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The trouble with
hope – as with all faith in the future, including "credit"
itself – is it keeps needing a fresh lick of
paint...
WHAT DIFFERENCE lies
between .org and .com at the end of a website address?
Hope Now is a British-based charity, founded more than two
decades ago, to spread the good news of Jesus Christ.
It works primarily in the former Soviet state of Ukraine, and
its recent good deeds include buying new boots for inmates at Stari Babbani Prison to wear
when they're breaking granite.
At least those prisoners might hope for parole, however. Because
Hope Now is also the name of "an alliance between counselors, servicers, investors, and other mortgage market
participants" founded barely two months ago to prolong the United States'
current housing-led slump forever and ever, Amen.
The Hope Now Alliance exists "to spread the word that hope
is but a phone call away," according to US Treasury secretary Henry
Paulson. And to date, the good deeds of Hank's evangelical mission amount to
the dopiest government project since British taxpayers spent $800 million on
"cost controls" for the 2012 Olympics in London – initially
forecast to cost $4.1 billion; now set to cost $18.7bn at the very least.
Hope Now is urging US mortgage lenders to contact
borrowers 120 days before their adjustable-rate loans reset. "Reach them
early, before their mortgage problem becomes overwhelming," says Hank
Paulson, pretending that a couple of letters and a toll-free phone call are
all it will take to forgive the sins of lazy and greedy lenders – as
well as greedy and stupid home-buyers – between 2002 and 2007.
Then comes Paulson's infamous "teaser freeze",
extending the initial interest rate for another two, three or maybe even
seven years if Hillary Clinton gets her way...prolonging the Bush
administration's idiotic, tax-funded meddling well into her second term (God
help you, America!).
And finally, to help cover the interest due on all the
mortgage-backed bonds sold against these ARMs
– interest that will evaporate if the home-buyers' rates don't reset
– Hope Now wants Congress to give tax-exempt status to municipal bonds
underwriting subprime refinancings,
rather than just first-time buyers and purchases in distressed areas.
A neat and tidy Washington
scheme, in short – and the perfect partner for savage rate-cuts from
the Federal Reserve. Just what "Bail 'em out" Bush
promised from the Rose Garden in August, in fact!
- The Federal
Housing Administration will guarantee loans for delinquent US borrowers
– up to half-a-million on Paulson's math – through its new FHA Secure program;
- "Homeowners
who finally find relief [by either foreclosing or reducing their
mortgage] shouldn’t get put back in financial straits because of
the tax code," says Paulson, repeating another of Bush's Key Pledges of August. Congressional approval
is still pending;
- The Treasury and
Housing & Urban Development department (HUD) will identify
home-buyers at risk of defaulting between now and 2009 (or even 2014 it
seems), creating "more favorable" loans by working with
private lenders and insurers to reduce rates in the market.
Bibbidy-bobbidy-boo! You shall
stay in your home, Cinderella. Never mind that the Dollars in your pay-check
will turn to dust at midnight.
Forget as well that "a bailout is nothing less than a
wealth transfer to those who made ill-advised credit decisions from
creditworthy, fiscally responsible taxpayers," as Steve Berger –
an investment manager in Boston – noted for Mises.org way back
in the spring, "postponing hard choices into the future and props up
faulty credit."
And also forget that "foreclosure holidays are equally
flawed," as Berger went on, since "such laws in one fell swoop
eviscerate contractual agreements and contravene the impairment of contracts
clause of our Constitution."
This is about hope. Hope now.
But the trouble with hope – as with all faith in the
future, including "credit" itself (from the Latin: belief, trust) – is that it keeps
needing a fresh lick of paint on the lintels if it's going to keep finding
new buyers.
Tomorrow can only improve on today if yesterday's problems get
fixed-up first. And yesterday's troubles – in this case, the mountain
of idiot loans made to home buyers who just couldn't afford to buy –
sit a long way from Hope Now's tax-funded solutions.
"It's a big misconception to think that [mortgage] resets
are responsible for the delinquencies," according to Andy Laperriere, managing director of ISI Group in Washington.
"What's driving the delinquencies is that people can't afford the
initial payments," he told Caroline Baum at Bloomberg on Tuesday.
That's why one-in-four subprime loans
made in 2006 but not due to reset until '08 is already delinquent. The best
Eric Rosengren, president of the Boston Fed, could
say about his data this week is that 55% of borrowers with subprime ARMs – around
1.2 million home-owners – have yet to miss a payment this year.
Locking higher-risk buyers into new, longer-term teasers will
also bring wider social costs, too. "The effect of propping up sub-prime
borrowers, so they can stay living in homes they couldn't afford when they
bought them," as David Nason notes for The Australian newspaper, "is to
keep property prices artificially high."
But that's assuming success – and "what little data
there is," says the Lex column in the Financial Times, "suggests 35% or
more of such modified loans default within two years anyway."
So why bother? Well, "this is the most serious housing
downturn since the Great Depression," as Mark Zandi
of Economy.com told the Office of Thrift Supervision's National Housing Forum
on Monday. And residential investment accounted for 5% of gross domestic
product between 1996 and last year, adds the Mortgage Bankers Association. Which is why the Hope Now Alliance is also busy explaining to the
lenders themselves that foreclosing on non-paying debtors can prove costly,
and thus self-defeating.
But rather than leaving the lenders' self interest to address
the two million resets looming between now and 2009 (or beyond...!) Hank
Paulson thinks they need a little charitable help, too.
"While increased industry funding is very important, we
also need to do our part to support non-profit mortgage counseling
organizations," Paulson told the same conference that Zandi addressed on Monday. "For this public outreach
campaign to be successful there must be enough trained mortgage counselors to
answer the phone when homeowners call.
"[So] the Administration requested funding for NeighborWorks America and other non-profit
mortgage counseling operations in its budget. But the appropriations bill has
yet to be finalized; Congress needs to get it done quickly."
Why the rush? Because hiring extra staff to review, advise and
decide on changes to outstanding mortgages won't come cheap. Not now the
profits made by lending money to home-buyers with no hope of repayment have
dried up entirely. Not now that 196 major lenders have gone kaput on ML-Implode's count since Merit Financial blew up in May
2006. Not until asset-price deflation in US housing slips into wage-price
deflation for home-loan call center staff.
A clutch of tax-funded call centers in the meantime might just
help support the lenders. And without solvent lenders, joined at the hip to
the solvency of their debtors...who are also to be supported by tax-payers'
dollars, freshly printed municipal bonds and more savage cuts to Federal
Reserve interest rates...how can US home-buyers keep buying?
Perhaps that's why the Federal Home Loan banks stepped up their
loans to Countrywide, the nation's biggest mortgage lender, to the point
where – by Sept. 30th – it had borrowed one-third of all
outstanding advances from the FHL's Atlanta division
according to SEC filings.
At $51.1 billion, the Atlanta FHL's
loan to Countrywide is almost as great as Northern Rock's debt to the Bank of
England here in London.
But Northern Rock is a global laughing-stock, the first British bank to
suffer a run in 130 years. It also stands on the verge of nationalization by
a desperate and panicking government – and that could never happen in
the free-market United
States, right?
Still, let's not harp on about the costs, absurdities or risks
of governments meddling in real-estate bubbles when they burst. This is about
hope. Hope now.
Let's worry about tomorrow some other time.
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash is
head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
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