(Author's Note: I do not own a home. Nor Have I ever paid a mortgage...just rented for decade.)
With the current prospect of Mortgage resets and foreclosures and the potential Subprime egg foo yung on the lenders' faces, President Bush (via Treasury Secretary Hank Paulson Jr.) has unveiled a bailout program for potentially 1.8 million persons facing this debilitating situation.
This situation arose in early 2007 out of lending money to buy homes to people securing Low-Doc or No-Doc loans, those with minimal or no documentation, who, as a result, get higher interest rates on their Mortgages. The lenders such as Countrywide (see chart left) soon found that many defaulted on their mortgage, which in turn drove the stock down.
This lending practice is often seen as predatory, since the lender will take over the asset. However, since the price of real estate has plummeted in various areas of the country (Ohio, Michigan, Nevada and some large cities) the lender is now face with the reality of selling an asset at $.70-$.80 on the dollar.
Meanwhile, since the prices of real estate fell, other speculators and those who secured teaser rate ARMs are suddenly in mortgages where the reset rate is too high to pay, and the real estate price has dropped below the outstanding principal on the loan. (Upside down equity.)
The use of teaser rates tends to grow dramatically during times when long-term interest rates move toward historical lows. Lenders stand to make much more money on ARMs if interest rates
rise, while borrowers with ARMs will be faced with high interest
payments. (This was the case in early-to-mid 2007 as the bond market reach very
But Along Came Paulson.
In the post-Katrina, Post-hoc 2006 election, the President's response to this is admirable, if (to me) politically motivated. The Republicans certainly don't want to see as too mean on hard-working, taxpaying, home-owning citizens, especially with a Presidential election laying out in the grassy knowl. And granted, many of these people need help to stave off foreclosure or homelessness.
But several questions arise:
1. How many of you have been bailed out after you made a financial decision that was unwise?
2. Do we think this is really about the borrowers or the lenders, who must maintain profitability and therefore, keep the borrowers paying something to them?
3. Is government interference healthy here?
4. Should I care if big corporation A goes under due to haphazard lending and market assessment?
5. What if these borrowers can't get long-term financing and default anyways?
6. Should the case-by-case situation be done electronically - to see who qualifies (not a $250,000-a-year earner), what the property value is (if over $750,000 for example, they might be declined) or whether there is a more efficient way to get renegotiated contracts?
As the NY Times reports:
Despite the criticism, the Bush plan is a significant change in an initial
reluctance to impose solutions. As recently as a month ago, Treasury Secretary Henry M. Paulson Jr. argued that lenders should try to work out new terms on a
But Mr. Paulson and federal banking regulators became increasingly
impatient with the industry’s failure to produce a systematic, rapid approach to
evaluating borrowers. Sheila C. Bair, chairman of the Federal
Deposit Insurance Corporation, proposed a comparatively radical plan to
permanently freeze rates on all subprime loans. Mr. Paulson rejected that idea,
but began to push for a standardized approach that would temporarily freeze
rates for many borrowers facing upward adjustments on their monthly payments.
Administration officials emphasized that the rate freeze was only one
part of a broader plan. Mr. Bush will also ask Congress to temporarily expand
the authority of states and localities to issue tax-exempt mortgage-revenue
bonds to help people refinance their mortgages. Treasury officials are also
pushing the industry to come up with a streamlined way to help subprime
borrowers refinance with a more conventional, lower-rate mortgage...
“You don’t want to reward speculators,” said Senator John
McCain of Arizona, who is running for the Republican nomination. “You’d
like to take each individual case on its own, but there’s no time to do that.
What’s important is to stop the bleeding.”
Whether this is called a workout plan or a bailout, I wonder exactly how deep is the crap the investment banks and financing companies are shovelling to the public. How far down will it go? That has been on the minds of people like (Erin Burnett, CNBC, below left) and numerous other talking heads at the various outlets.
The number of foreclosures in 2006 were 1.3 million, up by 42% from 2005. And based on filings in the 1st quarter of 2007, the number escalated even higher. Is there an end in sight? (The article linked appeared in April 2007.)
From Business Week article:
The same day Bush unveiled his plan, the Mortgage Bankers Assn. said that foreclosures had reached a record high in the third quarter. The share of mortgages that have entered foreclosure hit 0.78% in the quarter, up from the previous high of 0.65% set in the previous quarter. At the same time, delinquencies for all mortgages rose to 5.59%, from 5.12%, in the second quarter. None of the people who are delinquent or facing foreclosure will be helped by the plan.
The deal almost certainly won't stop the decline in housing prices. Investors are betting that there will be double-digit declines (BusinessWeek.com, 11/27/07) in home prices in nine of 10 major markets over the next year. The only exception is Chicago, and there the estimate is for a 5.6% drop in home prices (BusinessWeek.com, 11/27/07).
Now, Wall Street (investors) are pissed off now because:
1. Government interference in the precious free market is a no-no
2. They can not accurately predict what the market will do on the semi-predictable stocks, and thus their money will have to be on the sidelines, or lower yielding investments
3. Lawsuits can only arise, thus making it difficult to react
4. They will be just like the average, everyday, ordinary you and me (except richer)
Paulson believes that: "THE APPROACH ANNOUNCED TODAY IS NOT A SILVER BULLET. WE FACE A DIFFICULT PROBLEM FOR WHICH THERE IS NO PERFECT SOLUTION. TODAY’ S ANNOUNCEMENT IS A SIGNIFICANT STEP. I KNOW EVERYONE HERE HAS WORKED VERY HARD SINCE AUGUST AND WE WILL CONTINUE WORKING. AS EVENTS UNFOLD, OUR APPROACH WILL CONTINUE TO ADAPT AND EVOLVE."
No matter what the Standard & Poor 500 will still be moving tomorrow, and that is what it is all about, ain't it???
Answer: The United States Government.