Will The Bush Bailout Exacerbate Problems In The Housing Market?

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We've found ourselves in the uncomfortable position of being part of a large chorus of skeptics of the Bush administration's plan to forestall foreclosures through a combination of fast-tracked refinancings (mostly aimed at people who would be better off defaulting and moving into a rental) and freezes. We prefer to take contrarian, controversialist stances but the risks of this plan seem overwhelmingly obvious.
If you've got a brighter picture of the plan to paint, please email us your ideas or leave them in comments. Even if it's just a link to a likely best-case scenario we'd like to read it. In truth, we're so uncomfortable with being in the majority that we start to re-think our position. But even on second and third thought we don't like the plan.
This morning we learned of Peter Schiff's argument that the plan will dampen demand for housing by depressing credit availability. It's so totally obvious that once you see it spelled out for you, you almost imagine you had already thought of it. But you hadn't.
"Without question, the Bush administration’s mortgage" rescue plan will exacerbate, not alleviate, the problems in the housing market. As the plan will sharply reduce the ability of new buyers to make purchases, it really amounts to a stay of execution and not a pardon," Schiff writes. "Although there are mountains of uncertainty as to how the plan will be structured and implemented, there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe (higher down payments, mortgage rates, and required Fico scores, lower loan to income ratios, and perhaps the death of adjustable rate loans altogether). The result will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan."

The Mother of all Bad Ideas
[Euro Pacific Capital]

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