Tuesday, March 18, 2008

The Mortgage Crisis

Many of my Readers want to know what is going on in the Mortgage Crisis, and Arnold Kling probably gives the best test for the venues to examine. Read his commentary before I screw up your ideas about the Crisis. Bringing it down to fundamentals, it is all about equity, but how does One explain equity so that it is easy to understand. Let’s start out real simple(ton), and state that an immense amount of Housing has been constructed in the last 15 years. This Housing construction was accomplished because Mortgage bankers became very inventive in the creation of instruments, establishing new ways and Rules to pay for this Housing. An Addendum which gathers importance later lay in Retail development of equity financing to pay for enhanced Consumption patterns, which was sold to Consumers without Reservations attached. The helium tanks were built and filled to blow up the Mortgage Balloon.

The Mortgage bankers supplied a great amount of liquid Cash assets, and Land prices, Construction Costs, and Housing began a rapid rise in Price; while Retail Sales maintained good position because of the easy available Cash. Times were Great, and Housing equity seems the panacea for a lack of a Savings rate. A glimmer of gloom did appear, in that actual equity was shrinking, as the residual value of the Housing less the Mortgage debt owed upon it was decreasing in percentage size in relation to the Cost of the Housing. Clouds started to appear on the economic horizon, as Materials Costs and Resources began to increase in Price faster than Receipts from Labor and Equity Return, due to the excess draft placed upon those Materials and Resources. Consumers suddenly found themselves pressured by higher Budget expenditures for basic Goods and Services than were evident when the Mortgages were originally taken out, and they start finding methods to reduce their Maintenance Costs. Retail Sales did not exactly flounder, but they did not grow at the necessary rates to increase Household Incomes. Housing was placed on the Market with a greater Need to Sell, and found fewer qualified Buyers. Housing Prices wavered, then began to drop. The Age of Negative Equity in Housing was born, sliding-scale Mortgage rates went up, and Mortgage payments increased in monthly Cost. People started to pay more for their Homes, than the Housing was worth; and they could not unload the Housing because of lack of Buyers. Foreclosure again entered the lexicon of American Business language.

The real trouble faced by the American economy lays in the adamancy of the financial community, which will not allow Homeowners to be helped, without their being bailed out of the financial mess they themselves designed for their own personal profit. The financial community refuses to register their losses, and restrict extension of Credit services to necessary economic operations, until such time as they receive the promised Profits they designed for themselves; at rates of repayment which was always excessive and unreasonable. They reaped vast Profits from bad loan extension, relent such Profits again in bad loans, and now insist on repayment before they will allow liquidity to return to the American economy. The Fed and Congress accept this position, and attempt fulfillment of the financial community’s demands, rather than actually help Mortgage-holders, and return the economy to normal rates of Return. I must admit most Economists would disagree with the later assessment, but it is regrettably true. lgl


Anonymous said...

Mr. Lux, I am one of the millions of people that is affected by this crisis. Currently I am in foreclosure. My primary loan on my home is 30 year plain vanilla. My exhausted HELOC was granted when I was still employed in 2005. I did it then because I thought my desk was going to close (which it did in 2006) and I was unsure how long before I would find my next position. I have not found it as of yet. It is mind boggling as to how much there is to be done. I agree with you whole heartedly that Wall Street is asking to be made whole on the mess that they had a large hand in making. I am praying that when Congress re convenes.I hope that they pass Dodd's plan with great speed. What are your thoughts on his legislation? How long before foreclosures on residential homes are put on hold?

Lawrance George Lux said...

I have not read the Dodd proposal, and do not feel great need to do so, as it will essentially be changed to favor the Commericial Banking industry before any passage; which itself may be doubtful.

Placing the foreclosures on hold may not be the best method of handling the Crisis. I favor a forced negotiation plan, where Banks will accept a reduced Mortgage based upon the current Housing value of the Units; taking as compensation defrayed Tax credits. You, along with maybe 10% of current Mortgage-holders, could be better off with alternate cheaper Housing; your basic problem being the lost investment you have already placed in the current Housing.

I cannot give you very good advice, not knowing exactly what financial constraints are placed upon you. I will suggest that you not rely on Government action, which will come too late, and will be most probably ineffective for the Mortgage-holders themselves. lgl