afford any time soon. So it seems like unless the government is going to come in and basically gift these houses to those buyers, there isn’t a good way of keeping them in those homes–and yet, for the good of the economy, you have to. Holy Moral Hazard, Batman.

This entry was posted on Wednesday, November 26th, 2008 at 4:36 pm and is filed under The Political Mindscape. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

2 Responses to “Keep Them in Their Homes”

JimBeau Says:
November 26th, 2008 at 7:53 pm
Well, at some point, the sub-prime deals were in fact affordable to the families - usually just at that low teaser rate.

It seems to me that the Feds should have aprogram where people can bring in their mortgages and, as long as the home is worth more than the (base) mortgage, the loan is refinanced by the current holder at a rate that will make their housing expenses <= 35% of their gross - or whatever the magic number is (either as a fixed or a fairly long term ARM). My understanding is that most fiscal people believe that is the point at which people can afford their mortgage payments (plus utilities, taxes, ins, etc.) Now the mortgage holders (banks) do not actually lose real money here - they just may make less (because 5% will get you less than 8%), but they significantly increase the odds that they actually get the return on their investment. And to make it really worth their while, the Feds could use this bailout money to pay the equivalent points for the reduction of the interest rate, thereby also infusing $ into the system. [So if the rate lowered from 8% to 5% on a $200K house, the bank would get $6K in points.] So now the bank gets a cash infusion for securing a more likely to happen return on their investment, albeit at a somewhat lower level. And this would be putting money back into the credit markets slightly more directly than that first gift of bailout cash did. And the family would at least stand a fighting chance of staying in their home.
Rick Says:
November 27th, 2008 at 8:26 am
Well put — I was actually about to post something similar (i.e., banks getting a reduced interested rate is a softer thing than them getting the overhead of dealing with selling fc homes into a saturated market).

That, and to suggest that the people who bought houses over their heads should be required to wear the letters “SP” emblazoned upon their chests so society can readily identify them and refuse to interbreed.

Keep Them in Their Homes

2 Responses to “Keep Them in Their Homes”

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