How To Fix Toxic Mortgage Assets — Prop Up Artificial Home Values!

Giving a blood transfusion to a dying economic patient, jump starting the dead battery of the economy, and providing a federal backstop to prevent wild financial baseballs from injuring spectators have all had one goal so far: propping up housing prices. This really is known as stabilizing the housing market, and is designed to help the banks.

In fact, every thing the government has carried out so far to “fix the economy” continues to be for the benefit of the banks. From the Federal Reserve (really not a part of the government but close enough) delivering new “windows” at which banks can trade poor assets for good, to the Treasury shoveling $350 billion at a variety of banks, all of it has helped financial institutions.

The difficulty, according to the banks, is that mortgage securities have fallen in value. If the value of these securities’ underlying assets, mortgages on residential homes, could possibly be propped up, then the problem would disappear, regardless of the truth that the people who own the properties would still be unable to pay them.

The problem is not the fact that so many people were sold mortgages that they would in no way have the ability to pay back. The challenge is that the prices of houses collapsed from the artificially high levels of 2005-2006. Mortgage companies had been unable to flip the homes that went into foreclosure as a result of poor lending decisions.

If the banks could only get home values back to levels observed during the bubble, the mortgage securities would not be underwater anymore. Actually, the Ponzi scheme could choose up steam again, if home values would just go back up to levels that were grossly inflated to start with. Then additional securities might be sold to much more unsuspecting investors.

This technique of improving the banks applies to President Obama’s foreclosure bailout package, lately unleashed upon the housing market. The plan is designed to help homeowners reduce their monthly mortgage payments to prevent foreclosure, as well as hide the steep declines in home prices across the country.

In effect, folks are being asked to ignore the truth that their property has fallen in price in exchange for the government stepping in and helping lower their monthly housing bill. No foreclosure, no forced sale of the property, and no inconvenient sheriff sale or appraisal to establish the value of the property will aid hide the accurate value of a house.

The question no one seems to be asking is if homeowners might be willing to help keep paying anything every month for a household that’s deeply into negative equity, even with government help. Of course, some will, but others will likely be willing to let the home go through foreclosure and rent for some years.

This may, actually, be a much better strategy to dispose of a really inflated house — fight the foreclosure, get a short sale or a deed in lieu, and rent for some years whilst saving dollars for a down payment on a vastly less costly home. President Obama’s mortgage plan attempts to convince individuals to accept becoming locked into a lower payment although still overpaying for their household.

It’s unfortunate but not really surprising to see a different foreclosure relief strategy put forward by the government exactly where the primary purpose would be to hide a much-needed correction in house values. Rather than addressing the difficulty and lowering mortgage balances, the strategy tries to solve the symptom of the challenge and hide a accurate valuation of residence costs.