Against: mortgage reduction ... by gimleteye

Mortgage reduction. When the idea appears as "quotes" in the New York Times from prominent officials and then on the editorial page, know that trial balloons are in the air to gauge public reaction. So.

There are not enough four-letter words in the English language to express how I feel about "mortgage reduction".

Why should I bear the cost of others' mistakes? To keep the economy from sinking into a depression. Then why shouldn't renters, college students living at home who are old enough to vote or serve in the military, why shouldn't Americans who scrimped, saved and sacrificed to make their monthly mortgage payments be given the same deal as someone who would benefit from a reduced mortgage? Free money for a free market.

Real estate speculators drove the U.S. economy into a ditch. I use the term generically. During the bubble decade, speculation became a cultural obsession as well as an economic one. It also became a virtue due to changes in U.S. banking laws that knocked down barriers between investment banks and commercial banks. Phil Gramm, anyone? This was the "free market" at work, giving free-passes to banks to use complex financial instruments turning mortgages into casino chips to "shift risk" and grow the economy. The bankers and law makers who allowed this to happen should have been made to wash their mouths out with soap, but who would have held their heads over the sink? No one.

On a conceptual level, mortgage reduction is the retail version of what banks already got: a "get-out-of-jail" card as in the game of Monopoly. TARP and the various stimuli packages from the Fed (what we know about and don't know about, because the public hasn't been told), have been freebies for the banks, allowing them to repair (somewhat) their balance sheets by giving them no-interest money (fees and compensation, all the same) and allowing them to "lend" money to borrowers vetted more carefully (we learned our lessons!) on their capacity to repay.

Conceptually, mortgage reduction is along the same line: give retail customers their own personalized TARP. Allow mortgagees to break contracts with banks in order to recapitalize their personal finances. The logic goes: when homeowners can afford their mortgages, then they can begin expanding their purchases of consumer goods again in copious quantities to revive the economy. That goal is so important on a societal scale we need to forgive their sins, they know not what they have done. In concept, this means repegging home values to levels of value in line with what had always been deemed reasonable in the past: that mortgage expense should not exceed more than a quarter of disposable income.

It is not hard to guess who is pushing this come-to-Jesus moment through the halls of power. The homebuilders holding reports in their hands, waving terrible statistics to support their case for mortgage reduction to the White House and to Congress and to Ben Bernanke at the Fed. Shamelessly Alan Greenspan intones the same, to the TV cameras. That's right: the same homebuilders who screamed bloody murder whenever the mainstream media cast a negative spell over the housing mania, putting casino chips into Alan Greenspan's pockets on the sly, are now walking up and down legislatures, Congress, and the White House with their hair on fire. "We were sinners but we have been saved!"

Their justification is that the economy is in crisis because of the crushing weight of home mortgages on consumers; ergo, only homebuilders can pull the economy out of this depression. "We create jobs." It never occurs to the powerful that some of these same "job builders" should be behind bars serving ten to twenty. With their frantic rutting they spawned "the ownership society"-- the last tranche of the scam that brought down the economy-- and egged on Fannie Mae and Freddie Mac to absorb trillions of mortgages in their ticky tacky platted subdivisions that funded countless county commission campaigns. They should be in jail today instead of roaming the halls of Congress or pleading their case with the Fed for mortgage reduction.

So who would hold the bill for the cost of mortgage reduction? Obviously, someone has to pay the banks the difference between the contractual value of an individual mortgage and the new reset. That would the taxpayer; you and me. On millions of mortgages. Think about the opportunities for corruption. It is mind-boggling. Financial industry executives took down billions in pay for mass marketing mortgages according to the business of speed and friction-less execution, they took down billions through the TARP free pass, and would reap additional billions from any mortgage reset policy. That's the free market at work.

The United States economy is on the horns of a dilemma. My own view is that the homebuilders are the least likely candidates to help the economy on the way out based on their culpability on the way in.

You didn't have to be a genius with a Phd in economics or Alan Greenspan to see what direction this nation was heading a decade or even two decades ago. There is plenty of "conservative" in the idea of "conserving" natural and financial capital; as in, saving for a rainy day. On mortgage reduction, I will have more spleen to vent this week.