Thursday, December 4, 2008

Bernanke is funny

So today, Bernanke commented that lenders were not doing what was in their best interest by modifying mortgages they service to keep people in homes they cannot afford. Now, I'm not sure when Benny became a comedian, but let's examine that pronouncement:

- By modifying the loans they don't own, banks would be violating the contracts with the owners of the securities, exposing themselves to lawsuit costs and judgments for the write-down value (normally the loss to the investor, which would become the bank's loss if they illegally modified the loans).

- The amount of write-down required to keep people in the houses they bought would, in many cases, be much larger than the current loss in value of the home, even subtracting the cost of foreclosure. Since foreclosure is still possible in the country (at least for two more months), it's still the most cost-effective option in those cases, even with the barriers the government is scurrying to erect. Strike two, Benny.

- Modifying loans keeps people in the house longer while the house continues to decrease in value, and if they default later (more than 50% of the loans modified so far have already defaulted again, something like 90% probably will eventually), the bank loses more money. No rational person thinks the housing market is going to magically stop correcting to where it should be any time soon, even the NAR (news flash: they lie). Moreover, the banks' situation is likely to get worse in a couple of months, when the socialists who don't give a rat's ass about preserving private businesses are running the country. Thus, the best thing the banks can do with obviously bad loans (financially speaking) is foreclose ASAP, while it's still possible. Strike three, Benny, you're a funny guy.

Now, you could take from this that Benny is just an idiot, and I wouldn't fault you, but I'd guess that's not correct. More likely, Benny knows exactly what's going on, but he's doing the same thing the auto executives are doing when they extol why they deserve a piece of the wealth redistribution programs for their otherwise admirably-run businesses: lying. Tell me again, uncle Benny, how the secret undisclosed assets the Fed is holding as collateral for trillions in US dollar loans (and thus are "as backed as US currency" in the financial sense) are totally safe (even though you can't tell anyone what they are), and the US people are not getting screwed by your backdoor unregulated shadow-government financial machinations... I like that fairy tale...

1 comment:

  1. This is another facet of the government’s view that the economic problems are really just a problem of confidence. That’s why Paulson argued that the government could buy up mortgage-backed securities and the taxpayers might actually see a profit from it once the crisis is over and investors realize how foolish they were for not snapping up those troubled mortgages.

    Here Bernanke is showing another side of this same view. If we could just slow down the foreclosures, housing would be more expensive (and justify mortgage holders waiting to foreclosure). There’s no thought that maybe there is a surplus of housing and that’s why it’s not expensive. It must be a technical factors, not fundamentals. When things get more expensive, though, it’s all fundamentals.