Mortgage rates are sliding below 6 percent 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.
Now $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.
There are 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 percent last year, but consumption in the China/India/Russia/Middle East bloc (same-size market) rose by 4 percent. U.S. coal was $45/ton last year and is now $99; natural gas is up 45 percent, and it’s spring, not winter.
Congress, federal agencies, including the Fed, and local governments agree on the need for a big, new effort to prevent foreclosures, with White House opposition more on fine points of style than purpose. I 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 upside 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.
(Before you come after me with tar and feathers, know that my mother lost her Ada, Okla., home as a teenager in the 1930s. I know what foreclosure means.)
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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