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To: goldstategop
I like Mark Steyn, but wasn't the bail out just an agreement between the administration and the big lenders, to freeze the rates of certain sub-prime arms? According to Dave Ramsey, this effects less than 1% of the sub primes that are over 30 days and no tax dollars are involved. If that's correct, I'm not sure I understand where Mark's coming from. I am prepared to be corrected though.
7 posted on 12/08/2007 4:45:08 AM PST by TheRake (Still Taxed to death in Michigan....it's getting worse.....and worse)
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To: TheRake

“I like Mark Steyn, but wasn’t the bail out just an agreement between the administration and the big lenders, to freeze the rates of certain sub-prime arms? According to Dave Ramsey, this effects less than 1% of the sub primes that are over 30 days and no tax dollars are involved. If that’s correct, I’m not sure I understand where Mark’s coming from. I am prepared to be corrected though.” ~ TheRake

Try this:

The Not Paulson Bailout
December 6, 2007; WSJ - Page A18

The next time we suggest that the government give advice to the private sector, tie us down until the fever passes. A couple months ago, we endorsed the idea of mortgage service companies voluntarily negotiating with subprime borrowers and investors to avoid a wave of defaults next year. Now come the politicians to wrap their arms around the idea, and maybe give the U.S. a reputation for forcibly rewriting financial contracts. Don’t cry for us, Argentina?

Both Treasury Secretary Hank Paulson and the White House are touting a plan to freeze interest payments on up to two million troubled mortgages. Except we’re told that this isn’t “the Paulson plan.” Treasury says its only role has been as a facilitator to get everyone in the room, and that the terms are being worked out by the private parties.

We wonder what these parties really think. Offering free advice is one thing. But when the feds sit down as a negotiating partner, the line between moral suasion and coercion starts to blur. Companies begin to think they’re hearing an offer they can’t refuse. So perhaps we should call it the Not Paulson bailout.

It’s not as if banks, investors and mortgage servicers don’t have incentive to avoid foreclosures on their own. Investors typically lose 30% to 50% of the unpaid mortgage balance when a home has to be resold due to foreclosure. So they have every incentive to renegotiate subprime loans that are expected to become delinquent. And that process is already well under way.

Treasury sources say that wasn’t good enough because this process is costly and complicated without uniform standards. So they had to get everyone in the room and “facilitate.” No doubt that’s true, but then contracts aren’t supposed to be rewritten on a whim. They take two to untangle.

The U.S. economic and legal systems are built on the sanctity of contract, and even the hint that government is compelling investors who now own these mortgages (the banks having sold them as bundled securities) to take less money puts the U.S. on a very dangerous road. At a minimum, it will raise the future risk premium that investors will demand for investing in U.S. real estate, which means it will be costlier to get a mortgage in the future.

Now, some of our friends claim that freezing interest rates in this way doesn’t violate mortgage contracts. When securitizers purchase loans, the Pooling and Servicing Agreements normally assign servicers a fiduciary duty to maximize cash-flows for the investors. In some cases, servicers can modify loan terms if this is consistent with “standard industry practice.” This plan establishes a new “standard industry practice.” We trust everyone is prepared to fight that out in court, maybe for years to come, because the lawsuits are going to test that “standard” practice claim.

The Not Paulson plan has other defects. Which borrowers will qualify for the lower interest rate payments? Almost all subprime borrowers will argue that they should benefit from loan forgiveness, especially if they’ve been responsible and sacrificed to make their payments. The problem with imposing uniform loan forgiveness is that you quickly get universal take-up rates.

Moreover, the evidence suggests that even when troubled borrowers receive a generous reset on their mortgage payments, as many of 40% of those borrowers still eventually default. The refinancing plan might only delay the day of reckoning and lead to bigger losses in a falling market. An analysis by the financial services consulting firm Graham Fisher calls this “the rolling loan gathers no loss” philosophy, and notes its similarity to the strategy that prolonged the “S&L crisis and the Japanese banking crisis.”

By the way, another part of Mr. Paulson’s nonplan would allow states to float more tax-exempt bonds to refinance subprime borrowers. State housing authorities can now float tax-exempts to help first-time home buyers, but Treasury wants to let them float bonds to refinance loans or pay closing costs as well. This is clearly a taxpayer-financed bailout.

Many in the Bush Administration and mortgage industry privately agree that this is dubious policy, but they plead that it’s better than the alternatives being offered on Capitol Hill. These include “antipredatory lending” laws and new bankruptcy provisions that are punitive and would delay any recovery in the mortgage market. Right on time, Hillary Clinton weighed in with the truly awful idea of freezing subprime mortgage rates for five years — presumably, through the end of her re-election campaign in 2012. She’d combine price controls and contract repudiation — an Argentina double.

Rather than cave to these impulses, however, the Bush Administration would be better off politically opposing anything that smacks of a “bailout.” A Public Opinion Strategy polls find that 62% of Americans oppose a mortgage bailout. More than 95% of homeowners are making their payments on time, and they believe it is unfair to pay more in taxes to assist those who’ve been less responsible. They’re right.


25 posted on 12/08/2007 8:45:15 AM PST by Matchett-PI (Algore - there's not a more priggish, sanctimonious moral scold of a church lady anywhere.)
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