(De)fault Line Status Report: MBS and Mortgages

 

One of the great mysteries of the universe for this administration is what to do about mortgages. The political heat is on to help the growing legions of underwater homeowners, more and more of whom have taken the added hit of unemployment. They can envision only one outcome which can help those mired in negative equity, and that’s to reflate the housing bubble. That’s because their only answer to every policy question is to reflate some bubble, any bubble.

 

But stubborn reality is refusing to cooperate. Reality wants to deflate. “The market” wants real price discovery. Everything is resisting the administration’s bland hopes that an anodyne modification program, based only on temporarily reducing payments (while applying compounding interest to the principal), with only a thin slice of the beleaguered borrowers eligible, with lenders obstructing the whole way, can restore bubbling prices.

 

If that description sounded silly, it’s because the program isn’t meant to achieve anything. The whole thing really just meant to put on a political show. As always with Obama, it’s empty words and no action. That’s because the only things which truly could help underwater mortgage holders are permanent mods based on reductions of principal, and empowering bankruptcy judges to write down principal themselves (cramdowns). The problem here, other than that it eats into bank profit, is that writing down principal would help prices go in the reality-based direction, which directly contradicts the Obama re-bubble fantasy.

 

And what’s going to happen at the end of March when the Fed’s MBS purchases are supposed to end? In December the system quietly authorized itself to extend these buys to infinity, through the Fannie and Freddie bailout. (Fannie just announced it lost $16.3 billion in the Q4. As Dean Baker pointed out, if Fannie’s expenditures are simply buying MBS from the banks, and they lose money on the deal, then by definition they paid the banks too much. It’s simply another laundered bailout. A clandestine, illegal TARP.) But since the government is the only buyer for this toxic crap, if they stop buying MBS, the market for bundled loans will dry up. Without having an automatic buyer at bloated prices, mortgage lenders would find it worth their while to lend only at higher rates. The market is already moribund. So this can only further depress it. So there’s every reason to believe that the administration will see no choice but to continue with the MBS buys. How else can they even pretend to themselves they’re reflating the bubble?

 

What’s a poor administration to do? They seem well stocked with theology (“I believe because it’s absurd”; we are magically “predestined” toward resumed bubble growth) and metaphysical philosophy (“a conflict of duties is inconceivable”; the status quo is “the best of all possible worlds”), yet oddly these aren’t working. Maybe it’s time for some astrology? Elizabeth heard what she wanted to hear from Nostradamus, and she survived extreme perils. And Reagan’s reputation is holding up pretty well among Obama’s kind of people. Reagan is his hero, and he strives to imitate Reagan in every other policy arena, so why not bring in an astrologer as well? (I’d suggest the Oracle at Delphi if she still existed, but even of she did it would seem she’s not doing the Greeks much good these days.)

 

Well, we can leave Obama to rot in his self-festered cesspool. In the meantime, what about us peasants? How should we be viewing all this? What should an underwater homeowner be thinking? A renter?

 

We know the government doesn’t care about us. It cares only about the banks, and will do everything for the banks’ benefit. If that ever accidentally helps us, that’s incidental and not a feature.

 

So if they want to reflate the bubble, then they do want to accidentally help recover some of the position of existing underwater borrowers (although this completely leaves aside job loss and everything else which will make the high nominal mortgage values untenable regardless of what the market says). But at the same moment this would perpetuate the longstanding overvaluation of the necessity, shelter. With over 17% unemployed or underemployed (and if you add in all those who aren’t even counted by the U6 number but who really aren’t making this kind of living wage, the number is worse) and getting worse, any zombified housing bubble would simply increase the pain on the non-rich.

 

And it really wouldn’t help existing underwater borrowers in the long run. No such bubble is sustainable, and to zombify prices would simply delay the reality-based deflation and render it all the more catastrophic when it returned a few years down the line. In the meantime an ever greater mass of Americans would be priced out completely. Extended families cramming themselves together and tent cities will become ubiquitous.

 

So the prospect is for the unholy Fed-GSE MBS scam to be the lead drivers of the Bailout to prop up housing prices as high as possible for as long as possible, for the sake of propping up the insolvent banks’ balance sheets and phony profits, extending some meager relief to some homeowners while inflicting yet more general pain upon the populace.

 

So far their top-down reflation efforts have failed. One new kludge they’re floating is a HAMP-imposed freeze on foreclosures. This looks like an extension of the existing HAMP scam, the intent being the same, to induce underwater mortgage holders to keep paying instead of walking away. The only difference would be that whereas the old HAMP gave the lender complete freedom to foreclose at will, this would on paper restrict that. But the goal is the same, to bait people into thinking they’ll get a really helpful permanent mod when they’re really just being strung along.

 

Another, rather bizarre, proposal is to have the FDIC in some unspecified way effect a principal reduction after the underwater borrower has kept paying for some length of time. Again, reeks of a bait and switch. Meanwhile Citi is trying out the “deed in lieu of short sale” in several states. The deal would be that the borrower turns over the deed, gets to stay in the home for a certain number of months before leaving, and the bank promises not to foreclose during that time. (The borrower promises not to trash the house or strip it for spare parts.) You’d qualify for this plan once you’re 90 days late on the mortgage. So the borrower has to already have entered the credit score reporting extortion labyrinth before qualifying. In other words, this program is only for people who look serious about walking away. It’s not for those Citi thinks it can still bully into keeping up on payments they can’t really afford. It is not meant to help borrowers, even a little bit, but rather only to help Citi.

 

So there’s the situation. It’s doubtful that the system can reflate the bubble enough to help more than a few underwater borrowers. Such a reflation would be extremely precarious and temporary. It would be set up in a way to benefit the banks only, while their only real goal vis the borrower is to pretend they’re helping him.

 

So for those who are underwater, as painful as it may be, the reality is that their situation is not likely to be improved except in maybe the most fleeting manner. (So if you are holding on hoping prices will go back up, and they somehow miraculously do, you should probably get out while you’re lucky.) If you love your house and want to struggle to stay in it, fine. But be clear that it’s likely to remain a struggle. People shouldn’t let themselves be strung along with seductive lies about how the price can stably go back up, implicitly that there was never a bubble in the first place. There was. Eight trillion dollars worth. That $8 trillion is gone forever, as part of the inconceivable destruction of bubble wealth which has taken place. The only way they could “reflate” even a miniscule fraction of this would be through hyperinflation.

 

Strategically defaulting is and almost certainly will remain the best rational option for those suffering negative equity. Everything the system does is geared to obscuring that truth and saying “trust me.” We should know by now we can’t trust them. They don’t have our best interests at heart, and everything they say is a lie.