Tuesday, October 12, 2010

The Ant and the Grasshopper

So are you an ant or a grasshopper? It seems an odd question, but when you talk about the housing crisis and its governmental solutions, homeowners are clearly divided into ants and grasshoppers. And if you’ve been reading my articles, you know that I root for the ants.

Aesop’s fable, “The Ant and the Grasshopper” is well known. It goes something like this. There is a grasshopper that spends the warm months singing and dancing with the ant works diligently to store up food for the winter. When the cold winter finally arrives, the grasshopper finds itself dying of hunger. The grasshopper goes to the ant to beg for food, but is rebuked. While there is little variation of the story, the ending has many variations. Some end with the grasshopper starving to death, others with the ant offering help, and some leave the ending ambiguous. The moral of the story remains the same, which, if you could not guess, is idleness brings want.

The fable offers a fairly good allegory for the housing crisis. You begin with homeowners. At this point you should know if each homeowner is an ant or a grasshopper based on the amount he has borrowed and his ability to keep up with payments. But as this is the mortgage crisis, both the lenders and lendees were either ignorant of the fact or disregarded that fact. And so over the warm months, or the growth period of the housing bubble, you had homeowners that dutifully salted away money to build equity in their home. You also had homeowners who believed their home values could only increase and make up for impending ballooning payments in the future. So you have the ants and the grasshoppers, respectively.

Then the housing bubble burst, and home values plummeted. The majority of home values went underwater, with values less than the mortgage owed. This was complicated by the banking crisis as well, and homeowners saw their retirement savings plummet as well. Many people lost their jobs. Suddenly there was a population of homeowners that could not make their mortgage payments. And while many of these instances resulted from unfortunate circumstances such as unemployment, the majority of defaults resulted from homeowners simply taking mortgages too large for their financial situation. The remainder of homeowners also suffered from loss of home value and even underwater mortgages, but were still able to keep up with their mortgage payments.

So now here we are in the dead of winter. You have homeowners that were responsible enough to take on mortgages they could handle, and homeowners that cannot keep up with their payments because they wanted a bigger house than they could afford. How will this story end? Well, it ends with the ant being forced to help the grasshopper. The government has set up programs to help defaulted homeowners keep their homes by magically reducing their interest rates. In essence, banks are coerced to refinance, in one form or another, defaulted mortgages to give the miscreant homeowners lower mortgage payments. All the while, homeowners that are keeping up with their underwater mortgages are eligible for nothing. They must maintain their current interest rate, unless they have enough equity or cash to refinance. And on top of that, their taxes are used to help the defaulted homeowners refinance.

So much for the moral of the story. For me there is only minimal comfort in knowing that a swarm of ants could take apart a grasshopper as it stands there in under a minute.