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Homeowner bailout is a lousy idea


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#1 milbank

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Posted 06 December 2007 - 05:10 PM

Wow! This guy sounds like me. :blink:

Dr. Frankenstein's debt monster

"The breaking of these obligations will not be free. Foreign investors will demand a higher "risk premium" to invest in U.S. real estate, which will make it more expensive for future mortgage seekers to get loans. And they are bound to sue to get the payments they thought they were owed, which will drive up mortgage banks' expenses.

Moreover, the courts and bureaucrats will be tied up for years in a struggle to define exactly who deserves loan forgiveness. People who are making payments on time will naturally demand to get something out of the deal -- why should they essentially suffer for being responsible? As the cost of the bailout goes up, there's little doubt that state and federal governments will float new bonds to pay the refinancing fees and, of course, interest payments on those obligations will be paid by all citizens.

When you start working your way though the ramifications, you may begin to understand why I called the great de-leveraging of America a very big, very long-range problem in this column back in September -- not something that can be ignored or wished away. Debt that was created, distributed, leveraged and re-leveraged by a factor of up to 30-to-1 over the past 10 years by financial Dr. Frankensteins has wormed its way into every corner of our lives and will alter the way we do business in ways we are only beginning to understand.

Indeed, everywhere you look now is evidence that the subprime debt crisis is morphing and expanding like a creature in a horror movie. Just this week, we learned from hearings in Congress that strapped credit card companies such as Capital One Financial (COF, news, msgs) and Bank of America (BAC, news, msgs) had begun to soak customers by jacking up interest-rate charges on balances for the slightest changes in their credit profiles.

When you start working your way though the ramifications, you may begin to understand why I called the great de-leveraging of America a very big, very long-range problem in this column back in September -- not something that can be ignored or wished away. Debt that was created, distributed, leveraged and re-leveraged by a factor of up to 30-to-1 over the past 10 years by financial Dr. Frankensteins has wormed its way into every corner of our lives and will alter the way we do business in ways we are only beginning to understand.

Indeed, everywhere you look now is evidence that the subprime debt crisis is morphing and expanding like a creature in a horror movie. Just this week, we learned from hearings in Congress that strapped credit card companies such as Capital One Financial (COF, news, msgs) and Bank of America (BAC, news, msgs) had begun to soak customers by jacking up interest-rate charges on balances for the slightest changes in their credit profiles."



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#2 *JB*

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Posted 06 December 2007 - 05:42 PM

Some of this article makes good points, especially points about debt issues of late in general. I was pretty alarmed when I saw 125% refinances starting a decade or more ago. MANY of the protection that came out of earlier crisis, including banking laws have been dropping away for decades..that was alarming in many cases. The community reinvestment act signed around 1996 or so -- and the forcing of lower standards on lenders -- for people of low income hurt a LOT, as well.

However, as I understand it, there are no specifics finalized -- by ANY means -- that would make his predictions right OR wrong...or both.

The loans involved go from prime adjustable loans at low teaser rates to sub prime arms that STARTED at 9-12%....with many variations in between.

These will NOT be dealt with the same, and many of the proposed approaches for all the variations are by the banks and mortgage holders/bundlers themselves.

As I see it, there will likely be NO tax money involved.

BTW -- NO law has been passed.

Of course, when all is said and done, many people will rightly be upset by the unfairness that will come out SOME of the final resultS -- but NO ONE knows what THOSE results will be...yet!
"Don't think...LOOK!"
Carl Swenlin, founder of Decision Point and original Fearless Forecasters board.

#3 ed rader

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Posted 06 December 2007 - 05:47 PM

Some of this article makes good points, especially points about debt issues of late in general. I was pretty alarmed when I saw 125% refinances starting a decade or more ago. MANY of the protection that came out of earlier crisis, including banking laws have been dropping away for decades..that was alarming in many cases. The community reinvestment act signed around 1996 or so -- and the forcing of lower standards on lenders -- for people of low income hurt a LOT, as well.

However, as I understand it, there are no specifics finalized -- by ANY means -- that would make his predictions right OR wrong...or both.

The loans involved go from prime adjustable loans at low teaser rates to sub prime arms that STARTED at 9-12%....with many variations in between.

These will NOT be dealt with the same, and many of the proposed approaches for all the variations are by the banks and mortgage holders/bundlers themselves.

As I see it, there will likely be NO tax money involved.

BTW -- NO law has been passed.

Of course, when all is said and done, many people will rightly be upset by the unfairness that will come out SOME of the final resultS -- but NO ONE knows what THOSE results will be...yet!


iraqi oil revenue was supposed to pay for the freeing of the iraqi people too :D.

ed rader

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#4 LongJohn

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Posted 06 December 2007 - 06:03 PM

One one of the financial channels today they were interviewing several people and I heard one Ed Leamy(??) from the UCLA think tank talking about the lending troubles. He basically said a government initiated bail out is the wrong course of action and will delay the real solution for a long period of time. His thoughts (I think) was to let those that could not pay default then the mortgage companies would have to revalue the properties, then you get to the true value the soonest. Even if the borrower is given a lock on the interest rates for 5-years, he will no doubt see the value of the property that he is struggling to pay for depreciate to the point that he will be upside down on the loan for years. Probably doesn't matter to the borrower who is planning to live in the house forever, as long as he is doing well enough in 5-years to stay current. I guess a borrower who defaulted would not be able to get another loan anytime soon in order to take advantage of the lower values. THE MORTGAGE COMPANIES WOULD TOTALLY BE AGAINST THIS METHOD. However I think it has merit.....'course my house is paid for and I don't have any ARM resetting soon.

#5 vulture

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Posted 06 December 2007 - 06:04 PM

Some of this article makes good points, especially points about debt issues of late in general. I was pretty alarmed when I saw 125% refinances starting a decade or more ago. MANY of the protection that came out of earlier crisis, including banking laws have been dropping away for decades..that was alarming in many cases. The community reinvestment act signed around 1996 or so -- and the forcing of lower standards on lenders -- for people of low income hurt a LOT, as well.

However, as I understand it, there are no specifics finalized -- by ANY means -- that would make his predictions right OR wrong...or both.

The loans involved go from prime adjustable loans at low teaser rates to sub prime arms that STARTED at 9-12%....with many variations in between.

These will NOT be dealt with the same, and many of the proposed approaches for all the variations are by the banks and mortgage holders/bundlers themselves.

As I see it, there will likely be NO tax money involved.

BTW -- NO law has been passed.

Of course, when all is said and done, many people will rightly be upset by the unfairness that will come out SOME of the final resultS -- but NO ONE knows what THOSE results will be...yet!


The key to this entire charade (reminds me a great deal of 2002-03) is that there has to be non-stop jawboning of impending legislation to keep the markets semi-buoyant. The calendar of Fed governors doing luncheons, symposiums, guest lectures must be constant.

This has really become a fixture in our financial markets.

#6 ogm

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Posted 06 December 2007 - 06:16 PM

I think people who are not in trouble now will stop making payments, in order to qualify for the rate freeze. This will be a big mess. The non performing loans will soar.

#7 ed rader

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Posted 06 December 2007 - 06:32 PM

One one of the financial channels today they were interviewing several people and I heard one Ed Leamy(??) from the UCLA think tank talking about the lending troubles. He basically said a government initiated bail out is the wrong course of action and will delay the real solution for a long period of time. His thoughts (I think) was to let those that could not pay default then the mortgage companies would have to revalue the properties, then you get to the true value the soonest. Even if the borrower is given a lock on the interest rates for 5-years, he will no doubt see the value of the property that he is struggling to pay for depreciate to the point that he will be upside down on the loan for years. Probably doesn't matter to the borrower who is planning to live in the house forever, as long as he is doing well enough in 5-years to stay current. I guess a borrower who defaulted would not be able to get another loan anytime soon in order to take advantage of the lower values. THE MORTGAGE COMPANIES WOULD TOTALLY BE AGAINST THIS METHOD. However I think it has merit.....'course my house is paid for and I don't have any ARM resetting soon.



i think home values will be lower in 5 years so i agree that this will only make the problem worse. the bailout is for "repsonsible" homeowners who are current on their payments.

if they knew the terms of their mortgage and qualified why on earth are they getting a bailout?

ed rader

Edited by ed rader, 06 December 2007 - 06:33 PM.


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#8 *JB*

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Posted 06 December 2007 - 06:54 PM

iraqi oil revenue was supposed to pay for the freeing of the iraqi people too :D.

ed rader


If it is handled like Carter did the S&L crisis, than you are dead right (in you implications)!

BTW -- it would be instructive for any who want to move toward a more "considered" opinion, not just cynicism, to study the S&L crisis and how it came to be (one contributor was excess liquidly cased by S&L deposit insurance going from $40 grand to $100 = to much money for S&L in invest "wisely" and big time criminal activity by S&L officers) -- and -- the problems that "bailout" caused. (and it was a bailout)

We'll see!
"Don't think...LOOK!"
Carl Swenlin, founder of Decision Point and original Fearless Forecasters board.

#9 OEXCHAOS

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Posted 06 December 2007 - 06:59 PM

Guys, I don't think most folks with ARMS really understood what they were getting into. I looked into them for a project and when I spoke with loan officers they were absolutely unclear about the near CERTAINTY of the rate and payment jumping DRAMATICALLY at reset. They say, "Your payment could rise or fall, depending upon interest rates". A reasonable person presumes that if rates are roughly the same, then the payment will be too. Surprise! "Ooops! You mean you didn't arrange a fixed loan? Sorry, now you don't qualify! Pay up!" Nobody every said, "Teaser rate." I never ONCE heard it until I pressured my banker to say it. And I spoke to a lot of folks. I am nothing if not thorough when it comes to any borrowing, and I'm fairly sophisticated, and it still took me a lot of probing and knowing what questions to ask in order to get to the true nature of the loans. I can't imaging that the MAJORITY of "sub prime" or even prime ARM borrowers weren't snookered with just enough weasel words and shifty and intimidating disclaimers to keep the originators from getting sued (too often). I don't think that most of these loans were fairly explained or disclosed. Certainly, as an investment professional I was shocked at the utter deceptiveness. A stock broker would do time if he pulled that stuff on his clients. The bankers/loan brokers? Not so much. I've got no problem with a work out deal for current borrowers. They've been responsible, but got snookered. It's cheaper to do a work out than to deal with class action suits. Some of the folks who've already gone teats-up on some of these probably have some recourse, too. Mark

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#10 ed rader

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Posted 06 December 2007 - 07:05 PM

Guys,

I don't think most folks with ARMS really understood what they were getting into. I looked into them for a project and when I spoke with loan officers they were absolutely unclear about the near CERTAINTY of the rate and payment jumping DRAMATICALLY at reset.

They say, "Your payment could rise or fall, depending upon interest rates".

A reasonable person presumes that if rates are roughly the same, then the payment will be too. Surprise! "Ooops! You mean you didn't arrange a fixed loan? Sorry, now you don't qualify! Pay up!"

Nobody every said, "Teaser rate." I never ONCE heard it until I pressured my banker to say it. And I spoke to a lot of folks. I am nothing if not thorough when it comes to any borrowing, and I'm fairly sophisticated, and it still took me a lot of probing and knowing what questions to ask in order to get to the true nature of the loans.

I can't imaging that the MAJORITY of "sub prime" or even prime ARM borrowers weren't snookered with just enough weasel words and shifty and intimidating disclaimers to keep the originators from getting sued (too often).

I don't think that most of these loans were fairly explained or disclosed. Certainly, as an investment professional I was shocked at the utter deceptiveness. A stock broker would do time if he pulled that stuff on his clients. The bankers/loan brokers? Not so much.

I've got no problem with a work out deal for current borrowers. They've been responsible, but got snookered. It's cheaper to do a work out than to deal with class action suits. Some of the folks who've already gone teats-up on some of these probably have some recourse, too.

Mark



Mark -- i knew they were being "snookered" and so did many others. and you don't think the ones who are in real trouble now won't walk from their obligation once they find out they don't qualify for a bailout?

ed rader

"Everybody's got plans... until they get hit."

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http://erader.zenfolio.com/