Never Underestimate the Power of Stupid

Some Background…

Part of my work history includes managing multiple campaigns for state representative here in southeastern Michigan.  As such, I’ve never really been able to shake the draw of the political arena.  In fact, 2010 may be the first time in my voting history that I did not tune in to a gubernatorial primary race until a week before the election…

All of that to add context and background to my following statement:

It IS an election year!

And this post from James Pethokoukis highlights a potential upcoming move that, in my book, reeks of political pandering for votes.

Don’t believe me?  Check out what could happen August 17th:

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses.

[emphasis mine]

Am I blind to the fact that many folks (1 in 5 homeowners, according to the article) are upside down on their mortgages?  Ummm…no.  I counsel selling clients on this exact issue on nearly a daily basis.

Am I oblivious to the positive impact this could have on 20% of the households across the country?  Nope. See above.  In fact, I know quite a few folks whose stress levels would drop immediately and would no longer need blood pressure medication.

“Todd, aren’t you inflating the significance of this “Main Street bailout” just a little bit?”

First, where is the money going to come from to pay off the principle owed on nearly $800 billion dollars worth of upside down properties?  It will come from the taxpayers’ pockets, THAT’S where.  Our magical printing press is nearly out of ink, after all.  Oh, wait…

Second, to whom will the money actually go?  When the Main Street bailout happens, it will appear to benefit the voter a lot, but ultimately will line someone else’s pockets.  In fact, it appears as though it will line the very pockets of those that helped create this housing debacle… the creators and investors of those new-fangled mortgage instruments that are backed by troubled mortgages.

Admittedly, it is very hard to not be heartened by sheer sympathy, given that this could affect so much positive change in peoples’ lives.  The fact remains that we simply do not, as a country, have anything to back the projected $800 billion that would be required for this “bailout.”   And let’s not forget the logistical mess this will create.  For starters, do you think the banks are ready for nearly 9,000,000 – nine million! – refinancings all at once?  How about put-back costs?  What about the costs of those nearly nine million refinancings?

As for whose pockets this money ultimately ends up in, well, let’s go down that rabbit hole, shall we?

Today’s Real Estate Example


Understand that this example only applies to mortgages sold by Fannie and Freddie on the secondary market.  Collectively, they own or guarantee 40% of the mortgages in the United States.

When one of these mortgage notes was created, it was then sold by Fannie/Freddie on the secondary market as a Mortgage Backed Security (MBS).  Suffice it to say, the investors of the MBS’s expect a return on their money.  If Fannie/Freddie suddenly forgive a bunch of the principal owed on these mortgages, and the MBS holders are expecting a certain rate of return, then the money Fannie and Freddie receive as part of their “wipe the slate clean” approach will go directly into the investors’ pockets.

But what galls me the most is not the lining of the investors pockets, though that is a bitter pill to swallow.  No.  To me, the most galling thing here is the thought that goes into such an insidious move.

Stupid Is As Stupid Does

Yep, I’ll say it.  Votes are the conductor of this train of stupid thought.  Here is Paul Jackson’s take of the reason behind the move:

The argument here is as simple as it is seductive: the Democrats, facing an ostensibly challenging upcoming election cycle, decide to go after some 15 million or so votes by using Fannie Mae and Freddie Mac…

The idea sounds so far fetched, that there’s no way that it could come to pass!  Right?  I mean, no one is so myopic as to even consider attempting this kind of move.  Are they?

forrest gump

Paul Jackson from, again:

Dig deeper and it becomes pretty clear that the entire idea of the government stepping in and wiping out mortgage principal for some borrowers is utter and complete nonsense. But don’t let the sheer stupidity of it all fool you into thinking it can’t happen. It’s simple, it’s seductive, and it’s stupid. Sounds just like the sort of plan only a politician could love, doesn’t it?

[emphasis mine]

Did I mention I used to run political campaigns in the state of Michigan?  That experience taught me that if it garners more votes in this election cycle, regardless of the long term consequences, then we’re going to make it happen. Unfortunately, I cannot agree more with that last line of Jackson’s.

“Sounds just like the sort of plan only a politician could love, doesn’t it?”

One final word from James Pethokoukis on the political calculation behind this move:

The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

Not this again...

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