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

[steve88]

should have bought five 1 million dollar homes 2 years ago

 

[TeeRuh]

Just the facts maam.

I know it is always more fun to rant when it comes to politics or gummint but eventually (as the brewmaster is saying) one should return to the facts.

"As envisioned, the plan would effectively extend the fixed-rate period for stressed borrowers and so shield them from a payment spike that could push them into foreclosure."

Link

t.r.

 

[tryan]

This whole mess should not be looked at as an opportunity to kill the wounded. Trust me on this one: if banks, there investors and the borrowers all go under, and that drives us deep into a recession/depression

This mess is not big enough for THAT impact. Just have to go back ~20 years to the S&L "crisis" .... Resolution Trust Corporation "bailout" ... same stuff just fast forward a couple decades. I made my wad killing the wounded ... just sit still; they're coming.

 

[twaddle]

This mess is not big enough for THAT impact.

A lot of people have underestimated the magnitude of this thing. So far, the most pessimistic predictions have turned out to be on the optimistic side.

Imagine a crash bigger than the dot-com crash, but instead of a bunch of nimble 20-somethings out of work for a couple years, the banks are the dot-coms. Banks are the backbone of our economy. Dot-coms we can live without.

 

[tryan]

I don't see it ... yes, lots of banks will go under (and they NEED to). BUT lots of banks did NOT get sucked into the caze. Smaller banks stuck to thier principals.

Owners not moving into properties; bribbed appraisals; hidden second mortgages; fasified incomes ... saw it all in 1989.

BTW, bet you could sell a Venn Diagram: GDP vs Banking vs Subprime Mess.

 

[Texas Proud]

Just my opinion... but I don't think that there are a lot of banks that are going under if nothing is done... most have a good amount of capital and can absorb the losses...

And a lot of the losses are in CDO and CMOs, and why should they be bailed out?

Will it hurt, yes, but I would be the economy will be stronger for it...

And on one of the shows that had a 'poster boy' on the bad lending had a house that was PAID FOR, but got a mortgage on it so he could 'buy stuff'... now his house is being repoed and he is blaming the lending people... WHAT HAPPENED TO THE MONEY? He spent it..

And how many of the people should not be in their house anyhow

The banks will make concessions to the borrowers if they do not want to take a bigger loss... and if the person is not a good risk, then they should not have made the loan in the first place....

I do NOT want any of my taxes to bail out anybody... this is not something like the S&Ls where the depositor was who was being protected... but the S&Ls went under...

SO, let the banks take it in the chin.. if there are some that go under, then someone else will be there to buy it and keep it going... that is the system we have and it has worked well for a long time..

 

[brewer12345]

I don't see it ... yes, lots of banks will go under (and they NEED to). BUT lots of banks did NOT get sucked into the caze. Smaller banks stuck to thier principals.

I think that we need to be a little more careful with language here. Actual banks mostly did not make the really hideously stupid loans that are going bad in droves. The worst subprime loans are the 2/28 loans that were very popular through early 2007. This structure has a fixed rate for two years, then the rate adjusts (higher, most likely). The idea is that after two years you have either fixed your credit, refinanced, or sold the house. Most of these loans were not made by actual banks that are backed by the FDIC (with a few notable exceptions). They were made by non-bank lenders who either sold the loans into the capital markets or held them and financed them. Why didn't banks make these loans? Because the bank regulators wisely held the banks to higher standards than the non-bank lenders, which meant that when the stupidest loans were being made, it was done by non-bank lenders because the regulators wouldn't let the banks be that loose. Some actual banks made subprime loans, but they generaly underwrote the loans a lot better and didn't make use of the 2/28 structure, so their loss experience has been much better.

And so who has blown up? Mostly, the non-bank lenders: New Century, Novastar, Saxon, etc. Actual depository institutions that blew up are few and far between. So I think that this demonstrates that bank regulations do work, if imperfectly.

What is putting pressure on all the banks now is that there has been credit market contagion that has spread throughout the mortgage market. The capital markets entities that financed a lot of mortgages (and not just subprime: prime jumbos, Alt A, etc.) have been shut down or hamstrung, and many of them ae being forced to liquidate in a stressed market. That means that banks that usually made loans and sold them in the ordinary course of business can't sell and ended up keeping lots more loans than they intended to. So these banks didn't (mostly) make droves of bad loans, they just ended up with a bigger balance sheet than they planned. Until they can delever a bit or sell some of these loans, many banks are pulling back on lending so as not to overstress their capital. And therein lies the problem for the wider economy. A widespread contraction in credit is a big damper on economic growth.

I see some signs that things are starting to loosen up a bit. I see some deals getting set up to sell or securitize some pretty squeaky clean loans (prime jumbos, etc.), so maybe this is a sign that the machinery of the mortgage part of the capital markets will get unstuck. I sure hope it happens soon, though, because we will all feel the effects pretty quickly if it doesn't get going soon.

 

[youbet]

Just my opinion... but I don't think that there are a lot of banks that are going under if nothing is done... most have a good amount of capital and can absorb the losses...


I do NOT want any of my taxes to bail out anybody...

Agree on both counts......

If banks find it in their best interest to modify a lot of loans to reduce the risk of default, fine. That's their business. But it would be a mistake to use any public funding to bail out home owners or banks.

 

[Martha]

I think that we need to be a little more careful with language here. Actual banks mostly did not make the really hideously stupid loans that are going bad in droves. The worst subprime loans are the 2/28 loans that were very popular through early 2007. This structure has a fixed rate for two years, then the rate adjusts (higher, most likely). The idea is that after two years you have either fixed your credit, refinanced, or sold the house. Most of these loans were not made by actual banks that are backed by the FDIC (with a few notable exceptions). They were made by non-bank lenders who either sold the loans into the capital markets or held them and financed them. Why didn't banks make these loans? Because the bank regulators wisely held the banks to higher standards than the non-bank lenders, which meant that when the stupidest loans were being made, it was done by non-bank lenders because the regulators wouldn't let the banks be that loose. Some actual banks made subprime loans, but they generaly underwrote the loans a lot better and didn't make use of the 2/28 structure, so their loss experience has been much better.

And so who has blown up? Mostly, the non-bank lenders: New Century, Novastar, Saxon, etc. Actual depository institutions that blew up are few and far between. So I think that this demonstrates that bank regulations do work, if imperfectly.

What is putting pressure on all the banks now is that there has been credit market contagion that has spread throughout the mortgage market. The capital markets entities that financed a lot of mortgages (and not just subprime: prime jumbos, Alt A, etc.) have been shut down or hamstrung, and many of them ae being forced to liquidate in a stressed market. That means that banks that usually made loans and sold them in the ordinary course of business can't sell and ended up keeping lots more loans than they intended to. So these banks didn't (mostly) make droves of bad loans, they just ended up with a bigger balance sheet than they planned. Until they can delever a bit or sell some of these loans, many banks are pulling back on lending so as not to overstress their capital. And therein lies the problem for the wider economy. A widespread contraction in credit is a big damper on economic growth.

I see some signs that things are starting to loosen up a bit. I see some deals getting set up to sell or securitize some pretty squeaky clean loans (prime jumbos, etc.), so maybe this is a sign that the machinery of the mortgage part of the capital markets will get unstuck. I sure hope it happens soon, though, because we will all feel the effects pretty quickly if it doesn't get going soon.

Really really good description Brewer.

 

[twaddle]

The problems extend well beyond subprime. I think it was Bill Gross who used a plankton analogy for subprime. Once the plankton dies, the entire ecosystem is affected. The subprime lenders are already dead. The Alt-A lenders are near death. Even the GSE's are hurting. They need to raise capital to meet their capital requirements, and that new capital is expensive in this environment.

But those are all first- and second-order effects. As brewer points out, an extended credit crunch would choke the economy. And combine that with depressed consumer demand, and you have a potentially lethal combo.

If a large number of ARMs were allowed to reset, there would be an increased default rate. Most of the current focus is on the new wave of bank write-offs that would lead to.

But that would also dump a bunch of REO inventory on an already saturated market. That would drive down prices for everybody, and we could start to see lots of "prime" mortgages upsidedown. This thing goes all the way up the food chain.

 

[Tadpole]

The problems extend well beyond subprime.

Monthly Mortgage Rate Resets

I don't know what the proper resolution is but I think people should look at the chart at the link above and ask what the impact COULD be five years from now.

 

[tightasadrum]

Excellent summary Brewer. Twaddle, the plankton analogy is point on, as I would expect from Pimco's Bill Gross. It's far to complicated for most of us to understand clearly or predict reliably. But I do feel that too much emotionally uninformed screaming will add only coloring and clouds to an already serious issue.

 

[tryan]

Monthly Mortgage Rate Resets

I don't know what the proper resolution is but I think people should look at the chart at the link above and ask what the impact COULD be five years from now.

Nice find! This is a keeper!

Looks like a real blood-bath thru 2008 ... opportunity abound in 2009. Looking out any further is futile (things change).

 

[ERD50]

Is there a pony under this manure pile?

Yes, some people who over-extended themselves with aggressive mortgage terms are going to get hurt. But, now that home prices are down, are homes more affordable for many?

We complain about the price of gas going up, and the price of homes going down? Sure, if you own a house, and buy gas, that *could* be bad, but what about first time home buyers?

I say *could* be bad, because I fail to see why housing price drops are bad for *most* people. If you are moving, your house is worth less, and the house you buy is worth less - all comes out in the wash. For first time buyers, or those upsizing, seems like a good thing. Seems like the only problem is if you are downsizing, or took on more mortgage than you can afford, and are forced to sell.

-ERD50

 

[twaddle]

Let's dig for that pony!

Are there more home owners or more first-time buyers? Right, there are more home owners. In fact, more than ever before in our history.

What kind of shape are those home owners in? Not so good -- they have they highest debt burden in our history.

Besides the wealth effect and spending based on equity extraction, what else might homes affect? You guessed it. They are used to collateralize debt. The lower the equity value, the lower the quality of debt. Banks and investors should care about that.

 

[ERD50]

Let's dig for that pony!

Are there more home owners or more first-time buyers?

Sure there are more home owners. But what % of those home owners are downsizing in any given year? Seems like those are the only ones hurt.

What difference is it to me if my house (on paper) goes from a market value of $400K to $350K, especially if I'm not selling? And if I am selling, well the house I'm buying dropped from $400K to $350K also. Heck, I save on realtor fees - it's gravy

Yes, if you over-extended yourself and are forced to sell and are going to rent afterwards, you are hurting. For most of the rest of us, I don't understand the fuss.

-ERD50

 

[twaddle]

What difference is it to me if my house (on paper) goes from a market value of $400K to $350K, especially if I'm not selling?

Like I said, two things:

1) The wealth effect. People spend less when they feel less rich.

2) Less equity extraction. People have been spending via home equity loans.

Both of these will potentially ding the economy. Now, add that to a credit crunch where both consumers and businesses will find it more difficult and more expensive to take on debt. The current bank write-downs are just the first symptom of a potentially nasty disease.

But, you're right that conditions will favor buyers and investors with lots of cash.

Also, if your home is worth less than your mortgage, you tend to both feel bad and consider walking away from the house....

 

[ERD50]

Like I said, two things:

1) The wealth effect. People spend less when they feel less rich.

OK, some will see that from an emotional viewpoint. Again, it probably does not make real sense, unless you are downsizing. Maybe I feel a bit more immune to this as I don't bother to count my house equity in my 'net worth' - since I can't get an EOD or EOM quote on it at a click of the mouse, I just think of it as a little 'back pocket' insurance (if I downsize or reverse mortgage) on my SWR.

2) Less equity extraction. People have been spending via home equity loans.

Yes, it will have an effect there. In the long run, I'm not sure that is a bad thing. If people never learn the dangers of over-extending, then why not always over-extend? That will lead to a super-bubble someday.

-ERD50

 

[twaddle]

Maybe I feel a bit more immune to this as I don't bother to count my house equity in my 'net worth' - since I can't get an EOD or EOM quote on it at a click of the mouse, I just think of it as a little 'back pocket' insurance (if I downsize or reverse mortgage) on my SWR.

Agreed. For some on this board, it will be easy to ignore -- as long as it doesn't spread beyond home values. But understand that home equity represents most of America's net worth. The value of all the houses out there is $21 trillion. 160% of GDP. A large drop will have a serious and long-lasting effect on every aspect of our economy.

 

[Texas Proud]

The problems extend well beyond subprime. I think it was Bill Gross who used a plankton analogy for subprime. Once the plankton dies, the entire ecosystem is affected. The subprime lenders are already dead. The Alt-A lenders are near death. Even the GSE's are hurting. They need to raise capital to meet their capital requirements, and that new capital is expensive in this environment.

But those are all first- and second-order effects. As brewer points out, an extended credit crunch would choke the economy. And combine that with depressed consumer demand, and you have a potentially lethal combo.

If a large number of ARMs were allowed to reset, there would be an increased default rate. Most of the current focus is on the new wave of bank write-offs that would lead to.

But that would also dump a bunch of REO inventory on an already saturated market. That would drive down prices for everybody, and we could start to see lots of "prime" mortgages upsidedown. This thing goes all the way up the food chain.

But here is my problem with any 'bailout'.... why doesn't the bank or other entity give the borrower a break IF IT IS IN THEIR INTEREST.... I mean, if I had lent you money at 5% and you could not pay 7%... then can we agree on 6%? Could you still pay? If not, then maybe you can continue at 5%... I would rather have a 5% interest rate than a repoed house..

And since I made the loan (or bought it), then I should be the one to suffer my bad decision..

Some of the problem is that home prices had gone up at a higher rate than they should have BECAUSE OF CHEAP MONEY... and now the home prices have to correct back to where they should be... but will not if there is a bail out... so to me it is just kicking the can down the road... the correction will happen eventually...

 

[emilylynn]

To the extent that these loans have been securitized and sold off to investors, it is no longer the lender's prerogative to renegotiate the terms of the loans. I am not familiar with what is presently being proposed in terms of a bailout, but if the government is suggesting that securitization trusts be denied the ability to exercise their remedies for the "greater good," this would be a truly astounding move.

 

[Texas Proud]

To the extent that these loans have been securitized and sold off to investors, it is no longer the lender's prerogative to renegotiate the terms of the loans. I am not familiar with what is presently being proposed in terms of a bailout, but if the government is suggesting that securitization trusts be denied the ability to exercise their remedies for the "greater good," this would be a truly astounding move.

I read some of the articles to see what was being reported....

This seems to be the action that is being proposed... that the loan servicing company makes the call, not the actual owner of the loan... and the article said that there would not be gvmt money...

There were complaints from some that a blanket move would mean that there would be some people who can actually pay the higher rate get a break... and why would they want to do that.. they want their investment back...

And it is hard (impossible) for the gvmt to change a contract after the fact... so it seems like a lot of wind being spent for something that might not happen..

 

[cute fuzzy bunny]

My biggest problem with all of this isnt that homeowners who made bad decisions might get bailed out.

Its that speculators that bought two or more homes that arent their primary residence might enjoy the same bailout benefits. I sincerely hope they restrict this to loans on a primary residence only.

 

[twaddle]

And it is hard (impossible) for the gvmt to change a contract after the fact... so it seems like a lot of wind being spent for something that might not happen..

Yup, I think you've hit on the hitch in the plan. Work-outs involve contract modifications. Massive automated work-outs are unprecedented. It'll be interesting to see how (or if) they actually implement this.

 

[brewer12345]

Yup, I think you've hit on the hitch in the plan. Work-outs involve contract modifications. Massive automated work-outs are unprecedented. It'll be interesting to see how (or if) they actually implement this.

Just guessing, but I don't think the gummint will end up imposing anything on anyone. Remember, we are talking about a republican administration that hates gummint and wanted to privatise SS. And I think Sec'y Paulson is smart enough to know that if you piss in the securitization punchbowl this time, nobody will be willing to get a glass of punch for a long, long time.

What I really think will happen is that the administration is trying to get everyone with a stake at the same table to talk things out. The gummint may nudge things along with an implied threat, but that's about it. What I think Paulson wants to end up with is a set of ground rules that everyine voluntarily agrees with. Right now, banks can modify their own loans at will when it benefits them to do so, but have very little leeway in modifying loans that are securitized, even when it would benefit the investors in the deal. If everyone agrees on ground rules for how securitized loans shouldbe modified if necessary, a lot of defaults will be avoided and a lot will be pushed out several years.