A few followup points on the bailout thing.

First, I hope this was clear, but the efforts I mentioned were not by any stretch intended to be comprehensive list of interventions either proposed or already underway. It was just a smattering off the top of my head. I even forgot to include the most appalling one of all: the allegation that Treasury Secretary Paulson was pushing to give taxpayer money to subprime lenders to compensate them for losses they would incur in working out delinquent mortgages. (I was unable to confirm that tidbit anywhere else, so I’m not sure if it’s accurate — hopefully not!)

Second, a reader wrote in to say that this (by which I mean the assorted monetary and legislative interventions underway) is about helping financial markets, not about helping individual homeowners. Now, if you’re really going to follow the chain of intent to its end, I would argue that this is about buying votes or re-appointments by trading short-term problems for long-term ones. But that said, I do agree with my correspondent’s general theme. By virtue of the ability to turn home equity into money (for a fee, of course), the housing market has come to play a crucial role in both the financial markets and the economy itself. Given that politicians and Federal Reserve members seem to have decided that it’s their collective duty to prevent a recession from ever happening again, the bulk of these policies are probably less about helping kindly old ladies stay in their homes than they are about keeping the economy and financial markets afloat.

Third, I don’t really want to dig into the guts of the new federal rate freeze because everyone else is doing it and, let’s face it, it’s kind of boring. But one line in this Bloomberg article jumped out at me:

To be eligible, borrowers must not be more than 60 days behind in their payments or have less than 3 percent equity in their property.

Well, that appears to rule out a whole lot of San Diegans who could stand to benefit from this plan. The hordes of homeowners already in default are clearly out of luck. And having 3 percent equity is a pretty tall order in a market that’s declined by over 10 percent since 2005, a time when low- and no-down payment mortgages were the norm.

And that still leaves the question, mentioned in the prior post, about whether hugely-underwater borrowers will even want to stay in their mortgages, rate freeze or no. All in all, I’m not convinced that this particular plan will make all that much difference in San Diego.

As counterpoint, I now present a chronologically ordered series of quotes by Ben S. Bernanke, chairman of the Federal Reserve and steward of our national monetary system.

“[House] price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.” — Oct. 20, 2005

“[The housing downturn] looks to be a very orderly and moderate kind of cooling.” — May 18, 2006

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” — May 17, 2007

“[The rate freeze proposals are a] welcome step in helping Americans protect their homes and communities from the consequences of unnecessary foreclosures.” — Dec. 6, 2007

Well, I feel better already.

Update: The actual quote in the Bloomberg article was:

To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property.

There is obviously a typo in this sentence, but I interpreted it to mean:

To be eligible, borrowers must not be more than 60 days behind in their payments or have less than 3 percent equity in their property.

It turns out that I was wrong; my thanks go out to a reader who pointed me at a clearer description in the Wall Street Journal:

Those who can’t afford the higher payments, and who have credit scores below 660 and less than 3% equity in their homes, will get the biggest break from the lenders.

So you need to have less than 3 percent equity, not more. That’s a situation that will be a whole lot easier to find among San Diego homeowners who are struggling with potential mortgage resets. I apologize for getting this issue mixed up.


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