Sub-Prime Mortgage Bail-Out??
 

I'm not a financial or housing guru - we've only had one VA loan that was for under $100k, so a lot of the vocabulary about ARM's and other types of loans in this whole mess is completely over my head. I'll be the first to admit that maybe I'm just not getting it. But I'd really like to understand.

So here is what I don't understand - why am I, as a non-mortgage holding taxpayer, about to help pay for someone else's mortgage when they got in over their heads because they wanted more house then they can afford? Don't all these bail-out bills that are flying through Congress basically amount to the taxpayer bailing out those who made really dumb financial decisions in the race to keep up with the Joneses? I do realize that there were many predatory practices occuring as well on the part of the lenders, but - shouldn't they be the ones being punished? I support any bill that punishes those companies and their practices. But on behalf of the homebuyers, what happened to natural consequences? There are all those "truth in lending" papers that say EXACTLY what you are signing up for (or don't those exist when you get these crazy loans?). You can't afford it - you lose it. Right?

I guess I also understand that there would be a ripple effect that if a lot of people lost their houses the economy would suffer... but if my taxes go up, that's going to hurt too and I'm going to spend less - and isn't that going to cause a ripple effect? A lot of this smacks of election time pandering. Especially the part where there is bipartisan support for these proposals AND it is sounding to me like there is a lot of equivocation and rationalization going on in the Hill hearings. None of this makes me comfortable or happy.

Here is one of the articles out today on the issue - there are others but none seem to be getting a ton of attention even though I think this should be a major issue for taxpayers.

Lawmakers: Subprime plan is no 'moral hazard'

By Nina Easton
September 21 2007: 11:31 AM EDT

(Fortune) -- Barney Frank and Hank Paulson and Ben Bernanke want everyone to know this: They are not engaging in morally hazardous behavior.

"Nothing being contemplated rises to the level," said Frank, Democratic chairman of the House Financial Services Committee.

"I don't see a moral hazard," said Paulson, Republican secretary of the Treasury.

"I see no problem," said Bernanke, independent chairman of the Federal Reserve Board.

All this moralizing was coming not from a pulpit but from a room on Capitol Hill on Thursday morning, where everyone was straining to ward off concerns that the Federal Reserve's emergency relief for borrowers was not going to foster reckless behavior or inflation down the line.

Two days after the Fed's decision to cut the federal funds rate by a dramatic half point, the House banking panel had convened for a hearing on how the federal government should further confront the credit crunch sparked by out-of-control lending on subprime home loans -- a crisis that has already rocked Wall Street and now threatens to slow the economy.

As political pressure mounts on Washington to act, both parties are eager to demonstrate their plans to "do something" -- but not too much. No one wants to be accused of bailing out greedy lenders or irresponsible borrowers.

"Fiscal subsidies to lenders would be a moral hazard. I see no problem in helping people refinance," Bernanke said in answer to Barney Frank's determined questioning to prove that this threesome -- lawmaker, policy maker, central banker -- was not "encouraging misbehavior."

This was an important moment because it showed that beneath the predictable Democrat-Republican sparring over the subprime mortgage mess, there is a rarely seen (these days) coming-together of both parties toward a fairly muscular but limited federal response to complement the Fed's recent actions.

At the agency level, it consists of a P.R. campaign to get borrowers and lenders talking to each other, in the hopes they can reach refinancing deals rather than defaults. "Fifty percent of foreclosures occur without the borrower ever talking to the lender," said Paulson. "The most crucial message we can send to borrowers is to call your lender or mortgage counselor today."

The Administration is also broadening the role of the Federal Housing Administration (FHA), which insures mortgages for low- and middle-income borrowers. And the Democratic House acted quickly on the White House request for further reform.

Sure, there remains disagreement. The Democrats want Fannie Mae and Freddie Mac to ride to the rescue, while Republicans worry that these twin behemoths, operating under a perceived government seal of approval, could reduce market discipline.

More broadly, Frank opened his hearing extolling the benefits of "sensible regulation," while Paulson fretted that impulse going too far: "Today's solutions should not create tomorrow's problems."

But a promising give-and-take has already started. Paulson made it clear he was willing to accept a temporary increase in the dollar value of mortgages Freddie and Fannie can purchase -- letting them operate in the "jumbo loan" market to improve liquidity -- but only until that segment settles down. He also called on Congress to enact reform legislation aimed improving oversight of both agencies in the wake of accounting scandals.

Earlier this week, the House, by an overwhelming 348-72 vote, passed legislation to allow the FHA to back refinanced loans from borrowers who had bought mortgages with low "teaser rates" that had converted to financially crippling interest-rate levels.

While the White House raised objections to a portion of the bill that would dramatically increase the value of mortgages the FHA can insure, HUD Secretary Alphonso Jackson on Thursday praised the House action. Frank, meanwhile, went out of his way to make clear that the differences "can be negotiated."

Frank repeatedly signaled that he wants to broker a solution. The only finger-pointing he did during the hearing was aimed at the Senate, where a slower acting banking committee has passed a more limited response. Frank wants a broader approach -- fast -- so he can begin House-Senate-Administration negotiations on a final bill.

But the politics in the Senate are complicated by its hefty pool of '08 presidential candidates -- not just Hillary Clinton and Barack Obama, but also banking committee chairman Chris Dodd, all eager to score political points with primary voters. That could slow down the process.

Lucky for Frank, there was only one Presidential candidate at his hearing Thursday, though this '08 prospect wasn't buying into the morality play Frank was eager to sketch. Libertarian Republican Ron Paul of Texas complained that "abnormally low interest rates" -- including the Fed's rate cut this week -- led to a morally questionable bailout of Wall Street.

"We talk about market discipline, but there's no possibility to have market discipline," the candidate declared. "What moral justification do we have to deliberately devalue the dollar?"

In response, the cautious Bernanke left his own moral high ground for the safer moorings of policy commentary on the ills of inflation: "I agree with you that an economy cannot grow in a healthy stable way when inflation is out of control."

Activists weighing in...
 

The loudest voices seem to be the ones that say the bail-outs should be bigger and higher dollar. Which just seems absurd.

Activists not happy with loan fix plan

Community groups say Bush administration and Congress are giving too little help to troubled borrowers.

By Les Christie, CNNMoney.com staff writer
September 20 2007: 5:13 PM EDT

NEW YORK (CNNMoney.com) -- Many community groups had little good to say about Washington's most recent response to the subprime mess.

Speaking before the House Financial Services Committee Thursday, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson outlined their plans to help out troubled homeowners.

Bernanke spotlighted the Fed's efforts: urging mortgage servicers to be more flexible in modifying unaffordable mortgages, partnering with neighborhood and community groups to provide counseling to borrowers and reducing interest rates to provide liquidity and free up mortgage and credit markets.

The Bush administration has proposed modifications to the FHA loan program so borrowers with adjustable loans that reset to higher interest rates can refinance into more affordable fixed-rate loans. It's also putting tax breaks on the table for borrowers who are forgiven mortgage debt.

But, according to John Taylor, chief executive of the National Community Reinvestment Coalition (NCRC), some of the initiatives discussed on The Hill Thursday will have some positive impact, but they don't go nearly far enough.

"You have people talking about the FHA program and saying it will help 80,000 people. That's a drop in the bucket," he said. "Even industry sources [such as Moody's Economy.com] say there will be 1.7 million people losing their homes."

"We have passed the point where piecemeal solutions can work; significant measures are necessary to give working families a reasonable chance to stay in their homes."

Taylor criticized government efforts in an area in which his organization specializes: advising troubled borrowers. "We have to recognize that not everyone can be counseled out of debt. For some, we need to reduce the actual debt obligation," he said.

Another fix on the table from Paulson was temporarily raising the limits on the size of loans that Fannie Mae and Freddie Mac may buy. Both the government sponsored enterprises currently guarantee the purchase and trade of mortgages that don't exceed $417,000 and meet certain underwriting criteria.

Continued:
http://money.cnn.com/2007/09/20/real...h_in/index.htm

If they raised the limits wouldn't that mean the taxpayer would ultimately be on the hook for these higher dollar mortgages if and when the homebuyer defaulted? I always thought Fannie Mae and Freddie Mac were around to back first-time homebuyers, "starters" and lower-income buyers. Does that really stretch into the over $400k market unless you are being very irresponsible?

I disagree completely.

Why is this a Federal responsibility, and where in the US Constitution does it grant the authority for the government to pay people for their own failure to plan?

I am pretty sure that it isn't in the Federalist Papers, either.

TR

TR--Well said Sir.

A personal responsibility, not a Federal one. If folks only looked into people's eyes...:rolleyes:

Holly

What's getting me (among other things about all of this) is that during the heyday MANY mortgage companies were saying things like -
- No money down
- 125% of the home's value
- "stated income" loans

and all of this lured in people who were otherwise unable to qualify for homes and really had no business buying homes, or buying in the market they were looking to buy. None of that greatly benefitted a person financially. Buying a home only benefits a person financially if they do it reasonably and unless I'm mistaken, none of these bail-outs are for the reasonable loan to the person who bought reasonably.

The mortgage company on the other hand was making BANK of off the interest and other fees. So now that the going is tough they want me to pay for everyone's stupidity. I'm not feeling so happy about it. This might sound harsh, but I don't feel the need to keep someone in a house they can't afford. I'd sure like to live in some of these houses.

If it sounds too good to be true, it is. Amazing how many people ignored that simple little fact...and now we the taxpayers need to bail them out? Not so much.

Are you familiar with a product availale to the public called insurance?

Or should I expect the government to bail me out if my house burns down, or I wreck my truck?

TR

The insistence upon government bailouts is the natural consequence of how children have been raised in recent generations.

Specifically, when children are protected from the natural consequences of their choices, they never learn from their experience.

When every kid is declared "winner" after the race, they never learn accurate self-assessment, nor are sufficiently motivated to improve.

When children are lavished with attention for being a helpless victim, and an attitude of helplessness is rewarded with immediate rescue, they never learn to overcome.

These attitudes become hard-wired.


A multitude of naive, deluded, lethargic, helpless victims are loosed upon society....
and are given the right to vote.

<edited for grammar>

CDOs, CLOs, and leverage...
 

Perhaps I can offer a different view on this.

The bailout purports to be helpful to borrowers, and this is true to some small degree. Helping people about to lose their homes is good political theater.

Actually, the problem lies in the derivatives market. To understand that issue better, let’s look at what happens with a mortgage.

An aspiring homeowner goes to a mortgage broker and applies. The mortgage is approved, and a fee is generated for the broker – which may be an individual, a bank, or a brokerage firm. The loan (mortgage) is then packaged with other loans and sold to investors. So far, so good, right? The purchasers of the package of loans have a responsibility to know the characteristics of the security they’re buying.

However, it’s possible to take a package of loans and put them together in a different way – for example, a CDO (Collateralized Debt Obligation). A CDO is broken into parts called “tranches”, which have different priorities for being repaid. Therefore, the highest quality tranch is paid before anyone else; however, they get a lower yield. Lower quality tranches get more yield, but accept more risk of not getting paid. The quality (or rating) is assigned according to a mathematical model created by the company selling the securities. Rating firms do not independently evaluate the model.

This gets far nastier. CDOs can be repackaged into new CDO securities (called CDO squared), and the new CDOs have tranches that, in turn, have different priorities for repayment. There are, as I understand it, CDO3 (CDO cubed) and CDO4 securities.

The problem? No one – not the Fed, not treasury, not the banks, not anyone – knows how to evaluate the securities. If someone wishes to sell them (or, for that matter, buy them), how does one come up with an appropriate price? It’s as if I strolled up and said I had a coin for sale, but couldn’t (or wouldn’t) provide other details. It might be a pure gold coin, of recognized type – or it might be a shiny penny. Unless you knew what you were buying, how could you possibly make a bid? So, to be safe, you’d offer a very low price. However, that means that the seller would take a horrific loss – and if the seller happened to be managing money for others, those clients (investors, whatever) would be quite unhappy. Lawsuits would be the order of the day.

Oh, but it gets worse. The derivatives are leveraged – a lot. So a small loss on the underlying security can completely wipe out capital. This happened to a hedge fund managed by a major Wall Street firm. By the way – state pension funds, banks around the world, and lots of other financial entities bought these things (CDOs and their cousins, CLOs).

We were, in fact, looking at a general failure of the global financial system. We probably aren’t out of the woods yet. I have been betting on inflation for some time, and it is developing apace. This is bad for the country – and devastating for the folks trying to live on a fixed income or a meager wage. If you think ammo is expensive, wait a year.

And if you want to look at the problematic aspect, ask what our national creditors will do as we debase the currency. Will they continue to hold trillions in U.S. debt securities, or will they sell? Will they continue to buy U.S. debt securities? Because if they sell (or even quit buying) long-term U.S. rates will go up a lot, no matter what the Fed does. If that occurs, times are likely to get hard.

Now….should the federal government bail out all these people? Probably not. Will there be a price to pay? Sure – massive inflation. Probably a weaker economy. But the consequences of not acting aren’t pretty either. So will politicians choose to defer the day of reckoning, even at the risk of making it worse? I’ll leave that answer to others.

Here’s a link for your reading “pleasure”.

LINK

Thank nmap!

I can't say I understood much more then about 50% of what you wrote on the first pass, but it's what I was looking for - I knew there had to be a lot more to this whole deal then what I was reading.

I think I'll take a bunch more passes at it and go to the link you suggested. This is clearly a very complicated issue.

My pleasure, Shar.

As you say, it is a complicated issue - one that's still developing.

If you want to do more reading, you might wish to consider a free e-mail newsletter I subscribe to. LINK

The last two issues (Thoughts From The Frontline and Mauldin's Outside The Box) can be viewed at LINK

The twist on all this - the one that takes the complexity up another notch - is the effect on our relations with other nations. For decades, Saudi Arabia has pegged its currency to the dollar; but with the latest rate cut, KSA decided not to follow the Feds lead. LINK

So, they're happy with increased oil prices, since the price increases offset the dollar decline. OK for them, perhaps, but maybe not so good for us. And does this connect with other developments in the Middle East?

By the way - food is subject to international trade as well. I think it is no coincidence that wheat is making new highs, as a hungry world buys U.S. grain.

My expectation is that we're going to see a crunch about May, 2008...

OK...So, I am a potential home buyer planning on purchasing a home between April and Jun of 2008.
Other than significantly complicating my mortgage experience...what does this mean for those of us who are responsible with our money and actually honor our word when we sign our name to a promissory note?

Eagle