Thursday, September 25, 2008

Welcome to Fantasy Island.

I watched Bush's address to the nation last night, compelled by curiosity to see what he would say and if it would make sense. Alas, I was disappointed.

The plan (as proposed) is based on a huge fallacy - one Bush himself pointed out but did not understand, obviously, what he was saying. That fallacy is that if we just do this plan, banks will start lending again, home values will go up again, and things will get "back to normal."

Two problems with that, class. First and easiest, of course, is that overvalued real estate is not "normal" in the first place and getting "back" to the unwarranted higher values will simply be putting us in another bubble.

The second problem is deeper and more intrinsic to the current financial situation. Think about this: why did banks begin lowering their standards for mortgages in the first place? - before somebody figured out the greed angle, there had to be an underlying reason for the ball to start rolling.

The ugly truth was that since the "service economy" began being shoved down our throats along with "free trade" back in the 80s, and the Robber Barons moved all the living wage factory jobs out of this country, the vast majority of middle class people in this country simply can't qualify for a mortgage. That's why the standards were lowered in the first place - because average income, which has been flat or declining in real terms, is now inadequate to finance houses anymore.

Now, real estate had gone through the roof in many major metropolitan areas, with 800 sq. ft. bungalos going for over a million dollars in many areas. But let's say the median price for a reasonably sized single family home was only about $200,000 or so. I believe that is more or less the national average, so let's use that as our baseline.

In order to put a 20% down payment plus closing costs and realtor's fees on such a house, a person would need more than $50,000 in cash. There is no way on God's green earth that people working at wally-wort or mowers-r-us or laundry-heaven are going to be able to save $50,000 in cash to buy a house. That's a fact. So as living wage manufacturing jobs were taken away from these shores and replaced with sub-living wage "service economy" jobs, banks HAD to lower their standards or else they would not be able to issue mortgages at all for the vast majority of people.

The median income in this country for most wage-earners in America is now less than $50,000 a year - I believe it's about $30,000 in the state where I live. That means most people would have to save more than a year's salary in order to have the required cash to qualify for a mortgage and buy a house - and while they're saving that much, they still have to pay rent, pay utilities, buy groceries, raise their kids, and all the other stuff that normal people need to do to live - on less than $50,000 a year. Let's just be real here, class. If you put $100 a month into regular bank savings accounts, it would take nearly 500 months, that is, about 40 years, to save up $50,000 when you acknowledge that the "interest" you are supposed to be making on your passbook savings account is negated by inflation and currency devaluation (which it most certainly has been). Most people understood that quite well.

That left the stock market, which supposedly earned far more "interest" than regular savings, as the only place to "put" money that would "grow" it fast enough for a person to actually buy a house before retirement, presuming they started saving at about 20 years of age (though most people don't even graduate from college and get a decent job until their mid-20s, which of course makes things worse). This is why the stock market has grown at an unnaturally high rate in the last 20 or so years, after enjoying a slow, steady, sustainable climb previous to that. The true equilibrium value of the stock market is about $8000 right now, as we have discussed before. At $11,000ish it is nearly 50% overvalued itself. This can't end well - but that's a topic for another day.

Back in mortgage land, a 10% down payment would naturally take only about half the above amount of time, say, 15-20 years, meaning you'd be able to qualify for a mortgage just about the time your kids started college if you had to save that much cash out of the average American wage-base. Obviously, that wasn't going to work either, which is why they gave up, for the most part, the idea of down payments all together for couples buying their first home and simply let them get by with paying only the closing costs, because if they had to wait 10 or 20 years to save up for a down payment, in real life the money would simply never get saved.

This was something the Powers That Be did not want to admit - that the American Dream was wishful thinking for the vast majority of middle class people, and you may remember in the late 80s and early 90s that "homeownership for everyone" became a political topic as our government began pushing banks to qualify more people for home ownership, under the premise that it was a big step toward financial independence and toward upward mobility. And that's how the standards got lowered in the first place - government trying to cover up the fact that average wages in this country will no longer support a family since they allowed the Robber Barons to rape our economic infrastructure.

Now, one of two things has to happen - either banks put the old down payment and income-ration standards back into place to avoid making loans to people who can't really afford them, or they go back to making loans to people who can't really afford them.

If they refuse to re-implement the down payment and income-ratio standards, then we will be right back where we started again in a few years - a bigger mess needing a bigger bailout.

If they do re-implement sound mortgage loan standards, the vast majority of supposedly middle class people in this country will not be able to buy a house.

EITHER WAY, there is ZERO CHANCE that housing values are going to go back up and stay up to "repay" all that bailout money anytime in our lifetimes, class. It's NOT going to happen, it CAN'T happen. We simply don't have enough income anymore to make it happen. It's that simple.

This "plan" is based on a fantasy that can NEVER be real. It's just a means to get the rich fat-cats of wall street off the hook and interferes so much in the supposed "free market" that the problems will be perpetuated instead of solved. Every one of these businesses deserves to crash and burn, to disappear into the void from which they sprang. As I mentioned before, you were accused of being pinko commies for wanting your job and your livelihood protected and were laughed at by them (all the way to the bank) - now they're getting all that and a box of chocolates.

What they deserve is the firing squad.

UPDATE: Somebody else admits lowered standards caused this mess, but makes it sound like only "very low income" people were the goal of these directives instead of average middle class families - not surprising since it's Ernest Istook. Get this, he also claims that 90-95% of all mortgages are "good." I don't know what he means by "good," but the data tables don't substantiate that claim, as we have seen here previously. But wait - it gets weirder.

Worldnet Daily Exclusive Commentary
The wheat and the tares
Posted: September 25, 2008 1:00 am Eastern

...Many of the bad seeds were sown 30 years ago by the Community Reinvestment Act of 1977.

As Harvard professor Hal S. Scott told a Heritage Foundation audience in 1995, "The Act can only be understood as pressuring banks to make non-market loans," a problem that he described as worsened by further Clinton administration regulations under the CRA. Scott went on to predict: "In the longer term, bank safety and soundness may be significantly eroded."

That was an understatement.

CRA started with a worthy-sounding goal: to enable low-income persons to buy a home of their own. So long as property values were rising, the risks of putting people in houses they couldn't afford remained dormant. But the bubble has burst.

While intact, the bubble empowered unscrupulous individuals. While cloaked in noble purpose, they processed loan papers for bad credit risks, knowing that Fannie Mae and Freddie Mac would buy the loans and take them off their hands. (Even after their recent takeovers, these institutions are still trumpeting their commitment to providing money for "affordable" housing, as they call it.)

What's at fault here was regulation, not deregulation...


WHAT????

What planet is this guy living on?

If the regulations had STAYED IN PLACE requiring adequate down payments and income-ratios for borrowers, NONE of this would have happened. Less people would own homes, but this foreclosure crisis and market saturation leading to devaluation of people's property would NEVER have happened if the old regulations had been ENFORCED instead of SLACKENED.

Welcome to Fantasy Island, indeed!

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