The Daily 2¢ - Jackson’s Yuppies

The Bush administration has got to get its story straight.

On several occasions now, including as recently as last Thursday’s hearing in front of the House Financial Services Committee, Housing and Urban Development Secretary Alfonso Jackson has explicitly stated that administration policy is not intended to help so called “Yuppies”.

Yet, with their now uniform acceptance of the “temporary” conforming loan limit increase, that’s exactly Senator Schumer, Representative Frank and a reluctant Bernanke, Paulson and Jackson seem bent on doing.

In an interview with Bloomberg last July, Secretary Jackson initially made his anti-yuppie bailout position.

“We have very educated people that decided that they wanted to live above their means, and we call them yuppies… young people who wanted a Mercedes Benz but at the same time wanted a $600,000 home. So, they go in and make a loan that is basically interest only wake up the next morning and they can’t cover the note because the house has not increased [in value]… In those cases, we are not willing to bail those people out. But low and moderate income people, fireman and police who didn’t read the fine print, we will be able to help them stay in their home.”

Again, during the press conference preceding the “bailout” conference with all the national homebuilders that occurred earlier this month, Jackson reiterated his anti-yuppie stance.

“… this is a limited market we are trying to save. We’re not here to save those persons who made those huge exotic loans, which I call yuppies, We’re here to look at middleclass Americans.”

Then again, at last week’s committee hearing, Jackson stated that yuppies were not on the list to be saved.

“Let me say this to you mister chairman, clearly there are some people that we are not going to be able to help. Especially, as I always say, the yuppies who had this extravagant decision to have two or three cars, and a huge house they can’t afford but the people we are looking at are basically middle income people, fireman… police, teachers, nurses.”

So, I would think the point has been made very clearly… No Yuppie Bailout!

Yet, with the proposed conforming loan limit increase to $625,000 for the more expensive “urban” areas, it’s obvious that, by its definition, the yuppie and his or her lender is being bailed out.

Who else lives in the expensive metro markets and borrows $625,000 toward their home purchase anyway… fireman, police and nurses?

It’s important to keep in mind that the main proponents of the conforming loan limit increase are Senator Charles Schumer (D-NY) and Representative Barney Frank (D-MA), both of whom receive the overwhelming majority of their campaign contributions from the real estate and financial service sectors (hat tip Frothy).

It seems obvious that, in the name of helping the common American, and even with numerous public statements to the contrary, the government will plow ahead and bailout Wall Street.

One good turn deserves another as they say!

The Daily 2¢ - The China Solution

Seeing Housing and Urban Development Secretary Alphonso Jackson sitting next to Treasury Secretary Paulson at yesterday’s lender bailout summit jogged my memory of Jackson’s recent trip to China that, although covered in the traditional media, didn’t seem to garner the attention it deserved.

In early July, Jackson appeared in a very candid Bloomberg interview in Hong Kong as he was passing through on his way to meetings with Chinese People's Bank of China governor Zhou Xiaochuan, Construction Minister Wang Guangtao, and other Chinese officials.

In the interview, Jackson showed no hesitation when revealing that the purpose of his visit was to attempt to persuade China to participate in the “very lucrative” market of American mortgage backed securities.

Specifically citing both FHA and Ginnie Mae, Jackson’s intention was to lean heavily on the explicit federal guarantees that both of these programs provide when making his case to Chinese officials who, as he stated, had already showed some interest in the investment.

“The best argument that we can make is that they have the full faith and credit, and backing, of the US government. “

This was the precise message he pressed during the delivery of his speech as well stating “They are a sound, solid investment, a win/win situation for the investors and for the American people. These securities are attractive because they have no credit risk and are backed by the full faith and credit of the U.S. Government. Also, most Agency Mortgage-Backed Securities even have a higher yield than the Treasury Securities.”

The result of the meeting was a lengthy “Memorandum of Cooperation” that was signed on August 30 between the two governments that established many areas “of mutual interest”.

Given that the federal government now seems bent on dramatically expanding its role in the mortgage market, I thought it was important to recount the events surrounding the Jackson visit to China.

Keep in mind that all mortgage related programs and agencies of our government (Fannie Mae, Freddie Mac, Ginnie Mae, various FHA programs etc) require some form of private investment in order to function.

With a reeling and risk averse Wall Street now pulling back from mortgage securities, possibly even including government agency investment, China may inevitably pick up the demand for agency securities and even drive an expansion.

It seems to me that a more sensible approach, considering that compensation for failed government agency securities would be funded by the US taxpayer, would be to let the turmoil in the US housing markets play itself out before looking for additional fuel from foreign investors.

More private investment will likely equate to a broadening of these programs possibly putting them further in jeopardy of overreaching.

This would be especially risky considering the uncertain state of the housing markets at the moment.