File this entry under, “it must not be the act, it must be the market” that matters.
Two distinct stories in the Wall St. Journal today opposing Congressional views on forms of speculation. The first deals with oil and is simply titled “Oil Speculation Draws Scrutiny.” It discusses hearings in Congress suggesting oil prices could fall if bills were passed to curb speculation, perhaps by imposing higher margin requirements on futures (basically the money down to cover the contract):
House Energy and Commerce Committee Chairman Rep. John Dingell, (D., Mich.), said lawmakers should set firm limits on the size of energy speculators’ positions, require full disclosure of all energy trading from investment banks; and prevent pension funds from investing in commodities as they seek to diversify their holdings.
Mr. Dingell and others at the subcommittee meeting said Congress should consider forcing speculators to put up margin, or collateral, worth 50% of the value of energy futures in which they seek to trade [emphasis mine]. Today margins requirements for most traders in oil futures are often in single-digit percentages of the value of their commodity holdings.
I found it interesting that his news is out the same day as anoher story in the Journal today called “Mortgage Program Fuels Risks.” This excellent story by Nick Timiraos details how a government-backed program has largely replaced the private subprime loan market in allowing buyers to get into homes with little to no money down [emphasis mine]:
Mortgages that allow consumers to put little if any money down when buying a home have largely disappeared as a financing option available from private lenders. But they are still available — and growing more popular — through a government-backed program.
Supporters of the down-payment programs say they help the FHA fulfill its goal of assisting first-time home buyers. But critics say the programs will burden the government agency, and taxpayers, with bad loans. The FHA, which essentially is filling the void left by the collapse of the subprime market, renewed a push to eliminate the programs this month, after warning that above-average default rates for seller-assisted down-payment programs will force the agency to request a government subsidy for the first time in its 74-year history. The agency says it will need $1.4 billion next year.
“I just smell a massive taxpayer burden coming,” says Sen. Christopher Bond (R., Mo.), who calls the programs “too good to be true.”
The story continues, outlining the potential risk:
To critics, mortgages with down-payment assistance are similar to no-money-down subprime loans, which have triggered a wave of foreclosures. Most bankers believe defaults are so high because borrowers who encounter financial difficulties are more willing to walk away from a home when they didn’t put much of their own money into the purchase.
So let’s get this straight; oil speculators are bad for the market because they 1) drive prices up by putting very little money down, 2) with little concern about the market’s overall health and 3) have no vested interest in the underlying asset.
But yet the government is promoting and backing programs that allow homebuyers to get into homes they may not be able to afford and 1) can walk away from 2) without much risk and 3) the added new buyers in the market contribute to altering prices or driving them up by creating artificial demand.
Housing and mortgage speculators have been widely blamed for contributing to the home bubble’s burst. In the once red-hot housing markets of Phoenix, Las Vegas, Miami and parts of California speculators - or ‘flippers’, people with no interest in living in the home - are estimated to be as much as 30% of the homebuying activity. My question then is this: how much is home flipping different from oil speculation? Isn’t the incentive and goal the same: use little to no capital to ride a hot market higher purely for profit?
The high price of oil and gas is often referred to as a tax on American drivers and families. Whatever you want to call it, high commodity prices leave us with less in our wallets at the end of the month. Just like subprime bailouts. By some accounts, 90% of new homes purchased recently are using loans guaranteed by the FHA, Fannie Mae or Freddie Mac. Basically, the government is putting its credit up to allow buyers to find low-or-no money down loans.
So if the buyer defaults on the home and walks away, who holds the note? The government. Pay attention to the part in the housing story that says: “The agency says it will need $1.4 billion next year.” Who then covers the potential losses in the housing market if government-backed subprime borrowers default and walk away? You do. Sounds a lot like a tax.
I understand the difference between the markets. Congress has zero incentive to stabilize gas and oil prices. Just the opposite, the incentive is to keep them lower. Higher commodity prices benefit few save for the producer of the commodity. Higher home prices meantime help drive the American economy. Home ownership is proven to provide both economic and social benefits to communities. However, there is a big difference between helping out those who were misled on their mortgages stay in their current homes versus promoting government-backed programs that not only enable further speculation in the housing market, but also help to drive the sales of private-sector companies like the homebuilders. If I were Ford, GM or Chrysler I would read Nick’s story and ask: where are our government loan programs to push the sale of cars and trucks using taxpayer money?
Regardless of the market, to me an extra $200 bucks a month in gas or an extra $200 bucks a month in taxes to bailout defaulting government-backed homebuyers is no different. I’m still out of the money.