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 ...
“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.
Ok.
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.
/rant off
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.
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