How Bad Could It Get?

There have been lots of discussions these days about where the housing market is going. I read a lot from a variety of sources, from those who think that the markets and the players will take whatever actions are needed to preserve some order and rationality in the system, to those who think it is all out of control and headed for a dark and scary period of collapse.

Many people have asked me directly what is going to happen. Whatever my answer, if it agrees with your opinion at the time, I'm a genius. If I vary high or low, I'm an idiot or worse.

This Blog provides information that you can use to hopefully have a more informed opinion and make more intelligent decisions.

That said, the following is an argument against bailing out over-leveraged homeowners and Mortgage Backed Securities. Safehaven is pretty over-the-edge but if you think the Fed is the center of all evil, safehaven is the place for you!

RK

http://www.safehaven.com/article-8263.htm

It's a Shoe In
Excerpts by Peter Schiff

In order to breathe life into the dying secondary market for non-conforming mortgages, some have suggested that Fannie Mae and Freddie Mac be allowed to buy jumbo mortgages. Others, such as bond guru Bill Gross, have suggested that the Federal government itself establish a fund to bail out homeowners who cannot afford their mortgages. Gross maintains that such a move would be necessary to prevent the biggest real estate price collapse since the Great Depression. If he truly harbors such fears, then he should know that creating such a fund will not prevent the disaster. Even if it means that millions of foreclosures do not occur, real estate prices will still have to fall substantially to return to normal levels and to be in conformity with traditional lending standards.

Setting aside the constitutional or ethical arguments against it, the cost of such a bail out would be staggering. My guess is that the price tag would exceed one trillion dollars (Gross estimates the cost at only around $200 billion). Even if Gross' numbers are accurate, it still represents a significant sum which we would likely have to borrow from abroad. What Gross fails to consider is the moral hazard implicit in such a bail out. Were the government to create a program whereby anyone falling behind on their mortgage could have their loan restructured to some lesser amount with lower payments, one would have to be an idiot not to take advantage of it. If such a nutty plan were ever implemented, it would not be 2 million homes going into foreclosure as Gross fears, but 20 million.