Awhile back, I wrote a post warning about the impact that junk debt buyers could have on the housing crisis. The business model is as simple as it is brutal: buy delinquent loans for as little as 20 cents on the dollar, foreclose on the homeowners, sell the properties at 50 cents on the dollar, and double your money after costs. Never mind that the activity wrecks home values and destabilizes communities - this is business, after all.
Don't you love how it's "business" when common people get screwed, but it magically becomes "a confidence crisis" once the fat cats start losing money?
In a move that has the potential of making a bad situation worse for millions of Americans, the Bush Administration is trying to scare the Congress into approving a $700 BILLION blank check for Treasury Secretary Paulson to make US taxpayers the biggest junk debt buyers in history.
Members of Congress are wary, and many are calling for additional help for regular people, like tougher mortgage workout requirements for lenders and additional jobless benefits for the increasing number of people unable to find work.
The questions that the Administration must be required to answer before any plan is approved are these:
How will the government behave as a note holder? Will Uncle Sam be required to provide workouts for the homeowners suffering under the junk loans that Wall Street seeks to dump?
As hard as it is dealing with a lender's Loss Mitigation Department, that experience will likely pale in comparison to dealing with the government, unless the Congress puts in place clear ground rules that favor turning these junk loans into affordable, stable loans.
I would think that, if the Congress has the courage to require this as part of any bailout, the value of junk loan portfolios could actually be enhanced by converting them to stable, low risk loans. Over the long run, taxpayers would see three net positives: investment banks would stop dying off in droves, the retail lending market would start working again, and most importantly, the foreclosure crisis could be put in check.
Sadly, political reality is such that these protective measures probably won't end up in the final version of the law, even though they would be in the best interests of the taxpayers being asked to foot the bill.
I'm not holding my breath, but I will hope for a miracle.
CNN reported earlier today that the entire bailout plan fits on three sheets of paper. WOW! I cannot imagine it's well thought-through at all if it's so short. And probably no one in Treasury or Congress has even remotely thought of the level of bureaurocrasy needed to make this work. No one has even mentioned things like guidelines for restructuring the bad loans (to let distressed homeowners stay on), what sort of commitment the government will have to being either a REO department or else a landlord, and, of course, how they'll deal with loss mitigation--probably because few people involved have even thought these things through at all.
As someone waiting on final approval on a short sale purchase (we were nearly there last week--just waiting on final numbers on the net sheet to be approved by the bank and mortgage insurer after initial nods--now it's back up in the air), I am afraid some banks are going to freeze up and wait to see what Uncle Sam brings to the table, hurting both buyers and of course the distressed homeowners trying to get on with their lives.
Don't you think that the people who CANNOT afford them now are just not meant to be homeowners in the first place? What good is re-structuring their loan going to do if they took in more than they could handle? Not everyone is meant to be a homeowner. There are people who just don't have the income or the credit- right!?!
Because of LIBERAL LENDING laws that let anyone, including low income households, purchase homes, regardless of wether or not they could afford it, once adjustments were made to the interest rate, they are now over their heads.
I know there are many contributing factors to this housing and financial mess we are in. I am not an economist and don't know what sort of an impact these bailouts are going to do in the long run but it seems if the government didn't step in that our economy might have been in a huge heap of trouble- at least the housing market anyways. What I don't get is the big banks or even the homeowners who invested in bad loans, couldn't afford it, because it's bad debt, and now we are trying to help them re-structure their loans? People need to take responsibility for their actions. Get a little ruffed up from their stupid mistakes. I have done dumb things with my money and the government didn't try to fix my problem.. I DID BECAUSE IT IS MY RESPONSIBILITY!!!
And FYI, in 2005, McCain tried to reform Fannie Mae and Freddie Mac, completely predicting the widespread danger they posed to the economy. Obama, however was among those who shot down the bill.
http://townhall.com/video/TheFivewithAmandaCarpenter/1450_091708Five
http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190
http://www.govtrack.us/congress/bill.xpd?bill=s109-190
Thanks for sharing, Nicole Weidauer
The Egerer & Weidauer Team, Keller Williams Realty North Seattle
And that is what we need, a "MIRACLE" I do not claim to fully understand the whole mess, (but the government doesn't either) What get to me is that it all "happened overnight" please, nobody saw it coming and now we need an emergency decision? How good can that possibly be if they can't even make Good decision when they have all the time of the world?
One quick comment on Nicole's comment:
I agree with you - many people became homeowners who clearly should not have during the boom days of the past several years.But you would have to agree that the banks who opened their purses, and the brokers and appraisers who made immense amounts of money during the boom, are at least as much to blame here, if not more so. After all, it's the Wall Street guys who went to business school and style themselves as experts, and the brokers and appraisers are supposed to be professionals.
Where I part company with you is in your characterization of the cause ("liberal" lending rules). The subprime lending market was orchestrated in a Republican Congress during the late 1990s, at the behest of then Senator Phil Gramm of Texas - who was, until recently, a top McCain advisor. Gramm is still a big lobbyist for UBS, the Swiss banking outfit. In other words, this is a case where the bank lobbyists wrot the laws, and bought enough congressional votes to get the rules they wanted. Incidentally, Fannie Mae and Freddie Mac did exactly the same thing.
As far as the government paying for dumb decisions, just take a look at who's getting taken care of: the same bankers who could have prevented this whole fiasco if they had acted with an eye towards managing risk, instead of giving in solely to their greed. If lenders had exercised even the most basic due diligence, then most of the homeowners who shouldn't have received loans would never have become homeowners. It is a known fact that lenders routinely ignored their underwriting guidelines in approving stupid loans, because the lender was betting on further appreciation in the housing market. After all, if a borrower didn't pay, the rising property value would cover all the lender's costs. Lenders cast off their responsibilities as financial institutions and behaved as market speculators.
Now, taxpayers are being asked to eat these so-called experts' mistakes, while the bankers walk away with their golden parachutes. Isn't it about time regular taxpayers had some form of parachute too?
As I've mentioned in my blog before, my father was in the Navy for over 20 years. He spent much of that time keeping some of the government's books. Within government accounting (perhaps an oxymoron, but stay with me here), the government carries the going in price of an asset, and looks to recoup that same amount of money, irrespective of the time value of money.
What this means for homeowners in loans purchased at a discount by the government is this: if Uncle Sam buys a loan for 50 cents on the dollar, then any deal that nets Uncle Sam more than 50 cents on the dollar is a win. If the government buys smart, and if the Congress requires those savings to benefit taxpayers by 1) giving distressed homeowners a chance at a realistic, affordable loan through a principal writedown, and 2) by ensuring that the deal is worth more to taxpayers than they put in, then the foreclosure crisis we're facing could be stopped dead in its tracks. The benefits to regular people, communities, and the real estate industry would be immense.