Thread: Bush Wins Agreement To Freeze Mortgages

President Bush will announce this afternoon an agreement with major mortgage firms to freeze interest rates for five years for financially troubled homeowners -- a plan advocates say will help forestall a major foreclosure crisis but some conservatives say amounts to a bailout of people who made bad financial decisions.

The plan would apply to homeowners who got adjustable-rate subprime mortgages between Jan. 1, 2005, and July 31 of this year and are facing a sharp jump in their rates before July 31, 2010. It would also offer to put them on a fast track to refinance their mortgages through lenders or through state and local housing authorities, according to several people briefed on the matter who spoke on condition of anonymity because the deal has not been officially announced.

Eligible homeowners are those with enough income to pay their mortgages at lower rates but not so wealthy that they could afford the increase in monthly payments. The plan would be offered only to people who live in their homes, an effort to exclude real estate investors and speculators.

On Capitol Hill yesterday, some Republican lawmakers and their aides expressed concern that the plan would anger homeowners and others who stayed out of the subprime mortgage mess.

Darren McKinney, 48, a renter in the District, said he has been waiting for housing prices to fall so he can buy a condo without resorting to a dubious loan. He turned down an opportunity to buy his 600-square-foot apartment for $310,000 in late 2004 because he thought it was "absurdly overpriced."

Now the government is rewarding people who made irresponsible decisions and bought homes beyond their means, he said.

washingtonpost.com - nation, world, technology and Washington area news and headlines

***


This kida of bullsiht burns me up.
Greedy people, living beyond their means bailed out by the government, again.

What kind of message does this send to every American?

If enough people are greedy morons, no matter what type of mortgage contract you've signed, your glutoney will be rewarded with another bailout. You'll be relieved of your stupidity.

There is precious little incentive anymore for upstanding Americans, living like Boy Scouts, to be responsible, modest informed homeowners that live within their means.

What ever happend to free markets? Blaze your own trail, determine your own destiny. Let the chips fall where they may?

Open the floodgates, free money for all who've been suckered in.
Sorry to those who bought a house a few hundred sq feet smaller, or in a bit shabbier neighborhood -- to secure a reasonable mortgage -- you're not stupid enough to get any handouts.

Originally Posted by Texpat

Sorry to those who bought a house a few hundred sq feet smaller, or in a bit shabbier neighborhood -- to secure a reasonable mortgage -- you're not stupid enough to get any handouts.

It must seem like a rough deal to those who were more careful. Having studied the fine print of the deal its clear that it aint much of a package. it wont stop the decline of the housing market and its unlikey to prevent a global recession in my opinion. I just read that some towns in Norway lost 48 million dollars as a rsult of sub prime related securities, workers in those towns could not be paid.
Its a fcuked up situation and it will take years to overcome.
For those wishing to profit from this situation I can recommend looking at Ultrashort ETF's, SKF and SRS. The stock markets will hobble to the next earnings season and then the carnage will unfold

Its got nothing to do with helping people with subprime mortgages and all that crap . Look further than the end of your nose its about Politics .

Originally Posted by Sparky

Its got nothing to do with helping people with subprime mortgages and all that crap .

I know.

It's about sustaining and aiding the macro-economic policy.

Look further than the end of your nose its about Politics .

And yes, it's also about politics. Elections are 11 months away.


I still say screw them. The boneheads deserve what they get. The case histories say a lot about these people.

It's about-
1- Bailing out the Lenders more than it is about bailing out the borrowers, economically speaking. Propping up the financial sytem.
2- Buying votes. A lot of the mid American Republican faithful are caught up in this.

It will help keep the USD down too, which might not be such a bad thing given the current mess the US is in with it's trade and debt figures.

If it doesn't work, and property prices keep going down, there will be one hell of a mess. The bailouts are not infinite, unless the USD is debased.

Risky stuff. The stockmarket continues to ignore risk, and defy gravity. I won't be touching it with a bargepole.

Both the Bush administration and the Fed have got it horribly, horribly wrong. I hope I'm wrong, but this could take years to unwind. The next Presidency is looking like a poisoned chalice to me. Maybe the Dem's should think long term and run someone unelectible (Obama?), and leave the Republicans to sort out their own mess. But that ain't politics.

Sure it's political. But that doesn't mean it's not reinforcing bad spending habits and sending the wrong message.

There's a generation of Americans who believe it's OK to spend more than they make and somehow a fairy will sprinkle stardust over their mortgage contract and everything will be peachy.

When the Japanese bubble burst in the late 80s, you didn't see the central government in Tokyo softening the blow to speculative landowners who lost their shirts. They didn't reward greed -- it was a tough lesson, but they're better for it. Nor should the US government reward this behavior.

Fcukin softies. We all pay for it.

^the borrowers gain in "no mortgage increase" despite what their contract said. The lenders still get either a mortgage payment or these houses that are dropping in value.

^ I totally, totally agree.

1. your link doesn't work....which is becoming a frequent and tedious problem with your posts. please take a few moments to learn how to properly post a link.

2. how exactly did bush 'win' agreement?

When I copy the address from the website, it pastes like this: washingtonpost.com - nation, world, technology and Washington area news and headlines

Type www before this address and Bob's your uncle.

washingtonpost.com/wp-dyn/content/article/2007/12/05/AR2007120501340.html?nav=rss_email/components

Originally Posted by raycarey

2. how exactly did bush 'win' agreement?

Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers.

In Mortgage Plan, Lenders Set Terms - New York Times

here's some very disturbing information from herb greenberg's blog on marketwatch. it's really long, but worth the read...

Even before this mortgage mess started, one person who kept emailing me over and over saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A and beyond the imagination of most pundits, politicians and the press. When I asked him why somebody from inside the industry would be so emphatically sounding the siren, he said, “Someobody’s got to warn people.”

Since then, I’ve kept up an active dialog with Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena — primarily on the West Coast. He lives in the Bay Area. So far he has been pretty much on target as the situation has unfolded. I should point out that, based on his knowledge of the industry, he has been short a number of mortgage-related stocks.
His current thoughts, which I urge you to read:

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.

Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.

Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out?

The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

How are the banks going to get this junk second mortgage paper off their books? Moody’s is expecting a 15% default rate among ‘prime’ second mortgages. Just think the default rate in lower quality such as sub-prime. These assets will need to be sold for pennies on the dollar to free up capacity for new vintage paper or borrowers allowed to pay 50 cents on the dollar, for instance, to buy back their note.

The latter is probably where the ’second mortgage implosion’ will end up going. Why sell the loan for 10 cents on the dollar when you can get 25 to 50 cents from the borrower and lower their total outstanding liens on the property at the same time, getting them ‘right’ in the home again? Wells Fargo recently said they owned $84 billion of this worthless paper. That is a lot of seconds at an average of $100,000 a piece. Already, many lenders are locking up the second lines of credit and not allowing borrowers to pull the remaining open available credit to stop the bleeding. Second mortgages are defaulting at an amazing pace and it is picking up every month.

The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.

The clue to who will blow up first is each lenders ‘max neg potential’ allowance, which differs. The higher the allowance, the longer until the borrower gets the letter saying ‘you have reached your 110%, 115%, 125% etc maximum negative of your original loans balance so you cannot accrue any more negative and must pay a minimum of the interest only (or fully indexed payment in some cases). This payment rate could be as much as three times greater. They cannot refinance, of course, because the programs do not exist any longer to any great degree, the borrowers cannot qualify for other more conventional financing or values have dropped too much.

Also, the vast majority have second mortgages behind them putting them in a seriously upside down position in their home. If the first mortgage is at 115%, the second mortgage in many cases is at 100% at the time of origination — and values have dropped 10%-15% in states like California — many home owners could be upside down 20% minimum. This is a prime example of why these loans remain ‘no bid’ and will never have a bid. These also will require a workout. The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake.

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.

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.

What I am telling you is not speculation. I sold BILLIONs of these very loans over the past five years. I saw the borrowers we considered ‘prime’. I always wondered ‘what WILL happen when these things adjust is values don’t go up 10% per year’.

Herb Greenberg » Blog Archive » Straight Talk on the Mortgage Mess from an Insider

Oh dear.

was that sincere or sarcastic?

It was sincere. My prognosis is not great anyway, if you read my post above, but it just got worse.

In '05 I witnessed very young professionals buying 600,000 homes in Los Angeles. I knew something was majorly screwed. That's also when those house-flipping TV shows were popular. Made me sick.

^ What part of LA were you in, Texpat, if you don't mind.

Redondo beach, 3 miles south of LAX.

Originally Posted by mortgageman

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

"Oh Shit"

Originally Posted by Spin

I can recommend looking at Ultrashort ETF's, SKF and SRS

Theres money to be made from this mess....

ProShares ETFs – UltraShort Financials – SKF – Overview

^ Please I.D. the poster Mortgageman withing 24 hours.

I cannot find that post.

i think spin was quoting someone from the comments section of the greenberg blog.

i'm wondering if perhaps you're a bit jealous that someone thought of the nik before you.

Originally Posted by Milkman

I cannot find that post.

Its part of the quoted long text in Rays post above. Do try to keep up

The market is getting brutal, WallSt is crying to the Feds to lower their rate, because they can't deal with the turd they created. Banks, investors are all guilty of the same mess.

Remember how the dotcom meltdown was blamed on Clinton by the clueless Bushies ? I wonder how they are going to play that one ?

is the sub-prime mess a direct responsability of the uncareful Bush administration ? were they again sleeping at the wheels ? How does the free market theory work if they are going to intervene and save the poor borrowers from fucking themselves ?

Greenspan commentary from the WSJ on the big mess

Originally Posted by WSJ

The Roots of the Mortgage Crisis
By ALAN GREENSPAN
December 12, 2007

On Aug. 9, 2007, and the days immediately following, financial markets in much of the world seized up. Virtually overnight the seemingly insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged. Interest rates on a wide range of asset classes, especially interbank lending, asset-backed commercial paper and junk bonds, rose sharply relative to riskless U.S. Treasury securities. Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.


The crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.

* * *
The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World.

A large segment of the erstwhile Third World, especially China, replicated the successful economic export-oriented model of the so-called Asian Tigers: Fairly well-educated, low-cost work forces were joined with developed-world technology and protected by an increasing rule of law, to unleash explosive economic growth. Since 2000, the real GDP growth of the developing world has been more than double that of the developed world.

The surge in competitive, low-priced exports from developing countries, especially those to Europe and the U.S., flattened labor compensation in developed countries and reduced the rate of inflation expectations throughout the world, including those inflation expectations embedded in global long-term interest rates.

In addition, there has been a pronounced fall in global real interest rates since the early 1990s, which, of necessity, indicated that global saving intentions chronically had exceeded intentions to invest. In the developing world, consumption evidently could not keep up with the surge of income and, as a consequence, the savings rate of the developed world soared from 24% of nominal GDP in 1999 to 33% in 2006, far outstripping its investment rate.

Yet the actual global saving rate in 2006, overall, was only modestly higher than in 1999, suggesting that the uptrend in developing-economy saving intentions overlapped with, and largely tempered, declining investment intentions in the developed world. In the U.S., for example, the surge of innovation and productivity growth apparently started taking a breather in 2004. That weakened global investment has been the major determinant in the decline of global real long-term interest rates is also the conclusion of a recent Bank of Canada study.

Equity premiums and real-estate capitalization rates were inevitably arbitraged lower by the fall in global long-term interest rates. Asset prices accordingly moved dramatically higher. Not only did global share prices recover from the dot-com crash, they moved ever upward.

The value of equities traded on the world's major stock exchanges has risen to more than $50 trillion, double what it was in 2002. Sharply rising home prices erupted into major housing bubbles world-wide, Japan and Germany (for differing reasons) being the only principal exceptions. The Economist's surveys document the remarkable convergence of more than 20 individual nations' house price rises during the past decade. U.S. price gains, at their peak, were no more than average.

After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own. There was clearly little the world's central banks could do to temper this most recent surge in human euphoria, in some ways reminiscent of the Dutch Tulip craze of the 17th century and South Sea Bubble of the 18th century.

* * *
I do not doubt that a low U.S. federal-funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices. In my judgment, however, the impact on demand for homes financed with ARMs was not major.

Demand in those days was driven by the expectation of rising prices -- the dynamic that fuels most asset-price bubbles. If low adjustable-rate financing had not been available, most of the demand would have been financed with fixed rate, long-term mortgages. In fact, home prices continued to rise for two years subsequent to the peak of ARM originations (seasonally adjusted).

I and my colleagues at the Fed believed that the potential threat of corrosive deflation in 2003 was real, even though deflation was not thought to be the most likely projection. We will never know whether the temporary 1% federal-funds rate fended off a deflationary crisis, potentially much more daunting than the current one. But I did fret that maintaining rates too low for too long was problematic. The failure of either the growth of the monetary base, or of M2, to exceed 5% while the fed-funds rate was 1% assuaged my concern that we had added inflationary tinder to the economy.

In mid-2004, as the economy firmed, the Federal Reserve started to reverse the easy monetary policy. I had expected, as a bonus, a consequent increase in long-term interest rates, which might have helped to dampen the then-mounting U.S. housing price surge. It did not happen. We had presumed long-term rates, including mortgage rates, would rise, as had been the case at the beginnings of five previous monetary policy tightening episodes, dating back to 1980. But after an initial surge in the spring of 2004, long-term rates fell back and, despite progressive Federal Reserve tightening through 2005, long-term rates barely moved.

In retrospect, global economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities. Simple correlations between short- and long-term interest rates in the U.S. remain significant, but have been declining for over a half-century. Asset prices more generally are gradually being decoupled from short-term interest rates.

Arbitragable assets -- equities, bonds and real estate, and the financial assets engendered by their intermediation -- now swamp the resources of central banks. The market value of global long-term securities is approaching $100 trillion. Carry trade and foreign exchange markets have become huge.

The depth of these markets became readily apparent in March 2004, when Japanese monetary authorities abruptly ceased intervention in support of the U.S. dollar after accumulating more than $150 billion of foreign exchange in the preceding three months. Beyond a few days of gyrations following the halt in purchases, nothing of lasting significance appears to have happened. Even the then seemingly massive Japanese purchases of foreign exchange barely budged the prices of the vast global pool of tradable securities.

In theory, central banks can expand their balance sheets without limit. In practice, they are constrained by the potential inflationary impact of their actions. The ability of central banks and their governments to join with the International Monetary Fund in broad-based currency stabilization is arguably long since gone. More generally, global forces, combined with lower international trade barriers, have diminished the scope of national governments to affect the paths of their economies.

* * *
Although central banks appear to have lost control of longer term interest rates, they continue to be dominant in the markets for assets with shorter maturities, where money and near monies are created. Thus central banks retain their ability to contain pressures on the prices of goods and services, that is, on the conventional measures of inflation.

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).

Originally Posted by Butterfly

The market is getting brutal, WallSt is crying to the Feds to lower their rate, because they can't deal with the turd they created. Banks, investors are all guilty of the same mess.

I noticed the market took a negative hit today following the feds announcement of a further interest rate reduction. Maybe Wall Street got it wrong?