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Where Would The Housing Markets Be If The Government Had Dealt With The Sub-Prime Mess In An Effective Manner?

By R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Mortgage and Lending with Bank of England (NMLS#418481) NMLS# 1046286

July 25, 2008 05:00 AM

I've got a question for all of you, What would have happened if the government hadn't pussy footed around with the sub-prime mess and had addressed the issues in a forthright and substantial way early in the crises?

Would the housing crises have so deep and damaging?

Could some of the decline in property values have been averted?

Would there have been thousands of families less that wouldn't have been forced onto the streets?

I think the answers to these questions would have been;"No", the housing crises wouldn't have been so deep and so damaging. "Yes" declines in property values could have been averted. And "yes" there would have been far fewer families who would have lost their homes!

As I wrote about in, "Take Two Fed Cuts And Call Me In The Morning" the government went at this problem from the perspective of dealing with things from a macro economic point of view. Instead of worrying about Joe Blow and his family, the government was more concerned with the welfare of Bear Stearns and Citibank/JP Morgan.

They dealt with this issue by attempting to wave the magic interest rate wand and then praying that the whole thing would go away. Instead of dealing with the root cause of the problem, the fact that a large number of people were stuck in mortgages that were adjusting beyond their ability to pay, they said, "screw these guys, we're going to make it cheaper for big business to borrow".

By doing so, they weakened the already weak dollar and caused oil prices to surge which in turn has caused the the downturn to spread to other parts of the economy.

Even today, while it has become evident that housing is in a free fall and dragging the rest of the economy down with it, the government is still not directly addressing the foreclosure problem. While the new housing stimulus package does do some good things that will help, it doesn't go nearly far enough towards helping people stay in their homes.

Nor does it directly address any of the other issues such as the fact that the bond insurers and the PMI companies are so damaged from their exposure to the sub-prime mortgage market that they are making it more difficult than it should be for average people to be able to buy homes!

The end result is that people are still not convinced that the worst is over and therefore are simply standing on the side lines waiting for things to get better. Many potential home buyers couldn't partisipate even if they wanted to due to the fact that guild lines have been tightened to the point where they don't qualify to buy a home even though they have jobs and half way decent credit.

I realize that I'm a voice in the wilderness here, but I'll say it again. President Bush, Members of the House and Senate and anybody else who has the ability to influence our government, please stop pussy footing around with this! Address the problem directly....where it matters. That is, at the root of the problem!

Create a program that:

1) Buys up the mortgages of the folks who are in danger of default and renegotiate them to a point where families can afford to stay in their homes! (If done right, there is even a profit potential available that could possibly pay for the entire program and not end up costing the government a red cent!)

2) Either prop up the PMI companies and bond insurance companies or create some new ones so that Fannie and Freddie can do what they've done so well for the last 70 years! That is, provide liquidity to the mortgage markets.

I'm tired of hearing this crises referred to as "A Correction In The Housing Market". It's not! The problem isn't with the housing markets, it's with the credit markets! If this had been realized earlier on in the crises and the problems had been dealt with forthrightly and directly, we'd already be on our way out of this mess!

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc.

Bob Mitchell is the president of ValueList Real Estate Services, Inc., St. Louis' largest discount/full-service real estate and mortgage company. To find out more about Bob, ValueList or our flat-fee listing program please feel free to visit our web page, valuelistre.com

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Mike Kang

American Family Insurance - Ryan Carlson Agency - Seattle, WA

Bob,

Nice post! Contrary to your opinion, I would have to answer your three questions as no, no, and maybe and here are my thoughts as to why.

As soon as the "subprime meltdown" happened, it was already too late. The mortgage bonds that many investors loved were losing value due to "unexpectedly" increasing default rates. Apparently, no one expected this to happen. With investment portfolios dwindling, investor appetite for the once highly sought after mortgage bond, evaporated causing many lenders to close their doors. The Fed's and the Bush administration were immediately put into a reactive mode.

If there was a way to avoid or minimize the impact of the fallout in the subprime market, they would have had to intervene in not only mortgage lending practices, but in Wall Street at least three years prior to the meltdown.

I believe the Fed's had to bail out Bear Sterns because a collapse to such a huge hedge fund would have caused even more damage to the economy.

So since the Fed's and the government couldn't stop a "correction of risk" from occurring, they could have done more to save the homeowner from foreclosure.

At least recently, the House approved a bill that would allow the government to guarantee $300 billion in refinanced mortgages and bail out Fannie and Freddie if need be.

Thanks for getting my wheels spinning on a Friday morning and sorry for the long comment!

-Mike

Jul 25, 2008 06:00 AM

Bryant Tutas

Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL

Selling Florida one home at a time

Bob. I just don't know about this. I agree with Mike thatthe issue runs so much deeper withe involvment of Wall Street. The bulk of these loans have already been sold off as MBSs and buying up these loans and renegotiating terms just ain't going to happen. And since a whoole bunch of these securities were bought by foreign countries it would be even more dificult.

I guess I need to think about this stuff more.

Jul 25, 2008 07:31 AM

Robert Vegas Bob Swetz

Las Vegas, NV

You know Bob when it comes to the government and some the problems they don't take care of and or try to take care of, it's always a mess. And the government always puts the blame on someone or something else.

If we the people really knew about everything the government is into, the people would try to over-turn the government.

I rest my case!

Robert

Jul 25, 2008 06:56 PM

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Bank of England (NMLS#418481) - Raleigh, NC

Bob Mitchell (NMLS#1046286)

Robert, what we don't know is part of what is making me nervous....It like a conversation that I had with someone once about an astroid heading towards the Earth that could wipe us out and the government knowing about it...would they tell us? I don't think so.

I think that it may be the same with this mess...if you look at the balance sheets of some of these big companies, it's scary! Thanks for the comment.

Bob Mitchell

ValueList Real Estate Services, Inc.

Jul 29, 2008 06:02 AM

Paul McFadden

Responsive Pest Control - Seattle, WA

Pest Control, Seattle, WA.

Hi Bob: The scary truth is we might be in the same place. Realize that from 2002-2006 was probably one of the greatest real estate booms in our history. That's what capitalism is all about. Cycles. Now we're in a protracted down cycle that could last another year or so before we start climbing again. Yes, it's possible that we could have headed some of this stuff off at the pass, but greed always enters the landscape when times are good. Then we pay a heavy price afterward. Just my 2 cents!

Paul

Jul 29, 2008 11:33 AM

Ryan Trask

3plains - Shakopee, MN

Good post Bob... agreed. The real estate market will still get worse as our dollar falls since our purchasing power gets hurt ultimately.

Bernanke will keep pumping out more money, our politicians will fill us more full of BS, the shadow goverment stats (http://www.shadowstats.com/) and the lying will continue.

As Jim Rogers states, we need to let this problem correct itself and the Fed needs to lay off the presses on this one and stop stealing dollars from American's.

Death of the middle Class? Any savers that saved 10,000 in 2001 is now worth $6,666. No one at Washington wants to deal with any issues besides Ron Paul.

Jul 29, 2008 10:26 PM

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Bank of England (NMLS#418481) - Raleigh, NC

Bob Mitchell (NMLS#1046286)

Paul: My educational back ground is in economics and from what I've been taught, you're right that markets do tend to go in cycles with the dips corresponding to the peaks (to a certain degree). Now, there are numerous schools of thought on whether these cycles can be managed or not or whether they should be managed or not. Arguments can be made on both sides.

That's theory. We have to deal with reality and the reality is that we don't live in a free market capitalistic society. Government policy has intervened, usually in an effort to help the wealthy (if you don't believe me, look at the tax code) and that's what they did here.

They stepped in to help the rich at the expence of us all and in doing so have put us in a very dangerous position.

Did people get greedy? Yep, I was one of them and so were you and probably about 99.999% of everyone else. That's human nature. But when it became obvious (to me it was when I got that first fax "announcing" 100%, Stated Income down to 580 credit scores) that the credit markets were broken, action should have been taken.

Okay, people are greedy and sometimes we don't see what they don't want to see, but this has been going on for a while now and they are just getting around to a bill that does anything real (not enough, by the way) towards dealing with the credit crises and helping people stay in their homes?!!!!

Maybe they had good reason for bailing JP Morgan/Citibank out. Maybe they knew something that I didn't? But my gut level is that Bear Sterns and JP Morgan going belly up wouldn't have been as bad as allowing the entire housing sector of the economy to flounder and possibly crash!

Bob Mitchell

ValueList Real Estate Services, Inc.

Jul 30, 2008 05:44 AM

Ricardo Cobos

SunTrust Mortgage - Raleigh, NC

First of all, only a communist or socialist government can step in to solve market problems and that is only temporarily. The Mortgage industry is the most regulated of all financial markets and rightfully so. As I have said before; if peoples houses had INCRESAED In value 25% in the past 18 months no one would want to have their neighbor (i.e. the taxpayer) share in the gain, so why should his neighbor be expected to share in his losses? That is called redistribution of wealth and that my friend is not an American value, at least is hasn't been in my lifetime and not in the America I grew up in during the Reagan Administration!

Just like mobile phones have become cheaper the more people use them, the same thing happened with mortgages, their was a HUG amount of capital thrust into the markets post 9/11 and that is a serious reflection of the confidence in American resolve after losing trillions of dollars on our stock-markets in the four days post 9/11 when are markets opended for business! This infusion is what caused the "competition" in the mortgage market which is what drove down the credit quality. The lenders who took the greatest risk reaped this biggest profits and they are no longer in business, to date some 271 have closed their doors since this mess began and none of them had one dime of taxpayer monies! Check the Daily Tally yourself at Mortgage Imploder That my friend is called a"correction" if you worked for one of those companies, it means you lost your job! That my friend is the result of capitalism! Not one realtor that I know and I know hundreds shared with me or anyone else a commission check during the boom, so quit bellyaching about the bust!

What happened to our American Resolve? The same resolve that defeated Nazi Germany and Stalin? How about the American resolve that defeated the imperialism of the Japanese! What about the dust-bowl years, or the Great Depression? So we feel a pinch in our pocket books and we all become little panty waisted pussies? It sounds like a French solution to bailing out Airbus!

This cycle will "correct" itself. Even Sir Isaac Newton figured out without a computer that what goes up MUST come down! Isn't anyone reading and posting these blogs old enough to remember the Carter Administration? His failed energy policies and double digit interest rates, inflation and unemployment? As long as people in this country keep looking to blame someone else for their own shortcomings, this will stay with us for another decade! A band-aide on cancer just means you can't see the legion, you still have cancer!

Jul 30, 2008 09:49 AM

Ryan Trask

3plains - Shakopee, MN

Hey Bob... I agree with you, they obviously know something we don't. Maybe bailing JP & Bear Stearns out could have been the wrong decision. It's like trying to solver a murder with the Fed. The Fed seems to have secrets that we don't know about and I am sure they are only giving us a little information. I still want the facts on them bailing out a 100 yr old company and how it was a good thing circulating more money vs. letting them fail and letting these companies and our economic system deal with the problem vs. slapping on the proverbial band-aid.

Jul 30, 2008 04:30 PM

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Bank of England (NMLS#418481) - Raleigh, NC

Bob Mitchell (NMLS#1046286)

Ricardo....I guess that our government is a communist or socialist country then. We've had "interventalist" fiscal policies since.....well, since we've been a country.

As I mentioned in my last comment on this post, there are many who are in favor of laize fare government policies. Entire schools of economic thought on this subject. I personally waffle between the two or at least believe in a somewhat "hybrid" version of it.

Anyway, you missed my point completely. My point in this post is that it's not the housing markets that are out of whack here. It's the credit markets. The demographics that underlie the housing market are and contintue to be strong. That is, the population is continuing to grow and housing formations are still on the rise and both are expected to continue on their present path for some time to come.

The reason that the housing markets are in the tank is because of the credit markets which are in the tank because people got greedy. But you're right, that is human nature and part of living in a capitalistic society. That said, the Bush administration decided to step in and bail out JP Morgan/Citibank and leave the home owners hanging. I just don't think that this is fair.

If instead of bailing out millionaires and billionaires, Bush could have taken a different path that would have directly addressed the root of the problem...the fact that the credit markets had overstepped themselves and that people were being foreclosed upon as a result. If he had, we would be on our way out of this by now. Instead, get ready for a long cold winter!

Regarding President Carter....have you noticed how history has been kind to him? That's because he actually did a very good job in a very difficult period of time. Those double digit interest rates and the unemployment were the medicine that we needed to "WIN" (Whip Inflation Now).

Lastly, regarding your analogy to putting a band-aid on cancer, I agree wholeheartedly...I wish that they would rip the band-aids that they've been putting on this off and actually treat the real problem!

Thanks for your comment.

Bob Mitchell

ValueList Real Estate Services, Inc.

Aug 01, 2008 03:14 AM

R. B. "Bob" Mitchell - Loan Officer Raleigh/Durham

Bank of England (NMLS#418481) - Raleigh, NC

Bob Mitchell (NMLS#1046286)

Ryan: I'll fess up, when I was in school, I was taught that the our markets were actually pretty transparent and that the Fed and the government actually shot things pretty straight. After watching this mess unfold, I don't know that I believe that now.

If they had let JP Morgan go belly up, would that have thrown us into a recession/depression? I honestly don't know. I do know that by not addressing the root of this problem...people in mass numbers getting foreclosed upon...they have pretty much guaranteed that we will have a recession/depression.

Thanks for your comment!

Bob Mitchell

ValueList Real Estate Services, Inc.

Aug 01, 2008 03:19 AM

Ryan Trask

3plains - Shakopee, MN

Bob, 1 more comment on the issue dated Sept 30, 1999.

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260

I think that tells part of the story in addition to other things.

On a unrelated note, I remember specifically commenting on one of your blog posts stating the DOW will end up at 7-8,000. This was when the DOW was at 11-12,000 or so. Well, look at it now. I guess on another note, I see it getting worse and sinking in the 6,000's. I hate to say it, but I think it is a reality.

As always, I enjoy reading your blog from time to time Bob.

Ryan

Dec 03, 2008 08:08 PM