Making myself at home – but not in The Zone

This Progressive has taken a long time off of blogging. I just bought my own home for the first time and it’s consumed me for the past couple of months. Between escrow, moving, unpacking, and painting, I’ve had no time for blogging … until now.

I’ve been struck by a couple of interesting things going through this process. I opened escrow concurrent with the final meltdown that led Treasury Secretary Paulson to foist his $700-billion bailout plan on congress and the President (no matter that it was resoundingly rejected by the American people). My mortgage was funded weeks after Paulson’s insistence that the credit markets were dried up and no one could get a loan anymore. This was right on the heels of me also getting a very large vehicle loan. How did I manage to get all this credit—at very favorable rates, I might add—when no one is lending money right now?

It’s also interesting where the real estate valuations that I bought into are at right now. There have been many foreclosures lately, so prices have dropped at least 30% off their peak just over a year ago. How much further might they drop before the bottom of this cycle is reached?

I’m prepared for the possibility for the value of my condo to drop to significantly less than the outstanding principal on my mortgage in the next year or two. However, there is one strong indicator that the market in my neighborhood is near the bottom of the cycle. My total cost of ownership for the condo is significantly less than what it would be to rent comparable housing around here.

So I wonder how wise a move it was for me to buy this home at this time. The wisest investors say the best time to buy is when the market looks very negative and everyone else is getting out. It will be interesting to see if the market conditions a year or two from now would even support me being able to buy a home had I instead waited until then to buy.

The minimum down payment for an FHA loan to a first-time home buyer was 3% when I bought but it’s already 3.5% now. There’s even talk of it going up to 5% soon. If the credit market is as dry as Paulson claims, could the minimum down payment get to ten or twenty percent in a year or two? Could I be looking at a 10% APR, or even more, in a year or two rather than the 5.5% rate I got? How high would my FICO score need to be to even qualify for a mortgage in a year or two? Even if the price of a comparable condo next year turns out to be ten or twenty percent lower than what I just paid, it might still be unaffordable to me under the market conditions we’ll have in the near future.

All things considered, I feel pretty good about becoming a homeowner so far. The walls are finally painted and the condo is looking great. Even if my mortgage goes underwater in the next year, I can afford to make my payments. I’m sure five years from now, I’ll have some equity. Most importantly, I’ll have more time to blog in the near future.

Economic forecaster

Lately, I've been taking my cue on the economy from a man named Peter Schiff. Specifically when he talks about the negative impact the $700-billion bailout will have on our economy -- creating rampant inflation and lengthening the impact of the deep recession which is inevitable -- I listen.

Schiff is a securities broker, so why would I listen to him? You'd think he'd say whatever would benefit the industry, right? So why would he oppose the bailout plan?

The only reason I could think of is because he thinks it will be bad for the nation. He should know. In November of 2006 -- almost two years ago -- Peter Schiff told the Western Regional mortgage Bankers Association that, in a couple of years, they would be facing the exact economic environment they are facing now.

He was probably not a very popular speaker that day, telling a group of over 1,000 mortgage brokers that they were about to be out of jobs. Of course, no one believed him then, with the real estate market booming and the brokers getting wealthy selling Alt-A and subprime loans hand over fist. It didn't matter whether or not home buyers who qualified for their loans based on their word about the income they claimed they were making could actually afford the home. After all, homes would forever more appreciate endlessly, right?


To be specific, I'm adopting Peter Schiff as my economic forecaster. If Schiff could make an economic forecast that turned out to be right on target in spite of how unpopular that forecast was, he's the man I'll listen to about what's going to happen next.

Letter to the leadership

I've become convinced that the Fed is going about this "rescue" of our economy all wrong. So I decided to send the following message to the Senate Leader, the Speaker of the House, and the chairmen of the Joint Economic Committee and the Banking, Housing, and Urban Affairs committee, as well as my own senators and congressman:

I am writing to express my opposition to the $700-billion bailout of the financial services firms. All it would do is postpone the inevitable by artificially sustaining the valuations of real estate and mortgage-backed securities above their intrinsic values.

If we didn't bailout the financial services sector, there would be economic repercussions. But it would be mostly localized to those sectors with values that are currently artificially inflated. It would not lead to the collapse of the entire economy.

It seems that secretaries Paulson and Cox forgot everything they learned in economics class. Otherwise, they'd realize that what would actually happen in the economy without the bailout is a redistribution of assets and debt to where they would be put to their highest and best use. This is what we should want to happen in our economy because it would actually lead to the strengthening of our economy in the long run, not the destruction of it.

If you want to put $700-billion dollars to use stimulating our economy, do it from the bottom up. Imagine the boost the economy would realize if we suddenly injected $700-billion dollars into it for things like rebuilding our infrastructure, developing alternative forms of energy, and providing healthcare to the uninsured. With that amount of money being injected into social good, the advancements and benefits the American society and economy would realize would far outweigh and counterbalance the drag that would be created on them from the retraction of the financial services sector.

Even the financial services sector would end up healthier in the long run. Sure, fiscally irresponsible firms would go under if we didn't bail them out. But there are plenty of firms that have put their assets to good use and neither greedily provided subprime loans nor loaded up their balance sheet with mortgage-backed securities. These are the firms that would end up dominating the financial services sector when the others go bankrupt, and Wall Street would be better off for it in the long run.

I ask that, if you must support some kind of economic rescue package, don't make it the one that secretary Paulson and president Bush have presented to you. It simply creates a moral hazard and encourages future irresponsible behavior by Wall Street fat cats. Make it one that will create long-run benefits to the future of the American people.

The media has been reporting that they're being deluged with such messages, with those opposing the bailout ten times as many as those supporting it. It seems the American people are dead-set against bailing out the greedy financial services firms. I hope congress listens to us when it comes time for them to vote. Unfortunately, as of now, it seems the congressional leadership has their collective foot on the gas and they're headed straight at the cliff of this bailout.

Putting out fire with gasoline

The US treasury secretary, Henry Paulson, was on FOX News Sunday today. He was trying to justify his proposed $700-billion bailout of financial institutions. His justification was anything but comforting.

For example, he said that the intent of the bailout is to "minimize risk" to the American taxpayer. Yet his approach to doing so is to purchase only what he called "illiquid assets" from the financial institutions who hold them. "Illiquid assets" is just another way of saying "worthless securities." How could there be anything of higher risk from a fiscal perspective than this?

He went on to say that he's taking this action to "avoid failure." Yet Paulson's approach to avoiding failure is to buy $700-billion worth of failed mortgages. That doesn't sound like avoiding failure. It sounds more like charting a course directly to failure and turning up the screws to full speed.

If Paulson wants to instill confidence in the American people about how he's handling this financial situation, he's going about it all wrong.

Super-Fed to the rescue?

In the wake of the recent upheavals in the financial sector, president Bush has come to the rescue. He and his economic advisors have come up with a Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets. Not willing to rely on the media's descriptions of it, I read the complete text of the actual proposal myself. It strikes me as a unidimensional, monolithic solution to a complex, multidimensional problem.

It's clear to me how this proposal would artificially inflate the valuations of mortgage-backed securities that otherwise lack a foundation of intrinsic value. I can see how this would benefit institutions and investors who own these securities. However, I fail to understand how the proposal rescues the two remaining members of the investment banking oligopoly or how it helps distressed homeowners who purchased homes they could not afford.

This Progressive is no economist but I do grasp economic concepts well enough to understand explanations about the economy. So I invite you to post comments to help me out. Please explain to me how bailing out AIG prevents the collapse of our financial system. I've heard a lot of economists claim that the bankruptcy of AIG would have led to the downfall of the financial system but none of them says why or how.

Bush's proposal permits the purchase of mortgage-related assets only from financial institutions. I understand how this benefits the fat cats on Wall Street who manage firms like AIG that irresponsibly speculated on such securities and how it pays off individual speculators who can now divest their REITs which would otherwise be worthless. But can you explain to me how it alleviates the pain felt by homeowners who irresponsibly obligated themselves to trust deeds that they knew they couldn't possibly afford to pay off when their interest rates reset?

It seems to me that the proposal does nothing for those responsible homeowners who only purchased a home when they knew they could afford to service the loan rather than betting on perpetual appreciation. It does nothing for those renters who recognize that they cannot afford to purchase their own home with an ARM and a leg. It does nothing for middle-class Americans who diversified their retirement accounts rather than investing them purely in REITs, even though they paid substantial returns early in this century. And it does nothing for the small businesses on Main Street that responsibly plow their retained earnings back into assets that they use in operations rather than in risky securities.

When I pull back and take a broad look at this proposal, I simply don't understand the positive macroeconomic impact it would have. I can see an elite cohort that will make out from it but I only see the proposal wreaking further damage on the economy at large. Somehow I can't see how piling an additional $700-billion onto our national debt will rescue us from economic collapse.

McCain now resorting to flat out lies

Did you see John McCain's ad about Senator Obama's comment regarding "lipstick on a pig"? It's completely disingenuous on its face. I heard Obama's entire statement in context, and he was explicitly talking about a couple of specific McCain positions, not Governor Sarah Palin. Yet McCain outright states that Obama was talking about Palin.

You should have seen Hardball the other night. Chris Matthews completely owned the McCain Mouthpiece who came on his show to talk about the issue. The guy got himself so twisted up in the facts that not even he could support the contention that Obama was calling Palin a pig. It's a must see!

Then McCain released an ad that says, "Obama's one accomplishment: legislation to teach comprehensive sex education to kindergarteners." The truth is that when he was in the Illinois legislature, Obama favored (but did not sponsor) a bill to provide "age and developmentally appropriate" material for older students. It also allowed parents to opt-out of the education. The only education that it allowed for children in kindergarten was to teach them to avoid sexual predators.

Furthermore, it wasn't his only accomplishment regarding education:

In reality, Mr. Obama not only helped administer a $49 million education project in Chicago in the 1990s, but also sponsored or co-sponsored measures that increased the number of charter schools in Illinois, and expanded federal grants to summer school programs and to historically black colleges.

Hands off the housing market

Whatever happened to the value of personal (or corporate, for that matter) responsibility in the United States? Since when must the federal government bail out every citizen and every corporation for everything?

The federal government is not obligated to bail out either those losing from the deflation of the housing bubble or those going bankrupt from the meltdown of the subprime mortgage market. It should definitely not be doing so with tax dollars. To do so takes taxpayer dollars to reward irresponsible fiscal activity and encourage such activity in the future.

Obviously, anyone who is a victim of predatory lending should be redeemed. The federal government guaranteeing a refinance for the victim, which they wouldn't be any more able to afford, is not the way to do it. Instead, the victim should be exempted from making payments greater than they can afford to the predatory lender or the holder of the fraudulent note. However, before qualifying for exemption, there needs to be an objective, quantitative, and consistent set of criteria established to validate predation.

The federal government should not be bailing out any other defaulting borrowers. They were irresponsible people who got greedy during the inflation of the housing bubble and purchased a home they knew they wouldn't be able to afford. They did so based on the assumption that real estate always appreciates and that they could resell their homes for a profit when their interest rates reset. Fiscally responsible Americans should not have to pay to bail out those financially damaged by that faulty assumption.

The Fed should not be bailing out the lenders of the defaulting loans either. As previously stated, that would reward making loans to people who cannot pay them back, thereby stimulating more such activity in the future. The American economy is not going to collapse if the lenders who made too many risky loans go out of business. On the contrary, it will be bolstered by becoming dominated by the responsible lenders who declined to make loans that the borrower could not afford to repay.

It's true that many lenders won't lose out because they already resold the risky mortgages on the secondary market. The funds and trusts that bought those notes should no more be bailed out than the lenders should. The owners of the funds and trusts should have read the prospectuses before buying shares so they knew the risk they were getting in to. Taxpayers who invest wisely should not have to pay for the losses of ignorant or greedy investors. The economic system would be churning along just as it is now had Bear Stearns not been bailed out.

People need to take personal responsibility for their actions. Defaulted loans should be foreclosed on, not rescued with tax dollars. The homeowners will lose their homes but they should be renting their homes anyway because they cannot afford to buy. Failing lenders should go bankrupt, not be bailed out by the Fed. There are plenty other responsible lenders to provide mortgages to responsible borrowers. When this happens, property values will drop back to intrinsic levels. Those who are now renting their homes because housing values have been artificially inflated by low interest rates and irresponsible real estate speculators will finally be able to buy their own homes.