First of all, I am glad that this is happening because I am just sick of all the efforts to push down mortgage rates  when there is no good reason to push it down.  Higher mortgage rates will encourage people to borrow less money, and push down housing prices.  That is not a bad thing on both counts. People will buy houses when it is affordable and reasonable.  Many people are buying right now because housing prices have come down dramatically, and not because of the historically low  mortgage rate. New homebuyers may not be able to lock down mortgages under 5% any longer, but the dip in prices to come may just make up the difference. The only negative is for those who are waiting to refinance, because those below 5% rates are now gone.

Higher yields on treasuries may also make those in charge of the  U.S. government think a little bit before they issue more debt. They need to know that they cannot make every bond buyer pay extremely low rates and this endless borrowing needs to be controlled. If the U.S. government spent and borrowed less, then our taxes may be lower.  However, these higher yields will just mean that Americans will be paying more in interest for years to come with their tax revenues.  This is unfortunate, but bond buyers are investors who should not have to accept rates that do not match the risk of the investment.  For what it is worth, I think right now the yield on 10 and 30 year treasuries is still fairly low so the U.S. is still getting a fairly good deal.

Some other effects I am hopeful about is that perhaps short term rates will follow on the upward trend and savings rates will go up accordingly.  The worst scenario is that inflation is going up AND savings yields are still abysmal, and in a way that is sort of happening now.  Inflation isn’t tremendous this year, but I am noticing some small increases in gas and food prices.  Additionally, wage growth is fairly small all over the board due to the recession.

Anyway, the Obama administration tried to reassure  China that its holdings are safe by pledging that the U.S. will try to reduce its budget deficit and eliminate the market manipulations by the government.  I personally think that China’s worries are justified because actions speak louder than words.  If the U.S. is really trying to reduce its budget deficit then it shouldn’t pledge more and more borrowing and spending.   The fact that Geithner had to make such a trip to reassure Chinese leaders shows that the U.S. government is feeling insecure about its debt situation and that does not inspire confidence in the bond market. China really has no obligation to buy trillions of U.S. treasuries and China is free to invest its reserves however it wants.  If China’s reluctance to lend encourages the US to cut its borrowing and spending then it is a good thing for  United State citizens in the long run.

In conclusion, the stock markets are showing signs of recovery, so this will probably push bond yields higher since there will probably be less demand for bonds.   This is good news for everyone who has money in the stock market.  It is reasonable that bond yields are going up, and it is nice to see some market forces push back against the heavy hand of government intervention.

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First of all, the cost of the plan is up to $2 trillion.  To borrow a quote  from Senate Minority Leader Mitch McConnell, “if you started the day Jesus Christ was born and spent $1 million every day since then, you still wouldn’t have spent $1 trillion.”  Senator McConnell was speaking about the huge bloated stimulus bill, and now Geithner proposes a plan that costs 2 to 3 times of that monstrosity.  I have no idea how this is possible.

Second, the new administration is heralding Geithner’s plan as a completely new idea.  If you drill down into the fact sheet and read what he plans to do, then you will see that it is not so different from Paulson’s rhetoric of buying up bad bank assets.  They did add initiatives to drive more consumer and business lending, but the method is the same as before.  Basically, they want to provide more capital to the banks. After billions of dollars already injected into the nations largest banks, they are still doing business as usual and actually making more profit than ever since they are borrowing at the lowest costs in decades and lending out at similar rates as before.  The banks are doing just fine, and I doubt that giving them more money will compel them to lend at better terms to consumers.  They will just profit further because that is the goal of a bank.

Finally, there is more language about preventing “avoidable foreclosures”.  I am not sure if Geithner read the old news that modifying mortgages for people who cannot pay just does not work.  One of the biggest problems facing the entire country right now is the rising unemployment rate, and that is fueling more foreclosures.  There is no point in trying to prevent these foreclosures through loan modification because what people need are sources of income.

Obviously,  I am not the only one who has no confidence in this plan because the stock market took a huge dip today.  Perhaps the Treasury should change their website’s name from FinancialStability.gov to FinancialDisaster.gov because that would at least instill some panic into people’s hearts just like how Obama is campaigning for the stimulus bill by using the “politics of fear“.

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When I read the news I thought to myself, “well, what did you expect?” Many of these loan modifications either changed the loan term from 30 years to 40 years or lowered the interest rate, but the borrowers still owe a gigantic debt on a depreciating asset. There is no incentive for them to pay the debt if they can find a place to live in for even less money than the reduced mortgage payment.   Seriously, who would want to pay a $400,000 debt on an asset that is worth only $200,000?

Additionally, all of these loan modifications encourage bad behavior.  The borrowers probably think that if they don’t pay they will be bailed out again because bailouts are all the rage right now.  Everyday the news is reporting some kind of government action to deal with foreclosures.  So if you already got free housing for 3 to 4 month and then got a modification on your loan, then you have another 3 to 4 months until a foreclosure comes.  That’s 6 to 8 months of no housing payments even if there is no second modification, and that seems like a good financial incentive to default.

Another driver in re-defaulting is the worsening economic state of the world.  In November the United States lost 553000 jobs, and perhaps a lot of people no longer have the amount of income they had when they received the loan modification.  For now, I think the unemployment situation is only going to get worse.

I think the lesson in this is that the government should stop messing with the free market and let foreclosures happen naturally.  These modifications and bailouts are just prolonging the pain for everyone involved.  I suppose that more than 40% of these borrowers are still paying for their modified loans,  but they really  may be better off by renting and saving for a down payment on a cheaper home.  Home prices have come down more than 25% in many parts of the country, and it is slated to go down even further.  It would take a while for a foreclosure to come off someone’s credit report, but that might be the perfect time for that person to build up a sizable down payment.

I think home prices will go down for at least another 4 to 5 years and recover if the government stops with the interventions.  If they continue to manipulate the market through interest rates and loan modifications then it may take the housing market a longer time to recover precisely because the bad apples will still be hanging on.  For example, if a person gets a foreclosure now then  it would take seven years for it to come off their credit report.   So in seven  years this person would be a prime borrower again.  However, if he hangs onto the mortgage through various bank and government deals and then redefaults after two years, then it would take nine years from now for that person to become a prime borrower again.  The sooner people get foreclosed on, the sooner they can rebuild their credit and become suitable homebuyers again.  The housing market will only recover when the demand returns, and I truly believe that  all of these government polices to prevent foreclosure will simply stall the recovery of the housing market.

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First of all,  no one knows what the exact damage would be yet since the housing meltdown is not over.  Fannie and Freddie hold over $5 trillion dollars in mortgage loans, and own about 44% of all the foreclosed homes as of August 2008.  Since foreclosure numbers are still stacking up the amount of losses Fannie and Freddie will sustain is still going up.  Once the government officially takes over these enterprises taxpayers would be paying for all the loan guarantees and costs to dispose of these foreclosed properties.  Even if the housing market does not worsen, I think it is safe to say that the Treasury will stand to lose billions if they take over Fannie and Freddie

The situation right now is that if the government does not take over Fannie and Freddie then they may not stay open for very long since investors have lost quite a bit of confidence in the mortgaged backed securities spewed by these companies.  The stock prices of these companies have plunged and they’re drowning in billions of losses.  Without Fannie and Freddie’s guarantees on loans, it would be harder for everyone to get loans and home sales will be even slower and that will simply bring about more losses amongst the financial industry.  It is almost like  the government almost has no choice but to step in and stabilize the mortgage and credit market.

Interestingly enough, both McCain and Obama agree that Fannie and Freddie should not be bailed out since they are supposedly private entities,  but these two government sponsored enterprises have so much influence  and so many loans now that just letting them fail could have a huge impact on the real estate market.    I think it is really bizarre that these two companies were allowed to operate in such a way that they are government sponsored, and yet not carefully regulated to take on sensible risks.  Where was the line drawn?  Now that the crap has hit the fan, taxpayers have to pick up the pieces?

So on one hand, I agree wholeheartedly that Fannie and Freddie need to be restructured by the government for the good of the economy, but will they do it correctly this time?  If the current lending and fraud prevention practices continue, Fannie and Freddie will be nothing but endless money pits where taxpayer money bleeds into oblivion.  If management becomes good and these enterprises become profitable again, where will the money go?  Will taxpayers see any return on the good fortunes of these companies as their former shareholders once did?  Right now, there are so many questions and so little answers, and the big unknown future of Fannie and Freddie is rather frightening.

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Since I didn’t have time to put together any new content, here are some links to the great blog carnivals I participated in the past week:

Carnival of Rants -  There are definitely a lot of weird articles here.  I really liked this one about John Edwards.  It’s short and sweet.

Carnival of the Vanities -  This carnival isn’t as awesome as it used to be.  So hmm, I submitted my rant about technical recruiters.

Finance Fiesta   – This article on ways to blow a job application by Frugal Zeitgeist reminded me of some of the horrible interviews I had to deal with.

Finally, Broke Grad Student did a Olympics themed Carnival of Personal Finance.  My article about not being an debt slave to education was included.  I thought the Olympics was fantastic this year and the following were my favorite moments:

- Jason Lezak anchoring the 4×100m relay for the USA men’s team.  That was amazing to watch.  He was the oldest guy and had the fastest split ever.

- Oksana Chusovitina winning a silver in vault as the oldest female gymnast EVER.  This woman’s story is just amazingly inspriring.

- India winning their first individual gold medal ever.  The winner is a young hardware engineer named Abhinav Bindra.  He just seems so nerdy, and that’s why it’s so cool.

- Chinese badminton player rips off his shirt to show off his funny tattoo.  I was watching that game live on nbcolympics.  I actually fell over laughing when he ripped off his shirt, but later on I figured out what exactly the words on his back said.  That just made it funnier.

- China ending the games with 100 medals, including 51 gold, the most gold medals ever won by China.

That’s it for now.  I’ll write more when I find time!

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