Posted on 12/06/2007 7:53:20 AM PST by SmithL
The Bush administration will unveil its methadone plan for the mortgage crisis today.
Instead of going cold turkey and letting the free market take its course, the administration reportedly has reached an agreement with lenders and mortgage investors to freeze interest rates for a select group of subprime borrowers who made bad, greedy or uninformed decisions.
"You're just giving the junkie more dope," says Christopher Whalen, managing partner with Institutional Risk Analytics, a consulting firm.
Treasury Secretary Henry Paulson also has urged Congress to pass a law that would let cities and states sell tax-exempt bonds to refinance mortgages for borrowers who otherwise might lose their homes. If that's not a bailout, I don't know what is.
Paulson offered a general outline of the plan on Monday. He identified four groups of subprime borrowers facing rate increases on their adjustable-rate loans: Those who cannot afford their payments even at the current rate; those who could afford payments at the higher rate; those can refinance into a "sustainable mortgage while keeping investors whole;" and those who can afford their mortgages today but could not at the higher rate.
Only the fourth group would get help.
According to media reports, people in this category who took out a subprime loan between January 2005 and July 30 of this year and whose rate is scheduled to rise between Jan. 1, 2008 and July 31, 2010 would have their rates frozen for five years.
(Excerpt) Read more at sfgate.com ...
Your question is irrelevant. The agreement is involves the corporations who receive those payments. And the agreement only applies to people who have been making payments on time.
It’s still the same problem whether it’s a teaser rate or a regular ARM, it’s just a matter of scale.
Re: foreclosures, investors DO get their money back, they call it the recovery rate in the industry.
If you’re an investor, would you rather recover 70% of your money back now through foreclosure and go put it in something else, or have 100% of your money locked in for five (or more) years in a possibly cash-flow negative investment, and eventually foreclose anyway at lower recovery rates (e.g. if the real estate market continues downward)?
Remember most investors themselves borrowed money to relend to homeowners. If their interest payment goes up but your ARM doesn’t go up to match, they may wind up paying you to live in your house.
This plan will delay the day of reckoning for a small number of borrowers while making it harder for everyone to get mortgages after burning investors further.
Best comment of the month!!!!
That’s a reasonable argument...however:
The foreclosure process usually takes about 2 years once that “recovery” phase is reached. By that time many of these people may well have been able to refinance their loans.
Also - the investors never expect to make money beyond the fixed-rate period of the ARM. The idea behind doing a three-year ARM is that the loan would be refinanced and paid off at the end of the three years, which is also usually when the prepayment penalty was up. Meaning, the investor gets their money back and what they made in interest the three years prior is all they’ve made on it.
Prolonging the 3 years to 4, 6 or whatever prolongs that time they get their money back.
However, they will continue recieving monthly payments this way. With foreclosure, yeah, they’ll get 70% of it back, but it will take about 2 years with no money recieved between now and then.
Bingo!!! Either harder and/or more expensive for those that have acted responsibly.
And for the banks, it's the government providing the vials to crack dealers.
A plan that keeps large numbers of foreclosed homes from being dumped on the market is a good thing.
Everyone is affected if housing prices have a significant decrease.
And individual risky behavior isn’t being rewarded, it is more like a bad situation doesn’t turn into a catastrophic one.
Don’t forget that the active housing market has pumped huge amounts of wealth into our economy.
Everyone benefits from this.
“Don’t forget that the active housing market has pumped huge amounts of wealth into our economy”
Change the word ‘wealth’ to ‘debt’ and then you would be making sense...otherwise, you are way, way off base....
The banks need to get burned, so that they do not overloan like this again.
And the excessive demand drove out housing costs. This correction will make housing affordable again.
Some of them will have more time to bring their credit scores up.
It’s not perfect but BETTER than what will happen, now. That’s all I’m saying.
I believe there will be a synergy between the existing problem and the proposed solution. Not talking out of both sides of my mouth.
How naive and ignorant.
Have you read no history?
The same could be said of the Tulip Bubble, the South Sea Bubble, the John Law Bubble, and the Trump Casino on a good day.
The best best and final resolution in each of those cases occurred when the bubble burst and the imaginary wealth dissipated.
Then, the citizens went back to working for wealth, instead of speculation. And people should be buying a house to live in, not to vie for appearances on lives of the rich and famous.
And your dismissal of the moral hazard argument adds to the speciousness of your position.
Are your initials "A.G." by any chance? (Mr. "ARMs are a good deal now". Now we know why they were such a good deal!).
Remember also a refinance is likely to increase their payment, so they’re right back up against the payment increase they can’t afford. There will be some people who benefits as you describe, but I’m concerned with the “collateral damage” impact on the whole mortgage system when you suddenly change the rules.
That is a good thing about falling prices, which are already occurring BTW.
The problem arises when the crash is too big and so many people are unemployed or see major drops in income, that they can’t buy anything at any price.
Car sales, computer sales, restaurant sales, etc, etc are affected by what the housing market does.
It’s hard to find people that aren’t affected.
Again, I haven’t seen how tax payer money is “bailing out” anyone.
Seems like the private sector is carrying this one.
I for one believe that economic stability is a good thing for everyone. Banana republics have economic instability.
I don’t hope for Armageddon in any industry, or have the attitude that “ I have mine so screw everyone else”.
You said that few people are affected by this agreement... so how can it be that this situation could lead to those kinds of widespread massive problems?
That said I think this Bush plan is a bad idea and an even worse precedent.
When prices return to a level where it is reasonable for people to buy property again, that is when the next boom will begin.
It is obvious to anybody who has watched the market in the past few years that a severe correction is warranted. The fundamentals don't justify 100%-200% increases and these valuations are WAY out of line.
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