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s a public affairs guy with clients in the land development business, one of the issues that is always on the agenda is affordable housing; specifically, how to avoid being taken to the cleaners because some politician wants to get some votes at the developer’s expense by forcing false affordability into the free market. 

My, my, my.  How things have changed.

It was just a year or so ago that cities were passing ordinance mandating that new development provide ten or 15 percent of units at market rate or lower.  For a developer of market rate or higher developments, this was akin to ordering Saks that 15 percent of its clothes would henceforth have to be Walmart priced.  Not only would Saks give up floorspace that could have gone to clothing with higher profit margins, but Saks’ snotty upscale customers wouldn’t really like sharing the store with those Walmart shoppers. 

But after years of political grandstanding on the affordable housing issue, politicians have forgotten every promise they made, every threat they uttered about the horrible societal cost of rising home prices and are pouring their passion (and our money) into the need to keep home prices up.  The absurdity would be delightful if it weren’t so dangerous, as Thomas Sowell points out today:

The same politicians who have been talking about a need for “affordable housing” for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?

The political meaning of “affordable housing” is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit.

Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

Here’s what will happen if Congress doesn’t intervene, in Sowell’s eyes and mine:  People who didn’t save for a rainy day or who bought beyond their means will lose their homes and move into apartments.  People who were saving for a rainy day and living within their means will move out of apartments and into now-affordable homes.

What a nightmare!

Strong, nasty-tasting medicine is all the economy needs right now, but Franklin Delano Obama is intent on re-establishing the warm, comforting governmental teat that Ronald Reagan worked so hard to stuff back into the bra. It’s a shame and a disaster, but the majority of Americans are ready to sacrifice the beautiful efficiency and freedom of the free market in the name of a thin security blanket imported from China.

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fter last night, I’m thinking about changing my license plates because I’ve discovered (again!) just how much I hate presidential debates.

These are not debates; they are hope-athons. I hope McCain will break through. I hope Obama will say something so wretchedly awful it will cost him the election. It’s like watching NASCAR just for the crashes. And because that’s what they’ve become - thanks to 30+-page memorandums of understanding between the candidates, thrashed out by lawyers - the candidates are so careful about not saying something wretchedly awful that they simply cannot break through.

If a high school debate team performed like these two men who want to be the leader of our country, they would fail to score a point. In a debate, you are expected to answer the question and counter your opponents answer with a logical rebuttal. All we see is block and bridge, block and bridge, block and bridge: They quickly dismiss the question at hand and bridge to a talking point from their prep sessions, too often a point they’ve made thrice already.

If I hear John McCain say one more time, “I know how to do this,” I’m going to puke. Don’t tell me you know how, show me what you know and let me decide whether you know how or not.

I would like just once to hear a candidate say something like this:

Well, you know I have a health care plan that will [do whatever it does], and I think it’s a very good plan.

But you also know who American government works. I will submit my plan to Congress where there will be committee hearings, and amendments proposed, and language struck. There will be votes in two houses and conference committees and new votes. There will be lobbyists for insurance companies, doctors, hospitals, sick people, trial lawyers and who knows who else. There will be campaign contributions and junkets.

In the end, we may or may not get a new health care bill. You are not voting in November, ladies and gentlemen [or "my friends," if you're McCain], for who’s got the best health care bill, you’re voting for the one who you think has the best chance of getting a bill that is somewhat like what you’ve hoped for through that maze. Let me tell you why I’m that man.

But of course we never do. They argue pretend points about fantasy legislation and we’re supposed to judge them on which one misrepresents reality in the way most pleasing to us.

There’s been a lot of hoopla this morning about McCain’s housing bill, including a typically excellent wrap-up by Michelle Malkin with a zillion links. She says of it:

I can’t underscore enough what a rotten idea John McCain’s ACORN-like government mortgage buy-up is. I said it during my liveblog. And I’ll say it again: “HE WANTS TO EXPAND THE BAILOUT. He wants to do what ACORN wants to do. We’re Screwed ‘08.”

This was his supposed “game-changer.” This was the very first thing out of his mouth during the debate tonight — his big pitch right off the bat. The McCain campaign immediately sent out this fact sheet on the proposal, which will cost at least $300 billion. The proposal involves directing the Treasury Secretary to “purchase mortgages directly from homeowners and mortgage servicers.” That’s on top of the trillion-dollar crap sandwich (update - McCain says it would be included in the crap sandwich), the $85 billion to AIG, the $25 billion to automakers, the $200 billion in capital and credit lines to Fannie and Freddie, and who knows what else we’ll be forking over to California, Massachusetts, etc., etc., etc.

Because we no longer have real debates, McCain felt the need to have an anti-crash, a game-changer, hoping that people would really like this, and at the same time Obama would pull out a can of spray paint and spray “potatoe’ on the wall of hall.

Judging from the reaction and the instant replay, he failed on both counts.

I’m not as apoplectic as Malkin and her friends. (Full disclosure: My income from the land development and home building businesses has dropped precipitously this year and I’d like to get it back.) As you may recall, I proposed a similar plan on the eve of the bailout:

I do not want one penny of my currently very dear money to go toward saving people who lied about their income on “‘no stated income” loans. And not a penny to people who made bad bets on the market with nothing down mortgages. And the people who sold and repackaged these mortgages? Let them stew in their own desperate financial juices.

Not one penny to any of them, and I don’t care what the consequences are!

Here’s what we should do instead: Be a government of the people, not a government of the businesses and the lobbyists. We should set up a short-term (three years ’til it sunsets) federal mortgage repackaging house. It would have only one purpose: To rewrite an individual taxpayer’s loan as a 50-year fixed (or even a 100-year fixed; such mortgages are common in Japan).

People who are in bad mortgages or are otherwise about to lose their houses would have show an ability to pay, with the term of the mortgage being flexible enough to allow some pretty underqualified people to slide through. Interest rates, though, would be competitive, not written down at our expense, so the government would be able to sell the mortgages to the private sector at auctions.

McCain’s plan will supposedly keep out those who lied about their finances, those who multi-mortgaged to flip houses, and those who put no money down. Good. Now get out of the underwriting business and the interest-rate jiggering business and do as I say: Re-write the term of the mortgage and only the term. Then I’m fine with McCain’s plan; as it is, I’m not at all fine with it.

So Obama forgot his WWII history and mistakenly had the government inventing computers. And McCain laid out a mortgage plan that reminds us that he’s not a conservative, like we didn’t know that already. Did anything change last night?

Of course not. I H8 DB8S.

Photo: Steven Crowley, NY Times

Updated

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t appears that under the plan Pres. Bush announced this a.m., the federal government (i.e., you and me) will spend up to $700 billion to buy back troubled mortgages from banks. AP characterizes these mortgages as “toxic,” and that’s a good definition.

I do not want one penny of my currently very dear money to go toward saving people who lied about their income on “‘no stated income” loans. And not a penny to people who made bad bets on the market with nothing down mortgages. And the people who sold and repackaged these mortgages? Let them stew in their own desperate financial juices.

Not one penny to any of them, and I don’t care what the consequences are!

Here’s what we should do instead: Be a government of the people, not a government of the businesses and the lobbyists. We should set up a short-term (three years ’til it sunsets) federal mortgage repackaging house. It would have only one purpose: To rewrite an individual taxpayer’s loan as a 50-year fixed (or even a 100-year fixed; such mortgages are common in Japan).

People who are in bad mortgages or are otherwise about to lose their houses would have show an ability to pay, with the term of the mortgage being flexible enough to allow some pretty underqualified people to slide through. Interest rates, though, would be competitive, not written down at our expense, so the government would be able to sell the mortgages to the private sector at auctions.

Those who are not able to meet the income requirements for a 50- or 100-year fixed would lose their houses. They don’t deserve to keep them; welcome to the wonderful world of personal responsibility. Even so, this would reduce dramatically the number of foreclosures on the market, which would help the homebuilding industry come back.

Also helping the homebuilders is the probability that new longer-term mortgages would become widely available through the private sector, to be used for new home purchases in addition to bail-outs. This is pivotal to a recovery because you just cannot underscore the importance of home-buying to the economy. In the early 2000s, the homebuilding industry had the highest sales of all industries in California - outpacing even retail for a year or two. That translates as jobs, purchases, taxes - what makes the world go round. If the “‘fix” doesn’t fix the homebuilding, it’s not a fix.

And what of the institutions, with their MBAs and PhDs that dreamed up mortgage based derivatives and other instruments of economic death? Let them all crash where they may, and watch very carefully the new institutions that will quickly rise to fill the void. Congressional hearings will be needed from day one to track what they’re doing and hold them responsible, and the members of Congress who serve on the oversight committees will just have to deal with the fact that America will no longer tolerate the acceptance of campaign funding from the industry they oversee, you SOB Chris Dodd.

Finally, we need to treat new financial products like we treat new pharmaceuticals. They need to be overseen, tested and certified by a Federal Financial Instruments Agency before they are foisted on the market, because like Thalidomide, they can create great human suffering if there’s something wrong with them.

This could work, and work without selling a lousy mortgage on America to our grandchildren and great-grandchildren, unlike the plan Bush outlined today. That plan just might prove the crazy liberals right: It just might make him the worst president in American history.

Update: Paul Krugman agrees:

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

As I posted earlier today, it seems all too likely that a “fair price” for mortgage-related assets will still leave much of the financial sector in trouble. And there’s nothing at all in the draft that says what happens next; although I do notice that there’s nothing in the plan requiring Treasury to pay a fair market price. So is the plan to pay premium prices to the most troubled institutions? Or is the hope that restoring liquidity will magically make the problem go away?

Adam Smith, cover your eyes. I’m about to reveal something that would be very upsetting to Mr. Invisible Hand, were he still with us.

AP, the world’s largest news distribution service, and therefore, one would think, one of its best, led off a story on the housing market today with this gem:

After falling for six straight months, sales of existing homes posted an unexpected increase in February. But the median home price tumbled by the largest amount on record.

“But?!” Obviously, “because” is the right word. Anyone with even a modest understanding of economics knows that government programs and bailouts aren’t going to be what starts bringing the housing market back. But lowering prices (and making more mortgage money available) will. In February we saw that: Prices dropped and people bought.

Meanwhile, Ms. Change (seen here signaling for eight more Clinton years), showed off that she’s right there in the dunce’s corner with AP, as she called for an “emergency working group on foreclosures” led by — here’s a new face — Robert Rubin, her hubby’s econ czar who helped the Clinton administration skate by on Reagan’s robust economy almost until the end of Bill’s second term, when it all collapsed.

Such a panel would recommend legislation and other steps to “help re-establish confidence in our economy,” Clinton said in prepared remarks for a speech on the economy in Philadelphia. She and Sen. Barack Obama are campaigning heavily in Pennsylvania, which holds its presidential primary April 22.

Clinton also proposed greater protections for lenders from possible lawsuits by investors, a version of so-called tort reform more often associated with Republicans than Democrats.

Uh-huh. Washington DC can re-establish confidence in the economy; we all believe that … just let us find our WIN buttons. And we’re all sooo behind Hillary on her bright idea to stiff investors — what do they do besides fuel the economy, anyway? — in order to bail out financially dumb or greedy people who are stuck in bottom-of-the-barrel mortgages.

The failed mortgages are made up, in large part, of claimed income mortgages, and most of the failed claimed income mortgages are ones in which the relationship between the claimed income and the real income is tenuous at best.

In other words, they lied and Hillary cried.

Being used to covering for liars, Hillary wants to take care of these people so they can live to lie again. Why teach them a lesson when you can bail them out again and again, ensuring that they’ll continue to vote Democratic?

Here’s a better solution, and it’s already done without the help of the junior senator from New York and her know-it-all buddies:

Government regulators are reducing capital requirements on Fannie Mae and Freddie Mac in a bid to add liquidity to the troubled mortgage market.

The Office of announced Wednesday that it has cut the government-sponsored mortgage investors’ surplus capital requirement to 20 percent from 30 percent.

The office estimates that this reduction, in combination with the release of portfolio caps announced last month, should provide up to $200 billion of immediate liquidity to the mortgage-backed securities market, and allow Fannie Mae and Freddie Mac to purchase or guarantee about $2 trillion in mortgages this year. (source)

Unlike Democratic senators running for president, the housing market economists at the Federal Housing Enterprise Oversight understand that making more money available for mortgages will make mortgages cheaper and more plentiful. They also understand that this is a temporary fix, and capital reserve levels should return to 30% once things straighten out.

I am a part of the housing industry. I have seen many friends laid off and am watching as a couple friends hold on by their fingernails to their companies. It is not a good time for us — but we all know that the last decade, which was incredible for the industry, would not have been possible if the already heavy hand of government were any heavier in our industry. So we also know that letting Hillary and her big government ilk have her way is not going to help in our recovery.

We were drunk in the good market and we’re hung-over today. And no thanks, Hillary — keep your snake oil hangover solution to yourself.

Ever heard of John Paulson? Me neither, but George Washington sure has, since Paulson made three or four billion Washingtons last year — and his hedge fund made $15 billion — by betting against housing. While others wallow in misery as their over-leveraged houses go into foreclosure, or as they look for new jobs outside the mortgage industry, Paulson is luxuriating in their misery.

WSJ subscribers can read the story here (non-subscribers can read an NYT piece on Paulson here). Here are the basics:

In early 2006, while most thought the housing market and its closely affiliated mortgage market could suffer a downturn but not a collapse, Paulson saw things differently and decided to bet on a collapse.

In several interviews, Mr. Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn’t enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, “you can’t short houses.”

Among the ways Paulson accomplished this were to “short risky CDO slices” and to “buy the credit-default swaps that complacent investors seemed to be pricing too low.” Got it? I don’t.

Paulson’s been a successful investor for a long time, and he did what investors do. Most of us prefer folks who see a market need and fill it more than we like those who see a market weakness and exploit it, but it’s all capitalism.

As he has before with earlier, smaller, killings, Paulson will invest his winnings back into the market. I suggest he use a part of it to help lift the housing market back up. That won’t only benefit a lot of people, it will also allow him to pull off the nifty trick of profiting off a market as it falls, and again as it recovers.

News of a global effort to ease the credit crunch is welcome, indeed, and far superior to the President’s dangerous, unfair and inequitable proposed solution to the mortgage meltdown.

Over the last couple days, I have spent hours with the leaders of Southern California’s home building industry. (Although I can hardly drive a nail, I guess I’m a leader of the industry as well, as I serve as public affairs VP for the industry’s So Cal trade association, the largest and most watched in the nation.)

To a person, they are pessimistic for the short term and ebullient for the long term — from perhaps 2010 on. All of them predicted a downturn and were preparing for it, but none anticipated the precipitous drop created not by a lack of demand but by a lack of credit.

How precipitous? Last year, new home sales and remodels in So Cal had a value of $17.9 billion; this year, it will be $5.5 billion less, according to the Construction Industry Research Bureau.

Adversaries in the no growth movement (the Greenies, Warmies and NIMBYs) may be desirous of a crumbling economy, or they may be ignorant, but if they are celebrating housing’s stumble, they should know the price: The So Cal economy took a $12 billion hit in 2007 because of the drop.

Since the market adjustment started in 2004, SoCal’s economy has lost $38 billion in economic activity that were lost as the value of new homes, remodels and new business activity created by them shrunk, according to CIRB.

This is the largest new home market in the country, but numbers of such a scale are cropping up in nearly every market across the country. As goes housing, so goes America’s economy.

That’s why this news from WSJ is so encouraging:

The Federal Reserve has joined with four other major central banks to announce a series of measures designed to inject added cash into global money markets in hopes of thawing a credit freeze that threatens their economies.

The Fed said today it would create a new “term auction facility” under which it would lend at least $40 billion and potentially far more, in four separate auctions starting this week. The loans would be at rates far below the rate charged on direct loans from the Fed to banks from its so-called “discount window.” But the new loans can still be secured by the same, broad variety of collateral available that banks pledge for discount window loans.

The European Central Bank, Bank of England, Bank of Canada and Swiss National Bank simultaneously announced parallel measures.

Stock futures soared Wednesday on the news, a day after the Fed’s rate moves disappointed the market.

The Fed also said it had created reciprocal “swap” lines with the European Central Bank, for $20 billion, and the Swiss National Bank, for $4 billion. These will enable the ECB and SNB to make dollar loans to banks in their jurisdiction, in hopes of putting downward pressure on interbank dollar rates in the offshore markets, principally the London Interbank Offered Rate, or Libor, market. The inability of foreign central banks to inject funds in anything other than their own currency has been a factor creating the squeeze on bank funding in those markets.

Because home sales today are not so much for homes, but for deals, stabilization is the first step toward recovery. As long as buyers remain reticent to close a deal because they think tomorrow will bring a better deal, sales will continue to drop.

The Fed’s move, by freeing much-needed new sources of credit, can bring new buyers into the market, and builders were working to diminish their standing inventory over the last couple of years, it won’t take too many sales before supply and demand achieve equilibrium.

With all the expected disclaimer, investors might want to start looking for deals in homebuilder stocks. There are risks of bankruptcies in the short term, of course, but the companies that make it through should begin appreciating quite robustly in a few years, thanks to moves like the Fed’s today.

Osama bin Laden might be one bad dude, but he’s not as tough as a crummy mortgage:

NEW YORK (AP) - Bad credit has supplanted terrorism as the gravest immediate risk threatening the economy, a key national research group reported Monday.

Borrowers’ withering ability to pay their bills and the subsequent fallout in the credit markets this summer topped the list of short- term risks on peoples’ minds, according to a survey of 258 members conducted by the National Association of Business Economics.

Of course, the key words here are “short-term risks,” which are certainly not good qualifiers for jihad-risk. Jihad-risk did rate number one when NABE last surveyed its members back in March when things were going along a bit more swimmingly in the economy.

Despite the economists’ pessimism about the current lending-fueled economic heebie-jeebies, they do believe it’s a short-term situation and things in the housing market should be back to normal in five years (my sources in the building industry say four years; I hope it’ll be less) .

Unfortunately, unless things take a miraculous turn, jihad will still be a threat to our economy and our safety then.

Very cool illustration: Jan Op de Beeck