The First Law of Thermodynamics states roughly that energy cannot be created or destroyed, but it can be changed in form. This is, as proponents of Anthropogenic Global Warming are wont to say, settled science. And, as these self-same acolytes of Gore (the creepy high priest of environmental fetishism) conclude, therefore beyond debate.
There is a corresponding, though lesser-known metaphysically certain scientific law: ‘Puter’s First Law of Finance. That is, “Risk can neither be created nor destroyed, but only transferred by mutual agreement (or, these days, government diktat).” It’s simple, really. And yet no one in charge gets it.
President Obama introduced his newest soon-to-be-failed attempt to resuscitate the cratered housing market. We can tell President Obama’s just phoning it in now, as he hasn’t even come up with a catchy acronym for his scheme. As near as ‘Puter can figure from the media’s gullible, yet oddly sycophantic at the same time, coverage (as exemplified by the Washington Post, here), the newest scheme has the following components:
1. Qualifying homeowner, whether their mortgages are federally guaranteed or not, can refinance. From what little is available on the specifics, it appears that one only need have a 580 credit score (‘Puter wouldn’t lend to you, even if the loan was over-collateralized) and have a mortgage within Federal Housing Administration limits (somewhere between about $270,000 and $730,000). That’s it.
2. Refinancing costs would be borne by banks, through the levy of a new tax on them. Republicans estimate the tax would cost banks between $5 billion and $10 billion. ‘Puter’s two thoughts here are (a) politicians always underestimate the cost of any program and (b) once a government benefit is instituted, it never ends, regardless of what politicians promise.
This program and every other program the Administration will come up with will not help the housing market one iota. That’s because the Administration doesn’t want to admit the problem. The problem is that losses have to be taken in order for the housing market to recover. Every single stinking program proposed to date involves pretending that no one has to bear negative consequences ever.
When each of these mortgages originated, banks valued the collateral and individual borrowers’ credit risk, determining how much they would lend. Borrowers looked at their income and prospects to see if they could afford the deal banks were offering. When the parties agreed, documents were drafted and executed, memorializing each party’s rights and obligations. We fancy-pants lawyer types call the documents “promissory notes” and “mortgages” or “deeds of trust,” depending on borrower’s state.
The structure of mortgage transaction is well defined under each state’s laws, from the document’s requirements, to the consumer protections, to the recording costs, taxes and fees. Heck, for most residential mortgage transactions on one-to-four family housing, the federal government (through Fannie and Freddie) even has provided forms. There are tons and tons of state and federal regulations governing the industry already.
Risk of loss provisions in these transactions are clear. Banks risk that you won’t repay the money, and that their recovery may be limited to the value of the collateral (your house). You risk that the value of the collateral will fall and you will have to choose between continuing to pay according to the contract terms or defaulting and filing bankruptcy (or walking away in a non-recourse state) taking a massive credit score hit. This is the calculation made up front, and both parties know or should know what they’re signing on for.
To be fair to President Obama, there are no good choices here. He (and hopefully his Republican successor in 2013) has the following choices, should he choose to follow the rule of law, letting contracts and courts sort things out in their own time:
1. Banks bear the losses. This screws shareholders and consumers. Shareholders (including pension funds, old timers), because they’ll be holding stock in a newly undercapitalized bank on the verge of a shutdown. Consumers because banks concerned about their capitalization ratios hoard cash and won’t lend.
2. Consumers bear the losses. This results in millions of lost homes and likely millions of consumer bankruptcies. Consumers are people, and people vote. Politicians can’t have their constituents bear pain associated with the foreseeable outcome of their gambles, else they become former politicians.
President Obama continues to pretend Clinton-esquely that there is a third option, one with no risk for anyone whatsoever. That option is to have the government rush in and rewrite the rules of the game, creating fanciful new programs and even tossing in money to grease the skids.
This is no solution, and never will be. Not only will the President’s proposals undermine the rule of law by upsetting centuries-old contract law, these proposals ignore statutes and the extant bankruptcy safety valve. Doing so will plunge the economy even deeper into the cold. If the government changes the rules of the game one day to the next to benefit itself or a favored constituency, who in his right mind is going to invest his wealth, knowing it can be devoured by government at its whim?
More importantly, President Obama claims to have done away with the risk. There’s no risk to consumers (you can keep your house) and there’s no risk to banks (no revaluation of portfolio assets to fair market value). But risk, as ‘Puter has sagely noted, never goes away. If you can’t find the risk, look harder. Risk’s still present somewhere in the system.
Where’s the risk in the Administration’s plans? Who’s left holding the bag? The answer’s as plain as the nose on your face because the answer’s attached to the nose on your face. You. You’re the answer, provided you pay taxes. Every single one of President Obama’s plans involves taxpayers financing crappy schemes that do nothing but prolong the inevitable day of reckoning. Worse, these schemes foist risk onto taxpayers who never were parties to these transactions.
President Obama can put as much lipstick on the pig as he wants, but the facts remain. Someone has to take the losses associated with this fiasco. The proper choices are the parties to the transactions, not the taxpayers.
Ignoring risk doesn’t make it go away any more than saying the Administration’s not screwing the taxpayers makes it so.