More government encouragement of irresponsible behavior

President Obama continues the traditional government policy of rewarding irresponsible behavior:

The Obama administration on Friday will announce broad new initiatives to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments. ...

The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.

About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.

So, if you bought a house with a large down payment, you reduced your risk of ending up underwater, and reduced your chance of government help. If you bought your house with no money down, you easily ended up underwater, and therefore get government help.

If you didn't cash out your home equity during the bubble, you're less likely to be underwater, so you don't get help. If you did cash out your home equity during the bubble, and bought lots of cool stuff, then you do get government help.

This is not just a subsidy for irresponsible homeowners, it's also a subsidy for banks holding bad loans:

Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.

Let's not also forget that the FHA is already on very shaky financial ground. Any FHA losses will come out of the pockets of the American taxpayer:

This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.

This plan is just a way of shifting the burden of loss off the backs of those who engaged in irresponsible behavior, and onto the backs of taxpayers. Of course, if the housing market kept going up forever, homeowners and banks would have pocketed all of the gains. Homeowners who made the smallest down payments would have gotten the highest return on equity. Heads they win, tails we lose.

There's no "Mc" in this mansion

An 8,000 sqft. colonial-era colonial in Harwood, Maryland goes on the auction block.


Built in 1756, it sits on 52 acres of land. George Washington was a friend of a former owner and slept in the home. Apparently it failed to sell at $2.75 million and is now bank-owned.

From the auction press release:

Considered one of the finest Pre-Revolutionary War historic estates in the United States, Tulip Hill is a grand Georgian plantation house built around 1756 by the Quaker merchant-planter Samuel Galloway. Frequent visitors included George Washington and Robert E. Lee.

"The magnificent home and grounds that encompass the Tulip Hill estate, combined with its extensive, storied history, makes this truly a one-of-a-kind property," Gestson stated.

The home has been beautifully preserved and restored on more than 52 acres that includes an expansive terraced garden, water frontage and a pier on the West River. Among the home's modern conveniences are central heat and air conditioning and a fully renovated kitchen.

The property was named for its grove of grand tulip poplar trees, many dating to the early 18th century. Located at the edge of a high plateau, with the land falling rapidly away on all three sides, the impressive approach to the house from the river by a tree lined lane exists today as it did more than 250 years ago.

Tulip Hill includes a two-level brick main house measuring 52 feet wide and 42 feet deep, and two 20-by-24-feet brick end wings. The approximately 8,000-square-foot mansion includes seven bedrooms, a large attic, full stone basement, and nine wood burning fireplaces.

"The upcoming auction of Tulip Hill represents a rare opportunity for the discerning buyer to own an estate with extreme aesthetic and historical significance," stated Laura Brady, Co-Founder and Vice President of Marketing for Concierge Auctions.

Located in Anne Arundel County near Annapolis, Harwood is approximately 30 miles from Washington, D.C. and about 35 miles from Baltimore. The county has several historic homes dating to the 1700s in addition to Tulip Hill.

The auction of the Tulip Hill estate at 4621 Muddy Creek Road in Harwood, Maryland will be held on Saturday, April 10 at 11am EDT. The properties are available for preview daily from 12pm to 3pm and by appointment. View Terms and Conditions of Sale for full details. For more information, visit www.TulipHillAuction.com or call 877-217-2001.

More photos here. Here's a map.

More Cash for Clunkers bashing

Ph.D. economist Rebecca Wilder echoes Calculated Risk and me in her contempt for last year's cash for clunkers program, calling it "the most economically atrocious piece of legislation in 2009."

Also, even in a fiscal mess, California is wasting taxpayer money.

Costs of renting vs. owning

The National Multi Housing Council (think of them as the anti-NAR) presents its argument for renting (from 1997):

Computing the total expense of homeownership is not easy. The costs vary from person to person, from city to city, and from time to time, because of both market conditions and tax treatment. A recent NMHC research paper (available upon request) offers one method of summarizing this diverse national experience. The study estimates how the housing costs — properly measured — of the typical home buyer in the mid-1980s would have compared with their costs had they rented identical housing.

That research concludes that, when all the costs of owning and renting housing are considered, a majority of all families and individuals that bought a home in the mid-1980s would have saved money by renting comparable housing. Specifically, the study estimates that the average homebuyer in 1985 paid six percent more for housing during his residency in that house than if he had rented.

The costs of owning were particularly high for short-term owners, according to the study. Buyers who sold within four years of purchase on average paid 19 percent more as owners than they would have paid as renters. For these short-term owners, transactions costs averaged 23 percent of their total costs of owning.

These cost estimates make no allowance for the home-owners' time spent in the process of buying and selling, which typically far exceeds the time spent by renters in securing their housing and subsequently moving out.

And they present several home-ownership "myths" (from 2004):

Myth: I'll reduce my tax bill if I buy a house.
Reality: A majority of homeowners reap no annual tax benefits from owning a house.

Myth: Paying rent is throwing away money.
Reality: For the first five years of ownership, you are simply giving away your money to a bank. Nearly one-third of all buyers move within five years before they start building any real equity.

Myth: My mortgage payment will be less than my rent.
Reality: Your mortgage payment is just the beginning. The "hidden costs" of ownership can add up to thousands of dollars a year.

Myth: As an owner, my housing costs will stay constant. I won't have to worry about rent increases.
Reality: Your mortgage may remain constant, but other costs, such as maintenance, insurance and property taxes can go up significantly every year. And if you have an adjustable-rate mortgage, your mortgage payment itself can increase.

Myth: Investing in a house is a safe investment.
Reality: Even in today’s healthy housing market, stocks and bonds often still offer a better return.

Of course, this organization is probably as trustworthy as the National Association of Realtors, but we hear so much of the Realtors' spin that I thought I'd post the counter-argument.

Greenspan still in denial

Alan Greenspan's slightly updated denial of the ability to prevent the housing bubble:

The former Fed chairman also acknowledged that the central bank failed to grasp the magnitude of the housing bubble but argued, as he has before, that its policy of low interest rates was not to blame. He stood by his conviction that little could be done to identify a bubble before it burst, much less to pop it.

Can't identify a bubble before it burst? Really? This blog was created before the peak of the housing bubble specifically because my cob-logger, David, had identified a housing bubble.

At the time I first created my housing graphs in May 2006, I had already been following the housing bubble for five years. When housing activity had peaked but prices were still rising rapidly, that was the last straw that finally pushed me to warn people publicly.

Robert Shiller published the second edition of Irrational Exuberance in February of 2005, before the housing bubble peaked, specifically warning about the housing bubble. Because research and writing take time, he must have noticed the housing bubble quite a while before his book was published.

The editors of The Economist, after warning of the housing bubble for years, made it a cover story right before the peak in housing activity, a year before the peak in housing prices, and 2-3 years before the Federal Reserve decided to take it seriously.

Finally, economist Dean Baker first noticed the housing bubble in autumn of 2002 and was warning people for years before the peak.

Update: Harvard economics professor Greg Mankiw gives his thoughts.

Australia's housing bubble

Compare Australia's housing bubble to America's:

One may wonder why their bubble keeps growing. Apparently, the Australian government has been actively promoting the bubble at taxpayer expense.

Meredith Whitney: Housing market will double-dip

Financial analyst Meredith Whitney forecasts a second fall in the housing market:

The US housing market will face another retreat while mortgage-backed securities and Treasurys are likely to go through a "material" correction, Meredith Whitney, CEO of Meredith Whitney Advisory Group, told CNBC Tuesday.

"The housing market surely will double dip," Whitney told "Worldwide Exchange."

Government programs to support housing have been "murky" and when the modifications caused by them come to an end, a lot of supply may come to the market and that's when the real-estate market is likely to go down, she explained.

Senator Dodd's financial reform bill, in summary

Here's a brief summary of the financial reform bill proposed by Senator Dodd:

• Consumers: A consumer-protection division would be created within the Federal Reserve, with the ability to write new rules governing the way companies offer financial products such as mortgages and credit cards. It would have authority over any bank with more than $10 billion of assets, and certain nonbank lenders.
• Banks: The Fed would oversee bank holding companies with more than $50 billion of assets. Regulators would have the discretion to force banks to reduce their risk or halt certain speculative trading practices.
• Failing companies: The government would be able to seize and break up large failing financial companies. Big companies would have to pay into a $50 billion fund to finance the dissolution of a failing firm.
• Systemic risk: A new council of regulators would be created to monitor broader risks to the economy. The council could strongly urge individual agencies to take specific actions to curb risk.
• Corporate governance: The Securities and Exchange Commission would have authority to write rules giving proxy access to shareholders who own a certain amount of stock. Shareholders would have a nonbinding vote on compensation packages for top executives.
• Hedge funds: Large funds would have to register with the government.

On the surface I don't think it's bad. I don't know much about the details.

I really like the consumer protection part, because a lot of credit card and consumer lending has gotten completely out of control. Will the new regulation result in 20% down payments for houses again? I doubt it. Why would the new regulation result in 20% down payments when the government, via the FHA, is encouraging 3.5% down payments?

I think having a systemic risk regulator is a good idea. I am skeptical about its ability to prevent future financial crises, though. After all, didn't the Fed completely look the other way during the buildup of the housing bubble? When everybody's getting rich, nobody wants to step in and stop the party. I don't see how this changes that innate human tendency.

New book: Ending government bailouts

Brief description:

In Ending Government Bailouts as We Know Them, a team of expert contributors examine the dangers of continuing government bailouts and offer constructive alternatives designed to both resolve the current bailout problem and prevent future crises.

The authors include former Fed Chairman Paul Volcker, current Kansas City Fed President Thomas Hoenig, former U.S. Treasury Secretaries George Shultz and Nicholas Brady, and Stanford University professors John B. Taylor, Darrell Duffie, and Joseph Grundfest, among others.

Author Michael Lewis on the financial crisis

For those who missed 60 Minutes last night:

Part 1


Part 2