WhipperSnapper
Lifer
- Oct 30, 2004
- 11,442
- 32
- 91
I agree. Let the morons who overextended themselves and who drove up the prices of housing for everyone else take it on the chin.
I agree. Let the morons who overextended themselves and who drove up the prices of housing for everyone else take it on the chin.
WhipperSnapper
Lifer
- Oct 30, 2004
- 11,442
- 32
- 91
I disagree that the American economy "recovered well". What's the end result? Fewer knowledge-based jobs per capita, fewer solid middle class jobs per capita and more poverty wage service jobs? With a "recovery" like that who needs recession?
Slew Foot
Lifer
- Sep 22, 2005
- 12,381
- 96
- 86
And now the government is trying to give subprimers a chance to keep their intro rates low for an extended time. The banks are mixed on this, they want the people who can pay to pay as much as possible, but they still want something from the people on the edge. Of course, the regular guy whos always pays on time or the guy who is still looking for a house is probably going to get screwed. Banks will try to keep their rates or fees higher for the rest of us to compensate for the subprime loss.
Home foreclosures hit record high
I doubt even temporaty interest freeze is gonna save the situation now, people are spooked and new lending rules would not allow old times to return. For now the only way for housing prices is down.
Queasy
Moderator<br>Console Gaming
- Aug 24, 2001
- 31,796
- 2
- 0
Yeah, I have a feeling there are going to be alot of unintended consequences of freezing the interest rate for five years.
House prices are going to drop.
Interest rates for new loans are going to rise.
And, there's no guarantee that the people that over-borrowed will get their finances in order in five years.
fleshconsumed
Diamond Member
- Feb 21, 2002
- 6,483
- 2,352
- 136
More relief to banking and sub-prime borrowers, while new buyers are screwed again
http://money.cnn.com/2007/12/0...postversion=2007120613
Awesome. Banking industry who brought it upon itself with lenient lending practices get help, sub-prime borrowers who took out a loan beyond their means get help, all while people looking for their first house like myself get screwed. It looks like this administration and Bernanke are doing everything to cater to big financial institutions and to keep the housing bubble up. This relief plan, along with another rumored half point fed rate cut coming up soon (it's only been what, 6 months? and we already had .75% rate cut) surely don't make things easier for new buyers. It looks like housing bubble is here to stay or at least seriously delayed. [sracasm]Thanks.[/sarcasm]
http://money.cnn.com/2007/12/0...postversion=2007120613
Awesome. Banking industry who brought it upon itself with lenient lending practices get help, sub-prime borrowers who took out a loan beyond their means get help, all while people looking for their first house like myself get screwed. It looks like this administration and Bernanke are doing everything to cater to big financial institutions and to keep the housing bubble up. This relief plan, along with another rumored half point fed rate cut coming up soon (it's only been what, 6 months? and we already had .75% rate cut) surely don't make things easier for new buyers. It looks like housing bubble is here to stay or at least seriously delayed. [sracasm]Thanks.[/sarcasm]
Please, this is not capitalism any more, it's socialist OLIGARHY in slightly lesser form than some other countries.
From reading commentary on the web, it seems like this mortgage bailout plan pretty much doesn't change anything, other than creating the false impression that politicians are doing something, and perhaps creating a short covering rally / desire to create a Santa Claus rally in the stock market so mutual funds can beat the market by year end. ??
Anyways, direct economic fallout of foreclosures was really never a significant issue for U. S. economy. "Good news" may hopefully prevent what seems to be stagnant economy from being dragged down into a true consumer recession based on people not spending because of stock market declines and bad news continually on tv.
Real issue seems to potential massive losses in credit markets (stunting growth going forward because of decreased available capital and tighter lending standards), where these bundled subprime mortgages were collateral for massives amounts of leveraged upon leveraged bets based upon the worldwide liquidity bubble created around the world in the past several years. Significant down days in world wide financial markets almost seem like global margin calls and large institutions anticipating large redemptions from their investors.
Anyways, direct economic fallout of foreclosures was really never a significant issue for U. S. economy. "Good news" may hopefully prevent what seems to be stagnant economy from being dragged down into a true consumer recession based on people not spending because of stock market declines and bad news continually on tv.
Real issue seems to potential massive losses in credit markets (stunting growth going forward because of decreased available capital and tighter lending standards), where these bundled subprime mortgages were collateral for massives amounts of leveraged upon leveraged bets based upon the worldwide liquidity bubble created around the world in the past several years. Significant down days in world wide financial markets almost seem like global margin calls and large institutions anticipating large redemptions from their investors.
ponyo
Lifer
- Feb 14, 2002
- 19,689
- 2,811
- 126
This bailout is mere bandage on a broken bone. Lot more pain coming and the rich are rightly scared.
Straight Talk on the Mortgage Mess from an Insider
Good article worth reading.
Remember when Japan stock market and real estate busted in the early 90s, banks were in denial and only slowly wrote down assets and dragged it out. They extended it far longer than need be because they were stubborn or ashamed to recognize the massive losses. Looks like we're doing the same here in the US. This pseudo bailout is just going to prolong the inevitable pain.
Straight Talk on the Mortgage Mess from an Insider
Good article worth reading.
Remember when Japan stock market and real estate busted in the early 90s, banks were in denial and only slowly wrote down assets and dragged it out. They extended it far longer than need be because they were stubborn or ashamed to recognize the massive losses. Looks like we're doing the same here in the US. This pseudo bailout is just going to prolong the inevitable pain.
Good to see things getting back to normal. Too many people bought houses they couldn't afford, or that depended on dual incomes to survive, and drove prices too high. My wife works about 25 hours a week but we made sure that we afford our house comfortably with my salary alone. I made sure to buy a house that would have good resale value as well - on a cul-de-sac with a 4 car garage and decent sized yard. Bought for $405K in 2004, and now probably worth about $450K based on houses that recently sold.
I grew up in SoCal, and my parents bought a house in 1982 for $550K. It was in La Habra Heights, with an Acre of land and a swimming pool and tennis court in the backyard. My parents sold it in 1987 for a loss at $500K. Amazing that you can live somewhere for 5 years, and lose that much value. Then the market went up again, and in 1989 my mom bought a duplex in Yorba Linda for $249K. It then dropped in value, and it wasn't until about 1998 (almost 10 years!) that it was finally worth what she originally paid for it. Crazy times.
I grew up in SoCal, and my parents bought a house in 1982 for $550K. It was in La Habra Heights, with an Acre of land and a swimming pool and tennis court in the backyard. My parents sold it in 1987 for a loss at $500K. Amazing that you can live somewhere for 5 years, and lose that much value. Then the market went up again, and in 1989 my mom bought a duplex in Yorba Linda for $249K. It then dropped in value, and it wasn't until about 1998 (almost 10 years!) that it was finally worth what she originally paid for it. Crazy times.
Aye, that was pretty much what my comment said too. I was berating those commies Bush and Paulson.
redgtxdi
Diamond Member
- Jun 23, 2004
- 5,463
- 8
- 81
Lesson to be learned.............
People have forgotten what it's like to DO WITHOUT!!!!!!!
It's all about entitlement. I want, I want, gimme, I need, I have to have!!! WTF!?!?!? NO............You DON'T have to have!!!
BTW, $550K in 1982 was a ridiculous sum of money for a house. My folks bought a very nice home in Chino Hills in 1982 for $200K. That same amount of house is worth about 6 or 7 times that amount today!!
Lastly.......................it's not a LOSS until you SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
People think they're losing all of this money because their house depreciated!!! BZZZT!! WRONG!!!!!!
You bought a house that you figured was worth $600K and now it's worth $500K yet, in actuality the real market value for 2007 A.D. is probably closer to $400-$450K (maybe not even that). You O-V-E-R-P-A-I-D by $100-$200K and now the market is correcting your mistake!!
WELCOME TO CAPITALISM!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
People have forgotten what it's like to DO WITHOUT!!!!!!!
It's all about entitlement. I want, I want, gimme, I need, I have to have!!! WTF!?!?!? NO............You DON'T have to have!!!
BTW, $550K in 1982 was a ridiculous sum of money for a house. My folks bought a very nice home in Chino Hills in 1982 for $200K. That same amount of house is worth about 6 or 7 times that amount today!!
Lastly.......................it's not a LOSS until you SELL!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
People think they're losing all of this money because their house depreciated!!! BZZZT!! WRONG!!!!!!
You bought a house that you figured was worth $600K and now it's worth $500K yet, in actuality the real market value for 2007 A.D. is probably closer to $400-$450K (maybe not even that). You O-V-E-R-P-A-I-D by $100-$200K and now the market is correcting your mistake!!
WELCOME TO CAPITALISM!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Found this on Google News:
"Loan bailout is not likely to help many homeowners"
Kathleen Pender
San Francisco Chronicle
Sunday, December 9, 2007
The subprime rate freeze plan announced by the Bush administration last week was clearly designed to win votes. I just wonder whose.
The number of people who will meet all the complicated criteria necessary to qualify for a five-year rate freeze on their subprime adjustable-rate mortgage is relatively small. Estimates range from fewer than 100,000 to 600,000 nationwide. To put that in perspective, Oakland has about 400,000 people.
The percentage of people opposed to the plan appears to be high, based on informal polls.
Business news site CNBC.com asked visitors, "Is the Bush administration's idea to freeze mortgage rates necessary to insulate the economy from the subprime crisis?" Only 13 percent said "Yes - The danger to home values and the economy warrants government intervention," while 81 percent said "No - the marketplace should be left to resolve the issues on its own." That's not surprising coming from a business audience. The rest said it's not yet clear.
The Chronicle's Web site, SFGate.com, asked, "What do you think of the mortgage-rate freeze plan?" Of the 1,758 responses, 8 percent said it's good because it keeps people in their houses, and 89 percent said it's bad because it bails out reckless banks and borrowers. The rest said, "Only a fraction qualify, why not me?"
Based on flood of e-mails I've gotten in response to my Thursday column on the plan, some people believe the government should not be meddling in contracts between borrowers and lenders. Some say the housing and mortgage markets should be set free to correct themselves as quickly as possible, the same way a forest fire, while devastating, clears out excess and sets the stage for new growth.
George Topor of Corte Madera wrote, "I have yet to hear a homeowner state that it is their fault they are in this mess. Yes, there are definitely hardship situations. But what about personal responsibility for your actions? I have been scammed, a fairly small amount, and I have lost money on investments. My fault. I paid."
This letter sums up what a lot of readers said: "I'm a software engineer in Silicon Valley and my wife is a professor. When we moved to California we were alarmed at the cost of homes and how much of our combined income it would take to get into one. We chose not to get caught up in the mania, and I like to think that it was the smart, rational, reasonable and responsible decision. I have a certain amount of sympathy for those who may lose their homes, but rewarding such reckless decision-making seems like a bad policy. Homes in the Bay Area are largely overpriced because of all the speculation and investing that happened over the last few years. I will be truly disappointed to find out that my wife and I worked hard to get the jobs we have, impeccable credit and a good income and cannot afford a $600,000 home, whereas through government aid somebody who couldn't be bothered to read the documents they were signing is helped to keep what they should not have had in the first place."
What many find irksome is that the freeze seems to help those who gambled the most.
Conceptually, the plan aims to help only subprime borrowers who are mostly current on their adjustable subprime mortgage today, but could not afford it when their interest rate adjusts and could not refinance into another loan.
It does not aim to help subprime borrowers who are making their payments today and could afford them after the reset, or who could refinance into a more-affordable loan. It will not help people who already behind in their payments. It does not try to help borrowers with good credit scores or who have substantial equity in their homes.
To qualify for the rate freeze, you must have taken out a subprime adjustable-rate mortgage between Jan. 1, 2005, and July 31, 2007. You must be facing your first interest-rate adjustment between Jan. 1, 2008, and July 31, 2010, and the payment increase must be at least 10 percent. Your mortgage must have been sold into a securitized pool of loans. You must be living in the home.
Your FICO credit score must be less than 660 and less than 10 percent higher than it was when you took out the loan. That puts you in the bottom 30 percent of Americans based on your credit score.
Also, your first mortgage alone must be for more than 97 percent of your home's value, meaning you put less than 3 percent down, or the value of your house has fallen significantly.
People who meet these criteria will be eligible for an automatic or "fast-track" five-year freeze. People who meet some but not all might be eligible for a freeze on a case-by-case basis.
A fascinating though somewhat technical piece on the blog Calculated Risk surmises that this "convoluted and counterintuitive plan" was designed to stay "on the allowable side" of the contracts (called pooling and servicing agreements or PSAs) that govern how securitized loans are handled.
Loan servicers - the companies that collect mortgage payments and work with borrowers on behalf of investors who own the loans - are given only so much leeway when it comes to modifying loans for struggling borrowers. If they step outside those bounds, they could be sued by investors. The loan pool could also lose some of its tax and accounting advantages.
"As it happens, the PSAs for these deals will nearly universally contain language that says loans can be modified only if they are in default, or default is imminent, or default is reasonably foreseeable. Therefore, what the plan does is simply provide a kind of standard definition of those categories for the vintages of loans in question," the report says.
That's why borrowers who could refinance their subprime ARMs are never eligible for these "fast track" modifications. "It is hard to say that default ... is reasonably foreseeable for a loan that has a refinance opportunity," the report says. "This isn't about solving the borrower's problems permanently in the best possible way. ... It's about solving the problem while staying inside the security rules," the report says. (For the full story, go to www.calculatedrisk.blogspot.com and scroll to The Plan: My Initial Reaction.)
Because the plan is written so narrowly, it might not spur the flood of litigation that some were expecting. Treasury Secretary Henry Paulson said, "The risk of litigation should be manageable." But it also might not help all that many people.
"The amount of relief that is going to be realized from this is going to be minimal," says Bobby Lazenby of Lazenby Associates, a Las Vegas consultant to companies that securitize loans.
"The couple people who actually do get their loans frozen, it'll mean something to them," he adds. "It will make headlines, it looks like people are trying to go after this."
Lazenby says investors might not sue over this plan, but "they will complain about it. You never want to give up any ground at all in a field you think that's yours. Once you give up ground, what's next? If Democrats gain the White House, you can see this kind of action being taken much more aggressively," he says.
But even if investors don't sue, they could become less willing to buy loans in the future, and that could make it harder to get mortgages.
"If the federal government is going to come in, flex their muscle, pass legislation or intimidate investors into changing the terms of the deal they've agreed upon. ... the impact on the financial markets is going to be immeasurable," Lazenby says.
G. Marcus Cole, a professor at Stanford Law School, agrees. "There are not likely to be substantial objections from investors" because the plan is voluntary and a small number of loans would be affected, he says.
"It strikes me as more of a rhetorical or political device than a financial device. It provides some type of cover for servicers that want to take that step but need some source of authority," Cole says.
But it also sends the wrong message, Cole says. Two of them, actually.
"It gives a sense that the government ought to be engaged in rescuing borrowers in this particular category. It also conveys the message that foreclosures are a bad thing or unhealthy. Foreclosures are a natural part of market discipline. If you take out the impact of foreclosures you have reduced the stick that stands behind the commitment to pay on the mortgage. I would think this would make the markets nervous. This is very interventionist, even to the extent it's voluntary."
http://www.sfgate.com/cgi-bin/...09/BUPHTQB1F.DTL&tsp=1
"Loan bailout is not likely to help many homeowners"
Kathleen Pender
San Francisco Chronicle
Sunday, December 9, 2007
The subprime rate freeze plan announced by the Bush administration last week was clearly designed to win votes. I just wonder whose.
The number of people who will meet all the complicated criteria necessary to qualify for a five-year rate freeze on their subprime adjustable-rate mortgage is relatively small. Estimates range from fewer than 100,000 to 600,000 nationwide. To put that in perspective, Oakland has about 400,000 people.
The percentage of people opposed to the plan appears to be high, based on informal polls.
Business news site CNBC.com asked visitors, "Is the Bush administration's idea to freeze mortgage rates necessary to insulate the economy from the subprime crisis?" Only 13 percent said "Yes - The danger to home values and the economy warrants government intervention," while 81 percent said "No - the marketplace should be left to resolve the issues on its own." That's not surprising coming from a business audience. The rest said it's not yet clear.
The Chronicle's Web site, SFGate.com, asked, "What do you think of the mortgage-rate freeze plan?" Of the 1,758 responses, 8 percent said it's good because it keeps people in their houses, and 89 percent said it's bad because it bails out reckless banks and borrowers. The rest said, "Only a fraction qualify, why not me?"
Based on flood of e-mails I've gotten in response to my Thursday column on the plan, some people believe the government should not be meddling in contracts between borrowers and lenders. Some say the housing and mortgage markets should be set free to correct themselves as quickly as possible, the same way a forest fire, while devastating, clears out excess and sets the stage for new growth.
George Topor of Corte Madera wrote, "I have yet to hear a homeowner state that it is their fault they are in this mess. Yes, there are definitely hardship situations. But what about personal responsibility for your actions? I have been scammed, a fairly small amount, and I have lost money on investments. My fault. I paid."
This letter sums up what a lot of readers said: "I'm a software engineer in Silicon Valley and my wife is a professor. When we moved to California we were alarmed at the cost of homes and how much of our combined income it would take to get into one. We chose not to get caught up in the mania, and I like to think that it was the smart, rational, reasonable and responsible decision. I have a certain amount of sympathy for those who may lose their homes, but rewarding such reckless decision-making seems like a bad policy. Homes in the Bay Area are largely overpriced because of all the speculation and investing that happened over the last few years. I will be truly disappointed to find out that my wife and I worked hard to get the jobs we have, impeccable credit and a good income and cannot afford a $600,000 home, whereas through government aid somebody who couldn't be bothered to read the documents they were signing is helped to keep what they should not have had in the first place."
What many find irksome is that the freeze seems to help those who gambled the most.
Conceptually, the plan aims to help only subprime borrowers who are mostly current on their adjustable subprime mortgage today, but could not afford it when their interest rate adjusts and could not refinance into another loan.
It does not aim to help subprime borrowers who are making their payments today and could afford them after the reset, or who could refinance into a more-affordable loan. It will not help people who already behind in their payments. It does not try to help borrowers with good credit scores or who have substantial equity in their homes.
To qualify for the rate freeze, you must have taken out a subprime adjustable-rate mortgage between Jan. 1, 2005, and July 31, 2007. You must be facing your first interest-rate adjustment between Jan. 1, 2008, and July 31, 2010, and the payment increase must be at least 10 percent. Your mortgage must have been sold into a securitized pool of loans. You must be living in the home.
Your FICO credit score must be less than 660 and less than 10 percent higher than it was when you took out the loan. That puts you in the bottom 30 percent of Americans based on your credit score.
Also, your first mortgage alone must be for more than 97 percent of your home's value, meaning you put less than 3 percent down, or the value of your house has fallen significantly.
People who meet these criteria will be eligible for an automatic or "fast-track" five-year freeze. People who meet some but not all might be eligible for a freeze on a case-by-case basis.
A fascinating though somewhat technical piece on the blog Calculated Risk surmises that this "convoluted and counterintuitive plan" was designed to stay "on the allowable side" of the contracts (called pooling and servicing agreements or PSAs) that govern how securitized loans are handled.
Loan servicers - the companies that collect mortgage payments and work with borrowers on behalf of investors who own the loans - are given only so much leeway when it comes to modifying loans for struggling borrowers. If they step outside those bounds, they could be sued by investors. The loan pool could also lose some of its tax and accounting advantages.
"As it happens, the PSAs for these deals will nearly universally contain language that says loans can be modified only if they are in default, or default is imminent, or default is reasonably foreseeable. Therefore, what the plan does is simply provide a kind of standard definition of those categories for the vintages of loans in question," the report says.
That's why borrowers who could refinance their subprime ARMs are never eligible for these "fast track" modifications. "It is hard to say that default ... is reasonably foreseeable for a loan that has a refinance opportunity," the report says. "This isn't about solving the borrower's problems permanently in the best possible way. ... It's about solving the problem while staying inside the security rules," the report says. (For the full story, go to www.calculatedrisk.blogspot.com and scroll to The Plan: My Initial Reaction.)
Because the plan is written so narrowly, it might not spur the flood of litigation that some were expecting. Treasury Secretary Henry Paulson said, "The risk of litigation should be manageable." But it also might not help all that many people.
"The amount of relief that is going to be realized from this is going to be minimal," says Bobby Lazenby of Lazenby Associates, a Las Vegas consultant to companies that securitize loans.
"The couple people who actually do get their loans frozen, it'll mean something to them," he adds. "It will make headlines, it looks like people are trying to go after this."
Lazenby says investors might not sue over this plan, but "they will complain about it. You never want to give up any ground at all in a field you think that's yours. Once you give up ground, what's next? If Democrats gain the White House, you can see this kind of action being taken much more aggressively," he says.
But even if investors don't sue, they could become less willing to buy loans in the future, and that could make it harder to get mortgages.
"If the federal government is going to come in, flex their muscle, pass legislation or intimidate investors into changing the terms of the deal they've agreed upon. ... the impact on the financial markets is going to be immeasurable," Lazenby says.
G. Marcus Cole, a professor at Stanford Law School, agrees. "There are not likely to be substantial objections from investors" because the plan is voluntary and a small number of loans would be affected, he says.
"It strikes me as more of a rhetorical or political device than a financial device. It provides some type of cover for servicers that want to take that step but need some source of authority," Cole says.
But it also sends the wrong message, Cole says. Two of them, actually.
"It gives a sense that the government ought to be engaged in rescuing borrowers in this particular category. It also conveys the message that foreclosures are a bad thing or unhealthy. Foreclosures are a natural part of market discipline. If you take out the impact of foreclosures you have reduced the stick that stands behind the commitment to pay on the mortgage. I would think this would make the markets nervous. This is very interventionist, even to the extent it's voluntary."
http://www.sfgate.com/cgi-bin/...09/BUPHTQB1F.DTL&tsp=1
"Bailouts and Bailins"
CR did a wonderful post yesterday clearing up some of the myths and misunderstanding about the Hope Now/"Paulson Plan." I just want to follow up on one of them, the issue of whether this is a "bailout."
We will never establish consensus on that point as long as anyone uses the term "bailout" to mean just any post-hoc action that could benefit someone. CR is using the term somewhat more specifically, in the sense of providing actual taxpayer funds to subsidize mortgagors or make whole mortgagees. In that latter specific sense, the Paulson Plan does not represent a "government bailout."
Several people have noted that it does seem to rely on the availability of government-insured refinance loans (FHA and FHASecure), and it proposes, certainly, the development of government-sponsored bond programs (the "government" in the latter case would be states and counties and cities, not the federal government, as far as I can tell).
I therefore thought it would be helpful to remind everyone what the difference is between a "government-insured" loan and a bond program. FHA does not buy loans. It does not provide capital to make loans with. It is not entitled to any interest income from performing loans. It does not service loans. Ginnie Mae securitizes FHA loans, but Ginne Mae doesn't buy loans either. It "wraps" pools of loans with its guaranty.
So FHA gets nothing out of performing loans except the required insurance premium that the borrower pays. Premiums are held in the MMIF (Mutual Mortgage Insurance Fund) and used to pay out for claims on defaulted loans. We don't need to get into all the technical parts of that today. The point is that the general goal of the FHA MMIF is to be revenue-neutral. Whether it is or not at any given point in time depends on how well the premiums were priced and how well the loans perform. For a long time the MMIF has been a "negative subsidy" on the federal balance sheet, meaning that it actually is in the black. It may well not continue to be in the black, but my point is that what's in the black isn't "profit" from interest payments made by mortgage borrowers. FHA doesn't own any loans. What's in the black is insurance premiums collected in excess of claims paid.
Bond programs are different. There are a jillion flavors of them, but in essence they are public versions of securities: they actually do buy loans, pool them, and issue bonds to investors who receive the principal and interest payments from the loans. Typically, they are set up to buy low-interest (below market) rate loans, because they are issued by governments and everything gets favorable tax treatment. It is possible that the loans in a bond program pool also have some other kind of credit enhancement like FHA insurance, private mortgage insurance, or second liens.
But the bottom line issue here is that insofar as the loans do perform, the bond program's investors do receive the interest income. The bond issuer is ultimately at risk if the loans default and there is not enough principal recovered to make the investors whole.
But in both cases--government-insured loan programs and bond programs--private investors are providing the capital. Of course cities and states and counties can themselves invest in mortgage securities, and we see that they have. But that's hardly the traditional way of doing a mortgage-backed bond issue: the idea there is to get someone else to provide the capital, since the issuer is providing the credit enhancement.
The federal government does not have any program in which it directly buys mortgage loans, or directly invests in mortgage loan pools. The lending capital in this context is always coming from the private sector.
So to get back to the "bailout" question: at the simplest level, what's going on here is that loans that were "insured" (or credit-enhanced) by the private sector are being refinanced into loans that are insured or credit-enhanced by the public sector. Therefore the risk is moving off the private balance sheet and onto the public one. The rewards--such as they are these days--are still firmly in the private sector. In that sense, you could call this a bailout: it's moving the risk of default.
On the other hand, it only works if investors are still willing to buy Ginnie Mae securities or municipal bonds. There has to be some capital supplied. The idea here is that nobody's stupid enough to buy high-risk mortgages right now without government guarantees. So far--and I do stress so far--not even FHA has been willing to go down the road of upside down loans to borrowers who can't qualify with income docs. That's why the whole Paulson Plan is about, in essence, what to do with those loans. So FHA is "taking out" some pretty weak loans, but it isn't taking the weakest ones. The weakest ones get "the freeze" or the foreclosure. That is why this Plan is usefully described as not a government bailout. If FHA or municipalities would take all the toxic waste, we wouldn't need this Plan; servicers would just be busy refinancing. The Plan exists because there is a big pile of loans that do not qualify for any of those refinancing opportunities.
Some people are getting confused by the extent to which The Plan talks about refinances. We already had FHASecure and plain old FHA before this Plan; the Plan did not invent those options. The Plan is about designing rules of thumb for quickly sorting out the loans that don't qualify for refinances, and doing something about them. In that sense it's no more of a "bailout" than what we had before The Plan.
Now, as I noted last week, Paulson's "total package" includes lobbying for "FHA Modernization," which would certainly increase the number of loans FHA could "take out" and decrease the number of loans the private investors have to live with somehow. There are many reasons not to like that; even if you do like the idea of FHA taking on more of the problems, though, the answer here would be to expand FHASecure, which is a new program specifically designed to refinance troubled loans. Changes to the regular old FHA warhorse program would allow more "take outs," but it would also apply to new loans, and we'd have it forever (because there's never the political will to tighten FHA requirements during the next boom), and so FHA would be in the front of the mess next time, with no "dry powder."
"FHA Modernization" might be a kind of bailout, but it's not, in my view, really much of a bailout of existing, defaulting mortgage securities. It's a "reflation" of the mortgage origination industry and the RE market (existing and new). That's the only rationale for pressing for FHA Modernization rather than pressing for easing restrictions on FHASecure. As I said, there are precious few investors who will put money in mortgages right now without a government (or quasi-government) guarantee. Ignore the spin: FHA Modernization is about making new purchase money loans, not about refinancing old problems. That is not an "investor bailout"; it's life-support for loan originators and builders and sellers of existing homes.
We should, I guess, pause over "sellers of existing homes," because we have a vocal subset of the commenting community who keeps arguing that borrowers in trouble should just be counseled to mail in the keys and be done with it. I take it the idea is not to have the banks and REMICs own that REO forever; the idea is that the REO would be sold at a much lower price to new borrowers. Who quite possibly can't get financing right now because the mortgage market is stalled and all appraisals are now in question. So even at a lower price, you need financing for these new borrowers. Enter "FHA Modernization."
There are many kinds of "bailouts," and they don't all depend on not foreclosing on current owners. I frankly am more worried about FHA Modernization becoming a "bailin" than I am FHASecure being a "bailout."
http://www.calculatedrisk.blogspot.com/
CR did a wonderful post yesterday clearing up some of the myths and misunderstanding about the Hope Now/"Paulson Plan." I just want to follow up on one of them, the issue of whether this is a "bailout."
We will never establish consensus on that point as long as anyone uses the term "bailout" to mean just any post-hoc action that could benefit someone. CR is using the term somewhat more specifically, in the sense of providing actual taxpayer funds to subsidize mortgagors or make whole mortgagees. In that latter specific sense, the Paulson Plan does not represent a "government bailout."
Several people have noted that it does seem to rely on the availability of government-insured refinance loans (FHA and FHASecure), and it proposes, certainly, the development of government-sponsored bond programs (the "government" in the latter case would be states and counties and cities, not the federal government, as far as I can tell).
I therefore thought it would be helpful to remind everyone what the difference is between a "government-insured" loan and a bond program. FHA does not buy loans. It does not provide capital to make loans with. It is not entitled to any interest income from performing loans. It does not service loans. Ginnie Mae securitizes FHA loans, but Ginne Mae doesn't buy loans either. It "wraps" pools of loans with its guaranty.
So FHA gets nothing out of performing loans except the required insurance premium that the borrower pays. Premiums are held in the MMIF (Mutual Mortgage Insurance Fund) and used to pay out for claims on defaulted loans. We don't need to get into all the technical parts of that today. The point is that the general goal of the FHA MMIF is to be revenue-neutral. Whether it is or not at any given point in time depends on how well the premiums were priced and how well the loans perform. For a long time the MMIF has been a "negative subsidy" on the federal balance sheet, meaning that it actually is in the black. It may well not continue to be in the black, but my point is that what's in the black isn't "profit" from interest payments made by mortgage borrowers. FHA doesn't own any loans. What's in the black is insurance premiums collected in excess of claims paid.
Bond programs are different. There are a jillion flavors of them, but in essence they are public versions of securities: they actually do buy loans, pool them, and issue bonds to investors who receive the principal and interest payments from the loans. Typically, they are set up to buy low-interest (below market) rate loans, because they are issued by governments and everything gets favorable tax treatment. It is possible that the loans in a bond program pool also have some other kind of credit enhancement like FHA insurance, private mortgage insurance, or second liens.
But the bottom line issue here is that insofar as the loans do perform, the bond program's investors do receive the interest income. The bond issuer is ultimately at risk if the loans default and there is not enough principal recovered to make the investors whole.
But in both cases--government-insured loan programs and bond programs--private investors are providing the capital. Of course cities and states and counties can themselves invest in mortgage securities, and we see that they have. But that's hardly the traditional way of doing a mortgage-backed bond issue: the idea there is to get someone else to provide the capital, since the issuer is providing the credit enhancement.
The federal government does not have any program in which it directly buys mortgage loans, or directly invests in mortgage loan pools. The lending capital in this context is always coming from the private sector.
So to get back to the "bailout" question: at the simplest level, what's going on here is that loans that were "insured" (or credit-enhanced) by the private sector are being refinanced into loans that are insured or credit-enhanced by the public sector. Therefore the risk is moving off the private balance sheet and onto the public one. The rewards--such as they are these days--are still firmly in the private sector. In that sense, you could call this a bailout: it's moving the risk of default.
On the other hand, it only works if investors are still willing to buy Ginnie Mae securities or municipal bonds. There has to be some capital supplied. The idea here is that nobody's stupid enough to buy high-risk mortgages right now without government guarantees. So far--and I do stress so far--not even FHA has been willing to go down the road of upside down loans to borrowers who can't qualify with income docs. That's why the whole Paulson Plan is about, in essence, what to do with those loans. So FHA is "taking out" some pretty weak loans, but it isn't taking the weakest ones. The weakest ones get "the freeze" or the foreclosure. That is why this Plan is usefully described as not a government bailout. If FHA or municipalities would take all the toxic waste, we wouldn't need this Plan; servicers would just be busy refinancing. The Plan exists because there is a big pile of loans that do not qualify for any of those refinancing opportunities.
Some people are getting confused by the extent to which The Plan talks about refinances. We already had FHASecure and plain old FHA before this Plan; the Plan did not invent those options. The Plan is about designing rules of thumb for quickly sorting out the loans that don't qualify for refinances, and doing something about them. In that sense it's no more of a "bailout" than what we had before The Plan.
Now, as I noted last week, Paulson's "total package" includes lobbying for "FHA Modernization," which would certainly increase the number of loans FHA could "take out" and decrease the number of loans the private investors have to live with somehow. There are many reasons not to like that; even if you do like the idea of FHA taking on more of the problems, though, the answer here would be to expand FHASecure, which is a new program specifically designed to refinance troubled loans. Changes to the regular old FHA warhorse program would allow more "take outs," but it would also apply to new loans, and we'd have it forever (because there's never the political will to tighten FHA requirements during the next boom), and so FHA would be in the front of the mess next time, with no "dry powder."
"FHA Modernization" might be a kind of bailout, but it's not, in my view, really much of a bailout of existing, defaulting mortgage securities. It's a "reflation" of the mortgage origination industry and the RE market (existing and new). That's the only rationale for pressing for FHA Modernization rather than pressing for easing restrictions on FHASecure. As I said, there are precious few investors who will put money in mortgages right now without a government (or quasi-government) guarantee. Ignore the spin: FHA Modernization is about making new purchase money loans, not about refinancing old problems. That is not an "investor bailout"; it's life-support for loan originators and builders and sellers of existing homes.
We should, I guess, pause over "sellers of existing homes," because we have a vocal subset of the commenting community who keeps arguing that borrowers in trouble should just be counseled to mail in the keys and be done with it. I take it the idea is not to have the banks and REMICs own that REO forever; the idea is that the REO would be sold at a much lower price to new borrowers. Who quite possibly can't get financing right now because the mortgage market is stalled and all appraisals are now in question. So even at a lower price, you need financing for these new borrowers. Enter "FHA Modernization."
There are many kinds of "bailouts," and they don't all depend on not foreclosing on current owners. I frankly am more worried about FHA Modernization becoming a "bailin" than I am FHASecure being a "bailout."
http://www.calculatedrisk.blogspot.com/
Slew Foot
Lifer
- Sep 22, 2005
- 12,381
- 96
- 86
Someone told me that they read in the LA TImes that Fannie Mae was adding a ton of fees to ANY loan that doesnt have 30% down starting March 1. Not sure if its true or how it works, but damn, talk about kicking the market when its down 
On another note, the 1.5 million dollar homes in the East Bay I was looking at six months ago are now in the 1.1-1.2 range, should be in decent shape in the middle of 2009 Im guessing.
On another note, the 1.5 million dollar homes in the East Bay I was looking at six months ago are now in the 1.1-1.2 range, should be in decent shape in the middle of 2009 Im guessing.
"Someone told me that they read in the LA TImes that Fannie Mae was adding a ton of fees to ANY loan that doesnt have 30% down starting March 1. Not sure if its true or how it works, but damn, talk about kicking the market when its down"
A commentator on a real estate mortgage show I listen to on the internet (Real Estate Insiders) said there is a 0.75% discount point surcharge in the works if you don't have 30% down and / or a credit score of 660 (forgot if it is and or or and whether credit score cut off was 660 or 680).
I believe 20% down is number lenders have historically found that protects themselves from significant loss if a borrower defaults. If home prices are anticipated to go down say 10 - 15 % (conservatively) over time, 30% down makes sense because it is the collateral for the loan.
Credit score cut-off probably reflects real world statistics on history and likelihood of actual defaults for any given credit score.
Sounds like you will be essentially be buying mortgage insurance whether you want to or not, unless you have stellar credit history and financial reserves.
A commentator on a real estate mortgage show I listen to on the internet (Real Estate Insiders) said there is a 0.75% discount point surcharge in the works if you don't have 30% down and / or a credit score of 660 (forgot if it is and or or and whether credit score cut off was 660 or 680).
I believe 20% down is number lenders have historically found that protects themselves from significant loss if a borrower defaults. If home prices are anticipated to go down say 10 - 15 % (conservatively) over time, 30% down makes sense because it is the collateral for the loan.
Credit score cut-off probably reflects real world statistics on history and likelihood of actual defaults for any given credit score.
Sounds like you will be essentially be buying mortgage insurance whether you want to or not, unless you have stellar credit history and financial reserves.
TRENDING THREADS
-
Discussion Intel current and future Lakes & Rapids thread- Started by TheF34RChannel
- Replies: 23K
-
Discussion Zen 5 Speculation (EPYC Turin and Strix Point/Granite Ridge - Ryzen 9000)- Started by DisEnchantment
- Replies: 10K
-
Discussion Speculation: Zen 4 (EPYC 4 "Genoa", Ryzen 7000, etc.)- Started by Vattila
- Replies: 13K
-
Discussion Intel Meteor, Arrow, Lunar & Panther Lakes Discussion Threads
- Started by Tigerick
- Replies: 7K
-
Facebook
Twitter