Home Subsidies

by Larry Levin

I'm sure you have heard of the phrase "just in time inventory." The government has now given us "just in time bailouts." Late this afternoon, when the S&P and Dow were on the precipice of another major decline, Reuters ran a story about the latest bailout: Obama eyes home loan subsidies. With that headline, all of the indices staged a major reversal as investors further embrace Socialism.

Reuters reported the Obama administration is working on a program to subsidize mortgage payments for troubled homeowners who have gone through a standardized re-appraisal and affordability test. The affordability test is said to be at 38% of one's gross income. From what I have read, the government will force banks to cram down the total mortgage amount, thereby breaking contract law. Then, for example, if the lower mortgage payment is $700/month lower, the government will pay half of it. Well, since the government earns nothing, YOU will be paying your neighbors mortgage. Said another way, if you bought a home you can't afford and the monthly mortgage payment is greater than 38% of your gross income, it's not your fault; President Obama is coming to save the day.

Sure, many will say it's a "step in the right direction" or something similar, but do you honestly think this will go over well with everyone? Isn't this sending a message to all the hard-working people who are paying their own mortgages that now their (and their children's and grandchildren's) taxes are going to be used to help OTHER people pay their mortgages? Owning a house is not a right, it is a privilege that you need to work for. And how long will the subsidies continue, 30-years until the mortgage is paid off? If not they are only delaying the inevitable.

Happy days are here again. Buy, buy, buy but not just stocks - buy anything. Yes, go buy a house you cannot afford and don't even worry, just pay whatever the person wants. Then, take out a second mortgage and buy a boat, a car, a very expensive new wardrobe. But don't stop there, splurge a little and take that well deserved vacation - you know, like the one you took 3 months ago. Worried about paying for it? Why? The government is there for you; yep, they will take it from the ones that don't live beyond their means and give it to you.

However, for this to be done without too much moral hazard, the following needs to happen:

1. The eligibility test should consider if there was any change in income for the homeowner that is causing the problem. If there was no change in income levels then no subsidy should be given. People who were foolish enough to buy more than they could afford should not benefit.

2. Taking the subsidy should have the same effect as foreclosure in that the recipient's credit rating would be affected similar to a foreclosure. This will drive out people who are going to take this as a free handout.

3. The amount of subsidy taken should be deducted on any capital gains received later on a sale of the house, so they do not benefit at other taxpayers' expense.

4. Names of recipients of all such subsidies should be made public records so that it can be publicly monitored.

Without the above, it will be a slap on the face of those that have lived responsibly.

Welcome to the brave new world where the government decides the economic winners and losers. People won't bother trying to be efficient producers in this environment. What's the point? Why play by the rules only to see the rules changed by a capricious government?


Previous Day's Trading Room Results:

Trade Date: 2/12/09

E-Mini S&P Trades*
(before fees and commissions):


1) B/away sell @ 8:30am at 817.75 = +2.50 (1 lot)

2) B/away sell @ 8:35am at 817.00 = +3.50*3 (3 lot)

3) FT buy @ 12:15pm at 817.50 = -0.50 (1 lot)

4) Algorithm positions (3)...combined SofT and Algo total...+16.00


Electronic (YM) Mini-Dow:


1) No trades today



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