Sunday, August 26, 2007

Bailouts?

Mr.Mortgage asked, "In the spirirt of democracy and a good Saturday round table discussion, what is your view on the proposed bailout plans that the presidential candidates have been discussing?"

This is important and timely, with recent posts by Mish, OC Renter, Calculated Risk, Housing Doom, and Marinite. The LA Times editorialized against it, linked on the LA Land blog. I also posted back in March on Marinite's wiki and an LA Times article on earlier bailout proposals.

My main points include: (1) How can buyers who just can't afford their mortgages be successfully bailed out? (2) How would that not also bail out undeserving speculators and irresponsible lenders? (3) Bailouts would delay the necessary fall in house prices before the market can recover at affordable price levels.

I see two levels operating: First, politicians want to appear to be doing something. The probably good news is that whatever modest amount of money committed would be little more than symbolic, with no big effect, good or bad.

But the bigger question is, I can imagine the Fed and major banks searching in uncharted territory for something to avoid major defaults. We've seen initial actions with lowering the discount rate and getting big banks to borrow there. Presuming that doesn't solve the problem, what happens next?

4 comments:

Don said...

I would allow a "bailout" of the following form: Allow a homeseller to deduct capital loss on the sale of a house against the "income" of debt relief on a short sale. The person who bought high and sold low with 100% financing would then not get hit with the double whammy of losing their house and getting a big tax bill. On the other hand, the person who treated their house as an ATM would most likely not see their situation change.

The benefit? First off, it can be sold as tax relief for those losing their homes which sounds really nice for the political class. Second, it makes it easier for a homeowner to do a short sale which will increase the supply of homes and help bring prices back to reality faster.

Bubblewatcher said...

I'm with her:
http://www.dailynews.com/marielgarza/ci_6718955

For starters, who would you bail out? Flippers who got caught holding the bag? Heloc-addicts who just couldn't stop renovating or buying crap at Best Buy?

And with what money? The tax dollars of the 86% of us in this country who didn't fall for this ponzi scheme?

And would further debt-enslaving these folks to some McMansion for the rest of their lives, with little money left over for expensives, really benefit them...or the mortgage companies?

A lot of this have been saying for years that this is coming, and now that it has I think it'll just have to play out until markets have stabilized. Until then, we're in for some necessary pain.

Mr.Mortgage said...

A Distorted View:Existing Home Sales.
http://www.thegreatloanblog.blogspot.com/

Mr.Mortgage said...

Senators and Bankers Beg for Jumbo Loan Changes
http://thegreatloanblog.blogspot.com/