Although all of the shrieking is about whether we will have a recession, i.e., a drop in GDP, the real issue is the health of the asset markets. Investors today are not able to predict the cash flow from the mortgage-backed bonds and other fixed-income securities they own. So, the fix is not to hand out $600 checks–it is to do things that improve the visibility for investors. Mortgage lenders can’t lend people money to buy a house unless there are investors who are willing to buy the mortgage after it is made. That’s where the money for the next mortgage comes from.
Here is are 2 articles showing the kind of thinking that will actually help to get the mortgage market back in business. Gov’t to Lift Fannie, Freddie Limits and Govt frees Freddie,Fannie reins despite loss. Last week the Office of Federal Housing Enterprise Oversight removed the restrictions on the amount of mortgages that Fannie Mae and Freddie Mac can hold on their books. The restrictions had been put in place in 2006 in response to the companies’ multibillion-dollar “accounting lapses”, limiting their participation in the market for mortgage-backed securities. The regulators did not lift a further punitive mandate that requires Fannie and Freddie to keep reserves against losses 30 percent higher than the minimum legal requirement, but hinted they may do so soon.
This will not fix the whole problem but is a step in the right direction. And it highlights why it is so important that investors are able to trust the numbers they see on financial statements. Shoddy accounting helped create the lending problems; the restrictions imposed in 2006 helped trigger the collapse. They call these things securities for a reason. They are supposed to be secure.
Finally, this shines a bright light on how stupid members of Congress are being when they raise politically popular proposals that make securities more risky. Top of the list is the recent proposal to allow bankruptcy judges to rewrite mortgage contracts on the spot. That would both make it impossible for investors to predict the cash flow from their securities and remove the potential gain on properties that are obtained during foreclosure, which you can think of as either downside protection or a real option, which makes the security more valuable. The bankruptcy proposal would further reduce the value of mortgage securities and dry up the already-slim supply of mortgage funds to home owners.