Points of Interest

"Your debutante just knows what you need.  But I know what you want."

                - Bob Dylan's Stuck Inside of Mobile with the Memphis Blues Again

I am not sure if anyone else has noted this, but Todd Harrison says that he continues “to see inflation in things we need and deflation in things we want”.

The things we need include food and energy where recent price indexes are starting to report increasing costs.  Domino’s (DPZ), the pizza chain is reporting that its component costs (cheese, flour, tomatoes) are at a ten year high.  And we all realized when gas prices doubled or the cost of a gallon of milk went up by a buck or more that inflation was alive.  Why it didn’t make it into the reports then is still a mystery.

Those items we want include a fine home where prices have been sliding to some extent and falling in others.  This may be the first year that home prices do not increase nationwide since 1933.  That touches off the deflation component argument regarding the economy.  If one were to listen to the financial talking heads the debate has started regarding which is more important: inflation or deflation.

It’s an important discussion as the cure for either of these could be disastrous should the other ailment be the true problem.  Drop rates to cure the housing issue and fan the inflation fires.  Fight inflation and further exacerbate the housing issue.

All of this may be leading to another situation: stagflation. This phenomenon, defined in its simplest terms is inflation + recession… at the same time.

Next, we will discuss some of the more significant aspects of stagflation.

Note:  I was amused by Alan Greenspan's call that there is a 50-50 chance of a recession.  Talk about hedging your bets.  Now he can't be wrong.  Far different than him keeping the cost money so cheap for far too long and thus creating one bubble after another.

After denying the existence of a problem in the mortgage and housing industry earlier this year, the current administration through the Treasury Department has come up with a plan.

"We believe that any efforts by Treasury, originators, servicers and investors to help families in distress weather the current downturn are welcome and positive developments," Freddie Mac said in a statement.

This isn’t the first plan to help those with interest rate and payment resets and the whole housing / real estate / subprime meltdown.  The House passed “The Mortgage Reform and Anti-Predatory Lending Act of 2007”.  And without discussing the specific merits, good or bad of this legislation it only serves to prevent future credit crisis.  Likewise, the Senate has weighed in and proposed legislation that reportedly would allow bankruptcy judges to modify current mortgages.

This new plan, to be announced later today by Treasury Secretary Paulson, has been characterized as freezing mortgage rates (payments) for homeowners with Adjustable Rate Mortgages (ARMs).  It may sound as if all mortgages with resets will be available for this plan , but that isn’t true.

There will be a litmus test of sorts as borrowers will be placed in one of three classes:

1.) Those who can not pay their mortgage now before it resets;

2.) Borrowers who can pay their ARMs when they reset;

3.) And those who are currently paying but in all likelihood would not be able to pay their new, higher payment after resetting.

If you are in the last group you may become eligible for help with this proposal.  Of course, this creates a lot of questions and concerns especially of fairness.  For instance, those that are now paying and abiding by the terms of their loan would not be eligible for the plan.  It would seemingly tempt those with otherwise good payment histories to "game" the offer, maybe miss a few payments and demand help.  Furthermore, there’s the question of who’s ultimately paying for this renegotiation.

Even though a lot of questions remain, there’s no doubt that keeping homes from going to foreclosure will be good for the borrower, their neighbors and the lender servicing the loan and the owner of the mortgage investment.