Mortage Bailout

[Flasch186]

depends on who you ask

[Tekneek]

Originally Posted by Flasch186

depends on who you ask

Indeed. K Street and Wall Street really love the idea.

[sterlingice]

I'm trying to figure out how the cost is only $1.7B. We're talking about billions in lost home values and that's the supposed cost of a "bailout". That sounds like a tax writeoff for a couple of companies that isn't even that much money. What's the deal behind the deal here?

SI

[flere-imsaho]

Originally Posted by sterlingice

I'm trying to figure out how the cost is only $1.7B. We're talking about billions in lost home values and that's the supposed cost of a "bailout". That sounds like a tax writeoff for a couple of companies that isn't even that much money. What's the deal behind the deal here?

The $1.7 billion number is the projected cost of defaults on the new, government-backed mortgages. So if a homeowner with a current "bad" mortgage (i.e. an ARM that's now too high to pay) gets a new, lower-cost, government-backed mortgage and then defaults on it, the government, not the original bank, has the bad debt on its books. So the taxpayers pay for that.

The number doesn't address the lost home value, as that's already passed by the time this transaction takes place. It also doesn't address money lost in when the mortgage-backed securities lost their value, as much of that has already been written off (though, again, most of that was also subsumed by the government when the Fed agreed to do it earlier this year).

This is S&L all over again. Financial institutions make a bunch or horrifically bad mistakes that even a 5-year-old could see weren't a good idea, and then go crying to the government to help them out.

[Tekneek]

There is no shortage of people who come out of the woodwork when individuals want to get bailed out from their mistakes, but they get harder to find when business comes around looking for handouts. I'd rather just have the economy collapse than continue living with these double standards.

[st.cronin]

Originally Posted by Tekneek

I'd rather just have the economy collapse than continue living with these double standards.

I don't think I believe you.

[molson]

Originally Posted by flere-imsaho

when the Fed agreed to do it earlier this year).

This is S&L all over again. Financial institutions make a bunch or horrifically bad mistakes that even a 5-year-old could see weren't a good idea, and then go crying to the government to help them out.

You could say the same about about lendees crying to the government.

I'm against either getting these kind of benefits. The people and businesses it penalizes are those with good judgment, which is a quality we should reward.

A dumb-ass lender or company shouldn't be put in close the same position as someone that acted responsibility. That's what this country, should be about, IMO. An opportunity - if you work hard, do your homework, don't do anything stupid, you should come out ahead. If you don't, you shouldn't be subsidized by those that do.

[molson]

Originally Posted by st.cronin

I don't think I believe you.

Sadly, I do.

He's the classic example of a guy who wishes for bad things so his political views can be promoted.

[Tekneek]

Originally Posted by st.cronin

I don't think I believe you.

Probably right to doubt it, but I am really tired of everybody trying to hold individuals to a different standard than business enterprises. If anything, business should be held to a higher standard than some regular Joe. If getting bailed out is bad for the average person, it is just as wrong for any business entity as well.

[Tekneek]

Originally Posted by molson

I'm against either getting these kind of benefits. The people and businesses it penalizes are those with good judgment, which is a quality we would reward.

That is the way I feel about it. Unfortunately, according to the FED, these banks have intertwined their financial deals to the point that it is feared that the collapse of one would create a domino effect leading to the complete collapse of the economy. I'm sure this point was not lost on the managers who created this mess.

[Tekneek]

Originally Posted by molson

Sadly, I do.

He's the classic example of a guy who wishes for bad things so his political views can be promoted.

What political view is that? The elimination of double standards?

[st.cronin]

"The greatest good for the greatest number."

I feel like that is the criteria that should be used to judge this, not who comes out ahead.

[Tekneek]

Originally Posted by st.cronin

"The greatest good for the greatest number."

I feel like that is the criteria that should be used to judge this, not who comes out ahead.

A business should be allowed to fail, just like an individual can. That's how capitalism works. When times are good, these same financial institutions would be whining about how they want an open and free market without government intervention or regulation.

[st.cronin]

People talk about banks like they're goblins or trolls, but how many people work for banks or have stock in banks? And pretty much everybody keeps their money in banks, and uses banks for lines of credit.

Banks are people - not literally, but when a bank fails, there are people who lose.

[Tekneek]

Corporations are treated as people under the law. That's how they get to have Constitutional rights to free speech, get to hold copyrights, patents, etc.

Sure, there are people who lose. That's why FDIC exists. They are there to mitigate some of the risk to those who have deposited money with banks that later fail. If the plan is to never have a bank fail in this nation, why does FDIC even exist?

"People" lose every time that a business fails, but that is what happens in capitalism. It sucks, but it is hardly a good reason to allow some businesses to fail and not others.

[Flasch186]

they let Drexel fail. It's a broader view they are trying to take.

[st.cronin]

Originally Posted by Tekneek

"People" lose every time that a business fails, but that is what happens in capitalism. It sucks, but it is hardly a good reason to allow some businesses to fail and not others.

Well, I think its an excellent reason. Note that I have no opinion on this particular problem - I don't understand the details nearly well enough. But I think the function of government in a crisis like this is to mitigate the damage to the economy as much as is reasonable, and it seems to me plausible that helping the banks makes sense.

[Tekneek]

Originally Posted by st.cronin

But I think the function of government in a crisis like this is to mitigate the damage to the economy as much as is reasonable, and it seems to me plausible that helping the banks makes sense.

You may be right.

You only hear the mantras of "capitalism" and "free market" when it is favorable to business to promote those concepts. When they are retreating, you don't hear them talking about it at all. I'd like to see those "brave" and "smart" people who ride the wave of deregulation and capitalism during good times actually stick by their guns when times get tough. They want government out of their way when it might prevent them from making an extra dollar, but they cannot wait to have government come back in when it might save them a dollar. I don't see the integrity in that.

[Flasch186]

from my parents foreclosure thread, one problem IMO, IMO is that the banks dont seem to be able to help themselves. There are people, like my parents, who dont want to get foreclosed on (they havnt yet) and want to rework something out with their lender but cant get them to respond to their cries. Instead the banks seem paralyzed and continue to accept foreclosure after foreclosure instead of being able to stave off the event and mitigate their own loss. BTW this is factual and a quick search will show you that the banks have been able to reach less than 5% of those that they think need help.

[flere-imsaho]

Originally Posted by molson

You could say the same about about lenders crying to the government.

Wait, that's exactly what I said. Do you mean "lendee"?

I'm against either getting these kind of benefits. The people and businesses it penalizes are those with good judgment, which is a quality we should reward.

Yes and no.

I would prefer to see free enterprise succeed and fail largely on its own merits. I would prefer to see regulation employed almost always only when individuals or corporations in the system act illegally or in such a way that's obviously detrimental to the entire system as a whole.

But.... In such cases as the subprime mess, if nothing was/is done to manage some of the losses, you're looking at a potential serious impact on the economy. Even worse than what we've seen already. Although maybe we're going to get there regardless of what the government does (or tries to do).

However, instead of the government just blanket bailing out individuals and/or corporations (and we've seen much more of the latter than the former, sadly), I'd prefer an approach as I've described earlier in this thread, which is equal stick and carrot, and to let these individuals and corporations shoulder their share of the pain.

It's a balancing act, but that's part of the job.

[flere-imsaho]

Originally Posted by Tekneek

Unfortunately, according to the FED, these banks have intertwined their financial deals to the point that it is feared that the collapse of one would create a domino effect leading to the complete collapse of the economy. I'm sure this point was not lost on the managers who created this mess.

Here's an idea: treat these corporations like individuals. If they've so fucked up the entire system because of their stupidity, then bail them all out, but... garnish their corporate earnings to help pay for the bailout.

Originally Posted by st.cronin

People talk about banks like they're goblins or trolls, but how many people work for banks or have stock in banks? And pretty much everybody keeps their money in banks, and uses banks for lines of credit.

Banks are people - not literally, but when a bank fails, there are people who lose.

This is just semantics, though. People aren't really criticizing the banks as entities made up of thousands of regular people who service millions of regular people. They're critizing the managers and leaders of these institutions who either got in over their head or just plain acted illegally. For the sake of brevity, however, it's just easier to say "banks".

And that's not even to mention that some of these institutions are hedge funds or high-end investment firms who aren't exactly made up of the "little guys".

[molson]

Originally Posted by flere-imsaho

Wait, that's exactly what I said. Do you mean "lendee"?

I did.

Every loan agreement is different. Some are accurate on their face, and one side just makes a bad deal because they didn't do their homework, they were reckless, or they took a calculated risk that didn't pan out. Sometimes there's fraud and illegality. In the latter case, it's not a valid contract, I have sympathy for the victim, and full restitution should be paid by the wrongdoer (not the taxpayer). A company acting illegally is a HUGE drain on the system and I'm all for aggressive criminal prosecution, restitution, etc, etc.

I do understand that there's a negative impact on the economy as a whole, but I don't think that's necessarily a bad thing long term. We're so afraid of the lows but they're often necessary to create the highs. Lower home values create opportunities. Tougher credit means less foreclosures. The system being down doesn't mean the system isn't working.

[Logan]

Originally Posted by Tekneek

Corporations are treated as people under the law. That's how they get to have Constitutional rights to free speech, get to hold copyrights, patents, etc.

Sure, there are people who lose. That's why FDIC exists. They are there to mitigate some of the risk to those who have deposited money with banks that later fail. If the plan is to never have a bank fail in this nation, why does FDIC even exist?

"People" lose every time that a business fails, but that is what happens in capitalism. It sucks, but it is hardly a good reason to allow some businesses to fail and not others.

There are banks that have already failed, and there are many more banks that will fail regardless of any "bailout" (see the FDIC's attempt to bring people out of retirement to deal with the upcoming work).

These banks are not being bailed out because, generally speaking, the only ones who will lose, outside of a small group of shareholders, are those who are inconvenienced enough to have to get their money back through the FDIC. Flere is right...its the interconnectedness of these larger banks, and our general reliance on these banks for a huge part of our nation's economic activity, that's the problem. It's not as simple as "they made the mess, they should deal with it." We all will deal with it in a way that no one wants to see and that's why they need to survive.

[Tekneek]

Originally Posted by Logan

its the interconnectedness of these larger banks, and our general reliance on these banks for a huge part of our nation's economic activity, that's the problem. It's not as simple as "they made the mess, they should deal with it." We all will deal with it in a way that no one wants to see and that's why they need to survive.

Which leaves a blueprint behind to others as a way to keep their bank afloat. I already stated earlier in the thread that these banks are being saved because they made sure that they were too important to fail. I would expect banks that are too important to fail to make sure they weren't on the verge of failure, but these banks apparently thought it meant they had a free pass to engage in high risk activity because they wouldn't be ALLOWED to fail. They didn't see their position as a reason to be more responsible, but rather as a safety net for their irresponsible behavior.

[Logan]

Also just want to add that this is most likely a blip on the radar compared to what's coming when commercial real estate officially goes bust.

[Logan]

Originally Posted by Tekneek

Which leaves a blueprint behind to others as a way to keep their bank afloat. I already stated earlier in the thread that these banks are being saved because they made sure that they were "too important to fail." I would expect banks that are too important to fail to make sure they weren't on the verge of failure, but these banks apparently thought it meant they had a free pass to engage in high risk activity because they wouldn't be ALLOWED to fail.

It doesn't matter how they got there; all that matters is the end result. Hell, take the CEOs and VPs and the rest of senior management (we all knew they were aware of the shit they were peddling, take a look at the results of the SEC's investigation into the credit rating agency's corruption for more proof) and throw them in jail, banish them to burn for eternity, whatever you want. But it doesn't change the fact that we are where we are right now, and simply teaching these banks a lesson so that 50 years from now, another bank doesn't make the same mistake...that's not feasible.

[Tekneek]

Originally Posted by Logan

But it doesn't change the fact that we are where we are right now, and simply teaching these banks a lesson so that 50 years from now, another bank doesn't make the same mistake...that's not feasible.

They won't learn the right lesson regardless. Lots of banks collapsed back around the Great Depression. It did not stop people like Phil Gramm (and others) from trying to unwind financial regulation so these banks can run unbridled into disaster all over again. It will happen again and again until people start accepting responsibility for their actions. These people did these things out of nothing other than greed, whereas an over-extended person who was just trying to get a home for their family could not be characterized the same way.

[Logan]

Originally Posted by Tekneek

They won't learn the right lesson regardless. Lots of banks collapsed back around the Great Depression. It did not stop people like Phil Gramm (and others) from trying to unwind financial regulation so these banks can run unbridled into disaster all over again. It will happen again and again until people start accepting responsibility for their actions. These people did these things out of nothing other than greed, whereas an over-extended person who was just trying to get a home for their family could not be characterized the same way.

I completely disagree with your last sentence, but that's besides the point.

What is the "responsibility" you want these people to learn? Is it worth it to have a further national disaster, economically-speaking, just so these guys can really understand what they did? Do you really think that because a lot of JPM/Chase/Lehman/Bear execs ruined the economy and paid the price for it, that's going to stop the future financial kingpins from becoming greedy? They're suddenly going to toe the line and only book conservative, fixed-rate loans while investing in treasury securties?

[Fidatelo]

I read in the local paper this morning that the Federal government here in Canada is putting in new rules for insured mortgages in hopes to avoid ever ending up in a similar housing meltdown. Apparently 40 year terms will be out (new max will be 35) and minimum 5% down payment will be in effect. I like the changes.

[sterlingice]

Originally Posted by Logan

Also just want to add that this is most likely a blip on the radar compared to what's coming when commercial real estate officially goes bust.

How far off from that are we? I know that as part of cost cutting measures, the company I work for (a big one)- closed a lot of offices around the country. I'm sure this is happening with other companies, too.

SI

[Logan]

Originally Posted by sterlingice

How far off from that are we? I know that as part of cost cutting measures, the company I work for (a big one)- closed a lot of offices around the country. I'm sure this is happening with other companies, too.

SI

Probably still a bit off. While it's being felt in many places, a big issue is developments that are still in the process of being built or have only recently been completed. All of these banks have been funding the construction, and they're considered "current" (i.e. nowhere near default because the scheduled interest payments have been made) but in fact these payments are being drawn from interest reserves that are structured into the loan. So in essence, the bank's are recording interest payments by just shifting the balance of the loan from the borrower's cash position onto the balance sheet.

Fast forward to when the interest reserve is tapped...now you realize that the construction delays, budget overruns, etc have caused the project not to be completed on time, which obviously delays the project from receiving cash flows from prospective tenants. Therein lies the problem. So a huge, huge amount of "current" loans are going to shift into write-down mode once the banks realize that there is no way they will receive the cash flow that can pay the loans once they're off an interest reserve and amortizing normally.

[Logan]

Good lord, Fannie and Freddie got crushed pre-market.

[JPhillips]

I was shocked at how much commercial real estate was empty in the St. Augustine Beach area compared to last year.

[Marc Vaughan]

Originally Posted by flere-imsaho

The $1.7 billion number is the projected cost of defaults on the new, government-backed mortgages. So if a homeowner with a current "bad" mortgage (i.e. an ARM that's now too high to pay) gets a new, lower-cost, government-backed mortgage and then defaults on it, the government, not the original bank, has the bad debt on its books. So the taxpayers pay for that.

This might explain why I've heard frequently of banks turning down what appear to be reasonable offers on foreclosed houses in my area.

Simply put I think they're hoping to get more selling them to the goverment than they would get on the free market.

[Logan]

I'm not sure how the sale to the government would work, but at least for nationally-chartered banks, if a house is foreclosed on and auctioned off, the bank only receives the amount that was still owed on the loan. There's no profit for them.

[Galaxy]

Originally Posted by Logan

Good lord, Fannie and Freddie got crushed pre-market.

What happen exactly?

[Tekneek]

A lot of FUD started spreading about Fannie Mae and Freddie Mac being insolvent, about to be bailed out, etc, overnight... At least that is the impression I got. When I saw competing headlines early this morning of it being insolvent, not being insolvent, needing an immediate bailout, and not needing an immediate bailout, I knew something was up.

[Tekneek]

Worst part about the market being dragged down by this, is that there will probably be another run made on oil as these fund managers/speculators dump other stocks and buy more oil futures.

[flere-imsaho]

Originally Posted by JPhillips

I was shocked at how much commercial real estate was empty in the St. Augustine Beach area compared to last year.

I heard on NPR earlier this week that there is 300 million square feet of commercial real estate currently vacant.

That's not good.

Originally Posted by Logan

I'm not sure how the sale to the government would work, but at least for nationally-chartered banks, if a house is foreclosed on and auctioned off, the bank only receives the amount that was still owed on the loan. There's no profit for them.

Bear in mind that the foreclosure price isn't likely to equal the amount still owed on the loan, so the bank loses money. If the bank sells the loan to the government, they at least get present value on the loan. That is the attraction to the banks.

[Flasch186]

the ethics side of the argument just simply got thrown in the trash today.

[Flasch186]

http://biz.yahoo.com/ap/080713/fed_mortgage_crisis.html

Originally Posted by Article

AP
Fed poised to curb shady home-lending practices
Sunday July 13, 12:13 pm ET
By Jeannine Aversa, AP Economics Writer
Federal Reserve ready to give home buyers more protection against shady lending practices

WASHINGTON (AP) -- Confronted by record foreclosures, the Federal Reserve is ready to give home buyers more protection from the types of shady lending practices that have contributed to the housing crisis.

ADVERTISEMENT
Chairman Ben Bernanke and his central bank colleagues were expected to approve a plan Monday that would crack down on dubious lending practices that have hurt many of the riskiest "subprime" borrowers -- people with tarnished credit histories or low incomes.

Proposed rules made public in December would:

--restrict lenders from penalizing risky borrowers who pay loans off early.

--require lenders to ensure those borrowers set aside money to pay for taxes and insurance.

--bar lenders from making loans without proof of a borrower's income.

--prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the homes value.

--curtail misleading ads for many types of mortgages.

--bolster financial disclosures to borrowers.

Consumer groups have complained that the new rules are not strong enough. Lenders worry they are too tough, could limit mortgage options for people and made it harder for some to obtain financing.

Expected approval of the plan comes as the Fed copes with investors' dwindling confidence in the financial health of the nation's two biggest mortgage companies, Fannie Mae and Freddie Mac, They hold or back $5.3 trillion of mortgage debt, about half the outstanding mortgages in the United States.

The Fed and the Treasury Department, consulting closely over the weekend, are exploring ways to shore up the companies. If one or both were to fail, it would deal a devastating blow to the already crippled housing market. Mortgages would become even harder to get and rates would rise.

The new lending rules may not get a test for some time because there are fewer home buyers these days, given all the problems in the housing and credit markets. Also, some of the shady practices -- along with some lenders -- have not survived, felled by the mortgage meltdown.

"Clearly this is closing the barn door after the fact," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business. Yet, she said, "this is a very important move. It absolutely will make a difference going forward."

Ken Wade, chief executive of NeighborWorks America, a network of housing organizations that promotes neighborhood revitalization, hoped the new rules would curb future abuses. "It's not going to do anything (to fix) the problems we're wrestling with right now, but there's still a need to create the rules going forward," he said.

Much will hinge on effective enforcement.

The plan would apply to new loans made by thousands of lenders, including banks and brokers. It would not cover current loans.

Those different lenders fall under a patchwork of regulators at the federal and state levels. So it will be up to each of these authorities to enforce the new provisions. "We have a very fragmented regulatory system. This will be a challenge to enforce. This will be daunting," Wachter said.

The Mortgage Bankers Association had asked the Fed to act carefully. Overly broad rules "could prevent many lenders from making loans to those borrowers most in need of credit and significantly increase the costs of credit for all borrowers," the association said in a filing with the Fed.

Under former Chairman Alan Greenspan, the Fed came under criticism for not acting earlier to address dubious lending. Some critics complained that Greenspan, who ran the Fed for 18 1/2 years, was not a forceful enough regulator, especially during the 2001-2005 housing boom when easy credit spurred subprime home loans and many exotic new types of mortgages.

Bernanke, who took over the Fed in early 2006, also took heat for what critics believe was lax oversight.

"How disappointed I am with all of us," Rep. Maxine Waters told Bernanke during a recent House hearing. "Members of Congress, for what appears to have been weak oversight of our regulatory agencies, and our regulatory agencies for what appears to have been weak oversight of our financial institutions," said Waters, D-Calif.

Bernanke replied: "Admittedly, it would be better if it had been earlier, but we have responded." He believed the rules would be "very effective" in stemming abusive lending practices.

Congress is working on legislation that would put into law some tougher provisions than those envisioned by the Fed. Prospects for final action are uncertain.

AP Business Writer Alan Zibel contributed to this report.

I dont understand. It's not the lenders fault. It's the stupid homeowners. Why would they need to curb something?

/sarcasm

[BrianD]

A few days ago I caught the tail end of some radio discussion about how odd it is that the government is now pushing restrictions to make lenders be more careful with risky loans when it was the government pushing lenders to make it easier for low income folks to get housing loans previously.

I don't recall lenders being pressured to relax their restrictions before all this trouble. Can anybody speak to this?

[Logan]

Yes, you're 100% right.

[Tekneek]

I am curious about this. Can anyone point me to when the government asked banks to not seek verification of income before offering someone any mortgage that represented 80% or more of the value of the house? Can anyone also point me to when the government asked banks to implement penalties for early payment of principle? I'm even more interested in the statements related to encouraging banks to not push escrow for tax and insurance payments, especially for any mortgages that represent 90% (or more) of the value of the home/property. I am not personally aware of that, but I allow for the possibility that it happened and definitely want to read about it.

[Flasch186]

The poorly regulated market and greed TOLD them to do it and push people into these loans because they made more on them (when they were resold in bundles). The best part is that many people who wouldve qualified for Alt-A or conventional loans were sold on loans in the subprime market so that the originator made more. In some cases (see Beazer & KB) the originator actually forged documents and applications to fill in those blanks you mention.

[Flasch186]

FDIC's Bair has put a halt to Indymac's homes in Foreclosure, 'We believe that a loan that is modified to a good faith Owner-operated household would always be worth more than a foreclosure.' Exactly what has been said in multiple threads but for whatever reason the banks just either cant or won't reach those that need the modifications. Maybe the Indymac failure will give the other banks some fair warning that they need to get their bearings when it comes to handling the loans on their books.

[Cringer]

Email received this morning, for some reason two days after it says it was sent in the body of the email, haha...........

To: Our Broker Partners
Sent: Sat Jul 12 14:51:22 2008
Subject: Indymac Federal Bank FSB

I have just come from a meeting with FDIC personnel and I am pleased to announce that as of Monday morning July 14th the REO Department will be back to business as usual.

There may be some minor changes in how we market property owned by IMB (less then 10% of our overall portfolio) but even those changes will be transparent.


I appreciate your support and our working relationship as we move forward during these historic times.



Thank You

[flounder]

Originally Posted by Tekneek

I am curious about this. Can anyone point me to when the government asked banks to not seek verification of income before offering someone any mortgage that represented 80% or more of the value of the house? Can anyone also point me to when the government asked banks to implement penalties for early payment of principle? I'm even more interested in the statements related to encouraging banks to not push escrow for tax and insurance payments, especially for any mortgages that represent 90% (or more) of the value of the home/property. I am not personally aware of that, but I allow for the possibility that it happened and definitely want to read about it.

They didn't quite do that, but they did require Freddie Mac and Fannie Mae to purchase more "affordable" loans. Then they looked the other way as they bought subprime loans left and right.

In 2004, as regulators warned that subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development helped fuel more of that risky lending.

Eager to put more low-income and minority families into their own homes, the agency required that two government-chartered mortgage finance firms purchase far more "affordable" loans made to these borrowers. HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count billions of dollars they invested in subprime loans as a public good that would foster affordable housing.

[Tekneek]

And this was happening under the watch of George W. Bush, supposedly a conservative?

[JPhillips]

Originally Posted by BrianD

A few days ago I caught the tail end of some radio discussion about how odd it is that the government is now pushing restrictions to make lenders be more careful with risky loans when it was the government pushing lenders to make it easier for low income folks to get housing loans previously.

I don't recall lenders being pressured to relax their restrictions before all this trouble. Can anybody speak to this?

It's a big myth that this is a low-income, subprime crisis. This is a general mortgage problem that only partially has to with low-income buyers.