That is an amazing bit of breathless hyperbole, and a dangerous one, for all the people who are buying it. The administration very properly used its power to mediate toward the public interest. It did not force anyone into anything, but rather addressed the blocs of mortgage holder and homeowners toward what is probably in everyone's better interest. Any positive effects will be marginal IMO, but that's another story.
The mortgage holders do see the bigger picture, and it's not pretty. With many of these mortgages, the investors left holding the bag never ensured that they became holder "in due course", thus they are left legally unable to foreclose! So their interest in avoiding defaults is greater than ever, because they have been extremely sloppy in ensuring that they have recourse.
And that's on top of their already having made irresponsible loans that put them in this boat. So the administration's role as an intermediary is limited and mitigates a complex harm that is threatening the national economy, all without the direct application of the police or legislative powers of government. That realizes some of the better, and certainly not the worst, potential of governmental power.
I see now that wolfwaler basically commented on this aspect already, but I'll post it for good measure.
Corsair
· 2 years ago
One thing you left out is how congress pushed low income home buying. http://www.businessweek.com/magazine/content/04... this made the lenders lower their qualifications to give out loans. That was 2004 and now those same people are the ones getting foreclosed on. The main problem aside from the ARM adjusting is the huge rise in fuel and food prices. This blew the budgets of those families who were living paycheck to paycheck. Unless they get more income even stopping the ARM's from adjusting will not save the majority of them for more than a year because unlike the government, they cannot deficit spend for very long.
wolfwalker
· 2 years ago
A free market allows producers and consumers to treat each other as adults and rational actors. And therein lies the problem: in many of these risky ARMs, one side or the other was deceptive. Some borrowers knowingly borrowed more than they could afford. Some falsified their loan applications, entering wrong numbers for income and such. OTOH, some of the lenders buried booby-trap clauses deep in the fine print that no one ever reads, while others didn't even bother burying the trap, but just outright lied to the borrower. Some lenders gave out risky mortgages and then immediately sold them off to other parties, usually banks or securities traders, who never knew that the notes they were buying were so risky.
In a number of cases, lenders sold off loans to third parties in ways that didn't leave a proper paper trail, so that now nobody knows who actually owns the loans. Think about that. You're a bank with a portfolio of loans that seem to be in default -- but you can't foreclose because you don't have the actual loan note, just a notice of transfer. Or you're a borrower who might just possibly be able to renegotiate your mortgage in a way that will save your house -- but you don't know who actually owns your loan now, so you don't know who to negotiate with.
When things like that can happen, the whole industry is out of whack, and the consumers who trusted their lenders to act like responsible adults have had that trust betrayed.
(On a side note, something appears to be wrong with your blog's template. In Firefox, the main box is filling the whole screen, forcing the two sidebars way down, and the background is showing as a sickly green-brown color.)
runawayyyy
· 2 years ago
Oh come on. You can't refinance your house because you don't know who owns the loan? Tell ya what, just "forget" to make your payment this month and see how long it takes to find out "who owns the loan". I predict 3 days from the due date.
Mike
· 2 years ago
I'm surprised at you, Ed; you're completely misreading this.
First, no one is forcing anything; the rate freezes are purely voluntary.
Second, the freezes are targeted toward mortgage holders who
1. Are current with their payments 2. Could stay current under the current rates. 3. Would default if their rates go up.
In other words, the freeze is targeted to help the mortgage owner. Yes, they'll get less money than if the rates went up *and the mortgage continued to be paid*, but that's not a possibility. The damage was already done when mortgages were sold to people who couldn't afford to pay them. Then those mortgages were packaged, sold, re-packaged, re-sold, etc., like hot potatoes, and the loser is whoever owned them when the defaults started. All of them want the revenue stream the mortgage represents. None of them want to foreclose on a large number of properties and sell them in a depressed market.
So the mortgage owners are better off, because they get some return on their investment. The mortgage holder is better off, as they don't lose their homes. Existing property owners are better off, since there won't be as many foreclosures to depress the market. Existing renters are worse off, since a depressed market would help them buy homes, but you can't please everyone.) Your concern that credit will get tighter is already the case, because the lending industry has now figured out that you can't profitably lend money to the unqualified. (Not forever, anyway.)
The only problem I can see with this solution is that the irresponsible borrowers aren't being punished the way you'd apparently like. (You don't mention the irresponsible lenders, by the way. Why is that? If I lend money to someone who I know isn't qualified and then sell the loan, isn't that a form of fraud? )
charles dorfman
· 2 years ago
Mike, I do agree with you. This temporary freeze on interest rates is indeed intervention. I prefer minimal intervention philosophically. Capitalism is the best economic system Man has developed so far. But it is an amoral system. Unbridled capitalism can be very destructive to society if left totally unchecked. In this instance, the reverberation throughout our entire economy if nothing were done, could have extremely dilitarious effects on us all. Why would that be the correct approach? Bush does nothing and the stock market drops precipitously, housing values collapse, our economy goes into a recession...who's the winner here? There is plenty of blame to go around. Builders, bankers, home buyers all feeding like pigs at a trough. Yea it pisses me off. But I'd be a lot more pissed if because of them my hard earned savings dropped like a lead ballon. I say "Go Bush" soften the blow.
anonymous
· 2 years ago
The solution to this mess is simple....fixed rate mortgages. Adjustable rates are recipe for a disaster such as this. We don't need government intervention on adjustable rates. We just don't need adjustable rates AT ALL! Adjustable rates are the product of a greedy lending industry that saw a way to make even more money over what they were already raking in with fixed rates. Consumers took the bait and the rest is history. ARM's should actually be called APM"s,Adjustable PROFIT Mortgages.
HNAV
· 2 years ago
Mr. Henderson,
"Any interest is called usury. Well, that's not going to happen in this modern world. But why not?"
Sorry, you are not thinking this through. Your good intentions are commendable, but that is how some get into promoting oppressive socialism.
You are talking about a system that empowers everyone, especially the very poor. Without the ability for some to gain on the risk of loaning something, there would be no incentive to loan.
Thus, folks who need it the most, would be unable to improve their quality of life. Who could afford a home without the ability to borrow. Or put a child through a better educational system?
Just another positive aspects of the US FREE Market. The competitive nature of 'shopping' for good deals for borrowing drives costs down for all.
A free market allows one to find the fair price for the risk of a loan. And without some reward for the risk, the loan would never exist.
The USA provided great opportunity, freedom, quality of life, because of this healthy economic system, including these vital incentives.
The alternative is a nightmare.
Doug Henderson
· 2 years ago
Captain Ed, thanks for your blog - I read it every day, and you are a remarkable communicator. I'm a fan of you, hewitt and limbaugh, but I disagree with you on your take about these mortagages. First, I think that ARMs should be abolished. I think poorer folks get roped into a slavery that sucks all there time away, leaves their kids unparented, and creates more heartache than joy. Second, could it be that home prices really are too high? Let's get them lower so more can afford homes. Finally, just to make a point - the Bible says to lend money without interest. Any interest is called usury. Well, that's not going to happen in this modern world. But why not? And, is the Bible wrong on that? Or is it right? Thanks for you diligence, and stewardship of your gift. You and your wife are in my prayers whenever you need them.
Ed
· 2 years ago
So it seems that attempt to circumvent the free market ends up having consequences in the free market. Good Grief, Charlie Brown! Has no one in D.C. ever taken Econ. 101?
MarkJ
· 2 years ago
I'm on your side, but, hey, when have "logic" and "politics" ever been mutually inclusive terms? History is littered with examples of politicians who made decisions they full well knew could, or would, have disastrous consequences, but pressed forward with them anyway.
Holding interest rates at an already high level from absurd increases really isn't a big deal.
The lender is still making a huge profit, the buyer is still required to live up to the contract.
If no intervention were taken, many of US would eventually have to bail out the mess.
There are simply reasoned efforts to become involved.
Just as the USA was forced to engage in anti-trust-monopoly-corruption issues of the past...
In fact, this preemptive, slight effort, is going to help avoid a Democrat Liberal push from encouraging US taxpayers to pay for everything in the end.
unclesmrgol
· 2 years ago
HNAV, your position would be right for those ARMs which aren't "capped" in their contract to a maximum interest rate. Most are. For those that aren't, imposing a cap of some sort (such as setting a cap similar to that of the already-capped ARMs) would be fine.
But capping it at the current rate the homeowner is paying leads where the Captain points out. I offer my own case as an example -- I had the choice a few years ago of an ARM at 3% (rate guaranteed for 2 years) capped at 12.5% or a fixed rate mortgage at 4.5% plus 3 points. I chose the fixed rate mortgage even though the points cost thousands of dollars and the rate was higher, because I didn't want to bet that inflation might not kick in and raise the rates on the ARM to their maximum.
Other borrowers might have made a different decision from what I did. My feeling is that I have paid for being wise in a manner that the government's intercession will absolve my 3% peers from paying, and instead force payment for their unwisdom onto the loan provider.
Since my peers are "locked in" forever at 3%, I think the government owes me the 1.5% extra and the 3 points I paid for my loan. It's fair, given that the government has stepped in and made this private market into a public one, right?
pelosi delende est
· 2 years ago
I am wondering where I can go to get a refund for that AMC Pacer I bought in '77.
burt
· 2 years ago
Perceptive and funny.
rightwingradical
· 2 years ago
Steyn and Morrissey are absolutely correct. This is another move toward a nanny society where nobody has to take ownership of their actions if it doesn't fit their desired result. Nobody obtaining interest only or adjustable rate mortgage should be shocked when the rates go up. The borrower signs papers at closing warning them about possible rate changes and the effect of those changes (Reg Z). This deal is supposed to help only owner occupied loans - just wait until the smart guys start manipulating that condition. In addition, the lender does not make huge profits on these deals. The usual income amount is one percent of the loan amount and that has to be deferred over the life of the loan. So, now the cost of new loans will go up as the lenders have to recoup what they lose on not being able to adjust rates upward to cover their current costs.
Mwalimu_Daudi
· 2 years ago
The Compassionate Conservative-in-Chief strikes again!
Bush is a very fortunate man - the Democrat-controlled Congress is a carnival of dunces, and the GOP-phobic MSM' influence is waning. Bush has also never backed away from his Christian faith in order to placate the Christophobes in the chattering classes. Bush has also made his own luck by fighting two successful wars and appointing fine judges to the bench. The economy is booming, and pro-American leaders are emerging in Europe.
But with actions like this one thing is clear - Bush has been and remains his own worst enemy. His record in dealing with anti-war demagogues in Congress is appalling. Then there was the amnesty debacle earlier this year. For six years he never met a spending bill he didn't like, although after last year's electoral meltdown he seems to have gotten a bit of spending-restraint religion. Bush also continues to ignore alternative media and try to get his message out through a hostile MSM.
No one - not his domestic critics on the Right or Left, nor Islamofascists, not even international leaders have damaged his Presidency as much as he has himself. The entire Bush Era has been a slew of unforced errors and bungled opportunities.
One may be for given for wondering if there are not two President Bushs (I am sure some liberal heads will explode at the mere mention of that possibility). One is the smart, strong leader we saw after 9/11 and who is leading the US to victory in Iraq and Afghanistan. The other is the Compassionate Conservative who tries to ram amnesty down the unwilling throats of the American public and who has been a milquetoast in dealing with Murtha and other anti-American maniacs in Congress.
pilsener
· 2 years ago
Interesting responses.
If some of these borrowers lose their homes, those homes will go on the market at a discount and be sold to another person who wants a home. Financial instituions do not hold property for exended periods. The person/family that buys the discounteed home will benefit.
I especially liked the "home prices are too high comment". Homes are available in a wide range of pricing. It has to be assumed that the "sub-prime buyers" purchased the largest house they could afford at the sub-prime rate. Perhaps if they had purchased a less expensive property, they would have had room to handle the mortgage increase, or could have afforded a fixed rate mortage originally. They assumed a risk.
The lending instittuions will simply adjust their rate structures so that other borrowers make up the lost revenue from the sub-prime mortgages. In short, all other borrowers will be charged for the failure of the sub-prime borrowers to meet their obligations. Under what twisted system of thinking can that be considered fair and reasonable.
I am not a free market absolutist, but I do believe that if the government intervenes it should be for a very short-time frame, with costs and unintended consequences fully considered. This is a kneejerk political reaction to a media story. The fact that Democrats would have demagogued the issue is not adequate justification for the Bush administration recommendation.
newton
· 2 years ago
"If some of these borrowers lose their homes, those homes will go on the market at a discount and be sold to another person who wants a home. Financial institutions do not hold property for extended periods. The person/family that buys the discounted home will benefit."
That's how the sig.other and I were able to buy our nice little house, almost ten years ago. It had been placed on the market by a bank as a pre-foreclosure sale. We saw it during a weekend excursion of the South TX area - the sig.other was considering a new career here, and we were itching to get the hell out of the DC area - and immediately made a bid for it. We were told by the next week that we got it. A month later, we said "Adiós" to DC and "Howdy!" to TX. We have never looked back.
Oh, we sure have benefited from it. There are still some remnants from the previous owners who, for some reason, couldn't keep it together - family, marriage and house. We still have the BB's inside their holes from the spiteful act committed by the previous owner and his son (we were told whodunit by our neighbors), who sneaked into the house right after the bank had repossessed it, and began shooting to all corners of our great room. The Realtor and the bank had to replace a few windows and lights before we moved in, but that was it. We have patched the holes over the years, but there are a few places where you can still see the BBs: they're encrusted and impossible to remove.
And not only that: we got it with a fixed-rate mortgage, which we refinanced a few years later. With the increase in the property value, we no longer need mortgage insurance. Our monthly payments are lower than before... and we didn't have to go for an ARM.
That's how it's done. And we sleep at night, too!
Chris Edwards
· 2 years ago
Maybe Bush is just making it right, and free market, as the lenders were failing in their due diligence , and by lending to folks who cannot pay then why not make them help out, it will only come out of their profits, unlike the people who are struggling to pay a loan they should not have been offered! In the UK lenders used to limit house loans to 3 times annual salary, now it is up to 8 times, check out our house prices!!
NahnCee
· 2 years ago
I disagree, too. Doing as the Feds are suggesting will be saving *all* the adults concerned from a bath, both the lenders and the borrowers. I don't see how allowing an economic melt-down that could lead to a global recession would benefit anyone or anything, especially just to enforce a philosophical concept of what "capitalism" or "market economy" *should* entail.
How is this one-time action any different from all the options the government did to end the Great Depression back in the day? If the "market economy" survived the stock market crash and the Great Depression and all the "nanny state" things that were implemented at that point, I really don't see where bailing out a bunch of overextended middle-class home-owners and Enron-wannabe executives now is going to seriously affect anything.
(I don't suppose the upward-spiral in the price of gas and oil has had anything to do with people not being able to pay their mortgages ... in which case, those overextended homeowners could fairly say that their government OWES them one!)
terrye
· 2 years ago
The White House is not forcing anyone to do anything, this is voluntary which is exactly why the Democrats are complaining that Bush is not doing enough.
I was a realtor and I could see years ago where this was going to end. If something is not done now the damage will only grow and with it the likelihood of real interference in the markets. The problem here is that if nothing is done a lot of innocent bystanders who did not make any bad choices could be damaged. Remember the Great Depression? That was the free market at work too but I don't think anyone wants to relive it. Free market does not have to mean that government just stands back and does nothing while banks collapse.
And they are not allowing anyone to welch on anything. This program is not available to anyone who missed a payment at his original level. It only offers a freeze for some people for a limited time. This is not a bail out.
Gahrie
· 2 years ago
This freeze is ridiculous. Nobody forced these people to sign those contracts. And I bet that a little investigating will find that a significant portion of these ARMs did not go to new homebuyers, but rather to people refinancing so that they could live beyond their means. I have huge amounts of paper equity in my house....six figure equity. My friends were all telling me to refinance and take some of that money out, so I would have more money to play with. Several of those friends are now facing ballooning ARMs, while I have a very comfortable fixed rate.
So my irresponsible friends are now going to get a freeze at least, and there is still talk of a bail out, that I would help pay for of course.
So where is the incentive to behave responsibly? Why are we taklking about incentives to behave irresponsibly?
Also, I have yet to see an ARM whose rate has risen as high as fixed mortgage rates were in the 1970's. Mortgages rates all used to be in the 11% to 12% range, and people were able to buy homes. The problem is, people used these ARMs to buy more home than they could afford. So once again, people behaved irresponsibly.
olddeadmeat
· 2 years ago
Gahrie:
Many of the ARMs under discussions start low, like 2-4% and then can escalate to 12% or even more.
Moreover, the only ones that qualify for the freeze are those with close to no equity or are underwater on the loans already.
This freeze achieves nothing except keep these folks in their homes for a little longer.
Gahrie
· 2 years ago
olddeadmeat:
So your defense of the freeze is that it only helps those who were the most irresponsible?
How many of those with no equity have refinanced within the last five years?
olddeadmeat
· 2 years ago
I absolutely am not defending the freeze - see below.
Corsair
· 2 years ago
I commend you on not refinancing to an ARM. Dabbling in real estate, I get friends and family asking my opinion on issues. I have told several that if you can't afford a conventional loan, then getting an ARM isn't going to be any cheaper in the long run. And never ever but the max you can afford unless you have a three to six month safety net. The Fed and others in the real estate business have been saying there was a big housing bubble forming (especially in certain states) but like the tech bubble nobody listens.
justsomemoron
· 2 years ago
Yea, have to agree with the dissenters here.
Where'd you get the idea that the market is free to start with? Ever heard of usury laws? No market is free of government regulation. We have the freeist market in the world, but that doesn't make it "free."
It's no wonder you're upset that the administration is putting the brakes on an out-of-control industry (the banking industry). It's as if you think the banking industry is free to do whatever it wants, no matter the larger effects their actions have on the "free market."
They've been deceiving people and forcing otherwise qualified people into accepting these mortgages in the first place, by lying to people and claiming that the high rates are "the only thing your credit score can get you." It's total BS. Today, 1 in 6 mortgages is "sub-prime." It's been extremely profitable for some very rich "NY moneymen" - but it's bad policy for middle America.
And, not for nothing, this affects .2% of all mortgages. It's a band-aid put on by the administration to keep Congress from actually regulating the market (see, it's a feint.) There won't be anyone you know who qualifies for a rate lock.
Sheesh, for someone who the White House claims is a direct vein into the heart of conservatism, you could at least get the analysis right.
Bikerken
· 2 years ago
I live out here in San Diego and in one recent five year period, ending in '06, we saw a rise of 135% in home prices in this county! Thats ONE HUNDRED AND THIRTYFIVE PERCENT! Now since people were not making 135% more money, the only way you could sell a house was with little or no down payment. The median income was 55k a year and the median house was almost 600k at one point. The realtors hyped the market to no end and everybody was in on it. I know at least a dozen people who are close friends who are or were working in the housing market as realtors, house flippers, titlers, appraisers, you name it. They were getting pig rich on this deal. it was a nationwide scam! Almost all of them are not working now. Most of the people who bought during this time figured that their home was going to double in price, or more, over the next few years so they were easily talked into very risky loans regardless of what their credit was like. I personally know people who were so panicked to get into the hot housing market that they are, or were, paying up to eighty percent of their income on their mortgage! They really thought this was going to pan out. What I don't think most of these vaulted economic geniuses are missing is that many of these people cannot afford to keep their homes at ANY interest rate because they just paid too high of a price for it, and when that price comes down to a normal level, as it surely will, they will choose to walk away from them being so badly upside down with negative equity.
The bad effects of the 'Teaser Freeze" plan is that is will artifically keep housing prices high, therefore stalling the market correction. It will also, as the captain and Mark so correctly noted, undermine the credibility of US banking. I'm not so sure this plan could withstand even one challenge in court. The only people it is helping is the financial markets, and we all know how poorly they are doing. How many hundreds of millions of dollars are they paying themselves in Christmas bonuses again? I don't recall but it is a new record. Trust me when I say that the only reason the financial markets are for this plan is that is gives them time to dump bad assets on unsuspecting chumps like the average joe sixpack investor before the bottom falls out.
One more thing, about the credibility of the US banking system, do you remember a little while ago when B of A caught a lot of heat for offering bank accounts to illegal aliens? Where do you think the "No Doc" loan idea came from? This was El Presidentes office pushing the banking community to make more financing options available to his best friends, the twenty million illegals in this country who could not afford a new car or home just a few years ago. "No Doc" loans were a tool for "No Doc" immigrants! And these people accounted for much of the housing run-up because they didn't give a damn about buying what they couldn't afford. They could walk away and laugh about it. One of my real estate friends told me that she had seen as many as 20 names on one mortgage contract! My mother in Tucson told me how many illegals she saw down there who were buying houses and SUV's that hadn't been in the country for two years! They didn't earn that by cutting grass. I doubt if they banks that financed this silliness even knew their real names! This is the folly you get into when you allow the rules of law and common sense to go by the wayside because they are not convienient! If we continue down this road of no responsiblity, no respect for law, the take what you can get now attitude, we will soon be just like Mexico and the border won't matter anyway.
Whenever anyone tells you the rules have changed, you can be damned sure they haven't.
Flyover Frank
· 2 years ago
Bikerken writes: "I know at least a dozen people who are close friends who are or were working in the housing market as realtors, house flippers, titlers, appraisers, you name it."
Ever time the wife would watch one of those "flip that house" shows, I'd be bothered by nagging thoughts from college finance and economics about the longevity of super-normal profits. Every time, it seemed we'd have a guy buying a house for $200K, adding $50K of slapped-together improvements, and selling it for $650 for a one-month profit of $400K. Keep that up for a year and you've got a decent salary.
Incidentally, it'd be interesting to see what happens to farmland pricing, especially if the ethanol welfare for farmers is curtailed. Even given current grain prices, an acre of row crop land in western Iowa has a payback period of between 25 and 30 years (after seed, apportioned equipment costs, labor, chemicals, fuel). Not many investments would permit waiting nearly 30 years before they got their original money back, without any interest and compounding. This is a serious bubble that hasn't yet popped.
ppmurphy89
· 2 years ago
See what happens when you start to do creative financing! See what happens when the bosses don't check on their subordinates to make sure all is on the up and up! See what happens when "experts" start telling the non-experts what they can and cannot afford using future projections and outright lies to make a quick buck. See what happens when you ignore the investing advice that past performance does not guarantee the future performance!
You'll notice that none of the Wall Street Gurus like Angelo of Countrywide Financial are in jail for theft and deception. This wasn't a free market to begin with! Simple economics should tell you that if you can get millions of dollars by leveraging it against one dollar with subjective ratings of worth for the base asset something is gonna give.
olddeadmeat
· 2 years ago
Cap'n, and everyone:
This is the worst possible type of government interference, and it's at the worst possible time.
Low interest rates fueled a giant real estate Ponzi scheme. Here's how it worked:
Buy a house with a mix of mortgages, borrowing 100-110% of the value of the home. Enjoy the extra money, wait a few months for the home to appreciate, sell it to someone else either trying to do the same thing, or is someone who can't qualify for a fixed rate mortgage - e.g. a family with $90K in income trying to buy a starter home in California.
No consequences for anyone. Why? - Because the loans went thru a bank's magic sausage factory, where the bad parts were sliced and diced and mixed up and sold as triple-AAA investments ("as safe as T-bills") to pension funds, other institutional investors (like that big fund in Florida that was holding tax revenue for a lot of school districts), or foreign investors - none of whom could tell what they were buying. Even post Sar-Ox, there was greed in play and no rules to speak of.
This all worked so long as home prices kept appreciating, and did so quickly. So we built a bubble, where housing costs rose something like 70+% in less than a decade, and became totally disconnected from rental prices.
But if prices fall, as is happening, the whole house of cards starts collapsing, and suddenly credit becomes hard to get.
The music is stopping, the fat lady is singing, and as a consequence, the entire manner in which capital flows thruout the economy is seizing up. The best analogy I can think of for its effect: imaging the economy is a car engine, and credit is 10W-40. When there are a bunch of leaks, pretty soon the engine stops running.
This has been obvious for several years, Greenspan even mentioned it was a risk, and NO ONE did anything to stop it. It's too bloody late now. There is nothing that can be done but let the market function, let the crash happen and then pick up the pieces. We can recover from that, but it will mean a tough couple of years. Japan tried to fix their crash, and wound up stringing it out over a decade.
Our President wants the lenders to freeze the rates, and to encourage them to do so, he wants Congress to grant the lenders immunity from lawsuit for screwing the investors who bought these loans but now won't get the interest they were contractually promised to receive.
Guess who agrees with him? Hillary Clinton. Oh, joy, when those two agree on something, lock up your wallets. Does the rationale for all this feel something like "from each according to their ability, to each according to their need"? It does to me.
By the way, everyone is missing who the freeze is really trying to save - the banks that were enablers of all of this. If all those suckers stop paying their mortgages next year, many banks would fail quickly. But if they keep paying for a couple of years, Paulson and the banks are hoping they can somehow stave off disaster.
No matter what, the suckers will still lose their homes, because they can't really afford to live in them, and never could.
Guess who gets screwed? Everyone who behaved intelligently and responsibly - who didn't take out ARM mortgages but now get to watch their property values drop as houses down the street. What gets rewarded: the greedy reckless risk-takers.
Next year is going to be an awful one for the economy, and worst of all, it's an election year, which means everyone will be acting with political motives instead of the best interests of the country.
Bikerken
· 2 years ago
I'm just now watching Paulson on CNN defending this stupid idea. He isn't really that enthusiastic about it either. About the best he could say was that "It's not perfect, but I haven't heard any better ideas." Really?!? This guy is older than his IQ. Anytime someone tells you that this plan might have some positive effects, you can bet your butt that they didn't look at the possible negative effects.
gregdn
· 2 years ago
I can't believe how anyone who calls him or herself a Conservative can agree with the government getting involved in this manner. There are two types of people who got caught with their pants down in this market: the greedy ones who were either speculating or pulled equity out of their houses to buy boats etc. and the truly ignorant who didn't understand the terms of their loans. No amount of government intervention will help the second group, but losing a home is good lesson for those who fall in the first category.
starfleet_dude
· 2 years ago
You can stand down Ed - Steyn, as usual, is full of B.S. Here's a link to a website that isn't and has a rundown of what this plan is all about:
O.K., for those here who are allergic to links that aren't in sync with suppositions, here's the skinny:
10) This is not a bailout. There is no federal money involved.
9) The Paulson mortgage plan does not violate any contracts.
8) There will be no lawsuits from investors (other than lawsuits that would have happened anyway).
7). These are not teaser rates.
6) The plan is voluntary - not a mandate - and this is not government regulation.
5) The plan targets homeowners with weak credit who owe more than their house is worth.
4) This is an industry / investor plan. Don't be confused about the happy talk about helping homeowners stay in their homes. This is about helping the investors, and trying to slow the impact of the housing Depression on the economy.
3) The savings for the investors will be small.
2) Recidivism will be high.
1) For the Home Builders: Nothing.
AND FINALLY: The purpose of the plan is to publicize that lenders will modify loans. ... The goal of this plan is get homeowners to pick up the phone.
Ed, please, start paying attention to people who know what they're talking about for a change. Even if they're not slavish pundits. Especially if they're not slavish pundits.
TrollFeeder
· 2 years ago
Bingo. It is voluntary. As I understand it, the Administration simply acted as a mediator so that there was one general plan that all lenders were willing to adopt, simplifying the general public's understanding of how the situation would fall out.
The lenders lose some profit if they adopt this plan, but potentially not as much as having to foreclose on a bunch of properties. The lenders will adopt the plan if it makes more financial sense that having to foreclose. If it does not, then they will not.
I do not see the problem.
BurfordHolly
· 2 years ago
What we have here is a system of resellers that have no interest in putting together a reliable product. They bundle these crappy loans that are basically junk because the high rate of defaults is predictable. Then they resell these mortgage portfolios to retirements funds and municipalities. The middlemen get rich, the school systems go broke from relying on their junk investments, and the tax payers have to take up the slack.
It's a billion dollar scam, and you bet your house that there a couple Bush cousins pocketing millions in the process.
Gahrie
· 2 years ago
Yeah...because it's not like there are any prominent Democrats who have been involved in real estate scandals. Certainly not the Clintons or Harry Reid.
You have to have a real bad case of BDS to use this topic to attack the Bush family, but lucky for us, there's a lot of that going around.
Gahrie
· 2 years ago
Yeah...because it's not like there are any prominent Democrats who have been involved in real estate scandals. Certainly not the Clintons or Harry Reid.
You have to have a real bad case of BDS to use this topic to attack the Bush family, but lucky for us, there's a lot of that going around.
BurfordHolly
· 2 years ago
Just google "Neil Bush" and "savings and loan scandal" for a quick history lesson about how to make billions of dollars in middle class savings vanish like a soap bubble.
Trillions of dollars DON'T just get "lost." Lost like what, the quarter under the sofa cushion? No, every penny ends up in someones pocket. This is just one more trillion dollar fraud, and when they say "lost," it means the taxpayer ultimately picks up the tab.
Gahrie
· 2 years ago
Right...because Neil Bush pocketed all of those billions of dollars, and the Democratic Congress and their contributors had nothing to do with the whole thing.
It's one thing to bring up something that happened 20 years ago to make an arguement that Congress was too lax in its oversight (which you don't attempt to do), and another to bring up something that happened 20 years ago to make a cheap attack on the Bush family. Especially when there are far more recent, far more on point examples that involve Democrats like the Clintons and Reid.
runawayyyy
· 2 years ago
Gee, a minute ago it was a BILLION dollar scam....and now it's a TRILLION dollar scam? Talk about moving the goal posts, but that's what we've all come to expect from you. Do you even read your own previous posts???
njcommuter
· 2 years ago
"Trillions of dollars DON'T just get 'lost'."
If I have a business making DVDs, and I sell that business to you for a billion dollars, and over the next two years people decide that they want to download video instead of buying DVDs, that business, once valued at a billion dollars, is now worth very little.
That billion dollars (a market capitalization) was a value based on expectations. When the expectations failed, the value disappeared.
Yes, billions of dollars can vanish. As a former employee of Lucent, I saw it happen as a series of management tomfooleries and a few big mistakes destroyed the company, and left a lot of livelihoods in doubt.
NAFTALI
· 2 years ago
Lots of extreme comments here--but I think the reason is that a free market does two extreme things. When it works well, prices are lowered, quality is raised. But it also moves to chaos and can cause folks lots of pain. To live in a free market system, I believe you have to learn how it all works, what's wise and what's not wise. That is not in our school system--doesn't even begin to teach how to live in and by this country's very own system of government and economic principles.
The reason the federal government grew in the first place is because of the free market's tendency towards chaos. A society that values democracy and freedom in economics shouldn't also take a sink or swim attitude with its citizens. The economy is complicated enough even if you work for the Fed or on Wall Street. In some ways the economy is like sex--somewhere along the way, from whatever the source, a little education can help the uninitiated to avoid some very serious problems.
So in the cultural chain, the links of institutions, whether government or family, whether public or private whose task is to perpetuate the culture, some links are missing. And that's usually when the feds hop in, because no one else is doing what's necessary. I think that is the history of government growth.
But I could be wrong. That's just how it looks from here.
TheYell
· 2 years ago
Call it "Whip Interest Now" and we can recycle the buttons.
Flyover Frank
· 2 years ago
As someone who took a 15-year fixed in 2003, we paid more in interest than these ARM people have. By fixing ARM rates, you're locking them permanently at the lower rate, destroying the incentive for fixed rates and impairing both lender and borrower risk management incentives. Increasingly, we're allowing special interests to destroy market processes, distorting rational economic behavior.
Doug Henderson comments that home prices are too high. As a household of two professionals, we too were troubled with west Omaha prices for a "moderate" home at $325,000 (yes, many in other cities are probably laughing). But instead of seeking political favor or other artificial means to lower the market price, we put a manufactured home on farm property far outside of the city. 50 acres and a 2500 square foot house for well less than the inflated Omaha home and 1/4 acre price. We solved the problem by adjusting our expectations, not pleading for government interference.
Furthermore, there are countless houses in the countryside seeking an owner, only requiring someone to put serious effort into fixing them up. Of course, you'll have a long commute or have to telework, and sacrifice having movie theaters, sports arenas and such nearby. Their neglected presence seems to suggest very few who want but lack homes seem to be capable of action without a government handout.
GawainsGhost
· 2 years ago
What is missing in this discussion is a real understanding of what created this mess in the first place. My grandfather was a Realtor. My mother is a Realtor; she owns one of the largest, most successful real estate coorporations in South Texas. I am a third-generation Realtor. We deal almost exclusively with repossessed homes and count Fannie Mae, Freddie Mac, Option One, Centex, MGIC, Nation Star, Fidelity, among others as our clients. Here is the inside story of what is going on.
Prior to the 1980s, brokers could perform property appraisals. After the savings and loan debacle, Congress, in its infinite wisdom, changed the law so that only licensed appraisers could perform appraisals. But, and this is the key, the appraiser must be given a copy of the sales contract prior to performing the appraisal. What this did was provide the appraiser with a target price to meet for the valuation of a given property. Instead of providing the fair market value of a home, the appraiser's job thus became to justify the loan, even if the house is overpriced. If the appraiser does not value the home at the sales price or higher, the loan cannot be approved. And the lender will not hire that appraiser for future valuations. This created upward pressure on the prices of homes, as houses where not valued at their real fair market value but at their often inflated sales price or loan amount.
In the 2000s, particularly the years 05-06, as housing prices soared, lenders abandoned all standards and began handing out no-documentation, interest-only and adjustable-rate loans, in the name of "creative financing" (i.e., predatory lending). These loans were then bundled as securities and sold on the secondary market. The problem is that when a lender sells a loan on the secondary market, he is supposed to write and have signed an assignment to designate the investor as the "holder in due course." But these lenders didn't do that, because they didn't want to bother with the paperwork. They simple bundled thousands of loans together and sold them.
There have been several court cases recently, the first out of Ohio, in which the judge ruled that the investor did not have the right to foreclosure, even though the borrower was in default, because, without the assignment, the investor could not prove he was the holder in due course of the note. That's the problem right there.
No one can determine who owns the real property (that would be the rights, as opposed to the real estate which is the house and land) on these notes. Neither the lender who made the loan nor the investor who bought it without an assignment has the right to foreclosure, even if the borrower defaults, and thus neither can repossess the house for resale to recover the losses on the bad loan or poor investment.
This is why the lenders and investors are willing to agree to the government's "solution." It's not to stave off foreclosures. It's to buy time to get all the assignments written to designate the holders in due course! Because until that happens, the foreclosure process cannot even begin.
Welcome to the wonderful world of 21st century financing, where no one seems to have any idea of what to do with money other than lose it. It's going to cost a whole lot of money to get the assignments written before the foreclosure process, which in itself is expensive, can begin. Meanwhile, housing prices are declining (returning to fair market value), credit is tightening (making it harder to get a loan) and sales are slowing (keeping more and more inventory on the market). All of this will only be exacerbated as foreclosures inevitably increase.
The whole thing is a mess, and a lot of people are going to lose a lot of money. Anyone who thinks the government can solve this problem does not understand that the government, by corrupting the appraisal process and turning a blind eye to questionable lending practices, created the problem to begin with. It's just like the old saying, if the disease doesn't kill you, the cure will.
I defer to Mark Twain. "Imagine you were an idiot. Imagine you were a member of Congress. But I repeat myself."
burt
· 2 years ago
"This is a pretty remarkable act by a 'conservative' administration."
This statement is a truism but also a nonsequiter. The only thing a conservative and a compassionate conservative administration have in common is similar names.
"When newspapers start filling with stories about how young couples and people who endured a few tough years can't get home loans, readers should recall how a supposedly free-market administration forced lenders to protect themselves."
This statement is on point.
cognitorex
· 2 years ago
What you espouse seems so right; so logically straight forward. It however for the most part is simply dead wrong. Forget entirely who made the loans, both the borrower and the initial lender. Trillions of dollars of mortgage loans were made and having been made these promises to pay became assets; account receivables to the hedge funds and institutions that subsequently purchased them. Any middling good economist knew that excesses were going on and that with a rise in interest rates a ton of these CMO assets would default or otherwise decline in value. So,and nevertheless, the pros, the hedge funds and their mega wealthy clients and other financial institutions still gobbled up these assets. There was indication aplenty that the ratings were hyped on CMOs and that the financiers were buying a portion of junk assets. In summary, the big boys bought crap assets and being leveraged their entire equity is exposed. As and if it were to be 'free marketly' allowed to happen the big boys equity and concommitent lending resources would evaporate. Hence the government steps in and says, "You know, the two hundred billion in mortgages that are shaky? Well, we're going to going to say that they are okay for the next cycle at least." And you say, "Oh, they're now okay and I don't have to write off my entire equity and go out of business. How swell is that?" Bottom line. The government cares not a whit that Jane, Joe, Dick or Harry will default and lose homes. They care that the big boys will tank due to their stupidity and that the credit resources of America will then hemorrhage. Unfortunately, allowing the free market to work in this instance could be a mega disaster for all so the big money guys will of necessity be bailed out. Jane and Joe, not so much.!
All Comments
That is an amazing bit of breathless hyperbole, and a dangerous one, for all the people who are buying it. The administration very properly used its power to mediate toward the public interest. It did not force anyone into anything, but rather addressed the blocs of mortgage holder and homeowners toward what is probably in everyone's better interest. Any positive effects will be marginal IMO, but that's another story.
The mortgage holders do see the bigger picture, and it's not pretty. With many of these mortgages, the investors left holding the bag never ensured that they became holder "in due course", thus they are left legally unable to foreclose! So their interest in avoiding defaults is greater than ever, because they have been extremely sloppy in ensuring that they have recourse.
And that's on top of their already having made irresponsible loans that put them in this boat. So the administration's role as an intermediary is limited and mitigates a complex harm that is threatening the national economy, all without the direct application of the police or legislative powers of government. That realizes some of the better, and certainly not the worst, potential of governmental power.
I see now that wolfwaler basically commented on this aspect already, but I'll post it for good measure.
http://www.businessweek.com/magazine/content/04...
this made the lenders lower their qualifications to give out loans. That was 2004 and now those same people are the ones getting foreclosed on. The main problem aside from the ARM adjusting is the huge rise in fuel and food prices. This blew the budgets of those families who were living paycheck to paycheck. Unless they get more income even stopping the ARM's from adjusting will not save the majority of them for more than a year because unlike the government, they cannot deficit spend for very long.
And therein lies the problem: in many of these risky ARMs, one side or the other was deceptive. Some borrowers knowingly borrowed more than they could afford. Some falsified their loan applications, entering wrong numbers for income and such. OTOH, some of the lenders buried booby-trap clauses deep in the fine print that no one ever reads, while others didn't even bother burying the trap, but just outright lied to the borrower. Some lenders gave out risky mortgages and then immediately sold them off to other parties, usually banks or securities traders, who never knew that the notes they were buying were so risky.
In a number of cases, lenders sold off loans to third parties in ways that didn't leave a proper paper trail, so that now nobody knows who actually owns the loans. Think about that. You're a bank with a portfolio of loans that seem to be in default -- but you can't foreclose because you don't have the actual loan note, just a notice of transfer. Or you're a borrower who might just possibly be able to renegotiate your mortgage in a way that will save your house -- but you don't know who actually owns your loan now, so you don't know who to negotiate with.
When things like that can happen, the whole industry is out of whack, and the consumers who trusted their lenders to act like responsible adults have had that trust betrayed.
(On a side note, something appears to be wrong with your blog's template. In Firefox, the main box is filling the whole screen, forcing the two sidebars way down, and the background is showing as a sickly green-brown color.)
First, no one is forcing anything; the rate freezes are purely voluntary.
Second, the freezes are targeted toward mortgage holders who
1. Are current with their payments
2. Could stay current under the current rates.
3. Would default if their rates go up.
In other words, the freeze is targeted to help the mortgage owner. Yes, they'll get less money than if the rates went up *and the mortgage continued to be paid*, but that's not a possibility.
The damage was already done when mortgages were sold to people who couldn't afford to pay them. Then those mortgages were packaged, sold, re-packaged, re-sold, etc., like hot potatoes, and the loser is whoever owned them when the defaults started. All of them want the revenue stream the mortgage represents. None of them want to foreclose on a large number of properties and sell them in a depressed market.
So the mortgage owners are better off, because they get some return on their investment. The mortgage holder is better off, as they don't lose their homes. Existing property owners are better off, since there won't be as many foreclosures to depress the market. Existing renters are worse off, since a depressed market would help them buy homes, but you can't please everyone.) Your concern that credit will get tighter is already the case, because the lending industry has now figured out that you can't profitably lend money to the unqualified. (Not forever, anyway.)
The only problem I can see with this solution is that the irresponsible borrowers aren't being punished the way you'd apparently like. (You don't mention the irresponsible lenders, by the way. Why is that? If I lend money to someone who I know isn't qualified and then sell the loan, isn't that a form of fraud? )
In this instance, the reverberation throughout our entire economy if nothing were done, could have extremely dilitarious effects on us all. Why would that be the correct approach? Bush does nothing and the stock market drops precipitously, housing values collapse, our economy goes into a recession...who's the winner here?
There is plenty of blame to go around. Builders, bankers, home buyers all feeding like pigs at a trough. Yea it pisses me off. But I'd be a lot more pissed if because of them my hard earned savings dropped like a lead ballon.
I say "Go Bush" soften the blow.
"Any interest is called usury. Well, that's not going to happen in this modern world. But why not?"
Sorry, you are not thinking this through. Your good intentions are commendable, but that is how some get into promoting oppressive socialism.
You are talking about a system that empowers everyone, especially the very poor. Without the ability for some to gain on the risk of loaning something, there would be no incentive to loan.
Thus, folks who need it the most, would be unable to improve their quality of life. Who could afford a home without the ability to borrow. Or put a child through a better educational system?
Just another positive aspects of the US FREE Market. The competitive nature of 'shopping' for good deals for borrowing drives costs down for all.
A free market allows one to find the fair price for the risk of a loan.
And without some reward for the risk, the loan would never exist.
The USA provided great opportunity, freedom, quality of life, because of this healthy economic system, including these vital incentives.
The alternative is a nightmare.
I'm a fan of you, hewitt and limbaugh, but I disagree with you on your take about these mortagages. First, I think that ARMs should be abolished. I think poorer folks get roped into a slavery that sucks all there time away, leaves their kids unparented, and creates more heartache than joy. Second, could it be that home prices really are too high? Let's get them lower so more can afford homes. Finally, just to make a point - the Bible says to lend money without interest. Any interest is called usury. Well, that's not going to happen in this modern world. But why not? And, is the Bible wrong on that? Or is it right? Thanks for you diligence, and stewardship of your gift. You and your wife are in my prayers whenever you need them.
"Smoot-Hawley Tariff Act," anyone?
http://en.wikipedia.org/wiki/Smoot-Hawley_Tarif...
Holding interest rates at an already high level from absurd increases really isn't a big deal.
The lender is still making a huge profit, the buyer is still required to live up to the contract.
If no intervention were taken, many of US would eventually have to bail out the mess.
There are simply reasoned efforts to become involved.
Just as the USA was forced to engage in anti-trust-monopoly-corruption issues of the past...
In fact, this preemptive, slight effort, is going to help avoid a Democrat Liberal push from encouraging US taxpayers to pay for everything in the end.
But capping it at the current rate the homeowner is paying leads where the Captain points out. I offer my own case as an example -- I had the choice a few years ago of an ARM at 3% (rate guaranteed for 2 years) capped at 12.5% or a fixed rate mortgage at 4.5% plus 3 points. I chose the fixed rate mortgage even though the points cost thousands of dollars and the rate was higher, because I didn't want to bet that inflation might not kick in and raise the rates on the ARM to their maximum.
Other borrowers might have made a different decision from what I did. My feeling is that I have paid for being wise in a manner that the government's intercession will absolve my 3% peers from paying, and instead force payment for their unwisdom onto the loan provider.
Since my peers are "locked in" forever at 3%, I think the government owes me the 1.5% extra and the 3 points I paid for my loan. It's fair, given that the government has stepped in and made this private market into a public one, right?
Bush is a very fortunate man - the Democrat-controlled Congress is a carnival of dunces, and the GOP-phobic MSM' influence is waning. Bush has also never backed away from his Christian faith in order to placate the Christophobes in the chattering classes.
Bush has also made his own luck by fighting two successful wars and appointing fine judges to the bench. The economy is booming, and pro-American leaders are emerging in Europe.
But with actions like this one thing is clear - Bush has been and remains his own worst enemy. His record in dealing with anti-war demagogues in Congress is appalling. Then there was the amnesty debacle earlier this year. For six years he never met a spending bill he didn't like, although after last year's electoral meltdown he seems to have gotten a bit of spending-restraint religion. Bush also continues to ignore alternative media and try to get his message out through a hostile MSM.
No one - not his domestic critics on the Right or Left, nor Islamofascists, not even international leaders have damaged his Presidency as much as he has himself. The entire Bush Era has been a slew of unforced errors and bungled opportunities.
One may be for given for wondering if there are not two President Bushs (I am sure some liberal heads will explode at the mere mention of that possibility). One is the smart, strong leader we saw after 9/11 and who is leading the US to victory in Iraq and Afghanistan. The other is the Compassionate Conservative who tries to ram amnesty down the unwilling throats of the American public and who has been a milquetoast in dealing with Murtha and other anti-American maniacs in Congress.
If some of these borrowers lose their homes, those homes will go on the market at a discount and be sold to another person who wants a home. Financial instituions do not hold property for exended periods. The person/family that buys the discounteed home will benefit.
I especially liked the "home prices are too high comment". Homes are available in a wide range of pricing. It has to be assumed that the "sub-prime buyers" purchased the largest house they could afford at the sub-prime rate. Perhaps if they had purchased a less expensive property, they would have had room to handle the mortgage increase, or could have afforded a fixed rate mortage originally. They assumed a risk.
The lending instittuions will simply adjust their rate structures so that other borrowers make up the lost revenue from the sub-prime mortgages. In short, all other borrowers will be charged for the failure of the sub-prime borrowers to meet their obligations. Under what twisted system of thinking can that be considered fair and reasonable.
I am not a free market absolutist, but I do believe that if the government intervenes it should be for a very short-time frame, with costs and unintended consequences fully considered. This is a kneejerk political reaction to a media story. The fact that Democrats would have demagogued the issue is not adequate justification for the Bush administration recommendation.
That's how the sig.other and I were able to buy our nice little house, almost ten years ago. It had been placed on the market by a bank as a pre-foreclosure sale. We saw it during a weekend excursion of the South TX area - the sig.other was considering a new career here, and we were itching to get the hell out of the DC area - and immediately made a bid for it. We were told by the next week that we got it. A month later, we said "Adiós" to DC and "Howdy!" to TX. We have never looked back.
Oh, we sure have benefited from it. There are still some remnants from the previous owners who, for some reason, couldn't keep it together - family, marriage and house. We still have the BB's inside their holes from the spiteful act committed by the previous owner and his son (we were told whodunit by our neighbors), who sneaked into the house right after the bank had repossessed it, and began shooting to all corners of our great room. The Realtor and the bank had to replace a few windows and lights before we moved in, but that was it. We have patched the holes over the years, but there are a few places where you can still see the BBs: they're encrusted and impossible to remove.
And not only that: we got it with a fixed-rate mortgage, which we refinanced a few years later. With the increase in the property value, we no longer need mortgage insurance. Our monthly payments are lower than before... and we didn't have to go for an ARM.
That's how it's done. And we sleep at night, too!
In the UK lenders used to limit house loans to 3 times annual salary, now it is up to 8 times, check out our house prices!!
How is this one-time action any different from all the options the government did to end the Great Depression back in the day? If the "market economy" survived the stock market crash and the Great Depression and all the "nanny state" things that were implemented at that point, I really don't see where bailing out a bunch of overextended middle-class home-owners and Enron-wannabe executives now is going to seriously affect anything.
(I don't suppose the upward-spiral in the price of gas and oil has had anything to do with people not being able to pay their mortgages ... in which case, those overextended homeowners could fairly say that their government OWES them one!)
I was a realtor and I could see years ago where this was going to end. If something is not done now the damage will only grow and with it the likelihood of real interference in the markets. The problem here is that if nothing is done a lot of innocent bystanders who did not make any bad choices could be damaged. Remember the Great Depression? That was the free market at work too but I don't think anyone wants to relive it. Free market does not have to mean that government just stands back and does nothing while banks collapse.
And they are not allowing anyone to welch on anything. This program is not available to anyone who missed a payment at his original level. It only offers a freeze for some people for a limited time. This is not a bail out.
So my irresponsible friends are now going to get a freeze at least, and there is still talk of a bail out, that I would help pay for of course.
So where is the incentive to behave responsibly? Why are we taklking about incentives to behave irresponsibly?
Also, I have yet to see an ARM whose rate has risen as high as fixed mortgage rates were in the 1970's. Mortgages rates all used to be in the 11% to 12% range, and people were able to buy homes. The problem is, people used these ARMs to buy more home than they could afford. So once again, people behaved irresponsibly.
Many of the ARMs under discussions start low, like 2-4% and then can escalate to 12% or even more.
Moreover, the only ones that qualify for the freeze are those with close to no equity or are underwater on the loans already.
This freeze achieves nothing except keep these folks in their homes for a little longer.
So your defense of the freeze is that it only helps those who were the most irresponsible?
How many of those with no equity have refinanced within the last five years?
Where'd you get the idea that the market is free to start with? Ever heard of usury laws? No market is free of government regulation. We have the freeist market in the world, but that doesn't make it "free."
It's no wonder you're upset that the administration is putting the brakes on an out-of-control industry (the banking industry). It's as if you think the banking industry is free to do whatever it wants, no matter the larger effects their actions have on the "free market."
They've been deceiving people and forcing otherwise qualified people into accepting these mortgages in the first place, by lying to people and claiming that the high rates are "the only thing your credit score can get you." It's total BS. Today, 1 in 6 mortgages is "sub-prime." It's been extremely profitable for some very rich "NY moneymen" - but it's bad policy for middle America.
And, not for nothing, this affects .2% of all mortgages. It's a band-aid put on by the administration to keep Congress from actually regulating the market (see, it's a feint.) There won't be anyone you know who qualifies for a rate lock.
Sheesh, for someone who the White House claims is a direct vein into the heart of conservatism, you could at least get the analysis right.
The bad effects of the 'Teaser Freeze" plan is that is will artifically keep housing prices high, therefore stalling the market correction. It will also, as the captain and Mark so correctly noted, undermine the credibility of US banking. I'm not so sure this plan could withstand even one challenge in court. The only people it is helping is the financial markets, and we all know how poorly they are doing. How many hundreds of millions of dollars are they paying themselves in Christmas bonuses again? I don't recall but it is a new record. Trust me when I say that the only reason the financial markets are for this plan is that is gives them time to dump bad assets on unsuspecting chumps like the average joe sixpack investor before the bottom falls out.
One more thing, about the credibility of the US banking system, do you remember a little while ago when B of A caught a lot of heat for offering bank accounts to illegal aliens? Where do you think the "No Doc" loan idea came from? This was El Presidentes office pushing the banking community to make more financing options available to his best friends, the twenty million illegals in this country who could not afford a new car or home just a few years ago. "No Doc" loans were a tool for "No Doc" immigrants! And these people accounted for much of the housing run-up because they didn't give a damn about buying what they couldn't afford. They could walk away and laugh about it. One of my real estate friends told me that she had seen as many as 20 names on one mortgage contract! My mother in Tucson told me how many illegals she saw down there who were buying houses and SUV's that hadn't been in the country for two years! They didn't earn that by cutting grass. I doubt if they banks that financed this silliness even knew their real names! This is the folly you get into when you allow the rules of law and common sense to go by the wayside because they are not convienient! If we continue down this road of no responsiblity, no respect for law, the take what you can get now attitude, we will soon be just like Mexico and the border won't matter anyway.
Whenever anyone tells you the rules have changed, you can be damned sure they haven't.
Ever time the wife would watch one of those "flip that house" shows, I'd be bothered by nagging thoughts from college finance and economics about the longevity of super-normal profits. Every time, it seemed we'd have a guy buying a house for $200K, adding $50K of slapped-together improvements, and selling it for $650 for a one-month profit of $400K. Keep that up for a year and you've got a decent salary.
Incidentally, it'd be interesting to see what happens to farmland pricing, especially if the ethanol welfare for farmers is curtailed. Even given current grain prices, an acre of row crop land in western Iowa has a payback period of between 25 and 30 years (after seed, apportioned equipment costs, labor, chemicals, fuel). Not many investments would permit waiting nearly 30 years before they got their original money back, without any interest and compounding. This is a serious bubble that hasn't yet popped.
You'll notice that none of the Wall Street Gurus like Angelo of Countrywide Financial are in jail for theft and deception. This wasn't a free market to begin with! Simple economics should tell you that if you can get millions of dollars by leveraging it against one dollar with subjective ratings of worth for the base asset something is gonna give.
This is the worst possible type of government interference, and it's at the worst possible time.
Low interest rates fueled a giant real estate Ponzi scheme. Here's how it worked:
Buy a house with a mix of mortgages, borrowing 100-110% of the value of the home. Enjoy the extra money, wait a few months for the home to appreciate, sell it to someone else either trying to do the same thing, or is someone who can't qualify for a fixed rate mortgage - e.g. a family with $90K in income trying to buy a starter home in California.
No consequences for anyone. Why? - Because the loans went thru a bank's magic sausage factory, where the bad parts were sliced and diced and mixed up and sold as triple-AAA investments ("as safe as T-bills") to pension funds, other institutional investors (like that big fund in Florida that was holding tax revenue for a lot of school districts), or foreign investors - none of whom could tell what they were buying. Even post Sar-Ox, there was greed in play and no rules to speak of.
This all worked so long as home prices kept appreciating, and did so quickly. So we built a bubble, where housing costs rose something like 70+% in less than a decade, and became totally disconnected from rental prices.
But if prices fall, as is happening, the whole house of cards starts collapsing, and suddenly credit becomes hard to get.
The music is stopping, the fat lady is singing, and as a consequence, the entire manner in which capital flows thruout the economy is seizing up. The best analogy I can think of for its effect: imaging the economy is a car engine, and credit is 10W-40. When there are a bunch of leaks, pretty soon the engine stops running.
This has been obvious for several years, Greenspan even mentioned it was a risk, and NO ONE did anything to stop it. It's too bloody late now. There is nothing that can be done but let the market function, let the crash happen and then pick up the pieces. We can recover from that, but it will mean a tough couple of years. Japan tried to fix their crash, and wound up stringing it out over a decade.
Our President wants the lenders to freeze the rates, and to encourage them to do so, he wants Congress to grant the lenders immunity from lawsuit for screwing the investors who bought these loans but now won't get the interest they were contractually promised to receive.
Guess who agrees with him? Hillary Clinton. Oh, joy, when those two agree on something, lock up your wallets. Does the rationale for all this feel something like "from each according to their ability, to each according to their need"? It does to me.
By the way, everyone is missing who the freeze is really trying to save - the banks that were enablers of all of this. If all those suckers stop paying their mortgages next year, many banks would fail quickly. But if they keep paying for a couple of years, Paulson and the banks are hoping they can somehow stave off disaster.
No matter what, the suckers will still lose their homes, because they can't really afford to live in them, and never could.
Guess who gets screwed? Everyone who behaved intelligently and responsibly - who didn't take out ARM mortgages but now get to watch their property values drop as houses down the street. What gets rewarded: the greedy reckless risk-takers.
Next year is going to be an awful one for the economy, and worst of all, it's an election year, which means everyone will be acting with political motives instead of the best interests of the country.
No amount of government intervention will help the second group, but losing a home is good lesson for those who fall in the first category.
Ten things to know about the Freeze - Calculated Risk
O.K., for those here who are allergic to links that aren't in sync with suppositions, here's the skinny:
10) This is not a bailout. There is no federal money involved.
9) The Paulson mortgage plan does not violate any contracts.
8) There will be no lawsuits from investors (other than lawsuits that would have happened anyway).
7). These are not teaser rates.
6) The plan is voluntary - not a mandate - and this is not government regulation.
5) The plan targets homeowners with weak credit who owe more than their house is worth.
4) This is an industry / investor plan. Don't be confused about the happy talk about helping homeowners stay in their homes. This is about helping the investors, and trying to slow the impact of the housing Depression on the economy.
3) The savings for the investors will be small.
2) Recidivism will be high.
1) For the Home Builders: Nothing.
AND FINALLY: The purpose of the plan is to publicize that lenders will modify loans. ... The goal of this plan is get homeowners to pick up the phone.
Ed, please, start paying attention to people who know what they're talking about for a change. Even if they're not slavish pundits. Especially if they're not slavish pundits.
The lenders lose some profit if they adopt this plan, but potentially not as much as having to foreclose on a bunch of properties. The lenders will adopt the plan if it makes more financial sense that having to foreclose. If it does not, then they will not.
I do not see the problem.
It's a billion dollar scam, and you bet your house that there a couple Bush cousins pocketing millions in the process.
You have to have a real bad case of BDS to use this topic to attack the Bush family, but lucky for us, there's a lot of that going around.
You have to have a real bad case of BDS to use this topic to attack the Bush family, but lucky for us, there's a lot of that going around.
Trillions of dollars DON'T just get "lost." Lost like what, the quarter under the sofa cushion? No, every penny ends up in someones pocket. This is just one more trillion dollar fraud, and when they say "lost," it means the taxpayer ultimately picks up the tab.
It's one thing to bring up something that happened 20 years ago to make an arguement that Congress was too lax in its oversight (which you don't attempt to do), and another to bring up something that happened 20 years ago to make a cheap attack on the Bush family. Especially when there are far more recent, far more on point examples that involve Democrats like the Clintons and Reid.
If I have a business making DVDs, and I sell that business to you for a billion dollars, and over the next two years people decide that they want to download video instead of buying DVDs, that business, once valued at a billion dollars, is now worth very little.
That billion dollars (a market capitalization) was a value based on expectations. When the expectations failed, the value disappeared.
Yes, billions of dollars can vanish. As a former employee of Lucent, I saw it happen as a series of management tomfooleries and a few big mistakes destroyed the company, and left a lot of livelihoods in doubt.
The reason the federal government grew in the first place is because of the free market's tendency towards chaos. A society that values democracy and freedom in economics shouldn't also take a sink or swim attitude with its citizens. The economy is complicated enough even if you work for the Fed or on Wall Street. In some ways the economy is like sex--somewhere along the way, from whatever the source, a little education can help the uninitiated to avoid some very serious problems.
So in the cultural chain, the links of institutions, whether government or family, whether public or private whose task is to perpetuate the culture, some links are missing. And that's usually when the feds hop in, because no one else is doing what's necessary. I think that is the history of government growth.
But I could be wrong. That's just how it looks from here.
Doug Henderson comments that home prices are too high. As a household of two professionals, we too were troubled with west Omaha prices for a "moderate" home at $325,000 (yes, many in other cities are probably laughing). But instead of seeking political favor or other artificial means to lower the market price, we put a manufactured home on farm property far outside of the city. 50 acres and a 2500 square foot house for well less than the inflated Omaha home and 1/4 acre price. We solved the problem by adjusting our expectations, not pleading for government interference.
Furthermore, there are countless houses in the countryside seeking an owner, only requiring someone to put serious effort into fixing them up. Of course, you'll have a long commute or have to telework, and sacrifice having movie theaters, sports arenas and such nearby. Their neglected presence seems to suggest very few who want but lack homes seem to be capable of action without a government handout.
Prior to the 1980s, brokers could perform property appraisals. After the savings and loan debacle, Congress, in its infinite wisdom, changed the law so that only licensed appraisers could perform appraisals. But, and this is the key, the appraiser must be given a copy of the sales contract prior to performing the appraisal. What this did was provide the appraiser with a target price to meet for the valuation of a given property. Instead of providing the fair market value of a home, the appraiser's job thus became to justify the loan, even if the house is overpriced. If the appraiser does not value the home at the sales price or higher, the loan cannot be approved. And the lender will not hire that appraiser for future valuations. This created upward pressure on the prices of homes, as houses where not valued at their real fair market value but at their often inflated sales price or loan amount.
In the 2000s, particularly the years 05-06, as housing prices soared, lenders abandoned all standards and began handing out no-documentation, interest-only and adjustable-rate loans, in the name of "creative financing" (i.e., predatory lending). These loans were then bundled as securities and sold on the secondary market. The problem is that when a lender sells a loan on the secondary market, he is supposed to write and have signed an assignment to designate the investor as the "holder in due course." But these lenders didn't do that, because they didn't want to bother with the paperwork. They simple bundled thousands of loans together and sold them.
There have been several court cases recently, the first out of Ohio, in which the judge ruled that the investor did not have the right to foreclosure, even though the borrower was in default, because, without the assignment, the investor could not prove he was the holder in due course of the note. That's the problem right there.
No one can determine who owns the real property (that would be the rights, as opposed to the real estate which is the house and land) on these notes. Neither the lender who made the loan nor the investor who bought it without an assignment has the right to foreclosure, even if the borrower defaults, and thus neither can repossess the house for resale to recover the losses on the bad loan or poor investment.
This is why the lenders and investors are willing to agree to the government's "solution." It's not to stave off foreclosures. It's to buy time to get all the assignments written to designate the holders in due course! Because until that happens, the foreclosure process cannot even begin.
Welcome to the wonderful world of 21st century financing, where no one seems to have any idea of what to do with money other than lose it. It's going to cost a whole lot of money to get the assignments written before the foreclosure process, which in itself is expensive, can begin. Meanwhile, housing prices are declining (returning to fair market value), credit is tightening (making it harder to get a loan) and sales are slowing (keeping more and more inventory on the market). All of this will only be exacerbated as foreclosures inevitably increase.
The whole thing is a mess, and a lot of people are going to lose a lot of money. Anyone who thinks the government can solve this problem does not understand that the government, by corrupting the appraisal process and turning a blind eye to questionable lending practices, created the problem to begin with. It's just like the old saying, if the disease doesn't kill you, the cure will.
I defer to Mark Twain. "Imagine you were an idiot. Imagine you were a member of Congress. But I repeat myself."
This statement is a truism but also a nonsequiter. The only thing a conservative and a compassionate conservative administration have in common is similar names.
"When newspapers start filling with stories about how young couples and people who endured a few tough years can't get home loans, readers should recall how a supposedly free-market administration forced lenders to protect themselves."
This statement is on point.
Forget entirely who made the loans, both the borrower and the initial lender. Trillions of dollars of mortgage loans were made and having been made these promises to pay became assets; account receivables to the hedge funds and institutions that subsequently purchased them.
Any middling good economist knew that excesses were going on and that with a rise in interest rates a ton of these CMO assets would default or otherwise decline in value.
So,and nevertheless, the pros, the hedge funds and their mega wealthy clients and other financial institutions still gobbled up these assets.
There was indication aplenty that the ratings were hyped on CMOs and that the financiers were buying a portion of junk assets.
In summary, the big boys bought crap assets and being leveraged their entire equity is exposed. As and if it were to be 'free marketly' allowed to happen the big boys equity and concommitent lending resources would evaporate.
Hence the government steps in and says, "You know, the two hundred billion in mortgages that are shaky? Well, we're going to going to say that they are okay for the next cycle at least."
And you say, "Oh, they're now okay and I don't have to write off my entire equity and go out of business. How swell is that?"
Bottom line. The government cares not a whit that Jane, Joe, Dick or Harry will default and lose homes. They care that the big boys will tank due to their stupidity and that the credit resources of America will then hemorrhage.
Unfortunately, allowing the free market to work in this instance could be a mega disaster for all so the big money guys will of necessity be bailed out.
Jane and Joe, not so much.!