Subprime Mortgage Bailout

[Danoff]

http://money.cnn.com/2007/12/05/real_estate/bush_freeze.ap/index.htm?postversion=2007120610

The US housing boom of recent years has come to a dramatic end, and with it, some very bad loans.

As long as housing prices are rising all kinds of crazy loans are viable. But once prices start sinking, adjustable rate mortgages with zero downpayment can be a death sentence if you're already in up to your neck.

This phenomenon is causing a rash of foreclosures, and has got politicians thinking of a way to buy voters.

A few years back, the republicans tossed around the ludicrous idea of giving everyone $100 to offset the price of gas - I can't believe that idea ever made it to the surface. This time, they're being a little more crafty. They're going to bail out people who are in bad loans by forcing the banks to pay for it. That way, taxpayers can't claim they're being ripped off, and the republicans still get to look good for saving the day.

The plan (as I understand it so far), is to force banks to not readjust at the end of the normal adjustable rate term. When the loan was written, there was a term limit for the interest rate - 5 years for example. Now that 5 years is up, and suddenly the borrower has to cope with a new, higher, interest rate and can't afford it. If the banks are forced not to adjust, the borrower can maintain their ridiculously low interest rate - making me wonder why I bothered to fix my rate at all. Had I known the government would force the banks to keep giving out the teaser rate, I'd have gone for it in a heartbeat - would have literally saved me 10's of thousands of dollars.

There are a few things I hate about this policy.

- It rewards spending over saving
- It attempts to buy votes with someone else's money
- It pretends that the blame for these loans lies with the bank rather than the guy signing the bottom of the contract
- It quite literally screws over the people who acted responsibly
- It basically defecates all over the constitution
- It harms the economy by forcing banks to shell out money to delay the inevitable until after election season

Bad bad bad.

 

[Duke]

Agreed agreed agreed.

 

[arora]

I agree, a very bad idea.

The people who bought houses under those conditions where fooling themselves obviously, and if they cannot live up to their contracts then out they go. The banks took a huge gamble as well by offering such silly terms and actually they need a bail out as well because if there is enough of those people out there who can no longer afford those payments the banks are going to end up owning a whole grip of houses that they will not be able to sell, thus making nothing at all.

What a mess.

 

[Danoff]

I agree, a very bad idea.

The people who bought houses under those conditions where fooling themselves obviously, and if they cannot live up to their contracts then out they go. The banks took a huge gamble as well by offering such silly terms and actually they need a bail out as well because if there is enough of those people out there who can no longer afford those payments the banks are going to end up owning a whole grip of houses that they will not be able to sell, thus making nothing at all.

This doesn't help banks at all. They were already free to enact this plan. There's no rule saying they have to foreclose. But you're right, they're going to need an even bigger bailout if this one goes into effect.

 

[UnoMOTO]

YIPPIE!!! The government saves the day again! It's the same old pattern of I got myself into trouble I am not going to take resposibilty for it.

 

[Pupik]

I'm selling my house while the getting's and my credit's good. Let someone get a loan they don't deserve, so I can get a nicer home, and I didn't do anything wrong. Might as well play the system while I can. I can bitch about it later.

It all seems so evil, though. Where's my horn and hoof polish? I might as well look good when I'm bad.

 

[Philly]

Hold up a sec.

Are these the same republicans that want the government to stay out of business? SOCIALISTS!!!

Bad move.👎

 

[FoolKiller]

I still can't believe people get adjustable rates. Since I was old enough to understand what a mortgage was I had understood that you wanted to get a fixed rate.

The only decent part of this that I can see is that it will only apply to people who haven't missed a payment. That doesn't make it right by any means, but at least if this does pass it won't be protecting the people that can't afford a house at all.


Anyway, I had been waiting for the housing market to crash and teh foreclosures to start stacking up so that banks would be trying to get rid of houses too quickly to haggle too much on price. If this goes through then I will get screwed.


The fact that Republicans are doing this just goes to show that politicians don't care about party lines when it comes to increasing their own power and buying votes.

 

[Philly]

The fact that Republicans are doing this just goes to show that politicians don't care about party lines when it comes to increasing their own power and buying votes.

I know that I never would have voted republican, but now I'm just mad at them. Give the people what they are voting for. If they are doing this just to buy votes, then obviously the people don't want them in office and they should not be in office. And I thought that with Bush and them leaving soon, they would have become more intelligent and maybe people I can actually respect.

 

[FoolKiller]

they would have become more intelligent and maybe people I can actually respect.

We are talking about politicains, right? Any politician? Quite frankly I would not use those words for either party.

Well, maybe Ron Paul.

 

[Philly]

We are talking about politicains, right? Any politician? Quite frankly I would not use those words for either party.

Great point. I must have missed something in all of my ranting.

 

[arora]

This doesn't help banks at all. They were already free to enact this plan. There's no rule saying they have to foreclose. But you're right, they're going to need an even bigger bailout if this one goes into effect.

Right, I did not mean to imply that the banks need the gov to bail them out. It was a false stimulation of the market and now it needs to be corrected, hopefully through some savy capitalistic investors, not politicians, we all know what happens when they stick their thumb in the pie

 

[ERacer]

My apologies for the repost. I posted this some time ago in another thread, but I felt it merited some space in this discussion.

The sub-prime lending mess is certainly related to changing loan interest rates for sub-prime borrowers, but it really has more to do with the 'securitization' of mortgages. Many years ago, it used to be that your mortgage was held by a bank. The bank had strict lending guidelines. Then, early 1980's, along came a Salomon Brothers trader, Lewis Ranieri, who single-handedly created an industry which forever changed the way mortgages were processed. Ranieri recognized the value of holding and trading a mortgage note and Salomon Brothers was a Wall Street powerhouse which excelled at correctly valuing bonds when everyone else had such difficulty. But how do you trade Bob & Mary's 3 bedroom 2 bath home in Connecticut? You lobby the US Congress to create an association or agency which would be responsible for pooling and administering these loans. And that's exactly what Ranieri did. And so, today, we have GNMA, FNMA and a host of other mortgage pools thanks to Lewis Ranieri. He even managed to convince the US government to back these mortgage pools. Truly remarkable.

What does this have to do with the sub-prime debacle? Today, the bank does not hold your mortgage. Today, a mortgage broker will gladly qualify you for 3x what you should qualify for and collect a hefty fee for doing so. The fee, not surprisingly, is based upon the amount you qualify for. The mortgage broker never actually holds onto your mortgage. As you sign the paperwork and leave their offices, the mortgage broker quickly sends your loan to Wall Street to become part of one of the mortgage pools (GNMA, FNMA, etc). It is now securitized - part of a quantifiable, tradeable approved asset class. Bonds issued by GNMAs and FNMAs are commonly called Agency Bonds and are considered very creditworthy and very "safe" investments. Once in the market, your mortgage is, as part of the mortgage pool, traded and used as collateral by large institutional investors (corporations, mutual funds, non-profit organizations) against their more risky investments within their portfolios. These Agency Bonds are considered so secure that investment banks will often allow the bond holders (corporations, mutual funds, etc) to leverage, or borrow cash, against their Agency Bond holdings in their investment portfolios. Up to 20x their face value!!

That's right - the loan which so many Americans should never have qualified for is, in effect, being used as a hedge against larger, riskier asset classes. Billions of dollars worth of hedged investments are at stake here. It is the fundamental reason for this sub-prime crisis. The very foundation upon which US corporations have built their investment portfolios, including their employee pension plans, is now crumbling. It is the primary reason why Congress is now being asked to intervene. Not because you lost your house, oh no, it's because major corporations are hemorrhaging cash.

The question is; who is now going to buy into a declining multi-billion dollar pool of assets? Who has pockets deep enough to bail out GNMA or FNMA? The US government is obligated to shore up the pools, but how to finance that? Increase taxes? Issue more debt in the form of government bonds? At what interest rate would someone be willing to buy our new debt issue?

ERacer

 

[Omnis]

Don't forget that all of these low interest rates and bailouts mean that money has to be printed. Inflation!

Basically, what has happened is that collectivists have overtaken the entire political system. Democrats and Republicans are two of the same breed. Both now advocate big government (except for a few, of course). G. Edward Griffin has a cool speech about this on google video somewhere.

 

[Danoff]

Don't forget that all of these low interest rates and bailouts mean that money has to be printed. Inflation!

Basically, what has happened is that collectivists have overtaken the entire political system. Democrats and Republicans are two of the same breed. Both now advocate big government (except for a few, of course). G. Edward Griffin has a cool speech about this on google video somewhere.

The second part is pretty much right on. The first part, though, not so much. The government isn't paying the interest. The banks are being forced to sustain loans past the original contract date. No new money is being printed.

 

[Zrow]

*snip*

But surely GNMA wouldn't approve subprime mortgages to sell as bonds?

 

[Touring Mars]

In many respects, I share the sentiments expressed in Dan's original post - I am fundamentally opposed to bailing out people who have knowingly over-stretched themselves and totally against the government seeking to make political capital out of it to boot. I also have to say that I don't know the root causes of the problem well enough to make a reasonable argument regarding it, but ERacer's post is certainly an excellent primer 👍

It seems strange to me that the Republicans are suggesting this and that the Democrats, far from throwing their hands up in horror, are actually saying that these measures don't go far enough...!? So with both sides endorsing the same idea, does that not undercut the argument that these measures are about buying votes?

Is it not the case that these measures are designed to prevent further instability that could lead to all sorts of terrible outcomes? It seems harsh and totally unfair that non-subprime borrowers feel cheated or even end up paying more taxes to assist with the bailout, but are the alternative solutions any better/fairer for those who deserve no 'punishment'? I guess what I'm asking is "Is this a no-win situation?" and is it the case that dealing with the problem head-on now will save further calamity later?

 

[Swift]

Wow, republicans are still stupid enough to think they can act like liberals and people will swallow it?

This is horrible. Like Danoff said, what about the people that didn't live outside their means. Nobody was jumping in to help my parents when the mortgage life dealt us a bad hand? Nope! Did my father walk around complaining about why the government didn't pay his mortgage? Nope!

This is getting so far away from what the founders wanted it's impossible to see how it's legal. This was a person's CHOICE nobody put guns to these people's heads to get these loans.

Man, we so desperately need a third party that actually READS the constitution!

 

[Omnis]

Wow, republicans are still stupid enough to think they can act like liberals and people will swallow it?

This is horrible. Like Danoff said, what about the people that didn't live outside their means. Nobody was jumping in to help my parents when the mortgage life dealt us a bad hand? Nope! Did my father walk around complaining about why the government didn't pay his mortgage? Nope!

This is getting so far away from what the founders wanted it's impossible to see how it's legal. This was a person's CHOICE nobody put guns to these people's heads to get these loans.

Man, we so desperately need a third party that actually READS the constitution!

Or we can elect Ron Paul.

http://www.ronpaullibrary.org/document.php?id=687
http://www.ronpaullibrary.org/document.php?id=974
http://www.ronpaullibrary.org/document.php?id=527

Since 1976.

 

[Swift]

In all honesty. This is more about the congress then the presidency. I want enough candiates in office at least make the "traditional" politicians check themselves.

But Mr. Paul is looking better and better(except for his horrid foreign policy stances)

 

[Omnis]

In all honesty. This is more about the congress then the presidency. I want enough candiates in office at least make the "traditional" politicians check themselves.

But Mr. Paul is looking better and better(except for his horrid foreign policy stances)

*Dr. Paul. Like I was saying, the collectivists have taken over. Ask yourself why more people like RP aren't in congress, and then do something about it.

Oh, and I suppose the founders had horrid foreign policy as well. You can't knock it when it worked when we tried it. Interventionism doesn't have such a pretty track record. I can't believe people think conducting foreign policy as the Constitution mandates and as recommended to us is so radical.

Anyway, we've already had this discussion. Maybe it's time to talk about congresspeople who don't support this bailout crap and runaway inflation.

Theodore Terbolizard is running for California's 4th district and Dean Santoro is running for Florida's 21st. I've met Dean and he's a cool guy.

By the way, what are all of your opinions on some solutions to the bailouts and how they relate to the collapse of our dollar? What do all of you think about competitive currencies and, for instance, how effective a gold dollar might be against the banking cartel's notes?

 

[Danoff]

It seems strange to me that the Republicans are suggesting this and that the Democrats, far from throwing their hands up in horror, are actually saying that these measures don't go far enough...!? So with both sides endorsing the same idea, does that not undercut the argument that these measures are about buying votes?

Not really, no. It buys away that argument from the democrats anyway. Anything you can do to steal your opponents' thunder. If the republicans hadn't offered this bailout, the democrats would have said that they should have - and people might have listened. This way they spend other people's money to prevent from being criticized - I think it still counts as buying votes. Of course the democrats are going to say that it doesn't go far enough, but that criticism never sticks well.

Is it not the case that these measures are designed to prevent further instability that could lead to all sorts of terrible outcomes? It seems harsh and totally unfair that non-subprime borrowers feel cheated or even end up paying more taxes to assist with the bailout, but are the alternative solutions any better/fairer for those who deserve no 'punishment'? I guess what I'm asking is "Is this a no-win situation?" and is it the case that dealing with the problem head-on now will save further calamity later?

It might be if this were anything even resembling "dealing with the problem head-on". This is actually more like "sweep the problem under the rug and hope it goes away" than anything else.

Yes, this is supposed to prevent more widespread foreclosures during an election - and it just might do that. People getting foreclosed on are likely to vote against the incumbents. People who know people who got foreclosed on are likely to vote against incumbents. People who's houses went down in value are likely to vote against incumbents. Hell, even people reading about foreclosures on CNN are more likely to vote against incumbents.

But the housing market has been inflated (much as it pains me to say it), and could use a correction. It can be directly compared to the .com busts not long ago. Lots of people lost their shirts - many of them regular folks like the ones losing their houses now. People make poor financial decisions, and bailing them out of it only further burdens the economy. Artificially holding interest rates low to prevent foreclosures further weakens the dollar (not that that's all bad). Forcing banks to maintain bad loans props up high housing prices - keeping home sales crawling. It also puts an undue burden on banks, which cuts their investments, slowing the market etc. etc. Hell banks were going to have to cut back anyway, given the number of foreclosures. Forcing them to keep bad loans is almost by definition even worse.

None of that is to even mention injustice of it all.

 

[Danoff]

Yup, all organizations like Washington Mutual here need are regulations forcing them to lose even more money (read: cut more jobs).

http://money.cnn.com/2007/12/10/news/companies/wamu/index.htm?cnn=yes