Skip to comments.Kathleen Pender: How mortgage-rate freezes could go wrong
Posted on 12/06/2007 7:53:20 AM PST by SmithL
The Bush administration will unveil its methadone plan for the mortgage crisis today.
Instead of going cold turkey and letting the free market take its course, the administration reportedly has reached an agreement with lenders and mortgage investors to freeze interest rates for a select group of subprime borrowers who made bad, greedy or uninformed decisions.
"You're just giving the junkie more dope," says Christopher Whalen, managing partner with Institutional Risk Analytics, a consulting firm.
Treasury Secretary Henry Paulson also has urged Congress to pass a law that would let cities and states sell tax-exempt bonds to refinance mortgages for borrowers who otherwise might lose their homes. If that's not a bailout, I don't know what is.
Paulson offered a general outline of the plan on Monday. He identified four groups of subprime borrowers facing rate increases on their adjustable-rate loans: Those who cannot afford their payments even at the current rate; those who could afford payments at the higher rate; those can refinance into a "sustainable mortgage while keeping investors whole;" and those who can afford their mortgages today but could not at the higher rate.
Only the fourth group would get help.
According to media reports, people in this category who took out a subprime loan between January 2005 and July 30 of this year and whose rate is scheduled to rise between Jan. 1, 2008 and July 31, 2010 would have their rates frozen for five years.
(Excerpt) Read more at sfgate.com ...
Translation: “Kick it down the road five years for the next administration to handle, and hope the housing market recovers.” Washington at its finest.
Let the deadbeats wither on the vine.
While I totally agree that this freeze is idiotic, the idea of the far left Chronicle lecturing anyone on the free market is hilariously funny.
sounds like socialism in chamo
Gotta keep housing prices up. Don’t want them to fall and keep people from refinancing to aid consumer spending. And don’t want the banks to lose money. Who cares if lower prices hlep first time buyers.
WTF are a bunch of Republicans doing by screwing with the market?
Paulson and those guys must be on brown sugar.
Hillary recommended this yesterday. It was a bad idea yesterday and the same today.
Exactly. What were these idiots thinking- I’ll take out a loan and pay interest only for the first 2 years— then my income will quadruple and I’ll be able to handle the real payment. Let them fail. Let the banks and mortgage companies who lent them the money fail.
It may be quite ironic but it just shows that the Bush economic team has yet to hear that Pluto isn’t a planet anymore. Ok, that doesn’t especially make sense, but they are in far orbit.
Talk about unfunded mandates—investors, the Fed and the federal government don’t want to touch that stuff, so they propose that local governments float bonds and be on the hook to bail it out.
Freezing ARM adjustments represents a mass invalidation of private party contracts and further wipe out investors. It also would likely cause no one to ever buy a mortgage-backed security again (at least adjustable ones). Minimally you won’t get the rate discount so much on ARMs because resets will no longer be credible. Guess what that will do to the market?
Finally, such borrowers are likely to be underwater equity-wise and can’t afford the payments on a fixed-rate mortgage. All this does is put the borrower in deeper in debt and ensure that they will leave a larger blast crater in five years.
Busts are part of the natural cycle of free markets. When you interfere with them, you either prolong them get a bigger explosion later.
Hillary knew the White House had been working on this for months. She came out with that "idea" yesterday to make people think it was her idea.
But as you read some of the comments here...
Hillaries housing bailout - communistic demon seed that will turn us all into slaves
Shrub’s housing bailout - brilliantly conceived plan to stabilize the economy and restore confidence
I wonder if anybody will even buy mortgages any more after this turn into corporate fascism. Bought a bond? Thought you knew what the rate of return would be? Nope, sorry, we’re the government and now your rate of return is cut in half. It’s for the good of the country (i.e. banks).
The heads of Citicorp, Merrill Lynch, and E*Trade are all history.
Who cares if the sane people who refused nosebleed prices and did not buy into the bubble, get screwed?
Not modern Republicans. So we wreck capital allocation some more, and inflate some more, and pretend everything is peaches.
But it won't make house prices go up. It'll just make them go sideways a while, while the price of everything else goes up (except the dollar).
Didn’t actually read this thread, did you DJF? There’s not a SINGLE ONE in your latter category. Every response is a stern condemnation of this idiotic plan.
This plan is Nixonian.
“You’re just giving the junkie more dope,” says Christopher Whalen, managing partner with Institutional Risk Analytics, a consulting firm.”
No it’s not.
It gives the market time to work. Many of these people will get a little time to get refinanced or sell the homes.
It will stabilize the housing market which will be good for everyone.
It is stupid and one of the eventual results will be that the middle class will have more trouble getting home loans and the original loans will come with higher interest. The bank will not choose to lose money, I can guarantee that.
So my daughter and son-in-law who have never missed a payment on their sub-prime loan by doing what was necessary to keep current - will also get their loan rate frozen, or does it only apply to those who are dead beats.
Only the fourth group would get help.
So then how is this "giving the junkie more dope?"
This is a situation where people who are a bit overstretched when you consider the rate increase, but are paying the pre-adjusted payment just fine, are being given enough time for the market to quiet down to refinance the loans. These are people who WANT to pay their bills, they're not "deadbeats" or "freeloaders."
You're not propping up deadbeats who can't pay on time even now, nor are you helping those who don't need the help. Granted, one could make the argument that it's unfair to those who are paying the increased rates and can afford to do so, but I suppose nothing's perfect.
Face it...if this were left until a potential Democrat administration (which I'm still optimistic we won't have to worry about, but let's say we do) it would be a LOT worse, Hillary would straight-up GIVE taxpayer money to these borrowers. This is the best "solution" we can hope for - it addresses the political and economic need to do "something" and costs the taxpayers essentially nothing...it preserves the values of the homes of people who are innocent in the whole thing by preventing a huge rash of foreclosures, and keeps the banks from taking as big a loss.
Read it again. The only people that qualify paid on time or can pay on time before the adjustment, but their incomes suggest they won’t be able to when the payment goes up.
It’s a good middle ground. Prices soften a bit, but it doesn’t totally kill the values of every current homeowner in the nation, either.
True. However, it's only a portion of these ARMs that are affected. Furthermore, the losses are greater if these homes are all foreclosed at the same time and forced to be sold in a down market.
If they didn't do the fix, bankers would not have received 10% returns on loans at nosebleed prices to deadbeats. The deadbeats would just hand them the keys to the house, and the banks would unload them. The industry rule of thumb is that anything that touches foreclosure loses 15% of its value just in transaction costs. Since the prices themselves are make-believe to the tune of another 20, 30, 50%, the paper was worth, realistically, as little as 35 cents on the dollar. The lower tranches of repackaged ones were worthless.
Instead keep people paying 4 or 5%, and they are worth more like 75 cents on the dollar.
The real losers are those who did not ride the house bubble up, and anyone trying to get a house transaction done. Nosebleed make believe prices are incompatible with transaction volume. Prices will be propped up and any adjustment slowed down - and as a result, nobody's house is going to sell for oh maybe three year or so after listing. (For 20% less, even then).
Orderly liquidation and a return to rational pricing are what was needed. Instead we get a "freeze". Which will help the banks, but leave capital grossly misallocation - and stationary.
What’s the rate of return if they foreclose on thousands of houses in a down market?
Probably less than it will be under this plan.
Actually, I did read the thread and noticed exactly what you pointed out.
But that is not really the point I’m trying to make. To politicize this in any way is a bad idea, period. A bad idea is a bad idea no matter what side of the aisle it comes from. And if the Dems do come up with a good idea (which I agree is rare), then they should be applauded for same.
I personally think that the political model has failed us. A large amount of the bad legislation that came about happened during a Republican congress. Nafta, Gatt, etc.
Anyone who adheres to the idea (all Dems are deluded, all Republicans are honest warriors) is being played like a cheap fiddle.
We need something better. We need a better measure of whether government is doing it’s job. We’ve payed billions of dollars for OSHA, etc, and now we just import our lead from the Chinese. The border is NONEXISTENT!! Education... education... let’s not even go there. :-(
We need ideas. We need people to be honest. We need ATTAINABLE goals.
We don’t need bigger government. We don’t need more cops with tasers.
Prices are already down because CURRENT financing standards are a lot tighter, regardless of what is done here.
All this does is extend the start rate on about 25% of the subprime ARMs in the market...if this applied to EVERY ARM then I’d share your concerns.
Foreclosures would do the same thing and cost a LOT more money to the banks than this will.
Any house forced out of weak hands and sold for a low price, eventually gets owned by somebody. The real value of the house does not change. The return to a future buyer goes down in exact proportion to that of any existing deadbeat owner or his banker's, going up. That part is a straight wealth transfer from future buyers to current owners.
The only net economic impact comes from the secondary incentives set up. Here, they are all bad - make loans at high rates to poor credits, ignore default risks, ignore rational house prices, make more houses if they cost less than X in labor and parts, invest in real estate transactions infrastructure, keep available credit supporting make believe house prices instead of loans to small businesses, wire the financial system to shovel newly created money to politically preferred forms of collateral not the highest returns or objectively safe investment, etc.
It is a typical bailout of losers, and economically a typical bit of short-term, panicky Keynesianism.
“Nobody professed to understand the matter of the frozen railroad bonds; perhaps, because everybody understood it too well. At first, there had been signs of panic among the bondholders and of a dangerous indignation among the public. Then, Wesley Mouch had issued another directive, which ruled that people could get their bonds ‘defrozen’ upon a plea of ‘essential need’: the government would purchase the bonds, if it found the proof of the need satisfactory. There were three questions that no one answered or asked: ‘What constituted proof?’ ‘What constituted need?’ ‘Essential - to whom?’ “
See the three questions....
Nope. The investors were lied to, and they’re the ones being forced to take the hit. There’s no way you can pretty this up for your banker friends who are the only ones who should be on the hook.
Ups and downs used to be part of the deal. You have no business being here if you think it’s ok for the government to change the terms of this private contract.
Sounds a lot like: "From each according to his ability, to each according to his need."
By the way, how do you gauge whether somebody can really afford the higher payment? Won't it be in their best interest to spend every last penny they make, so that it "looks" like they have nothing left over?
I agree. The rats have proposed a much more sweeping solution. I would prefer that the housing market left alone. We have had past housing slumps without bailouts. If you lived in Colorado, Texas, or Oklahoma in the mid 1980s, you will remember the large number of foreclosures. Housing prices were driven way down (50% or more loss of value).
This policy will drive up the cost of credit. There is now a substantial political risk for lending to marginal borrowers.
That was my thought.
I don’t have “banker friends.” In fact could make the argument that higher foreclosures=more buying opportunities for my clients.
The point is the overall economy. Also, the investors are taking a hit, but how are they NOT taking a hit when you consider that probably 85% of the people this will affect would be foreclosed on, costing the lenders about $20,000 average just to foreclose, then to sell at a discount both because of a slow market, plus the fact that foreclosures usually sell cheap anyway due to condition and distress.
If I were an investor in this situation, I’d rather take a partial payment than a loss and that’s what this boils down to here.
And BTW...the government didn’t change anything, the lenders did. All the government did was sit in on the negotiation, something I’m not thrilled with, I’d rather the banks have done this on their own.
That’s the flaw in this. Although they’ll probably just use a debt-to-income calculation based on what is on their credit report, to determine affordability, so things like cable TV, food, and whatever, isn’t even included in the equation.
The funny thing is that methadone is/was the cop-out for heroine, heroine was the cop-out for morphine, and morphine was the cop-out for opium.
Why can’t people just rent? And also, these people got their houses only within the past two years. It is hardly as traumatic to go through foreclosure than with someone who lived in a house for 20 years. They’ll deal with it, and move on.
The industry has already eliminated most of the riskier subprime loans anyway - so I don't think much will change there. I'd venture to guess that 90% of the people who are affected are people who wouldn't qualify for anything today, since those loans are no longer available.
I couldn't agree more.
“No its not.
It gives the market time to work. Many of these people will get a little time to get refinanced or sell the homes.
It will stabilize the housing market which will be good for everyone.”
Most of the market did not buy homes in the last 3-4 years and a large percent that did buy didn’t use these BS loans. This “plan” does nothing for most of the market. It does reward risky behavior on both the borrower and lender sides.
There is a big difference between stablizing the market and proping the market up. I believe this long term is more destablizing. Letting the chips fall and allowing investors to buy the foreclosed homes is painful, but necessary to clean it up. Similar to the savings and loan crisis and aftermath.
I don’t see another Ronald Reagan/Paul Volker out there that will be capable of cleaning up this mess in the making in 2016.
Yep. We are descending into Latin American-style socialism. The little confidence global markets have in the U.S. will now evaporate.
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
In the same breath, you say that “most people didn’t use these loans” (true) and that it’s a “mess.”
If most people aren’t in a situation where this policy will affect them, then it’s not a “mess” at all and is a small part of the entire market.
It’ll help a few people and smooth things out, nothing more. For that matter, I would say just leaving it be would be better, but the pragmatic side of me knows that politically, something had to be done, and I’d rather it be this than a taxpayer-funded bailout.
There’s no rate of return if the property is foreclosed.