Renewing the Mortgage Credit Boondoggle

Where but Congress could you find a group of ostensibly intelligent people so willing to address a crisis situation by duplicating the original cause of the problem?

Yesterday, with only 12 dissenters, the House approved a bill extending unemployment benefits – the most notable bipartisan action taken by Congress I can recently recall. Congratulations on a job well done! The rationale and benefits of that extension surely deserved that bipartisan support.

Attached to the bill, however, was an extension and expansion of the Mortgage Credit program. Unfortunately, it’s impossible to know how many dissenters might have voiced their opinion if it hadn’t been attached to the unemployment bill.

A year ago, our mortgage markets tanked. They tanked for good reasons. Mortgage values had been actively and aggressively stimulated and inflated by policies which mistakenly valued Home-ownership above affordable housing. Since that collapse the official responses to the crisis appear to be consciously directed toward prolonging and exacerbating the problem. It seems so obvious to me that I have a difficult time in even describing these effects as “unintended consequences”. Instead of seeking to flush the collapse through the system and let values stabilize at more rational levels – the government has been directly and aggressively trying to re-inflate the bubble.

They established programs to prop up the balance sheets of major banks and investment companies by transferring private losses to the public coffers and sought to prolong the agony by forestalling foreclosures and leaving control of debt restructurings in the hands of the lenders – where incentives drive toward minimization of acknowledged losses rather than effective resolution of the underlying problem. I have not seen recent figures upon the number and value of completed debt restructurings, but it is far less than was needed or had been projected. On the other hand numbers that have been circulated indicate that re-default rates on lender restructured mortgages remain near 50% – suggesting that this approach is not only slow but highly ineffective.

The Administration and Congress tout their first time buyers’ credit as a successful program benefiting homeowners. That claim falls somewhere between nonsense and wishful thinking. The buyers’ credit is directed toward lending institutions, not homeowners. It accomplishes nothing more than inflating the price of current home purchases.

How does this happen? Are the Administration and Congress being willfully obtuse? Probably not. Certainly the politics of appeasing certain core constituencies (ie well-heeled donors) plays a role. But I attribute the basic problem more to group think. Despite the Administration’s claim that they are open to all voices, policy analysis and decisions are being driven by a narrow range of voices; Wall Street Traders and Academics, whose Ivy League educations taught them to read profit and loss statements and balance sheets but gave them little experience with the mundane nuts and bolts of the underlying transactions.

So they do what they know – tinker with complex valuation models and try to manipulate balance sheets. And they listen to each other, reinforcing their over-sized egos and misplaced confidence in too narrow perspectives.

So far their manipulations have led to a resurgence of Wall Street profits (and attendant mega-sized bonuses) but done little to stem the loss of jobs and pain inflicted on the general population.

For the record, this is not a political commentary targeted toward the Obama administration – many of the key voices and constituencies with which he has surrounded himself were prominent in the prior administration as well. But until and unless our leaders step back and broaden their circle of advisors I’m afraid all we will see is more high level manipulation attempts and no substantive progress on the underlying challenges.

There are better ways to spend our money than propping up inflated bubbles and Wall Street profits. To Congress’ credit, extending unemployment benefits in the face of double digit unemployment was certainly one of them. However, continuing its attempts to re-inflate the bubble by extending the mortgage tax credit was not.

There are also better ways to tackle mortgage restructuring than placing control in the hands of the parties more interested in perpetuating denial than acknowledging reality. As example I would urge you to examine the proposal originally circulated on February 17, 2009, and recently reposted nearby as A Citizen’s Proposal.

As any experienced workout advisor could tell you, no amount of tinkering with peripheral issues or balance sheet presentations will lead to effective change if you fail to confront and address core, structural problems.

Comments, replies and discussion will be greatly appreciated. Even more importantly, if you should happen to both 1) find any of these observations intriguing, and 2) have suitable contacts in Treasury, the Fed, or the Government – I would appreciate any introductions or referrals to contacts within those institutions who might be interested in joining and participating in such a dialogue.

SDH – 11/6/09

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