Is Paulson's mortgage-rate freeze really the ticket?
In a speech today, Treasury Secretary Hank Paulson let slip a few more details about the plan to freeze rates on some adjustable rate mortgages so a few hundred thousand hardworking Americans who took out really crazy loans can hold on to their homes.
While the reality is a bit more complex, in the interest of simplicity, there are four categories of subprime borrowers. There are those who can afford their adjusted interest rate; these homeowners need no assistance. There are also a substantial number of homeowners who haven't been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again. A third category of homeowners might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.
And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them.
What exactly does this mean?
Calculated Risk sees it as forestalling the inevitable:
Whenever the freeze ends, most of the homeowners in the defined group will still face foreclosure. So the purpose of this plan is clear - since the industry lacks the infrastructure to handle the work load, this guideline helps decide which loans to foreclose on now, and which loans to foreclose on later.
Steve Randy Waldman sees deeper meanings:
The proposal effectively represents a transfer of wealth from junior to senior trancheholders. Which gets us to its clever systemic implications.
The current credit crunch stems not from the absolute scale of writedowns, but from the distribution of the losses. Highly leveraged entities with very little capacity to bear risk, who thought they were holding "supersenior" (but yield enhanced!) securities, are facing catastrophic unexpected losses. If those losses could be shifted to investors with a greater capacity to bear risk, the systemic implications would diminish towards the absolute scale of the losses, that is, towards insignificance.
Less senior trancheholders are being asked to take a hit, because they can, to save other investors who can't afford their losses. From each according to his ability, to each according to his need. You've gotta love capitalism.
Elizabeth Warren has mixed feelings:
This negotiation over mortgage looks like a giant non-bankruptcy bankruptcy. By doing it as a one-time negotiation, perhaps it will be better suited to the immediate problem presented. On the other hand, by making this a one-time deal, does it stall the kind of legal change that would clean up the mortgage industry and that would help families whether they are the only one in trouble or one of two million?
My main thought is that the quickest way to get through the current housing mess is to recognize all the bad loans for what they are, kick people who can't make their payments out of their houses (or come up with some kind of solution short of that through bankruptcy court), let mortgage investors take their lumps, shut down a few more lenders and get on with things. The fact that this didn't happen in Japan in the early 1990s was one big reason why that country's economic misery went on and on. In that light, any kind of a rate freeze seems like it would merely shove the day of reckoning into the future and thus prolong the misery.
But that stance doesn't appear to be politically acceptable at the moment, partly because Congress, at the behest of the financial industry, kinda messed up the bankruptcy code a couple years ago. Also, given the apparent current fragility of the financial system, it may not make economic sense either. Which leaves us with Paulson's stopgap. Still, I vote that we all hold out for Jubilee.
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1
"...kick people who can't make their payments out of their houses..."
Really? And where do you suggest they go?
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2
Well, you did leave out the subsequent parenthetical,
"(or come up with some kind of solution short of that through bankruptcy court)"But I would suggest that those who can't make their mortgage payments can move into a rental place that costs less. That's what people in such circumstances have done since time immemorial. That's what I would expect to do if I couldn't make my payments.
The complication this time around is that a lot of people can't make their mortgage payments purely because they were tricked by naughty mortgage brokers into taking out ridiculous loans. If we can find some reasonable way to undo that damage, which is I think is what Paulson is trying to do, great. But if it just ends up delaying the inevitable, what's the point of that?
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3
Speaking as an "naughty" mortgage broker, I think the most important reason to do this is to slow the bleeding. House prices are declining. Listings are taking longer to sell as buyers are hesitant to buy properties with declining values. Foreclosures are on the rise, adding surplus houses for sale, further reducing property values. This doesn't just hurt the subprime market, it hurts all property owners. For homeowners that have negative equity in their home, there is no refinance alternative. This program will help some of them them stay in their homes for the time being. If more foreclosures keep flooding the market, I don't think it would be surprising to see prices fall back to where they were before the real estate boom started. If this happened, many people in conventional loans will lose all their equity. Huge amounts of real estate debt was created during the "refinance boom", if house prices decline too far, much of this debt could become much riskier than previously thought. Then many of these "safe" loans could begin to go through foreclosure rather than short sales. Basically, it's the end of easy credit. With bankruptcy no longer an option for many debtors and equity to pay off credit cards with equity loans evaporating, many consumers will lose buying power, albeit power that they never should have had. The point is that if nothing is done to stop the real estate market from falling apart, it could quickly spill over into other markets and cause a huge recession. Hopefully that won't happen, but it's not hard to imagine it happening.
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4
anonymous
"Really? And where do you suggest they go?"The answer is quite simple: wherever the defaulter wants to go that he can afford.
Most of us from meager backgrounds know how to scrimp and cut back when the cash is not there. A smaller house is one way to save. An apartment can save even more. A mobile home or trailer can save even more. Sharing a house or an apartment with friends can save even more. I know people who lived in tents to save money. There is nothing wrong or shameful with any of this.
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5
Why can't the mortgage companies ramp the payments up slower to keep the people in the houses? Instead of the mortgage going from $1,500 a month to $2,500 a month, it can be increased every six months by $200. This way, the people can find a way to make extra money and keep their houses. The mortgage company does not have to worry about selling the house or letting it sit empty. The borrowers will not build any equity, but they will have a place to stay. The mortage comapany may not make a gain is short-term profit, but they can keep the borrowers in debt longer, which would lead to more money over the long run. Mortgage companies need to work with people not to do them any favors, but to keep them in debt for as long as possible.
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6
back to whatever rock they crawled out from with their greasy little sweating palms wide open for a $300,000 per house handout. one such innocent made multiple home ninja mortgage purchases on the run from the law before his arrest on other charges and even thereafter from prison.
who is dumber, these parasites who purportedly did not know they they could not afford a $300,000 house mortage with no income, bowling for houses, or the average joe six-pack paying his own mortgage and now who paulson expects to pay for these as well, i.e., by taking on a night job cleaning up the bowling alley after the lending-borrowing party-goers have all slunk home for the night, to sleep off their drunken stupor?
we all knew goldman sachs was filled with genius thieves. now we see a new flora of the species: the so-callled meek who seek to inherit the earth.
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