Posted on 04/12/2008 4:41:25 PM PDT by Lorianne
IT was the nation’s lending institutions and mortgage originators that got us into this credit mess, but it is consumers, taxpayers and those companies’ shareholders who will end up shouldering most of the costs.
The latest example of this is in the mass freezing of home equity lines of credit going on across the country. Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure.
In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen, estimated Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans.
Major lenders — including Washington Mutual, IndyMac Bank and the Greenpoint Mortgage Unit of Capital One — say that declining property values are prompting the decisions to cut off credit.
Banks have the right, of course, to rescind these credit lines at any time under the terms of the contracts they struck with borrowers. And as home prices have tumbled in many parts of the country, banks are undoubtedly trying to protect themselves from exposure to additional losses.
One especially exasperating aspect of now-you-see-them, now-you-don’t equity lines is that borrowers are not receiving refunds for fees they paid to secure the credit in the first place.
These fees can be significant, Mr. Kratzer said: on a $50,000 line, for example, fees of $1,500 are common. If the line is being frozen at, say, $25,000, why shouldn’t the borrower be entitled to receive a refund of $750?
(Excerpt) Read more at nytimes.com ...
Fannie and Freddie's regulator lowered their excess capital requirements from 30% to 20% which will allow them to buy more loans. And I'm pretty sure they won't refinance a bad loan until the original lender writes off the bad part. I've seen nothing saying that they'll be buying known bad loans as you originally claimed.
At this point it doesn’t matter who is responsible, at least not in the bigger picture. The problem is so big that perfectly innocent folks will get dragged under if something significant isn’t done.
Blame and consequences are fine and dandy, but they are not always the deciding factors in making the right policy decision.
It certainly DOES matter who is responsible!
I don’t want to PAY for someone elses stupidity!
You don’t understand history. The Depression would not have been so severe if the GOVERNMENT had NOT gotten involved. Our government is doing the same thing all over again. The market needs to correct itself and people who had poor judegment need to learn from it and NOT be bailed out.
“Fannie and Freddie’s regulator lowered their excess capital requirements from 30% to 20% which will allow them to buy more loans. And I’m pretty sure they won’t refinance a bad loan until the original lender writes off the bad part. I’ve seen nothing saying that they’ll be buying known bad loans as you originally claimed.”
The whole point is to have the government buy back the loans since NO ONE ELSE in the PRIVATE SECTOR WANTS THEM!
Recently ( was it after the Countrywide meltdown, The Thornburg default, the Bear Stearns collapse, the Fremont fiasco?, can’t remember?) Fannie and Freddie were told by the Government to expand their purchases of mortages well beyond the previous limits of about 500K into the jumbo categories. The obvious reason, to mitigate the mortage industrys exposure there due to the dastardlly evil borrowers who had tied their fair daughters to the railroad tracks and forced them to give them million dollar mortages.
Credit only works when the creditor holds 100% collateral on the loan, and that collateral is non-speculative. That is, the axiom holds true that credit is for those who don’t need credit.
And the problems with a credit system are also evident in the above statement. Creditors who hold less than 100% collateral. Creditors who hold speculative collateral. And debtors who use credit to buy what they cannot afford.
Our society as a whole, individuals, companies and the government, has willfully violated these simple rules and created an imaginary credit castle in the sky. And while this allowed all of us to spend wildly beyond our means, the outcome was inevitable.
So where do we go from here?
There must be a grand retraction, don’t call it a recession or a depression, in credit. Credit must be returned, at the individual, corporate and governmental level, to its basic principles.
Many existing debts will have to be erased, because they are leveraged creations many times the value of the collateral on which they were given. Creditors will be severely punished for giving credit where credit was not due. At the international level, for example, the US may renounce much of its national debt.
But debtors will also be chastised. They will no longer have credit available to them, so they must pay for future debts in real goods or cash. From the lowest to the international level, a return to a cash economy. Credit cards will be replaced with debit cards.
If you do not have the cash, you cannot buy. And this is not as radical a notion as you might imagine. Not too long ago, it was the norm, and not only was credit the exception, but it was tightly bound by the rules of credit.
At the national level, confidence can only be restored with the passage of a real balanced budget amendment to the constitution, with a prohibition against off-budget appropriations or assumptions of debt. If the government does not bring in the revenue with taxes, it cannot spend the money.
Ergo, the size of the government will have to be radically reduced, and payments to individuals except for goods and services, curtailed. Treasuries and bonds can only be issued if they are redeemable for a desired commodity.
Consistent with this, their will also be massive deflation, as currencies contract to reflect only commodities, products and essential services, not the incredibly leveraged credit system based on them. Ironically, governments will have to print vast numbers of new bills, as cash must be represented in cash, not on computer. If a person has $20,000 in the bank, the bank will have on hand $20,000 in bills for their account, if not at a particular branch.
A severe drop in prices and wages. Wages may be reduced by half or more, concomitant with prices. Wealth will be associated with liquidity.
Fannie and Freddie aren't the government and they aren't buying back bad loans made by others no matter how much you use the caps lock key.
The junior mortgage holders have a choice - they can either pay off the first and protect their interest, or they can let the first lien holder foreclose their interest. At that point, they end up with an unsecured loan, which will probably be discharged in bankruptcy.
The credit card lenders may well turn out to be better off than the home equity lenders.
The government didn't tell them to do anything. The government is allowing them to raise conforming loan limits in certain high cost areas through the end of the year.
“Fannie and Freddie aren’t the government”. They are GSE’s (Gubmint SUPPORTED Enterprises) created by FDR and the New Deal. Our government is Absolutely the bagholder of last resort for these two “Corporations”.
They are government sponsored enterprises and receive substantial subsidies from the government. Paramount is that GSE obligations are collateral for ensuring the safety of the federal government's won funds when deposited in private institutions... This subsidy is worth billions[page X]
They are government sponsored, not supported. The few perks they are still allowed aren’t even used.
see the CBO report in #30. As GSEs they actually receive substantial federal benefits in underwriting their credit worthiness.
ping
Reporters don't even try any more. Greenpoint shut down at the beginning of the year
Nope, it was also the banks, investment banks, monoline insurers, ratings agencies and central banks who played a big role, too.
It’s well known that Fannie and Freddie do enjoy lower borrowing costs because of perceptions, but they still aren’t the government.
It’s not as simple as that — by letting the market run its course innocent folks will pay for the stupidity of others by way of decreased property values, loss of jobs, inflation, lack of access to credit, and a dozen other ways.
we would not need all these fixes if the government had not messed with the lien strippon on homestead property in bankrupcy.
It was a provision under bankrupcy where an unsecured portion of the loan was stripped off the house and classified as unsecured and the mortgage was reduced to the secure portion.
It was originally for those situations where predatory lenders leant more than the collateral was worth. (ie inflating the value of a house to justify lending too much on a house)
The entire bankruptcy reform has been a complete failure. We now have politicians giving new dole programs to solve a problem, under the law, which they created.
Probably the banks that took bad consumer decisions and leveraged them 10 to 20 times into even risker loans. All this talk about a bailout is irrelevant - the banks already got their bailouts. There can be no consumer bailout because the consumers are on the hook for the institutional bailout.
There's no one left to do any bailing out, except maybe the Chinese dollar investors.
And who wrote the regulations enabling, if not encouraging, such unsound lending practices?
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