Attention Congress and Mr. President! American Homeowners Need to be Rescued!

[Moe Bedard]

A Washington Post article came out today and arrived in my email inbox this morning. It caught my eye because of the title, “Why We Need a Housing Rescue”, by William H. Gross. The writer is founder and chief investment officer of PIMCO, the world’s largest bond mutual fund. This column was adapted from his September investor’s outlook newsletter.

Mr. Gross goes on to explain what I have been trying to follow and interpret myself everyday. Daily I’m confused by all of the sophisticated mumbo jumbo of financial structure that were created by what he quoted as “ Wizards of Complexity: youthful financial engineers trained to exploit cheap money and leverage and who have, until the past few weeks, never known the sting of the market’s lash.”I am not a financial guru or MBA grad and my writing and business skills tend to be on the unsophisticated side. My blog isn’t intended to confuse or manipulate people by throwing out financial terms that not even I can understand. I do my best to convey what’s happening by throwing my spin on the market that is easy reading for the people that need to understand what the hell is going on out there. I enjoyed this Washington Post article because Mr. Gross also feels the same way.

He goes on to explain:

“My explanation of how the subprime crisis crossed the borders of mortgage finance to swiftly infect global capital markets is perhaps unsophisticated. What Federal Reserve Chairman Ben Bernanke, Treasury Secretary Hank Paulson and a host of other sophisticates should have known is that the bond and stock market problem is not unlike the game “Where’s Waldo?”—Waldo being the bad loans and defaulting subprime paper of the U.S. mortgage market. While market analysts can guesstimate how many Waldos might appear over the next few years -- $100 billion to $200 billion worth is a reasonable estimate—no one knows where they are hidden.”

What he is saying is that our mortgage crisis is affecting the world’s markets and that these mortgage backed securities are everywhere and no one truly knows what’s inside of them. Bad loans, good loans? Junk or money making opportunities?

Wall Street made a mistake and now they are paying for it. The rules and guidelines set up by these “youthful wizards” are the same rules that are hurting homeowners, our economy and quite possibly the international markets. I predict that they will all be affected greatly as we have seen the instability over the last few weeks and quite honestly, I don’t think they have seen anything yet.

WP Gross- “Should markets be stabilized, policymakers must then decide what to do about the housing market. Seventy percent of American households are homeowners. Granted, a dose of market discipline in the form of lower prices might be healthy, but forecasters are projecting more than 2 million defaults before this cycle is complete. The resulting impact on housing prices is likely to be close to a 10 percent decline. Such an asset deflation has not been seen in the United States since the Great Depression.”

The market is not going to stabilize and Wall Street needs to get that through their thick skulls. This will be the biggest market failure in our country's history. With trillions of dollars on the line, no end to foreclosures, mortgage job losses and soon to be mass layoffs on Wall Street, they have got to be living in some kind of bubble to not think that we are headed into our generation’s first “Great Depression”. I’m not about doom and gloom. I’m a man of positivity and optimism. But I also am a realist and this is very real people.

"The ultimate solution must not emanate from the Fed but from the White House. Fiscal, not monetary, policy should be the preferred remedy. In the early 1990s the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers yet 2 million homeowners must be thrown to the wolves today? If we can bail out Chrysler, why can’t we support American homeowners?”

Critics warn of a “moral hazard.” If we bail out homeowners this time, they claim, it will just encourage another round of speculation in the future. But there’s never been a problem in terms of national housing price bubbles until recently. Home prices have been the most consistent, least bubbly asset aside from Treasury bills for the past 50 years. Only in the past few years, when regulation has broken down, when the Fed has failed to exercise appropriate supervision, have we seen “no-doc” and “liar” loans and “100 percent plus” loans. If you enforce regulation, you’ll have no problem with moral hazard.”

I agree with him 110% on this. We need congress and the president to step in. We are on the verge of a global economic crisis from the mortgage fall out and they are actions as if these agencies like the Federal Reserve and the SEC can handle the market. That’s a joke. Look what it has done so far and it’s going to get worse. Lack of supervision is an understatement.

“This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hardworking Americans. Those who would still have them eat Wall Street cake (as a Wall Street Journal editorial suggested, saying they should get used to renting once again) should look at it this way: your stocks and risk-oriented leveraged investments will spring to life anew. Republican officeholders would win a new constituency of voters for generations.
Get with it, Mr. President. This is your moment to one-up Barney Frank and the Democrats. Create a Reconstruction Mortgage Corporation. Or, at the least, modify the existing FHA program, long discarded as ineffective. Bail ‘em out—and prevent a destructive housing deflation that Ben Bernanke cannot avert. After all, you’re the Decider, aren’t you?”

A rescue by congress is the only way to stabilize our housing and financial markets. I am not talking about a major bail out either. We need a massive campaign to help homeowners who need help and can’t refinance out of these toxic soup adjustable rate mortgages. That is the major problem and I am sure most everyone that is working in foreclosure prevention services will attest to. Just implementing massive loan modifications to “qualified homeowners” will help curtail losses for lenders, Wall Street, investors, our economy and the American people.