They never learn

Dave -

I agree with out. Helping out wavering home-owners is a mistake.

I can see a role in providing a temporary rate modification stopgap for those who are involuntarily unemployed.

Again, this would be temporary. It would provide a vehicle for servicers to convert a loan to an interest-only model for up to one year as long as the homeowner is on unemployment.

A lot of solid homeowners are getting the pink slip, and this would not reward bad behevior, it would allow good homeowners to ride out the storm and limit economic damage by destroying credit.

The greatest long-term hangover from all of this will be a nation with battered credit.

Credit will perhaps never flow like it did. It certainly will not for another 7 years.

The problem right now is that nobody has the authority to temporarily convert a mortgage that is part of a pool, and that is a market failure.

It prevents a prudent lender from making an economically optimal decision to temporarily modify the terms of the mortgage.

Basically the pooling of mortgages has put lenders in cars without brakes and steering wheels.

This I think is the bigger issue. Mortgages in a pool are on robotic autopilot.

This has to get fixed fast. Smart decisions are not being made because market actors do not have the information or authority to make them.

This is a legitimate market failure that could warrant some intervention.

The pooling of mortgages without a model for trusteeship of the component mortgages is a cataclysmic disaster.

They changed the dynamic of the incentive. It was originally not a credit, and now it is a refundable credit.

The amount is not enough, in my view, to distort a home purchase decision.

I think the only incentive that works is to get people who really do want to buy a house, and are well-qualified to buy one, to stop waiting.

My view is that as long as lending standards are sufficiently robust, that this incentive is not terribly distortionary.

To agree with you a bit, though, this needs to be temporary.

I think a much more effective plan is to induce well-capitalized real estate investors who will rent foreclosed properties.

These buyers are savvy enough that they will only choose foreclosed properties that can produce a positive cash flow.

There are millions of such investors, and rental to purchase price ratios are coming back in line.

If you assume that the average foreclosure is sold at about a 10-15% discount vs. a traditional sale (they usually need some maintenance and appliances) then the rental-purchase ratio (assuming discounted foreclosed homes) is at the 15 year baseline in about 80% of the housing market.

I think some investment incentives would not fundamentally change the ultimate purchase decision, it would change the timing of it.

This is what matters in my mind. I am a free market guy, but I realize that psychology can be managed with incentives too.

The only way to get nervous people with money to spend is to give them a reason not to wait any longer.

My view is that the depth and length of any recession is fundamentally driven by how long people are willing to put off decisions they would have otherwise made.

Eventually consumers start buying the things they need (and some they just want). Capital wears out and has to be replaced. You can delay it for awhile, but not forever.

The one single psychological event that would instill more confidence in the economy than any other at this moment is the appearance of a bottom in home prices.

This will never happen as long as foreclosures flood the market at this rate, and the foreclosure spigot has 3 more years to run, folks.

If a foreclosure can be purchased and produce positive cash flow for the owner, they will buy it. Especially with other asset classes so depressed.

The only reason they would not buy it is the perception of excessive risk. An inducement would be a great signaling tool.

Real estate investors will be much more likely to make prudent capital allocations. Getting them to move faster rather than slower will provide a tremendously positive systemic externality to the system.

Even libertarians agree that government has a role in rewarding and punishing externalities with policy.

I think this is a sensible action that gets to the actual root of the problem and would not distort decision-making. It would just accelerate it.

The root of the problem is too many owner-occupied homes and too few rental properties.

We need to accelerate the normalization if we can do so.

I have to wonder how those who say that the free market caused the housing bubble react to this kind of news. It's hard to deny that even if it was unregulated capitalism that started the bubble, that government is equally irrationally trying to prop it up.

I'm genuinely concerned about the rapid downward spiral that has started in this country. It's both the big news and the small news. But they all seem to share a common underlying root cause...a failure to think through the logical and reasonably expected results of actions. But this is happening at an ever quickening pace, in an ever wider scope and on an ever larger scale each day.

I guess it comes back to a persistent failure to heed Hazlitt's one simple, yet deeply insightful and profound lesson.

I believe it was Einstein that said expecting a different result from the same experiment is the definition of insanity.