Bush, Bernanke, BandAids & Bloodletting

Article by Joseph Chatham, President, Chatham Street Mortgage Services, Published September 7, 2007: http://www.glgroup.com/Council-Member/Joseph-Chatham-138496.html

"While I believe the quickest (and bloodiest) solution to this crisis is to let the markets do their mayhem, the proposals and talk, thus far, of President Bush and Chairman Bernanke may provide a a much-needed salve for the jittery markets. The proposals, however, are nothing more than the equivalent of putting a (re)cast on your pinky-finger to fix a broken ARM (pardon the pun...I could not resist). I applaud Bush and Bernanke for calming market nerves with tough talk and baby BandAids. The actions, for the most part, of these two men give the appearance of actually doing something while, in fact, allowing the markets to find equilibrium without rewarding bad behavior. I do have concerns that some of the proposals may, however, worsen the crisis.In fact, one of the proposals may be particularly onerous for the mortgage and real estate markets. The idea to temporarily suspend tax liabilities on short-sales may actually prompt fence-sitters to short-sell instead of keeping their homes. Thus, perpetuating the foreclosure crisis...and thus lowering real estate values. Clearly, if borrowers cannot afford to make their mortgage payment, they cannot afford to pay the taxes on a short-sale. With Bush's proposal, the government will solve the aforementioned dilemma, but they will definitely offer the borrower an easier escape than trying to meet their mortgage obligations. Good politics, bad policy. While, I disagree with the idea of taxing a loss, it is this tax that makes many people "stick it out" and weather the storm.Other mortgage holders may find that they are upside-down and, despite the fact that they can afford the mortgage, they can simply walk away from a bad investment with only a bad credit blemish: "Do I want a credit blemish or do I want to lose $100k while making mortgage payments along the way?" HMMMM? Again, without a consequence of measure, keys will be thrown back to lenders.Increasing FHA availability and lending limits makes sense, particularly in higher priced states like California, New York, Alaska, Hawaii, and Massachusetts. The existing limits should be raised not to $417k, however, but rather to a more realistic number; perhaps $600k? This step alone would allow borrowers in some of the states who are suffering the most in this crisis to put up the good fight by allowing them to refinance or purchase. Thus , eliminating many foreclosures and bolstering an anemic purchase market. FHA is long overdue these changes despite the recent market meltdown. It is a shame that it has taken a crisis to kick these proposals around.Whether or not Bernanke lowers rates should be driven by his overall view of the economy and inflation...not simply the mortgage markets. It is my belief that, if left alone, without rate cuts and policy changes, the lenders would be very creative with their loss mitigation efforts and lending products in an effort to soften the existing crisis.Bush and Bernanke have made laudable efforts at easing our nerves, but it is going to take a lot more bloodletting for this market to hit equilibrium. As I have predicted before, we are probably in for another 20% decline in values before things start to turn around.