Can 100 Monkeys Pass a Decent Housing Bill?
Friday, April 11, 2008 | Ethan RobertsRating:
There is an old quote, attributed to Thomas Henry Huxley (1825-1895), a proponent of Darwinian thought, that if you leave 100 monkeys in front of 100 typewriters for 100 years, eventually they will type out a Shakespearean masterpiece. This is sometimes referred to as the "Infinite Monkey Theorem", and it has to do with the randomness of language, mathematical probability, and the tenacity of 100 monkeys pounding away on the keys, day after day, year after year.We have our own version of the 100 monkeys in the United States Senate. If we could keep the Washington crew in that senate room for long enough, eventually they might bang the typewriters enough to produce a decent proposal for our national foreclosure mess. Amy Crews Cutts, the deputy chief economist at Freddie Mac, says that housing prices may continue to fall another 10%, and may not bottom out until 2010. Clearly, something needs to be done.
Any day now, and perhaps soon after I send this to press, the monk... I mean the Senate, will be coming out with a housing stimulus bill that offers some tasty treats for everybody.
Some of the recent proposals were downright stupid, such as allowing bankruptcy judges to decrease the principal amount of a mortgage for people who took a loan they couldn't afford. Yes, I said the principal, not just the interest rate. So if you can't pay your mortgage, the court can order the bank to bring down your monthly payment by knocking thirty or forty grand off the total. If that laughable provision had passed, would anybody have made their mortgage payments anymore? "Your honor, I'm sorry. I can't pay my bills. Can I have the "Mortgage Principal Reduction" punishment, please? In addition, the banks would simply pass this increased risk for principal reduction on to new home buyers via higher interest rates or closing fees. So how would that be good for the Real Estate market?
Fortunately for everyone, the "Dumb-o-crats" were pressured into dropping this provision by the "Re-dumb-licans", at which point the noble 100 were finally able to reach a compromise agreement. Mitch McConnell (R-KY) and Harry Reid (D-NV), the leaders of both parties, stood up and said that the 100 need to play together nicely and share their bananas, because the problems in the housing sector are too urgent for the bickering to continue! Applause, applause, photo opp, etc.
Another provision that has me shaking my head in disbelief is the one to raise the Federal Housing Authority (FHA) loan limit from the current $362,790, up to $729,750. Why are we raising loan limits for people whose credit is so bad that they do not qualify for a conventional mortgage? Could it be because none of the banks want to continue providing jumbo loans? But give the 100 some credit. At least they had the sense to propose raising the down payment requirement on these expensive loans to 3.5%.
Simultaneously, over in the House of Reprehensibles, they are drinking their own version of jungle juice.
Just yesterday, Barney Frank (D-Mass) was not-so-sweetly telling banks to refinance their high risk loans, and don't forget to knock 15% off the principal to factor in a decline in home values. In exchange for the lenders' kindness, FHA will back 300 billion dollars of these loans. Fellow taxpayers, guess who will pay for that? Borrowers who are in financial trouble can trade in their sub prime, or whatever type of stupid loan they secured, for an FHA fixed rate loan with a 15% principal reduction. Can you imagine? It may not be a Shakespearian sonnet, but apparently over time, 100 monkeys can figure out how to type the word "Socialism"!
Not to be outdone, President Bush has his own version of what should happen. Under the President's plan, FHA would now receive a risk based insurance premium for taking over these risky loans from the lender. The riskier the loan, the higher the premium will be. Since the homeowner has to pay the premium, how many high risk borrowers do you think can afford this?
Furthermore, to refinance the loan, the home owner will have to come up with a 3% down payment. Moody's Economy.com now estimates that almost 9 million homeowners have mortgages equal to or greater than their home's value. So more than likely, they can not use equity in their home to produce the 3%. Attention Washington: If these struggling homeowners had 3% of the mortgage amount in savings, they would have been making their regular mortgage payments all along, or they could have refinanced before the equity collapsed!
Now comes word that Reps. Vito Fossela (R-NY) and Bill Pascrell (D-NJ) have another new plan to try to stimulate home sales. They want to give a one-time $10,000 tax credit to all home buyers (sorry flippers, you have to actually live in it) for the next year. There was a similar tax credit given in the mid 1970's, which helped to reduce unsold home inventories. However, the difference between now and then was that in the 1970's, home buyers had better credit and the down payment money to qualify for a home. The combination of declining credit worthiness and tightened mortgage standards will likely temper any rapid increase in 2009 sales. Still, it's an election year, the 100 are typing away, and it's just raining down tax payer money!
But there is one provision of the bill that finally makes some sense:
It gives a tax break to people who buy a foreclosed home. The original proposal was for $15,000, but it now appears that the amount will be $7,000, spread out over a two year period. The bill also provides $4 billion in grant money for states to purchase foreclosed homes, in an effort to keep neighborhoods from decaying. Instead of "monkeying" around, someone finally came up with a feasible plan which rewards those who would use their time, money, and elbow grease to buy and refurbish the abandoned homes that are destroying neighborhood values across the country.
Well, it's a good start, but let's not get too excited. Afraid of being left out of the party, an activist group called the "National Low Income Housing Coalition" is telling lawmakers that 25% of all new dollars for purchasing foreclosed homes must serve extremely low income households. Huh? Someone needs to tell them that HUD has been serving low income households on a national level for years through their FHA foreclosure home sales. And wasn't it similar pressure on the Bush administration to create "Home ownership for all", that led to the horrible sub prime loans that produced this housing crisis? Now that it's raining down taxpayer money, in the immortal words of Yogi Berra, will it be deja vu all over again for the Real Estate market?
What we need are more ideas with substance, and less that are about politics and showboating. The tax break for foreclosure buyers is a good start, if we don't let it get out of hand. Mostly we need laws that are well thought out, with consideration for all the potential ramifications, before they are force fed upon the tax paying public.
Stay tuned, folks! The clattering of typewriters continues on ad infinitum, and perhaps our 100 esteemed leaders will eventually bang out a little Shakespeare after all! One can almost see the final version now:
"To be homeless, or not to be homeless? That is the question!"
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Ethan Roberts
Contributing Editor
The Tycoon Report
