Do you want to pay for the Sub-Prime freeze?

[emilylynn]

Here's Hillary Clinton's plan--straight from the horse's mouth--for solving the subprime crisis. Prop up the borrowers with taxpayer money, legislate a freeze on mortgage resets, and strip end-investors of their right to sue when their money market funds tank.

Clinton Writes Paulson a Letter and Asks For 90 Day Ban on Foreclosures | Loan Modification & Loan Workout News

 

[twaddle]

Looks like another good reason not to pay off your mortgage. If it gets too expensive, the taxpayers will pay it off for you.

I love the newspeak we're getting from this. "Foreclosure timeout." "Hope Now Alliance." I wonder which one will stick. So far, I'm betting on "teaser freezer."

 

[Retire Soon]

In Hillary Clinton's letter to Secretary Henry Paulson, she threatens the use of $5,000,000,000 of taxpayer money to give to communities to deal with the problem if he does not come up with a solution. Taxpayer money should not be used in any way to deal with this crisis. These home buyers were not forced at gunpoint to take out these loans. If home prices were going up instead of down, would these same borrowers who are now in serious financial trouble share their equity with taxpayers?

Hillary is right on one count: where were federal regulators when all of these home loans with ridiculous underwriting requirements written? The answer is they handled the situation in the same manner as they dealt with the 12,000,000 illegal aliens that crossed our borders-they simply looked the other way. Sorry folks, Washington has once again failed to protect its citizens.

 

[lets-retire]

The government's role in mortgages has been to protect people from predatory practices and discrimination based on a protected class. In most cases neither of these issues were raised. The mortgage, like any other loan, is a private contract between two entities. The only time government becomes involved is when one of the parties to the loan brings them in. In most cases it is when the borrower files a complaint. People were very happy with their loans when things were going well, but now they are very upset.

I think if government leaves it alone things will work themselves out. The banks will not foreclose so much that they put themselves out of business, so they will work out some kind of deal. If government wants to help things along pass a law that forbids a mortgage company from renting residential property. That would force the banks to to either work out a deal or foreclose themselves into closure.

 

[Gumby]

Anything that paves the way for lenders to restructure instead of foreclosing is a good thing. There are enormous deadweight losses to the economy when houses go into foreclosure. Among other things, they resell for less than they are typically worth, driving down the prices of the neighbors' houses. Also, cranking up the legal machinery of foreclosure imposes large transaction costs. Ultimately, the borrower loses their home, the lender does not recover the full loan amount and going after a deficiency judgment is probably not worth the lender's time and money. In that scenario, value that otherwise would exist has simply vanished. However, if people can be kept in their homes and continue paying the loan on terms that they can handle, that value is eventually unlocked to the benefit of the economy as a whole. The lenders/investors may receive less than they bargained for, but the first loss tranche will receive much more than they otherwise would in a foreclosure scenario.

You can feel morally superior and berate the borrowers for their irresponsible behavior all you want, but it won't change these economic realities. I would prefer to save the economy than crater it just teach a moral lesson to foolish and/or naive people.

 

[emilylynn]

And what about the costs to society--intangible, but nonetheless real--of a governmental policy that changes the rules midstream and that penalizes the honest, hardworking folks who worked to pay off their modest $150,000 home while their neighbors bought into a $500,000 McMansion and refinanced it five times to pay for expensive automobiles and big-screen TVs? When a government loses the confidence of those of its citizens who have played by the rules, it has lost its entire foundation.

 

[jimhcom]

Wow.... this topic just keeps coming back to this forum it seems. But you will not find any name calling, inflamatory statements, or wishful thinking coming from me. Folks who inject such statements into this thread make themselves look foolish, and do not help their arguement, if in fact that was really their intention at all.
When you break this issue down all the way, it really has to do with individualism, vs. collectivism. Yes... I have mentioned this before, but it seems to bear out repeating again. individualism says, "What is best for me?". Collectivism says, "What is best for all of us?". While the above two statements seem obvious, some of the implications of it are certainly not.
So you have a bank that made an irresponsible loan, and a person that was foolish enough to accept it. We are assuming here that no coersion was being used (no knives, guns, kidnapping of family members etc) to make either party go for that loan. This was an individual's personal decision. Now you have thousands of such individuals decisions that are just as bad going on, that has led us to the subprime mess that we currently find ourselves in.
There are many here that have expressed the position that the govt needs to do something, because the govt inaction will cause banks to fail, people to lose their homes, and the economy in general will tank. All of these things are probably true. As least for the short term they will be. If the govt does intercede, and artifically "helps" this situation, a lot of that pain to the economy, and to individuals can be reduced or eliminated. However, there is no such thing as a "free lunch", even for the govt. When the govt steps in and "helps", it encourages more of the the "irresponsible" behavior that occured in the first place. Sort of like when a drug addicts parents give the child money "to help them" that they know will be going for drugs. In the short term it takes away their pain and suffering, but in the long run, it just makes things even worse.
If people in this forum still believe that the collective "all of us" (when they talk about the economy, jobs, etc) are more important than the individual's wants, then let me ask the following questions. Should the govt outlaw Mcdonalds and all fast food restaurants? The US would be healthier if that option was not available, and medical costs would go down. Should boxing be outlawed as a sport? A very large percentage of boxers have long term medical problems that are directly related to their time spent in the ring.
How about a question near and dear to everyone in this particular forum. Should the govt outlaw early retirement? The more people that we have in the workforce, the more taxes are being paid. The more taxes that are being paid, the more SS can be funded, and that helps out everyone... doesn't it? IMHO our democracy protects the individuals right to choose for himself. And sometimes those decisons are bad, even disasterous. Sometimes the problems are so bad, that it can affect larger things like the economy as a whole. But the fact remains, that I would much rather live in a system that allows my failure by my own hand, than a system that denys my right to choose because I might pick a bad road for myself. I am an adult.... I live for myself... and not for others.

Excelent points. If anyone really believes there will not be some kind of Quid Pro Quo between the banks and the goverment on this deal they are fooling themselves. Both Motley Fool and the Wall Street Journal have done articles in the past few days on how this would really work. Does anyone really believe the banks would ever take this loss? What are you nuts?

 

[brewer12345]

Hillary is right on one count: where were federal regulators when all of these home loans with ridiculous underwriting requirements written? The answer is they handled the situation in the same manner as they dealt with the 12,000,000 illegal aliens that crossed our borders-they simply looked the other way. Sorry folks, Washington has once again failed to protect its citizens.

I suppose I might as well be throwing meringues into a black hole trying to talk about facts on this subject, but one more try:

The federal regulators were doing what they were supposed to be doing: they were regulating and restraining the banks in their lending. If you look at the last two years worth of "proposed guidance open for comment" (i.e. this is what we will force you to do shortly, so stop doing it now) that the bank regulators issued, you will see: restrictions on subprime lending, restrictions on construction lending, resquirements to qualify borrowers for loans based on verifiable income, etc. The real problem is that a lot of lending was done outside the banking system. So while actual FDIC-backed banks were kept from doing the really stupid loans (mostly), non-bank lenders could do whatever the ultimate buyers of the paper would put up with. In an era of loose credit, dumb things were done but the federal regulators (mostly) kept it out of the banking system.

The problem now is that the non-bank lenders (who were regulated by the states if at all) have pissed in the punch bowl. Want a cup?

But it isn't the bank regulators' fault.

 

[cute fuzzy bunny]

Once again we learn that the prudent will pay for the mistakes of the foolish, and in the middle of it a whole lot of people who were more interested in their commissions failed to do their due diligence in a responsible manner for the customer, who was an idiot.

The agents got paid. The brokers got paid. The collateralizers took on the risk and the banks got paid for wrapping up such a tasty package for them. The homeowners turned the good part of their brains off and trusted that everyone would do the right thing for them thinking that they were going to get rich!

Now the politicians will thump their chests in an election year. Taxes will be levied. Pockets will get relined.

I say let the chips fall where they may. Risk taking has to have some form of penalty to it. Some of the stories will be sad to hear. Lessons will be learned. Wont be a lot of fun. The net result will probably be better than the US government armed with five trillion dollars spraying half of the money into the pockets of speculators and morons.

Up until I wrote this, I was securely in the camp that said that the economy couldnt be allowed to hit a huge speedbump over this, and a bailout was an unsavory necessity.

I changed my mind.

 

[Retire Soon]

In Treasury Secretary Henry Paulson's exact words today, according to the Wall Street Journal he stated, "Additionally Congress needs to complete its work and create a strong independent regulator for Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac have an important role in making mortgages available and affordable, and appropriate regulatory oversight is critical to their ability to serve their public policy purpose."

It's very apparent that more regulation is probably in store for the mortgage industry. In a perfect world, a real estate loan should be between two parties, without government intervention. Sorry folks, it's simply not a perfect world.

 

[Gumby]

And what about the costs to society--intangible, but nonetheless real--of a governmental policy that changes the rules midstream and that penalizes the honest, hardworking folks who worked to pay off their modest $150,000 home while their neighbors bought into a $500,000 McMansion and refinanced it five times to pay for expensive automobiles and big-screen TVs? When a government loses the confidence of those of its citizens who have played by the rules, it has lost its entire foundation.

Why is it a zero sum game?

I have always made the payments on my modest mortgage. I have refinanced four times and never taken a penny out (I have reduced the rate and pulled in the term). As far as mortgage debt goes, I am the soul of rectitude -- the responsible, hard working borrower. If anyone deserves to be annoyed about the McMansion inhabiting morons (there are many of them around here), it is me. But, aside from the schadenfreude value, there is absolutely no benefit to me from my neighbor's misery.

In fact, as far as I can see, it doesn't hurt me one bit if those neighbors who can't make their mortgage payments are allowed to restructure their loans and stay in their homes. While I am certain that if they are foreclosed, it will harm the value of my house. And as an investor (like the majority on this board), I am much better off with a continued robust economy that is not destroyed by massive foreclosures.

Did my neighbors live it up while I remained sober and responsible? Yes. But would I want to trade places, even with the prospect of restructuring? Not for an instant.

 

[youbet]

Once again we learn that the prudent will pay for the mistakes of the foolish.......... I say let the chips fall where they may. Risk taking has to have some form of penalty to it. .

I'm certainly finding it heartwarming that Hillary, Paulson and the others would like me to pick up the tab for the house flippers, McMansion owners and other over-extenders. It's the ******* tax I'll have to pay for a lifetime of LBYM, playing it conservative and paying my own way........or not having a way.

 

[barbarus]

Methinks you aren't all that familiar with the machinery of the mortagge market that has developed over the past few decades. And oddly enough, I heard very few complaints as the housing market rocketed upwards, fuelled by all this cash.

FWIW, the people who made the lousy loans have either gone bust or nearly so; those who bought the trashy paper wish they had bever heard of this stuff; teh rating agencies are awaiting a replay of the Congressional ass-whipping session that followed the implosion of the junk market in '02-'03; and everyone else involved has suffered plenty. I think the remedies being proposed are being offered with the intention of limiting the damage to the wider economy, which seems reasonable to me.

The reason you didn't hear them Brew is that you labeled them as wearers of tin foil hats and ignored their wisdom, but they surely HAVE been complaining about skyrocketing prices for several years now. I've learned a lot of practical economics from them.

 

[twaddle]

Frankly, I'm more upset about having to pay for the Bush Wars.

So far, the taxpayer cost of the Paulson proposal is zero. And if implemented well, the costs to the banks and other bag holders could be fairly low too. In many cases, we're simply talking about keeping a high-rate mortgage from reaching astronomical rates. Some of the teaser rates on the 2/28's started at 7%....

I still see this as a Good Thing. We need to see work-outs on a massive scale. The one-at-a-time work-out thing ain't workin' out.

 

[youbet]

.

In fact, as far as I can see, it doesn't hurt me one bit if those neighbors who can't make their mortgage payments are allowed to restructure their loans and stay in their homes.

As said in an earlier post, I have absolutely no issue with lenders renegotiating with borrowers to make the best of a bad situation. What I'm against is everyday citizens forking up tax dollars to reimburse the lenders for the foregone interest rate escalations.

Restructure, yes. Tax payers subsidize the resturcturing.....no way!

 

[TickTock]

Once again I find my Libertarian viewpoint not quite as strong in this area.

On the far end of the scale of folks who I think might deserve some special consideration are the homebuyers (particularly first-time homebuyers) who were at best uninformed by their broker/loan officer, most probably mislead, and at worst defrauded (very hard to prove, though). Yes, they should have better educated themselves, but IMO the loan originator should have a duty to act in the best interests of their clients. When the person getting the commission is telling the buyers 'Oh don't worry about the ARM feature, you'll be able to re-finance, prices will be up, your income will increase, blah blah blah' at the same time the buyers are signing a written agreement that they aren't relying on any oral statements - well, I have a problem with that.

Next on the list are folks who re-financed and took cash out.

Next are the folks who bought a second/vacation home.

Last are the folks who bought homes as an investment. Hey, you thought you'd become a millionaire in three years starting with no cash by flipping houses and didn't do the due diligence for the business - well, you took the risk, you take the consequences.

Really, I'd only push for special consideration for the first group.

********************

Thought: A couple of years ago (?) on the cover of Money magazine was a 20-something who had bought a house in San Diego about 1000' from an airport runway with no money down for something like $520,000 with no money down. It was a four-bedroom home, and the one thing she did right was rent out the other three bedrooms to help make the payments.

Wonder how she's doing now?

Her I don't have much sympathy for. She wasn't mislead (as far as I can tell by the article); she thought she'd make infinite return on her $0 investment. Risk cuts both ways.

********************

On the other hand, in last week's USA Today was an article that highlighted unions using their money to help their members with downpayments for houses near their workplaces that they could not otherwise afford. A good idea one would think...

Except that the case in point was a school teach in New York City. She makes $55,000 per year, and the teacher's union helped with a downpayment for a $299,000 house!

Okay, does anyone else think that buying a house that's 5.4x your annual income a bad idea?

Now, it's not an extravagant house; houses in NYC are expensive. But still, if no houses are affordable near your work, I'd suggest either (1) living with the commute, or (2) finding work somewhere else.

There's no indication in the article as to wether she was actively mislead, but someone should have run her through the economics. At best, she'll be house-poor. And if that was properly explained to her and she judges it worthwhile, fine it's her decision. But I doubt that's the case.

********************

I have more sympathy for the second woman than the first. But I'd put the second woman somewhere between categories 1 & 2 on my list, and the first woman between categories 3 &4.

********************

In short, I think it's a complex issue that a one-size-fits-all approach does not adequately address, but because of that complexity makes it difficult to properly design a nuanced approach for.

 

[Running_Man]

I suppose I might as well be throwing meringues into a black hole trying to talk about facts on this subject, but one more try:

The federal regulators were doing what they were supposed to be doing: they were regulating and restraining the banks in their lending. If you look at the last two years worth of "proposed guidance open for comment" (i.e. this is what we will force you to do shortly, so stop doing it now) that the bank regulators issued, you will see: restrictions on subprime lending, restrictions on construction lending, resquirements to qualify borrowers for loans based on verifiable income, etc. The real problem is that a lot of lending was done outside the banking system. So while actual FDIC-backed banks were kept from doing the really stupid loans (mostly), non-bank lenders could do whatever the ultimate buyers of the paper would put up with. In an era of loose credit, dumb things were done but the federal regulators (mostly) kept it out of the banking system.

The problem now is that the non-bank lenders (who were regulated by the states if at all) have pissed in the punch bowl. Want a cup?

But it isn't the bank regulators' fault.

This is absolutely a total falsehood. There may have been some toothless guidelines issued but there was no enforcement and the banks did not stay out of the business. Of the top 10 originators of subprime loans you have Citigroup, Merrill Lynch, Countrywide, Wells Fargo and Washington Mutual. They then took these loans and had Wall Street package them all over the world in tranches. If you read the story you will see Wells Fargo originated 23 billion in the 3rd quarter of 2006 in subprime loans to lead the country. I don't see restraint there!?

You had Greenspan and Bernake state they never realized the troubles until it was too late. Bernake thought all was well and waited until April of this year to ask for some more oversight. Greenspan never saw any problem.

At the same time Goldman makes a fortune shorting the very loans they packaged. To claim this all happened outside the main banking area is totally misleading and a false claim you have been making from the beggining of the subprime mess. Yes there were a great many mortgage companies making loans but it was the big players who gave the impression to all that it was a profitable and good way to finance housing.

To look at a chart of the amount of subprime lending up to 2006 and I do not see a definition of restraint. I believe 20 percent of all loans were subprime in 2006.


Top 10 subprime originators slanted toward West Coast - MarketWatch

Bernanke Believes Housing Mess Contained - Forbes.com

Greenspan defends subprime market - CNN.com

 

[Texas Proud]

Hillary is right on one count: where were federal regulators when all of these home loans with ridiculous underwriting requirements written? The answer is they handled the situation in the same manner as they dealt with the 12,000,000 illegal aliens that crossed our borders-they simply looked the other way. Sorry folks, Washington has once again failed to protect its citizens.

Sorry, but another person that is not aware of the facts... most of the loans were made by companies that are NOT regulated (except for fair lending and such)... they are not 'banks' that get told who they can lend to and how much capital they need... they are not getting 'deposits', but buying their funds from others. They then sale the mortgages to investors, again not regulated as much as you think as they are not sold to the general public...

All the cry about regulation is from the people who could have passed laws but did not...

 

[Texas Proud]

A
You can feel morally superior and berate the borrowers for their irresponsible behavior all you want, but it won't change these economic realities. I would prefer to save the economy than crater it just teach a moral lesson to foolish and/or naive people.

OK.. then where was the gvmt when the S&L crisis was happening (remember, they only paid of depositors) There were neighborhoods in Houston where 50% of the houses were foreclosed.. Housing prices dropped by up to 50% (my house for one, me being on the good side).. it created an opportunity for people to buy a house when before they had no chance to do so... housing was affordable... and Houston still is one of the most affordable cities to live in...

So, you can say 'morally superior' to me.. so be it... if someone makes an irrational decision and it craters they should live with the outcome.. and if that is having a foreclosed house.. so be it... if the economy goes into recession.. so be it... it will happen sometime as it is the business cycle... something will trigger it.. why not this?

 

[Texas Proud]

This is absolutely a total falsehood. There may have been some toothless guidelines issued but there was no enforcement and the banks did not stay out of the business. Of the top 10 originators of subprime loans you have Citigroup, Merrill Lynch, Countrywide, Wells Fargo and Washington Mutual. They then took these loans and had Wall Street package them all over the world in tranches. If you read the story you will see Wells Fargo originated 23 billion in the 3rd quarter of 2006 in subprime loans to lead the country. I don't see restraint there!?

You had Greenspan and Bernake state they never realized the troubles until it was too late. Bernake thought all was well and waited until April of this year to ask for some more oversight. Greenspan never saw any problem.

At the same time Goldman makes a fortune shorting the very loans they packaged. To claim this all happened outside the main banking area is totally misleading and a false claim you have been making from the beggining of the subprime mess. Yes there were a great many mortgage companies making loans but it was the big players who gave the impression to all that it was a profitable and good way to finance housing.

To look at a chart of the amount of subprime lending up to 2006 and I do not see a definition of restraint. I believe 20 percent of all loans were subprime in 2006.


Top 10 subprime originators slanted toward West Coast - MarketWatch

Bernanke Believes Housing Mess Contained - Forbes.com

Greenspan defends subprime market - CNN.com

Of the top 10, it appears to me only 3 are regulated... and they might have been subs that were not in the "banking system" so they might not have been either...

 

[brewer12345]

OK, I am done throwing innocent meringues into the clutches of the evil black hole. Believe what you want, regardless of the facts. Yes, it was all fraudulent. Yes, the feddle gummint os going to send a large man out to your house to hold you upside down by your ankles and take what falls out t pay for the latte-sipping, SUV-driving, McMansion-defaulting debtors. Yes, the banking regulators were too busy freebasing cocaine and spanking each other to notice what was going on. Yes, there really is a Council of the Elders of Zion who control everything (and I am their agent trying to pull the wool over your eyes).

"The weather's getting colder,
The pig is getting fat,
Please put a dollar in the old man's hat.
If you ain't gotta a dollar then a penny will do;
If you ain't gotta penny then **** you too."

 

[tryan]

There were neighborhoods in Houston where 50% of the houses were foreclosed.. Housing prices dropped by up to 50% (my house for one, me being on the good side).. it created an opportunity

Same story here (north of Boston) ... best opportunity I've seen in my lifetime (pick-up over a dozen of them). Can't wait to do it again!

Brewer,

Were Freddie and Fannie largely "shielded" from dabbeling in subprimes by thier regulations? Or are they given enough rope to hang themselves?

This could be the long pole IMHO.

 

[armor99]

One thing I wonder about though. Sub-prime mortgages by their very nature are more "risky". More chance of default to the bank etc. If banks had gone the other way and said to lots of folks, "sorry... I will not give you a loan because your credit is just not good enough, not earning enough, etc", how many lawsuits would have been filed against the banks for NOT lending folks the money? Although I cannot prove it, I would wager lots of lawsuits against banks would have occured.

 

[Retire Soon]

In a Wall Street article, entitled, "Some Cry Foul Over Relief Plan for Borrowers," some readers raised some valid points against Paulson's Plan. Here are some of these:

1) How far should we go to help borrowers who can't pay their bills.
2) What are we going to do when they can't pay their credit card bills too?
3) We're just postponing the inevitable. The more government steps in, the more we get into a deeper quagmire.
4) Many would-be homeowners have been working hard to save their money to buy a home and have waited patiently for prices to go down. Now big government is trying to re-inflate the bubble.
5) Many readers who lost thousands of dollars in the burst of the dot-com bubble wonder why the fed did not rescue them.
6) One individual was reminded of a TV commercial that went like this when the announcer asks: "Do you owe back taxes? A client responds, I settled for half of what I owe." How is that fair?

This is my own personal viewpoint: It is sad that we now live in a society where individuals are taught not to take responsibility for their own actions. When they make poor choices, they can always count on someone to give them a helping hand, regardless of who caused their problems in the first place. How will anyone ever learn from their own mistakes? How can we possibly ever expect to teach responsibility to our children?





Some Cry Foul Over Relief Plan For Borrowers - WSJ.com

 

[Running_Man]

It's inevitable that when markets are strong and booming there's a natural aversion to being the first one into a market and the last one out. That's a fact of life," Corrigan said. ]

In a heated hearing lasting over an hour -- part of an inquiry into financial stability and credit market turmoil -- lawmakers said banks had created complex financial instruments that meant the mis-selling of home loans in Chicago could result in the near collapse of British bank Northern Rock

From Goldman themselves is the tale of what occurred. It was not some unregulated loans by mortgagers that caused the problem it was the packaging of massive amounts of loans by banks that made everything possible. The banks were earning fees for these packages, the sale of packages of subprime loans made possible loans to individuals who could not possibly have gotten a loan any other way.

The purchase of homes financed by subprime caused a bubble in housing

Between 1997 and 2006, American home prices increased by 124%. Wikipedia[

prices, to try and maintain that bubble for as long as possible for the major banks in the nation by offering below market rates to the worst credit risks is merely dragging out an unmitigated disaster explicitly caused by the major banks in the world of finance, not unregulated mortgage lenders.

That the proponent for this rate freeze plan is the former head of Goldman who was a leading enabler of the subprime fiasco should cause anyone to doubt why the plan is being sought in such a strident fashion and what promises are being made in exchange for the acceptance of his plan.

Anyone who would sell a product as AAA rated and then go and short the very same products they were selling as a natural "hedge" is a snake oil salesman in my opinion. Especially when they claim they were "fortunate" in that they adopted a net short position in total.



UPDATE 1-Mistakes made during credit crunch, bankers say | News | Market News | Reuters