Tentative Bail-Out Plan Reached

[cute fuzzy bunny]

Originally Posted by Want2retire

Since I don't subscribe to the WSJ (or anything else online with paid subscription) I couldn't read the article.

Little known workaround. WSJ.com allows google news to crawl their site, and carries whole articles.

So if you go to a stub article like the one above that asks for a username and password, simply highlight and copy the headline, go to google, pick news, and paste the headline in. Voila...whole article for free.

http://online.wsj.com/article/SB1222...googlenews_wsj

[Retire Soon]

Originally Posted by Want2retire

Since I don't subscribe to the WSJ (or anything else online with paid subscription) I couldn't read the article. However, I could read the following comment by someone who did:



If what he said is true, then I am outraged as well.

Here is part of the summary from WSJ:

Office of Speaker Nancy Pelosi -- Sept. 28, 2008
REINVEST, REIMBURSE, REFORM
IMPROVING THE FINANCIAL RESCUE LEGISLATION
Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets -- including cutting in half the Administration's initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers' funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

• Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
• Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
• Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN
Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable
Office of Speaker Nancy Pelosi -- Sept. 28, 2008
REINVEST, REIMBURSE, REFORM
IMPROVING THE FINANCIAL RESCUE LEGISLATION
Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets -- including cutting in half the Administration's initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers' funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

• Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street
• Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets
• Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

[samclem]

Originally Posted by Nords

I think it's the biggest in terms of $$, such as they are today, but I'd like to see an analysis based on inflation-adjusted amounts or % of GDP. I suspect that what we're seeing now is is a tiny blip next to the S&L crisis or the Depression or the banking crises of 1907.

This $700B is quite a lot by any historical measure. The snippet below is from "America Needs a New New Deal" from the WSJ.

The size and scale of the Bush administration's proposal are mind-boggling. During the New Deal, the Roosevelt administration spent about $250 billion (in today's dollars) on public-works projects, building about 8,000 parks, 40,000 public buildings, 72,000 schools and 80,000 bridges. The entire cost of all the New Deal programs (in today's dollars) was about $500 billion. The secretary of the Treasury now wants to spend perhaps twice that amount, simply to prevent a financial collapse.

The inflation adjustment seems a little off. I think if you used a conversion rate based on wage increases rather than consumer inflation, you'd get a closer comparison of the bailout to the New Deal. (Wage growth seems a more applicable metric, since a lot of the govt expenditures were for pay to perform the public works projects.)

Still, at least in absolute inflation-adjusted dollars, the size of the two programs is comparable. I can't believe there's not a more productive use for $700 billion in taxpayer money when you look at what we got for our nickel last time.

[cute fuzzy bunny]

I think there also wasnt a minimum wage back then, and there were lots of unemployed people willing to do fairly expensive work (by todays standards) for next to nothing just to get a paycheck.

[socca]

Full article: Draft Proposal on Financial Rescue Legislation - washingtonpost.com

I don't subscribe to the Post, but I'm still able to read the article.

Interesting intellectual exercise: let's say that it's my money that is entirely funding the bailout (oh, sorry, financial rescue plan). What risk should I assign to this 'investment'? Reading Pelosi's article, she's implying that I should consider this a very low risk investment with the additional provisions added to the original Paulson proposal.

However, as a cautious and skeptical investor, I need to differentiate between pro-bailout marketing hype and reality. I can probably find a set of assumptions regarding how the future is going to unfold in which the new bailout proposal does indeed represent low risk to my investment. What is troubling is that there may be an entirely different set of completely reasonable assumptions that lead to disaster. What are these alternative assumptions?

Let's not forget how the 2003 Iraq invasion was marketed to the American people: low risk, high reward, short time-frame. Within 3 days after the Iraq invasion, American commanders on the ground were reporting that the fundamental assumptions supporting the pre-war invasion risk estimate were wrong. Oops! Well, no problem, it's just going to be a long, hard, slog.

[al_bundy]

Originally Posted by samclem

This $700B is quite a lot by any historical measure. The snippet below is from "America Needs a New New Deal" from the WSJ.



The inflation adjustment seems a little off. I think if you used a conversion rate based on wage increases rather than consumer inflation, you'd get a closer comparison of the bailout to the New Deal. (Wage growth seems a more applicable metric, since a lot of the govt expenditures were for pay to perform the public works projects.)

Still, at least in absolute inflation-adjusted dollars, the size of the two programs is comparable. I can't believe there's not a more productive use for $700 billion in taxpayer money when you look at what we got for our nickel last time.

what really got the US out of the depression was WW2 and that cost a lot more than $700 billion in 2008 dollars.

[socca]

Have our brilliant leaders really engineered a deal where no one loses?

Can you really transmute a great stinking pile of s*** into a pile of gold?

Has some kind of fundamental law of economics been violated?

[brewer12345]

testing

[Oldbabe]

"Many of these assets still have significant underlying value, because the vast majority of people will eventually pay off their mortgages," President Bush said yesterday in his weekly radio address. "In other words, many of the assets the government would buy are likely to go up in price over time. This means that the government will be able to recoup much, if not all, of the original expenditure."

First, because without paying more for the MBS than they are worth, the banks still have to write down huge losses; consequently, the banks would not be re-capitalized. So the government has to buy the MBS hoping they will increase in value to save the banks.

Meanwhile, the housing market is tanking, housing values are going way down. They are not going back up to levels of last year because people could only afford those prices with creative financing. Those option ARMs have gone away, big time.

So the only thing left for mortgagees who are way under water in Calif, FL, maybe other states, is to walk away. Jingle mail! Mortgage holders take the loss. That means you and me!

So the government will be holding these MBS forever.They are crap, not to put to fine a point on it. And there's a lot of crap out there, more than the government can afford to buy with $700 billion.

This big gorilla has just gotten started. Read RGE Monitor if you want to get a sense of the magnitude. Or Dr. Housing Bubble Blog who analyzes the meltdown in California.

[Want2retire]

CFB, thanks for the tip. And Socca, thanks for the link. I am a happy camper to find the information provided by you two (after being away from the computer for a little while).

The article does indeed end with:

Help to prevent home foreclosures crippling the American economy

• The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year.
• Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures
• Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks.

(red bolding is mine)

So, indeed they plan to pay principal and interest on these houses.

[Oldbabe]

Originally Posted by Want2retire

CFB, thanks for the tip. And Socca, thanks for the link. I am a happy camper to find the information provided by you two (after being away from the computer for a little while).

The article does indeed end with:[/list](red bolding is mine)

So, indeed they plan to pay principal and interest on these houses.

The government will have to reduce the principal amounts by a lot in order to placate homeowners in Calif who are seeing the values tank. As I stated above, it won't matter to homeowners if they get refinanced into a 40 year mortgage if their house is now worth 30% less and they see that they'll never be able to sell. Who'd want to be caught in a debt trap like that? Not me! I'd walk away. Wouldn't you?

[Want2retire]

Originally Posted by Oldbabe

As I stated above, it won't matter to homeowners if they get refinanced into a 40 year mortgage if their house is now worth 30% less and they see that they'll never be able to sell. Who'd want to be caught in a debt trap like that? Not me! I'd walk away. Wouldn't you?

No - - because I would be able to make the payment, which would be the same as if I had bought it today, and because I wouldn't want to ruin my credit so that I couldn't get a mortgage on another house that would not even have a lesser payment.

But then, I don't claim to be really savvy about these things! That's just what my thinking would be.

[cute fuzzy bunny]

Depends on what I'd be walking away to. If it was walking away to a cheaper house that I couldnt get a loan on because I'd just waltzed out of my mortgage or to a rental that cost more in monthly rent than the payment I'd get on the house I was living in, then I dont think I'd walk away.

But if I was staring at a $2000 a month mortgage payment on a house that had lost 1/3 of its value when I could rent a similar house for $1000 a month, I'd seriously consider walking.

Do recall I've hotly contested the severity of how many people are how much underwater LTV on their mortgages. Unless you bought at the height and did a no money down deal, you arent too bad off. I'm betting the vast majority of buyers are no worse than down less than 5-10% ltv, although that includes their down payment.

Unless they were a first time buyer, they sold their old house for a tidy profit before getting pasted on their new house too.

So whats the universe of first time home buyers who bought at or near the peak on a 100% financed deal? 3% of homeowners? 5% tops? They'll need the bailout and new terms and some kind of principal/payment reduction. Everyone else will pay. The feds will get most of their money back. Eventually.

[Oldbabe]

Originally Posted by Want2retire

No - - because I would be able to make the payment, which would be the same as if I had bought it today, and because I wouldn't want to ruin my credit so that I couldn't get a mortgage on another house that would not even have a lesser payment.

But then, I don't claim to be really savvy about these things! That's just what my thinking would be.

Your reasoning would only hold true if two things happen. The government refinances your underwater house at a 40-50 year mortgage AND lowers your principal amount.

Now that would be a pretty sweet deal but would not make you a favorite neighbor if I, for example, had also bought my house at the height of the market but with a 30 yr fixed rate that I was dutifully paying on time.

I have an acquaintance who foolishly bought a house in CA with an interest only loan. Then renovated it with her credit cards. When she proudly told me about it, I was horrified, and couldn't help but ask her why she got that kind of loan. She said, "Because I couldn't have bought the house any other way." There are thousands of people in CA who did this.

[samclem]

There will also be people who must move due to their jobs, ill health, etc. The workforce is pretty mobile these days, and this happens frequently. If a guy is upside down in his house, even if he can make the now 40 year loan with reduced interest, no one will pay him his loan balance. With his credit already maxed out, he can't (or won't) borrow money to bring to closing, so he'll walk away from the house.

-- unless the government makes these favorable terms (subsidized low interest for 40 years) available to new buyers of homes. In which case, maybe enough suckers clients will be out there to help stabilize prices. At the cost of even more $$ being pumped into these houses (due to the lower interest rates) and the acceptance of 40 years as the new standard mortgage term.

Based on some of the tract home construction I've seen, a 40 year mortgage would be like getting 10 year financing on a Yugo.

[cute fuzzy bunny]

Yep, they sure dont make 'em like they used to.

Although around here, a good rule of thumb is to avoid homes built during peak rushes like 88-90 and 2004-2006. When those were on, construction went full tilt and anyone who could swing a hammer got a job. And the GC wasnt checking their work.

But if you buy a home built during a slow period, they're usually much better made.

[lazygood4nothinbum]

Originally Posted by Want2retire

...or forgiving half the mortgage amount on the condition that half or more than half of the proceeds when selling the home would go back to the government. This type of maneuver would be OK with me, I suppose.

sounds like a reverse mortgage on future equity. only instead of payments going to the homeowner, no payments are made on the reverse part of the mortgage. doesn't sound any odder than paying up front for future depreciation.

[Texarkandy]

Originally Posted by Want2retire

I think you are right.

Politicians who will be up for re-election shortly must be persuaded to back the plan, if it is to be adopted. They are concerned because the American public is not "sold" on it, yet. So, they are reluctant to back this bailout plan and are concerned about losing votes.

Consequently, it is to the best interest of Paulson, Bernancke, and others such as Buffet who back the plan to scare the public a little so politicians will come on board and the plan will be passed.

Well put. I too have a strong suspicion this is what is really going on.