Economics Tricks

A recent political cartoon in my small-town newspaper showed a little man with big ears standing in a boat wherein a fat man sat smiling and smoking a cigar. The fat man was labeled "Banks"-obviously one of the two being rescued. The small guy with big ears-the other person being rescued-was bailing water from their beleaguered craft, to keep it from sinking into the black as night sea called "SUBPRIME." Trouble was, as the bucket's contents were hurled with great speed (indicated by the ferocity of the cartoonist's splash marks), they hit the face and chest of a passerby in another boat-labeled "Homeowners."

According to "saman" at Foreclosure DataOnline, "There is, of course, a difference between steps that can be taken to prevent foreclosures and a bailout, but many people fail to recognize the difference and remain steadfastly against both. Some economists even believe that proposed remedies might do just the opposite of what they are for, and actually make things worse."

Lenders, by and large, are not known for holding their customers' interests closest to heart. That's why they didn't offer fixed rate loans to 45% of people of color (Black or Hispanic) who qualified for them! And of course, by reselling the mortgages as securities, lenders including the government's Freddie Mac entered into contracts with investors. Now that really complicates saving anybody besides the government and the lenders, with the possible exception of investors.

Jack Hough, over at SmartMoney.com, is clear the bailout will hurt homeowners far more than it will help them. But his reasons may surprise you. Here's Hough:

"The government's new 'teaser freezer' plan would extend for five years the artificially low introductory rates on mortgages made to some buyers with spotty credit between January 2005 and this past July, a period that contained the real-estate market's bubbliest months. A typical such mortgage carries a teaser rate of 7% to 9% for the first two years, and an ordinary rate of 9% to 11% thereafter. Without government intervention, monthly mortgage payments on these loans will increase as much as 30% over the next two and a half years...The president's plan will keep some of these people in their homes, no question.

"But it will also make them poorer. That's because if two percentage points on a mortgage rate decides whether someone can afford to keep their house or not, then they can't afford to keep their house. They're paying too much. By continuing to pay too much, they'll divert their would-be savings to an asset that's likely twice as expensive as it should be right now, and even if it's not, tends to produce poor returns over long time periods."

Hough himself rents, and has good reasons for doing so. He goes so far as to say that renting would make more sense for most people in this day and age. As a homeowner, and a renter until five years ago, no one appreciates his point more than I. He dumps his "excess cash" (my term, not his) into business investments, which even at 1% profit have a greater yield than the house you live in. (The house you live in generates no yield until you sell it, and even at what most folks call a huge profit, may not cover maintenance during the time of ownership.)

He says if the government intervenes at all, it should do so in a way that will make folks wealthier, not poorer. I like that idea. Let's make sure every homeowner in America gets a comparable favor or cash flow similar to what's being forgiven those who can't pay. Then we'll all be wealthier!