Tuesday, February 24, 2009

The current housing debacle was predicted in 1999!

"From the perspective of many people, including me, this is another thrift industry growing up around us. If they fail, the government will have to step up and bail them out in the way it stepped up and bailed out the thrift industry." - Peter Wallison a resident fellow at the American Enterprise Institute, New York Times article by Steven A Holmes September 30, 1999

This quote comes from an article entitled "Fannie Mae Eases Credit to Aid Mortgage Lending" by Mr. Steven A. Homes that was published in the New York Times September 30, 1999. Mr. Holmes is currently a professor at NYU School of Law. Needless to say Mr. Holmes demonstrates tremendous foresight and leaves me wondering why our country does not elect more people like him to office. In the article he cites pressure from "the Clinton Administration to expand mortgage loans among low and moderate income people and (Fannie Mae) felt pressure from stock holders to maintain its phenomenal growth and profits."

Moreover, he quotes Peter Wallison from the American Enterprise Institute who correctly predicted the current bailouts, "From the perspective of many people, including me, this is another thrift industry growing up around us. If they fail, the government will have to step up and bail them out in the way it stepped up and bailed out the thrift industry."

I'm sure that many are impressed by the articles foresite and frustrated that his warnings fell on deaf ears. Mr. Holmes' predicts the center of today’s economic crisis 10 years, tens of thousands of sub prime loans, and millions or billions of tax dollars prior to the great housing bubble. I have emailed Mr. Holmes for permission to post the article in its entirety.

What does Mr. Holmes think about today’s current bailouts, the idea that tax payers should subsidize and create an artificial floor for home prices? In my opinion, any government subsidization beyond allowing those that can afford a 30 year fixed fully amortized loan at market rate to refinance is too much. First, most of the modifications will be back in foreclosure in less than twelve months. Second, subsidizing home prices with the thought that keeping prices high and stopping foreclosures will help the overall economy is short sighted. If the government successfully keeps home prices 10% higher through subsidization than the market otherwise would all future buyers will pay 10% more than they should and have that much less disposable income to spend on things besides housing.

Moreover, there is a whole generation of people that have overpaid for homes and if current housing stimulus policy is successful there may be a whole new group of people that will overpay for housing. When people over pay for housing they do not save enough for retirement, they do not have disposable income to spend and stimulate the economy, they may not have time to spend with their family, or the money to send their kids to college. Is using people’s tax dollars to subsidize and artificially inflate the price of housing a good idea?

I find this article particularly interesting because I wonder how many other people out there recognized that stated sub prime, interest only, and negative amortization loans were a bad idea and how did our best and brightest not? Moreover, I wonder if there are political science professors, economic experts, or others that share my opinion regarding government, subsidization to artificially inflate home prices? Foremost, I wonder if these voices will be hear and win out so that a larger crisis is not created.

I remember asking my wife many Sundays while reading the real estate section of the Orange County Register when the crazy over inflated prices will end. It was apparent that prices could not continue to rise at such unsustainable levels while people were barely able to afford payments using interest only and negative amortization loans. I often wondered how and why it was not apparent to others, particularly the banks giving the loans. One question I posed to people in the height of the crisis was what can banks do to go beyond the negative amortization loan? The bank pays you loan? Today I ask, when will they see that using people’s tax dollars to artificially inflate the price of the very homes those people have been saving to buy (at a reasonable price) is not a good idea.

While I was cautioning against over exuberance my warnings fell on deaf ears and in the back of my mind I wondered if maybe I was wrong. Fortunately, I trusted my beliefs and was able to avoid direct damage from the housing bubble, however, the collateral damage has been felt by all. Let’s hope that wiser voices prevail in regards to the current debates regarding housing bailouts. To this point, it seems that they are not.

I hope to hear from Mr. Steven A. Holmes soon.
previous article published on my blog November, 2008

America is quickly becoming desensitized to its moral obligation and duty to repay debts. In fact, many American’s now feel that they are owed something regardless of their behavior and actions. This moral path could lead to an economic crisis far worse than anything we have seen.

In the movie Cinderella Man Russell Crowe plays James Braddock, a.k.a Cinderella man. This movie is a story about a poor ex-prizefighter during the great depression. Unable to pay his bills struggling to feed and clothe his family he is forced to go on public relief. Driven by love and honor James Braddock returns to the ring to become a legend and a symbol to many American’s during the time, proving that hard work and sacrifice, pay off when he defeats the heavyweight champion. In a memorable scene, James Braddock returns to the public assistance office to return the money he was lent when he was down and out.

This brings me to today's economic crisis, a majority of Americans did not lose their homes trying to feed, clothe, and keep their children warm. In fact, of the entire country 6% of homeowners are behind on their mortgage, most of them are losing their homes as a result of irresponsible behavior that has caused many others that did not participate in the irresponsible behavior to lose their jobs, 401k's, and retirements. As Larry Roberts author of The Great Housing Bubble puts it, a majority of American’s are losing their homes because they “were lured by the free money accumulating as appreciation and took out an additional $400,000 in home equity lines of credit and refinancing and lived the good life. This neighbor was driving around in new cars, taking vacations, buying expensive toys and pretending to be rich,” while others sacrificed, even spent less time with family and friends in order to pay down their mortgage and in hopes of a better future. Now, current legislation endorsed by John McCain, Arnold Schwarzenegger, and others seeks to use the tax dollars of the prudent to pay for the imprudent and worst of all the imprudent are beginning to feel entitled and even proud of the plunders. Furthermore, this legislation leads to others saying why not me and the potential for the number of bad loans to increase exponentially as the banks tell people that they need to quit paying their mortgage to qualify for the modification.

“When the thirteen colonies were still a part of England, Professor Alexander Tyler wrote about the fall of the Athenian republic over two thousand years previous to that time:A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship.The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage.”1

1Alexander Tyler http://www.mcsm.org/democracy1.html In accordance with Title 17 U.S.C. Section 107, any copyrighted work in this message is distributed under fair use without profit or payment for non-profit research and educational purposes only. http://www.law.cornell.edu/uscode/17/107.shtml

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