What’s a thing worth?

Whatever price the market will bear.

The rest is all fluff.

So why not let the housing market find it’s own solution? We’ve got lots of people apparently struggling to make payments on houses that are no longer worth as much as the outstanding loans. While this may be a sad case for the individuals involved, it’s not a death sentence. Default on the loan as a penalty for risking too much, and go rent someplace up the block. Next time don’t bite off more than you can chew.

James Saft agrees:

LONDON (Reuters) – The U.S. government should just get out of the way and allow the crash in U.S. housing; the market is too big, has too far to fall and Americans’ finances are too strained.

[ . . . ]

 

There is an absolutely credible argument that many Americans, particularly less well off ones, would be better off out of home ownership entirely. They would rid themselves of the yoke of a mortgage on an asset which, even after a principal write down, may not end up being a good investment.

 

“They are going to try and keep you in a home that arguably you don’t want to be in. You might be able to go up the street and rent for half the price,” said Ivy Zelman, a housing analyst who was early in identifying the issues.

 

A person paying rent and with the flexibility to move to where there are jobs is better off than one anchored to an underwater mortgage in a town with high unemployment, even if the lender has to go bust in the process.

 

Prices of housing in the U.S. were driven too high by too much leverage even as supply increased. Let’s accept that, allow prices to fall, the banks to fail and start again on a new stable footing.

But we’re not going to let that happen, are we? Of course not. Obama’s got a plan to defy markets and to artificially prop up people who shouldn’t be paying as much as they are in houses that aren’t worth as much as the outstanding loans. How will he do this? How else to Socialists do anything? By applying a thick gooey coat of Government on the problem. But this won’t solve the problem, will it? Of course not.

A mortgage is part of a conractual arrangement freely entered into between 2 parties each seeking a benefit. In exchange for a loan from a lender to make up the difference between the down payment and the purchase price of a home, a borrower gives the lender a) repayment with interest; and b) a lien on that property for the amount of the loan. You get your home (benefit) and the bank gets money (interest) plus the right to extract the value of the unpaid loan from your property if you break your promise to repay. Your home is the “collateral” for the loan. Without that collateral, the bank would not have lent you the money in the first place. Wasn’t there a Brady Bunch episode on this once? Or was that the one where Carol found cigarettes in Greg’s jacket?

Regadless, the point is that there is an element of risk involved for the borrower relative to a) the amount you’re borrowing; and b) your ability to repay. If you only borrowed a little and you were a good credit risk, had a good job, and were fairly stable financially, there wasn’t much of a risk at all. But if you borrowed a lot and were financially unstable, there was a likelihood there that you’d default. Either way, you took that risk and you should accept the consequences. This of course is not to be vindictive or hurtful. Not at all. This is to be pragmatic. If there were 100% certainty that bad consequences would attend to bad acts, then we’d all be less likely to engage in bad acts. That would mean that in our current example, we’d be less likely to take risky loans and banks less likely to give them.

But what happens when we start playing with rules and make it less certain that such bad consequencs will result from bad acts? Of course we’d get more people tempting fate. If I’m not worried about losing my home to foreclosure and uprooting my family because the government is going to come in and save me, I’m going to take more risky loans and act more irresponsibly. But this applies to banks too. If I’ve got Fannie and Freddie behind me guaranteeing the loans I make no matter how risky, I’m going to go out and make more risky loans.

Which is how we all got into this subprime mess to begin with. We slathered on Government (Freddie and Fannie), we removed the likelihood that bad consequences will follow bad acts, we rewarded risky behavior (by lenders and borrowers alike) and now we see the result. Failure on a mass scale. Failure that would not have happened if Government didn’t alter the rules of the fair dealing and human nature. 

And now Government is back to hand a giant ‘get out of jail free’ card to everyone who got hurt by listening to government in the first place.

Sweet.

Here’s an excellent post running down how all this Government will work in practice to acually harm us more than if we just got out of the way and let the market seek it’s bottom (as Saft recommends).