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“The worst thing in this world, next to anarchy, is government.”     Henry Ward Beecher

December 4, 2007

Bush Administration Proposes Mortgage Bailout Plan

by Doug Mataconis

The Bush Administration appears to be on the verge of proposing a bailout in response to the subprime mortgage crisis:

Treasury Secretary Henry M. Paulson Jr. unveiled new details of the Bush administration’s mortgage-relief plan yesterday, including a proposal that would grant new powers to local governments to refinance the mortgages of struggling homeowners.

Paulson spoke publicly for the first time on the strategy that would temporarily freeze interest rates for many troubled homeowners or help them refinance, a plan that is gaining momentum among federal regulators, leaders of the mortgage and housing industries, and lawmakers of both parties as the mortgage crisis worsens.

And the details of that plan, it seems, essentially would be to allow borrowers to re-write the terms of their loans and shift risk more decisively to lenders, who traditionally use things like higher interest rates to account for the fact that a given borrower is a high credit risk:

Many homeowners with subprime loans could apply to freeze their rates or refinance their loans quickly under the deal being worked out by Treasury officials and the Hope Now Alliance, a coalition of consumer counseling groups, investors, nonprofits, and lenders such as Citigroup, Wells Fargo and Countrywide Financial.

The major sticking point is the investors who buy securities made up of subprime loans. For years, they provided the financial backing that allowed mortgage firms to expand their lending. No type of loan made more money for investors, or was as risky, as subprime mortgages, because they required homeowners with shaky credit to pay more interest.

If lenders agree to freeze loans at lower rates, investors would lose out on the higher payments promised under the original loans, which could give them grounds to sue the lenders.

“While the devil in the details, this is the first time the administration is devising a plan that meets the magnitude of the problem,” said Sen. Charles E. Schumer (D-N.Y.). “If investors can be compelled to go along without long legal delay, it has the potential to make a real dent in the problem.”

In other words, let’s screw the investors.

I’ve said it before, and I’ll say it again — the only “problem” that exists in connection with the subprime mortgage crisis is the fact that it is the inevitable outcome of two bad ideas. First, for nearly a decade we were living in a real estate bubble where housing values were rising at rates that were, to any rational person looking at the numbers, not sustainable. Second, in part because of the housing bubble and in part because of simple bad decision making, people were buying houses they really couldn’t afford and entering into loan transactions that were not in their best interest. As a result, when the bubble popped and rates started rising, people started defaulting on their loans.

None of this should come as a surprise, and the rational response to all of this should be to let the situation play itself out. Instead, everyone involved — Congress, the White House, Wall Street, the banks, and the real estate industry — wants to come up with a plan to delay the inevitable reckoning that we’re already in.

And this is coming from a Republican President and a supposedly conservative Treasury Department. I’d like to say that I’m surprised, but I’m not.

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26 Comments

  1. This isn’t a problem, as long as it’s voluntary. The subprime mess is a major mess, and for a lot of these lenders, it makes sense to rewrite the loans rather than foreclose. Foreclosure costs everyone a lot of money, including the lenders, especially when there are 2nd mortgages and the home is worth less than the mortgage.

    Where this can cause a problem is if the government forces their plan to be accepted (which I’m ideologically opposed to) or if the investors have legal standing to sue the lenders for rewriting mortgages (which is unfortunate, but is the situation). If the former, the government is outside its legitimate mandate. If the latter, that’s going to suck for all of us, and the best we can hope is that the investors realize that if they sue they’re screwed worse than if they don’t.

    Comment by Brad Warbiany — December 4, 2007 @ 11:08 am
  2. Brad,

    It depends on your definition of “voluntary” doesn’t it ?

    When you’ve got the Treasury Department, the White House, the Federal Reserve, and the Democratic Congress leaning on major lenders like Citibank and Wells Fargo and threatening (in the case of the Democrats) to pass legislation that increases regulation of the mortgage industry signficantly, can you really say that anything the banks agree to is completely voluntary ?

    Comment by Doug Mataconis — December 4, 2007 @ 11:15 am
  3. The idea of a bailout is absolutely insane! Two parties are involved here and both deserve what they have coming to them.

    1.) Stupid investors that over-extended themselves under the false impression that real estate only goes up! Many of them put 0 down on a 5 yr arm and now they want a “bailout” from us prudient investors that actually only bought what we could afford and/or are still renting b/c we simply were not comfortable taking the same risks as these STUPID people. And 2.) the over eager lenders that somehow decided that someone making $80k per year, who had 0 – little cash for a down payment was a good candidate to lend $400k to help them overextend themselves.

    Keep on keeping up with the Jone’s people! Our country, it’s leaders and this talk of a possible bailout are making me sick! Moreover, it speaks loudly to our culture on the whole. We’ve become a country of insane “instant gratification” FREAKS. No one believes anymore that they have to work hard and save before they buy their expensive cars and/or homes. They just go and buy today! And there are lenders there to feed the frenzy! (Actually, they prey on it!)

    My family came here from Europe in the 50′s and my Great Grandparents with there 3 children and 6 grandchildren lived in/rented a 3 flat while saving in hopes of someday buying a home. Then, when they were finally able to realize that American Dream, they purchased a modest home and within their means! Actually, they most likely paid $ for their homes.

    I am quite certain that his proposed bailout will happen b/c Paulson has his buddies on Wall Street that have to get paid out there huge bonuses at year end! Anyone really care if these over eager lenders/buyers of debt get their mulit-million bonuses this year?

    As far as “throwing people out of their homes”, God forbid these people had to sell their homes for a smaller profit than they had hoped or even a loss. Ultimately, they’d just end up purchasing or renting the home they should have been in for the last 5 years. Something within their means!

    Let free markets work and don’t set a precedent of a bailout. That will only continue to encourage the insane behavior!

    Nicole (not keeping up with the Jones’)

    Comment by nicole — December 4, 2007 @ 1:03 pm
  4. It looks oddly enough like a price control. And we know where that road leads. Shortages.

    Then, to make matters worse, the government appears to be set to bail out the bad loans. Anyone want to take a wild guess as to who will end up holding that bag? The taxpayers.

    This looks like a really bad idea.

    Comment by tkc — December 4, 2007 @ 1:15 pm
  5. Screwing investors would probably create a future housing crisis since investors would deign from investing in mortgage-back bonds. The lowered ability to borrow to pay for houses may just cause a housing crisis that puts most loans underwater.

    There losses from the change in agreement, however, isn’t that big. The fact is the uniform downward shift of credit-worthiness of the entire sub-prime mortgage sector has already inflicted heavy losses on these investors. For some home-owners, the downward revision of the mortgages will prevent default. For others the downward revision still puts them at risk for foreclosure.

    But it still sucks to get paid AAA 4-5% interest rate for default risk that’s on the level of junk bonds. It’s a deal that’s even worse than the current losing propositions that they are holding on to.

    And yet based on history, I am confident that the Fed will inflate to fend off this crisis and instead create an inflation crisis. Bond owners will be completely destroyed by inflation. Hard assets will protect you from inflation. Land, gold, houses, commodities, and all manners of durable goods. I think it’s time to use your money while it’s still worth something.

    Comment by TanGeng — December 4, 2007 @ 1:36 pm
  6. essentially, the government is trying to ruin everybody’s credit for the benefit of a few morons. Great!!! SCREW YOU GOVERNMENT!!!

    Comment by Greg — December 4, 2007 @ 4:11 pm
  7. Once again you have the government moving to use its coercive power to nullify a stern but beneficial market reaction to abject stupidity. Sounds like just another day on the beltway to me.

    Comment by Quincy — December 4, 2007 @ 11:14 pm
  8. Wow! Would it be considered “treasonous”, “anti-American” and “aiding the terrorists” to label this plan what it really is: Socialism?

    I always suspected Bush and his McGovernite entourage of being socialist. All you have to do is a look at their monolithic social engineering programs in full swing in Afghanistan and Iraq. Not too much of a difference between handing checks out to poor Afro-American women in inner cities and dole checks to Iraqis. Their monolithic and eternal bureaucracy, the Department of Homeland Security, the largest in history, is another telltale sign of their socialist ideology.

    Now, after creating the worst housing problem since the Great Depression by loosening loan restrictions between 2003 and the collapse under the guise of “home affordability for all” [some suspect to buy votes in the 2004 election], these Bush socialists want to rewrite real estate contracts, effectively reward people for being greedy idiots, punishing those who chose higher interest, fixed loans.

    Good help America for picking this socialist nut to be its’ President.

    Comment by Josey2006 — December 5, 2007 @ 4:57 am
  9. Doug,

    I agree, the threatening is sometimes implicit.

    But what I’m saying is that the idea of rewriting these loans to keep people out of foreclosure is not a bad thing. I’m not sure that the government getting involved is a good thing, but the idea itself isn’t bad. This thing needs to unravel (and it will), but it’ll be a lot less painful if it unravels slowly than if it unravels quickly.

    Comment by Brad Warbiany — December 5, 2007 @ 7:47 am
  10. Brad,

    I agree with you that the bank trying to rewrite the notes to prevent foreclosure is not a bad thing. Especially since a large number of foreclosures leads to stuff like this ( http://money.cnn.com/2007/11/16/real_estate/suprime_and_crime/ ) which eliminates any benefit the bank might have gotten from the foreclosure and actually creates a costly liability for them.

    I do think, though, that the government getting involved will only serve to make the situation worse because they’ll likely find a solution that’s not helpful at all to the creditor…so the politicians can appear to be “sensitive” to poor people who are apparently too stupid to read the documentation when buying their house or can’t handle their own finances.

    Comment by UCrawford — December 5, 2007 @ 8:13 am
  11. Brad,

    If the banks can’t find a way to rewrite the loans to keep their head above water, I can’t imagine the government could force them to do any better. What’s likely to happen is that when the banks can’t underwrite the loss of money anymore, everything gets handed over to the government, who robs my money to keep said homeowner from defaulting through artificially low mortgages.

    Comment by Lost_In_Translation — December 5, 2007 @ 4:18 pm
  12. me and my wife wrk everyday..we pay our bills and we saved money to put down on the house with..but refinance time comes and my propety value has drop 25-30k and i cant get a loan.. my rate has gone up 5% my wife job is cutting back on raise bouns and (board) (but there getting all these extras party’s extra time off for the holidays for those guys) now making them pay for inssurance 300 a month and shes 3 months preg.. so what should i do now…HELP…american dream!no home and no TAXES

    Comment by tony (aus. texas) — December 5, 2007 @ 5:28 pm
  13. To Tony:
    Go to night school and learn how to write in ENGLISH
    then go for a better paying job

    Comment by kafco — December 5, 2007 @ 8:00 pm
  14. Who says its a major mess??? 35% of people in the country dont even have a mortgage. Of the 65% who do 95% are on time currently!!! This is so blown out of proportion by the media its not even funny. Let the market control itself. The other losers are the smart people who just took out a 30 year fixed at a slightly higher interest rate and now will be losing ground to the people who are now frozen into their amazing rates. This is a travesty of the largest proportions!

    Comment by Dustin — December 6, 2007 @ 6:15 am
  15. Maybe they’d recognize a term that’s going to be beating people over head once all of this is over.

    Moral Hazard.

    Comment by TanGeng — December 6, 2007 @ 8:02 am
  16. Free markets? If the lenders want to save their paper with new loans (the essence of the Bush plan) rather than initiate foreclose, that’s their business. If they choose to foreclose and absorb any losses, that too is their business. Free markets find balance on their own. Heavy-handed manipulations such as the Bush plan have no place in a society of free people. The fallout of the sub-prime mess will affect everyone until the market re-balances itself. I saw this coming and am prepared. Even so, I will take a loss on my balance sheet. So be it. I prefer taking my losses in the context of liberty rather than social manipulation “for the better good.”

    Comment by Dan — December 7, 2007 @ 12:56 pm
  17. The bank are only negotiating with the individuals that are 30-90 days late and not working with the ones that are current, but do not want to fall into that situation to save their good credit. That is not fare. If they are going to modificate the rates it should be with all borrowers with primary residence or investment properties. Do not pick and choose, because they it fall into discrimination. You do it for all or for none. Or get suid for discrimination. Sandra

    Comment by sandra — December 7, 2007 @ 4:20 pm
  18. I can’t see how refinancing will save some people. The house’s value wouldn’t depreciated any. To keep the same payment or close to it, wouldn’t you have to finance for 80 years or something? It is just a lose, lose situation. If you can’t sell, the mortgage company may not be able too either.

    Comment by Hathor — December 9, 2007 @ 6:53 am
  19. Hathor,

    The benefit of a loan for a long long time is that you’re paying less and less principle per month at the beginning of the loan. At 30 years, principle paid per month is almost nothing. 80 year mortgages do nothing because these people can’t afford the interest rates on the loans.

    Comment by TanGeng — December 9, 2007 @ 9:49 am
  20. TanGeng,
    I was using an adsurb number for the mortgage, but if you did amortize for eighty years that would change the year in which the interest would almost be nothing and no matter what the interest rate, you would get a smaller monthly payment for the same principal, the longer you financed.

    You know, I use this reasoning when I did calculations to determine how I wanted to finance my house.

    Of course I could have been very wrong and not understood any of this, but it kept me in my budget.

    Comment by Hathor — December 9, 2007 @ 5:10 pm
  21. Absurd is the right spelling.

    Comment by Hathor — December 9, 2007 @ 5:13 pm
  22. Actually, you’re missing something.

    If a million dollar loan is borrowed at 6% annual interest (.5% per month). The interest on the principal is $5000 per month. If the borrower pays less than that, the loan has negative amortization, and the borrower owes more each successive month.

    A borrower has to pay the minimum to cover the interest. The borrower then pays down the principal. Paying more principal allows the borrower to pay off the loan faster. This is where the duration of the loan helps. A longer loan mean paying less principal on your loan per month and that lowers your monthly payments. But you can’t really get away from paying the minimum which is the interest.

    Comment by TanGeng — December 9, 2007 @ 7:19 pm
  23. TanGang,
    Do it for $300,000. 80 years is doable, since most started with a payment $1200 or so. I don’t think the avg home cost was more. Any way I was just trying to make a point with my first comment not a math lesson. I also didn’t do the actual calculation myself, I let software do it.

    Comment by Hathor — December 9, 2007 @ 9:55 pm
  24. Hathor,

    I think that’s a lowball. My old house was purchased for about $240K, and financed 80/20, 30 year on each. With decent credit, my payment on the loan was about $1500/month, and with prop. tax and insurance, was about $1700. I don’t think you can do $300K for $1200/month, no matter how you look at it.

    Comment by Brad Warbiany — December 9, 2007 @ 10:00 pm
  25. $1200/month is $14400/year. That’s less than 5% annualized interest rate. You could get that in 2003/2004, you can’t get interest rate now.

    But that’s an interest only loan. To pay off that loan, you need the numbers Brad’s talking about 1500/month.

    Comment by TanGeng — December 10, 2007 @ 8:08 am
  26. $1200 or so, 80 not 30 years. My,my!

    Comment by Hathor — December 18, 2007 @ 4:30 pm

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