Foreclosures Are a Symptom, Home Prices Are the Problem

The Problem

The plans politicians have put forth thus far to 'keep Americans in their homes' range from poorly conceived to downright unethical. Worse yet, none of the plans come even remotely close to addressing the real problem: home prices.

There has never been much of a gap between incomes and home prices. When one gained, so did the other. This formula changed in 1997.

Source: NAR; Census Bureau

Home prices began to climb at an unprecedented pace. Within a few years, the gap between home prices and incomes had become so large that affordability was suddenly an issue for many potential homebuyers.

This should have been enough to keep prices in check, but it was not. Lenders and borrowers alike found a way to dodge the issue: mortgage fraud.

Applications were falsified, appraisals were inflated and lenders loaned reckless amounts of money to unqualified borrowers. Everyone took a financial gamble on the housing market, assuming that the bad loans could be refinanced or that the houses could be sold for profit later on. These assumptions were built on the theory that home prices would continue to climb.

Of course, it didn't work that way. Home prices are falling, leaving banks and borrowers scrambling to find a way out of their self-created financial sinkhole. Foreclosures are at levels not seen since the Great Depression and are expected to get worse in the near future.

But foreclosures aren't the problem; home prices are. People simply can't afford today's prices. The majority of the people who are in default right now have not even seen a rate increase yet. It's not their bad loan working against them, it's the fact that they bought more house than they could afford. Furthermore, they bought at a time when home prices were artificially propped up.

Freezing rates and other ploys to treat the symptom of the problem are pointless. The government is essentially laboring to keep people in a depreciating asset that was a bad investment from the get go.

Don't Drink the Kool-Aid

The government wants the public to think that the series of initiated bailouts are meant for 'working families who got duped into bad loans.' The reality is that the big bailouts are for banks, not the public.

For example, Bush's teaser freezer has nothing to do with working families and home prices. The actual goal of the plan is to prevent the real owners of most subprime loans (foreign investors of mortgage backed securities) from suing U.S. banks. It is fraud at its finest.

Bush's moronic plan has single-handedly undermined confidence in the sanctity of U.S. contract law. Since our economy is propped up by an inflow of foreign funds, our President has figuratively bit the hand that feeds us.

If banks had to buy back the worthless paper, which coincidentally will cost 10 times more than the market value of the securities, the world might realize how unfavorably leveraged U.S. banks really are. This would be bad for U.S. banks--some would go out of business--but it's better than the alternative Bush forced on us.

The bottom line is that it is time to face facts. We are well past the point of a pain-free correction. Home prices are going to fall. People are going to lose their homes. Banks are going to be hurt when real numbers finally hit the books. And the economy is going to suffer.

What we should be contemplating is how far we are willing to let the government go in their misguided and fraudulent attempts to delay the inevitable.