Never let the Three Stooges work on your house (of cards). They will only make things work. It is the one immutable law in the Universe. Maggots feed off dying flesh, they don't breathe life back into the carcass.
Nov. 30 (Bloomberg) -- School districts, counties and cities across Florida are scrambling to raise cash after being denied access to their deposits in a $15 billion state-run investment fund.
[snip]
The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, which kept its entire $2.7 million of cash in the fund.What we just experienced here is a classic run-on-the bank meltdown.''
Thousands of school districts, towns and fire departments across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money-market funds, are supposed to invest in safe, liquid, short-term debt such as Treasuries and certificates of deposit from highly rated banks.
[snip]
Standard & Poor's yesterday said it contacted state officials about whether the fund holds any money for debt service payments by local governments and whether that cash will be made available. The credit-rating company said it hadn't yet received information and was monitoring the situation.
The Florida fund has invested $2 billion in structured investment vehicles, or SIVs, and other debt tainted by the collapse of the subprime mortgage market, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding similar investments, in smaller quantities.
I want to thank everyone involved with trying to stop this bubble from popping for guaranteeing that future generations will not be able to afford to buy a house.
Really, I have NEVER heard a good argument that keeping a bubble inflated is good for the economy.
If the Govt bails out defunct homeowners its the ultimate bail out of the banks, and completely corrupt. That Bush is behind such stupidity is of no surprise. The man and his hanger ons are morons.
Nixon tried wage and price controls and, as always, they didn't work. Cities tried rent control, and - over time - realized the failure of that policy. Now, the administration is trying "interest rate control". Won't work either - too many borrowers can't pay the mortgages they currently have, pre-reset, and too many more won't pay a mortgage on a depreciating asset. Further, lenders will LOVE giving ARMs to borrowers after this, right???
If the teaser rate freezing plan is only for those who can pay current rates but not the higher rates and nothing for anybody else, what are the legal implications. What sort of legal argument can somebody who gets bucketed into "can pay more so no bailout for you" construct? Any legal eagles or beagles care to comment ?
Peterbob, freezing rates only partially delays the inevitable by delaying mushrooming supply. In fact, it may not even do that: lenders may raise interest rates on future homebuyers to compensate them for the risk that the gubmint may devalue their mortgage assets. If rates for future homebuyers increase then prices today will have to go down. Nevertheless, I think this moves us out of the "pain for the next 2 years" column into the "pain for the next 10 years" column. This is not good news if you want to avoid slow and crushing housing deflation.
There is no way on heaven and earth to keep prices out of whack forever.
government officials are trying to avoid "fast pain" rather than "slow pain." maybe they should talk to the Japanese about their experience with a real estate bubble (and constantly lower interest rates) and see if "slow pain" is really preferable.
The name alone makes it seem likely that this plan (or at least its name) comes straight from Bush. He couldn't administer an evacuation from a wet paper bag, but he's great at coming up with pretty, Orwellian names for stupid projects. "Operation Infinite Justice" and "No Child Left Behind" come to mind.
His job is to keep sentiment from swirling down the toilet during the holiday shopping season.
Once January arrives, he can talk to Greenspan about keeping bubbles inflated with negative real Fed rates. Oh, and about how to find a good publisher for the eventual book.
=============================
How will it be deteremined who can and can't make their payment? If the borrower is underwater and decides to walk away, is that enough?
MarkS
LOL ! Yeah, I can see the Catch-22 now -
You can prove you can't make higher payments by walking away so you now qualify for the bailout.
But, hang on, you just missed a payment, you aren't current and our rules say only those who are current qualify for bailouts !
I've heard supposedly smart people (including hedge fund managers) say recently that the market is going to the moon, because the fed is going to just cut and cut. When I asked why this should happen, they said "because it always has."
I don't think so. I don't think we've ever had (in my lifetime) a situation where a Fed chairman felt such pressure to prevent a record-high market from falling any. I'm with you, CR. The fact that Bernanke just caves to the market is a real sign of insecurity and weakness, and it will come back to haunt him when the market gets disappointed.
Rate cuts take time to work on the economy, if they work at all. When the market has roared after cuts, it's often been after the recession had begun and the market had already tanked.
Speaking of the Santa mission, did some better numbers on the Black Friday shopping weekend ever come out? When have they come out in the past when there was something to crow about?
You are considering buying a mortgage backed security in 2008.
What would you pay for get the funds flowing from a contract that might be changed by the goverment at any time? (even by Republicans, for god sakes!)
Then they will wonder why mortgage rates don't come down when they cut rates.
"How will it be deteremined who can and can't make their payment? If the borrower is underwater and decides to walk away, is that enough?"
MarkS
Moreover, if you are underwater and the choice is moving to a rental, paying less for shelter and consequently having MORE disposable income or paying a bit less to "own" an obviously depreciating asset and STAYING underwater, what would you choose?
I think more would bite the bullet and get foreclosed. Sure, a credit hit would be painful but that can be rebuilt. Living in a dead "asset" would simply mean prolonged agony and uncertainty. Wouldn't most people just "move on"?
This plan won't work on so many levels it can't be anything other than just a gesture.
Hey don't knock it; the USA runs on hope; it's all we've got. Hope that the Chinese don't stop buying our paper; hope that the Gulf oil flow doesn't stop; hope that your house isn't foreclosed on; hope you don't lose your job; hope we get a decent President next time round; hope Iraq doesn't get worse; hope Bush doesn't go mad and bomb Iran, etc., etc., etc., etc.
REBear provided the Goldilocks comment on Bernanke: I don't know why we are bothered about this announcement.
Paulson also favors a strong dollar.
REBear | 11.30.07 - 12:29 pm |
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Some--actually, most--days I'm happy to be a renter. I would be pissed if I had recently purchased with a fixed rate mortgage that I could pay, my house was losing value, and my neighbors who bought at the same time pay 50% less!
Q: Who's really the sucker now?!
A: An FB with a fixed.
Here's what I think will happen in Florida. They will allow limited emergency withdrawals next week. Then, after a cooling off period of several weeks, they will break the buck and give back 95 cents or so but with limits on withdrawals. Eventually, everyone will be able to exit and everyone will. Within 6 months this fund will be gone, and probably others like it in other states. A lot of commercial paper will be unwound.
This mortgage freeze plan will have a lot of unintended consequences, if it actually amounts to anything. My guess is that it is nothing but window dressing designed to staunch the panic and delay the pain until after the election. Republicans do not need a couple million foreclosures in the year before the election. Bernanke and Paulson will do their best to help the team out and leave the next President holding a much heavier, stinking bag of crap.
Someone needs to speak for the tens of millions of small savers ,many retired, whose income is somewhat based on interest from MM funds, CDs, and savings accounts and who will see a big reduction in their income when rates are cut (as they will be as part of the deal) in the face of rapidly rising grocery, energy, and medical costs. This is where much of the bail out funds will come but these people are transparent to power and no one speaks for them but many will be seriously hurt.
I have listened for days to discussions about the need for rate cuts and not once has the cost to savers been mentioned - not once.
You sound surprised. These guys aren't Republicans - they're Neocons. What's in YOUR Treasury?
The fundamentals of nature (market forces) haven't changed. Our Captain, Commanderer, and Deciderer and his officers steered the ship into perilous waters, and now they're bailing like hell to keep it afloat - all the while telling the passengers that it's perfectly normal for the ship to list 15 degrees while water rushes over the gunwales. Just keep on gambling, folks!
crispy&cole have you been living in dizzyland for the last century? The United States has been a fascist state since post world war 2. Mousillini invented it and the Yanks have taken it to its extreme. From energy to foodstuffs, from communication to the courts the national security state marches hand in glove with the corporate state. History repeats , ryhmes and then rams a police baton up yer arse if u ain't careful.
I have become convinced that all the talk of mortgage bailouts is just that; talk carefully crafted to keep people paying and hoping. The Florida halt on withdrawls is more important. Everyone is reevaluating their actual as opposed to presumed liquidity and exposure. It also just killed the Super-SIV proposal as well. You cannot simultaneously sell these things at the same time you are prohibiting getting out.
Mike in Long Island As time goes by it's as if CR's writing style is becoming more Tanta-like - or is it the other way around???
No, what's happening is that the claims of "economists" become more and more like the semi-literate ramblings of the journalists. I wouldn't call this a good sign, but I certainly agree with CR's take.
Despite the use of the term "swap," CDS are really insurance contracts. A protection seller (effectively, the insurer) agrees to make a payment to the protection buyer if specified bad things happen (a "credit event" usually defined as bankruptcy or failure to pay) to a "reference entity" which can be a company ("single name") or an index. See here for more detail.
Now while it may look like the risk being traded here is default risk, there is a second risk: counterparty risk. CDS are the largest credit derivative product, and they are traded solely over the counter. That means that the CDS agreement is only as good as the protection seller that wrote it.
When Warren Buffet described derivatives as "financial weapons of mass destruction" he wasn't worried about speculators blowing themselves up, but about counterparty risk:
from the comments:
The hedge fund participation is the fatal defect in the CDS system.
The part that was worthy of particular attention was this:
"According to printed statistics and consistent with anecdotal evidence, hedge funds are sellers of 32% of all CDS, insuring exposure of $14.5 trillion.[xvii] Recent estimates indicate that the entire hedge fund market is approximately $2.5 trillion in net assets under management."
So hedge funds have written $14.5 trillion in credit insurance.
The question is:
Assuming the economy went into a recession as severe as let's say 1990-1991 (and that is being terribly kind), what kind of loss rate (%) would be experienced on the credit insured by CDS?
What about a loss rate from the 1982 or 1974 recession?
Therefore, how much of that $14.5 trillion would the hedge funds be called upon to pay in claims?
========
Could a run on CDS policies lead to the implosion of the Hedge Funds?
If so, that worse-financial-crisis-since-1929 prediction takes on a compelling urgency.
This could make the Florida LGIP run look like a day at the beach.
I have noticed that a lot of people are getting foreclosed on. Has anyone else noticed this? Is there something our government can do about that?
larrystoken35
ur that guy from Broker Universe that gave so many ppl a good bellylaugh aren't u? and u dared stray over here?
Is anyone shocked that the 1-2 punch of Paulson's DOA plan and Bernanke's not-so-obtuse reference to undesirable equities declines comes the day before many IBs & Hedgies close their books out and prepare their statements?
Coincidence? Or is the "Working Group" really a conspiring group.
bill wrote, "Why is Libor climbing with a pending cut in the Fed Fund rate? That's really disturbing."
IMO, LIBOR is reflecting banks' lack of trust in each others balance sheets. They know what's on theirs and don't want to risk a loan to the other guy who probably has equal badness on his. The Fed is injecting liquidity. The banks are concerned about solvency.
At the moment, "BS" is an appropriate abbreviation for Balance Sheet in the financial world. Sad.
From the article " Mr. Paulson, who spent 32 years at Goldman Sachs Group Inc., has been on the phone nearly every day in recent months with the heads of financial institutions such as J.P. Morgan Chase & Co., Bank of America Corp. and Lehman Brothers Holdings Inc. "
Here is how the phone calls went:
CEO: "Look if we extend these things, we may end up taking bigger losses due to deflation, or at least housing deflation"
Paulson: "I really, really, REALLY don't think you should be concerned with deflation, if you know what I mean."
CEO: "Oh, I see, okay then! "
With these loans thoroughly securitized, how can they get all the creditors to go along with extending teaser rates or whatever after-the-fact fiddle is being contemplated?
can someone explain the Ted spread to me and why its more important than the Weighted Average on the TOMO of the FRBNY? i assume its Libor dollars they're referring to and not Libor Euros.
"I just don't think we have what it takes to prick the bubble... I don't think prices are going to fall, and I don't think they're even going to be flat. "
- Diane C. Swonk, chief economist at Mesirow Financial in Chicago, New York Times, Trading Places: Real Estate Instead of Dot-Coms, 3/25/05
"South Florida,'' he said, ''is working off of a totally new economic model than any of us have ever experienced in the past" according to a realtor who predicted that a land shortage will support higher prices indefinitely."
- New York Times, Trading Places: Real Estate Instead of Dot-Coms, 3/25/05
Paulson "incapacitated" him with a classic double finger poke to the eyes followed by a devastating "windmill head-bonk"...he was trying to take too much of the PR...
I'm wondering when they changed the law to make the Federal Reserve a government funded boiler room for the stock market. I didn't know that was a government function. But I suppose the policy of socialism for the rich and conservatism for the rest of us is what Bush meant by compassionate conservatism. After all, you have to have to weave a social welfare net so that the investment bankers don't get all depressed about the smaller bonuses this year. That would be a national crisis!
One of the unexpected results of tilting the economic landscape so that the top ten percent engross a good 40 percent of the national wealth is that they will use the Government as their piggy bank, without any ideological compunctions at all. Count on it.
Here's what I think will happen in Florida. They will allow limited emergency withdrawals next week. Then, after a cooling off period of several weeks, they will break the buck and give back 95 cents or so but with limits on withdrawals. Eventually, everyone will be able to exit and everyone will. Within 6 months this fund will be gone, and probably others like it in other states. A lot of commercial paper will be unwound.
Agreed. There is a lesson to be learned here. The number of investors was low (I still think of them as depositors, but whatever). It only took a small number of people making withdrawal decisions to hurt the fund. The paper quality may be no better or no worse than any other similar types of funds, the difference was the ratio between the fund size and the number of investors. If other funds, (e.g. Florida Retirement System) are holding similar paper, they do not have the same type of 'bank run' exposure because the investors (i.e. employees/retirees) have a much longer time period they expect the funds to be taken out. There would be a far smaller rush to the exits (if any). That doesn't make the investments any better, just the exposure to the run lower.
At the end of the day, the run on the LGIP may trigger a review of the paper that the other funds are holding. That may trigger additional orderly unwinding of those investments. At the end of the day, LGIP may be an unintended watershed event, in shining a searchlight on paper quality.
Though a couple people here have mentioned it, in general I haven't seen nearly enough talk about what a government-imposed unilateral contract modification would do in reality. It's a heck of a precedent.
It goes WAY beyond the economics of asset bubbles.
Rising mortgage interest rates are natural at this stage of the economic cycle, and the impact on homeowners with adjustable-rate mortgages including interest-only and payment-option ARMs should be relatively small, according to Treasury Secretary John Snow
(Per National Mortgage News - May 10, 2006)
Patrice Yamato, president of the Florida Association of Mortgage Brokers, insists the dangers of option ARMs are overplayed in the media. She said borrowers are informed twice in detail during the home-buying process about the specifics of the loan. What else do we need to do to make those borrowers understand? We go over it and they sign a disclosure and then its disclosed again at closing, Yamato said.
I agree that option ARMs are not for everyone but there are so many safety measures in place that that type of scenario thats being described in (articles) cant happen, she said. BradentonHerald.com 404
Could a run on CDS policies lead to the implosion of the Hedge Funds?
If so, that worse-financial-crisis-since-1929 prediction takes on a compelling urgency.
No, it won't, because the hedge funds will have more than enough money to support the few names in the indexes. They'll keep those patients alive to avoid paying off the insurance.
That means two things -- one, those debts that are part of the index might actually be sound investments BECAUSE of the insurance, and two, I wouldn't want to own anything that isn't actually a name in the insured index,
because it's going to be marked-to-market.
Rising mortgage interest rates are natural at this stage of the economic cycle, and the impact on homeowners with adjustable-rate mortgages including interest-only and payment-option ARMs should be relatively small, according to Treasury Secretary John Snow
(Per National Mortgage News - May 10, 2006)
crispy&cole | 11.30.07 - 1:17 pm | #
"Further, lenders will LOVE giving ARMs to borrowers after this, right???" - iceman.
This is the most important point. Houses getting dumped back on the market through forclosure is way down the list as far a pressure on prices, etc. Near the top of the list is credit availability. This will actually make new loans less forthcoming.
Also, won't there be legal challenges to this plan?
Finally, if they are concentrating on 2/28s and 3/27s, what % of the market is that?
heh heh, look like we are all jumping. But what exactly are we jumping for? There is hardly any details about this mortgage workout plan and no one has claimed that the plan will jam into investor's throat if they don't want to do it. All we have here is a few big bank representatives meet with Treaury head and issue a PR. Anyone really think that the bank represents all the mortgage bond holders? May be a better thing to do is have a cold beer and enjoy the firework this morning from all the financial stock jumping this morning on both the rate and workout news.. Better yet, short some more financial this morning..
Being upside down cannot be fixed by any interest rate (unless we want to pay people to stay, sort of like a resident security patrol).
So the political machine has to halt the process that makes people go upside down in their homes.
I'm gonna go out on a limb and predict that we'll see 1% rates again & a lower dollar too....because to halt nominal declines, we have to get the real decline done fast.
Maybe we get there fast enough, maybe we don't, but I expect that's where we're going.
i have no idea if this paulson plan will indeed be effective, i doubt not. we need tanta to illuminate us! however, i can say that it has put a nail in the coffin for securitizing mortgages! who in their right mind would ever buy them? and, what does this do to the value of FNMA and FRE paper?
Re: no real details. Absolutely! How many mortgages does this affect? What happens in the freeze? Negative amortization, or loss to the note holders? Who is going to crawl through the mortgages to figure out which borrowers are elegible?
Why do you have to have a coalition of banks? If it makes economic sense for the banks, they would do it in the first place.
I'm with the other posters who think this is just an attempt to restore confidence. Similarly, the debt markets seem to think that the rate cuts are nothing more than a short-term gesture, and inflation will remain under control
Further, lenders will LOVE giving ARMs to borrowers after this, right???
That's right, this stupidity will only succeed in ending ARM's for all borrowers. Say hello to good old-fashioned vanilla lending, take your pick 30 or 15 year fixed w/ 10% down.
OT - stock market flashing huge sell signal ... 1490 S&P resistance held up well, I predict we end up red.
Interestingly, Roubini wrote favorably today about this proposal, specifically because he feels it avoids the mistake of necessitating a case-by-case look into the problem loans.
I posted this at his site:
I don't understand how this avoids the cases-by-case criteria of a failed solution. The whole problem stems from the fact that accurate income and asset data on these people was never gathered. Now these servicers, who are already stretched thin by rising costs, will have to go back and, on a case-by-case basis, ascertain accurate income, asset and (in order to quantify the borrowers' equity stake) current home value.
Now these servicers, who are already stretched thin by rising costs, will have to go back and, on a case-by-case basis, ascertain accurate income, asset and (in order to quantify the borrowers' equity stake) current home value.
Bob_in_MA | 11.30.07 - 1:34 pm | #
Like an overpriced restaurant: If you have to ask, you can't afford it.
The potential hindrance on their plan is rampant inflation due to expansive monetary policy. Currently, inflation is kept outside of the US because of the willing participations of other countries. The US are counting on the OPEC to retain the petrodollar status, the Chinese and Japanese to not dump the dollars, and the Europeans to absorb chunk of the US exports, and finally the American to restrain from protectionism mentality in coming years. Already, there are signs of dissatisfactions at the US' "Too big too fail" policy. Iran and Venezuela want oil to be denominated in different currency; Kuwaii, UAE, other gulf states already diversifying into basket of currencies; China too is talking about currency basket, and in politics taking actions such as twice disallowing US warships to port in HongKong; Russia becomes more emboldened with new found wealth and clout -- nationalism is on the rise there; over in Europe the question is how much can their uncompetitive economies take amid the onslaught of American goods crowding out their owns because of the cheap dollars. At the moment, the problems are still in the realm of economics; however, the complications will spread into the political arena not too distant in the future. Inflation and international angsts will be coming, count on it.
The proposal for mortgage modification now supported by Treasury and the coalition of lenders takes a similar approach with three groups of borrowers. First, interest rate resets will be frozen for a while (possibly up to seven years) while face value of the loan will be maintained for selected group of sub-prime borrowers who are illiquid but otherwise solvent. Second, those who can afford to keep on paying their mortgages would not receive the interest rate relief. Third, those who cannot afford to service their mortgages even at frozen reset rates should not receive the relief but should be allowed to default. As the WSJ put it:
Don't know who Moe will be but since Goldman Sachs and the Ivy League are already in the house I assume he'll have a southern drawl.
What bothers me more about proposals like this is less a matter of their weirdness and more a matter of the aura of desperation in them: Are these people nuts or are they seeing something that scares the spit out of them; if so, what?
WRT the death of capitalism in the US, what Greenie said but I would disagree with yy: American corporatism does not share many qualities with European fascism; e.g., it is socialist to the degree that the public trough is sequestered by elites but that control is more often typified by extraction (or extortion) of economic rents rather than outright suppression of individual liberties (although if we are not careful laws and regulations passed to facilitate the so-called war on terror could lead to the kind of restrictions on individual freedom that a European-stle fascist would readily recognize).
Question: How does this help fix the real problems inherent in the system, which is beginning to fail on a massive level?
We don't have an educated enough workforce to jump start this economy, we don't have a government poicly of investing in anything useful, just throwing money into an unwinnable war, and we don't have a fed that can make the truly tough decision to stop bailing out the wealthy at the expense of the middle and lower class.
When does all this change so that we can really grow again?
Could a run on CDS policies lead to the implosion of the Hedge Funds?
If so, that worse-financial-crisis-since-1929 prediction takes on a compelling urgency.
No, it won't, because the hedge funds will have more than enough money to support the few names in the indexes. They'll keep those patients alive to avoid paying off the insurance.
KnotRP,
That's one of the stupidest things I've ever read on this blog. The hedge funds are going to bid up Standard Pacific and Beazer stock just to prevent having to pay off CDS? I don't think so. Hedge funds already are shorting the hell out of homebuilders. Smart hedge funds are jumping out of risky CDS contracts, even at a loss, leaving somebody else to hold the bag. By the time this recession is over, there will be far too many small company defaults for hedge funds to prop up.
Remember, debt stands in line ahead of the equity. Betting on risky equity against risky debt always loses in a recession.
"We need badges printed up, you know, "Whip Subprime Now" or something like that. GWB could wear one to show he's on top of things.
libertas | 11.30.07 - 12:37 pm | #"
Or, bid on ebay for one of those "Countryfried" "Protect Our House" green arm bands. Now you too can officially become another member of the "loyalty oath" lemmings.
Obviously I'm short these, so obviously I'm losing money. And of course I've forgotten all the money I'm made and cashed in by being short these and the others for quite a while. And obviously all my tears are for myself and not for all those poor buggers who have options - put buyers and call sellers on these. And obviously I'm not closing the shorts but adding to them, cautiously ( reason over emotion, and that's HARD) cos I'm betting this doesn't work. Oh yeah and obviously I'm diversified in my shorts so I'm not caught by the short and curlies.
But, this is governmental intervention of the worst sort - where its only arm twisting and not any actual legislation - its the sort of thing that communist/fascist totalitarian governments like China do ( you'll recall that China didn't use any formal procedure to tell their banks to stop lending till the end of the year - they just informed them that they'd LIKE them to ).
This is a symptom that the rule of law is breaking down in the financial contracts field - All sorts of models, mental and mathematical have to redone now. Worse, once respect for the rule of law goes and the belief in justice disappears then mob-justice and make your own justice behavior looks justified, defensible and at some level even moral.
As someone else pointed out, what about the small savers who'll get screwed ( AGAIN ! Twice in 7 years is not good ) by the reduction in interest rates and are not sophisticated enough to get out of the US$ and into foreign currencies, commodities etc as Jim Rogers has pleaded with them for a month now. Its pretty well known that the petit-bourgeouise voted, VOTED, Hitler into power. We increase the chance of that happening, IMO. Melodramatic ? Who knows.. I make my own arrangements.
The thing to remember about Florida is it's a money market fund. You can't compare it to a pension fund. But you can compare it to any other money market fund that holds a lot of ABCP.
What is happening in Florida could easily happen in a retail money market fund exposed to this stuff. In fact, it will happen faster, because the Florida cities and counties have more loyalty to this fund than most investors have to their MMFs.
In fact, I think you'll start to see runs on MMFs before Christmas.
It is unfair to the Three Stooges to compare them to the worst manipulators (mis-leaders) in the world today. It is not good to treat liars and criminals as stupid and funny.
"The Fed's asymmetrical response to asset bubbles is an interesting discussion, but concern over a 5% or 10% decline in the stock market? Come on."
BB would certainly agree but problems the FED is facing has little or nothing to do with the stock market. Its a nice cover story for the MSM but under the covers the banking problems must be extreme.
except what relation did the bright light in florida that put that into the 'money market fund' have to the investment decisions for the florida pension fund?
I don't think the freeze proposal broadly speaking is necessarily a bad idea. Calling the initial rates "low teaser rates" is misleading. For the vast majority of sub-prime loans, the initial rates were already well above prime fixed rates and would continue to be when frozen. Since they were ARMs, investors could not value them based on set future rates, since until the strike date, the future rates are unknown. Further most of these loans were designed to be refinanced at reset, so expectations of the percentage of these loans that continue to exist and perform at higher rates must have been pretty low. Home owners were expected to refi into new loans with similar initial rates (while paying lots of fees). They can't refi this because HPA has stopped/reversed and lenders are tightening up on high loan to value. If they have paid on-time so far at existing rates, however, then they should have strengthened their creditworthiness and in effect should be eligible for "frozen rates" that will still be above prime, thus including some risk premium.
I don't think it makes sense, however, to sort into three buckets. First of all eligibility for relief should be based on payment behavior on the existing loan so far, and not ability to handle increases. It makes no sense to "punish" those who can "afford" increases versus "rewarding" those who can't. It would create obvious adverse incentives. Secondly, sorting these two categories from each other would require the kind of detailed case-by case review, that allegedly this entire exercise is designed to avoid. The third group, who can't afford current rates is out of luck under any scenario anyway.
The "New Hope Alliance" Looks like a weird version of Star Wars "A New Hope" and the "Rebel Alliance", everybody cheers for the movie heroes, but on further consideration, does the US look more like the stellar insurgents or the bloated, militaristic, huge boondoggle, Empire? Is our Death Star economy waiting for some trigger. Come to think of it, that Dot.com death star was the first casualty,...
I like the comedy element to all of this - even if I'm a fixed-rate target - but I'm more reminded of Andy Kaufman than the Stooges. He's out there, wide-eyed in front of an audience and knowing that he's way over his head, but hoping that somehow he'll not get the shepherd's crook.
"BB would certainly agree but problems the FED is facing has little or nothing to do with the stock market. Its a nice cover story for the MSM but under the covers the banking problems must be extreme."
Exactly. IMO, BB doesn't give a rip about the market aside from the implications to the bigger issue, bank insolvency. That's why the Fed will keep cutting. BB doesn't mind that the MSM and blogs are fixated on the idea that he's cutting to prop up the stock market. Pay no attention to that bank behind the curtain...
Calling the initial rates "low teaser rates" is misleading. For the vast majority of sub-prime loans, the initial rates were already well above prime fixed rates and would continue to be when frozen.
Dying for data. Got anything? Please?
How many of these loans are below current "prime" rates? What percentage have payments that are below rents?
Is this a subsidy of millions of "on-the-edge" homeowners? Or is this the banks trying to tie households to their debt traps?
If we are going to give people financial relief on a mass basis, then we must be assuming the trouble they are in is not their own doing. In order to ascertain that it WAS their fault, we'd have to examine each and every loan and we dont have the resources. So nix that. Right? So, if the problem isnt that of the borrowers', hmmm, strikes me it must be the lenders fault for this mess, right, and maybe the people involved with the securitization process. Well, why dont we just pony up for it out of their profits (oh, they dont really have any when you account for this the right way.)
The whole thing just makes me sick, because it looks more and more like everyone involved will get a handout, while the renters and savers pick up the tab. WTF is that all about?
Look maybe I can find a bunch of people who made a bad investment in one of these companies - yeh, we didnt do our homework, we got greedy, so? - and then maybe we can say, well, we were saving for retirement, and then we can all run to the gubmint and say how we'd really like to get a better return on our investment.
Another point, once again seemingly all of the analysts inevitably pigeonhole the problems into the "subprime" arena. Ask E-Trade if that's an accurate characterization.
I'm not sure "We're all subprime now," but I do think the word "subprime" needs to be set aside for a bit.
I wondered last Winter (or whenever) why on earth Paulson would leave a high profile and income job at GS to join an unpopular, lame duck administration. I suspect the Boyz saw the end of the credit bubble coming and decided they MUST have a competent insider at Treasury when the bust came rather than another of Bush's cronies like "Snowjob".
These people are not stupid (Paulson not Bush) they saw this coming or at least were very concerned.
FDIC Statement of Michael H. Krimminger, Special Advisor for Policy, Office of the Chairman, FDIC on Foreclosure Prevention and Intervention: The Importance of Loss Mitigation Strategies for Keeping Families in Their Homes; before the Subcommittee on Housing and Community Opportunity of the Financial Services Committee; U.S. House of Representatives; Los Angeles, CA. November 30, 2007:
what I don't understand is why there are people who still sell stocks. Who are they ?
The FED will cut and cut and cut. The ARM will not reset for 3 years - this will prevent forclosures and maybe even R/E prices will start going back up. stocks will surly climbe.
so who are the people who are selling - don't they see DOW 16,000 in 6 month ?
I jus don't get it. If Fed Chairman is worried when dow goes below 13,000 this is called a .... PUT or am I mistaken ?
If this selling continue once in a while and the dow goes below 13,000 I can see how interest rates wouild become negative: 'take this money - invest in stocks and will give you 1% per year on every amount you borrow from us to play in the market"
I am telling you this is how things should work - this is economic heaven.
Can someone please tell me why someone must be kept in their home? They've basically been on a subsidized higher standard of living that they really cant afford, when they should have been renting, and now we are thinking of subsidizing them further. Since WHEN did we decide that homeownership, or even stupid attempts at ownership, was a right? This whole thing from the start is just one sick sick sick ride that I cannot get off. First you have to watch the insanity as prices go up for all the wrong reasons, and now, when the inescapable would seem to be here, I have to watch as we try and avoid our own stupidity with more stupidity. UGH!
otice this whole weeks rally has been on "hope" of a fed cut and talk of a bailout almost on a daily basis. nothing substantive anymore. all done to counteraactt a slew of REAL bad serious economic data on a daily basis.
Not to worry! The Realtors have sounded the "all clear" signal:
NAR's Chief Economist Lawrence Yun said in a phone interview after releasing the data that the Northeast's downturn arrived in the summer of 2006 -- earlier than in other sections of the country -- with its worst drop of 5% happening in October, 2006. "For the Northeast, the worst is already past and the question is how fast the recovery will be," Yun said. "Will it be a strong recovery or weak recovery?"
Yun says he's hopeful other regions will follow the Northeast's lead.
That's one of the stupidest things I've ever read on this blog. The hedge funds are going to bid up Standard Pacific and Beazer stock just to prevent having to pay off CDS?
You have misunderstood my point.
It's been discussed previously on
this blog -- the indexes upon which
the insurance is based have very
few real bonds underlying them.
One can keep THOSE specific
bonds from failing, without having
to bail out anything approaching
the entire class. As recently as
this summer, one of the major
investment houses was accused
of "not playing fair" for preventing
default rather than allowing the
default and paying much more
out to the insured. This isn't something
I discovered...it's an older thread
that I'm only bringing up in response
to some folks who think the insurers are not as bright as the insured, in this case.
BTW, "stupid" ain't much of a counter argument....
"the indexes upon which
the insurance is based have very
few real bonds underlying them.
One can keep THOSE specific
bonds from failing, without having
to bail out anything approaching
the entire class."
well they are failing miserably. there are numerous hedge funds and IB's that have been shorting the ABX to hedge their cdo holdings. its what makes a market.
I am starting to move into the deflationary camp. I think there is an over supply of everything, due to demand created by cheap credit to the American Consumer, which ain't coming back, even with tons of rate cuts. I am beginning to suspect the death of the American Consumer will have a deflationary effect which will dwarf any inflationary pressures.
idoc - I would presume that once most of the insured figured out the game, they'd stop buying insurance, which would make it no longer profitable to keep the indexes alive. The former insurers would short up on the index and pile on, since there is no longer an insured counter party.
"Is this a subsidy of millions of "on-the-edge" homeowners? Or is this the banks trying to tie households to their debt traps? Anyone?"
Kicker | 11.30.07 - 2:11 pm
This game is NOT about interest rate X's and O's......it IS all about maintaining Debt Traps. Paraphrasing CA Gov. S. "it is a two-way street" when he described that so-called deal with lenders in CA in order for everyone to get out of this "mess" of forclosures.
Moe will be that special person who shows up at your door when you do not take the offer you cannot refuse that was designed in order for you to remain in your Debt Trap of a home voluntarily.
Before this thread dies, this whole insanity reminds me of Krispy Kreme and their various attempts to keep their stock price up - and the sturm and drang that people short the stock on basic accounting reads had to go through before making out like bandits in the end.
The particular episode I'm reminded of is their move from Nasdaq to the NYSE. ( delisting and relisting causes havoc with shorts ) One had to laugh - even as one lost money - at the sheer creativity of it all.
It was all very well for a private company like KKD to do this - but for the government to participate in these shenanigans ?
If they want a rate freeze they should forfeit any possibility of capital gains, now and in the future, based on original purchase price.
Those that made withdrawals in form of HELOC's should be disqualified.
Those that qualify should no longer qualify for interest tax deductions.
Why Paulson, Bernanke, and others in the know worry so much about the deflating of housing bubble? They are pulling out all the stops to prevent the deflation from taking place even at a substantial risk of high inflation. The reason is our economy now is an asset economy. Assets valued at inflated price are our most productive components that drive our economy. Imagine where would our economy without the inflated housing market in the last 7 yrs! And on top of the mortgages, layers of derivative assets were built to finance takeovers, mergers, etc... Where would our miraculous 3% GDP growth be without such stimuli? Efforts to prop up asset prices at artificially high levels for houses, CDO's, CDS, MBS, SIV, ... are the ultimate goals of our planners. Their efforts now are to help engineer a gradual unwind of past-issued toxic debts. The market for new issues of these junky financial instruments that have greased the DOW, NASDAQ, other financial activities in the past 7 yrs is essentially dead! Investors around the world now think twice about American-made assets and will be in their betrayal-risk averse for years to come. Lacking the steroidal-stimuli from these finacial innovations, and new technological advances in our industries, no wonder economic pundits now have predicted below-trend growth for years to come.
Note the homepage versus # active link for but the difference until they figure out the rest.
This is nothing more than evidence that CalculatedRisk has "arrived." Sad that trolls and worse start showing up. Encouraging that even trolls and worse see the importance of great sites like this. It is interesting at the very least that this "issue" shows up within hours of my taking Sebastian to task for his behavior.
Geoff, are you being facetious about keeping people in their homes? If not: it's about politics. Americans are the most entitled people in the world. Once we have something, even if only on paper, we believe in our souls it is ours. If someone takes away what we think is ours, we deal with them and move on to someone who gives us what we want. It's important to remember who the Fed Chairman's boss is. And there's also the civil strife thing...
ottnot : "It isn't the change in interest rate at reset that matters, it is the change in actual monthly payments made."
Exactly.
I have been telling people for the last 4 years that with these exotic mortgage loans, it's not about the 'rates' it's about the 'terms'. I always get blank stares.
Why do the sub-Average Joes & Jills generally understand the consequences of a "balloon" loan, but not understand the basics of his/her Interest-Only or Option ARM?
I'm sure that the note holders will be insisting on this (if they have any say at all), but the bailout recipient should NOT be allowed future extensions of credit. No credit cards, no HELOCs, etc. Unti the note holder is made whole.. if ever.
Funny, they had enough people to push the toxic loans on everyone, drive prices to unaffordable levels, and pillage huge profits while telling us "it's different this time."
Well, it's not different: just more crooks working the system in creative ways, and we, the responsible people, get stuck with the bill.
I was disappointed that more people didn't read and comment on the link posted earlier by FFDIC, "FDIC Statement of Michael H. Krimminger, Special Advisor for Policy, Office of the Chairman, FDIC on Foreclosure Prevention and Intervention: The Importance of Loss Mitigation Strategies for Keeping Families in Their Homes"
Sadly, the usually erudite conversation here has completely failed to discuss the proposal or his arguments (or in some cases, even read the proposals or arguments). Check out the section "Correcting Misconceptions about Mortgage Restructuring" for as pithy a description of the reasoning as I've heard. For example, the first one is:
Misconception: Restructuring Will Create a Windfall for Subprime Borrowers
Some have expressed concern that restructuring subprime loans to a fixed rate of interest at the starter rate will result in a windfall for subprime borrowers. This misconception is based on the belief that the starter rates for these loans are similar to the low 1 to 2 percent "teaser" rates that were aggressively advertised for prime borrowers. In fact, of subprime hybrid mortgages originated in the first quarter of 2006, the average starter rate was 8.28 percent, which exceeded the average rate on subprime fixed rate loans made in that same quarter (7.93 percent), and was well above rates paid on prime fixed rate loans. These subprime borrowers will continue to pay higher subprime rates even after restructuring.
Read them yourself. Now, back to your regularly-scheduled ranting.
Oh, and I am still wondering when the massive pay increases will be showing up to support their "unaffordable housing forever" plan. Geez... if something can't be bought, trying lowering the price to sell it.
I call Bull**** on the rate freeze plan. My guess is that sub-prime mortgages with 7% teasers are indeed a small portion of the mortgage pie.
This leaves the McMansions and the $300K single family homes with the 1% teaser rates. Are the bondholders going to agree to a negative ROR for another three years?
I'm wondering when they changed the law to make the Federal Reserve a government funded boiler room for the stock market.
It occurs to me that that's what the creation of the President's Working Group was meant to accomplish, reining in the most independent of those officers.
I don't know why the eligibility criteria for this handout - that is, market stabilizing measure - can't include a statement by the borrower that the loan application completely and truthfully disclosed any facts that had a bearing on its approval, with some sort of criminal hazard for lying on that statement. Fitch seemed to be able to review a set of files quickly enough, I hear that evidence of fraud was simple enough to discover, and there's no reason the audits couldn't be performed at leisure after the money is shoveled out the door. It's painful enough to watch folly rewarded, but when fraud as flagrant as what we seem to be seeing is subsidized in this way, we're really approaching a tipping point in accepting systemic vice. I haven't been so furious about a public policy issue for many years.
In any case, it's probably changing deck chairs on the Titanic at this point. After all, the worst of the foreclosure activity seems to be in the vintages that are months or years from rate resets, anyway.
"Hope Now Alliance"
Rubber bracelets available... $1.00 each
in red, white and blue, for the USA
and in blue with stars for the EU
Made in China, of course.
The good news is China will not loan tom and purchase stock in, this terrific Alliance.
Autographed bracelets slightly higher...come with first edition rights to the duo's new book, as soon as they get the boot of freedom into their "pressing family reasons" new occupations.
Is anyone shocked that the 1-2 punch of Paulson's DOA plan and Bernanke's not-so-obtuse reference to undesirable equities declines comes the day before many IBs & Hedgies close their books out and prepare their statements?
Look, people can and will quibble over the details. While details mayyer, in the end they are not the most important thing. Markets and economies in the end come down to human psychology. When people feel confident things have a way of working out, even if imperfectly, despite the facts. And when confidence is missing than even modest problems can be insurmountable. So, to finally see something approaching action from Paulson, who has been AWOL throughout the whole saga (perhaps in an undisclosed location with Cheney) is a step forward. I don't get the whole moral hazard argument anyway. When a boatload of drunken fools capsizes we pull then out of the water and then worry about who to prosecute. After the crisis is past, i you want to strip every Wall Street crook, scamming Mortgage Broker and fraudter "homeowner" naked and flog them in the town squares, fine with me. Just first lets's clean up the mess.
Hope Now Alliance = banks hoping for more money NOW!
As I understand it, currently in California borrowers who have not refinanced have NON-RECOURSE LOANS.
The FBs (fed borrowers) with these loans have the right to walk away and mail the keys to the bank.
Definition of non-recourse loan: A secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply out the difference.
HOWEVER, IF the FB refinances, they LOSE their NON-RECOURSE status.
I would assume that if a FB takes the bail-out bait and calls the lender to get their interest rate increase frozen, then this revision in the contract would switch their mortgage from NON-RECOURSE to RECOURSE.
After their interest rate is frozen the FB cannot walk away from their home without losing everything: money in savings, 401k, cars and having their wages garnished. Seems similar to the new BK laws. It's the new indentured servitude (but didnt the servant get their freedom after they paid for 7 years, rather than 30 years or more paying on an inflated mortgage?).
I am wondering if one reason that these bail-out plans have been announced with such vague language is to test the waters to see if the public catches on about the downside for the FBs.
FB'S: Don't take the bait! Preserve your right to walk away from an upside-down mortage. This right is the most valuable thing you have in this uncertain time. Be sceptical! When was the last time a bank just did you a favor without something in it for them??!!
I was thinking my kid should go to college, work on the PHD and avoid flipping burgers. . .
Now I'm thinking flipping burgers would be the superior education.
BenB - Duh!
We all know a rate cut is coming...did anyone belive all the "tough talk"...
LIBOR continues to climb...will they freeze LIBOR too?
Never let the Three Stooges work on your house (of cards). They will only make things work. It is the one immutable law in the Universe. Maggots feed off dying flesh, they don't breathe life back into the carcass.
...only make things, er, worse.
Why is Libor climbing with a pending cut in the Fed Fund rate? That's really disturbing.
Why are the debt and equity markets so out of sync?
I'll be interested to see where the private equity funds invest. They will invest.
So far we have a ex-banker and an academic. In my opinion moe has to be a politician.
Will it be Chris Dodd or Chuck Shumer?
The Keep Hope Alive plan will fail!
Florida Schools Struggle to Pay Teachers as Investments Frozen
By David Evans
Nov. 30 (Bloomberg) -- School districts, counties and cities across Florida are scrambling to raise cash after being denied access to their deposits in a $15 billion state-run investment fund.
[snip]
The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson, chief financial officer of the Jefferson County school district, which kept its entire $2.7 million of cash in the fund.What we just experienced here is a classic run-on-the bank meltdown.''
Thousands of school districts, towns and fire departments across the U.S. keep their cash in state- and county-run pools. These public accounts, modeled after private money-market funds, are supposed to invest in safe, liquid, short-term debt such as Treasuries and certificates of deposit from highly rated banks.
[snip]
Standard & Poor's yesterday said it contacted state officials about whether the fund holds any money for debt service payments by local governments and whether that cash will be made available. The credit-rating company said it hadn't yet received information and was monitoring the situation.
The Florida fund has invested $2 billion in structured investment vehicles, or SIVs, and other debt tainted by the collapse of the subprime mortgage market, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding similar investments, in smaller quantities.
[snip]
My choices:
Sheila Barr??
Angelo Mozilo??
Arnold S.?
I want to thank everyone involved with trying to stop this bubble from popping for guaranteeing that future generations will not be able to afford to buy a house.
Really, I have NEVER heard a good argument that keeping a bubble inflated is good for the economy.
Today is the day America became a Socialist Country. Capitalism has died!
If the Govt bails out defunct homeowners its the ultimate bail out of the banks, and completely corrupt. That Bush is behind such stupidity is of no surprise. The man and his hanger ons are morons.
Bernanke is a rookie and an amatuer. Not the profile we need for the most powerful person on earth.
Nixon tried wage and price controls and, as always, they didn't work. Cities tried rent control, and - over time - realized the failure of that policy. Now, the administration is trying "interest rate control". Won't work either - too many borrowers can't pay the mortgages they currently have, pre-reset, and too many more won't pay a mortgage on a depreciating asset. Further, lenders will LOVE giving ARMs to borrowers after this, right???
Today is the day America became a Socialist Country. Capitalism has died!
Are you R. V. Winkle?
Will it be Chris Dodd or Chuck Shumer?
REBear | 11.30.07 - 12:20 pm | #
Moe is the boss - the deciderer, if you will. I think we all know from whence the incompetence and mendacious fiscal buggery flows.
I don't know why we are bothered about this announcement.
Paulson also favors a strong dollar.
How will it be deteremined who can and can't make their payment? If the borrower is underwater and decides to walk away, is that enough?
If the teaser rate freezing plan is only for those who can pay current rates but not the higher rates and nothing for anybody else, what are the legal implications. What sort of legal argument can somebody who gets bucketed into "can pay more so no bailout for you" construct? Any legal eagles or beagles care to comment ?
-K
``The unthinkable and the unimaginable have just happened here in Florida,'' said Hal Wilson...''
File under: No-one could have seen this coming.
"... mendacious fiscal buggery flows."
Marcus Aurelius | 11.30.07 - 12:28 pm | #
we are all buggered now...
Peterbob, freezing rates only partially delays the inevitable by delaying mushrooming supply. In fact, it may not even do that: lenders may raise interest rates on future homebuyers to compensate them for the risk that the gubmint may devalue their mortgage assets. If rates for future homebuyers increase then prices today will have to go down. Nevertheless, I think this moves us out of the "pain for the next 2 years" column into the "pain for the next 10 years" column. This is not good news if you want to avoid slow and crushing housing deflation.
There is no way on heaven and earth to keep prices out of whack forever.
Bernanke isn't behind the curve.
He's behind the eight ball!
Paulson's plan IMO is scrapping the basid pricipals of contract law. The lawyers will have a field day with this one.
REBear - hilarious!
Thanks for putting this in exactly the right perspective.
government officials are trying to avoid "fast pain" rather than "slow pain." maybe they should talk to the Japanese about their experience with a real estate bubble (and constantly lower interest rates) and see if "slow pain" is really preferable.
The name alone makes it seem likely that this plan (or at least its name) comes straight from Bush. He couldn't administer an evacuation from a wet paper bag, but he's great at coming up with pretty, Orwellian names for stupid projects. "Operation Infinite Justice" and "No Child Left Behind" come to mind.
We need badges printed up, you know, "Whip Subprime Now" or something like that. GWB could wear one to show he's on top of things.
what up - visitors just popped >200 - something interesting going on out in the world atm?
This plan does have at least one thing in common with Socialism.
both work...in theory.
Bernanke is on a mission from Santa.
His job is to keep sentiment from swirling down the toilet during the holiday shopping season.
Once January arrives, he can talk to Greenspan about keeping bubbles inflated with negative real Fed rates. Oh, and about how to find a good publisher for the eventual book.
=============================
How will it be deteremined who can and can't make their payment? If the borrower is underwater and decides to walk away, is that enough?
MarkS
LOL ! Yeah, I can see the Catch-22 now -
You can prove you can't make higher payments by walking away so you now qualify for the bailout.
But, hang on, you just missed a payment, you aren't current and our rules say only those who are current qualify for bailouts !
LOL ! This is just nutz !
-K
can I get some money back since I pay my mortgage on time every month and don't default? Seems only fair.
I've heard supposedly smart people (including hedge fund managers) say recently that the market is going to the moon, because the fed is going to just cut and cut. When I asked why this should happen, they said "because it always has."
I don't think so. I don't think we've ever had (in my lifetime) a situation where a Fed chairman felt such pressure to prevent a record-high market from falling any. I'm with you, CR. The fact that Bernanke just caves to the market is a real sign of insecurity and weakness, and it will come back to haunt him when the market gets disappointed.
Rate cuts take time to work on the economy, if they work at all. When the market has roared after cuts, it's often been after the recession had begun and the market had already tanked.
ott,
Speaking of the Santa mission, did some better numbers on the Black Friday shopping weekend ever come out? When have they come out in the past when there was something to crow about?
I see these brackets aren't just going to close themselves.
241 visitors? Could be this..
Yahoo! 404 - Page Not Found
You are considering buying a mortgage backed security in 2008.
What would you pay for get the funds flowing from a contract that might be changed by the goverment at any time? (even by Republicans, for god sakes!)
Then they will wonder why mortgage rates don't come down when they cut rates.
"How will it be deteremined who can and can't make their payment? If the borrower is underwater and decides to walk away, is that enough?"
MarkS
Moreover, if you are underwater and the choice is moving to a rental, paying less for shelter and consequently having MORE disposable income or paying a bit less to "own" an obviously depreciating asset and STAYING underwater, what would you choose?
I think more would bite the bullet and get foreclosed. Sure, a credit hit would be painful but that can be rebuilt. Living in a dead "asset" would simply mean prolonged agony and uncertainty. Wouldn't most people just "move on"?
This plan won't work on so many levels it can't be anything other than just a gesture.
"Hope is a crappy hedge".
Hey don't knock it; the USA runs on hope; it's all we've got. Hope that the Chinese don't stop buying our paper; hope that the Gulf oil flow doesn't stop; hope that your house isn't foreclosed on; hope you don't lose your job; hope we get a decent President next time round; hope Iraq doesn't get worse; hope Bush doesn't go mad and bomb Iran, etc., etc., etc., etc.
I agree with energyecon.
REBear provided the Goldilocks comment on Bernanke:
I don't know why we are bothered about this announcement.
Paulson also favors a strong dollar.
REBear | 11.30.07 - 12:29 pm |
.
.
Some--actually, most--days I'm happy to be a renter. I would be pissed if I had recently purchased with a fixed rate mortgage that I could pay, my house was losing value, and my neighbors who bought at the same time pay 50% less!
Q: Who's really the sucker now?!
A: An FB with a fixed.
Here's what I think will happen in Florida. They will allow limited emergency withdrawals next week. Then, after a cooling off period of several weeks, they will break the buck and give back 95 cents or so but with limits on withdrawals. Eventually, everyone will be able to exit and everyone will. Within 6 months this fund will be gone, and probably others like it in other states. A lot of commercial paper will be unwound.
As time goes by it's as if CR's writing style is becoming more Tanta-like - or is it the other way around???
Great write up CR - please keep it coming - if my savings are to be devalued I might as well laugh about it no - point in crying...
I don't know why we are bothered about this announcement.
Paulson also favors a strong dollar.
REBear
Well strong in this case just means that you have to flush a few more times before you can get it down the drain.
This mortgage freeze plan will have a lot of unintended consequences, if it actually amounts to anything. My guess is that it is nothing but window dressing designed to staunch the panic and delay the pain until after the election. Republicans do not need a couple million foreclosures in the year before the election. Bernanke and Paulson will do their best to help the team out and leave the next President holding a much heavier, stinking bag of crap.
Someone needs to speak for the tens of millions of small savers ,many retired, whose income is somewhat based on interest from MM funds, CDs, and savings accounts and who will see a big reduction in their income when rates are cut (as they will be as part of the deal) in the face of rapidly rising grocery, energy, and medical costs. This is where much of the bail out funds will come but these people are transparent to power and no one speaks for them but many will be seriously hurt.
I have listened for days to discussions about the need for rate cuts and not once has the cost to savers been mentioned - not once.
Very sad.
government officials are trying to avoid "fast pain" rather than "slow pain."
fast pain would happen while Bush is president. slow pain might be delayed until the next rube shows up.
Got Debt ?
(even by Republicans, for god sakes!)
hopeinsd | 11.30.07 - 12:42 pm | #
You sound surprised. These guys aren't Republicans - they're Neocons. What's in YOUR Treasury?
The fundamentals of nature (market forces) haven't changed. Our Captain, Commanderer, and Deciderer and his officers steered the ship into perilous waters, and now they're bailing like hell to keep it afloat - all the while telling the passengers that it's perfectly normal for the ship to list 15 degrees while water rushes over the gunwales. Just keep on gambling, folks!
Sheesh.
NC Jim,
Those savers are the most reliable voters in the country...
crispy&cole have you been living in dizzyland for the last century? The United States has been a fascist state since post world war 2. Mousillini invented it and the Yanks have taken it to its extreme. From energy to foodstuffs, from communication to the courts the national security state marches hand in glove with the corporate state. History repeats , ryhmes and then rams a police baton up yer arse if u ain't careful.
I have become convinced that all the talk of mortgage bailouts is just that; talk carefully crafted to keep people paying and hoping. The Florida halt on withdrawls is more important. Everyone is reevaluating their actual as opposed to presumed liquidity and exposure. It also just killed the Super-SIV proposal as well. You cannot simultaneously sell these things at the same time you are prohibiting getting out.
I thought there were three stooges!
1-1/2 + 1-1/2 = 3
If you don't know who Moe is....
I have noticed that a lot of people are getting foreclosed on. Has anyone else noticed this? Is there something our government can do about that?
This is all getting weirder by the minute. I don't think there is any chance of fixing this with delusional proposals.
The Florida halt on withdrawls is more important.
Yes it is. If any of the investors in that fund get too large of a haircut, it may add to the FC problem in Florida.
I'm still amazed that the fund was created in 1982. Isn't that when bank rates were running in the high teens ? Why did they need it then ?
Mike in Long Island As time goes by it's as if CR's writing style is becoming more Tanta-like - or is it the other way around???
No, what's happening is that the claims of "economists" become more and more like the semi-literate ramblings of the journalists. I wouldn't call this a good sign, but I certainly agree with CR's take.
CR -- care to tackle this issue?
Counterparty Risk Problems With Credit Default Swaps?
Counterparty Risk Problems With Credit Default Swaps? « naked capitalism
Despite the use of the term "swap," CDS are really insurance contracts. A protection seller (effectively, the insurer) agrees to make a payment to the protection buyer if specified bad things happen (a "credit event" usually defined as bankruptcy or failure to pay) to a "reference entity" which can be a company ("single name") or an index. See here for more detail.
Now while it may look like the risk being traded here is default risk, there is a second risk: counterparty risk. CDS are the largest credit derivative product, and they are traded solely over the counter. That means that the CDS agreement is only as good as the protection seller that wrote it.
When Warren Buffet described derivatives as "financial weapons of mass destruction" he wasn't worried about speculators blowing themselves up, but about counterparty risk:
from the comments:
The hedge fund participation is the fatal defect in the CDS system.
The part that was worthy of particular attention was this:
"According to printed statistics and consistent with anecdotal evidence, hedge funds are sellers of 32% of all CDS, insuring exposure of $14.5 trillion.[xvii] Recent estimates indicate that the entire hedge fund market is approximately $2.5 trillion in net assets under management."
So hedge funds have written $14.5 trillion in credit insurance.
The question is:
Assuming the economy went into a recession as severe as let's say 1990-1991 (and that is being terribly kind), what kind of loss rate (%) would be experienced on the credit insured by CDS?
What about a loss rate from the 1982 or 1974 recession?
Therefore, how much of that $14.5 trillion would the hedge funds be called upon to pay in claims?
========
Could a run on CDS policies lead to the implosion of the Hedge Funds?
If so, that worse-financial-crisis-since-1929 prediction takes on a compelling urgency.
This could make the Florida LGIP run look like a day at the beach.
=======
I have noticed that a lot of people are getting foreclosed on. Has anyone else noticed this? Is there something our government can do about that?
larrystoken35
ur that guy from Broker Universe that gave so many ppl a good bellylaugh aren't u? and u dared stray over here?
Is anyone shocked that the 1-2 punch of Paulson's DOA plan and Bernanke's not-so-obtuse reference to undesirable equities declines comes the day before many IBs & Hedgies close their books out and prepare their statements?
Coincidence? Or is the "Working Group" really a conspiring group.
bill wrote, "Why is Libor climbing with a pending cut in the Fed Fund rate? That's really disturbing."
IMO, LIBOR is reflecting banks' lack of trust in each others balance sheets. They know what's on theirs and don't want to risk a loan to the other guy who probably has equal badness on his. The Fed is injecting liquidity. The banks are concerned about solvency.
At the moment, "BS" is an appropriate abbreviation for Balance Sheet in the financial world. Sad.
"Hope is a crappy hedge"
...Now there's a book title if ever I heard one!
From the article " Mr. Paulson, who spent 32 years at Goldman Sachs Group Inc., has been on the phone nearly every day in recent months with the heads of financial institutions such as J.P. Morgan Chase & Co., Bank of America Corp. and Lehman Brothers Holdings Inc. "
Here is how the phone calls went:
CEO: "Look if we extend these things, we may end up taking bigger losses due to deflation, or at least housing deflation"
Paulson: "I really, really, REALLY don't think you should be concerned with deflation, if you know what I mean."
CEO: "Oh, I see, okay then! "
MoM,
Granted that honest economists are about as common as honest lawyers, there ARE some of both (which is more than most folks believe).
Don't forget Shemp!
With these loans thoroughly securitized, how can they get all the creditors to go along with extending teaser rates or whatever after-the-fact fiddle is being contemplated?
can someone explain the Ted spread to me and why its more important than the Weighted Average on the TOMO of the FRBNY? i assume its Libor dollars they're referring to and not Libor Euros.
Temporary Open Market Operations - Federal Reserve Bank of New York
"I just don't think we have what it takes to prick the bubble... I don't think prices are going to fall, and I don't think they're even going to be flat. "
- Diane C. Swonk, chief economist at Mesirow Financial in Chicago, New York Times, Trading Places: Real Estate Instead of Dot-Coms, 3/25/05
"South Florida,'' he said, ''is working off of a totally new economic model than any of us have ever experienced in the past" according to a realtor who predicted that a land shortage will support higher prices indefinitely."
- New York Times, Trading Places: Real Estate Instead of Dot-Coms, 3/25/05
Diane C. Swonk is a bimbo and shill
I'm still looking for Moe.
Paulson "incapacitated" him with a classic double finger poke to the eyes followed by a devastating "windmill head-bonk"...he was trying to take too much of the PR...
"I'm still looking for Moe."
He's in Camp David this week.
Great Post CR!
I'm wondering when they changed the law to make the Federal Reserve a government funded boiler room for the stock market. I didn't know that was a government function. But I suppose the policy of socialism for the rich and conservatism for the rest of us is what Bush meant by compassionate conservatism. After all, you have to have to weave a social welfare net so that the investment bankers don't get all depressed about the smaller bonuses this year. That would be a national crisis!
One of the unexpected results of tilting the economic landscape so that the top ten percent engross a good 40 percent of the national wealth is that they will use the Government as their piggy bank, without any ideological compunctions at all. Count on it.
News Flash: Mr Freeze proposes freezing everything. It's cold here in Colorado today I think it might be working.
Here's what I think will happen in Florida. They will allow limited emergency withdrawals next week. Then, after a cooling off period of several weeks, they will break the buck and give back 95 cents or so but with limits on withdrawals. Eventually, everyone will be able to exit and everyone will. Within 6 months this fund will be gone, and probably others like it in other states. A lot of commercial paper will be unwound.
Agreed. There is a lesson to be learned here. The number of investors was low (I still think of them as depositors, but whatever). It only took a small number of people making withdrawal decisions to hurt the fund. The paper quality may be no better or no worse than any other similar types of funds, the difference was the ratio between the fund size and the number of investors. If other funds, (e.g. Florida Retirement System) are holding similar paper, they do not have the same type of 'bank run' exposure because the investors (i.e. employees/retirees) have a much longer time period they expect the funds to be taken out. There would be a far smaller rush to the exits (if any). That doesn't make the investments any better, just the exposure to the run lower.
At the end of the day, the run on the LGIP may trigger a review of the paper that the other funds are holding. That may trigger additional orderly unwinding of those investments. At the end of the day, LGIP may be an unintended watershed event, in shining a searchlight on paper quality.
One can only hope (and hope is a crappy hedge)
Though a couple people here have mentioned it, in general I haven't seen nearly enough talk about what a government-imposed unilateral contract modification would do in reality. It's a heck of a precedent.
It goes WAY beyond the economics of asset bubbles.
Rising mortgage interest rates are natural at this stage of the economic cycle, and the impact on homeowners with adjustable-rate mortgages including interest-only and payment-option ARMs should be relatively small, according to Treasury Secretary John Snow
(Per National Mortgage News - May 10, 2006)
One more blast from the past:
Patrice Yamato, president of the Florida Association of Mortgage Brokers, insists the dangers of option ARMs are overplayed in the media. She said borrowers are informed twice in detail during the home-buying process about the specifics of the loan. What else do we need to do to make those borrowers understand? We go over it and they sign a disclosure and then its disclosed again at closing, Yamato said.
I agree that option ARMs are not for everyone but there are so many safety measures in place that that type of scenario thats being described in (articles) cant happen, she said.
BradentonHerald.com 404
No, it won't, because the hedge funds will have more than enough money to support the few names in the indexes. They'll keep those patients alive to avoid paying off the insurance.
That means two things -- one, those debts that are part of the index might actually be sound investments BECAUSE of the insurance, and two, I wouldn't want to own anything that isn't actually a name in the insured index,
because it's going to be marked-to-market.
Rising mortgage interest rates are natural at this stage of the economic cycle, and the impact on homeowners with adjustable-rate mortgages including interest-only and payment-option ARMs should be relatively small, according to Treasury Secretary John Snow
(Per National Mortgage News - May 10, 2006)
crispy&cole | 11.30.07 - 1:17 pm | #
There's Shemp.
"Further, lenders will LOVE giving ARMs to borrowers after this, right???" - iceman.
This is the most important point. Houses getting dumped back on the market through forclosure is way down the list as far a pressure on prices, etc. Near the top of the list is credit availability. This will actually make new loans less forthcoming.
Also, won't there be legal challenges to this plan?
Finally, if they are concentrating on 2/28s and 3/27s, what % of the market is that?
Yes must have got the Bush speech writers to suggest name like "Operation Enduring Freedom"
The smoke and mirrors sham continues...
heh heh, look like we are all jumping. But what exactly are we jumping for? There is hardly any details about this mortgage workout plan and no one has claimed that the plan will jam into investor's throat if they don't want to do it. All we have here is a few big bank representatives meet with Treaury head and issue a PR. Anyone really think that the bank represents all the mortgage bond holders? May be a better thing to do is have a cold beer and enjoy the firework this morning from all the financial stock jumping this morning on both the rate and workout news.. Better yet, short some more financial this morning..
Mom is drunk again and just shit her pants. I gotta go now.
Being upside down cannot be fixed by any interest rate (unless we want to pay people to stay, sort of like a resident security patrol).
So the political machine has to halt the process that makes people go upside down in their homes.
I'm gonna go out on a limb and predict that we'll see 1% rates again & a lower dollar too....because to halt nominal declines, we have to get the real decline done fast.
Maybe we get there fast enough, maybe we don't, but I expect that's where we're going.
i have no idea if this paulson plan will indeed be effective, i doubt not. we need tanta to illuminate us! however, i can say that it has put a nail in the coffin for securitizing mortgages! who in their right mind would ever buy them? and, what does this do to the value of FNMA and FRE paper?
Re: no real details. Absolutely! How many mortgages does this affect? What happens in the freeze? Negative amortization, or loss to the note holders? Who is going to crawl through the mortgages to figure out which borrowers are elegible?
Why do you have to have a coalition of banks? If it makes economic sense for the banks, they would do it in the first place.
I'm with the other posters who think this is just an attempt to restore confidence. Similarly, the debt markets seem to think that the rate cuts are nothing more than a short-term gesture, and inflation will remain under control
Further, lenders will LOVE giving ARMs to borrowers after this, right???
That's right, this stupidity will only succeed in ending ARM's for all borrowers. Say hello to good old-fashioned vanilla lending, take your pick 30 or 15 year fixed w/ 10% down.
OT - stock market flashing huge sell signal ... 1490 S&P resistance held up well, I predict we end up red.
Morgan Stanley may face $5.7 billion Q4 writeoff: report
| Reuters
Morgan Stanley may face $5.7 bln Q4 writeoff-CNBC
That's why I put "economists" in quotes! There are many honest ones.
"Montana fund sees $247 mln of withdrawals -- Florida's investment woes spark subprime fears in other states"
Montana investment fund sees withdrawals in wake of Florida woes - MarketWatch
Seems like the troubled Florida fund should have restricted withdrawals to a percentage of deposit some time ago. Now they have a bigger mess.
Interestingly, Roubini wrote favorably today about this proposal, specifically because he feels it avoids the mistake of necessitating a case-by-case look into the problem loans.
I posted this at his site:
I don't understand how this avoids the cases-by-case criteria of a failed solution. The whole problem stems from the fact that accurate income and asset data on these people was never gathered. Now these servicers, who are already stretched thin by rising costs, will have to go back and, on a case-by-case basis, ascertain accurate income, asset and (in order to quantify the borrowers' equity stake) current home value.
REBear,
What is that, about a 50% increase in the size of the writedown since guidance was issued?
Now these servicers, who are already stretched thin by rising costs, will have to go back and, on a case-by-case basis, ascertain accurate income, asset and (in order to quantify the borrowers' equity stake) current home value.
Bob_in_MA | 11.30.07 - 1:34 pm | #
Like an overpriced restaurant: If you have to ask, you can't afford it.
The potential hindrance on their plan is rampant inflation due to expansive monetary policy. Currently, inflation is kept outside of the US because of the willing participations of other countries. The US are counting on the OPEC to retain the petrodollar status, the Chinese and Japanese to not dump the dollars, and the Europeans to absorb chunk of the US exports, and finally the American to restrain from protectionism mentality in coming years. Already, there are signs of dissatisfactions at the US' "Too big too fail" policy. Iran and Venezuela want oil to be denominated in different currency; Kuwaii, UAE, other gulf states already diversifying into basket of currencies; China too is talking about currency basket, and in politics taking actions such as twice disallowing US warships to port in HongKong; Russia becomes more emboldened with new found wealth and clout -- nationalism is on the rise there; over in Europe the question is how much can their uncompetitive economies take amid the onslaught of American goods crowding out their owns because of the cheap dollars. At the moment, the problems are still in the realm of economics; however, the complications will spread into the political arena not too distant in the future. Inflation and international angsts will be coming, count on it.
The proposal for mortgage modification now supported by Treasury and the coalition of lenders takes a similar approach with three groups of borrowers. First, interest rate resets will be frozen for a while (possibly up to seven years) while face value of the loan will be maintained for selected group of sub-prime borrowers who are illiquid but otherwise solvent. Second, those who can afford to keep on paying their mortgages would not receive the interest rate relief. Third, those who cannot afford to service their mortgages even at frozen reset rates should not receive the relief but should be allowed to default. As the WSJ put it:
RGE - Finally moving from a case-by-case to an across-the-board approach to mortgage restructuring
Don't know who Moe will be but since Goldman Sachs and the Ivy League are already in the house I assume he'll have a southern drawl.
What bothers me more about proposals like this is less a matter of their weirdness and more a matter of the aura of desperation in them: Are these people nuts or are they seeing something that scares the spit out of them; if so, what?
WRT the death of capitalism in the US, what Greenie said but I would disagree with yy: American corporatism does not share many qualities with European fascism; e.g., it is socialist to the degree that the public trough is sequestered by elites but that control is more often typified by extraction (or extortion) of economic rents rather than outright suppression of individual liberties (although if we are not careful laws and regulations passed to facilitate the so-called war on terror could lead to the kind of restrictions on individual freedom that a European-stle fascist would readily recognize).
OK, so we have a rate cut.
And we freeze mortgage rates.
Question: How does this help fix the real problems inherent in the system, which is beginning to fail on a massive level?
We don't have an educated enough workforce to jump start this economy, we don't have a government poicly of investing in anything useful, just throwing money into an unwinnable war, and we don't have a fed that can make the truly tough decision to stop bailing out the wealthy at the expense of the middle and lower class.
When does all this change so that we can really grow again?
No, it won't, because the hedge funds will have more than enough money to support the few names in the indexes. They'll keep those patients alive to avoid paying off the insurance.
KnotRP,
That's one of the stupidest things I've ever read on this blog. The hedge funds are going to bid up Standard Pacific and Beazer stock just to prevent having to pay off CDS? I don't think so. Hedge funds already are shorting the hell out of homebuilders. Smart hedge funds are jumping out of risky CDS contracts, even at a loss, leaving somebody else to hold the bag. By the time this recession is over, there will be far too many small company defaults for hedge funds to prop up.
Remember, debt stands in line ahead of the equity. Betting on risky equity against risky debt always loses in a recession.
"We need badges printed up, you know, "Whip Subprime Now" or something like that. GWB could wear one to show he's on top of things.
libertas | 11.30.07 - 12:37 pm | #"
Or, bid on ebay for one of those "Countryfried" "Protect Our House" green arm bands. Now you too can officially become another member of the "loyalty oath" lemmings.
================
But what exactly are we jumping for?
Frankly, I'm jumping because:
MBI +4.72
ABK +4.43
CFC +1.86
MTG +2.31
etc...
Obviously I'm short these, so obviously I'm losing money. And of course I've forgotten all the money I'm made and cashed in by being short these and the others for quite a while. And obviously all my tears are for myself and not for all those poor buggers who have options - put buyers and call sellers on these. And obviously I'm not closing the shorts but adding to them, cautiously ( reason over emotion, and that's HARD) cos I'm betting this doesn't work. Oh yeah and obviously I'm diversified in my shorts so I'm not caught by the short and curlies.
But, this is governmental intervention of the worst sort - where its only arm twisting and not any actual legislation - its the sort of thing that communist/fascist totalitarian governments like China do ( you'll recall that China didn't use any formal procedure to tell their banks to stop lending till the end of the year - they just informed them that they'd LIKE them to ).
This is a symptom that the rule of law is breaking down in the financial contracts field - All sorts of models, mental and mathematical have to redone now. Worse, once respect for the rule of law goes and the belief in justice disappears then mob-justice and make your own justice behavior looks justified, defensible and at some level even moral.
As someone else pointed out, what about the small savers who'll get screwed ( AGAIN ! Twice in 7 years is not good ) by the reduction in interest rates and are not sophisticated enough to get out of the US$ and into foreign currencies, commodities etc as Jim Rogers has pleaded with them for a month now. Its pretty well known that the petit-bourgeouise voted, VOTED, Hitler into power. We increase the chance of that happening, IMO. Melodramatic ? Who knows.. I make my own arrangements.
-K
The thing to remember about Florida is it's a money market fund. You can't compare it to a pension fund. But you can compare it to any other money market fund that holds a lot of ABCP.
What is happening in Florida could easily happen in a retail money market fund exposed to this stuff. In fact, it will happen faster, because the Florida cities and counties have more loyalty to this fund than most investors have to their MMFs.
In fact, I think you'll start to see runs on MMFs before Christmas.
--
"I'm still looking for Moe."
Go find Greenspan.
It is unfair to the Three Stooges to compare them to the worst manipulators (mis-leaders) in the world today. It is not good to treat liars and criminals as stupid and funny.
Jas
We don't need no stiking badges.
YouTube - We don't need no stinking badges!
"The Fed's asymmetrical response to asset bubbles is an interesting discussion, but concern over a 5% or 10% decline in the stock market? Come on."
BB would certainly agree but problems the FED is facing has little or nothing to do with the stock market. Its a nice cover story for the MSM but under the covers the banking problems must be extreme.
rich,
except what relation did the bright light in florida that put that into the 'money market fund' have to the investment decisions for the florida pension fund?
I don't think the freeze proposal broadly speaking is necessarily a bad idea. Calling the initial rates "low teaser rates" is misleading. For the vast majority of sub-prime loans, the initial rates were already well above prime fixed rates and would continue to be when frozen. Since they were ARMs, investors could not value them based on set future rates, since until the strike date, the future rates are unknown. Further most of these loans were designed to be refinanced at reset, so expectations of the percentage of these loans that continue to exist and perform at higher rates must have been pretty low. Home owners were expected to refi into new loans with similar initial rates (while paying lots of fees). They can't refi this because HPA has stopped/reversed and lenders are tightening up on high loan to value. If they have paid on-time so far at existing rates, however, then they should have strengthened their creditworthiness and in effect should be eligible for "frozen rates" that will still be above prime, thus including some risk premium.
I don't think it makes sense, however, to sort into three buckets. First of all eligibility for relief should be based on payment behavior on the existing loan so far, and not ability to handle increases. It makes no sense to "punish" those who can "afford" increases versus "rewarding" those who can't. It would create obvious adverse incentives. Secondly, sorting these two categories from each other would require the kind of detailed case-by case review, that allegedly this entire exercise is designed to avoid. The third group, who can't afford current rates is out of luck under any scenario anyway.
The final
energyecon,
Few more billion and they will be looking for a new CEO
Okay they've got the name decided on
"Hope Now" alliance. Now all they need is a mascot/spokesperson. I'm thinking they could bring the pets.com sock puppet out of retirement.
Sock Puppet
The "New Hope Alliance" Looks like a weird version of Star Wars "A New Hope" and the "Rebel Alliance", everybody cheers for the movie heroes, but on further consideration, does the US look more like the stellar insurgents or the bloated, militaristic, huge boondoggle, Empire? Is our Death Star economy waiting for some trigger. Come to think of it, that Dot.com death star was the first casualty,...
Naw. It's just socialism for the wealthy.
Exactly. How can they mandate a legal contract be broken? Answer. They can't.
So, in other words, quartz - you don't like this idea and you think it should remain case-by case.
How will the banks profit from this deal? Something has to replace for all this lost revenue?
"Hope Now Alliance"
After all, who needs a plan when we have hope!
I like the comedy element to all of this - even if I'm a fixed-rate target - but I'm more reminded of Andy Kaufman than the Stooges. He's out there, wide-eyed in front of an audience and knowing that he's way over his head, but hoping that somehow he'll not get the shepherd's crook.
"BB would certainly agree but problems the FED is facing has little or nothing to do with the stock market. Its a nice cover story for the MSM but under the covers the banking problems must be extreme."
Exactly. IMO, BB doesn't give a rip about the market aside from the implications to the bigger issue, bank insolvency. That's why the Fed will keep cutting. BB doesn't mind that the MSM and blogs are fixated on the idea that he's cutting to prop up the stock market. Pay no attention to that bank behind the curtain...
quartz,
Calling the initial rates "low teaser rates" is misleading. For the vast majority of sub-prime loans, the initial rates were already well above prime fixed rates and would continue to be when frozen.
Dying for data. Got anything? Please?
How many of these loans are below current "prime" rates? What percentage have payments that are below rents?
Is this a subsidy of millions of "on-the-edge" homeowners? Or is this the banks trying to tie households to their debt traps?
Anyone?
I dont get it -
If we are going to give people financial relief on a mass basis, then we must be assuming the trouble they are in is not their own doing. In order to ascertain that it WAS their fault, we'd have to examine each and every loan and we dont have the resources. So nix that. Right? So, if the problem isnt that of the borrowers', hmmm, strikes me it must be the lenders fault for this mess, right, and maybe the people involved with the securitization process. Well, why dont we just pony up for it out of their profits (oh, they dont really have any when you account for this the right way.)
The whole thing just makes me sick, because it looks more and more like everyone involved will get a handout, while the renters and savers pick up the tab. WTF is that all about?
Look maybe I can find a bunch of people who made a bad investment in one of these companies - yeh, we didnt do our homework, we got greedy, so? - and then maybe we can say, well, we were saving for retirement, and then we can all run to the gubmint and say how we'd really like to get a better return on our investment.
Gad this makes we want to vomit.
Another point, once again seemingly all of the analysts inevitably pigeonhole the problems into the "subprime" arena. Ask E-Trade if that's an accurate characterization.
I'm not sure "We're all subprime now," but I do think the word "subprime" needs to be set aside for a bit.
I wondered last Winter (or whenever) why on earth Paulson would leave a high profile and income job at GS to join an unpopular, lame duck administration. I suspect the Boyz saw the end of the credit bubble coming and decided they MUST have a competent insider at Treasury when the bust came rather than another of Bush's cronies like "Snowjob".
These people are not stupid (Paulson not Bush) they saw this coming or at least were very concerned.
Kicker,
To give you some idea, if you look at 2/28 ARMS originated in 2006, the percentage that have a 'teaser' initial interest rate less than 7% is....
3% (by loan count)
So, that is what quartz is pointing out.
FDIC Statement of Michael H. Krimminger, Special Advisor for Policy, Office of the Chairman, FDIC on Foreclosure Prevention and Intervention: The Importance of Loss Mitigation Strategies for Keeping Families in Their Homes; before the Subcommittee on Housing and Community Opportunity of the Financial Services Committee; U.S. House of Representatives; Los Angeles, CA. November 30, 2007:
FDIC: Error 404 - Page Not Found
what I don't understand is why there are people who still sell stocks. Who are they ?
The FED will cut and cut and cut. The ARM will not reset for 3 years - this will prevent forclosures and maybe even R/E prices will start going back up. stocks will surly climbe.
so who are the people who are selling - don't they see DOW 16,000 in 6 month ?
I jus don't get it. If Fed Chairman is worried when dow goes below 13,000 this is called a .... PUT or am I mistaken ?
If this selling continue once in a while and the dow goes below 13,000 I can see how interest rates wouild become negative: 'take this money - invest in stocks and will give you 1% per year on every amount you borrow from us to play in the market"
I am telling you this is how things should work - this is economic heaven.
Can someone please tell me why someone must be kept in their home? They've basically been on a subsidized higher standard of living that they really cant afford, when they should have been renting, and now we are thinking of subsidizing them further. Since WHEN did we decide that homeownership, or even stupid attempts at ownership, was a right? This whole thing from the start is just one sick sick sick ride that I cannot get off. First you have to watch the insanity as prices go up for all the wrong reasons, and now, when the inescapable would seem to be here, I have to watch as we try and avoid our own stupidity with more stupidity. UGH!
otice this whole weeks rally has been on "hope" of a fed cut and talk of a bailout almost on a daily basis. nothing substantive anymore. all done to counteraactt a slew of REAL bad serious economic data on a daily basis.
as Roubini puts it; a suckers rally.
Yal - I have two words for you : Therapy.
Not to worry! The Realtors have sounded the "all clear" signal:
NAR's Chief Economist Lawrence Yun said in a phone interview after releasing the data that the Northeast's downturn arrived in the summer of 2006 -- earlier than in other sections of the country -- with its worst drop of 5% happening in October, 2006. "For the Northeast, the worst is already past and the question is how fast the recovery will be," Yun said. "Will it be a strong recovery or weak recovery?"
Yun says he's hopeful other regions will follow the Northeast's lead.
You have misunderstood my point.
It's been discussed previously on
this blog -- the indexes upon which
the insurance is based have very
few real bonds underlying them.
One can keep THOSE specific
bonds from failing, without having
to bail out anything approaching
the entire class. As recently as
this summer, one of the major
investment houses was accused
of "not playing fair" for preventing
default rather than allowing the
default and paying much more
out to the insured. This isn't something
I discovered...it's an older thread
that I'm only bringing up in response
to some folks who think the insurers are not as bright as the insured, in this case.
BTW, "stupid" ain't much of a counter argument....
2:30p - that was me, clicking too soon...
"the indexes upon which
the insurance is based have very
few real bonds underlying them.
One can keep THOSE specific
bonds from failing, without having
to bail out anything approaching
the entire class."
well they are failing miserably. there are numerous hedge funds and IB's that have been shorting the ABX to hedge their cdo holdings. its what makes a market.
Can someone please tell me why someone must be kept in their home?
So I don't have to roll them off of my stoop?
.
I am starting to move into the deflationary camp. I think there is an over supply of everything, due to demand created by cheap credit to the American Consumer, which ain't coming back, even with tons of rate cuts. I am beginning to suspect the death of the American Consumer will have a deflationary effect which will dwarf any inflationary pressures.
Am I missing something in my thinking?
idoc - I would presume that once most of the insured figured out the game, they'd stop buying insurance, which would make it no longer profitable to keep the indexes alive. The former insurers would short up on the index and pile on, since there is no longer an insured counter party.
I would add that even California recently figured out that insurance is worthless, in this environment.
"Is this a subsidy of millions of "on-the-edge" homeowners? Or is this the banks trying to tie households to their debt traps? Anyone?"
Kicker | 11.30.07 - 2:11 pm
This game is NOT about interest rate X's and O's......it IS all about maintaining Debt Traps. Paraphrasing CA Gov. S. "it is a two-way street" when he described that so-called deal with lenders in CA in order for everyone to get out of this "mess" of forclosures.
Moe will be that special person who shows up at your door when you do not take the offer you cannot refuse that was designed in order for you to remain in your Debt Trap of a home voluntarily.
Before this thread dies, this whole insanity reminds me of Krispy Kreme and their various attempts to keep their stock price up - and the sturm and drang that people short the stock on basic accounting reads had to go through before making out like bandits in the end.
The particular episode I'm reminded of is their move from Nasdaq to the NYSE. ( delisting and relisting causes havoc with shorts ) One had to laugh - even as one lost money - at the sheer creativity of it all.
It was all very well for a private company like KKD to do this - but for the government to participate in these shenanigans ?
-K
Even if the "low" teaser rates weren't actually low for most loans, the bubble areas had a large proportion of option ARM loans.
It isn't the change in interest rate at reset that matters, it is the change in actual monthly payments made.
If they want a rate freeze they should forfeit any possibility of capital gains, now and in the future, based on original purchase price.
Those that made withdrawals in form of HELOC's should be disqualified.
Those that qualify should no longer qualify for interest tax deductions.
Why Paulson, Bernanke, and others in the know worry so much about the deflating of housing bubble? They are pulling out all the stops to prevent the deflation from taking place even at a substantial risk of high inflation. The reason is our economy now is an asset economy. Assets valued at inflated price are our most productive components that drive our economy. Imagine where would our economy without the inflated housing market in the last 7 yrs! And on top of the mortgages, layers of derivative assets were built to finance takeovers, mergers, etc... Where would our miraculous 3% GDP growth be without such stimuli? Efforts to prop up asset prices at artificially high levels for houses, CDO's, CDS, MBS, SIV, ... are the ultimate goals of our planners. Their efforts now are to help engineer a gradual unwind of past-issued toxic debts. The market for new issues of these junky financial instruments that have greased the DOW, NASDAQ, other financial activities in the past 7 yrs is essentially dead! Investors around the world now think twice about American-made assets and will be in their betrayal-risk averse for years to come. Lacking the steroidal-stimuli from these finacial innovations, and new technological advances in our industries, no wonder economic pundits now have predicted below-trend growth for years to come.
Bank Lawyer's Blog - Borrower Bailout Near?
Bank Lawyer's Blog: FDIC
Mom is drunk again and just shit her pants. I gotta go now.
Robert Coté | 11.30.07 - 1:24 pm | #
As if it needs saying this is not the real RC above. Apologies to all here at CR as it appears some of my "fans" have followed me here.
Thanks for clearing that up, Mr. Coté - (no pun intended).
Note the homepage versus # active link for but the difference until they figure out the rest.
This is nothing more than evidence that CalculatedRisk has "arrived." Sad that trolls and worse start showing up. Encouraging that even trolls and worse see the importance of great sites like this. It is interesting at the very least that this "issue" shows up within hours of my taking Sebastian to task for his behavior.
"I'm still looking for Moe."
He's in Camp David this week.
Great Post CR!
Beano | 11.30.07 - 1:14 pm
No he's NOT. Moe was the smart one.
No he's NOT. Moe was the smart one.
thoth | 11.30.07 - 3:38 pm | #
That's soooo funny, on so many levels!
Moe was a freekin' genius!
Geoff, are you being facetious about keeping people in their homes? If not: it's about politics. Americans are the most entitled people in the world. Once we have something, even if only on paper, we believe in our souls it is ours. If someone takes away what we think is ours, we deal with them and move on to someone who gives us what we want. It's important to remember who the Fed Chairman's boss is. And there's also the civil strife thing...
ottnot : "It isn't the change in interest rate at reset that matters, it is the change in actual monthly payments made."
Exactly.
I have been telling people for the last 4 years that with these exotic mortgage loans, it's not about the 'rates' it's about the 'terms'. I always get blank stares.
Why do the sub-Average Joes & Jills generally understand the consequences of a "balloon" loan, but not understand the basics of his/her Interest-Only or Option ARM?
Piggybacking on Dissident from above....
I'm sure that the note holders will be insisting on this (if they have any say at all), but the bailout recipient should NOT be allowed future extensions of credit. No credit cards, no HELOCs, etc. Unti the note holder is made whole.. if ever.
Funny, they had enough people to push the toxic loans on everyone, drive prices to unaffordable levels, and pillage huge profits while telling us "it's different this time."
Well, it's not different: just more crooks working the system in creative ways, and we, the responsible people, get stuck with the bill.
I was disappointed that more people didn't read and comment on the link posted earlier by FFDIC, "FDIC Statement of Michael H. Krimminger, Special Advisor for Policy, Office of the Chairman, FDIC on Foreclosure Prevention and Intervention: The Importance of Loss Mitigation Strategies for Keeping Families in Their Homes"
Here it is again:
FDIC: Error 404 - Page Not Found
Sadly, the usually erudite conversation here has completely failed to discuss the proposal or his arguments (or in some cases, even read the proposals or arguments). Check out the section "Correcting Misconceptions about Mortgage Restructuring" for as pithy a description of the reasoning as I've heard. For example, the first one is:
Misconception: Restructuring Will Create a Windfall for Subprime Borrowers
Some have expressed concern that restructuring subprime loans to a fixed rate of interest at the starter rate will result in a windfall for subprime borrowers. This misconception is based on the belief that the starter rates for these loans are similar to the low 1 to 2 percent "teaser" rates that were aggressively advertised for prime borrowers. In fact, of subprime hybrid mortgages originated in the first quarter of 2006, the average starter rate was 8.28 percent, which exceeded the average rate on subprime fixed rate loans made in that same quarter (7.93 percent), and was well above rates paid on prime fixed rate loans. These subprime borrowers will continue to pay higher subprime rates even after restructuring.
Read them yourself. Now, back to your regularly-scheduled ranting.
Oh, and I am still wondering when the massive pay increases will be showing up to support their "unaffordable housing forever" plan. Geez... if something can't be bought, trying lowering the price to sell it.
Thank you DCRogers.
I call Bull**** on the rate freeze plan. My guess is that sub-prime mortgages with 7% teasers are indeed a small portion of the mortgage pie.
This leaves the McMansions and the $300K single family homes with the 1% teaser rates. Are the bondholders going to agree to a negative ROR for another three years?
Thanks for the data DC Rogers and Schnapsteroni.
I'm wondering when they changed the law to make the Federal Reserve a government funded boiler room for the stock market.
It occurs to me that that's what the creation of the President's Working Group was meant to accomplish, reining in the most independent of those officers.
I don't know why the eligibility criteria for this handout - that is, market stabilizing measure - can't include a statement by the borrower that the loan application completely and truthfully disclosed any facts that had a bearing on its approval, with some sort of criminal hazard for lying on that statement. Fitch seemed to be able to review a set of files quickly enough, I hear that evidence of fraud was simple enough to discover, and there's no reason the audits couldn't be performed at leisure after the money is shoveled out the door. It's painful enough to watch folly rewarded, but when fraud as flagrant as what we seem to be seeing is subsidized in this way, we're really approaching a tipping point in accepting systemic vice. I haven't been so furious about a public policy issue for many years.
In any case, it's probably changing deck chairs on the Titanic at this point. After all, the worst of the foreclosure activity seems to be in the vintages that are months or years from rate resets, anyway.
"Hope Now Alliance"
Rubber bracelets available... $1.00 each
in red, white and blue, for the USA
and in blue with stars for the EU
Made in China, of course.
The good news is China will not loan tom and purchase stock in, this terrific Alliance.
Autographed bracelets slightly higher...come with first edition rights to the duo's new book, as soon as they get the boot of freedom into their "pressing family reasons" new occupations.
Is anyone shocked that the 1-2 punch of Paulson's DOA plan and Bernanke's not-so-obtuse reference to undesirable equities declines comes the day before many IBs & Hedgies close their books out and prepare their statements?
great catch, barely!
Look, people can and will quibble over the details. While details mayyer, in the end they are not the most important thing. Markets and economies in the end come down to human psychology. When people feel confident things have a way of working out, even if imperfectly, despite the facts. And when confidence is missing than even modest problems can be insurmountable. So, to finally see something approaching action from Paulson, who has been AWOL throughout the whole saga (perhaps in an undisclosed location with Cheney) is a step forward. I don't get the whole moral hazard argument anyway. When a boatload of drunken fools capsizes we pull then out of the water and then worry about who to prosecute. After the crisis is past, i you want to strip every Wall Street crook, scamming Mortgage Broker and fraudter "homeowner" naked and flog them in the town squares, fine with me. Just first lets's clean up the mess.
Hope Now Alliance = banks hoping for more money NOW!
As I understand it, currently in California borrowers who have not refinanced have NON-RECOURSE LOANS.
The FBs (fed borrowers) with these loans have the right to walk away and mail the keys to the bank.
Definition of non-recourse loan: A secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the collateral. If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the lender is simply out the difference.
HOWEVER, IF the FB refinances, they LOSE their NON-RECOURSE status.
I would assume that if a FB takes the bail-out bait and calls the lender to get their interest rate increase frozen, then this revision in the contract would switch their mortgage from NON-RECOURSE to RECOURSE.
After their interest rate is frozen the FB cannot walk away from their home without losing everything: money in savings, 401k, cars and having their wages garnished. Seems similar to the new BK laws. It's the new indentured servitude (but didnt the servant get their freedom after they paid for 7 years, rather than 30 years or more paying on an inflated mortgage?).
I am wondering if one reason that these bail-out plans have been announced with such vague language is to test the waters to see if the public catches on about the downside for the FBs.
FB'S: Don't take the bait! Preserve your right to walk away from an upside-down mortage. This right is the most valuable thing you have in this uncertain time. Be sceptical! When was the last time a bank just did you a favor without something in it for them??!!