So where exactly has the government stepped in and forced anything on the lenders?
I hear it repeated over and over but haven’t actually seen evidence of it. That would seem to matter... It does to me.
I know. Lots of articles with lots of experts saying lots of crap, but none of them have a clue. The government has not stepped in and done anything. The current plan is a voluntary plan worked up between Paulson and the banks/financial institutions. Now if Congress steps in and tries to pass laws, that will be a different story. But so far, this is not a bailout and this is not the government forcing a solution on anyone. This is the banks volunteering to modify certain loans which are in their best interest to do so.
The administration indicated it would not use the justice system to block the settlement proposed by the banks. That is not what most of the posts on this thread miss.
This a proposal by the banks to limit the expected losses.
In the good, old days, when you'd borrow from your local bank and a banker you knew, this wouldn't happen. If you blew out financially and couldn't make the loan payments, then the bank had an incentive to re-paper the loan at term you could meet. There is still a great deal of this sort of activity, and this is how work-outs happen. Foreclosure from a bank's perspective is a bad thing (~$0.40 on the dollar, home in bad shape, etc, etc)
The trouble is... there is also a great deal of mortgage paper that has been sliced and diced by the Wall Street Wizards. No longer does the loan originator have any particular skin in the game (though in some cases a bad loan can be put back to them). Most of the problematic paper is in the form of asset-backed securities -pools of mortgages which have been packaged and sold off as various tranches of bonds at various credit ratings.
The mortgage servicer earns fees for processing the payments and ensuring that the AAA tranche gets paid first, the AA tranche next, and so forth. There are strict and contractually specified limits on how much a mortgage servicer may change the terms of the underlying paper (the mortgages). The bond buyers have expectations of certain cash flows, and they have bought bonds accordingly.
What this plan does is to cram the "freeze" down on bond buyers - who are now the lenders. Don't kid yourself: bond buyers have *not* signed on in any way to this plan. They are so dispersed that one could not even begin to assemble a quorum of them. Imagine you bought a bond with certain cashflows, and the government came in and said: "sorry; the flows are now X0% lower. Eat it." That's what is being forced on the "lenders" here.
There are some who will assert that this workout is better for the lenders because it avoids forclosures and better for the homeowner (homedebtor) because he or she stays put. Maybe, maybe not. That's not the point. When the gov't comes in and forces a change to contract terms between private parties (to benefit one over the other: servicers vs bond holders) it sets a terrible precident. Bondholders are on notice that what's agreed to may be changed if the other side becomes a favored victim class by the gov't. So while there is no explicit government payment flowing here, there also is no such thing as free money. You will pay the cost in the future as the captial markets price in government-fiat risk in the terms. And you can bank on that.
Big government solutions bring out positively the worst in their promoters, too. Since this program cannot be sold on the merits (other than rubbing salve on the poor grasshopper), demagoguery is all that's left. The Chairwoman of the FDIC is in the papers saying that those opposing this plan probably have short positions in ABX securities. She has no evidence to support such slander, but that doesn't matter. Pity...