A Plan to Freeze Subprime Rates

Treasury Secretary Paulson is pushing a plan to freeze interest rates for some subprime borrowers:

U.S., Banks Near A Plan to Freeze Subprime Rates, by Deborah Solomon and Michael M. Phillips, WSJ: The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans...

An accord could reassure investors and strapped homeowners ... on more than two million adjustable mortgages are scheduled to jump over the next two years. ...

The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. ...

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. ... The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year. ...

The mortgage servicers in the coalition represent 84% of the overall subprime market. The coalition also includes lenders, investors and mortgage counselors. ...

While the government can't force the industry to modify loans, Mr. Paulson and other administration officials have been using moral suasion to push for workouts...

Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all. ...

Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help. The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.

Mr. Paulson, who is philosophically opposed to federal meddling in markets, at first rejected a sweeping approach to loan modifications... But he shifted his position recently. He told The Wall Street Journal last week that it would be impossible to "process the number of workouts and modifications that are going to be necessary doing it just sort of one-off." ...

Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions. That is why few are suggesting direct support for borrowers who can't afford their loans. Mr. Paulson has decided his best option is to prod the markets to sort matters out themselves, as long as companies bear in mind the public interest in keeping people in their homes. ...

"If I ever saw a role for government, it is...to bring the private sector together when innovation has really outrun our ability to deal with it," Mr. Paulson said. ...

Will this be enough to make a difference?

Comments

[mark]

Great! If your irresponsible and least credit worthy we'll cut you a break.

[jm]

Will this be enough to make a difference?

Huh? Of course it will make some difference.

Will it bail out some undeserving flippers. Yes.

Will it bail enough of them to prevent the glut of homes on the market from forcing prices back down to where they should be -- at their historical ratio to incomes? Probably not. So it won't prevent naive non-flippers who paid unsustainably high prices for shelter in the belief they had to "buy now or be priced out forever" from losing their shirts when prices so decline.

Does "Will this make a difference?" indicate that you think it's so important to bail out those who naively overpaid that we should continue policies that force our youth to take on crushing debt loads to buy out every existing homeowner at a handsome profit?

[Jason]

"Great! If your irresponsible and least credit worthy we'll cut you a break."

I don't think of it as a break, I think its more of a hand out. People who were irresponsible now can now extend their below market teaser rates, while those who were responsible and saved 10-20% for a down payment, get to pay higher market rates for their mortgages. This will be a great tool for realtors, buy now, because even if the market declines, you don't have to worry since the govt will bail you out.

[General Specific]

Will it make a difference? Who knows. My magic eight ball usually tells me the what (e.g. real estate is too expensive) but never tells me when. Stupid magic eight ball.

But...

1. Consider the political side of this equation. The GOP would like to delay the home loan crisis beyond 2008. Sweep some beyond the election. Some people--GOP voters--will be feeling the pain in 2008. I suspect the GOP would like to sweep some of that pain into 2009.

2. Will speculators be able to participate? Or will there be a limit, e.g. one per person. Extreme moral hazard to let speculators participate. What percentage of foreclosed homes are held by speculators?

3. As noted above, there is the moral hazard associated with this, i.e. those who manage their finances well receive the message "here's your new mortgage reset rate" whereas those with sloppy finances coast along on low interest rates for a while. They can continue their sloppy financial situation. But this is a moral hazard that exists in any form of bankruptcy or insolvency. It's just that the black mark of bankruptcy or foreclosure won’t apply to those who benefit from this new extension program. Certainly doesn’t seem like it. Or would they have to report their participation in this program in the future.

4. Seems to me, this program just delays the inevitable. It's sort of like those circuit breakers in the stock market, but circuit breakers exist because stock markets trade so quickly. Housing is different. So if house prices are going down, for example, I don't think this program will make that much of a difference. Some. It will possibly reduce the number of foreclosures hitting the market in 2008 from a gazillion to a bazillion. (A bazillion is smaller than a gazillion, isn’t it?)

[eightnine2718281828mu5]

Republicans *hated* subsidized housing in Democratic cities; now they want to make it a national policy.

This could have the effect of shackling people to their current houses and distorting the housing market for years to come.

But that's probably a feature of any proposed 'solution'.

[Bill]

The process sounds all wrong. The lowest teaser rates came with the highest future spreads, so freezing at the teaser rate seems bizarre. Fixed rates get no break. Normal intro rates get little break. This is about as well thought out as the MLEC! Or Katrina rebuild... or Iraq occupation. And to think, I used to prefer Republicans.

They better condition any break on the borrower not taking on additional mortgage debt. Imagine the outrage if some schmoe with a 1% teaser rate who gets that extended goes and gets another $200,000 on top of that, just for fun!

The fact is, these servicers need to actually look at the loan, the borrower and the situation to do this intelligently. Which means subjectively. But I doubt that will happen.

[ken melvin]

About a year or less ago, Calculated Risk ran a piece showing high fraud about equally divided between buyer and lender. Let those with fraud go under. In those cases where there was no fraud, reset the loan to reflect the lower price and limit interest charged.

[Don]

"This could have the effect of shackling people to their current houses and distorting the housing market for years to come."

Exactly. I don't see where this benefits anyone, except the bankers. The sub-primers are nothing more than indentured servants, slogging away to pay off a loan they got to buy an asset that ain't worth even as much as they borrowed against it.

If it were me, and I was underwater in my house and couldn't make the payments, I would do exactly what these sub-primers should do--cut my losses and walk away. I'd squeeze as much free living out of the inevitable delays it takes to get me out, while saving for the first month's rent on a new place.

If the administration really wants to help someone except the bankers, they would make foreclosure the lender's only remedy, and thereby reduce the transactions cost for doing just what the economics says the sub-primers ought to do, i.e, walk.

Better to be freed of the slavery of a mortgage payment eating up over half of your income than to pretend you own that fancy house you couldn't afford to start with.

The means testing aspect of this program shows that even big banks (Goldman Sach's own ex-partner, Treasury Sec Henry Paulson helped engineer this bail-out), who otherwise hate government interference in their money-grubbing ways, just love the government when their money-grubbing bets go bad. Talk about a little moral hazard--only the most desperate will qualify--a distinction only the social welfare arm of the government could get away with.

As a real estate closing attorney here's my advice to all homeowner's that are underwater and can't service their mortgages--WALK AWAY--and tell the bank to kiss your ...

[bakho]

A lot of these home purchases were predicated on the housing prices continuing to rise. If prices are even flat (let alone declining) then this does not solve the problem. Don is correct.

[Greg]

If there is no public money in the proposal, then nothing changes. Future borrowers are still facing un-innovated mortgages. The distressed borrowers are still distressed because the market prices are falling (because future borrowers ...). The market value of the loans are still way below par because the future cash streams will be below par.

[esb]

Well, if this is a "voluntary cooperation" program without the force of law I suspect it will blow up in Paulson's pudgy little face, just as it should, as the lawyers representing the harmed interests move this mess into the legal system for irresolution.

What amuses me is that in the USA whenever there is a problem caused by some absurdity (such as insanely loose lending standards) the proposed solution is always an even greater absurdity (such as far more insanely loose lending standards).

I submit that the financial system in the United States simply cannot operate again without endless easy money and endless standardless lending practices. The brief period of lending practice tightening (July-?) will turn out to be little more than an extended head fake.

The lending practices insanity to come trumps the previous insanity which seemed to end in July/August.

The implications of this are beyond my ability to divine.

[Bruce Wilder]

Comments on this subject continue to amaze me. mark (the commenter) and Jason and some others seem to have a very specific, moral image of the unfortunate borrower, and only the slightest inkling of the criminal behavior of the major lenders.

The reporter suggests, without specific attribution, a more balanced, but still moral view: "Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions."

I really wonder, though, if Paulson's private attitude is one of "banks will be banks" (like "boys will be boys"). The plan seems to involve a form of price discrimination aimed at continuing to extract the maximum available from home "owners". It sounds like culling sheep.

The point of view of the home "owner" seems lost in the Treasury plan (and deprecated as morally unworthy in some of the comments).

The variety of personal and family situations will extend far beyond my poor imagination, or the three categories laid out by the banks.

There will certainly be people, who have sufficient income to make an increased mortgage payment, who would, nevertheless, be ill-advised to do so, given the market value of "their" home. I don't think people should be accepting peonage, just because it would be convenient to Washington Mutual.

Imho, Treasury Secretary Paulson's duty lies in a different direction, though I don't actually expect him to take it. It is not the careful culling of home owning sheep, which ought to be the focus of his attention. It should be solvency and ethical management of the banks.

I would be seriously worried that Citibank has borrowed base capital at 11% and e-Trade at 12.5% and god only knows what Washington Mutual will be paying. I would be worried about credit cards, where the same rapacious behavior has been evidenced.

Personally, I wonder, "if Angelo R. Mozilo is so rich, why isn't he in jail?" I know it would be an act of class betrayal and uncharacteristic moral acuity for Paulson to ask such a question, even in private. But, the managements of these big banks have to be reformed. It wasn't "innovation" that outran "our ability to deal with it" -- it was corruption that outran the willingness of right-wing Republicans to deal with it.

But, justice for foolish flippers, who lost the game of musical houses, or for millionaire executives, who defraud thousands, is going to require more than moral suasion.

[Bruce Wilder]

Don: "As a real estate closing attorney here's my advice to all homeowner's that are underwater and can't service their mortgages--WALK AWAY--and tell the bank to kiss your ..."

I'd love to see a list of States, where this is a legal option, and where it is effectively blocked or encumbered by the bank having recourse.

[Patricia Shannon]

Those horrible people, daring to think they deserve to own their own homes, daring to dream. How disgusting. They should accept that their purpose in life is to make life easy for their betters.

[dd]

This just smells like yet another Bush Marketing Moment (hint the coalition is named Hope Now Alliance): all flash, no substance and the extra added bonus that it undermines the little confidence remaining in the system for both borrowers and investors; but it'll lift IB stocks and that seems its main purpose. This marketing announcement will fade along with the infamous "contained" campaign.

[hari]

The "moral hazard" which Fed more or less didn't regulate is now coming back to rock the boat - no matter what Paulson asserts (after having been a culprit on Wall Street!) the downturn is not only imminent but, after reading Summers recent conclusion, recession is NOW a real possibility.

It seems to me, policy makers are avoiding tackling the structural problem of subprime credit crunch: namely, unregulated financial derivatives market with its global reach!

Who will be affected most by a recession? Can anyone take up this thread with comparative analysis?

[Jason]

"Comments on this subject continue to amaze me. mark (the commenter) and Jason and some others seem to have a very specific, moral image of the unfortunate borrower, and only the slightest inkling of the criminal behavior of the major lenders."

Or maybe I think its the responsibility of the borrower to fulfill their duty to pay their mortgage. While I do believe their is a small portion (5-10%) who may have been lied to by their broker in regards to the terms of the mortgage, a small percentage may have had some significant life event to change their financial situation, I believe the majority of the people just extended themselves too far or were just plain greedy. To me, blaming the major lenders is like blaming McDonalds for someone having poor health. Sure, over the short term you won't have any health problems eating there, but if you abuse it (ie below marker teaser rates) eventually you are going to have a heart attack (foreclosure). No one forced people into these mortgages, people did this because it was the only way for them to get a house that was outside of their means.

[Callahan]

You all have just described in eloquent detail, the state of the great bush ownerschipp schoschiety.

right on dubya.

[calmo]

Some troop of rescuers:The plan is being negotiated between regulators including the Treasury Department and a coalition [as in mine shaft] of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. ...I see HSBC is not in there and I wonder if there is another plan by those excluded companies to respond to this notice of pending corporate welfare.
You figure WSJ will parade this move as unwarranted government interference?

Hope you are right dd, that this is just a low cost PR move to bolster stocks in the short term.

Bruce Wilder, this bit: It is not the careful culling of home owning sheep, which ought to be the focus of his attention. is addressed by that open letter by Tanta to Paulson, underlining the fact that this "careful culling" takes expertise that is not cheap and readily available (like sorting out Fannie's books...times ~100). There is precious little evidence that the fraud perpetrated before will not be in full force doing the culling...you think that's cynical, you hoodwinkables?

[dd]

This whole "plan" is about what is happening with all those CDOs and their related cousin CDS and the myriad of other derivatives that are popping up everywhere from Fannie and Freddie to state retirement plans. We, the taxpayer will be on the hook here but the bailout is so unimaginably huge that even Paulson (a man who can make turnips bleed gold) is driven to talking about "helping" subprimers so that he can calm the growing fear in money markets.
Oh that IBs only served bad food but instead methinks they will be serving up unilateral contract terms that find subprimers waiving their rights to sue for fraud in return for an extended teaser rate.

[Patricia Shannon]

The problem is that housing costs are too high for a large proportion of our people. My great-grandfather was a florist in Germany. He emigrated and worked as a miner (not coal, some kind of mineral). He was able to buy a piece of land and build a house and plant fruit trees. He died when my grandmother was only 6 months old, but they had the land, and were able to grow vegetables, so did not starve. If you look at what land cost then, compared to incomes, it was much less. Also, of course, there was the socialistic practice of the U.S. giving away land (which they had first stolen from the Native Americans). Many families were able to rise into the middle-class then.

[Don]

"What amuses me is that in the USA whenever there is a problem caused by some absurdity (such as insanely loose lending standards) the proposed solution is always an even greater absurdity (such as far more insanely loose lending standards).

I submit that the financial system in the United States simply cannot operate again without endless easy money and endless standardless lending practices. The brief period of lending practice tightening (July-?) will turn out to be little more than an extended head fake."

esb,

Agree completely. Our one answer to everything it seems is to print more money. Roll the presses...

[Don]

Bruce,

There are no states of which I am aware that allow the lender the sole recourse of foreclosing, save the borrower's extinguishing the debt in bankruptcy. It's my contention that changing the laws to allow it would be the best means of helping homeowners. Bankruptcy law has become so onerously favorable to lenders and the process is so expensive nowadays that it is all but impossible for a truly insolvent debtor to pursue. I believe a reform like this would put the risk of declining home values back where it belonged all along--on the backs of irresponsible lenders.

However, even w/out bankruptcy reform, if a borrower has no assets for a judgment creditor to claim--and there are ways to ensure that there are none--then walking away can become the best option.

[bakho]

Given all the financial services money backing political campaigns, legislation that is more favorable to homeowners is unlikely.

[donna]

No, it doesn't change anything, it doesn't fix anything. At best it keeps some people from going under in a rate hike. For some it might mean keeping their home.

But it doesn't fix the problem of putting people into homes they couldn't afford. A lot of people will still go under. It doesn't fix the problem of lenders making bad loans. It doesn't fix the problem of greed driving national policy instead of rational policies for real growth instead of asset inflation. It doesn't fix the rich collecting all the wealth while the rest get more and more and more debt.

We're still screwed - just more slowly. It is slow avoidance of the real systemic problems that will lead to further decline, instead of stepping up and really fixing our broken economic system.

When oh when do we get real, desperately needed change?

[Don]

When oh when do we get real, desperately needed change?

--when we quit acting like Wilder's sheep and get off our collective butts and overthrow the plutocracy--

So long as we continue to accept the short-term comforts of pandering politicians over the hard choices that a foundationally healthy society requires, there will be no desperately needed change, just a slow slide into oblivion.

This must be how the ancient Romans felt along about two or three hundred bce.

[Patricia Shannon]

Don, you're right. When I was out of work several years ago, I couldn't make my house payments for a few months. When I called a bankruptcy lawyer, he said it would cost $500 to file for bankruptcy, which I didn't have. If I had had $500, I would have used it to make my mortgage payments. I understand it costs significantly more now. I ended up losing my home thru foreclosure, with only 4 years to go before it was paid off, paid ahead 4 years to the mortgage company, paid ahead 7 month to the Redstone Federal Credit Union in Huntsville, AL equity line of credit, which I had taken out during the 1990-1992 depression, to make the mortgage payments! The mortgage company didn't want to foreclose, but the credit union paid them off, then foreclosed.

[calmo]

From dd We, the taxpayer will be on the hook here but the bailout is so unimaginably huge that even Paulson (a man who can make turnips [turnips?...colloquial for us country bumkins?] bleed gold) is driven to talking about "helping" subprimers so that he can calm the growing fear in money markets.Agreed, as if "subprimers" (this B you, non-billionaires --scumbag millionaires!) represents the financial extent ("contained" is big on the "con") of the problem.
The trouble is the speech writers (and so help me Paulson looks like he's taking acting lessons from w) have grossly misjudged us...our intelligence, our sensibilities, our sensitivities, our sobriety!
"Hope Now Alliance"....Shoot man, did shortie exercise his Presidential Authority --so we have this: his signature? (Does it sound like the name of a recovering AA group?...in its early stages? I can see why they steered clear of "Group".)
Temptation to play with HNA alternative acronyms narrowly defeated as I sink into the mud of this desperation.

[Don]

Patricia...that sounds like a rough time. My sympathies.

Unfortunately, $500 wouldn't even get you in the courthouse today. Here's a thumbnail sketch of the fees it would take to get you in the Bankruptcy temple these days:

1) about $200 filing fees;

2) about $150-$200 pre-bankruptcy-counseling (as mandated by the bankruptcy reform law--guess who owns and runs the counseling agencies);

3) about $1,200-$2,500 attorney's fee-and did you guess correctly who owns the counseling agency?

Now, all this will get you in the door, i.e., will buy you a bankruptcy--a discharge of your debts--but here's the rub--only if you pass (fail) the means test for your area. You must show that your income falls below the median income for the area in which you live before a discharge of all debts is possible. Otherwise, you must agree to a repayment plan, repaying the bills and creditors that forced you into bankruptcy in the first place. The only difference is that unsecured creditors don't get any more interest. But guess who gets about 10% of the amount you pay into the plan as an administrative fee? You guessed right again--the attorney acting as bankruptcy trustee.

All you've essentially done is pay about $2000-$3000 for the priviledge of changing a variable 18-25% interest rate for a 10% interest rate, whilst destroying your credit record. I rarely advise people to bankrupt today. But for the ones that do, at least the lawyers are happy.

(My apologies to the site for straying so far afield, but the last bankruptcy reform of a couple years ago is utterly screaming to be itself reformed, especially in light of the subprime mess--which is sorta how this relates.)

[Worker]

Unless Hope involves a time machine to undo the stupidity of the last 5 years, the only difference this will make is possibly forestalling dumber bail-out ideas from Congress like enabling 0% down FHA loans in the house bill (Senate at least required 3%). And what happened to Super SIV?

Meanwhile, back at HQ, Bernanke is running the printing press overtime. When real estate prices climb 100% in 5 years, it's not the Fed's job to police asset prices. But when the Dow drops 5% from its alltime highs, a shocking loss in investor confidence begs for more rate cuts.

But what a couple of jokers these guys seem. No wonder the dollar is at all time lows.

[kthomas]

What analogy would work best here?

Perfume on a pig? Polishing a turd? A bucket of what for a raging inferno?

Any inervention, as many others here have noted, will only delay and distort. We are always scolded by so-called conservatives about the wonders of the non-inervention, about the magic of the free markets. How the mighty have fallen.

[anne]

Don:

"All you've essentially done is pay about $2000-$3000 for the priviledge of changing a variable 18-25% interest rate for a 10% interest rate, whilst destroying your credit record. I rarely advise people to bankrupt today. But for the ones that do, at least the lawyers are happy."

A superb summary. Bill Clinton vetoed bankruptcy "reform." George Bush signed the legislation after Joe Lieberman led a movement against using a filibuster to prevent passage then for political cover Lieberman voted against the bill whose passing he has assured.

[anne]

The plan to freeze subprime mortgage rates is, by the way, needed and hopefully extensive enough to be as excellent a rememdy as I would hope. I entirely approve.

[Robinia]

Am with General Specific that one of the primary purposes of this plan is the "NIMTOO" effect ("Not in my term of office") -- looking for some way to defer the inevitable foreclosures long enough to be able to somehow irrationally blame a new Democratic administration.

While clearly something must be done to protect those who were the victims of predatory lending, I think that this solution is not procedurally correct. Paulson's statement to WSJ ('He told The Wall Street Journal last week that it would be impossible to "process the number of workouts and modifications that are going to be necessary doing it just sort of one-off." ...') is precisely the WRONG attitude. What we need is to underwrite the work, if necessary, for the banks to DO THE DUE DILIGENCE that they should have done before making the loans. DO separate the borrowers one by one, and the brazen flippers and the "liar loan" liars who made up their income don't get a work-out, while those who simply lost their jobs or had a health emergency do.

Yes, looking at borrowers one by one costs money. But, you know, that's the point: NOT looking at borrowers one by one destroys the banking system. Cover the cost of arranging work-outs if need be, but, drive home the message that "sliced and diced" CDOs don't mitigate risk, they just hide it long enough to pass it to somebody else. BTW-- why is it that the media keep using the "butcher" analogy for describing CDOs, rather than the much more appropriate "chop shop" analogy, whereby stolen cars are made untraceable by partsing them out?

[dd]

Okay market closed so what to my wondering eyes does appear but:
White House: too soon to discuss subprime loan plan
"It's premature to talk about those discussions at this point," White House spokesman Scott Stanzel told reporters, when pressed on whether the administration is working on a new initiative regarding the mortgage market.
http://news.yahoo.com/s/nm/20071130/ts_nm/usa_subprime_bush_dc_1

[dd]

Yet another Bush team success:
Mortgage plan cheers Wall St
Wall Street stocks were mostly higher on Friday, rising for a fourth consecutive day, as hopes for further interest rate cuts and a nascent plan to help subprime borrowers lifted a range of financial companies and homebuilders.
http://news.yahoo.com/s/ft/20071130/bs_ft/fto113020071613066117;_ylt=Arh95Aqv009T6Gi6Gi1rOHeyBhIF

[dd]

Just in case anyone has any doubts that this administration is now all PR and no substance:
US withdraws Mideast resolution at UN
UNITED NATIONS - In an about face, the United States on Friday withdrew a U.N. resolution endorsing this week's agreement by Israeli and Palestinian leaders to try to reach a Mideast peace settlement by the end of 2008, apparently after Israel objected.
U.S. Deputy Ambassador Alejandro Wolff informed the Security Council that the United States was pulling the resolution from consideration less than 24 hours after U.S. Ambassador Zalmay Khalilzad introduced it.
http://news.yahoo.com/s/ap/20071130/ap_on_re_mi_ea/un_mideast;_ylt=Ai8IknkZSv3GffwO6ynZDHdI2ocA

[anne]

DD, thank you. I will be finding out about the possibilities of such a plan including mortgage contract issues tomorrow. I like the idea as such, but the reality I have no sense of.

[dd]

anne your faith gives hope; but given the track record this week's blitz will be forgotten much as my favorite PR moment:
'Made in China' labels hidden at Bush event
http://www.cnn.com/2003/ALLPOLITICS/01/22/bush.boxes/

[Robinia]

Yes-- thanks dd-- apparently, buying some time until the end of the term is more than the Bush team hoped for with the "Hope Now Alliance"-- the "hope now" was just to make it through to the weekend. Not that we are on thin ice or anything. Can we roll over the national debt held by China and Japan onto another credit card? Do the Saudi's Sovereign Wealth Fund offer teaser rates on theirs?

[esb]

The information I have from someone close enough to know reveals this "plan" to be voluntary in each and every sub-proposal.

Even more important, the "plan" is totally "neg-am" to the debtor(s). Of course one would expect that since no holder of paper would participate otherwise.

In other words, this is little more than a "please stay and continue to be our slaves" plan.

It is either worthy or unworthy of Henry, depending on what is in your portfolio.

[dd]

Oddly my concern is more prosaic. We are a nation of laws and not men; but right now not so much. So while anne cheers at the unilateral renegotiations I pause as this undermines the fundamentals of contract and property law that are the basis of our Constitution and then of course there is the Bill of Rights long since discarded. This is nothing to cheer about.

[prostratedragon]

Even more important, the "plan" is totally "neg-am" to the debtor(s).

That should be blared loudly should it turn out to be true. Peonage indeed.

[barry payne - economist]

The rate freeze seems little different than something like debt forgiveness of loans to a country by the WTO or IMF to minimize loss, or perhaps just an ordinary restructure-refinance of a major asset.

Paulson is meddling, but the "market" outcome could be the same absent the effects of securitization, so it's not serious meddling.

They've already separated out those who cannot pay anyway. The remaining target group that can pay extended teaser rates constitutes a loss minimized of greater value than any gain available by foreclosing and reselling in today's market of falling prices.

The only reasons the rates are being froze in mass through regulation is because the original loans that were bundled into securitized packages are too far removed from the possibility of corrective individual actions by willing original lenders and mortgage brokers.

If the market could have reversed-engineered all the loans back to their original status between the first buyers and sellers, Paulson would have nothing to do.

At arms length, most sellers usually act in self interest to extend debt terms rather than repossess and resell at a loss, which is what the government is doing here because transactional barriers prevent the same by individuals.

[dd]

Negative Interest Amortization without representation.

[Patricia Shannon]

dd

What is your opinion about the bailouts of business that the U.S. has done at various times?

[dd]

It is not about Paulson meddling with the "market" but meddling with the legal structure that underpins the market. If contracts and property law can be voided by the the executive branch without recourse ("voluntary" is a misnomer as borrowers have no voice; nor do assignees) then no contract or property right is valid as it is subject to unilateral amendment by fiat without even an act of Congress.

[dd]

Hmm, my opinion is that corporations exist by state charter and as such at the sufferance of state voters; albeit everyone has forgotten what still remains on the books.

[dd]

"If the market could have reversed-engineered all the loans back to their original status between the first buyers and sellers, Paulson would have nothing to do."

Ahh, but it is not the "market" that can reverse engineer as this is a legal issue but it does transport me back to my law school days arguing with Posner and Epstein; but I was at best a mediocre student; but then again consider the examiners.

[Patricia Shannon]

DD,

Would you approve of the government directly helping the individuals?

My feeling is that the lending organizations acted unethically in the first place. They are, I sincerely hope, more knowledgable on financial matters than the average person, and for sure the sub-prime targets.

[dd]

The government is its citizens and no not the corporate ones (as they are chartered and not lives in being) but the voting ones (although we are currently confused on this...and yes my hopes exceed anne's). So yes, the government has a place here and it would be a "Mr. Smith Goes to Washington" moment if true public servants were to be found to resolve this crisis; but does anyone believe Paulson or Bush are of that caliber? I'm not so sure that this government ought "help" as the outcome will be peonage and profit.

[Patricia Shannon]

dd, you have an excellent point. Anything the Bush administration comes up with should be suspect, given their track record.

[dd]

Agreed. When New Orleans residents return to the 9th ward in their rebuilt homes then perhaps this administration might be entrusted to deal with the current housing crisis.

[KP]

So all the morons who bought houses they couldn't afford now get to keep them, great. Housing affordability is terrible, they need to let the markets take care of themselves, the U.S. needs some creative destruction for once, we are beginning to fool ourselves that the economy is always good. One year from now the next bailout will be that the government just outright pays your mortgage if you can't afford it. It will be financed by higher tax rates on the rich.

[Jeff Dinkin]

Great BLOG! I have a few comments about this so-called “Bail-out” -

First, I don’t really believe this is actually a bailout of the people! it’s just one of many band-aids that will ultimately drag out the problem and hurt more people over time, while temporarily obfuscating the massive balance sheet problems at our financial institutions.

While it is wrong, all this nonsense of locking the ‘Bubble Buyers’ teaser rates is only going to keep people in a house that will continue to fall in value, all the while, they think they are being helped if they continue making payments on a constantly depreciating asset. People really believe this is helping them? Well, clearly, they truly are idiots. But they already proved they were idiots by buying into what was so obviously a bubble. I don’t buy the “poor me” nonsense. Where is personal responsibility and due diligence? There were plenty of people out there warning what a massive bubble this was years before it peaked.

Fundamentals matter! Borrowing 2 or 3 times income is standard. Why did people think RE appreciation was going to continue in perpetuity? Paying 6, 8, 10 times incomes is not only TRULY STUPID - but actually SHEER LUNACY! PRICE MATTERS!

I’m not afraid to call these people stupid. They were idiots to buy the hype - Did these folks not learn ANYTHING from the internet bubble only 4 to 7 years before ? (depending on when they foolishly “bought” and overpaid for their bloated home)….

The fact is - this MASSIVE BUBBLE in RE prices will still deflate, albeit perhaps somewhat slower with these constant band-aids being placed on this gushing wound.

What this nonsense really does is allow the holders of all this bloated (realistically worthless) mortgage paper to continue collecting payments and thus pretending the so-called collateral is still worth the amount of principal they foolishly loaned out with “sub-prime” loans, etc. They won’t have to mark it to market and can continue to pretend in the fantasy prices.

In reality, they are HELPING THEMSELVES!

For example - say they loaned out $700K on some 1800 sq. ft. house in CA. (I’ve seen it) - Now that house is worth $550K and headed back to it’s 1998 price of $230K (or lower). It’s better to keep the idiot borrower in that house paying a lower rate on the $700K, then walking away and leaving them stuck and having to recognize and “write-down” that loss.

It’s simple - the banks and mortgage lenders REALLY REALLY don’t want to foreclose, because of the simple fact they’d have to recognize the HEAVILY REDUCED VALUE of the properties they’d be stuck with and burdened with unloading into a collapsing market with more and more inventory coming online due to this spiral. So this slows it all down, but DOES NOT AND WILL NOT STOP IT FROM DEFLATING DRAMATICALLY!

There is still way too much bullishness about prices and people think RE is going to come roaring back when the decline has only just started. RE WON’T COME BACK AGAIN! This was a once in a generation event (as most bubbles are) It’s simply not possible to repair this damage without decades of pain! That’s just reality….

Also consider that all these folks who overpaid for their homes by stretching to buy using these exotic loans, etc. aren’t really getting a favor by being allowed to “STAY IN THEIR HOME” - first of all, it’s not their home, that’s a myth. They’ll NEVER own it (short of winning the lottery). This “American Dream” nonsense is pure BS!

More like American Nightmare since at best they will be STUCK IN THE HOME THEY HAVE!

They will never have any equity build up in what will be a very protracted decline - and thus won’t be able to move because prices will continue to fall regardless of these band-aids being orchestrated. They’d actually be better off walking away now and renting, saving money and buying in the future when prices come back to reality sometime WAY in the future………

People should study Japan as an example of how Government interference / intervention (MORAL HAZARD) worked out for them.

Hint - It DIDN’T! RE prices are actually 80% lower than in 1989 and they’ve only this year had the first uptick in prices in 18 years. Funny thing is the Japanese people don’t trust it. Even after an 18 year and 80% decline, they don’t believe it’s a bottom. Talk about a change in psychology. We are at least a decade away from that here if we’re lucky because OUR BUBBLE IS MUCH BIGGER!!!!

Sadly, this is going to get so much uglier than most can even comprehend or fathom……….

But hey, maybe I’m too bearish. Let me just say I blame GREENSPAN for all of it. He’s the father of Moral Hazard!

[hari]

Finally someone with practical experience in Cal/RE is making some good sense that the bailout is realy to protect the Cabal who engineered this subprime credit derivatives....

Jeff Dinkin is putting his fingers on the sore which FED & Paulson are afraid to deal with in public.

The scandal - yes! - it's a real scandal; not before end of year it will hit the front pages with more details, I suspect, because only now the exposure of EU banking system is finally coming into fore-front.

Govts are also experiencing difficult policy choices on financil derivatives and their screening and RATING policy!

[anne]

http://krugman.blogs.nytimes.com/2007/12/01/a-plan-called-hope/

December 1, 2007

A Plan Called Hope
By Paul Krugman

Oy - I somehow missed the fact that the proposal to help subprime borrowers avoid foreclosure is called the "Hope Now Alliance."

Um, guys — hope is not a plan, and the name seems custom-designed to undermine your credibility.

[ncheel]

Borrowers who will be given this gift, this reprieve...should show fiscal responsibility by purchasing mortgage unemployment insurance in case the predicted economic slowdown causes them to lose their jobs. Many are living paycheck-to-paycheck, and cannot afford the higher mortgage payment looming. If they get this reprieve, they're still dangerously living on the edge. How would they make the payment if they lost their job? A new plan is available: Mortgage Safety Plan can be investigaged at www.mortgagesafetyplan.com

[anne]

Ncheel

"Borrowers who will be given this gift, this reprieve...should show fiscal responsibility by purchasing mortgage unemployment insurance in case the predicted economic slowdown causes them to lose their jobs."

Come to think of it, I thought mortgage insurance had to be purchased in buying a home. I thought I had to buy insurance on each home. Please tell us if there are excpetions and why, or am I mistaken for many types of mortgages?

[BJ Feng]

I believe mortgage insurance only has to be purchased if you put down less than 20% of the purchase price. And the insurance is not for the benefit of the buyer, but the benefit of the lender! The insurance protects the lender in case something should prevent the buyer from making his mortgage payments, and only the lender can collect.

I totally agree with Jeff Dinkin. Mish's Global Economic Trend Analysis has a really good post about this.

"But let's get one thing straight right up front. This has nothing whatsoever to do with "saving people's homes". This is about saving financial institutions from collapse. And the plan will fail. It rewards those who cannot afford to pay. The details are not in yet but I suspect one measure of the ability to pay will be whether or not one is current on their loans.

Anyone who wants a freeze should stop paying their mortgage now. It's clear that lending institutions do not want those homes back. This is best explained by example, and the best example is on Calculated Risk's blog in Florida REO: Priced Below 2002 New Home Price.

That in a nutshell is why we have this panic proposal from Bernanke, the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc. (C), Wells Fargo & Co. (WFC), Washington Mutual Inc. (WM) and Countrywide Financial Corp (CFC).

Lending institutions are in a panic about the possibility of taking on more REOs. (Real Estate Owned, in this case by foreclosure)."

http://globaleconomicanalysis.blogspot.com
/2007/11/temporary-mortgage-freeze-is-doomed.html

Why would lenders want to freeze rates? Because they hope that people will continue to make interest payments so that they don't have to write down those loans as non-performing. That way, they keep on hiding these loans and deal with them at a later time. As previously mentioned, the danger in this crisis is not from people losing their shirts due to foreclosures, most of them didn't use any of their own money to purchase their home in the first place. The danger is that banks will have to write down so many bad loans so quickly, that they become insolvent or nearly so, thereby distressing the financial system.

[anne]

Thank you, I was wrong in confusing private mortgage insurance that may be required to protect a lender when a downpayment is below a settled level and mortgage insurance that is a form of life insurance and protects a family. I have neither on my homes, but needed a title search from a title insurer in each case, as my sister explained.

So, then, lenders already will have insurance protection on many or most low equity mortgages.

[barry payne - economist]

WINNERS AND LOSERS?
From the comments above, it's difficult to understand who the winners and losers are perceived to be from a rate freeze.

Sub-prime owners would seem to benefit from a rate freeze that allows them to stay in their homes. So what if it's negative amortization? It still beats renting and maintains a hold on what value is there. They're certainly going to have serious problems renting or buying anything else. And for the holders of loans, foreclosure under these conditions is clearly more expensive.

Freezing rates to extract the maximum available from existing owners allows lenders to avoid writing off a corresponding value of the asset. How's that a bailout if the lenders - including investors with securities backed by mortgages - are financing it themselves via a rate reduction?

True, a general, averaged rate freeze does not address the host of fraudulent fees and commissions associated with the original loans. Instead, they become a sunk cost and only indicate moral hazard if new buyers expect new loans will be manipulated accordingly going forward. That the existing fraud is not individually pursued is a failure of regulation, not the rate freeze.

The housing bubble itself should not be confused with the fraud and corruption associated with originating loans, even though the latter was fueled in part by the former.

Dean Baker predicted the housing bubble several years ago. Many legitimate prime loans were made based on rising real estate prices, similar to the many dot-com entities that flourished under non-fraudulent equity financing during a prior bubble.

Low rates from the Fed contributed heavily to the housing bubble and were also used recently as explicit bailouts to loosen up the credit tightening associated with the housing recession - both constituting a "bailin" or "bailout" as the case may be, in contrast to a self-financed rate freeze.

Meanwhile, as Baker has said, sub-prime borrowers are right back where they started. And as Paul Krugman explained, there's a sharp difference between the lax regulatory policies that encouraged the widespread corruption versus the the macro policies of the Fed that accomodated the same events at a different level.

Blaming the sub-prime borrowers for exploiting the system with underpriced loans makes no more sense than blaming the same group for purchasing used lemon cars sold under a layer of lies and fine print (except perhaps for chronic repeaters).

Given the expectations driven by the rising prices of the housing bubble, sub-prime buyers were pulled into the whirlwind by a layer of parasite lenders generally avoided by the prime buyers.

In other words, when major assets are sold to unsuspecting buyers at substantial initial discounts leveraged heavily with rising future payments, even LEGITIMATE sellers and subsequent purchasers of such paper are depending on the bubble to sustain itself - absorbing that risk entirely in the case of default.

So when ILLEGITIMATE lenders enter the fray at the sub-prime level, they exploit a vacuum of lax regulation coupled with rising price expecations that allows all sorts of garbage add-ons that willing buyers and sellers accept under such conditions.

When the bubble pops, the sellers are left holding the bag for which the least-bad option is to retain the buyer at a lower level of payment. And where fraud was involved, because the buyer has little or no equity, the sellers absorbs whatever part of those losses are reflected in the rate freeze as well.

As mentioned earlier, in the context of a rate freeze, Paulson through the government is not doing any more than a lender would do directly with a sub-prime owner to avoid default and foreclosure. Had more regulations been in place, either much of the overcharges would never have occurred, or those that did would be prosecuted for reimbursement to the owners.

That leaves three, general levels of market failure which Paulson and his friends ignore or deny. One is the need for more transparency regulation. Two is the inherent instability of private markets to create bubbles. Three is the necessary intervention of the Fed to stabilize markets (supported when convenient by faux anti-Keynesians).

[Evan]

We all have to live somewhere and due to the feds not maintaining the the value of the dollar the price of that home will most liky be double in 25 years and the mortgage will be history...replaced by real estate taxes higher then the mortgage payments... Since the gov't prints the money why not have a standard rate for prime dwellers with regulations that are fair to the home dweller and let the speculators take the risk.. What is the true cost of exchanging your means of living into dollars ? Many of our parents thought 3 or 4 % were fair interest rates....

[dd]

Not to worry; the real plan is the same old plan: PR and politics trump policy:

Paulson Asks Congress
To Act on Loan Crisis

WASHINGTON -- The Bush administration is putting the burden on Congress to fend off an approaching wave of home foreclosures.
With two million borrowers in the U.S. expected to see interest rates jump on their adjustable-rate mortgages over the next two years, Treasury Secretary Henry Paulson called on the Democratic-controlled Congress to pass stalled housing legislation and support a new White House proposal to use tax-exempt bonds to refinance troubled subprime mortgages.
After months of criticism that he hasn't responded aggressively enough, Mr. Paulson implied that the administration was already doing all it could to stem the nation's mortgage woes, which have roiled markets, threatened many homeowners and raised the risk of recession. Privately, Treasury officials say they don't have any major mortgage-relief initiatives in the works beyond those they have already aired.
"The administration and the private sector are taking action," he said. "Congress now needs to also act. ... The U.S. economy and America's communities deserve no less." WSJ http://tinyurl.com/2pspra

[Billy]

I currently have a subprime loan that is about to ballon with HSBC and I am not sure what is going to happen. My complaint is that my broker sold me on this loan because I didn't have a bundle to put down and now she can't get me refied because of the market. Why are the banks just shafting people who made all their payments on time with unbelievable rates...I think the greedy banks are mainly to blame in this mess. If you don't pay you should loose your house, but if you make your payments you shouldn't pay such an absurd penalty!!!

[RAS]

Billy, accept responsibility YOU bought a house YOU couldn't afford with money YOU didn't have. The greedy banks only want the money you borrowed and agreed to pay them back. Banks aren't in business to loan money to people at 1.25 percent for 30 years. you and everyone else who purchased a house they couldn't afford with little to no money down deserves to lose the house and be held accountable for their own stupidity.

For every subprime borrower default there is a hardworking individual or family that has been working and SAVING money to obtain the downpayment to purchase a house. And each year during the subprime craze had to wonder if he would ever be able to save enough to buy a house. Falling home prices coupled with tighter lending standards will help people WHO CAN AFFORD IT obtain homeownership the correct way.