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

[Running_Man]

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

 

[tightasadrum]

Anyone who thinks this sub-prime mess is isolated to a few over-extended players in the mortgage business is not watching what is happening. Talks of a bailout are not about them. It’s about the confidence in the entire credit system. With little affordable credit, businesses, especially small business, dry up. The economy slows and everything depreciates in value. FIRE fans, that includes the growth of your assets! Don’t listen to me. What I know wouldn’t fill a thimble. But check out how one expert sees it.

(See Hegcap.com for an explanation of the problem. Here are a few excerpts.)​

*********​

​

"The western world has embarked on a speculative journey for which all the historical precedents are ominous."

Peter Warburton​

Make no mistake about it - if the Federal Reserve is holding back on interest rate cuts because of near-term inflation fears, it will be fiddling while Rome burns. The collapse of the structured finance edifice must be understood as a highly deflationary event. The sell-off in the equity and credit markets signify a severe loss of confidence in the benchmarks of value established by market gatekeepers such as rating agencies, underwriters and market makers. A failure of the Federal Reserve to demonstrate that it recognizes the systemic threat posed by the collapse of structured finance and the subprime mortgage market could send the markets into a full-blown tailspin.
By writing off $38.6 billion of deferred taxes, General Motors is not merely removing that amount of value from its balance sheet. The company is also admitting that it does not expect profits to return to any significant extent in the foreseeable future because it is effectively saying that it will not have any profits to shelter with these deferred taxes. That is a remarkable admission, … that the company's goose is cooked. With a stock price below $30 dollars per share …, the quarterly loss resulting from this writeoff was a whopping $68.85 per share.

And GM's problems do not stop at the automobile business. The company reported a $757 million loss on its 49 percent interest in GMAC…. The previously profitable GMAC is being throttled by losses at Residential Capital LLC ("ResCap"), a home-mortgage business that was/is (surprise!) a big subprime mortgage player (reportedly the eighth largest home mortgage lender in the country).

…Freddie and the larger Fannie Mae have been aggressively supporting the expansion of the mortgage market for the past several years and will now be pulling in their horns. Shrinkage of these entities' balance sheets - even a slowdown in their growth - will contribute to the withdrawal of capital from the economy that the subprime mortgage meltdown is causing. America's debt-driven economy is rapidly being deprived of its lifeblood.

 

[armor99]

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?

Excellent points.... I agree with you completely... Most people seem to take the attitude of "Oh... but that will NEVER happen to me". And when it does, they are completely surprised. And then with the mentality of the average 5 year old, they look for the closest or most convienient person or agency to place blame on.

 

[pedorrero]

Not sure if it was mentioned here, think so, but a big problem with these "work out" plans is this: It involves the potential for the government to change the terms of what was (presumably) a voluntary, yet binding legal contract (the mortgage or loan). This does not sit well with us closet libertarians. Of course, the government has a long history of violating private contracts. Sometimes perhaps for a good cause (many property deeds still carry language that a property can't be sold to "Negroes", for example), other times more dubious ... the abrogation of gold clauses in the 1930s comes to mind. Or ask a local Native American about the U.S. Government itself has honored its own contracts. Hmmmm.

 

[outtarentals]

In early 2006, the housing market in Southern California had started its downturn so I put a rental house up for sale. I wanted to list for $495K but my agent insisted I could get more. I think he was in denial about what was happening. We agreed to price the house at a range of $495K - $570K, a strategy many agents in this area were using at the time, mainly because they were unsure what to expect. The house took 3 months to sell and close escrow, and I received 6 offers in that time. 2 of the offers were for $495K with $ 0 - $5000 down and with large 2nd mortgages with variable rates. It seemed to me that the buyer would be putting themselves in harm's way with such a huge mortgage but the agent said it was common so I accepted one of the offers.

But here is the bizarre part. 4 of the offers were for 0 down with a purchase price of $570K.....but the buyer was to get back $70K at close of escrow - supposedly to do "improvements" such as adding spas and skylights and handicapped access etc to the house. Also, I was to pay all closing costs. My agent warned me these offers were fraudulent and to ignore them - which I did. It seems the buying agent was also the mortgage broker and her relative was the appraiser. All 4 offers came from the same office with different buyer's names. I realized that the practice of offering a house at a "price range" - sometimes with $50K - $100K or more difference between the lower and upper asking prices was just asking for a scheme like this and I'd noticed some houses were closing at seemingly very high sales prices - compared to recent sales in the area - I wonder now how many of these fraudulent sales were happening and in what areas of the country...

 

[UncleHoney]

I wonder now how many of these fraudulent sales were happening and in what areas of the country...

Here's one of them.

I've been watching this house on our street. It always has a for sale sign in the yard. Look at the sales history over the last few years. The $285K sale price is way out of line, it's a nothing house on a narrow lot without a garage.



It's for sale again at $189K. {Edit: Just checked the asking price, it's now $249900. Don't think that will ever happen}

Edit: Doing a little research I found the $285K purchase price was financed with two mortgages, one for $57K and one for $228K. The $57k mortgage has been paid off, the $228k is still outstanding. I also found Pamela Almond and her husband have several tax liens against other property they own. You think maybe they left town?

 

[Retire Soon]

Eric Petroff of Investopedia wrote a very objective and concise article entitled, "Who is to Blame for the Subprime Crisis?" Below are some important points that he raised:

1) There is no single entity or person to point the blame at, as anytime something bad happens, blame starts to be assigned.
2) When the dot-com bubble burst in early 2000 and the terrorist attacks followed in 2001, there was a great risk of recession. Central banks around the world tried to stimulate the economy by creating capital liquidity with lower interest rates.
3) Investors wanted higher interest rates than what were available and began to seek higher returns. This demand for higher returns was met with lendors who on took greater risks by approving subprime loans for buyers with bad credit.
4) Fueled by subprime loans, consumers drove the housing bubble to its peak in the summer of 2005 until it began to burst in August, 2006.
5) Mortgage originators (lenders) should shoulder most of the blame, as they were the ones who loaned money to people with poor credit and high risk of default. Conversely, lenders probably saw subprime loans as less of a risk than what they were because rates were low, the economy was healthy and people were making their payments.
6) Home buyers purchased houses they could barely afford, often with no down payment in the form of 2/28 and interest only mortgages. They hoped that prices would continue appreciating and that they would refinance at a later date with lower interest rates and perhaps even take some money out with their new equity.
7) The housing bubble finally burst and prices dropped rapidly.
8) Some lenders may have given the impression that subprime loans presented no risk to the borrowers as the costs were low, however, home buyers simply took loans that they could not afford.
9) The secondary mortgage market added to the problem, as lendors simply sold their loans to these entities, collected their origination fees, which freed up more money to continue the cycle.
10) Much of the demand for these mortgages came from pooling these loans into security, know as "collateralized debt obligations" (CDO's), which were then sold to investors.
11) Rating agencies (such as Moody's) and the underwriters of CDO's can also take part of the blame. There could be a conflict of interest here, because the rating agencies collect fees from the security's creator for assigning a risk rating such as AAA. However, this is the process in which bonds are brought to market.
12) Investors in the CDO's can take blame as well, as they were the ones that bought these securities at "ridiculously low prices over treasury bonds." Investors did not do their homework and merely took the AAA rating at face value and did no further investigation.
13) Hedge funds made the problem even worse by purchasing CDO's on credit, which pushed subprime interest rates lower. As soon as investors recognized that subprime loans were of inferior quality, Many of these hedge funds went out of business.

14) Finally, as you can see there were many participants in the subprime crisis. But, when all is said and done, it was human greed that fueled the crisis, which is what fuels all bubbles.









Who Is To Blame For The Subprime Crisis?

 

[tryan]

I wonder now how many of these fraudulent sales were happening and in what areas of the country...

Here's several HUNDRED examples ...

http://www.early-retirement.org/forums/f28/anyone-close-enough-one-these-30813.html

 

[jazz4cash]

Steven Pearstein's Take

washingtonpost.com

 

[W2R]

washingtonpost.com

Wow!! Pearstein says,

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.
That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.
It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.
It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.
And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.
This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

I hope he is completely off base! I don't think he is taking into account the potentially very positive effects of the various mitigations he cites.

 

[jazz4cash]

No, I don't wish to "pay for the Sub-Prime Freeze", but I don't see where taxpayer dollars will be used directly. Yes, there will be costs borne by the taxpayers and prudent homeowner's, but I believe the cost will be much greater if the malaise is permitted to spread throughout the economy like an infectious diesease.

 

[jazz4cash]

I realized that the practice of offering a house at a "price range" - sometimes with $50K - $100K or more difference between the lower and upper asking prices was just asking for a scheme like this and I'd noticed some houses were closing at seemingly very high sales prices - compared to recent sales in the area - I wonder now how many of these fraudulent sales were happening and in what areas of the country...

There is a group in the DC area called Metro Dream Homes that was just shut down for operating a Ponzi Scheme. They encouraged home buyers to invest 15% of the purchase price (sometimes by paying over asking price with the cooperation of the seller). They operated in MD,DC, VA,NC, and also SoCal. They had over 900 homes in the program. The investment was supposed to go into an ATM's, POS, and Digital Ad business and the investor got thier mortgage payments made for them and mortgage paid off in 5-7 yrs.

 

[tryan]

Zandi believes that eventually the government will have to set up what amounts to a mortgage clean-up fund, similar to the Resolution Trust Corp. that was created to buy up loans after the collapse of the savings and loan industry in the late 1980s. Under such a plan the government would buy up mortgages at risk of default — at a steep discount — and work out new terms with homeowners.

Interesting read ... Funny to see the reference to the RTC.

Don't think changing bankrupcy law is the right move. Why do we need the judicial banch setting interest rates? I'ld rather hire a plumber to cut my hair. I mean I'ld NEVER loan money again if the terms can be altered in court (most lenders have to thinking the same thing).

Foreclosure solutions won't be easy - Mortgage mess - MSNBC.com

 

[Retire Soon]

washingtonpost.com

Just finished reading, "It's not 1929, but It's the Biggest Mess Since." Steven Pearlstein wrote an excellent article that rings with truth. He concurs with Eric Petroff in, "Who is to Blame for the Mortgage Crisis," in so far that the role of borrowing to purchase CDO's seriously exacerbated the problem in more ways than one. This is the first time I've heard the term, "tranches." Now I have a better understanding of the problem. This article helps to reinforce my decision to sell our San Diego house in the Summer of 2006. The more I learn about the "mess" we're in, the more I wonder when prices will ever reach that inflated level again.

 

[tryan]

This just in:

the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of as much as seven years and industry arguments that the freeze should only last one to two years.
Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

Bush administration reaches mortgage deal - Mortgage mess - MSNBC.com

 

[Texas Proud]

Quote:

Zandi believes that eventually the government will have to set up what amounts to a mortgage clean-up fund, similar to the Resolution Trust Corp. that was created to buy up loans after the collapse of the savings and loan industry in the late 1980s. Under such a plan the government would buy up mortgages at risk of default — at a steep discount — and work out new terms with homeowners.



Another person who does not know what happened... they did NOT go and buy up loans. They TOOK them from S&Ls that went under. They paid off the insured depositors. The amount they received from SELLING the property did not cover the cost they paid to depositors.

 

[TickTock]

My worry here is that once all the loans, CDOs, SIVs, and TLAs are unraveled, it turns out that $1 of house value is supporting $4 of loans...

 

[tryan]

Another person who does not know what happened... they did NOT go and buy up loans. They TOOK them from S&Ls that went under. They paid off the insured depositors. The amount they received from SELLING the property did not cover the cost they paid to depositors.

Absolutly right, there was no "work out" with the home owner. And I'll add that the RTC auctions I purchased property at sold property for roughly a dime on the dollar.

Just sit still ... there coming.

 

[emilylynn]

Seems that Bush and Hillary think alike on the really important stuff. What's next--a "freeze" on Level 3 valuations?

 

[audreyh1]

It seems that it is just a matter of time before people figure out how to properly value these securities and thus be able to trade them with more confidence. A year at most perhaps (MO).

Five years seems like an awfully long time to freeze the ARMs. Seems like 2 or 3 years would be more reasonable - at least enough time for people to get the securities valued, and get the credit markets moving again, and do workout with the homeowner or any refinancing that could be reasonably done on a given property.

It continues to be interesting to see how this all plays out....

Audrey

 

[cute fuzzy bunny]

Most of the folks in these homes will have moved within 5 years or refinanced, so only some will get the full five year benefit.

In the meanwhile, it sounds great that the politicos are giving the downtrodden a huge helping hand, what with that election year thing and all

 

[audreyh1]

Well, yes, I expect some of these folks will refinance - they had better! But getting a 5 year teaser rate might significantly delay that refinancing.

Audrey

 

[twaddle]

The teaser freezer only applies to those with FICOs under 660. So, we're talking about freezing their loans to a rate of 7% instead of letting them adjust to 10% or so.

Assuming these people could refinance, I don't think they'll be seeing a rate below 7% any time soon. FNM and FRE recently announced that any loan for somebody with a FICO below 660 will have a rate 1.25-2% over whatever the prevailing rate is.

 

[youbet]

When these ARM rates are locked for five years as proposed, is the lender taking the hit of the difference between the teaser rate and the hypothetical higher rate, or is the taxpayer?

 

[twaddle]

The lender (or investor).