Jon D. Markman’s article, “Get Aboard the Mortgage Bailout Plan” (link here: http://www.thestreet.com/_htmlbtb/newsanalysis/investing/10378291.html) is one of the strangest scenarios I’ve read regarding solving the mortgage problem.
Markman thinks President Bush, despite stating the contrary last Friday*, will launch a “mortgage bailout of unprecedented scope”. He will use the Emergency Home Finance Act of 1970 to have banks originate loans at 1% interest, FHA and VA insuring the loans, Ginnie Mae buying the loans from the banks and selling them to Fannie and Freddie at a discount. And who pays for the billions the government will lose? The nation does. (Markman cites the banks will too, but then they’re making a profit from “Ginnie buying the mortgages at par”.)
And the reasons Markman thinks Bush will do this? So Democrats can’t use the issue in the election, and because insiders in the financial services and homebuilding sectors are buying their own stock.
Let’s address these issues starting with the last one first.
- There are many reasons insiders would buy their own stock now. How about to instill confidence in the company so it appears that it still has growth prospects?
- I’m interpreting that his bailout scenario covers current mortgage holders. Will the bailout cover mortgages on investment and vacation properties as well? And further, what about people buying homes with mortgages going forward?
- Markman concludes by stating: “With almost one in every 7.5 housing units in the U.S. empty because of overbuilding during the easy-money years, it would take years for enough demand to emerge under normal conditions to soak up supply.” In what way would this bailout soak up the way under quoted supply number? And gee, whatever happened to all those immigrants who were supposed to buy up all the housing stock?
- Housing inventories are high, even though his numbers don’t factor in all the empty (or seldom used “passive” investor) properties whose owners are trying to “rideout” the downturn. The nation has to face the fact that the only way to lower high inventories is for prices to drop substantially.
* See my post, “Wall Street’s Warning” (8/31/07) in the Commentary section.