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So realistically, what percentage of loans can be saved?
If they can't make the payments on a creative mortgage solution, what makes anyone think refinancing into a 30 year fixed is going to help. Even at a 0.5% reduced rate.
I really hope that the new loans are saleable in the bond market. How about make them all recourse loans to reduce the risk of default.
The actions I described today are "first steps". Today and going forward, Fannie Mae can and will do more than our part to help lenders to protect homeowners
This was the best part of that speach this is the begining not the end.
Although it may or may not be a long-term solution it seems to me that the Fed could address the ARM reset problem with a minimum of fuss: Ease short-term rates just enough to release the worst of the pressure.
If this really is a problem of the magnitude it's alleged to be (no, but just for the sake of argument) that's got to be an option being considered, since legislation couldn't possibly arrive quickly enough to help.
Sebastia
Anthony, go back to this post and look at the expected 2007 resets by CLTV and FICO buckets, and tell me there aren't some subprime ARM borrowers who could qualify for a Fannie Mae fixed rate.
Calculated Risk: Fannie Mae on 2007 ARM Resets
The whole reason these people got exotic financing which they obviously can't afford is because that is the ONLY way they could afford to purchase property. So the easy way to look at it is that property values must come down. Why can't all of these entities see that even if they reduce rates by 1% or more, these borrowers CAN'T afford fixed rate fully amortizing payments! If you paid too much for a property, you won't be able to afford any type of "traditional" loan. The markets must clear to establish some sort of equilibrium.
After thinking about it, I'm not even too worried about these "bail outs" because they can't even be applied to most of the borrowers in trouble. To qualify, a borrower would have to be current on their payments AND have the income to support a slightly lower rate/longer term fixed rate fully amortizing loan. How many of the borrowers in trouble have these characteristics?
Sebastian, most ARMs adjust based on either 6-month or 1-year money (LIBOR or CMT). Even if the Fed eased on overnight loans to banks, it is not clear to me that these indices would plummet fast enough to bail out a borrower whose margin over that index is somewhere between 3.50% and 6.50%.
And I can't say I'm all enthusiastic about the idea of the yield on my savings account going back down to 75 bps so that subprime ABS holders can keep earning that kind of spread over LIBOR.
Seriously, many of these loans originated in late 2005 and 2006 will be upside down and will be going deeper in the red as the downturn progresses. Struggling to cover payments on those zero down loans that are deep underwater by borrowers that have shown a lack of ability or willingness to honor financial agreements is very unlikely to be successful - IMO. Where is the motivation going to come from as asset prices sink?
This was a gravy train chasing exercise for most if not all participants. A get-rich-quick scheme. Once that enticement is removed - the ATM is broken - so is any motivation. Hunting for the few that might play along is going to yield a lot of grief.
I hate to say it but the bottom line is that the industry and the borrowers did this to themselves collectively. The industry created products with lax lending guidelines and the borrowers snatched them up. There is/was greed on both sides of the equasion. The only thing that should be looked at at all is whether or not borrowers were steered into higher rate/higher commission products by lenders/brokers when they originally qualified for lower rate, more secure financing instead of exploding ARMS.
At least the problem is hitting right along the fault line next to Mortgage Servicing Fraud issues. The crossover from today's "subprime" issues makes it that much easier to make the jump to legitimate MSF problems. I can only hope that someone finally catches on to this soon because, from my own experience, no one wants to talk about it at any level of government or media - at least not yet.
Tanta:
I am reading this: Still Short Downey Financial Despite Jump on Earnings -- Seeking Alpha
and trying to add up all the Neg-amortization that DSL recorded as profit over the years - over $500M (of neg-amo)
granted that some of those loans have been re-fi or sold but many of them still standing.
What would be a reasonable % to estimate how many of these loans DSL will not see any of the neg-amo that was booked as profit for the past 4 years.
This is not just 1 Quarter (at a time) hit on earning but each time such loan deafaults the hit goes back many quarters and actually reduce book value ?
How can we make an intelegent guess what is tyhe liability /potential loss they have there ?
Do we just do it on the over all outstanding loan amont ($13B) or seprate for loan amount and neg-amo counted as profit and added to DSL book value ?
Tanta
Question
Was he talking about a program called Homestay, that uses 40 year mortgages to salvage a small percentage of subprime loans. I have heard that this new loan program will have a maximum of 20 billion dollars on hand.
Won't qulaification be based on the ability to pay back the loan over the life of it?
Also does anyone know if this bailout only be for owner occupied homes?
Tanta said: "...Sebastian, most ARMs adjust based on either 6-month or 1-year money (LIBOR or CMT). Even if the Fed eased on overnight loans to banks, it is not clear to me that these indices would plummet fast enough to bail out a borrower whose margin over that index is somewhere between 3.50% and 6.50%..."
No, but it might be enough to bring "legitimate" borrowers into the market to buy those properties. A qualified buyer might not be interested in buying at full price with a 6.25% fixed-rate loan, but might be very excited about buying at a 10% discount with a 5.75% mortgage.
Sorry, I've been reading a lot of economics books lately...elastic demand curves and such.
Sebastian
p.s. You might be able to sell newspapers, as your writing definitely has a Maureen Dowd quality, sometimes bordering on Anne Coulter.
s.
I love how they focus their noble attempts to foster homeownership for the masses on affordable financing. How about addressing why the ratio to average home price to average income levels is so high. That should be the focus of any efforts to address and solve the problem. Investigate what caused the prices of homes to increase so much relative to incomes, or more bluntly ,what caused this housing bubble to happen. I will give them a hint.Who benefited from this? Go look at what the Federal Reserve did starting aroung 2001.Who owns the Federal Reserve?. The Big Bankers pulled another hose job on us.
Subprimes "qualified" using both super low interest rates AND extreme DTI ratios. There's no way they can refinance.
I have heard that this new loan program will have a maximum of 20 billion dollars on hand.
HomeStay is apparently the name of the proposed Fannie Mae product. I have not yet seen a dollar figure named by Fannie; if anyone else has, please drop the link for us. The only $20 billion number I've heard so far is Freddie's (see posts below).
Tanta
Testimony by Daniel H. Mudd Before the U.S. House Committee on Financial Services
Right now, we're getting at least 15,000 applications for subprime refinancing coming into our system per month. Because we have been adhering to our own prudent standards throughout, even before our new enhancements, 80 percent got a "yes." Altogether, we estimate that about 1.5 million homeowners who face resetting ARMs and potential payment shock this year and next could be eligible for our loan options. Certainly, lenders may choose someone else to buy or securitize the loans, but 1.5 million would be eligible for our options; we think this will also help establish a benchmark in the market for safe loans.
Fannie Mae counter=5
They don't give a dollar amount.
Tanta-
If the borrower had the FICO and the CLTV for a "better" product, doesn't that mean that they must have chosen the loan they did just because it offered a lower initial payment?
deb, that's certainly the most likely explanation if you are talking about borrowers who understand the terms of their loan and who know enough about where the market is for rates and points to be able to judge what they got.
I don't for a moment believe that everyone who got a 2/28 with a prepayment penalty or an Option ARM had any clear idea what they were getting or whether they were getting a market rate or not. In those cases, which I think are the predatory ones, it's quite possible that the borrower would qualify for a better deal on a Fannie Mae-eligible loan.
So whether these folks were foolish--taking the low-cash-flow option that just became high-cash-flow--or taken advantage of, they have the choice, if they can find an originator offering one, to refi into a more reasonable loan. My sense is that only time will tell to what extent this will happen.
It looks like someone wants a do over.
Business & Financial News, Breaking US & International News | Reuters.com
Emmanuel Goldstein said: "...Who benefited from this? Go look at what the Federal Reserve did starting around 2001. Who owns the Federal Reserve?. The Big Bankers pulled another hose job on us..."
Well, as a homeowner myself, you'll have to add me to the list of "villains", because I've benefited substantially since 2001.
Sebastia
Sebastian
Keynes words in his book, The Economic Consequences of Peace:
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become profiteers, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (Italics his) (235-236) 4
Good for you brother.
I ran across a poll about a year ago where homeowners were asked if they had a fixed or adjustable rate loan.Half of them knew.for the next couple of months i made it a habit to ask people if they had a fixed loan,and got pretty much the same results,although my sample size was too small to be valid.Mencken was a Prophet when he said "No one has ever gone broke by underestimating the intelligence,or the good taste of the american people"
Very late to the party, but this statement must be addressed:
"[A]rbitrary and artificial tightening of credit & may be counterproductive -- that is, it may dry up credit for members of minority groups, the poor, and the 70 percent of Americans who live from paycheck to paycheck."
Unless I'm mistaken, it was the somewhat arbitrary and artificial loosening of credit that created this mess. What he refers to as "arbitrary and artificial tightening" is nothing more than a return to sane lending standards.
As noted above, the loose credit did a great deal to build the unstable house of cards financial institutions are now scrambling to escape from less they die of paper cuts in the avalanche.
sebastian,
For the home you mention, a legitimate buying situation is not 100% of the price at 6.25% , or 10% discount at 5.75% .
It is 25% discount from current price, by a buyer who puts down 20% down.
The market will clear, some of the craziness and unjustified transfer of wealth (from savers to debtors and speculators) that's gone on the last several years will be undone, and there will be a semblance of sustainability restored to the out-of-control system.
Don't go about suggesting further debasement of an already debased currency to bail out a bubble.
harim said: "...For the home you mention, a legitimate buying situation is not 100% of the price at 6.25% , or 10% discount at 5.75% .
It is 25% discount from current price, by a buyer who puts down 20% down..."
Respectfully, that's an economist's "ivory tower" viewpoint, things are very different in the real world.
A married couple with a baby on the way (whether it's their first or not) has a very different perspective when they're house-hunting, and I promise you that the husband isn't going to get very far with the "I know you love it, Honey, but let's bid 25% below the market" tactic.
))
With all the focus on factors affecting housing supply and none on factors driving demand (which can be incredibly powerful), it's easy to get a wrong-headed view about the continued "weakness" housing market.
Sebastia
sebastian,
i don't know what you're talking about..
You suggested the FED needs to reduce the cost of money more to support prices at close to the current (IMO terribly inflated and out of whack) prices.
I suggested that there is no legitimate demand at these prices without funny money. You need to stop thinking of current prices as "market" prices, which seems to show up in the last post.
In fact focusing on the demand side would hasten the conclusion that supply and (under legitimate, sustainable conditions) demand won't meet unless price is far far below current (what you say "market" prices). I suggested it's atleast 25% below.
When NASDAQ was at 5000, it was the "market" price . That's not set in stone. Similarly, the current prices are not "market" prices.
And that couple or whoever would be extremely happy to bid 25% below last year's transaction price (not "market price").
Most importantly, if they don't have a significant amount of skin in the game (like 10-20% down) and can actually pay off the loan they're being given they have NO business bidding.
edit to last post(too bad no editing feature on this board):
replace "current price" with "last recorded price" or "peak recorded price" in my post.
Reasonable mortgage rates and terms place for decades providing reasonable profits worked for the country. The financial boys and girls, with their tax schemes, @zero capital gains on several hundred thousand dollar homes they purchased for less than one third the price, jumbo loans moving prices up further. The boomers created real life Monopoly board game.
Twenty per cent down is a farcical. Paying off the predatory prepayment penalties ,etc. is a farce. Predator companies staff flippers, second and third properties deserve no help or sympathy.
Excuse editing errors above.