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Friday, November 30, 2007


the paulson mortgage rate freeze

the wall street journal is reporting that the treasury is negotiating with major mortgage lenders to freeze rate resets in an effort to keep people in their homes.

this bit i found to be particularly priceless:

Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions. That is why few are suggesting direct support for borrowers who can't afford their loans. Mr. Paulson has decided his best option is to prod the markets to sort matters out themselves, as long as companies bear in mind the public interest in keeping people in their homes. "There's not some silver-bullet piece of legislation out there," a senior Treasury official said.

that's how this administration cloaks a wholesale government intervention into the world's largest debt market!

this is a play out of the schwartzenegger playbook, and (as noted by calculated risk) what was said then applies.

it must be said that this amounts to price controls -- and when in the history of mankind have price controls worked to solve any economic problem? the likely result, as pointed out by mish, is to aggravate the problem -- people will be trapped in homes with mortgage notes that are vastly larger than the liquidation value of the house, as prices continue to decline and the payments that are being made on the note cannot significantly mitigate the principal (in fact in many cases actually grow the principal). on the whole, the vast majority of people now in the situation that california is trying to address are catagorically better off walking away from their houses today.

from the lender side, the invaluable tanta contextualizes why paulson and schwartzenegger are getting any traction with these proposals -- the expectation of a tacit government bailout to make this arrangement profitable, or at least more profitable than the extant alternatives.

kevin depew and scott reamer correctly note that it is a game to shift more of the losses at least temporarily onto investors while awaiting the eventual bailout.

Basically, the plan reduces the number of people being screwed. See, there's no free lunch on Wall Street (except for those banks and lenders in bed with the government cartel, the banks in the Fed system), so somebody has to get screwed, it's just a matter of determining which category of victims makes the most expedient category to screw.

Of course, keeping people in their homes sounds like a great idea, but just as there's no free lunch for most investors, there is no free lunch for those who are willing to sacrifice property rights for the greater good. Minyanville Professor Scott Reamer notes, "The idea of property rights for creditors is something no one thinks of, no one. Essentially, creditors are allowed to plunder a little for a long time, thanks to the inflation of credit, then occasionally the government steps in and says, 'Sorry, boys, gotta screw you, but don't worry, you'll make it up on the back end,' which is basically what the Savings & Loan crisis was all about."

not a solution, but a significant step, according to no less a bear than nouriel roubini. i must ruefully admit that it will in the short run and temporarily keep some people in homes that would otherwise go to foreclosure, end up as bank REO on the market and depress prices as aggressively-marked additional supply. to that end, it works against me as a renter who has tried to manage my finances responsibly and wait out the unwind.

but that's american government, indeed american society in a nutshell: do what feels good now, and fuck the responsible ones to do it.

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