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So many auctions in the country:
that mad roll of syllables blowing in
from all directions, the heart’s true music
plaintive and crude, … [1]
The humorous video about "stages of grief" that Jan-Martin linked to on April 12th had a serious purpose. Precious few diehards [2] are still in Denial about the widespread foreclosure crisis that has arisen out of the subprime mortgage sector over the last few months. Many more are still at the Anger stage, and the largely fruitless search for scapegoats is in full swing. Yesterday, on the other hand, may have marked an important milestone as the US Congress moved into the next stage — Negotiation.
The venue was Barney Frank’s "Possible Responses to Rising Mortgage Foreclosures" hearing at the US Congress House Committee on Financial Services. Politicians, activists, regulators, and big-time players in mortgage finance like the GSEs were all there eyeing each other, seeking a way to collectively help the untold thousands [3] [4] of Americans presently at risk of losing their homes. Unfortunately, the hearing video was only available live, although they may post a transcript eventually. There was extensive news coverage, though, plus several prepared testimony files on the hearing site. This material will serve as a start for assessing if this exercise was significant.
Veteran AP economics reporter Marcy Gordon (a long-time observer of Fannie Mae and the other players) weighed in [5] with a report about how the regulators were inviting the lenders to help out the borrowers, offering up liberalization of their own rules as an incentive. MarketWatch reporter Rex Nutting focused [6] on Sheila Bair, the FDIC CEO, who testified to the urgency of ARM borrowers somehow getting into fixed rate products. She is concerned that the financial arrangements backing the mortgages may make this difficult, and counsels MBS bondholders to be flexible about their contracts.
However, the stars of Tuesday’s show were the big GSEs. The media touted Fannie & Freddie as genuine saviors. Stephen Foley, reporting for Britain’s Independent, sums up [7] this picture of the cavalry riding to the rescue: "Poor Americans struggling to keep up their mortgage payments will be offered new loans with more relaxed rules, in an effort to head off a wave of repossessions." It’s not obvious that this new policy of loosening credit rules will do the trick for the at-risk borrowers. Certainly this plan will saddle Fannie and Freddie with more risk, and it will be fascinating to see how the big semi-public companies handle the additional load. One might suggest that this "We’re the GSEs and we’re here to help" episode will make more credible that pesky implicit guarantee on agency debt the Fed worries about. Again, only time will tell.
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Notes and References
[1]: Whetstone (poems), by Lorna Crozier, McClelland & Stewart, 2005, p 42.
[2]: "In the Company of Chickens: Subprime Market", by George W. Mantor, Realty Times, April 17, 2007.
Well, light the incense and let’s get to meditating. And while we seek a state of deeper consciousness, why don’t we also ask the Wiz for a little backbone.
Frankly, I think both of these clucking Chicken Littles need a good smack-down.
[3]: "Foreclosure pace nears decade high: The state’s increase could soon pull down home prices and even bring a recession, some economists say", by David Streitfeld, Los Angeles Times, April 17, 2007. Links to this and related stories on the California situation, plus some discussion, is available at Ben’s.[4] Emphasis in the quotes is mine.
Nearly 900 Californians a week are losing their homes because they can’t afford to pay the mortgage — up from about 100 a week a year ago — providing fresh evidence that the housing market’s troubles are nowhere near over.
The surge is raising concerns that home prices will soon suffer as a result. The 11,033 foreclosures in the first three months of the year represent an 800% increase over the same period a year earlier.
[4]: "A New Kind Of ‘For Sale’ Sign In California", by Ben Jones, TheHousingBubbleBlog, April 17, 2007.
[5]: "Regulators Call on Lenders to Help", by Marcy Gordon, AP / Houston Chronicle, April 17, 2007.
The Federal Reserve and the five other federal agencies that regulate banks, thrifts and credit unions, in a joint statement, encouraged the financial institutions to extend flexible terms to struggling homeowners. "Prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower," the statement said. "Institutions will not face regulatory penalties if they pursue reasonable workout arrangements with borrowers."
[6]: "Subprime loans can’t be easily rewritten: FDIC – Refinancing may be best way out for troubled borrowers, officials say", Rex Nutting, MarketWatch, April 17, 2007.
Subprime borrowers threatened with foreclosure because of big increases in their monthly payments won’t find it easy to get relief from their lenders, even if the lenders are willing, a top banking regulator said Tuesday.
Refinancing into a more affordable loan may be the best option for those who can, said Sheila Bair, chairman of the Federal Deposit Insurance Corp.
"Borrowers should explore all financing options that might be available," she said. Those with adjustable-rate loans should ask about fixed-rate mortgages. …
[7]: "Fannie and Freddie Mac act over sub-prime crisis", by Stephen Foley, Independent, April 18, 2007.
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unfortunately that is what lots have feared and with elections in 08…….
privatize profits……
… socialize risks
John-
I keep trying to picture how the GSEs pull this off. Daniel Mudd, CEO of Fannie Mae said of their new loan product:
Then from Freddie Mac:
So with lowering standards, expanded products, reduced margins and longer terms- I’m assuming the whole "limiting portfolios GSE reform thing" is out the window?
Then what happens if PIMCO’s Bill Gross is right, and prices drop another 20%? With 40 year mortgages, those subprime borrowers won’t be paying down their loan very quickly. Even in less toxic loans, factors such as job loss and moving will make these more risky. As it is, a lot of the problem is that homeowners owe more than a property is worth- will these loans be made for more than appraised value?
twist -
The world is now scheduled to end at 5PM March 15, 2008 (5:30 in Newfoundland) when Fannie and Freddie release their ’07 10-Ks. Of course they may start publishing their financials late again
This just in. Senator Dodd has convened a number of wise heads today to square the circle.
“Subprime summit to propose steps to help borrowers”, by Patrick Rucker, Reuters, April 18, 2007.
John-
Why is it that I keep thinking of one of the three least trusted phrases in the English language:
I’m from the government- I’m here to help.
John-
This makes me more than a little nervous. According to a Bloomberg article today, Freddie Mac to Buy $20 Billion in Subprime Home Loans. About this proposal the article said:
I’m glad to see they are thinking this thing through.
twist -
Evidently the politicians, regulators, REIC, GSEs, hedgies, bankers, and their aunts and second cousins are all tearing around Washington DC in their ReadyMix trucks pouring concrete into the foundations of a subprime recovery plan. We are likely to be living with the results of this week for a long time. Ideas Doomers?
John-
It would be nice if someone came up with a blueprint before they start pouring- if they don’t they’ll need a big jackhammer to undo what they’ve done.
I’m changing my mind a bit and may be slightly in favor of the bailout schemes. Only because;
Current and correct income won’t be there for the liars. This will be called upon during the ‘refinance’ and they will lose the house due to incom and 1003 fraud. You’ll have to have prrof on income for the bailouts.
The value won’t be there. The guidleines will not call for 135% loans and such, so the liars will lose the house because they don’t qualify. It really cuts back on the ATM crowd using the program.
They refied and took cash to buy a hummer with the funds. They will have to replace any equity they stole or they won’t be able to do the loan. I’ll buy that hummer pretty cheap.
The ‘I bought a second, third fourth, house as an investement’ crowd will not qualify. It’ll be primary homes only. That cuts out about 55% of the Phoenix homes.
Those that did not lie, did not get a kickback, did not look at their home as an ATM will get refinanced into something sane [sorta sane]. It ‘s the thieves and liars that will will not qualify. The 3 out of 100 that do indeed qualify will be able to refi under the new program. they’ll qualify at a rate that is similar to their fully indexed adjustable [just like the old days] and la la la, go on with life with some dignity. I think the refi program will bring a quick and easy kill to the liars. The msm is now doing disclaimer stories on the liars. I haven’t read a ‘we’re losing our house, the bastards’ story in weeks that didn’t include the type of mischief that the borrower brought on themsleves; ‘we bought a boat with the proceeds, ‘I’m a gardener making $2400 monthly, but I bought a 400k home because I thought it would go up in value’, ‘medical bills made me fail’, the msm is not portraying the liars in a positive light anymore. No middle America guy is going to feel sorry for someone who ATM’d their house.
ducksface:
In a nutshell, your pro-bailout argument boils down to: “Current and correct income won’t be there for the liars.”
But it seems to me you are saying that you are in favor of bailing out only those people who don’t need any bailing out.
That is, if the “truth-tellers” were originally telling the truth about their income, the value of the home they were buying etc, then assuming that they are still earning the same income, they will not be in a foreclosure situation!
The mortgage acceptance system is supposed to work in such a way such that if you are telling the truth, you will not be in a foreclosure situation.
I suppose that a small percentage of buyers will have lost the jobs since they bought their homes. But in these cases, is it the role of the government to refinance the mortgage of anybody who loses their job?
What are all sides learning, if they are bailed out? “Don’t worry about buying something you can’t afford, or thinking about the details too much. All the other taxpayers will be there to bail you out.”
If they can determine that the current mortgage system is lending those people who tell 100% the truth (about their income, property value, etc) too much money for them to pay back, then we need to change the current mortgage system.
I’m in favor of them TRYING to bail out everybody. It will greatly accelerate this whole debacle. When the govt. finally has to face the fact that all there are to help is liars, flippers, and investors, and not one of them deserve to be in the house they are in, we’ll not have to listen to the crap anymore. With this education maybe the government won’t let them file bk, make them pay back the 1099 on the short sale, and house prices will drop to the 2.5 times income they should be. A forclosure will really mean something like it used to, and maybe we can instill a little pride in these liars.