Sunday, February 3, 2008

The Real Estate fix: $600 for China from each of us...

Economists are forecasting that over 2 million people may lose their homes to foreclosure by the end of the year. RealtyTrac reported that in 2007 more than 2.2 million default notices, auction notices, and bank repossessions were issued on about 1.3 million properties. While a large portion of foreclosed homes were investor-owned, the overall numbers reflect a rate not seen since the Great Depression.

The reasons, in hindsight, were clear; The U.S. economy built up an enormous credit bubble that has now popped. This bubble was driven by a Federal Reserve, strongly influenced by Greenspan, that kept real interest rates too low for too long. The debt subsidy the Fed created encouraged risk taking and created a whole sub-economy of middlemen, loan brokers and other peddlers that offered all kinds of loan programs, too complex for the average homeowner to understand, but which generated huge commissions. These loans were securitized into large pools and sold to investors in turn. These pools included quite complex risk structures which few investors understood.

When the Fed decided to start raising rates again, it made the same mistake it did back in 2000 when it raised the rates too much, too quickly thus destabilizing the economy and creating the Recession that came soon after.

Now, eight years later, history repeats...

With the country heading into a crisis, the Greenspan boys realized they had done more harm than intended and admitted “Oops... I did it Again! - raised the rates too much, too soon, too fast... Here you go... , we are reversing our decision and are now cutting the rates back...” However, the damage is irreversible. While the recent rate cuts will certainly help curtail future additional destruction to the economy, the devastating losses inflicted on foreclosed homeowners is not recoverable. Giving them $600 to go spend it at Wal-Mart (China’s retail store) is in no way a solution. It’s what the Wall Street Journal calls “Feel Good Economics” because the only real effect is to make politicians feel good about themselves and buy reelection with the public purse.

Further, the people that lost their homes because they lost their jobs due to cutbacks as a result of the credit mess cannot even get the $600 to give to China... They likely had no income thus paid no taxes and are not eligible for the relief!.

What’s needed is decisive action to expand the Federal Housing Administration program into below-market 30-year mortgage refinancings with minimal down payments. We also need Florida to significantly reduce the cost burden of refinancings.

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