jennings rampage

Government bailout fail.

Surprisingly little wind has been passed over the news of the Fannie Mae/Freddie Mac bailout. While it may not seem like as epic a trainwreck as Sarah Palin, at least we get to forget about her in like two months. This bailout is going to stick with us for the long haul, and do quite a bit more damage when the lipstick comes off the bulldog-or-pig.

Because I expect you to patiently work through my analysis, I’ll be happy to provide a bit of condescending background to explain how we arrived where we are. Many people live in houses, which are expensive, and so a lot of those people borrow the money to buy those houses from banks, which is what is known as a mortgage. It used to be that mortgages were somewhat difficult to obtain, requiring a 20% downpayment and a load of other qualifications, but as these markets globalized and deregulated, the competition for borrowers made it much easier. As banks competed so strongly on rates, they began making more of their profits on fees — transferrin’ documents, that’s a fee; registerin’ titles, that’s a fee; paddlin’ the school canoe, you better believe that’s a fee. And how do businesses who profit on fees increase their profits? Volume! So it became easier to get a mortgage, and more people lived the dream of home ownership, and second home ownership, and investment property ownership. Mortgages would be structured to have low low monthly payments for the first few years, then jack the monthly payment — but who cares when it would be so easy to refinance?

The banks rolled all these “subprime loans” into securities which were traded as bonds, which is beyond the scope of our understanding, except to say: it insulated the lender from the damage of an individual bad mortgage, but pooled that risk into something that, once collapsed, would do real damage.

The other result of the free flow of credit was an artificial inflation of home values. Something worth $80k with a tighter mortgage market could easily be sold for $100k or more when you just need to dangle a low monthly payment, and that process fed on itself throughout the 1990s and whatever we end up calling this decade. The attitude was that housing values could never go down, they would have to keep growing, and you were an idiot if you weren’t building equity in a house. (Oh, and if you’d like to borrow against that equity, we can help you with that, too.)

And then, naturally, and completely obviously, the darn thing just up and collapsed. The price of tulips crept just slightly too high, and someone somewhere realized there was nothing behind this paper but more paper and more paper leading back eventually to poorly-structured mortgages of wildly overvalued property, and a few people tiptoed for the door, and a few more noticed, and now Bear Stearns is dead and Lehman is next. Funny, that.

Now, here’s the basic problem: lots of people find themselves all of a sudden extremely upside down on these mortgages, and as the markets for credits tighten back up organically and the values of these house continue to settle downwards, they’re only getting more upside down. Negative equity is a polite way to say you’re paying for nothing, and it’s not uncommon for something like a car loan (hi, CitiFinancial Auto!), but having $200k of debt for a house that suddenly can’t move for $120k makes a lot of people very very itchy. The borrower realizes that it’s completely rational to walk away from the mortgage and try again in several years after repairing their credit, the lender realizes that the borrower might make that rational move, and all of a sudden, welcome to widespread foreclosure.

So, this is where your friendly Federal government pokes its well-meaning head in to prop up Fannie and Freddie. Republicans love it because it helps their corporate overlords and their rich constituents with investments at risk, Democrats love it because it helps their corporate overloads and has that great populist flavor to help preserve the American Dream. It’s always the bipartisan efforts you have to look out for, my friends.

Now, a good chunk of the people at risk are folks who were fast-talked into a mortgage by a hungry industry trying to wring all the fees they could irrespective of whether or not home ownership was a good decision. These folks I have some sympathy for, and if their mortgages can be restructured to keep them in it, I’m all for helping them out. But a lot of these mortgages can’t be restructured because they make no sense, and require principal payments far beyond the realm of possibility, and they’ll have to do what a lot of very responsible people do: rent a fucking place. Hey, I’ve been a renter all my damn life, it’s not so bad. If you’re going from a foreclosure on a house to a tent city, I’ll be so bold as to suggest that the bad mortgage wasn’t your only financial misstep. You ought to be going from a foreclosure to a modest rental, and woe be unto you, but I’m not losing sleep over it.

On the other side, you have people who were playing the real estate market like Keno, people buying vacation property as investments, people who watched too much TLC and figured they could swing a hammer and flip a few houses, etc. These people, I’m sorry, but zero sympathy. They ought to take a bath on their failed investment, the end.

But instead of that, we’re getting a Federal guarantee on the largest holders of these mortgages and securities. All that’s going to do is prolong the pain. Real estate is extraordinarily overvalued in a whole lot of places, and propping up silly mortgages isn’t going to do anything to correct that market. Until housing values are where they should be, we’re wasting taxpayer dollars. People who chose to rent are being forced to subsidize the failed investments and financial missteps of people who chose a mortgage, and not only is it a gross redistribution of wealth, it’s an overwhelmingly regressive redistribution — i.e., from poor to rich.

So, that’s that. Don’t hold your breath for either major party candidate to do anything about this, because the politics are too good to quietly shuffle this through right now, keep fighting over the semantics and process of a campaign, and let the winner hold hearings and solemnly shake their head next year. But make no mistake: you’re getting screwed for no good reason.