My Mortgage Blog

Two salient issues may finally be receiving the attention they are due:

First, even though the problems slip from the front pages of our newspapers, the sovereign debt problems in Europe are no closer to solutions today than they were the last time they were Big News. And the politicians entrusted with the task of finding solutions and enforcing them are, quite simply, refusing to speak the undeniable truth and act on it.

The truth: Greece can’t make its debt payments; it needs special assistance from fellow European Union countries to raise all the money it needs whenever a large payment is due. That means European leaders are solving the debt problem by making the debt larger, step-by-step, and by pretending something positive is coming of the strategy.

And, of course, all that can bring Greece out of this pickle is economic growth. But—second truth—while you can reduce a country’s obligations by cutting its expenses, Greece’s economy is strapped by austerity programs. And it is sliding backwards.

The same, increasingly, can be said of Portugal and Italy, with Spain not far behind. We are living on borrowed time here, and it is not at all unlikely that we will have an international credit crisis that makes money very hard to borrow and leads, potentially, to an even bigger slowdown than what we’ve faced for several years.

Second, then, we have a Catch-22 from which our own politicians are unlikely to escape. For weeks now, analysts have been writing about the estimated $85 billion that could be added cleanly and inexpensively to our nation’s pocket money. Commentators have salivated over how much of a boost our economy—specifically, our retail sales—could receive from such a boost.

All we have to do is to find a way to refinance most of the million+ homes that are currently underwater. But you can’t do this thing without making someone very mad and throwing a monkey wrench into future lending. Either you create a program—as the Obama administration is attempting to do—that reduces the principal balance on a home, making it possible to refinance the home (and doubtless creating government obligation in the process) OR you don’t touch principal balances and, alas, the parade of foreclosures and home value reductions continues.

Notice that there are investors with every good intention who have their money in these mortgages. If we reduce the principal balance, we cut into their funds or, at the least, their returns. That would make the mortgage-backed security game unattractive to any further investment, and that would dramatically reduce the number of home loans that could be written at any given time.

Notice too, however, that there are homeowners with every good intention who took out mortgages that exploded in their faces like trick cigars. They can’t pay and, to a very real degree, it ain’t their fault.

But there are few good ways of solving a Catch-22 of such bewildering size and scope. It’s good that Obama seems to be trying, perhaps valiantly. But we still don’t have a solution and, without one, the housing market may continue to slide—even though interest rates remain attractive.

Keep in mind that the worse the economy looks to national and global investors, the lower our interest rates are likely to descend. Since lower rates truly aren’t increasing the numbers of home sales, we’ve reached the point where it’s difficult to applaud each time mortgage rates move further into record low territory.