Wall Street Bailout

[DERBENSKI]

'pkripper'

Here is the bigger picture deal. We have lost most all of our manufacturing jobs. That is because there is a huge low priced workforce overseas. The Housing Bubble allowed us to create a false economy to mask this situation. It created a large number of jobs in housing construction, Banks, mortgage lending, real estate, home furnishings, you name it. In additions, home equity loans flourished, dumping large cash into the economy.

Lots of people complain that they didn't participate in the housing bubble directly and should not have to pay. However we can't avoid the fact that although temporary, the economy was flush with good times and thus likely gained some economic benefit. Not saying it was worth it, just bring home the point that it was a super boost to the economy.

Now that the credit creation is over, we have overspent to where it now becomes a credit contraction.

Here is the current housing problem. Housing prices went up for two reasons. One was lower interest rates and we all know how that works. The other was lower lending standards where a greater focus needs to be because that was the primary cause.

The old time lending rules.
20% down
Source of down payment had to be verified to make sure you did not borrow the down.
36% of income was the limit that qualified you house payment, how much house you could own.
Credit score very important.

Housing Bubble rules.
No money down, same bank would lend 20% second for the down and do the 80% loan with no mortgage insurance required!
Up to 50% of income for house payment OK!
Stated income, no verification required.
Low teaser rates that will kick the loan to reset if you continue them and Jumbo loans.
560 credit score OK.

What needs to be understood is that as the old sound bank money lending rules return to the market, and in a higher interest rate environment, we are not going to have a large pool that will qualify to own homes at current prices even in the seemingly depressed state. Housing prices will conform to the lending practices. Housing prices can only be supported by loose lending, which is what got them into trouble in the first place. One fix is that we could do as Japan did and drop interest rates to near zero. Going against that is the fact that we still operate on a basis of needing to sell our debt to the world.

If we are to have sound banking, we need to have sound lending and sound lending means lower prices even at today's level. There is already lots of foreclosure property in the pipeline. The 700 billion bailout is a revolving facility, once it fills up, they are going to have to dump.

Now here is the big problem we have. Government wants affordable housing, just so long as affordable housing does not mean lower prices! That means that rather than letting the market adjust back to sound lending, they will do everything to try and keep housing prices up with more bad loan practices.

The other problem is that in many states the home loans are none recourse, meaning that if you just walk away, the bank just gets the property back. Therefore you only have to not like your situation in order to have justification to walk away from your investment even if you can make the payments, just for the simple fact that your investment is underwater.

With the taxpayer bailout passing, some that were likely holding off from walking on moral grounds will likely now see fit to walk by ceasing to make payments since they are now going to pay anyway. Look for a spike in notice of defaults (if they are even going to be filed now since the banks have a ready buyer).

So what is the reality? Some have suggested the taxpayer could actually make money! What is going to happen is when the government takes bad paper they are going to have to do something with it. They can try to modify the loan but borrowers should not take anything less than a markdown to current value, which means an immediate loss to the taxpayer on the paper just received. It is a borrowers right to walk from the property if they do not like the deal. The government now becomes the the bad guy evicting people due to foreclosure so they will likely loosen the terms on defaults. This just makes walking a better option because you get more free rent in the process.

Will the bailout shore up the economy? No, they are just trying to make banks whole again. Some politicians are saying that there will be "New Deal" legislation next year, so aparently they know the real scoop. This means more deficit spending of course.

The bottom line is that we need to be competitive on a worldwide basis with the new global reality of a lower wage base in Asia. This means a lower dollar like it or not.

Derb