patrick.net

I haven't waded throught Bush's "New Hope" proposal myself, but a lot of much smarter people who work in the mortgage industry have, such as Tanta from Calculated Risk. Her opinion reinforces J. Galt's opinion --basically, it won't apply at all to 0-3% "teaser" rates, and the majority of Jumbo-prime, prime Alt-A & option-ARMs won't be affected.

EBGuy,

Thanks for the link. You know, I could be a WHOLE lot more cooperative here if Paulson (among others) would simply come out and say...

"This was a major debacle and horrifying lack of anything resembling lending standards. We've lost prestige in front of our creditors and realize we are at your mercy to allow us to at least attempt to correct this. We're not even sure it CAN be "corrected"! We'll need to make amends to all of the responsible borrowers and taxpayers out there"

Yeah, then I could get on board!? However, as things stand all I'm hearing is "What has manifested itself is the result of... perhaps a little exuberance and we're going to do what we need to do to make it right. You may not care much for our tactics, but we're the ones calling the shots".

In which case all I can say is, best of luck.

Duke,

I would never want to imply that you were confusing the issue. Shooting past you, as it were, as I've seen some posts fearful that contract law is under attack. I was concerned myself at first, which led me to look at the business in detail.

As HARM so nicely points out, it's a token program in any event. Recessionary forces continue apace.

What I find much more interesting in the legal realm are the judges refusing to allow Deutche Bank to forclose on properties.
Cleveland is proving to be the proverbial canary in the coal mine for ferreting out all these "issues" surrounding the housing bust and securitization. Other gems include: how does a city figure out who to bill when combating blight as the mortgage has been securitized (see article I posted here over a year ago). Banks throw up hands and says, "Hey man, we are only the trustee." This can lead to the city taking much more aggressive measures as Wells Fargo recently found out. One of their foreclosed properties in Cleveland recently got razed as they did not properly communicate with the city that work was being done (after getting some nasty messages from the city manager). Also, Slavic Village is pioneering "forced urban scrap recycling" (aluminum siding and copper pipes) by desperate criminal elements -- coming soon to a mothballed Lenmar development near you. And block watches aren't that effective, if, ya know, no one lives there...

PS -- Tanta at CR is starting to remind me of the old EF Hutton commercials (not complaining here, as I "listen" too....)

Hi guys,

The government does not specify that they need any agreement from the investors. This is because if a loan is approved for this program it is taken private by the bank, and sold to FHA who would probably be paying a full price. Now, technically this is not a loss. It's the FHA buying a bunch of securities and putting them on their books.

Step-by-step case, someone calls the 1800 number and explains, 'I have such and such loan.' If the loan confronts to the criteria set, then the 1800 help person alerts the FHA or a new and coming GSE. It tells them, this and this loan from this and this bank is eligible. The FHA entity goes out and purchase the specific loan from the bank, hence taking it private. They then control the loan and can do whatever they want, such as freeze the rate. Since full price was paid and the loan was sold, investors don't really have anything to do. They just get money back.

And none are questioning which value of the property is considered when applying. If the last appraisal value is, there will be quite a few eligible loans around. Besides, just as the banks has been letting people sell for less instead of foreclosing, maybe they plan to do the same so the loan conforms to the government requirements just as they do many times for Fannie and Freddie loans. If they do it fast they can probably lose only as much as prices have currently fallen.

Marty

As far as people taking the government to court, they are currently not doing anything that is not a norm. They just approve loans based on specific criteria, just as Fannie doesn't want to give loans that are over 417k, and there are loans that are not given if the price is under 500k, such as many sub prime ones.
If the FHA says, we will only purchase loans originated between 2005 and 2007, and you loan did originate then, and you conform to all other criteria, and they refuse you, then you might have grounds for a trial.
Otherwise, it will be like going and suing Best Buy since you didn't get on "200$ Off Every HDTV" last week.

Sorry to burst your bubble. No pun intended :)

Marty

Thanks Marty, that answers a few questions that have been lingering in my mind.

Here is a good summary of the Plan.

Eligibility Requirements for a Teaser Freezer
A job
An income
Equity--borrowers must owe less on a home than it is worth
An inability to refinance
An inability to afford payments after a reset
A good payment history--delinquent borrowers do not qualify
A loan with a reset scheduled between 2008 and mid-2010
A loan issued between January 2007 and July 31, 2007

By taking to loan private the FHA will have to perform an appraisal. So recent mortgages with the equity to cover the losses the appraisal revelas makes sense - less the goverment be sued for favoring one class of borrower.

Frankly, I would be shocked if they even get the claimed 240,000 people (of the up to 2.8 million in trouble) as a number of homes are already heavily underwater. In fact, by dollar volume (which massively biases the problem to place like Palm Beach and Stockton) there is even less releif then the small amount of relief this 'fix' will heal.

So as a conclusion to this thread - there is no freeze. No one can sue. These are not the droids you are looking for. Move along.

Just in case anyone needs a link, since some people doubt this,

Story
Specifically:
"Under the plan, negotiated by the Treasury and White House with representatives from the private sector, borrowers will be able to refinance an existing loan into a new private mortgage or be moved into a loan from the Federal Housing Administration."

After watching Paulson talking about the plan last night on pbs, I think that this stories author took the statement out of context. I do not think that under the plan, the subprime homeowners will automatically receive a loan from the FHA.

I am more worried about the effects this bail out will have on foreign investment.

Currently we must import massive amounts of capital to keep our system going. The trade defecit, government debt, and our export of inflation will catch up to us. I wonder what will happen if the foreign investors decide to stop buying our bonds, t bills, and stop taking dollars for oil.

I believe this bailout will only lead to massive inflation here at home and an even worst set of consequences for the country than if we had not tried to step in. The Saudis will probably switch to a new currency before long such as the Euro. If this happens, god help us! You think $5/gallon is bad?

The foreigners will probably stop accepting US T-bills as well. All those wonderful programs that the government has will only survive with higher taxes on the tax payer. No matter what, tax payers will pay for this bail out with inflation and higher taxes for the government. China will stop buying our T bills as well. They will simply refuse to import our inflation and instead sell to Europe.

That is not all folks! Anyone paying for Social Security will be surprised to learn that the government really has no money in the trust fund. The government took the excess money and spent it! You will find plenty of T bills that are just promises from the government to pay for it later. I can see the government mailing these IOU in instead of a check. Can you trade IOUs for food/water/ or housing?

The US collectivly is nothing more than a crack whore trying to get the next fix no matter the cost. We will sell our own children's futures to slavery just to get that next hit. Soon our foreign creditors( drug dealers) will refuse to do buisness with us.

JGalt,

I also saw Hank w/ Erin Burnett of CNBC and after she... kind of grilled him briefly he was clearly relieved to be moving on to the next topic (China). I'm not saying there isn't merit to your point, there is. I'm just at a point to where I don't want to hear about ANYBODY being bailed out! Period.

It was kind of neat though to see the Wash. Post basically "surrender" the article to Keith over at Housing Panic! They even showed posts w/ a lot of angry and pointed graphics.

nutty,

At some point dealers HAVE to cut off a "waste case". Whatever it was they used to be known for (strong arm robbery, I.D theft or turning tricks) they reach a point where the addicts are no longer reliable to commit the crimes that once funded their habit.

Galt,
you are right. I got confused on the whole going private OR move into FHA. I am assuming that going private means the bank buys the loan back and holds to it. Basically, it can be seen as a 30 gov/30 banks/30 investors split on loses and risk for all subprime loans.

So to recap:
-Gov buys all performing loans with a very high risk of default and freezes them taking a hit.
-The banks buys the rest of the performing loans and freeze them taking a hit.
-Money from those transactions goes to high tranches investors(gov and institutional investors) right now so they can keep on driving the economy and recoup their loses.
-Lower tranches are left holding the defaults and the few good loans left so they can calculate their losses pretty fast.

It's a sweet plan. I actually could not think of a better and painless way to handle this dire situation.

As for the process outlined in the federal program it doesn't change much. In the end it will either be a FHA entity that controls your loan or the banks. The outcome is still the same.

@Dinor,

I doubt the world will allow us to commit another armed robery (Iraq's oil).

For entertainment purposes, I recently visited the CME site to check on Case/Shiller Home Index Futures.

For the ten city composite (peaked May 06 at 226.29) , there is actually some open interest in Nov 2010 contracts. Last trade was at 182.00 so this is predicting a 20% haircut from peak. We are currently sitting at 212.65 for the 10 city Composite Index.

San Francisco futures are not trading that far out (no open interest), but there is a bid of 132.6 for Nov. 2012s (anyone want to write that contract?). I realize it is probably fishing expedition, but that bid price would represent a 40% discount from the May 06 peak of 218.37. SF Bay Area Index is currently at 206.46 .

Quiting from http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/

>>

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

Sorry for the typo!

Mhirst, it is my understanding that the rate freeze is imposed on the bondholders' yields. Can you show me where this is not the case? FHA refinances are a part of the plan but rate freezes are not automatically moved to a federal loan program.

Malcolm, I have a link and a paste from the story a few comments back

Marty

I read it, and it does not say all of the loans which are frozen are purchased which is my and many others' sticking point.

In a study this July Countrywide found that only a small percentage of loans went into defaut due to ARM readjustment; Now, that study happened across loan spectrum, and before credit had tightened much, or price drops had accelerated. I seriously don't expect this to slowdown the foreclosure tsunami by more then maybe 2%...

The question was: Would buyers face higher prices from the "bailout" than if the market were allowed to work.

Well does anyone believe that a "bailout" that the idiot-child Bush announces with the wrong phone number is going to work?

Just asking.

# eburbed Says:
I haven’t heard as much negativity around [dismal shopping season] as I had expected. Could the shopping season actually be faring well??

Hard to tell from the cheerleading American MSM, but there seems to be some rumblings in the news today.

J Galt says:
I am just pointing out that 5 years seems to be the strategy cycle used by the authors of the plan.

Thanks for the clarification - this wasn't clear in your original post.

Home sales, however, should hit a bottom in early 2008

Oh bullshit. Here we go with the bottom-groping again.

Malcolm,
the loans are either purchased by FHA or the bank. The investor is not involved. The gov and banks agreed they will purchase all the sub-prime freeze loans. The gov and institutional investors get $$$ now. The lower tranches keep in the prime loans. And all defaults get devided by the players.

Just the messenger, Excuse me!

Marty

Note the phrase "tax payer". Sure, the plan does not directly dip into tax dollars, and so the fed monkeys can stand up and say this does not affect tax payers.

Rah rah, yippee.

What I care about is American consumers, and the overall economy. If government measures prop up housing prices, it affects our whole economy, at least it does in California where a larger proportion of these welfare recipients reside. What happens on the Hill disproportionately affects areas of the country where so-called subprimers have the qualifications needed for the free money. Which may raise, sustain, or stall the natural lowering of prices (could anyone disagree that this meddling will certainly NOT bring down prices??).

Maybe only 100,000 homes will be propped up in price by this move, and maybe it is only for a short period of time. Regardless, it does harm the market and more importantly, opens the door for more fiddling by Uncle Sam.

It stinks. Even if we cannot sue for damages, it still stinks. Worse, it makes no dent in the overall problem, but in my estimation, causes more problems for a larger class of Americans, namely, those who do not qualify for the free money and those who do not yet have a mortgage. Future potential buyers will experience unprecedented difficulty in the years to come in getting a mortgage. That fact was true prior to the US Treasury's involvement, however, now it is exacerbated as lenders build in higher rates and fees to cushion from any similar measures that the government may dream up.

The lenders are following this closely. This is their bread and butter afterall. If it could happen once, it could happen again, and they will be sure to build in safe-guards (read: higher rates) to ensure the return they thought was guaranteed by the free market (should the government hold that gun to their head again).

I hope all the drama is unneccessary and prices come down as they should, as they were meant to anyway. And all of this will seem like a big joke. For now though, we don't know how the industries and the market will react. Because it has never happened before.

I should clarify that by "it" in my post, I mean the freezing of rates for a select class of FB's.

@Mhrist

I just do not see that anyone has agreed to purchase the loans that match the criteria for the "plan". It seems to me that the lowest risk options are being offered a way out via a tranche upgrade, but this is a very small percentage. The 30/30/30 solution that you are talking about seems way out of whack. Ownership of the MBS's will stay as they are, the only change will mostly be the percentage of return in the short term.

Again, I invite criticism or comment, because I know far less than the collective on this forum...

"bottom-groping"

Take it any way you like! :)

@Mick,
Using the same logic, isn't it unconstitutional for a law that takes my hard earned money away from me and gives it to someone lazy in the form of an earned income credit? (Punishing those that work harder? You had to see my comments coming...)

Amen Brother.

BTW,
You forgot to end that with:
*Not Tax Advice*

Sweeeeeet. A *tricorn* tinfoil hat! :o

Mick, I would humbly submit that the People can still appoint their legislators. If the People were uniformly disgruntled about the taxes levied upon them, they would elect legislators who would abolish taxes.

I would further suggest that the People submit to taxes because they realize it is the most feasible way of funding public works for the benefit of all. We all need roads, hospitals, ports, a legal system and a military to defend us. There might be a few who claim that they don't need such infrastructure, but this is a Republic and the People have spoken. We the People (or the vast majority of us) decided that we will all chip in for the general good. Nobody likes taxes, but we like taxes a lot more than being an unindustrialized backwater at the mercy of foreign powers.

J Galt,
now I think it is more of a 20/20/20/20 split for all performing loans. Gov, Banks, Low Risk Inv, High Risk Inv. As for the part of the governemnt there are a few factors that can increase their participation such as:
1)The speed of implementation - the faster it is implemented the more loans will be purchased
2)The appraisal mechanisam - depending on how this is done it can drastically increase the participation as well.Making 600k real appraisals in a month or two, even with a 90 day foreclosure stop doesn't sound possible. So maybe it will be lax enough to let a lot of people in.
3)This might work for many prime borrowers that have purchased subprime loans because of the better rates and equity and moved off from Fannie. This is a way of the gov of getting the lost sheep back in the flock in a way. After all even in the worst hit areas right now the foreclosure rate is 1 in 100 or more. The other 99 most probably did syphoened the equity or refinanced to this new crap loans and they are needed back.
4)What are the banks willing to do to move you to an FHA loan - maybe they loaned 500k, the house is now worth 450k. They can drop the mortgage with 50k and sell it to the gov just as they are sometimes doing when you want to currently sell, and as I am sure it is and will be done to get you into Fannie.

Another point of this whole fiasco is that it sounds like an effective way to separate the people that have bought properties. You will know quite fast things like:
A)Real owners living in houses they like and want to stay in
B)Ones that cannot afford but want to keep their house
C)Speculators
D)Equity liars

This will be good for when we are unwinding this fiasco.

Finally, a point to consider: by setting this system up, the government will shortly have the infrastructure to handle transferation of troubled loans. Once they do have it, they can pluck back on TV and say they will bail out even more loans, and since the problem is bigger than anticipated this time it will cost money. Why hitting congress and the tax payer for money twice, when you can do it once when you have everything set up.

Marty

Brand,
altough the people can, they are so dependant that anyone even proposing abolition of taxes will be branded as a looney. If you do infact have such a person, he will need to abolish government spending with all the welfare, freeways, national parks, overloaded police and jail systems, wars, government contractors and government employment. And lest not forget that the governement is the biggest employer and spender around thest parts.
When our Founding Fathers came up with the no-tax crap, they lived in a very different world. Tarrifs ment something other than protecting industries inside the country thus hurting the average joe and we were exporting a lot to england and the world. Not the case today. We didn't have 30-40% of the population in some type of a government asistance with another 20% working for the said government.
I believe taxes are wrong, but I am also a realist. It will not be possible to get the political power with people that are dedicated, after all the ones hurt by taxes a LOT are very few compared to the majority that lives on government assistance. The only way is a major change in everyday life, like oil getting to 10$/gallon, or the dollar collapsing, or the banks and credit collapsing. Looking at it as such, you are in luck. We're just in the middle of such a predicament and I am pretty sure you will get your utopia sooner than you think without voting.
A horse ride to Washington takes 3-4 months after all from Cali. Maybe less while there are roads but still, it will take a while. And the Winter can screw it pretty bad too :)

Marty

The Founding Fathers lived in a pre-industrial society, where the basic unit of society was the "yeoman farmer" the independent farmer who educated himself in his spare time, took part in local government, sold farm products locally, bought things locally, etc.

It was before the time of the railroads and railroad trusts or people getting "railroaded", before the Civil War, before Marx.

Taken all the way, Peak Oil will return us to the days of the Yeoman Farmer, but the transition back is going to be pretty painful to most people.

Americans are actually pretty resilient in difficult times. Most people seem soft and whiney now, but if a real crunch hit I believe that we would tighten our belts. People's attitudes tend to change once they realize that other people aren't going to save them from disaster.

Of course, New Orleans might have proved me wrong. For all the money spent, the city is still a shambles with tens of thousands of residents still displaced.

Overall I believe that technology will prevent a major social decline based on "Peak Oil". Americans will learn to consume less energy, just like Europeans. Even as we cut back consumption, our wealthy society of 300M people will push along developments in solar, geothermal and plant-based fuels. I hope oil goes to $200/barrel and stays there for a decade. Americans will get smarter as a result. Despite being the world's most voracious consumers, we also seem to be a very unhappy society. People need to spend more time with their family, take long walks in the park and tend a garden.

I wouldn't shed too many tears for the uber-wealthy getting victimized by the government-dependent masses. They have legions of accountants and lawyers, so they are not particularly defenseless. If anything, the constant drain of taxes prevents them from becoming complacent, and that is an even greater benefit to society.

By the way, Calculated Risk has some excellent commentary on why this is not a bailout.

In short: the purpose of this PR campaign is to encourage delinquent and threatened borrowers to contact their lenders immediately to get on the fast track to a modified loan. As Tanta points out, most of these "teasers" are in the 6-8% range (these are subprime loans, after all). And most importantly, this is a voluntary industry action (meaning no new laws) costing zero taxpayer dollars, executed within the existing framework of the MBS/CDO/SIV legalese.

In other words, it's mostly a bunch of PR fluff, with the potential upside of getting a nice chunk of troubled borrowers into a slightly better situation.

@ex-renter,
I don't think that Peak Oil will be the cause of the change. More like Peak Globalization... But yea, the Founding Fathers did live in a very different enviroment. This is why, in the constitution it says that if times change, so should the constitution. Our society is very different, we are just slow to change the constitution.

There are many people that don't want the constitution to change, in a way shooting themself in the foot. Society does change, we have a bunch of laws and regulations that are not constitutional all over. Bot for a politician it is easier to curcumvent the constitution than to change it.

Imagine, Bush, wants to torture. He either tries to change the constitution which will be impossible. But he just creates a policy that allows it. Worst case scenario? In 2 years or so, the Supreme Court will rule against the policy. In turn Bush rewords the policy and he has a card blanche for another 2 years. He won't get into any trouble except with the voters who don't really care and have no real choice, especially if they are republicans. And even then, he just didn't know it unconstituional beforehand so he is not really a bad guy.

Marty

I don't see a need to make changes to the Constitution. It is such a well written document that it stands the test of time. I think the debate of the role of government is a healthy and ongoing discussion, and the Constitution will always have at least two interpretations regarding the federal role over states' rights.