Tentative Bail-Out Plan Reached

[al_bundy]

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]

Questions to ponder

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

 

[Zoocat]

"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.

 

[W2R]

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.

 

[Zoocat]

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?

 

[W2R]

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.

 

[Zoocat]

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]

...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]

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.

 

[Htown Harry]

Read the bill

Posted on the Senate Banking Committee site:

For a one page summary of the Emergency Economic Stabilization Act of 2008 click here

For a section by section summary of the Emergency Economic Stabilization Act of 2008 click here

For bill language of Emergency Economic Stabilization Act of 2008 click here

 

[socca]

You can read the full proposed legislation here:

Bailout Bill: Full Text Of Plan

I read the entire thing - I'm glad I did. This is a historic moment for America. My overwhelming reaction is just a profound sadness. This could be such a great nation if our resources were properly put to work. Massive new deficit spending to cover Wall Street and Main Street gambling debts is not how we build a great nation. Will we even climb out of the deep hole we're already in before the next crisis strikes an already greatly weakened country?

Another reason I'm glad I read the document: I get a more balanced view than the propaganda piece put out by Pelosi. I just don't see how the Treasury can possibly satisfy everyone who will qualify for assistance under the EESA. So, who gets to feed at the honey pot, and who gets excluded?

I found the warrant issuance part very interesting. Any company who receives bailout money has to issue stock warrants to the gov't if they are publicly traded. I scratched my head over this: OK, we just bought a ton of crap from these guys (replaced their trash with cash), and now we get to exercise warrants (pay more money) to take an ownership stake in the company? When would a Treasury official ever want to do this? This smacks too much of socialism, so I wonder if this option will ever really be used. It is great window dressing, though - you can claim that taxpayers can theoretically (if rarely actually) participate in the success of the companies we taxpayers bail out.

So, are we taxpayers really going to get our money back eventually, as the pro-bailout camp suggests? If it were my $700,000,000,000, I'd kiss it goodbye and be surprised if I ever see it again.

 

[al_bundy]

the Treasury can always sell the warrants to a private firm

without the warrants and just the debt purchases and no mortgage modifications i'm guessing around 30% losses on the $700,000,000,000

 

[Gone4Good]

OK, we just bought a ton of crap from these guys (replaced their trash with cash), and now we get to exercise warrants (pay more money) to take an ownership stake in the company?

You'd only exercise the warrants when they were in the money. So yeah, if the government can buy equity at $10 that is currently trading at $20 why wouldn't they "spend the money" to do so?

So, are we taxpayers really going to get our money back eventually, as the pro-bailout camp suggests? If it were my $700,000,000,000, I'd kiss it goodbye and be surprised if I ever see it again.

So your assumption is that the securities the treasury is buying are worth $0?

 

[brewer12345]

So your assumption is that the securities the treasury is buying are worth $0?

If so, it is silly. The problem is that nobody really knows what they are worth in many cases. So it will be interesting to see how deals are struck. If I ran the program and wanted to help the banks, I would buy whole portfolios at a time so that nobody could pin me down on what an individual piece of paper was priced at.

 

[Retire Soon]

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?

My daughter and son-in-law bought a two-bedroom condo in San Diego three years ago at about the height of the boom using subprime financing. They refinanced about a year ago into a fixed rate 30 year mortgage.

The condos in this particular project are now worth approximately $80,000 less than what they were selling for in 2005. Many of their neighbors have been foreclosed upon or are near foreclosure as many of the mortgages are upside down.

My daughter and her husband have chosen to take the high road. They plan to meet their moral obligation to the lender and repay the loan. Both of them have said that they feel a sense of responsibility to pay back what they have borrowed even though it may be years before they have any equity in their home.

I am sure they are not the only honest people left in California. There must be others who are not looking for a free handout.

 

[Finance Dave]

I am completely against the bailout in any form.

Yes, I realize that doing nothing will make things worse...in the short term. If we let things get bad, maybe we will learn our lesson and in the long run we'll become better savers and live within our means.

I say let the market work.

 

[brewer12345]

My daughter and her husband have chosen to take the high road. They plan to meet their moral obligation to the lender and repay the loan. Both of them have said that they feel a sense of responsibility to pay back what they have borrowed even though it may be years before they have any equity in their home.

Bully for them. No doubt Jeebus will welcome them into the Summerlands with open arms and fried chicken when they expire. But they apparently also have the ability to make the payments. Not everyone does, unfortunately, and in a worsening recession many more people lose the ability to keep up with the mortgage.

 

[armor99]

I am completely against the bailout in any form.

Yes, I realize that doing nothing will make things worse...in the short term. If we let things get bad, maybe we will learn our lesson and in the long run we'll become better savers and live within our means.

I say let the market work.

Thanks so much Finance Dave for the light of reason here. This whole situation makes me so angry. More than I have been in quite a long time. To be honest.... I think a lot of the reason the bailout is happening at all is due to the corrosive effect that the media (i.e. the duming down of america) has had on the general population. I can clearly see that most people in almost every situation, want simple answers to complex questions. Why am I too fat? Don't bother working out... take this pill or get liposuction. Why is the Iraq war going on for so long? Easy.. the pres. is an idiot! Why did millions of americans take out a loan they could not afford? Easy... the govt will save me because I was short-sighted!
For some people.... only consequences to their actions will bring about change. Some must actually touch that metaphorical "hot stove" before they believe they can be burned by it. And this is not a creulty.... it is in fact a mercy.

 

[Hamlet]

If my reading of the document is correct, almost all of the details are left up to Paulson, with oversight from a small committee made up of a few heads of current agencies.

He gets do decide who gets to sell assets. He gets to negotiate the prices, whether warrants are required, whether to buy assets directly or issue insurance, etc.

He has to create a report detailing the criteria he is going to use fairly quickly, but he seems to have free rein to determine those criteria.

Am I reading this correctly?

I think Paulson has just become the most powerful man in the world.

The outcome of this bill is going to depend almost entirely on the decisions Paulson makes in the future.

Another reason I'm glad I read the document: I get a more balanced view than the propaganda piece put out by Pelosi. I just don't see how the Treasury can possibly satisfy everyone who will qualify for assistance under the EESA. So, who gets to feed at the honey pot, and who gets excluded?

I found the warrant issuance part very interesting. Any company who receives bailout money has to issue stock warrants to the gov't if they are publicly traded. I scratched my head over this: OK, we just bought a ton of crap from these guys (replaced their trash with cash), and now we get to exercise warrants (pay more money) to take an ownership stake in the company? When would a Treasury official ever want to do this? This smacks too much of socialism, so I wonder if this option will ever really be used. It is great window dressing, though - you can claim that taxpayers can theoretically (if rarely actually) participate in the success of the companies we taxpayers bail out.

So, are we taxpayers really going to get our money back eventually, as the pro-bailout camp suggests? If it were my $700,000,000,000, I'd kiss it goodbye and be surprised if I ever see it again.

 

[samclem]

by El Fisgon of La Jornada-Mexico City

 

[ChrisC]

OK, we just bought a ton of crap from these guys (replaced their trash with cash), and now we get to exercise warrants (pay more money) to take an ownership stake in the company? When would a Treasury official ever want to do this? This smacks too much of socialism, so I wonder if this option will ever really be used. It is great window dressing, though - you can claim that taxpayers can theoretically (if rarely actually) participate in the success of the companies we taxpayers bail out.

So, are we taxpayers really going to get our money back eventually, as the pro-bailout camp suggests? If it were my $700,000,000,000, I'd kiss it goodbye and be surprised if I ever see it again.

Hmmmm, let's examine these assertions. Every major "rescue" plan seems to have the Government taking an equity piece in the entities rescued. Way back in the Depression the Government took equity pieces in businesses it rescued with the old Reconstruction Finance Corporation. (Indeed, didn't the grand poobah of American governmental finance, the esteem Alexander Hamilton, launch the First Bank of the United States, the first central bank of the U.S. with an equity piece. Didn't we also have equity pieces in the Federal Reserve System, the Federal Reserve Banks and the Federal Home Loan Banks?) Maybe that's a bit too old. We took an equity piece with the first too big, too fail, bank, Continental Illinois National Bank in 1984 and later had warrants with Chrysler when we guaranteed loans for its reconstruction and recapitalization.

Socialism didn't start until two gentlemen wrote about an economic system and labor theory in the nineteenth century. Yale Economist Schiller in today's Washington Post writes that the word "capitalism" was coined in that century as well, as the antithesis to socialism and that American Government, beginning with George Washington, never embraced an "unfettered free market." The "American system" always called for major Government involvement. Schiller writes that "bailouts" for extraordinary financial events (i.e. a crisis) have been the American norm. Everybody Calm Down. A Government Hand In the Economy Is as Old as the Republic. - washingtonpost.com

I wrote in another thread that if you lay me 1.5 odds, I'd take the bet that the Government will make money. It made money in the Depression when similar equity pieces took place; made money with Chrysler; and the only blot is the RTC experience, when the Government liquidated assets as expeditiously as it got them and never held them for gain.

Wanna bet?