This is the beginning. There will be an eventual bailout by the government . All of us will pay for it . More deficit spending postpone the fall and making it ever harder when it comes .
GuitarDaddy
Lifer
- Nov 9, 2004
- 11,465
- 1
- 0
This baleout plan is a horrible mistake and will do nothing but prolong the agony and further ruin the credibility of US financial institutions. This is like treating a herion addict by giving them free crack.
Regardless of any books the founding fathers have written, our government does take on the job of guiding the economy. (Outright control always leads to disastrous consequences). And there are constant manipulations of it by the federal reserve chairman. I am not saying that no banks should fail, no one will lose their jobs or housing, only that these drastic slides can be mitigated. And to note that massive market corrections benefit no one.
After doing some additional research I find my original desire to see people helped out was more of a knee jerk reaction based on a distorted perception of the country's economy. This most likely stems from the fact that I live in the state with the highest unemployment rate, highest foreclosure percentage and one of the weakest economies in the country (not to mention the 1st and 3rd deadliest cities)
exactly. seeing as how corporations pour billions of dollars to stem or support legislation, I'd have to concur that the gov't does nothing but manipulate our economy. having the chairman tweak interest rates is probably the closest thing to damage control we got. it is the government that protects against fraud right? monopoly? embezzling?
3chordcharlie
Diamond Member
- Mar 30, 2004
- 9,859
- 1
- 81
A few months ago, wasn't Bush still back-slapping his way around, bragging about the unprecedented level of 'home-ownership'?
The fuel for this crisis is rampant speculation, and loans that should never have been offered.
The savvy, professional loaners deserve to lose their investment at least as much as the unsophisticated buyers deserve to lose their houses.
Of course neither of these normative positions has the slightest relation to whether a 'softening' policy is in order. The only question is whether the massive and still snow-balling effect on the US economy can be mitigated in any reasonable way.
The fuel for this crisis is rampant speculation, and loans that should never have been offered.
The savvy, professional loaners deserve to lose their investment at least as much as the unsophisticated buyers deserve to lose their houses.
Of course neither of these normative positions has the slightest relation to whether a 'softening' policy is in order. The only question is whether the massive and still snow-balling effect on the US economy can be mitigated in any reasonable way.
kranky
Elite Member
- Oct 9, 1999
- 21,014
- 137
- 106
If they announced this mortgage relief plan as "we want to keep the banks from getting stuck with foreclosures, and keep people trapped in home mortgages they can't really afford" the public would be outraged. And yet... the plan itself would be exactly the same.
Ok...
1. Housing was never a "risky" asset before this bubble. Housing was always seen as a place to live, a place to inhabit and a place to raise a family. As such, it appreciated as a risk-less asset, marginally (.20%) above inflation. It wasn't until the last 10 years that it appreciated anywhere above that. Housing is a place to shelter, nothing more, it is a risk-less venture that should be treated as such.
2. The tax-write-off you mentioned is nothing more than wages contributed to a different expense, removed from overall wage taxes since they are contributed as such. You still pay interest on the debt you incur, you just pay at least 33% less interest. However, it shouldn't be thought of as a reason to own a house. You own one because you can afford it, not because the tax benefits (which are just a discount on interest) are "worth it".
3. Housing has moved out of reach for a lot of people because it has appreciated beyond what people can afford. Those who took out unreasonable leverage should pay for their risk-taking.
4. Housing was treated as nothing more than the .com-boom v2.0. It was over-leveraged, over-speculated, and over-gained. Nobody "saved" people on the down-side of the .bombs, or even the accounting scandals afterwards (enron, worldcom, Rigas'...etc). Nobody should.
Investments are a risk/reward proposition. If you want to treat housing as anything but a risk-less domicile, you take the risk...the *OWNERSHIP* of risk, into your own hands and you pay for it. If you get burned, that is nobody but your own fault.
I know that you like the pussified non-market economy, it's a comforting thought ot think that you have the *RIGHT* to own a house, but not the *PRIVLAGE* to own one. They are completely different ideals. If you want to look at the latter, go no further than the shantys owned by people in Soviet Russia, you shouldn't want that for this country.
Slew Foot
Lifer
- Sep 22, 2005
- 12,381
- 96
- 86
Ill make the prediction now I guess. Look for Fannie Mae to raise the conforming loan limit from 417K to 800K sometime next year. The taxpayers and regular joes who do nothing wrong, will end up paying for the wall street execs bonuses while subsidizing stupid douchebags who bought more than they could afford. They always do.
It wouldn't be in the bank's best interest to do this themselves because they would obviously take on a tremendous loss, substantially more than their already high default rates. Vic already touched on how the government's intervention will actually assist the banks.
The government is able to do this because the banks will embrace this with open arms. The homeowners that qualify will also embrace this because the government is going to pay the increase in their mortgage payment for them. The existing mortgage contracts that are already in place will remain in place. I'm over-simplifying things here but, The banks will get their payments based on the original contract with rate increases almost as if nothing has happened and the homeowners will make their original payments with no rate/payment increases over the next 5 years. The difference in payment will be paid to the bank by the government.
That is exactly the case here.
What is missing is that we're not talking about adjustable rates aimed at A paper borrowers where rate have the possibility of actually going down dependant on the market. We're talking about subprime adjustable rates. The most common loans are referred to as 2/28 or 3/27 loans where the first 2 or 3 years of the loan are fixed rates and the remaining years are adjustable rates tied to the LIBOR index. Each adjustment is a guaranteed increase in rate. The first adjustment will increase the rate by 3 percent with the following adjustments occurring every 6 months, typically 1 or 1.5 percent in rate each adjustment. This equates to a pretty substantial payment increase for a lot of homeowners.
While I agree the government does not need to bail out people who should have never owned a home in the first place, I dont think they should be labeled as scumbags.
WhipperSnapper
Lifer
- Oct 30, 2004
- 11,442
- 32
- 91
These folks helped to drive up the price of housing, making it unaffordable for other people when they couldn't afford to pay the overinflated prices they were subsidizing. Instead, responsible people who live in apartments will end up having to pay for this with their tax dollars. Hey Congress, thanks for nothing!
Will the taxpayers have to foot the bill in the difference of the interest rate? And what will this cost us?
Hey sparky, the taxpayers pay for nothing from tax money. The lowered interest is all borne by the bond investors and the banks, mortgage servicer/sellers and equity holders of the mortgage trusts.
I am sure you think you are smart, but at least try to read.
Just to address a few points. First off, AFAIK, *no* taxpayer money will be used. The government does *not* give the banks anything at all. The government merely stepped in and negotiated a voluntary freeze, much like the Governator did in CA. The Fed isn't "pumping out" cheap money to the banks.
The way these deals work is that excess spread provides default protection. The idea here is that you trade one for the other, you forgo excess spread to reduce defaults and pray that there is a 1:1 benefit.
Excess spread is the weighted-average coupon of the mortgages minus bond yield to the bondholders minus servicing fee. The excess spread normally goes to the servicer/seller, but in the case of defaults, it is used to pay the principal and interest of the defaulted mortgages. There is only a finite amount of excess spread in each transaction and what happens, towards the end of the transaction, is that you get concentration issues. Your "good" loans have prepayed out of the deal, your bad ones have defaulted, what you are left with is your worst loans, concentrated, and about to reset after this 5 year moratorium.
Additionally, by that time, there will have been a lot less spread left.
Defaults are not just protected by spread, but by what's called "advance rate". Advance rate is the calculation of what "stressed" defaults are, minus excess spread. For example...
If WAC of the mortgages was 6%, bond cost was 4.5%, and servicing fee were .5%, then your excess spread would be 1%. Now, you multiply that by the length of the mortgages, say 10 years, so 10%.
Finally, using historical default curves, which gauge how many defaults occur at what time, on a % basis, you determine what would happen under a "doomsday" scenario. So for a subprime mortgage pool, you may have 8% defaults. A AAA stress put on by the rating agencies would be maybe 3x, yielding 24% stressed defaults.
Now, we have 10% in spread to cover defaults, so we have 14% more defaults to be covered. This is covered by using more mortgages to put into the trust than money you get out. Thus, if you were selling $1Bn in mortgages, you'd only get $860MM in cash out of the deal. (100% - 14% = 86% * $1Bn).
The reason why I explained this is key.
1. The Rating Agencies determined the historical defaults of many of these mortgages by using imperfect *and* incomplete data. Usually you try to have at least 2-3 *complete* default curves, which may mean 12-13+ years of data. However, in many cases they had far less, so they kinda "winged" it by using extrapolation techniques.
2. The Rating Agencies set enhancement not only on #1, but also with the expectation that the deals would get the *FULL* amount of interest. Thus, the deal will have far less excess spread enhancement, meaning that bondholders, especially towards the end of the transaction, may not have enough money to cover defaults. Since you are pushing it out for another 5 years, the consequencies of this will not be felt until then.
Lets say that instead of 1% excess spread, you now have .5% due to this decision. That means instead of 10% over the life of the deal, you now have 5%. That means that you have 5% less excess spread enhancement. Since we stressed defaults by 3x, we divide 5% by 3 to get 1.66% defaults. What Paulson and the S/S are banking on, is that defaults will be reduced by 1.66%, OR 20.75%.
3. The excess spread not utilized by the transaction to cover defaults (true excess spread) goes back to the servicer/seller. This amount was modeled out by the S/S at the time of the deal inception, using imperfect default curves, and now, incomplete data on excess spread. The S/S took a "gain on sale" for these amounts when the deal happened. On a $1BN deal, the GOS might have been 100-200M. Now, since excess spread has virtually disappeared, that amount is gone, which will require write-downs of the GOS piece, hitting investors.
4. Since these bonds will be under-enhanced, their costs will go up (the bonds will become cheaper, making their yield to maturity higher). In the end, all prices of RMBS funding will go *UP* because of this.
All of this is a *huge* gamble, since you are giving up 5% ES over the life of the deal to bet that you will get 20% less defaults overall. If this fails and deals bust, you will have an even worse situation than before. If it succeeds you will have saved some deals, but still busted others.
Here is a decent article glossing over what I posted above. Just to reiterate...NO GOVERNMENT FUNDS ARE USED TO MAKE UP LOSS OF INTEREST.
http://www.bloomberg.com/apps/...9oNSXnLBU5w&refer=home
http://www.bloomberg.com/apps/...9oNSXnLBU5w&refer=home
BoberFett
Lifer
- Oct 9, 1999
- 37,563
- 9
- 81
LK
Tax money may not fund it directly, but find me your average tax-paying American who doesn't have money in various retirement funds who are going to see a reduction in their earnings due to plans like this. Either way, hard working middle Americans get shafted again.
Tax money may not fund it directly, but find me your average tax-paying American who doesn't have money in various retirement funds who are going to see a reduction in their earnings due to plans like this. Either way, hard working middle Americans get shafted again.
Which I have stated several times. I completely agree with you and I am angry that the government has cajoled people to do this. I firmly believe it will do more harm than good.
Like all recent trends both political parties are trying to bribe the voters with a bigger slice of the public pie. Democrats are on board with subsidizing the banking industry under the guise of helping the homeowner with public money. Republicans get their lame duck president to toss out the buzzwords to make it look like they care.
Sad state of affairs within this country atm. Wholesale bribery of the voter with their own money and we are stupid enough to believe it.
senseamp
Lifer
- Feb 5, 2006
- 35,787
- 6,195
- 126
Plus on this board it looks like people from both parties see through this.
Also, what exactly are these subprime borrowers getting by having these rates frozen? A few more years of mortgage payments while building no equity. Why not just foreclose now and pay rent. At least they'll get it out of the way and start living within their means and rebuilding credit.
who do you think is going to actually cash in on his proposal?
The people this proposal seems to address would be the people already making their house payments.
People with a good credit rating will probably have enough money to pay their bills already...
The people this proposal seems to address would be the people already making their house payments.
People with a good credit rating will probably have enough money to pay their bills already...
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