Some People Made Dumb Bets
Readers suggested a topic on the news of the week. “We might as well have a weekend discussion on the bush pseudo-bailout. (It will be spread over the all the posts otherwise…). The abbreviated summary of positions so far:”
“1. ‘Bailout will accomplish nothing and is just political positioning.’ 2. ‘If retroactive modification of mortgage contract occurs, new loans will dry up.’ 3. ‘Bailout is interfering with the free market! I’m leaving the country.’ 4. ‘FHA and appraisers will conspire to keep prices artificially high, believe you me.’”
“For my own point of view, I think it’s 1. Initial reviews of phone calls to the toll-free number seem to consistent with this view.”
One reported. “CNBC received an avalanche of emails about the plan and if those idiots are to be believed 80%-90% were vehemently against the plan and any bailout. A few of the emails were read on air and based on the emails read it sounded like CNBC was flooded with a bunch of HBBers. Maybe there is hope yet.”
One saw consequences, “The basic question is: Are you more worried about the popping of the current bubble, or the prevention of future bubbles? Policies that mitigate the effects of our current crash are diametricly opposed to those which seek to prevent another bubble. Do you try to make it possible for FBs to refinance out of foreclosure, or do you try to limit the stupid financing?”
One questioned the planning, “The way it was released does have some of the markings of a trial-balloon. The idea can’t have been hatched in secret, having time to get the bugs worked out, so it’s immature at best.”
“Experts are still weighing in on it’s effects assuming various unknown conditions and limitations.. and who knows.. maybe even bloggers ideas are contributing to the plan as govt lurkers keep tabs.”
Another said, “This thing will sink when JJ has a million-FB march on Washington demanding much more than a rate freeze.”
One points to the politics, “The real issue is rising and record breaking foreclosures. At this juncture, the housing crash is like a rapidly unfolding natural disaster. It cannot be stopped from wreaking havoc. It’s a national disaster with global consequences.”
“Consequently, you cannot fault the administration for trying to get ahead of the burgeoning political foreclosure firestorm. It does not want to be accused of doing nothing while 2 million or more families are thrown out on the streets. It had to act.”
One looked at the road to hell, “I think the plan will actually make things worse. The market for MBS was dismal already. Now I imagine it will cease to function unless much higher interest rates are paid by all future borrowers. This in turn will cause housing prices to drop even more than they would have if the bubble had been left to collapse on its own.”
The Courier Gazette. “Collin County real estate agents and mortgage brokers are tempering their enthusiasm for President Bush’s subprime mortgage bailout. Concern stems from the fear that it is prolonging the inevitable, they say.”
“Since Monday, the Collin County clerk has posted 49 trustee sale notices, properties that have been foreclosed on and are scheduled for a Jan. 1 sale on the courthouse steps.”
“‘A large class of people that bought homes misstated their income or did not have the willingness to pay debts on time. Homes were sold to those people in record numbers. Those people will return to being renters,’ said.”
“Investors make up another large chunk of those who defaulted on subprime loans. ‘The biggest problem is spec buyers and pseudo investors who bought when they didn’t have the money long term,’ he said. ‘They bought in droves in Collin County when prices got too high in other states.’”
“Many times, homebuilders would sell spec homes 10 at a time to investors to close out a neighborhood, he said. Bob Baker, president of the Collin County Association of Realtors, believes many of the current foreclosures probably were new homes just a couple of years ago.”
“‘Collin County has a lot of new homes,’ he said. ‘These foreclosures are probably buyers who bought new homes. I would say about two-thirds of the builders use the adjustable rate’ for their in-house mortgages.”
The LA Times. “The success of the Bush administration’s plan to stem home foreclosures will hinge in large part on whether the investors who own sub-prime mortgages will play along and accept lower interest payments to keep people in their houses. That may be asking a lot.”
“Thanks to the alchemy of modern finance, investors who put up funds for the same ‘pool’ of thousands of sub-prime mortgages can face very different levels of risk, depending on the section of the pool they own.”
“At the bottom are investors whose tranches pay high returns but could face wipeout if too many homeowners fall into default. Therein lies the problem in getting investors in a pool of mortgages to agree to change the terms of the underlying loans.”
“Modification is ‘clearly going to favor the guy at the bottom’ of the pool, said Jeffrey Gundlach, chief investment officer at Los Angeles-based TCW Group Inc., which manages more than $50 billion in CDOs for investors.”
“‘The guy at the bottom is starving for modification,’ Gundlach said. On the other hand, investors at the top of the pool, who know they have little risk of loss from a wave of foreclosures, could be hurt by modifications that could lead to reduced interest earnings for the pool overall.”
“There also is a fear that many struggling sub-prime borrowers who would be initially helped by the Bush plan’s interest rate freeze could default even before the freeze period is up. Investors might well prefer to just cut those people off now.”
“Some analysts said the risk of borrowers returning for more forbearance could be intensified by a provision in the program that calls for fast-tracking hundreds of thousands of loans for a rate freeze, as opposed to undertaking a detailed and time-consuming study of the borrowers’ finances.”
“‘To decide if a modification is beneficial,’ analysts at brokerage Deutsche Bank Securities wrote in a note to clients Friday, a mortgage servicer needs to assess the borrower ‘with the same degree of care as a new borrower walking through the door.’”
“Determining eligibility for a rate freeze based on just a few criteria, as the Bush plan proposes, ‘is to repeat the same type of underwriting shortcuts that got us here,’ the analysts wrote, referring to the no-questions-asked frenzy of 2005 and 2006 that gave home loans to almost anyone who could fog a mirror.”
“This is the kind of stuff governed by detailed contracts between investors and loan servicers. And in general, Gundlach said, ‘if you’re going to modify more than 5% of the loans [in a pool], you’re in blatant breach of contract.’”
“As for the idea that the servicers would get permission from every pool investor, good luck. Specific pools can have hundreds of investors, many of them foreign. The logistics of achieving some kind of consensus are daunting at best.”
“Josh Rosner, a managing director of financial consulting firm Graham Fisher & Co. in New York, figures that a rash of legal challenges to loan modifications is inevitable. ‘I think that’s exactly where we’re going to be’ in 2008, he said.”
“Well-intentioned though the rescue plan may be, Rosner said, to some investors it will amount to confiscation of their assets with the assent of Uncle Sam.”
“Edward Yardeni, a veteran economist who heads Yardeni Research in New York, may echo many Americans’ views when he asserts, perhaps only partly tongue-in-cheek, that lenders who made sub-prime loans under the terms targeted by the rescue plan ’should be charged with usury, arrested and thrown into lenders prison.’”
The University of Arizona. “Gerald Swanson, a professor of economics in The University of Arizona’s Eller College of Management, said that extracting the country from the subprime mortgage morass promises to be painful.”
“‘For the past two years, I’ve said allowing people to buy homes with interest-only mortgages is letting them rent with the option to buy,’ Swanson said.”
“‘That’s a dangerous game because if the housing market goes down and the mortgage flips, guess what will they do? Stop renting,’ he said. ‘Why continue to pay into an asset that is falling in value? So, houses are flipping and people are finding good reasons to just walk away.’”
“The problem there is that foreign banks bought many of these securities based on the assumption that as the interest rates on subprime mortgages went up, so would the value of their securities.”
“‘We’ve given the world McDonald’s, i-Pods, Coca Cola and the securitization of debt. Maybe they didn’t want that,’ Swanson said.”
“‘The moral hazard is that we gave banks the ability to issue loans, package them, sell them and avoid the risk. If you can make transactions taking cash off the top and then not have to assume any risk attached to it, would you do it?’”
“There’s a corollary in the early 1990s, when Japan’s real estate market came crashing down. Swanson said it continued to fester for a decade because Japanese government and banking officials initially refused to acknowledge the depth of the problem, a strategy he hopes the U.S. avoids.”
“‘We put up a bunch of incentives for people to try to make some money and now it’s starting to unwind and there will be some costs,’ he said. ‘We will not get out of this situation until we allow these losses to actually occur.’”
“‘Some people,’ Swanson said, ‘made dumb bets.’”
The plan virtually helps no one. You must have equity in the house to qualify and that equity must not exceed 3%. How many people who purchased subprime type homes after June 1, 2005 gave any equity in their homes. Certainly anyone who reads this blog knows better.
If I read your post, subprime FB’s are required to have 0-3% equity?! Can others confirm this? If so, that would really be threading the needle.
It would make more sense from the lender/bondholder perspective to let underwater (negative equity) FB’s in on this plan. Who wants to reposess a home worth less than the loan.
If your home can fit through a needle’s eye to qualify, you’re in.
LTV and CLTV will be determined based on information at origination. If an origination LTV is below 97%, a servicer
may obtain an updated home value by obtaining an AVM,
BPO or other means.
LTV test: All current loans with an LTV (based on the first
lien only) greater than 97% are deemed not to be eligible
for refinance into any available product, and thus are within Segment 2. (97% is the maximum LTV allowed under FHA Secure.)
Warning PDF
http://www.americansecuritization.com/uploadedFiles/FinalASFStatementonStreamlinedServicingProcedures.pdf
Can someone explain who determines how much equity one has and when. We are getting 3% variations per month, and appraisers vary by as much as 25%. I dont understand how this is possible to determine without fights, and who pays for those?
There’s a U.S. Government Appraiser coming soon, to a neighborhood near you!
That is the only way they can make their scheme work, IMO.
The way the lenders are arriving at a value is not an appraisal but what is called a BPO. They hire a real estate agent to supply 3 sales and 3 listings. That is it!
BTW, we got an email this week stipulating that comps older than 3 months would not be acceptable for our BPO work. Used to be 6 months — obviously, banks realize time frame is accelerating.
What’s a BPO? “Best Personal Opinion?”
Broker Price Opinion
“There’s a U.S. Government Appraiser coming soon, to a neighborhood near you!”
If they even do an appraisal. You can’t fast-track hundreds of thousands of loans. Not unless you are going to make very fast decisions. It takes time to do appraisals, credit checks, verify income, assets, etc. None of that will probably happen.
They are going to try to re-flate the bubble. To do that, bogus appraisals are essential. Also, raising the limits on insured loans is also crucial. That comes next. All these bad loans need to be unloaded on the public.
When did the mafia take over this country?
You hit on something very important.
In south Louisiana around June 2006, the State and Fed gov’ts designed the Road Home progeam to give grants to homeowners devastated by Katrina. Maybe 150,000 grants, $11 billion. Checks won’t be cut until probably next summer. Two years?
“How many people who purchased subprime type homes after June 1, 2005 gave any equity in their homes.”
Given YOY price declines on a national basis, I don’t see how they will be able to qualify anyone on this basis without some very optimistic appraisals.
Good point sir. Here in O’ town this deal helps virtually noone in trouble.
You are only eligible for this program if you have LESS THAN 3% EQUITY,NO EQUITY or NEGATIVE EQUITY!
Read what it says, not what you think it says. It is to keep those that should walk into their house. It bails out banks.
Popping in between cookie batches!
Amazingly so, that’s exactly what it says and a whole lot more!
They started this baby back in June. And it’s also gave clearance for the SIVs Fund.
Leigh
That is what I thought, and makes perfect sense… for lenders.
THe question is: how many underwater FB’s will take the bait?
“You must have equity in the house to qualify and that equity must not exceed 3%”
I had read that the plan applies to those with LESS THAN 3% equity (meaning those with negative equity are covered by the plan):
LA Times
http://tinyurl.com/2fpnlv
” Who qualifies for the rate freeze?
First, the residence must be owner-occupied. The borrower must be no more than 30 days late on his or her mortgage payments and have a FICO credit score of 660 or less. The loan must have been originated in January 2005 to July 2007 and have an initial reset date of January 2008 to July 2010. Also, the borrower must have less than 3% equity in the home.”
Not enough Lifeboats, Captain
Threading frozen waters
Hope Now!
The bad debt problem is already spreading to the auto loans and the credit cards.
Let’s see Bush try to freeze that.
Add student loans to that freeze.
“Dec. 7 (Bloomberg) — First Marblehead Corp., the third- largest U.S. arranger of securities backed by student loans, cut its dividend by more than half and halted sales until at least next year.
The Boston-based company, which facilitates lending by Bank of America Corp. and JPMorgan Chase & Co., fell for the fifth day in New York Stock Exchange trading and has lost more than 40 percent of its value in a week. First Marblehead, blaming falling demand for the debt, lowered its dividend to 12 cents a share to be paid on Dec. 12, from 27.5 cents last quarter.
First Marblehead postponed sales after Moody’s Investors Service said it may downgrade credit ratings of bonds sold by the company because of rising defaults on a class of loans that back them. Moody’s also may also reduce ratings on the nonprofit that guarantees the loans, a decision that would cause investors to demand compensation for the added risk at a time when demand for asset-backed securities has tumbled.”
“Let’s see Bush try to freeze that.”
He might. Look at all the unbelievable stuff he’s done so far, and now he doesn’t even have re-election to lose. He seems to fancy himself as a Franklin Roosevelt — I wish he’d have chosen Theodore.
Actually, I read somewhere that he fancies himself as Theodore Roosevelt, but acts like Franklin.
The only way we’re ever going to get out of this mess is to return to whatever it was that made the US successful, protectionist or not.
Ahhh… I retract that. Domestic socialism is not the only problem. Old Teddy was an eager foreign interventionist and I’m against that, too.
“1. ‘Bailout will accomplish nothing and is just political positioning.’ 2. ‘If retroactive modification of mortgage contract occurs, new loans will dry up.’ 3. ‘Bailout is interfering with the free market! I’m leaving the country.’ 4. ‘FHA and appraisers will conspire to keep prices artificially high, believe you me.’”
State your categorized response above, and logic to support it. I’d love to hear what everyone thinks.
I generally feel that #1 is the case, but I fear greater intervention, which would certainly lead to 2 and 3.
Here’s the 5th options.
The Democrats will go much deeper with the bail-outs than Bush and, with the economy on the way down, will get a chance to put forth their plans come 2009.
Don’t you think there would be enough opposition to a deeper bail-out to stop it? I mean everyone I talk to is seething about the current plan.
The real reason for a bailout is to save the banking system. If the big banks start going belly-up, nobody can get a loan anywhere, and unemployment is soaring, people will be a lot more amenable to a bailout.
Of course this isn’t a bailout, just an exhortation of mortgage holders to make some modifications that would actually be in their best interest (don’t force foreclosure if you can get the current occupant to pay more than current market payments on the current value).
This bailout can’t be about saving homeowners. This administration is all about big business. The longer people can pay their mortgages the better it is for investors.
And in the time we’ve been blogging today how many more homes went into foreclosure? That is what is so funny about this situation. This monster is eating homes by the minute. You have to wonder how many people are maxing out their credit cards to keep fighting until the “rescue” arrives.
Somebody should do a “foreclosure clock”. ticktickticktick
Polls show 58% agree with a bailout. You guys forget - the public are the same clowns that drive on the roads, vote (the few that do) are in parking lots, buy overpriced houses, take out exotic loans, etc.
‘If retroactive modification of mortgage contract occurs, new loans will dry up.’
Well loans won’t dry up but they will become very expensive for the borrower. Callable bonds (a bond which allows the borrower to repay the entire value of the bond early) are issued at a higher APR to offset the risk of the bond being paid off early if interest rates fall. In this case, the borrower will pay off the entire loan and re-issue a bond at a lower rate.
Now imagine a bond that at any moment can have its interest rate and/or maturity changed! The risk to the investor is extremely high. And we all know, with increased risk there is an expectation of increased return on investment.
“And we all know, with increased risk there is an expectation of increased return on investment.”
That’s what the theory says, but look at what just happened to CDOs.
Housing bonds almost always have a call at any interest date.
That is correct if you’re talking about corporate bonds. RMBS are a completely different animal.
Although some of the hand-wringers think the PTB have the ability to stop this crash, I don’t. Sure, they might encourage a small percentage of hamster-serfs to pedal a little longer. However, the PTB could not stop the Japanese or dotCom crashes. Somethings are simply too big to bail. In the end, the invisible hand overwhelms our very best intentions.
The “hamster serfs” discription is perfect.
The more I think about it…
This housing bailout, is the equivalent of the Smoot-Hawley act. It reeks of protectionism.
http://en.wikipedia.org/wiki/Smoot-Hawley_Tariff_Act
I am very afraid of a new Smoot-Hawley act. So far… they haven’t approached the impact of Smoot-Hawley. If anything, this stupid housing bailout has woken foreign investors to the possibility. Hence, the announcement by Deutches bank on contracts being the foundation of capitalism.
But I still worry the politicians will start a trade war. If we do that, it will be like Smoot-Hawley where we destroy import/export jobs fast while the politicians wonder why manufacturing is also shutting down. Then… we would get a depression. Sadly, the chance of them doing something stupid like that is growing.
Got popcorn?
Neil
Neil, what is the solution? A trade war would be awful. I agree with that. But our current trade situation is unsustainable. The only thing that has masked this fact is the artificial wealth created by the Housing Mania. Where do we go from here?
No doubt we’ll have pain and will have to adapt.
Some will be smart. e.g., Airbus, Rolls Royce aero engines, and other European manufacturers are sending production this way. We also do need to reign in China. Start by freeing up the currency exchange. Yes… instant import inflation. Some is going to be by forcing better fuel efficiency (we cannot keep up our oil imports at this level). Some is by forcing through the adoption of coal derived fuels (short term solution, because bio fuels just are not ready).
WSJ article today (sorry, subscription required) that notes that:’ Consumers spend more on housing, health care, education, travel, restaurants and other services — $4.6 trillion last year — than they do on food, gasoline, clothing, electronics, cars and other goods — $3.6 trillion. ‘
The article then goes on to note that we spend ~$15 Billion on optional surgery a year!
http://online.wsj.com/article/SB119707327901017729.html?mod=hps_us_whats_news
So there is no avoiding pain. But if we trigger an a trade war, its depression.
Dinner tonight!
Neil
I’m curious, does the unamortized interest on an ARM put into “suspended state” get tacked on to the back end of the loan or …?
Bush’s plan (like most of his plans) will actually backfire by forcing the banks to start raising rates to compensate for the higher default risk.
I’m actually pretty optimistic about Bush’s plan: I think it will work as well as the Katrina mop up and the Iraq campaign!
I guess the 3rd times the charm?
3swings and yerrrrrrrrrrr OUTTTTTTTTT
They both actually worked excellent. Well, if looting the treasury is your thing.
In this case, failure will be success.
“I’m curious, does the unamortized interest on an ARM put into “suspended state” get tacked on to the back end of the loan”
As far as I have heard, no, it doesn’t do a Neg-Am thing. It’s a “loss” for the investors…but it’s supposed to be less of a loss than foreclosing.
“I’m curious, does the unamortized interest on an ARM put into “suspended state” get tacked on to the back end of the loan or …?”
I called that one wrong. Though if this freeze applies only to 6+% loans that are being paid on time, then I’m not quite as ticked as I would be if they were freezing 1.5-3.0% teasers with no neg-am feature.
The city of Albuquerque did a beautification project on the road connecting the airport terminal to the freeway. In the median is some nice desert motif which includes a lot of Joshua Trees. It is an attractive design.
Picture this. You are arriving or leaving Albuquerque and riding along this road. Perched on top of each Joshua Tree is some of our favorite characters. Imagine seeing Greedscam, Old Leatherface, Crisp, Cole, Fun Yun, Liahrah, “in the bag” Gary Watts, LAY, Bernake, Robert Toll, that scumbag from Ameriquest, and any mortgage broker, realtor, anyone else I might have missed, or the sob story lying flippers that you would love to hate sitting there after receiving a personalized JT treatment from our own ex-NNVbroker. Ben would be present, of course, to record and report. TXChick would be there to do the flogging afterward. What a beautiful site this would be. What do you think? Nice picture?
I love that Albuquerque airport. It’s one of the nicer ones in the U.S.
“‘The moral hazard is that we gave banks the ability to issue loans, package them, sell them and avoid the risk….”
The irony is this design was suppose to avoid another S&L crisis. The problem is at some point you disperse so much risk that it becomes meaningnless.
Greedy financiers always seem to figure out a way to lay to waste any plan to make sure it’s different next time.
After I put this post together, I was reminded of when I was 19. One of my brothers and I were frustrated with the statism among the various political and economic groups at our small Texas college, so we decided to start a non-partisan economics club dedicated to classically liberal economics (Look it up). But we had to have a professor as a sponsor.
So we immediately went to the business profs, thinking they would naturally support us. Every single one turned us down. We finally found one in the arts department willing to do it. He was a pure marxist (the cold war was still on). And the reason he did so was he wanted to ‘raise hell’ with the establishment.
Imagine the business schools horror when our first posters went up, delaring, “Stop force feeding us this Keynsian swill!”"
Ah, youth…
Good Lord, Ben, how old are you? I figured you were about 35.
I ain’t tellin’. But it was right at the end of the cold war!
My assumption is the admin went to all their friends and buddies and said, how can we help you? They have never cared about people and I do not believe that has changed. Their friends must have given them the requirements to help the few of them while leaving the mass of people who were not flippers and just trying to buy a home in the lurch of the admin buddies.
If this admin proposed it, it is not good for those who truly deserve it or need it.
It is just another pr stunt for the business people, the banks who are really legalized loan sharks, and all the supporting characters who have no trouble making lots of money off of others and who have no conscience in business dealings.
when we used to deal one on one - it was less likely to do someone in - who was your neighbor or friend or lived in town - this everyone for themself attitude - means there are winners and losers and no more win-win solutions in any transactions.
From wikipedia:
“Austrian theorists…They do not answer the question “should this policy be implemented?”, but rather “if this policy is implemented, will it have the effects you intend?”.”
I heard on the radio this morning (KGO AM 810) that there’s a protest in Oakland! They want MORE bailout–in the form of “bridge loans” in the addition to a freeze.
(They also want, which I agree with(!), banks to have to keep tenants if they foreclose on a house that was being rented. Assuming the tenants had a legal lease, etc, the obligation should be carried to the new landlord. Did the previous owners “own” the house or not? One of the rights of ownership is the right to rent your property.)
For fair leases, a good policy. But what about a foreclosee who rents to his sister-in-law for $200/month on a 5 year lease? It’s difficult to write a law that keeps leases without allowing some serious fraud. IMO it would be better as bank policy. They’re sitting on all these properties for ever-increasing lengths of time, why not get a some money out of it and avoid the risks of an empty house?
And here, the Reverend Jesse Jackson is complaining that bush’s “fix” only helps those who haven’t fallen behind on their payments!
http://www.suntimes.com/news/metro/686991,CST-NWS-foreclosure08.article
(See photo caption). Let’s just give everyone houses for FREE and get it over with!
As we all know here, if the government never got in the business of Fanny- and Ginny- Mae, and never had mortgage interest deductions, and never had capital gains exclusions, and did start forgiving taxes on forgiven debt, housing would have been affordable to all working people anyway.
Burdened by three mortgages on two properties, Holland; her mother, Doris, and the Rev. Jesse Jackson Sr. stood in the snow Friday outside one of her homes and questioned why President Bush’s proposal to help those burdened with subprime mortgages only aids homeowners who haven’t fallen behind on their payments.
Speculators rattling the sabre.
Great,
Leigh
Can’t Jesse Jackson spend some time to find a more sympathetic person (i.e., one without multiple mortgages) to rally behind?
This is the key problem with the info going into the MSM: the sob stories with no research. So many could have gotten 30 yr fixed and chose ARMS, so many refied all the equity out of their homes, so many had great paying jobs in housing, mortgage or construction and saved nothing, so many could pay their mortgage but choose to walk because of devaluing, so many could pay mortgage if they stopped mismanaging their finances. I could go on and on, but the public is being duped into believing that all these innocent victims were preyed upon by the banks and mortgate industries. Like everyone was forced at gunpoint to buy a house or take a ARM and like it will ruin people’s lives if they have to rent. The sheeple only know soundbites and spin.
http://www.foxnews.com/story/0,2933,316101,00.html
Here’s one hate crime victim that Jes’ Me Jackson and his ilk won’t be rallying around.
Not true! From TFA:
“The uproar prompted two leading black politicians to issue statements decrying the attack.”
Jesse Jackson *is* an idiot (he called my hometown “Hymietown”), but let’s not create a race-war where there isn’t one.
I’m waiting for a mob of white people to march through Harlem while chanting “No justice, no peace”
Never happen !! White people are spineless.
“Many times, homebuilders would sell spec homes 10 at a time to investors to close out a neighborhood, he said. Bob Baker, president of the Collin County Association of Realtors, believes many of the current foreclosures probably were new homes just a couple of years ago.”
Amazing how much fraud there was, in everytown, USA…
Never was a opportunity missed, to deceive.
Collin County: Frisco, Plano, McKinney, et al are bankruptcy/FB central and have been since about 2000 when the telecom bust hit. I can’t put into words what an odious, pretentious, hyperconsuming hellhole that really is there. I have a very very good friend, two in fact, who are bankruptcy trustees in the Eastern District and I have seen the schedules for many chapter 7s out there. They would raise the hair on your head. The U.S. Trustee’s office in Tyler who oversees all that probably spends half their time objecting to the cases. People with 100K plus of credit card debt who want to dump all of it in bankruptcy yet keep their expensive car leases, three cell phones, $1,000/month to the 401k, etc. I would truly put a bullet in my head if I had to live there around those people.
It used to be pretty country up there, sort of. When there were just cows.
Parker is still nice but there are gigantic unneeded houses and many foreclosures there too.
Every time I take the MINI out that direction, I risk death and dismemberment. The sheer amount of huge SUVs driven by retards on cell phones, et al blowing through red lights is simply mind-boggling. If you want to know why the majority of the world hates the U.S. at the moment, take a stroll through one of the malls out there (hell, even NorthPark). The extreme amount of conspicuous consumption is enough to turn your stomach. Most of these folks will make the trek to one of the many super-sized Church’s each Sunday to pat each other on the back because they’re such great, caring folks.
I’ve really got to move out to the country and start hording arms.
The MEGA churches, SUVs, BIG hair and houses are all on steroids in TX Plano area etc. Anyone recall ‘go to church on Sunday, shoot your wife/husband on Monday’? In Tyler there was a major murder involving a major church guy who was mjr Real Estate mogul/ Society guy…killed his wife. Major story for that area. Among others involving RE and church/Society.
You want to really heave, trying a little family law work out there. I read a file a few weeks ago at a friend’s office. I’ve seen porn that was less disgusting. And this of course was one of the “landed gentry” out there, lol.
Guess what I am saying is.. I don’t get it.. why all the CA bashing ( some is earned by nuts) when there is so much going on in the Midwest Church Belt..IOWA mall killer, COlumbine, Tyler..Jena 6 and so much more. But lots of bashing re: CA?
Not me. I love California and will bash DFW all day if anyone wants to hear it.
Oh Tx - I spent years working family law on and off. I could only do it about 2 years and then would get so burned out I would have to switch to something else for a while. The things people will do to someone they used to love, the things people would do to their children in the name of their own rights, the amount of money people were willing to spend to win when the win was a salt and pepper shaker set. After a few years I realized that nearly every area was really the same - people just fighting out their emotional bs in the courts. I just couldn’t hear one more time “it’s not fair.”
“The MEGA churches”
When I moved to Texas I could never figure out why child molesters put their pictures on those big billboards.
Could not agree more. I have a friend in Dallas, a blues guitar player, who had a gig out in Frisco, the last time I was in Fort Worthless. I drove out there to see him at some horrible restaurant in a strip mall. What a depressing, soulless place.
“Plano, McKinney, et al are bankruptcy/FB central and have been since about 2000 when the telecom bust hit. I can’t put into words what an odious, pretentious, hyperconsuming hellhole that really is there.”
‘a depressing, soulless place’
So you have been to the metroplex!
I spent 3 years in DFW trying to find a niche but finally came back to Montana. I did find a good voice teacher in Carrollton though and took a bunch of lessons so it wasn’t a complete waste. Top notch stuff like that was hard to find in MT.
No one has adequately explained to me what happens to the frozen interest. Does anyone really know? I would assume it gets tacked on as principal (which some have told me is not the case) or lenders need to raise new rates to stay afloat and because of the risk of more contractual hampering which will, in turn, limit demand and bring on more waves of foreclosures. These ppl are not bright and/or ethical enough to be responsible for such decisions.
Again, what I have been reading is that investors eat it (ie it doesn’t become NegAm), in exchange for (in theory) not losing more money buy foreclosing.
I would really like to see how the money moves, however, as on the wall street securitization side the debt service is usually guaranteed by a letter of credit or an insurance policy. God knows what happens to the credit enhancer’s obligations. The costs will get added back in the system somehow. Money just doesnt disappear. All that happens is the burden is shifted. Sometimes the shift is obvious, sometimes its hidden.
“Money” certainly can be and is destroyed..
Lets say I deposit my $1,000 paycheck into a bank. The bank now has $1,000.
My car is for sale for $500. You approach the bank for a $500 loan to buy my car. It gives you $500. The bank now has $500.
You pay me $500 and take my car.
The bank has $500, I have $500 and you have my car.
You get drunk and drive my car into the lake.. a total loss. Then you catch pneumonia, and die.
You cannot repay the bank the $500 loan, so the bank, which now has only $500 of my original $1000 deposit cannot repay me my $1,000
$500 was created in this transaction with the sale of a valuable asset.. the car.
My $1,000 deposit plus your purchase of the $500 car equals $1,500 in total money that should exist somewhere…
But, since you defaulted on your debt only $1000 exists. I have $500 and the bank holds $500.
Debt creates money.. defaulting on debts destroys money.
It begins:
‘Bleeding red ink, MGIC Investment Corp. said Friday it intends to raise prices on about half of the mortgages it insures. The company has been hard hit by defaults on subprime mortgages and has said it expects to lose money through 2008. The price increase, its first since 1985, is only one of a series of steps MGIC is taking to deal with the problem.’
‘It also has said it will stop writing policies altogether for buyers in Florida and California who make mortgage down payments of less than 5%.’
‘Friday, Michael Zimmerman, the company’s vice president for investor relations, said premiums for borrowers with poorer credit will increase between 10% and 77% next year.’
I’m gonna love it when we gather enough facts about the unintended consequences of this freeze to list and jaw about them at length. Seems given that a favorite will be the “what the…?” house price declines that will happen after the stage smoke blows away. I’m cautiously optimistic that the freeze will not stretch out price declines anywhere near as long as might have been forecast by its designers. And maybe there will be a slight decoupling of sorts between foreclosures and the price declines from frustrated sellers who decide to just rip the rest of the bandaid off and get on with life.
“Thanks to the alchemy of modern finance, investors who put up funds for the same ‘pool’ of thousands of sub-prime mortgages can face very different levels of risk, depending on the section of the pool they own.”
They blinded me, with finance!
http://www.youtube.com/watch?v=1PmMFaVzbzc
LOL
‘Add another group to the list of those concerned about the White House plan to salvage the mortgage market — investors. The proposal could end up damaging the market because interest rate resets on some home loans may be frozen unnecessarily, to the detriment of investors, experts said on Friday.’
‘The five-year freeze on rates is the most troubling part of the proposal,’ said Joseph Mason, associate professor of finance at Drexel University. ‘That will create great uncertainty, hurting investors and mortgage-backed security valuations in the secondary market.’
‘ The new plan now means these servicers are not required to check the income of borrowers before modifying their loans and freezing the resets, according to Mark Adelson, a structured finance expert who has studied the proposal. Instead, servicers will rely on FICO scores, which measure how well a borrower has repaid debts in the past.’
‘They’re not bothering to check if borrowers can afford the higher payments,” he said. ‘That’s outrageous.’
‘There’s also no bottom limit on the loan-to-value ratio of mortgages that will be modified under the plan. That means borrowers could own 30% of their home and still have an upcoming reset frozen, Adelson explained.
That’s highly unusual because in a typical foreclosure of a home that’s 30% owned by the borrower, lenders and investors usually get most, if not all, of their money back, he noted.’
What happened to the 97% LTV limit everyone has been talking about? Urban myth?
The PTB have to create loopholes to that in order to qualify at least a few buyers with no savings, but they will merely succeed in helping a few otherwise-unqualified buyers catch falling knives, IMO.
Imagine what is going to happen when someone finds out they can’t qualify because they don’t have enough debt load.
“Honey, we can’t keep our low teaser rate because we don’t have enough debt. I figure we need to rack up another $50k to qualify. Should we go to the mall or the new car dealership?”
“The problem there is that foreign banks bought many of these securities based on the assumption that as the interest rates on subprime mortgages went up, so would the value of their securities.”
Did those wise guys on Wall St. sell the Europeans a bunch of buLL too?
Thats OK they have the Euro and we don’t.
What is with this idea that the rest of the world was just so viciously duped? They could have rented the movie “Wall Street” if they wanted to know what the Wall Street boys are like. Are the scammers in Hong Kong, London or Beijing any less greedy and scamming than those in New York? These financial guys are the same the world over. There is no innocent party in this mess. Blaming the U.S. for everything might be fashionable but it is also very tired.
Peter Schiff “explains it all” here
Peter Schiff “explains it all” here: http://www.marketoracle.co.uk/Article3009.html
I particularly like this unintended consequence (we need an acronym - “UIC?”):
“Compounding the problem is that subprime borrowers with frozen payments on loans that exceed the values of their homes will likely choose not to pay property taxes, condo or homeowners fees, or maintain the condition of their properties.”
Why is everybody so horrified at being another Japan? I would WAY rather go through a Japanese Long Depression than an American Great Depression. The Japanese experience shows that you can’t get away from a depression that’s “baked in” but you can make the process considerably less nasty. There weren’t Hoovertowns or masses of Okies in Japan, and that was a very, very good thing.
Best laugh I’ve had all day! Good stuff.
“There weren’t Hoovertowns or masses of Okies in Japan, and that was a very, very good thing.”
However, the Japanese are net “savers”. Americans are not. Do Americans have savings to weather 10-15 years of recession/depression?
Chuckle. Most Americans cannot get through 2 weeks. The smarter ones might be able to do 2 months. I have a feeling most that can get through two or more years have already found this blog.
We’re not having a Japanese depression. We have no ’shame’ in walking away from a debt. But that’s a good thing. We’re shift our surplus jobs into a new industry and grow from there. Alas… this will be a deep long recession, so I’m talking years in the future.
Got popcorn?
Neil
Two other reasons we can turn Japanese: Our accounting laws don’t allow corporations to park losses off-shore indefinitely (ahem, Fannie Mae), and we don’t have their savings rate.
Also, I remember reading about guys going to work for years in Japan, even though the company had folded, just so they wouldn’t have to admit to being unemployed. Sounds great!
(I assume you mean can’t turn Japanese)
True enough that it’s much harder to cook the books in America. I expect we’ll end up with a de facto nationalized banking system rather than zombie banks shielded by intentionally lax regulation.
I don’t think we’ll do things exactly like the Japanese did. They did everything they could to slow and cushion the crash. I expect about the same here, and based on the comparison of the two depressions, I think that’s the right thing to do in principle. Of course there are a lot of fairness and corruption issues to be dealt with and there’s no guarantee they’ll be handled properly, especially with all the secrecy and backroom dealings we’ve had in the past 7 years.
Both depressions were once-off events so you can always argue that some other aspect of the Japanese depression made it a milder one. But the events of the Japanese depression aren’t a good argument against bank-propping and reflation because it wasn’t nearly as bad as other 20th century depressions. The Japanese depression was onerous and, well, depressing, but the American one was horrifying.
But it can’t be repeated cuz we don’t have that evil gold standard, right? That paper moneys gonna save us!
don’t forget that the Japanese ZIRP has had global ramifications. they just exported their economic problems.
What Japan went through is not a “Great Depression”. It should be called the Great Deflation. Just like 1970’s are called in many economic text as the Great Inflation. If you have read old British economic text, you run across the Long Depression of 1873-1895. This time is sometimes even called a great depression. All it was was a peroid of deflation were Great Britian lost its industrial leadership to the U.S. and Germany. Prices deflated faster in the U.S. and Germany than they did in Great Britian.
This bailout our is a joke. If you have equity, then there is a huge possiblility that you can refinance on your own. If you don’t, then you are screwed. How can you freeze a 1-4 % teaser rate when you know it will increase the amount of the principle in time? How can you force mortgage investors to stop making extra interest revenues? How can you stop a uncontrollable bullet train? You can’t! in the end, it will eventually crash….
They are trying to have us believe that 1-4% teaser rates are not [the ones] being frozen — that loans with 6-9% initial rates are the ones affected. At least, as I read it so far. The farther they get from a rate that would be acceptable as a performing loan at market, the more lawsuits they’ll have.
My bet:
1. Bailout will accomplish nothing and is just political positioning, except for:
2. Bailout is partially meant to “slow down” things, to allow the markets to calm down, and price debt at other than fire sale prices, and keep at least some houses off the market until a hoped for rebound, and keep some loans performing until the (hoped for) house price rebound happens, and it’s safe to either refinance or foreclose on the homes.
It won’t work, housing prices will continue to slide, and the price of a house bought at the peak (2005-2006) won’t be hit again until 2015-2016 (if ‘last time’ is any indication). The note holders that acquiesced to the program will be stuck with receiving below market (relative to the risk) interest for 5 years, and then *still* foreclosing on a house (collateral) that is worth even less when the rate finally resets.
During the manwhile, as things get worse, 1/3 of the population will call for a massive, government sponsored (ie taxpayer sponsored) bailout to stop the bloodflow, and will invoke the “well we bailed out the S&Ls back during the savings and loan debacle, we need to do the same thing now” mantra.
The other 2/3 of the population will finally wake up and say “no way, we won’t pay”. Lawmakers will initially think that *everyone* wants a bailout, but after a massive letter, email, and fax writing campaign, they will realize that a majority of people are against it.
What happens after that is anyone’s guess.
IMHO the admin. has just created a monster. Just as those FB’ s did not read the note and mortgage they suffer from selective hearing and will be po’d when they find that they do not qualitfy for the program. I could see a mob mentality under which the powers that be will fold yet again to another more aggressive program. This is effectively a trial balloon….second verse will be a doozy.
Now is the time to kill the program. I have started investigating local news stories about people in foreclosure and posting the results on the newspaper web site. I phrase it in terms of Disney World vacations. Maybe a few others will see that a person who cashes out 20k (enough for 4 weeks at Disney World) does not need sympathy.
So how do you do that? Can you go online somewhere and find their HELOCs? I can’t figure out how to do that here.
Wow - the site is on fire these days. Seems more of the public is noticing the festering stench of the financial rot.
Bail out, pah ! Akin to Titanic passengers being given buckets. Heck of a job Pauly.
Here’s a wall street examiner discussion on it http://wallstreetexaminer.com/blogs/ducalion/?p=129
Tx, knowing how much you love tech fibo numbers etc.
“One reason why we expect weakness in the carry trade next week is the pattern that is unfolding in the Dow. The recent rally from 12,724.82 challenged and stalled at the 61.8% of the decline from the October top. The rally is in 3 waves (corrective) but is likely just the first corrective leg in a more complex correction. Since the rally is in 3 waves, we know that a large flat will probably unfold. In this case, it is likely that we see price decline to at least 61.8% of the recent rally (which would be 13,085). A deep decline such as this suggests deep trouble for carry.”
I’d agree with that. A lot of times they’ll gap things open on a Monday over those fibonacci numbers but they come back most of the time. So it’s a corrective “b” wave probably or the right shoulder of a head & shoulders possibly too, although I haven’t looked at the daily chart lately.
Having seen 7 years of this administration. Does anyone seriously think they can pull this off? Most of these guys can’t find their a** with their 2 hands. Add to that a lame duck president, this ain’t going nowhere.
Can any of these politicians pull this off without completely destroying the American economy? Sometimes we forget that they all stood blindly by while this thing went crazy. The only thing that will prove to be worse than their inaction is their action. I think that holds true for both parties.
Can someone clarify about the plan…is it open to those that have at least *some* equity, but less than 3%, OR is it open to those with *less than* 3%, including zero or negative equity?
LA Times
“Cash-strapped borrowers gain time to improve credit, equity”
http://tinyurl.com/2fpnlv
“Also, the borrower must have less than 3% equity in the home.”
I think the confusion comes from the following. Paulson has said that you must have less than 3% equity. The plan also says that servicers are supposed to follow their normal procedures, but doing it wholesale, not retail. Normal procedures for a workout include evaluating the equity, and the more negative the borrower’s equity, the less likely it is that the servicer will do a workout. A servicer might very well do a workout at -2% equity, but there is no way a servicer (using normal procedures) would do a workout at -20%. Whether a borrower would get a workout at -10% depends on how good their case looks. If the borrower is on unpaid leave with a guarantee of getting their job back when the easily treatable fracture heals, they will probably get the workout. If there is no guaranteed job and all the local industry has left, forget about it. So the plan says less than +3%, and the plan says follow normal servicing procedure , so much less than 0% won’t fly. That’s as good an explanation of the confusion as I can come up with.
As far as the bailout, I understand that the post was meant to be at least a little facetious, but it is important to remember that government action is a lot broader than the wholesale loan mod announcement. It includes Fed actions, mortgage revenue bonds doing tax expenditure through state and local governments, FHA, GSEs, and everything else. The effects can vary in different market segments, and none of these things are mutually exclusive. Since I was arguing FHA before, I’ll note that FHA will have virtually no impact in LA and San Francisco unless the limits are dramatically increased, but it might have a big impact in Detroit. It’s unlikely that FHA will offer much to people who are 20% underwater, as making that appraise will be difficult. I have no trouble in believing that an appraiser can juice a price by 5% for an FHA loan, and that someone at -2% can easily be made to look like they are plus 3%, and if the 100% LTV proposal goes through, someone at -5% can easily be made to look like a zero. I can also imagine servicers with a conventional loan in serious trouble agreeing to give a borrower at -5% a soft second for 5% of the loan balance if they can refi 95% of the first. It’s better than a foreclosure, and better than a short sale. Those might end up FHA.
“…OR is it open to those with *less than* 3%, including zero or negative equity?”
AG, it is open to everyone regardless of equity or lack of equity. Although it says less than 3% equity, zero equity and negative equity, it also gives the banks the option of using various measures of appraising the house. One of the methods is MLV pricing, which is traditionally 30% below recent comps. Everyone is welcome!
This bailout requirement is a joke. The real test is see if present subprime borrowers can now qualify for a super low 5.5% 30 yr fixed rate. If they don’t qualify no bailout.
In the spirit of Monty Python:
New Hope program will be commonly known as the “2008 Fibbing Act”
With a new asterisk “**” in the Websters Dictionary: Fibbing, a noun decscribing a new term coined by Congress to describe un-truth’s, modest exaggerations, a trivial lie and falsehood related to the special area on a HUD form commonly referred to as the 1003 in which income is disclosed as being just a tad higher than what it really was.
Consequently there will be a new form called the F-1003 for all new loan applications going forward. Good day.
F stands for Fraud . The F-1003 bail out loans .
“1. ‘Bailout will accomplish nothing and is just political positioning.’
While I agree that it will do close to nothing to help the FBs I have to wonder if it helps the banks and may also slow the decline in prices. As someone mentioned here, the banks may benefit because the payments continue on this small loan segment versus them going REO and selling at a reduced price. This also takes thes small set of properties out of the equation for falling prices.
2. ‘If retroactive modification of mortgage contract occurs, new loans will dry up.’
Because banks make money by lending money I see loans costing more to cover this risk rather than drying up entirely. Sure some borrowers will not be able to get loans, but there were far too many under qualified borrowers who were given loans in the recent past so this would be an adjustment in the right direction.
3. ‘Bailout is interfering with the free market! I’m leaving the country.’
IMHO, the PTB are interfering with the country, but in the grand schem of things it is still a pretty good place to live day to day so I’ll stick around.
4. ‘FHA and appraisers will conspire to keep prices artificially high, believe you me.’”
The REIC has been and will do everything in it’s power to keep prices artificially high because it keeps their compensation and paper wealth artificially high. We can only hope that the invisible hand is the strong hand and the REIC’s hand shows itself in the end to be the weak hand. The US economy has been driven primarily by a populace who was convinced to incur debt and engage in mindless consumption. This ponzi scheme relied on low rates and unsustainable property appreciation that was completely disconnected from the underlying fundamentals of risk and income. The cycle has ended it’s upswing and has turned down as all mania cycles have done in the past. The kool aid drinkers either do not yet get it or are trying to squeeze out of the game by duping the remnants of the GF pool into taking their holdings at inflated prices. But the market psychology has shifted and each day it seems we see further evidence that the GF pool is shrinking to dust. My biggest concern lies with what dark deeds are being hatched behind closed doors on Wall Street to shift the losses to the commoners and make sure the financial royalty goes unscathed. With the power of the internet we may see such dealings coming into the light of day and the commoners take up pitch forks and/or hold another tea party.
What are the stock symbols for the pitchfork makers? I’m going long.
1. Ampco Safety Tools - Garland, TX
Manufacturer
http://www.ampcosafetytools.com/interactive%20pdf_lr.pdf
Company Profile: Manufacturer of standard & custom pitchforks including garden forks, guncotton forks, hay forks & manure forks. Garden forks are 40 in. long & weighs 3.70 lbs. Guncotton forks available in lengths.
LOL — maybe they’ll come out with a “revolution” model.
Page 22 — the “Manure Fork” looks like the easiest to march with, and appropriately named.
Don’t forget that FHA and the GSE’s are there to back up those loans with taxpayer money.
Need more pitchforks.
I finally agree with Ben that the bailout will amount to nothing constructive; however, politically I think it’s going to backfire big time. When people realize it’s another “mission accomplished” that is meaningless they’re going to be pissed. I’m not a brain surgeon when it comes to all the investing and financial stuff, but I do really well on public psychology. I predict 2/08 is when the public will really get ugly. Credit cards maxed out, no refies to keep the go-go spending going, winter doldrums and cabin fever, news that the bailout plan didn’t help, foreclosures up, prices down, peak of heating oil costs and there will have been enough primaries so the candidates for both parties are set. We’re going to be one giant society of tantruming toddlers.
“We’re going to be one giant society of tantruming toddlers.”
Buying pitchforks with their last $20.
I forgot who said it…BUT
“”If stupidity got us into this mess, why can’t it get us out”"
Our whole monetary system, is built on credit [debt] expansion…
We’ve been TOTALLY successful, in lending money to people who can’t pay it back…
It’s the end of the game….It’s over….
It’s called “”debt deflation”"…The “X” generation, has just been “”X”"ed out….
If this plan is a free-market plan as Chimp and Company say it is, why did the government need to get involved? I thought free-market meant “void of government interference”?
Wouldn’t the free-market have come up with this idea on their own? Yeah, it’s bullshit.
The lending institutions needed a written opinion from the IRS on P & I payments for tax considerations.
I never thought about shorting the student loan companies. makes sense that kids in their 20s and early 30s who have crushing student loans won’t make the payments when their condo is underwater and their credit card bills are mounting.
I wish people would stop with the bailout talk. there is little money involved and it’s voluntary. save the hysterics for the real bailout.
“I never thought about shorting the student loan companies. makes sense that kids in their 20s and early 30s who have crushing student loans won’t make the payments when their condo is underwater and their credit card bills are mounting.”
I agree that many people in this demographic have tremendous debt from housing and student loans; however I want to believe that much of this group might not be carrying any debt at all. Most of Gen Y never participated in the housing bubble. Nevertheless, the ones that are underwater are going to get burned like their older counterparts. A bailout won’t work, a 2% interest rate is useless when you are facing $300K, $400K, or more in debt and only about 1% of the local population can actually afford such a house. Also, most of the BS housing (pretty much anything outside of your actual rich areas) will lose tremendous amounts of value. It’s possible that pigpens like Compton and East St. Louis could drop below five digit values when this housing/hosing bubble blows up if they haven’t already.
Economics focus
Subprime solutions
Dec 6th 2007
From The Economist print edition
The promise and pitfalls of the Treasury’s plan for mortgage-loan modifications
IS HANK PAULSON repairing America’s mortgage markets or wrecking them?
…
Modifying a loan does not eliminate the risk of default later on, particularly when house prices are weak—and may become weaker still. Since the Paulson plan includes only a subset of borrowers, it will have a modest effect on overall foreclosures, and on resulting downward pressure on prices. And weak prices mean higher defaults: a new paper by economists at the Federal Reserve Bank of Boston suggests that defaults by subprime borrowers are extremely sensitive to home prices, far more so than to other shocks, such as losing a job. If prices continue to fall, in other words, loan modification simply puts off the inevitable.
A second worry is that the plan is a form (albeit a gentle one) of government meddling in private contracts, one that could have far-reaching consequences for investors’ willingness to hold future subprime debt. America’s debt markets will be permanently damaged if investors fear that government will simply change the rules to suit the times. Plenty of international evidence suggests that the depth of financial markets does indeed depend on the strength of creditor rights.
http://economist.com/finance/displaystory.cfm?story_id=10251261
IMHO ….I have come to the conclusion that loan modifications or teaser freezers can’t be offered .
First ,because they set up these loan SIV trenches to be at war with each other, making a foreclosure for one part of the trench favorable and making a loan modification more favorable for the other part of the trench ,you can’t monkey with the way the investment pool was set up ,unless all investors in the pool agree or the investors that don’t agree are bought out .
Second, I believe you can’t just choose a group to get a bail-out ,leaving other stressed borrowers screaming discrimination . Loan modifications/freezers should be done on a case by case basis based on a careful review of the loan file and to some extend based on the original loan application not being a liar loan .Otherwise fraud is rewarded and encouraged .
Example one . Young family goes on a teaser rate of 5 % that they qualified for and expected to refinance into a fixed rate loan when it adjusted to effective rate in 3 years . Loan was qualified for based on the guidelines allowing qualifying based on the teaser rate . No fraud took place on the application but the loan is now adjusting to a 10% rate . The borrowers is no longer qualified for the 10% rate adjustment and the property has lost 10% of value ,so it would not appraise to qualify for a new loan and the adjustable loan program they originally went on is no longer available .The borrowers are able to continue to pay their 5% teaser rate ,but the 10 % rate would quickly throw them into foreclosure .The young couple was assured by the loan agent and the Realtor that they would be able to refinance into a fixed loan because in 3 years their property value would go up at least 30% .
First the loan is defective because it was based on qualifying on the teaser rate . If a lender was going to make a loan of this nature they should of made it a three year loan ,due and payable in three years .To increase the effective interest rate by 100% and expect that the borrower would qualify (when they never qualified for 10% is mean,dirty and low down ). This loan should be re-called based on it being a faulty loan and modified to be within the framework of what the borrower can qualify for which is most likely 5 or 6 % rate . Lender could avoid a foreclosure by freezing the teaser for 5 years and loan will be reviewed at that time .
Example 2 ..Borrower lied on the loan application and obtained a no doc loan with a teaser of 7 % that’s fixed in payments for 2 years with neg amortizing on a real rate of 11% ,but the payment doesn’t change to have a payment of 11% for 2 years . At the end of two years the neg.amortizing has increased the loan balance by 20 % and declining values in the areas have decreased the value by another 10% . The current loan is at 130% of the value of the property and the loan balance has increased by 20% because of the neg. amortizing . The borrower requests a loan modification or new loan and is denied immediately when it is discovered that the original loan application was false regarding income The loan is turned over to the fraud unit for further review.
Anyway, I think that this attempt to bail out loans ,other than what a lender would normally do to avoid foreclosures on a case by case basis ,is not workable in the final analysis . Also for the taxpayers to be set up to eventually take on these bad notes by the government insured loan programs taking over these bad notes is a crime .
While I agree that the lenders failed by writing faulty loans based on greed ,and borrowers went on creepy loans based on greed or fear during a mania ,and Wall Street structured the SIV investments so modifications could trigger a lawsuit ,it isn’t the problem of the taxpayers .
The lending was a big mistake and there is no reason to continue making faulty loans or fraudulent loans . A bad loan is a bad loan ,and nothing can chance that .We have to go back to prudent lending standard and go back to the borrower being able to afford the payment ,which means prices have to go down .
Prices are determined by supply and demand and affordability and they will continue to fall regardless of any sort of rate freeze or negotiations or economic machinations..
We’re watching the desperate flailings of the survivors of the capsized boat… climbing atop one another.. pounding the water, trying to scare the sharks away..
I’m suffering from witness abuse just watching this meltdown of
the housing bubble . If it wasn’t such a serious issue ,it would be funny watching all the bag-holders and liable parties try to pass the buck .
Nouriel Roubini’s comments on the mortgage restructuring plan:
http://tinyurl.com/34jm9s
He views this in the context of systemic financial crises which require broad, across-the-board rather than case-by-case adjustments. He also notes the need to try to distinguish between those which are illiquid versus those which are insolvent, i.e. to determine which may be candidates for restructuring versus those that are candidates for liquidation.
I think he may be on target in the sense of reducing the shocks to the financial system. However, I have my doubts about the motives of the administration. If they’re trying to “help”, it usually means they’re trying to loot.