gosh, first?
Key issue- banks would not do this if it was not in their best interest. Borrowers are being "helped" by getting locked into bad loans on overpriced houses that banks don't want back anyway.
I'm glad I don't need that kind of "help" from the gov't and feel sorry for those who get it.
Locked in at 7% for 5 years isn't so sweet when a 30yr fixed drops to 4.5% in 2009. Not that it matters to people with a 660 fico - they can't afford/maintain their mortgages anyway and will likely default over a period of years, regardless of any govt intervention. I have to agree with others who say this is more of a public relations move than anything substantive.
Will these sub-660 FICO folks have to provide... er.. 'documentation' of their uh... 'income' to participate?
I don't have the Official Word on that. I have gotten the Unofficial Word that, yes. They will have to provide current income documentation, and show that their DTI doesn't go over 40-50% (not sure exactly).
If those rate numbers are right, and that is not the teaser types I have seen and heard on the radio, this plan is a waste of time. If the spreads are higher, what do people think of this scenario:
Teaser Freezer borrower has the rate set at 4%. He paid $300k for the home. His monthly bill is set at $1200 for up to 5 years. New (previously unfrozen) borrower can only get a rate at 8% due to new lending requirements. Heck, he may even have to put 5% down! To offer the $300k price, the new buyer will have a monthly bill of $2400, double the amount. Unless new buyer is a very special kind of fool the government hopes for in this plan, he would only offer $150k for the home, and pay the same price of $1200.
I agree in general with your take, and we'll have to see what the details are tomorrow.
You said, "So far, I'm prepared to believe assurances that this will not involve taxpayer subsidies: the cost of this is, actually, going to be absorbed by investors in mortgage-backed securities."
I guess that all depends on how one defines "taxpayer", and who exactly owns these notes. I'd bet dollars to donuts that there are quite a few state-managed funds, pension funds, and general mutual funds owned by taxpayers that stand at the end of this line.
I'll also be interested to see just exactly how many free-market paradigms, contract law traditions and plain-language constitutional amendments we had to trample to get here. That's going to be the real cost... the unintended consequences.
Against that would be the benefit... how many dollars were "saved" by not letting affected loans default. I'd be very interested in your take on what that number might look like once all the details are understood.
I fear this number might seem small against what we are risking.
It will be interesting to see what the front end ratio is if the back end is 50%.
It is also interesting that they will have to document their income.. wasnt that the point of a boiler plate solution to begin with the fact that all paperwork would go out the window? That the servicers couldnt handle the load of going through all this stuff.
Looks like the suggestion from the investors camp is to maybe include Alt-A and Prime.
BC-USA-SUBPRIME/DOCUMENT 12-05 0000
BC-USA-SUBPRIME/DOCUMENT (UPDATE 2 )
UPDATE 2-Group proposes subprime mortgage framework-document
(Adds details)
By John Poirier
WASHINGTON (Reuters) - A trade group that represents
large mortgage investors has offered the U.S. Treasury
Department a plan to temporarily freeze interest rates for
borrowers facing foreclosure, a document obtained by Reuters
Wednesday says.
The outline by the American Securitization Forum focuses on
subprime adjustable rate residential mortgages with starter
interest rates of three years or less that were originated
between Jan. 1, 2005, and July 31, 2007.
For a borrower to qualify for a proposed five-year
rate-freeze, rates on those same mortgages would also have to
reset from Jan. 1, 2008, through July 31, 2010, the ASF
document states. The aid might extend beyond subprime loans to
prime and Alt-A loans, the document states.
The proposal also seeks to avoid rewarding borrowers who
may have participated in fraud, by targeting borrowers who
occupy their homes as primary residences.
It is not known if Treasury Secretary Henry Paulson, who
has worked closely with ASF, has accepted the document as
presented late Tuesday or if he demanded any changes.
President George Bush is planning an announcement Thursday
afternoon on the issue and it will be followed by a news
conference by Paulson.
The proposals, outlined in a document called the "ASF
Statement of Principles, Recommendations and Guidelines," does
not appear to be binding for the industry.
"While this statement addresses certain legal, regulatory
and accounting matters, it does not constitute and should not
be viewed as providing legal or accounting advice," the
document says.
Though it is not known how many borrowers might be eligible
for loan modifications, the proposal opens the door for "case
by case" assessments for current borrowers who are able to
refinance into private loans or loan products insured by the
Federal Housing Authority.
A complex formula comparing a current credit history score
with a score at origination will also help determine
eligibility for borrowers who live in their homes they bought
and are current on their payments.
For example, the document says that a subprime borrower
with a score of less than 660 and has not increased by 10
percent since the origination of the mortgage will be
fast-tracked for a modification.
The document does not mention any system to monitor the
modifications, which has been called for by some congressional
Democrats.
(Reporting by John Poirier and Patrick Rucker; Editing by
Diane Craft)
O/T but interesting in light of current credit conditions:
Cary Huang in Beijing and Daniel Ren in Shanghai
Dec 06, 2007
Beijing yesterday signalled a tougher stance against overheating in the economy, saying it would shift its long-held monetary policy stance next year from "prudent" to "tight".
``My biggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won't go to them,'' Representative Spencer Bachus, the top Republican on the House Financial Services Committee, told reporters after the meeting with Paulson today.
If they're paying, and current, why do they need help senator silly?
and that is not the teaser types I have seen and heard on the radio
Well, the "teasers" that you have heard about on the radio are either bait-and-switch rates (these borrowers didn't get that low rate that was advertised) or else they are the "payment rate" on an Option ARM. (And that rate is only given to the borrower, in most cases, for 1-3 months. After that the OA accrual rates adjust up to well into the 7.00% range. It's just that the borrower still makes the payment (until recast) based on that low "teaser" rate.)
Everybody can just forget about people with accrual rates of 4.00% getting "frozen." Not gonna happen.
Long term, this has to make debt repudiation "socially accetable."
If we keep lowering the bar, eventually foreign investors will flee causing interest rates to rise. This is soooo third world.
The Bush administration's efforts to forge an agreement have become more urgent as the economy falters after a third-quarter spurt. Growth may cool to an annual rate of less than 1 percent in October to December, economists say, following an expansion of 4.9 percent in the prior three months.
``The concern is that macroeconomic conditions will deteriorate significantly, which can happen in the absence of such a plan,'' said Wachter at the Wharton School.
Thought the economy was in great shape. Confused. Please clarify Mr. Central Planner Biz-School Guy
Would the investors that are being asked to forgo 2 / 2.5 % interest be able to claim on their MBS / CDO insurance - under some "change of terms" clause ?
I'm still trying to track down a MBS insurance contract. No luck yet.
Also, during Greescam's war on yields the majority of the credit created was allocated to real estate (gnoring the war spending). What's next? Seriously, are we so bereft of ideas that senseless inflation of assets is our only alternative. Personally, I think most families would prefer a shorter work week than this foolishness.
Won't the "costs" to investors of the proposed freeze really be savings over what the investors would get if the involved longs go belly up, which is what almost all will do?
The details so far limit the freeze to loans due to reset 2008-10, loans that are current on payments, and loans that could not be repaid at the higher reset rate.
Thus the operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings).
That's why Angelo and friends will agree to the deal.
And, along with the limited pool to which the freeze will apply, that's why the freeze does very few borrowers any significant favor. Borrowers getting by at 7.7% by the sking of their teeth will be paying at a premium to keep a house with increasingly negative equity, and little real hope of being able to refinance in 5 years.
This is Bush Admn plan, after all. What could we expect?
Although Paulson has said 'no taxpayer money' he's also said 'expand the mortgage revenue bond program' which is an indirect way of using taxpayer money (MRBs represent what's usually called 'tax expenditure').
What are the odds that this 'rate freeze' will have a recapture clause so that the 'foregone' interest will be payable upon sale or refi?
I am unclear as to how these re-worked loans will function. The amount paid on the loan will represent the I/O portion of the loan at the frozen interest rate, correct? So, at the end the freeze period the principal owed will be equal to today's amount, assuming no early payments, an appoproate expectation of borrowers who can't make increased payments. In a way, these are just five year leases with an option to buy at the end of the contract, though the lease payments won't be applied to the downpayment, or be foreclosed on and no better off than had this happened five years previously.
What this will eventually become is the legal basis for laws meant to maintain citizens in their homes during long periods of unemployment due to recession, resets etc. This will be part of many different kinds of bailouts, which reminds me of the song
"I think I am turning Japanese".
If they're paying, and current, why do they need help senator silly?
Jack | 12.05.07 -
I think the point being made is the folks who made wise financial decisions and/or have executed on their agreements are not receiving any government assistance (that's what this is), yet the folks that have not are being helped. Of course, the real reason their doing this is they believe they can turn the home cash registers back on and get the economy heated again. It will likely backfire as most home homeowners that would be able to qualify with a 45 to 50% DR could refinance anyway...
Thus the operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings).
Yes. End of the day, that is the choice.
There will probably be some people included in this who somehow could have managed the 10% (get a second job, sell the car, whatever), but whose ability to carry the mortgage will be markedly improved by keeping it at the start rate. In that case, it is foregone interest.
But I suspect that scenario will be rare. This is really about either taking 7.70% for a loan or facing 50% or more loss severity in a foreclosure.
"What this will eventually become is the legal basis for laws meant to maintain citizens in their homes during long periods of unemployment due to recession, resets etc. This will be part of many different kinds of bailouts, which reminds me of the song
"I think I am turning Japanese"."
Yes, this could set a very poor precedent.
I can understand the president wanting to do this...who would want this foreclosure mess on their watch
I wonder just how many of these borrowers there are. low FICO score, currently up to date on payments, but can foot the projected increase in rates and wanting to fight to keep the house. As home prices continue downward, these borrowers might just be a very small part of the pool of distressed borrowers.
What I don't understand is how determining all the various inputs (income/debt levels/current LTV, etc) isn't going to bog this down almost as much as the old system of dealing with them one-by-one.
The basic time/money consumer here would seem to be the need to ascertain accurate data. Having the formula may ease thinking time, but not much else.
he's also said 'expand the mortgage revenue bond program'
Yes, but surely in that case he's talking about refis.
So it is not that taxpayer subsidies are making private investors whole for these modifications. In a bond program refi, the bond program takes all the risk, but then it also gets all the interest payments. The MBS just gets paid off, as it would in any refi.
Of all of those who might be helped from this, how many will be found to have filed fraudulent mortgage applications (a felony if I'm not mistaken) and will avoid the help for fear of imprisonment?
How will the interest shortfall be distributed across the different tranches? Will the most senior tranches suffer a reduction in interest payments? If so, they might be worse off. And if they are worse off, why would they accept altering the contract?
The point is that the cost of this goes directly to investors in asset-backed securities, and those investors are being asked to forgo 10% (the reset rate) and take 7.70% (the current or start rate).
The federal government unilaterally rewriting these contracts is incredibly dangerous. It says the all debt contracts in the US are now subject to political risk which means the risk premium on all new mortgages has to rise.
I'm extremely bothered by the notion that its morally justifiable to transfer wealth from investors to borrowers because the investors were charging too high an interest rate. One assumption that Tanta is making is that all investors will be better off from the rate freeze but I don't believe that for second. Any MBS with properly underwritten subprime loans which did not have an unexpected rise in foreclosure rates will lose a ton of value as a result of this freeze.
There will probably be some people included in this who somehow could have managed the 10% (get a second job, sell the car, whatever...
On that subject, I saw a quote the other day from a woman analyst to the effect, "people will just need to cut out the $50/month cable, spend $100/month on food for a couple, rahter than $200..."
Yikes! When I was in college there was a period where I had $10 a week for food (and entertainment, luckily I knew several bartenders...) and I nearly starved. Adjusting for inflation, that would probably be $25/week now. This woman probably spends that much on a mediocre meal at a mid-town bistro...
The document does not mention any system to monitor the
modifications, which has been called for by some congressional
Democrats.
The key word missing here is "publicly" monitor the modifications.
This could be done with fast-track regulations to the Community Reinvestment Act or the Home Mortgage Disclosure Act (or both). Hey, you've got popcorn, you need a scorecard.
My guess is that there are relatively few people who will qualify for the freeze (ie., small percentage of the 2 million or so subprimers) and of them only a portion will be willing and able to continue paying at 7.7% for a sinking asset with the prospect of losing it at the end of 5 years.
So what is this all about? For Angelo and friends, its about getting 7.7% for as long as they can and delaying the rush of REOs maybe just a tad, plus PR to keep them a few steps ahead of the angry townspeople coming with pitchforks and torches.
And for Georgey Junior? Also PR, of course.
George Bush doesn't care about black people was an understatement. George Bush doesn't care about anyone not invested in the Carlyle Group.
Oh, GWB and the right wing of the Republican Party maybe also will benefit from the misplaced resentment that the freeze plan has stirred up. All those folks who have been screaming because they think some brown people are going to get a little help from the Gubbermint . . . believing they will be paying 1% on their loans at taxpayer expense! Divide, conquer, praise the lord, and make everyone believe that laissez-faire is god's word.
"But I suspect that scenario will be rare. This is really about either taking 7.70% for a loan or facing 50% or more loss severity in a foreclosure.'
Yes, and they model most of this without the reset increase after the first year. Problem still remains that the pool will be adversely selected with more lower fico score borrowers remaining in the pool which will still produce poor performance.
Seems to me it's still going to be a very cumbersome and slow process, once it finally gets rolling sometime early next year. Meanwhile, the foreclosure avalanche for the many many who have no chance of qualifying just continues downhill, dragging home prices ever lower with it. There just isnt' enough OOMPH here quick enough to make any difference to the momentum in the housing market already so I dont see how this changes a whole lot, aside from injecting another huge dose of uncertainty into what is happening in the credit markets.
What I don't understand is how determining all the various inputs (income/debt levels/current LTV, etc) isn't going to bog this down almost as much as the old system of dealing with them one-by-one.
Operationally, on the execution side, it does. It takes just as much effort to process a mod under this plan as it did before we had the plan.
What this does is two things:
Servicers get proactive with calling up borrowers in the targeted buckets to see what their current situation is and fast-track them for mod consideration if it's relevant. The old "case by case" way involved basically waiting for a borrower to go delinquent, and then waiting for them to ask you for a workout instead of proactively offering one. The problem with that, in turn, is that by the time you get around to talking about a mod with these people, they're so far behind that the mod gets too expensive relative to FC.
It offers a uniform definition of borrowers who have a "reasonably foreseeable likelihood of default." That's the technical standard in PSAs for when workouts are appropriate. In other words, The Plan boils down to making a practical working definition of the borrowers in that rather broad category. This, by the way, is why it really isn't very likely, in my view, to represent a violation of PSAs or securitization contracts. Almost all of them allow mods when the borrower is in default or reasonably foreseeable danger of default. So servicers ask, what counts in the "reasonably foreseeable" bucket, and the answer is loans in The Plan (current now but not likely able to afford the reset, and so in foreseeable danger of default at or just after reset).
Monkey In Chief: I'm extremely bothered by the notion that its morally justifiable to transfer wealth from investors to borrowers because the investors were charging too high an interest rate.
Sounds great. Let's get FHA started on this risk-based pricing approach, asap!
"Any MBS with properly underwritten subprime loans which did not have an unexpected rise in foreclosure rates will lose a ton of value as a result of this freeze."
In that case, the pool would see a ton of run off anyway as folks prepay to take better financing( if they have the equity to refinance) The only negative I see is duration will suffer and performance, but loss severity will be better.
The freeze is not a decree by the Feds! GWB's boy Paul is merely helping broker an agreement among the lenders and trying to clear the legal ground. The Bush Administration is not tearing up any property that belongs to Wall St firms. What President did you elect? We're talking George W "Carlyle" Bush and Dick "halliburton" Cheney, for Freddy Hayek's sake! Whose side do your think they are on?
Tanta,
I accept the real frozen rates would be say 7-8%. This plan is a scam then as even a subprime type fool is not going to pay for 5 years when they have no chance of selling then. The assumption of 7-8% instead of 10% on a reset is a dream. They need to get used to the idea of 0%.
Thus the operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings).
Yes. End of the day, that is the choice.
No. This is where the rescue breaks down.
The operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings) and massive impairment of near every other mortgage product.
And if that isn't enough, illiquidity, market distortions, on and on make for a messier investing environment. How's that for a moral hazard? Not the borrowers but the lenders. one of the intents of the 'bailout for dummies' program is to get investors investing again. now here they have the rules forcibly changed and they know the rules can be changed. No more investing.
The reason rates low FICO buyers have much higher is obvious and intelligent. First of all, low FICO buyers and prime buyer do not compete with eachother -- they do not want to buy the same type of property. If the low FICO buyer is given a low rate, then the price he pays for his house will end up being higher than it otherwise would have been because people spend as much as their wallets will allow. If the banks charge him more interest (higher rates) then the house price will need to be lower for him to be able to purchase the house. Dropping rates too low for FICO borrowers would be the disaster and would cost banks even more. Of course the loans should never have happened at all but that is another story. The prime crowd on the other hand ended up paying a higher price for the home itself because of their lower rates and my guess is that they are the ones that will feel the most pain in the long run.
"What this will eventually become is the legal basis for laws meant to maintain citizens in their homes during long periods of unemployment due to recession, resets etc. This will be part of many different kinds of bailouts, which reminds me of the song
"I think I am turning Japanese"."
Yes, this could set a very poor precedent.
An intense short-term recession and deflation that cleans most of the bad debt out of the system and learns people to use their brain again probably has the best long-term outcome.
But because of our pain-phobic nature it may be the least likely outcome, with a long drawn out Japanese-style "zombie economy" being more likely.
Denninger on this 5 yr freeze plan... pretty much on the money here...
Do any of these politicians have a brain? Let's think about this one for a minute.
Abrogation of contracts cause the following, immediately:
Lawsuits. Lots of them. Illegal "taking", theft by conversion and on and on and on. That will go on for years.
The ARM mortgage has been officially taken out and shot. That will cause an instantaneous cratering of the housing market (beyond what's already happened!) in any place where house prices are beyond affordability limits for people on 30/fixed mortgages. That'd be, oh, most of the country.
Securitization? Ha! Oh yeah, I want to be long a securitized bond in this situation. Heh, just curious - how many billions worth of ARMs do Freddie and Fannie have on their books? Oh, I wonder what this does to the NIM on their book? AIEEEEEE!
Could this really be a first step towards transparency for these MBS. Many of them are black holes of information because at the very core the bondholders dont know what they have (due to low/no doc). This could be a proactive step into finding out what people are holding so that they could be properly valued on the secondary market.
Investors (at least knowledgeable and realistic investors) know that they can lose their investment if the business or asset they invest in crashes and burns, or breaks laws and gets sued big-time, etc and so forth.
I agree with you that systemic crash is one of the possibilities looming in the futures (no odds on it, just saying it is possible). The freeze plan won't make the system crash. It won't do enough to keep the system from crashing, either, if a crash is going to happen (far too little in the freeze to have any real effect).
The big moral hazard is not from the subprime borrowers (just a bunch of little bump in the road hazards), it is from the subprime lenders and their finaciers. Joe and Jane in their little house won't make the system crash, not times 2 million. But Citi and Bear and HSBC, etc, and their CDOs and SIVs . . . that's where the big moral hazard is.
tanta said The MBS just gets paid off, as it would in any refi.
True enough. But a little off-topic. The refi wouldn't happen without the tax expenditure. If taxpayer money went to paying an interest subsidy on a loan you'd say its a taxpayer bailout, but if taxpayer money goes to supporting the refi of a loan that enables a pay off of the existing loan, you'd say it's something else???? That seems to be form over substance.
And someone asked how the rate freeze affects different tranches? Basically lower interest means there is less excess spread to support the senior tranches, but of course a foreclosure would reduce the support as well. The big effect is the fact that most of these deals have triggers - if defaults are too high more cash is diverted to the senior tranches in the early years. With frozen interest rates, there are fewer defaults, so the triggers aren't tripped and the senior tranches don't get the benefit of the change in cash flows. That part of the structures makes the senior tranche holders worse off. The rest is a little hard to determine - better off in some ways, worse off in others.
A loan workout offered by the lender is not an abrogation of contract. Not only do workouts get done all the time (for Chrysler's sake, and United Airlines, not to mention Enron and Worldcom), but in the 19th century the US repeatedly defaulted on its debts . . . the golden age of free market capitalism.
My point above about the benefits to the Bushies of the bailout plan. To some voters it looks like they are trying to help keep people in their homes, and among other voters they are stirring up resentments about big government, handouts to the poor and undeserving, and creeping socialism.
Tanta, what if there is a neg-am feature to the Freeze? Say the rate was going to jump from 7% to 9%, and the 200bps is a Mortgage PIK? (Payment in kind). Then the investors don't lose any money on paper (at least for 5 years).
"This is really about either taking 7.70% for a loan or facing 50% or more loss severity in a foreclosure."
I believe the choice is "50% or more loss severity on foreclosure" or "7.70% for a year or two and 75% or more loss severity on foreclose later". The sooner you can foreclosure, the better price you'll get in a downhill market. We know from Japan how freezing stuff worked perfectly.
Tanta, what if there is a neg-am feature to the Freeze? Say the rate was going to jump from 7% to 9%, and the 200bps is a Mortgage PIK? (Payment in kind).
I don't know if I'd call that neg-am so much as "waived-am". And I'll bet the answer is...NO.
Investors may be willing to take the 7.7% (or whatever) instead of the expected 10%... thereby establishing a market value for their securities by temporarily removing some of the question about default, but any smart investor will still immediately dump any securities as soon as the market makes a price - any price - because they will recognize the value as temporary, especially in light of an apparently slowing economy that will soon kick default rates even higher, freeze or no freeze.
This is, quite frankly, sheer desperation.
Shnaps, "no" is probably the answer. But a PIK feature would make the investors whole on paper. It worked great for a few years for Michael Milkin in the '80s.
Apologies if someone noted this already, but I was reading the Bloomberg piece when this sentence:
Paulson finalized the deal as the housing recession entered a third year, threatening the economic expansion.
Just so I'm clear on this, Bloomberg's Alison Vekshin is now able to just say, without any qualms, that 2006 was a tank year?
I would swear that the well-known and reliable economist David Lereah told me throughout 2006 that everything was swinging. I think I might be able to come up with a few others who said similar things if you give me a minute.
I would also note, in fairness to Lereah, that 2006 was indeed the 3rd or 4th best year evah.
How did the failure to break all previous records become a recession?
"I think the point being made is the folks who made wise financial decisions and/or have executed on their agreements are not receiving any government assistance (that's what this is)"
Banker, it is not 'government assistance'; in any way, shape or form to be further tied to a loan you should not have on a depreciating asset in an economy that is about to leave you high and dry. It is getting bled dry, pure and simple. The ONLY goal here is to establish the illusion of a market for securities.
"...now here they have the rules forcibly changed and they know the rules can be changed. No more investing."
Exactamundo!
It's called capital flight.
While it may be going too far to say no more lending, it's pretty difficult to imagine how this kind of action would encourage capital to seek its way into lower-FICO loans. At a minimum there will be a serious cost premium added.
Perfect example of an unintended consequence.
BTW... are these freezes intended to be mandatory? If I was a borrower sitting atop a depreciating asset, I might just want to walk. That way I end up with no debt, a bankruptcy hassle and a low FICO score (more or less where I started).
Does the borrower get to choose whether to accept the frozen rate?
An FDIC official said at a congressional hearing last Friday that a typical subprime 2/28, originated in the first quarter of 2006, had a starting rate of about 8.25 percent, or half a point higher than Bloomberg's estimate.
I think some readers here are confused about what constitutes a subprime mortgage. The 2/28s and 3/27s in question aren't interest-only loans, and the borrowers had to document income, assets, expenses, debts, blood type, sexual orientation, and whether the carpets match the drapes. These loans didn't have intro rates of 4 percent or lower; those generally were I/Os.
I wonder if a word was missing in this sentence from the Bloomberg article: "Borrowers whose credit scores are below 660 out of a possible 850 and haven't risen by 10 percent since the loan was sold will be given priority." Does that mean if you had a score of 590 when the loan was sold, you're ineligible for a rate freeze if your current FICO score is 649 or higher? I'm not sure what's the point of that. If your score rose more than 10 percent, you're more likely to keep current if the rate is frozen, correct?
Saith joe schmoe: So what is this all about? For Angelo and friends, its about getting 7.7% for as long as they can and delaying the rush of REOs maybe just a tad, plus PR to keep them a few steps ahead of the angry townspeople coming with pitchforks and torches.
Mozilo pretty well said as much at Monday's housing conference. I question the morality of squeezing five years' more of payments from people who are likely to default eventually anyway.
I watched that Sheila ( reference intended ) on Kudlow tonight and these points that she said struck me:
No servicer will be asked to violate anything in the pooling and servicing agreements.
The DTI will be 50%.
Do I trust her ? Who knows - but that's what she said and I have no beef if #1 remains in place. Whether what they do, as per the "Plan" violates the PSA will have to litigated won't it.
Paulson didn't call together a meeting of defaulting homeowners, just like GWB didn't call together the New Orleans evacuees.
Paulson called Angelo and friends to save their collective hides, politically more so than economically. Just like GWB got on the phone with Halliburton after Katrina.
How can anyone believe that GWB is tearing up investors property to hand over to poor schmucks with subprime loans??????
... it's pretty difficult to imagine how this kind of action would encourage capital to seek its way into lower-FICO loans. At a minimum there will be a serious cost premium added. Perfect example of an unintended consequence.
Entrepreneur, what makes you think this is not intended? Do you seriously think this isn't a necessary and beneficial consequence? It sounds like you believe that subprime rates weren't too low and subprime lending standards weren't lax.
BTW... are these freezes intended to be mandatory? If I was a borrower sitting atop a depreciating asset, I might just want to walk. That way I end up with no debt, a bankruptcy hassle and a low FICO score (more or less where I started).
The low FICO score is especially desirable as it opens the door to all sorts of bailouts and makes you the beneficiary many future "credit repair" initiatives.
Woe to any with a credit score above 780, however. A bleak future awaits indeed.
"The 2/28s and 3/27s in question aren't interest-only loans, and the borrowers had to document income, assets, expenses, debts, blood type, sexual orientation, and whether the carpets match the drapes. These loans didn't have intro rates of 4 percent or lower; those generally were I/Os."
I would make the case that most of these loans are/were IO and most were not income documented, based on analysis made available.
"Tanta, what if there is a neg-am feature to the Freeze? Say the rate was going to jump from 7% to 9%, and the 200bps is a Mortgage PIK? (Payment in kind). Then the investors don't lose any money on paper (at least for 5 years)."
I was hinting at that in a post to previous.
The point here is that this is just a way to force the subslime borrowers into a kind of debt prison, where the investors can grab oodles of caish at the coming Fed cut to refi their short term debt, while holding the subslime debtor to ridiculous rates.
I suspect that the PTB think that those in subslime iwth
I read a couple of weeks ago that goldman was closing out a lot of its profitable ABX positions. You can see that the ABX turned up. I wonder why? Think goldman had a wink hint what might be coming.
Also, seriously, who here for a second believes this narrow progam is the last we'll see. This is the example that will be used to justify the government coughing up huge sums, you know, since industry already made their contribution to society with HopeNow.
This is a massive debacle unfolding before our eyes.
Historical studies of loan modification show that about 40% of modified mortgages re-default within 2 years. A recent study by Joseph R. Mason (Wharton) suggests there will be a much lower success rate on recent mortages, since some 70% of mortgagors are believed to have exaggerated their income by 50%. Probably the best predictor of default is home equity, and most of the recent subprime borrowers have little of it if any.
Nobody mentions in the current debate that perhaps 50% of recent subprime was cash-out refinancing. Hard to feel sorry for anyone who bought a hummer on his house's appreciation and now wants a handout.
Ok, so each company has a proprietary database. They do what is said above and go pro-active. How does their data get transferred? Do they do the refinace? Who audits it?
If they forward the data to some gov. agency to sign off on, how does it get processed? With what software? Where does the staff come from?
I suspect that the PTB think that those in subslime with these mortgages will jump on board readily as they are just stupid poh people. That elitist War Shreik attitude may about to be tested.
Coming soon: Credit Impairment Companies. "Too good for the bailout? Lenders holding you to the terms you agreed to? No Problem! Let us here at No Hope Now dot com turn things into Hope Now! We will teach you how to game the system just like that greasy neighbor whose Hummer, Harley and RV are constantly blocking your Tempo as you drive to your second job. Act now before you are priced in forever.
1. No servicer will be asked to violate anything in the pooling and servicing agreements.
If this is the case, why is the federal government involved at all? Maybe the Bushies just want to look like they are doing something which would be classic Bushie behavior.
Tanta tomorrow - if a 'qualified' homeowner receives a mod and then sells the home/collateral afterwards how is the payoff calculated and what will the tax consequences be for a gain or loss on sale? I'm assuming payoff quotes will be at the adjusted freeze rate ignoring prior or future rates and tax consequences for now remain the same under current IRS rules. Thanks.
Historical studies of loan modification show that about 40% of modified mortgages re-default within 2 years.
The purpose of this ARM reset reprieve is not so much to keep homeowners out of foreclosure, but to support real estate values by slowing down the flood of REO properties coming onto the market.
I think you misunderstood my point. What I meant is that it doesn't make logical sense to "help" subprime borrowers by encouraging capital flight. Without that capital, there won't be any money left to fund a whole range of non-prime loans. If the ultimate goal of these concerned politicians is to only fund prime or near-prime loans in the future, then I guess the consequences are intended. I doubt that's their desire.
That kills capital formation. That reduces money... at least in the current system. That discourages liquid transfer of notes between capital institutions (i.e., reduces velocity).
I fear that people who mean well will end up causing more harm than good for everyone... borrowers (stuck with a bad deal), investors (lost return/unpriced risk), the citizenry (ex-post facto contract redefinition by the state) and the economy (destroyed capital).
Tanta, I cannot see, from the basic outline, how this so-called plan helps do anything beyond postponing the inevitable. It seems to me that most of the borrowers in that subset are going to end up in foreclosure anyway.
I don't think that this is strictly a "Bushie policy" but a policy that would be enacted by any politician period. Note that the Bush plan sounds a lot like what Hillary has been proposing. Politicians in general want to be seen doing something for the "little people" i.e. people that vote, yet offering very little in terms of real help. More posturing than substance. That's what politicians do, and usually to ill effect.
Well, I guess this ought to be a lesson to those of us with high FICO scores, a fixed rate mortgage we have no problem paying, and savings in the bank.
The future you describe is now. It is not a potential future danger that might be brought about by future actions, it is a pile of stinking moral hazard that we stepped in over the past six years.
The crisis is here, now. Blown trust. Lack of credit and credibility. If not capital flight, then clearly capital avoidance (China putting its money elsewhere), etc.
Lack of sound govt regulation got us here. If only GWb were more interested in surveillance over the financial markets than listening in on our phone calls . . . but hten he would not have been GWB.
I'm just a plain old California land use lawyer. If anyone fresh out of law school or more knowledgeable about the Constitution wants to talk about the "impairment of contracts" provision of Article 1, I'd very much want to read it.
I guess Paulson et al believe (hope?) that investors' losses from this rate freeze will be dwarfed by other losses, like the Adams Square CDO that was liquidated today, so that investors will conclude that political risk isn't much to worry about.
That's the intention, anyway.
It's sorta like if a teenager sneaks out dad's car in the middle of the night and crashes it. He returns the dented car to the garage, wondering how he's going to explain the damage in the morning. Then the house catches fire that night, and the kid casts his eyes heavenward: Thanks, God -- now maybe Dad will be distracted by the loss of the house and won't notice the damage to the car!
The purpose of this ARM reset reprieve is not so much to keep homeowners out of foreclosure, but to support real estate values by slowing down the flood of REO properties coming onto the market.
To some extent I think its a case of trying to head off the Democrats from inflicting greater damage but like all such proposals, consider the Homeland Security Dept the all in one answer to the terror threat, it becomes a political football and the way it bounces is dificult to control, clearly the political reality says they cannot sit on the sidelines and debate the issue but produce something no matter what the value.
I gather the thinking is that this will shaft the mortgage holders (whoever they might be) some, but that that is better than shafting them completely with a mortgage gone sour and foreclosure. I suppose it is worth a try, but as others have surmised, people who can't pay the new rate will probably also not be able to pay the old rate for long. And definitely not if we have a hard landing recession.
Some years back, I worked on a transaction in Belarus, and I wondered why our client would want to invest there at all. The ultimate problem was that you couldn't trust any of the institutions of government, let alone the business entities (which, though purporting to be privatized, were staffed by corrupt government officials).
Having just read the glowing language in a prospectus for a SIV that is now imploding, I am coming to realize that we are not really that much different, maybe only in degree. Who in their right mind would invest in anything Goldman or Citigroup sell, no matter how much lipstick they apply to it?
Since Francis asks, I will try to explain the "impairment of contracts" clause.
Article I, sect 10, cl 1 of the Constitution states that no state may pass a "Law impairing the Obligation of Contracts."
The key word there is "state" (the second key concept is "pass a law") -- this prohibition does not apply to Congress, which may impair contracts, subject only to the Takings Clause which is concerned with "property" not with "contracts".
Indeed, if you think about it, what is bankruptcy but the organized and perfectly legal impairment of contracts?
Therefore, even if there is state action here (which isn't obvious, as being a broker to a negotiation or even twisting arms informally -- which incidentally is not "passing a law" either -- is not going to rise to state action, and without state action the Constitution doesn't apply), the fact that the feds may have impaired contracts is not a constitutional problem unless the act can fairly be characterized as a "taking". Which I doubt this can.
Okay, so they are going with FICO scores under 660 which have not risen at least X% since the deal was done-now are these true FICO scores or manipulated FICO scores? Whole 'nuther soap box, I know, but, again, one of my huge pet peeves about credit repair. Anyway, they take that "qualifying" borrower-yeah, you know, the one guy that fits, and they freeze his rate and then. . .oops, he can't pay-NOW, after that does he still get the benefit of the cram down modification to the BK rules? (assuming, of course, that it gets passed). Geez, that is like, what; a triple bail out of the same person that bought more house than they could afford?
Sorry for ranting but this sht is pssing me the f*ck off.
"Somebody did the math, and somebody concluded that freezing a rate that is still about 200-250 bps over the 6-month LIBOR isn't going to be a disaster (at least not compared to having to foreclose these things)."
Isn't going to be a disaster for whom? If I'm holding a highly leveraged position in P/O strips, I might disagree.
Class warfare (or should we call it tranche warfare?) is such a bitch.
Barely- don't get me started on those companies-hell, yeah, they will do whatever you need. Trust me, if they can figure out how to fck the system in the first place, they can certainly figure out how to unfck the system-ya know what I mean.
DP- absolutely some of these mods will default, then what? We will be surprised? or maybe, we could have never predicted it?
So, we bail out the dysfunctional borrower and the responsible borrower sees no benefit? Why? Because, the responsible borrower DOES NOT NEED TO BE BAILED OUT! Big fat DUH!!
Again, sorry for ranting, but I have been doing mortgages for over 20 years-yep, damn near as long as BD has been alive, and I am sick of this crap. You try to get companies to do what they should, and they bitch about the cost; you try to get borrowers to do what they should and they bitch about the cost. . .frankly, they deserve each other!
Consider this, the reason that the loans start to adjust after a 2 or 3-year period of time is NOT so that the lender can collect the inflated rate, the reason they adjust is to force the borrower to refinance. When a sub-prime borrower qualifies with a 45-50% debt ratio at 7.9% and the 1st adjustment takes the rate to 10.9% its note hard to imagine the borrowers reaction, especially when the rate continues to increase by 1% every 6 months until the rate is around 13-14%.
This is why I have been preaching for months that these loans are designed to be refinanced, not kept, AND THERE IS NO SUCH THING AS A TEASER RATE ON A SUB-PRIME LOAN. The Idea of a teaser rate assumes that the investor wants to keep the borrower on his books, which is not the case here. The borrower gets two years to straighten out their credit and then they get the H%$L off the banks balance sheet, the increasing rate is just a cattle prod to get them moving.
The reason investors like two year terms on sub-prime loans is that a sub-prime borrower tends to keep making the same stupid mistakes that got them into an inflated rate to begin with, and keeping that individual on the investors books exposes the investor to too much risk. As a result, this freezing of the interest rates doesnt hurt the investor in the way that most people think. The investor gets the shaft because-
1.\tThey dont get the payoff on the loan, freeing up the capital.
2.\tLonger exposure to the borrower increases the banks risk dramatically.
3.\tPreviously, the sub-prime borrower has been a sort of renewable resource for the bank to sell every two years or so.
All three of these things are presently mute points so freezing the rates is probably somewhat of a no-brainer for the bank, in fact Id say if the bank is pushing back at all its because they want more free money from good old Bend-Over-Bernacki.
So it seems that half of the commenters here are bemoaning the fact that subprime borrowers are getting a sweet deal by deferring rate increases, and the other half are saying that theyre being ripped off by paying greater-than-rent rates on a depreciating asset and will be on the street five years from now.
Cant have it both ways, folks. Or can you?
Perhaps both perspectives are true. Subprime borrowers will be able to stay in their home by continuing to pay barely affordable monthly payments. As a result a train wreck of REOs wont hit the market and blast a hole into the home value of entire neighborhoods (homes jointly owned by the residents and the ML investors).
And perhaps after five years of paying above market rent (in the form of mortgage payments) they will be foreclosed on and lose their home. But for five years they will have had a home, and an opportunity to turn things around, both in their personal finances and for home values to find a level likely lower than today, but not so low that jingle mail is the best solution.
"Historical studies of loan modification show that about 40% of modified mortgages re-default within 2 years."
That's exactly it.
Let's imagine the number is 60% now just based on fraud regarding owner-occupied.
So if severities are going to increase in the future, its not clear mods are a good deal for investors.
I know it sounds cruel, but come on! A subprime borrower can rent for half the cost of owning the home (at an 8% interest rate). So why not rent? Everyone benefits: the borrower can afford his home, and the new home buyer gets a more affordable price. Tell me again why we are fighting that outcome?
Unfortunately, my suspicion is that freezing the rates will only draw out a situation that will inevitably end in foreclosure for the sub-prime borrower and the Banks know it. (I dont think the government knows it yet though, based on what Ive seen from them lately Im seriously questioning their capacity for logical thought, I cant believe some of those people are actually in charge of something other than keeping track of their Superman lunch box). If it were not for the economy teetering on collapse I would say its probably best just to rip it off like a band-aid and get it over with. People can start over, I know I will.
The sad fact is, these folks mostly couldn't make their mortgage payments if the rate was set o 0% for infinity...they are poor decision makers and the true bail out will be to let them draw $500 each month on a second mortgage line of credit.
This is about making headline scanners feel good and thus continue spending.
I am not a disaster forecaster, but this is destined for failure.
Let the foreclosures proceed. We bottom fishers will buy, fix, improve and bring back to market at a realistic price that moves the property to a realistic owner...life goes on. Let the dreamers, hopers and idiots who think they can sell their castle at 2005 prices molder on.
Oh I agree that mods are not in investors' interests for these types of loans. Better to get 60% today than 60% or less a few years down the road. But my guess is that Paulson's plan won't have more than a marginal effect on fc's. Everybody will get together in Hope Now'' tee shirts and singI'd like to buy the world a Coke'', but unless the servicers get a blanket indemnification from Uncle Sam they'll be just as quick on the trigger next year as this year. Let's try to remember that the incredible foreclosure rates this year stem mostly from people still in the teaser rate period. Foreclosures won't drop, but the rate of increase will slow a little.
You also may be old enough to remember WIN (`Whip Inflation Now') and how well that worked.
Tanta: "they are the "payment rate" on an Option ARM. ......It's just that the borrower still makes the payment (until recast) based on that low "teaser" rate.) "
so DSL and FED and the like will also enjoyu this by continue to book Neg-Arm as profit for the next 5 years ?
Tanta has already made the case that the major servicers don't have the staff to handle the NODs & FCs that are already coming at them. Soooo, how in the hell are they going to suddenly find the people who are supposed to proactively identify, contact and qualify people for this plan???
This is a very insightful post. It seems like your argument has satisfied most of the commenters above.
Even if the FICO buckets are really a way to isolate loans with rates that are already high, I still think the obvious lay person's reading of this is "people who don't pay their debts and aren't particularly responsible (those with low FICOs) are first in line when the gov't is organizing a bailout." It seems like a clear example of the strong carrying subsidies for the weak, and I think that creates a moral hazard. I find it very disappointing.
What's absurd about this whole thing is: why would anyone want to try to salvage the house when it is depreciating so markedly? If I'm 125 or even 100% LTV, I have absolutely NO INCENTIVE whatsoever to try to work it out. Why should i? I have no skin in the game.
Jingle mail is the only realistic solution. This plan is a scam to artificially prop-up fictitious capital schemes and nothing more. You are wasting your (impressive) prowess giving this any more than a cursory consideration.
Question: If the homedebtor can't make the adjusted payment, is the homedebtor going to be able to maintain the property for 5+ years? What will that to the collateral in the face of rapidly falling prices? What will a poorly maintained house do the property values around it in a time when inventories are skyhigh?
Also, will said homedebtor be able to pay property taxes?
One question has been on my mind about modifications - why don't the mortgage modifications utilize more sophisticated/variable terms to trade off the short term loss against a long term gain.
In other words, why not say "we will give you a mod, but we are going to watch your income and we reserve the right to increase the payment later" or "we will give you the mod, but it will cost us X dollars and we get first claim to the first X dollars of profit when you sell."
My impression is that most people, especially subprime people, are financially unsophisticated and desperate to keep their houses. If they bought into the ARM in the first place, couldn't you sell them on these kind of complex terms?
Is the fear that these borrowers are going to be wiser the second time around and choose to default rather than accept the onerous terms? I suspect you could sell a lot of these people a bad deal the second time if you dressed it up, and I don't understand why the banks don't do that if it they can make more money that way. They were clearly happy to sell the people an overly complex and expensive mortgage the first time, why not do it again?
So it seems that half of the commenters here are bemoaning the fact that subprime borrowers are getting a sweet deal by deferring rate increases, and the other half are saying that theyre being ripped off by paying greater-than-rent rates on a depreciating asset and will be on the street five years from now.
It's not about helping the borrowers. The Bush Administration hasn't all of a sudden gotten interested in the welfare of poor people. It's government of the suckorz by the playaz for the playaz same as it ever was.
It's not especially about "ripping off" overcommitted borrowers, though to the extent that does happen it's a feature not a bug.
The clue is that all this intervention is to be reset- triggered. What it is about is fewer foreclosures in 2008 at less distressed prices, and more time for RMBS-exposed institutions to find an escape hatch.
That is, "relief" is to be offered to borrower X, not to help her or to exploit her, but to keep her house off the market, and her mortgage on the books at face value.
If the Senate would pass an equivalent to HR 3915, then we would have a legal definition of "subprime." So far, only the House of Representatives have passed something.
First off, I'd say that the US economy is pretty ripe for some sort of recession. The irony is that both this coming recession (hopefully small and short lived!) and the last seem to have at root over-zealous investors. The main difference seems to be that the last time the investors had something to whip them into a frenzy (i.e. the explosion of computer use and usefulness), while this just seems to be that things have been going a little too well for a little too long and greed was really starting to set in.
I would say in the end that the house buyers are to be blamed along with the loaners. Anyone looking to invest in a house in the middle of a price bubble is asking for trouble. They should have seen that when things cooled down they would be left with an investment that they payed to much for.
Now the creditors just drove the nail in the coffin. Offering mortgages to anything that moved, and not just your standard mortgage that a dog could figure out, but the ARMs and other more complicated loans was a shady deal. Anyone who offers a mortgage these days pretty much knows that they can sell it to another institution and wipe their hands of the whole mess. And that's because mortgages are usually a very safe loan. So when the big dogs scooped these up, they had no idea what to expect, which they are responsible for.
In the end, blame can be squarely aimed at all the parties involved. But who is going to have to bear the burden of cleaning it all up? Since using fiscal policy to clean up a mess like this, I'm keeping my fingers crossed that the Fed is looking far enough into the future to help us through this in a way that isn't just a shot in the arm.
Basically, why have the house sitting empty as an REO for the next five years getting stripped when you can collect something on it for at least part of that time and still sell it in five years? It's a more reality based version of the refusal to mark financial assets to market "because the market is illiquid".
This isn't a government bailout. What the Feds are going to do is help the big guys collude and do this all at once. If One lender did this they'd be pummeled by investors, they all do it at once with a pretty banner and a press conference and everybody's happy (and if you aren't whatta ya gonna do about it, they're all in on it). Plus they hope it takes some wind out of the sails of the Congresscritters who might try to push through a real honest to goodness bailout. The only "takings" will be Congress exempting them from liability from the investors whose coupon just shrank.
Before the FICO constraint leaked, I was reading numbers like 12% of Subrime borrowers would be helped by this, now I'm sure the number will be somewhat lower. It'll make some difference on the margin but by and large everything is still on the same track it was a month ago.
So, we're Venezuela now! How is this BS any different than their government stepping in and nationalizing the oil companies over there? In both cases, the government has decided it can change written, legal contracts on a whim to benefit various corrupt organizations. So, we're now using 3rd world nation style legal agreements, where people keep their obligations only so long as it is easy for them.
If this goes through, if I were a foreign investor, I'd dump every chunk of investments in this nation and be putting my money someplace else.
I also like how the prudent workers will be punished by this (continued dragging out of the housing market to prevent affordable housing, high inflation that punishes our savings, etc.) while the bums will be rewarded (living at least a few more years in their unearned McMansion before defaulting.)
From each according to his abilities - savers have to give up their savings - and to each according to their needs - bums that "need" a McMansion, a Hummer, etc.
So if I go out and act irresponsibly by opening up LOTS of new credit accounts,going over credit limit and missing payments thereby beating down my FICO I can get to the head of the line?
I'm all over this. What a brilliant plan!
"The 2/28s and 3/27s in question aren't interest-only loans, and the borrowers had to document income, assets, expenses, debts, blood type, sexual orientation, and whether the carpets match the drapes. These loans didn't have intro rates of 4 percent or lower; those generally were I/Os."
I would make the case that most of these loans are/were IO and most were not income documented, based on analysis made available.
REBanker | 12.05.07 - 9:21 pm | #
I stand corrected, REBanker. You're right, at least about stated-income.
gosh, first?
Key issue- banks would not do this if it was not in their best interest. Borrowers are being "helped" by getting locked into bad loans on overpriced houses that banks don't want back anyway.
I'm glad I don't need that kind of "help" from the gov't and feel sorry for those who get it.
first
you're quick
Very insightful analysis, Tanta.
What you are saying to me is: The best spin-to-cost ratio possible.
the cost of this is, actually, going to be absorbed by investors in mortgage-backed securities.
Note to self:
Never buy mortgage backed securities again (unless it's with someone else's credit card).
Will these sub-660 FICO folks have to provide... er.. 'documentation' of their uh... 'income' to participate?
Locked in at 7% for 5 years isn't so sweet when a 30yr fixed drops to 4.5% in 2009. Not that it matters to people with a 660 fico - they can't afford/maintain their mortgages anyway and will likely default over a period of years, regardless of any govt intervention. I have to agree with others who say this is more of a public relations move than anything substantive.
Will these sub-660 FICO folks have to provide... er.. 'documentation' of their uh... 'income' to participate?
I don't have the Official Word on that. I have gotten the Unofficial Word that, yes. They will have to provide current income documentation, and show that their DTI doesn't go over 40-50% (not sure exactly).
If those rate numbers are right, and that is not the teaser types I have seen and heard on the radio, this plan is a waste of time. If the spreads are higher, what do people think of this scenario:
Teaser Freezer borrower has the rate set at 4%. He paid $300k for the home. His monthly bill is set at $1200 for up to 5 years. New (previously unfrozen) borrower can only get a rate at 8% due to new lending requirements. Heck, he may even have to put 5% down! To offer the $300k price, the new buyer will have a monthly bill of $2400, double the amount. Unless new buyer is a very special kind of fool the government hopes for in this plan, he would only offer $150k for the home, and pay the same price of $1200.
Any thoughts board?
I would just like to hear your opinions on one other thing, Tanta, because you are the Internet's leading expert on servicer issues.
how much cost/labor burden will this put on servicers to implement?
do you think servicers will take it seriously and train their people to implement it if it costs them too much or overwhelms their staffs?
Tanta -
I agree in general with your take, and we'll have to see what the details are tomorrow.
You said, "So far, I'm prepared to believe assurances that this will not involve taxpayer subsidies: the cost of this is, actually, going to be absorbed by investors in mortgage-backed securities."
I guess that all depends on how one defines "taxpayer", and who exactly owns these notes. I'd bet dollars to donuts that there are quite a few state-managed funds, pension funds, and general mutual funds owned by taxpayers that stand at the end of this line.
I'll also be interested to see just exactly how many free-market paradigms, contract law traditions and plain-language constitutional amendments we had to trample to get here. That's going to be the real cost... the unintended consequences.
Against that would be the benefit... how many dollars were "saved" by not letting affected loans default. I'd be very interested in your take on what that number might look like once all the details are understood.
I fear this number might seem small against what we are risking.
It will be interesting to see what the front end ratio is if the back end is 50%.
It is also interesting that they will have to document their income.. wasnt that the point of a boiler plate solution to begin with the fact that all paperwork would go out the window? That the servicers couldnt handle the load of going through all this stuff.
"and take 7.70%"
This might look pretty sweet to investors if the Fed brings down interest rates to say 3.5%. No REO and a good spread, guarenteed.
Looks like the suggestion from the investors camp is to maybe include Alt-A and Prime.
BC-USA-SUBPRIME/DOCUMENT 12-05 0000
BC-USA-SUBPRIME/DOCUMENT (UPDATE 2 )
UPDATE 2-Group proposes subprime mortgage framework-document
(Adds details)
By John Poirier
WASHINGTON (Reuters) - A trade group that represents
large mortgage investors has offered the U.S. Treasury
Department a plan to temporarily freeze interest rates for
borrowers facing foreclosure, a document obtained by Reuters
Wednesday says.
The outline by the American Securitization Forum focuses on
subprime adjustable rate residential mortgages with starter
interest rates of three years or less that were originated
between Jan. 1, 2005, and July 31, 2007.
For a borrower to qualify for a proposed five-year
rate-freeze, rates on those same mortgages would also have to
reset from Jan. 1, 2008, through July 31, 2010, the ASF
document states. The aid might extend beyond subprime loans to
prime and Alt-A loans, the document states.
The proposal also seeks to avoid rewarding borrowers who
may have participated in fraud, by targeting borrowers who
occupy their homes as primary residences.
It is not known if Treasury Secretary Henry Paulson, who
has worked closely with ASF, has accepted the document as
presented late Tuesday or if he demanded any changes.
President George Bush is planning an announcement Thursday
afternoon on the issue and it will be followed by a news
conference by Paulson.
The proposals, outlined in a document called the "ASF
Statement of Principles, Recommendations and Guidelines," does
not appear to be binding for the industry.
"While this statement addresses certain legal, regulatory
and accounting matters, it does not constitute and should not
be viewed as providing legal or accounting advice," the
document says.
Though it is not known how many borrowers might be eligible
for loan modifications, the proposal opens the door for "case
by case" assessments for current borrowers who are able to
refinance into private loans or loan products insured by the
Federal Housing Authority.
A complex formula comparing a current credit history score
with a score at origination will also help determine
eligibility for borrowers who live in their homes they bought
and are current on their payments.
For example, the document says that a subprime borrower
with a score of less than 660 and has not increased by 10
percent since the origination of the mortgage will be
fast-tracked for a modification.
The document does not mention any system to monitor the
modifications, which has been called for by some congressional
Democrats.
(Reporting by John Poirier and Patrick Rucker; Editing by
Diane Craft)
O/T but interesting in light of current credit conditions:
Cary Huang in Beijing and Daniel Ren in Shanghai
Dec 06, 2007
Beijing yesterday signalled a tougher stance against overheating in the economy, saying it would shift its long-held monetary policy stance next year from "prudent" to "tight".
Great line from the Bloomberg article:
``My biggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won't go to them,'' Representative Spencer Bachus, the top Republican on the House Financial Services Committee, told reporters after the meeting with Paulson today.
If they're paying, and current, why do they need help senator silly?
and that is not the teaser types I have seen and heard on the radio
Well, the "teasers" that you have heard about on the radio are either bait-and-switch rates (these borrowers didn't get that low rate that was advertised) or else they are the "payment rate" on an Option ARM. (And that rate is only given to the borrower, in most cases, for 1-3 months. After that the OA accrual rates adjust up to well into the 7.00% range. It's just that the borrower still makes the payment (until recast) based on that low "teaser" rate.)
Everybody can just forget about people with accrual rates of 4.00% getting "frozen." Not gonna happen.
Long term, this has to make debt repudiation "socially accetable."
If we keep lowering the bar, eventually foreign investors will flee causing interest rates to rise. This is soooo third world.
More from the Bloomberg article:
The Bush administration's efforts to forge an agreement have become more urgent as the economy falters after a third-quarter spurt. Growth may cool to an annual rate of less than 1 percent in October to December, economists say, following an expansion of 4.9 percent in the prior three months.
``The concern is that macroeconomic conditions will deteriorate significantly, which can happen in the absence of such a plan,'' said Wachter at the Wharton School.
Thought the economy was in great shape. Confused. Please clarify Mr. Central Planner Biz-School Guy
Would the investors that are being asked to forgo 2 / 2.5 % interest be able to claim on their MBS / CDO insurance - under some "change of terms" clause ?
I'm still trying to track down a MBS insurance contract. No luck yet.
-K
Also, during Greescam's war on yields the majority of the credit created was allocated to real estate (gnoring the war spending). What's next? Seriously, are we so bereft of ideas that senseless inflation of assets is our only alternative. Personally, I think most families would prefer a shorter work week than this foolishness.
What I cant figure out is will there be a provision preventing prepayment in a year or two? (ie refi'ing)
Either way I await the post!
Cheers,
7+% interest on a depreciating asset?? I think it's time to walk out...
I guess Paulson and Hillary want to be surprised.
I wonder if the MBS holders will get to take write-offs on their losses.
"This is soooo third world." I completely agree... Perhaps this is better for everyone but some people say nationalizing industries is too!
O/T
Head of Asset Allocation strategy at Barclays Capital - Stagflation
"The US economy is leading the way, having already entered a stagflationary phase. Such an environment is poisonous for financial assets"
FT.com / Markets / Insight - Market insight: Markets ill-prepared for stagflation
Tanta
Won't the "costs" to investors of the proposed freeze really be savings over what the investors would get if the involved longs go belly up, which is what almost all will do?
The details so far limit the freeze to loans due to reset 2008-10, loans that are current on payments, and loans that could not be repaid at the higher reset rate.
Thus the operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings).
That's why Angelo and friends will agree to the deal.
And, along with the limited pool to which the freeze will apply, that's why the freeze does very few borrowers any significant favor. Borrowers getting by at 7.7% by the sking of their teeth will be paying at a premium to keep a house with increasingly negative equity, and little real hope of being able to refinance in 5 years.
This is Bush Admn plan, after all. What could we expect?
Joe Shmoe
Although Paulson has said 'no taxpayer money' he's also said 'expand the mortgage revenue bond program' which is an indirect way of using taxpayer money (MRBs represent what's usually called 'tax expenditure').
What are the odds that this 'rate freeze' will have a recapture clause so that the 'foregone' interest will be payable upon sale or refi?
I am unclear as to how these re-worked loans will function. The amount paid on the loan will represent the I/O portion of the loan at the frozen interest rate, correct? So, at the end the freeze period the principal owed will be equal to today's amount, assuming no early payments, an appoproate expectation of borrowers who can't make increased payments. In a way, these are just five year leases with an option to buy at the end of the contract, though the lease payments won't be applied to the downpayment, or be foreclosed on and no better off than had this happened five years previously.
Basically, just put off the Big Problem until year three of the next President.
What this will eventually become is the legal basis for laws meant to maintain citizens in their homes during long periods of unemployment due to recession, resets etc. This will be part of many different kinds of bailouts, which reminds me of the song
"I think I am turning Japanese".
If they're paying, and current, why do they need help senator silly?
Jack | 12.05.07 -
I think the point being made is the folks who made wise financial decisions and/or have executed on their agreements are not receiving any government assistance (that's what this is), yet the folks that have not are being helped. Of course, the real reason their doing this is they believe they can turn the home cash registers back on and get the economy heated again. It will likely backfire as most home homeowners that would be able to qualify with a 45 to 50% DR could refinance anyway...
I am setting up a fund to get every home owner in the USA a current appraisal so they can realize it is time to mail the bank the keys.
No tax payer dollars will be used, it will be funded completly by shorting bank stocks and home prices.
Thus the operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings).
Yes. End of the day, that is the choice.
There will probably be some people included in this who somehow could have managed the 10% (get a second job, sell the car, whatever), but whose ability to carry the mortgage will be markedly improved by keeping it at the start rate. In that case, it is foregone interest.
But I suspect that scenario will be rare. This is really about either taking 7.70% for a loan or facing 50% or more loss severity in a foreclosure.
"What this will eventually become is the legal basis for laws meant to maintain citizens in their homes during long periods of unemployment due to recession, resets etc. This will be part of many different kinds of bailouts, which reminds me of the song
"I think I am turning Japanese"."
Yes, this could set a very poor precedent.
I can understand the president wanting to do this...who would want this foreclosure mess on their watch
I wonder just how many of these borrowers there are. low FICO score, currently up to date on payments, but can foot the projected increase in rates and wanting to fight to keep the house. As home prices continue downward, these borrowers might just be a very small part of the pool of distressed borrowers.
What I don't understand is how determining all the various inputs (income/debt levels/current LTV, etc) isn't going to bog this down almost as much as the old system of dealing with them one-by-one.
The basic time/money consumer here would seem to be the need to ascertain accurate data. Having the formula may ease thinking time, but not much else.
he's also said 'expand the mortgage revenue bond program'
Yes, but surely in that case he's talking about refis.
So it is not that taxpayer subsidies are making private investors whole for these modifications. In a bond program refi, the bond program takes all the risk, but then it also gets all the interest payments. The MBS just gets paid off, as it would in any refi.
Of all of those who might be helped from this, how many will be found to have filed fraudulent mortgage applications (a felony if I'm not mistaken) and will avoid the help for fear of imprisonment?
How will the interest shortfall be distributed across the different tranches? Will the most senior tranches suffer a reduction in interest payments? If so, they might be worse off. And if they are worse off, why would they accept altering the contract?
The point is that the cost of this goes directly to investors in asset-backed securities, and those investors are being asked to forgo 10% (the reset rate) and take 7.70% (the current or start rate).
The federal government unilaterally rewriting these contracts is incredibly dangerous. It says the all debt contracts in the US are now subject to political risk which means the risk premium on all new mortgages has to rise.
I'm extremely bothered by the notion that its morally justifiable to transfer wealth from investors to borrowers because the investors were charging too high an interest rate. One assumption that Tanta is making is that all investors will be better off from the rate freeze but I don't believe that for second. Any MBS with properly underwritten subprime loans which did not have an unexpected rise in foreclosure rates will lose a ton of value as a result of this freeze.
There will probably be some people included in this who somehow could have managed the 10% (get a second job, sell the car, whatever...
On that subject, I saw a quote the other day from a woman analyst to the effect, "people will just need to cut out the $50/month cable, spend $100/month on food for a couple, rahter than $200..."
Yikes! When I was in college there was a period where I had $10 a week for food (and entertainment, luckily I knew several bartenders...) and I nearly starved. Adjusting for inflation, that would probably be $25/week now. This woman probably spends that much on a mediocre meal at a mid-town bistro...
The key word missing here is "publicly" monitor the modifications.
This could be done with fast-track regulations to the Community Reinvestment Act or the Home Mortgage Disclosure Act (or both). Hey, you've got popcorn, you need a scorecard.
BillD
My guess is that there are relatively few people who will qualify for the freeze (ie., small percentage of the 2 million or so subprimers) and of them only a portion will be willing and able to continue paying at 7.7% for a sinking asset with the prospect of losing it at the end of 5 years.
So what is this all about? For Angelo and friends, its about getting 7.7% for as long as they can and delaying the rush of REOs maybe just a tad, plus PR to keep them a few steps ahead of the angry townspeople coming with pitchforks and torches.
And for Georgey Junior? Also PR, of course.
George Bush doesn't care about black people was an understatement. George Bush doesn't care about anyone not invested in the Carlyle Group.
Oh, GWB and the right wing of the Republican Party maybe also will benefit from the misplaced resentment that the freeze plan has stirred up. All those folks who have been screaming because they think some brown people are going to get a little help from the Gubbermint . . . believing they will be paying 1% on their loans at taxpayer expense! Divide, conquer, praise the lord, and make everyone believe that laissez-faire is god's word.
I don't think it will work. Just like Iraq.
Joe
Joe
"But I suspect that scenario will be rare. This is really about either taking 7.70% for a loan or facing 50% or more loss severity in a foreclosure.'
Yes, and they model most of this without the reset increase after the first year. Problem still remains that the pool will be adversely selected with more lower fico score borrowers remaining in the pool which will still produce poor performance.
Seems to me it's still going to be a very cumbersome and slow process, once it finally gets rolling sometime early next year. Meanwhile, the foreclosure avalanche for the many many who have no chance of qualifying just continues downhill, dragging home prices ever lower with it. There just isnt' enough OOMPH here quick enough to make any difference to the momentum in the housing market already so I dont see how this changes a whole lot, aside from injecting another huge dose of uncertainty into what is happening in the credit markets.
What I don't understand is how determining all the various inputs (income/debt levels/current LTV, etc) isn't going to bog this down almost as much as the old system of dealing with them one-by-one.
Operationally, on the execution side, it does. It takes just as much effort to process a mod under this plan as it did before we had the plan.
What this does is two things:
Monkey In Chief: I'm extremely bothered by the notion that its morally justifiable to transfer wealth from investors to borrowers because the investors were charging too high an interest rate.
Sounds great. Let's get FHA started on this risk-based pricing approach, asap!
"Any MBS with properly underwritten subprime loans which did not have an unexpected rise in foreclosure rates will lose a ton of value as a result of this freeze."
In that case, the pool would see a ton of run off anyway as folks prepay to take better financing( if they have the equity to refinance) The only negative I see is duration will suffer and performance, but loss severity will be better.
Monkey Chief
The freeze is not a decree by the Feds! GWB's boy Paul is merely helping broker an agreement among the lenders and trying to clear the legal ground. The Bush Administration is not tearing up any property that belongs to Wall St firms. What President did you elect? We're talking George W "Carlyle" Bush and Dick "halliburton" Cheney, for Freddy Hayek's sake! Whose side do your think they are on?
Joe
Tanta,
I accept the real frozen rates would be say 7-8%. This plan is a scam then as even a subprime type fool is not going to pay for 5 years when they have no chance of selling then. The assumption of 7-8% instead of 10% on a reset is a dream. They need to get used to the idea of 0%.
Thus the operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings).
Yes. End of the day, that is the choice.
No. This is where the rescue breaks down.
The operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings) and massive impairment of near every other mortgage product.
And if that isn't enough, illiquidity, market distortions, on and on make for a messier investing environment. How's that for a moral hazard? Not the borrowers but the lenders. one of the intents of the 'bailout for dummies' program is to get investors investing again. now here they have the rules forcibly changed and they know the rules can be changed. No more investing.
The reason rates low FICO buyers have much higher is obvious and intelligent. First of all, low FICO buyers and prime buyer do not compete with eachother -- they do not want to buy the same type of property. If the low FICO buyer is given a low rate, then the price he pays for his house will end up being higher than it otherwise would have been because people spend as much as their wallets will allow. If the banks charge him more interest (higher rates) then the house price will need to be lower for him to be able to purchase the house. Dropping rates too low for FICO borrowers would be the disaster and would cost banks even more. Of course the loans should never have happened at all but that is another story. The prime crowd on the other hand ended up paying a higher price for the home itself because of their lower rates and my guess is that they are the ones that will feel the most pain in the long run.
"What this will eventually become is the legal basis for laws meant to maintain citizens in their homes during long periods of unemployment due to recession, resets etc. This will be part of many different kinds of bailouts, which reminds me of the song
"I think I am turning Japanese"."
Yes, this could set a very poor precedent.
An intense short-term recession and deflation that cleans most of the bad debt out of the system and learns people to use their brain again probably has the best long-term outcome.
But because of our pain-phobic nature it may be the least likely outcome, with a long drawn out Japanese-style "zombie economy" being more likely.
Denninger on this 5 yr freeze plan... pretty much on the money here...
Do any of these politicians have a brain? Let's think about this one for a minute.
Abrogation of contracts cause the following, immediately:
Could this really be a first step towards transparency for these MBS. Many of them are black holes of information because at the very core the bondholders dont know what they have (due to low/no doc). This could be a proactive step into finding out what people are holding so that they could be properly valued on the secondary market.
Robert
Investors (at least knowledgeable and realistic investors) know that they can lose their investment if the business or asset they invest in crashes and burns, or breaks laws and gets sued big-time, etc and so forth.
I agree with you that systemic crash is one of the possibilities looming in the futures (no odds on it, just saying it is possible). The freeze plan won't make the system crash. It won't do enough to keep the system from crashing, either, if a crash is going to happen (far too little in the freeze to have any real effect).
The big moral hazard is not from the subprime borrowers (just a bunch of little bump in the road hazards), it is from the subprime lenders and their finaciers. Joe and Jane in their little house won't make the system crash, not times 2 million. But Citi and Bear and HSBC, etc, and their CDOs and SIVs . . . that's where the big moral hazard is.
Joe
tanta said The MBS just gets paid off, as it would in any refi.
True enough. But a little off-topic. The refi wouldn't happen without the tax expenditure. If taxpayer money went to paying an interest subsidy on a loan you'd say its a taxpayer bailout, but if taxpayer money goes to supporting the refi of a loan that enables a pay off of the existing loan, you'd say it's something else???? That seems to be form over substance.
And someone asked how the rate freeze affects different tranches? Basically lower interest means there is less excess spread to support the senior tranches, but of course a foreclosure would reduce the support as well. The big effect is the fact that most of these deals have triggers - if defaults are too high more cash is diverted to the senior tranches in the early years. With frozen interest rates, there are fewer defaults, so the triggers aren't tripped and the senior tranches don't get the benefit of the change in cash flows. That part of the structures makes the senior tranche holders worse off. The rest is a little hard to determine - better off in some ways, worse off in others.
Stuart
A loan workout offered by the lender is not an abrogation of contract. Not only do workouts get done all the time (for Chrysler's sake, and United Airlines, not to mention Enron and Worldcom), but in the 19th century the US repeatedly defaulted on its debts . . . the golden age of free market capitalism.
My point above about the benefits to the Bushies of the bailout plan. To some voters it looks like they are trying to help keep people in their homes, and among other voters they are stirring up resentments about big government, handouts to the poor and undeserving, and creeping socialism.
Joe
Tanta, what if there is a neg-am feature to the Freeze? Say the rate was going to jump from 7% to 9%, and the 200bps is a Mortgage PIK? (Payment in kind). Then the investors don't lose any money on paper (at least for 5 years).
Best Wishes.
"This is really about either taking 7.70% for a loan or facing 50% or more loss severity in a foreclosure."
I believe the choice is "50% or more loss severity on foreclosure" or "7.70% for a year or two and 75% or more loss severity on foreclose later". The sooner you can foreclosure, the better price you'll get in a downhill market. We know from Japan how freezing stuff worked perfectly.
We make Chavez proud.
Tanta, what if there is a neg-am feature to the Freeze? Say the rate was going to jump from 7% to 9%, and the 200bps is a Mortgage PIK? (Payment in kind).
I don't know if I'd call that neg-am so much as "waived-am". And I'll bet the answer is...NO.
Investors may be willing to take the 7.7% (or whatever) instead of the expected 10%... thereby establishing a market value for their securities by temporarily removing some of the question about default, but any smart investor will still immediately dump any securities as soon as the market makes a price - any price - because they will recognize the value as temporary, especially in light of an apparently slowing economy that will soon kick default rates even higher, freeze or no freeze.
This is, quite frankly, sheer desperation.
Not quite Beano.
To make Chavez proud, you'd need to do a 'taking' of Angelo's house and put some defaulted subprimers in there.
Somebody did the math
I don't have any faith in the government's ability to do math.
Shnaps
Now that is a great idea! I bet Hugo C would provide free heating oil for the five years of the freeze!
Joe
Will prepayment be allowed?
Risk versus reward.
A group of people took on incredibly reckless risk and now... they get to reap the benefits of reward!
(if you ask me, they should be treated like lotto winners, each one receiving a free house!)
Shnaps, "no" is probably the answer. But a PIK feature would make the investors whole on paper. It worked great for a few years for Michael Milkin in the '80s.
Best Wishes.
CR
Michael Milken! Now there is a role model for leading us out of this moral hazard.
Joe
Apologies if someone noted this already, but I was reading the Bloomberg piece when this sentence:
Paulson finalized the deal as the housing recession entered a third year, threatening the economic expansion.
Just so I'm clear on this, Bloomberg's Alison Vekshin is now able to just say, without any qualms, that 2006 was a tank year?
I would swear that the well-known and reliable economist David Lereah told me throughout 2006 that everything was swinging. I think I might be able to come up with a few others who said similar things if you give me a minute.
I would also note, in fairness to Lereah, that 2006 was indeed the 3rd or 4th best year evah.
How did the failure to break all previous records become a recession?
"I think the point being made is the folks who made wise financial decisions and/or have executed on their agreements are not receiving any government assistance (that's what this is)"
Banker, it is not 'government assistance'; in any way, shape or form to be further tied to a loan you should not have on a depreciating asset in an economy that is about to leave you high and dry. It is getting bled dry, pure and simple. The ONLY goal here is to establish the illusion of a market for securities.
Robert Coté wrote:
"...now here they have the rules forcibly changed and they know the rules can be changed. No more investing."
Exactamundo!
It's called capital flight.
While it may be going too far to say no more lending, it's pretty difficult to imagine how this kind of action would encourage capital to seek its way into lower-FICO loans. At a minimum there will be a serious cost premium added.
Perfect example of an unintended consequence.
BTW... are these freezes intended to be mandatory? If I was a borrower sitting atop a depreciating asset, I might just want to walk. That way I end up with no debt, a bankruptcy hassle and a low FICO score (more or less where I started).
Does the borrower get to choose whether to accept the frozen rate?
An FDIC official said at a congressional hearing last Friday that a typical subprime 2/28, originated in the first quarter of 2006, had a starting rate of about 8.25 percent, or half a point higher than Bloomberg's estimate.
I think some readers here are confused about what constitutes a subprime mortgage. The 2/28s and 3/27s in question aren't interest-only loans, and the borrowers had to document income, assets, expenses, debts, blood type, sexual orientation, and whether the carpets match the drapes. These loans didn't have intro rates of 4 percent or lower; those generally were I/Os.
I wonder if a word was missing in this sentence from the Bloomberg article: "Borrowers whose credit scores are below 660 out of a possible 850 and haven't risen by 10 percent since the loan was sold will be given priority." Does that mean if you had a score of 590 when the loan was sold, you're ineligible for a rate freeze if your current FICO score is 649 or higher? I'm not sure what's the point of that. If your score rose more than 10 percent, you're more likely to keep current if the rate is frozen, correct?
Saith joe schmoe: So what is this all about? For Angelo and friends, its about getting 7.7% for as long as they can and delaying the rush of REOs maybe just a tad, plus PR to keep them a few steps ahead of the angry townspeople coming with pitchforks and torches.
Mozilo pretty well said as much at Monday's housing conference. I question the morality of squeezing five years' more of payments from people who are likely to default eventually anyway.
I watched that Sheila ( reference intended ) on Kudlow tonight and these points that she said struck me:
Do I trust her ? Who knows - but that's what she said and I have no beef if #1 remains in place. Whether what they do, as per the "Plan" violates the PSA will have to litigated won't it.
Fun, fun, fun.
-K
Holden Lewis, great point. Many of these people will still default in 5 years, and they will paying more to "own" than the equivalent cost to rent.
Not exactly a great deal.
Best Wishes.
Holden, my man,
You are right to a T.
Paulson didn't call together a meeting of defaulting homeowners, just like GWB didn't call together the New Orleans evacuees.
Paulson called Angelo and friends to save their collective hides, politically more so than economically. Just like GWB got on the phone with Halliburton after Katrina.
How can anyone believe that GWB is tearing up investors property to hand over to poor schmucks with subprime loans??????
Joe
... it's pretty difficult to imagine how this kind of action would encourage capital to seek its way into lower-FICO loans. At a minimum there will be a serious cost premium added. Perfect example of an unintended consequence.
Entrepreneur, what makes you think this is not intended? Do you seriously think this isn't a necessary and beneficial consequence? It sounds like you believe that subprime rates weren't too low and subprime lending standards weren't lax.
Interested in hearing your explanation.
BTW... are these freezes intended to be mandatory? If I was a borrower sitting atop a depreciating asset, I might just want to walk. That way I end up with no debt, a bankruptcy hassle and a low FICO score (more or less where I started).
The low FICO score is especially desirable as it opens the door to all sorts of bailouts and makes you the beneficiary many future "credit repair" initiatives.
Woe to any with a credit score above 780, however. A bleak future awaits indeed.
"The 2/28s and 3/27s in question aren't interest-only loans, and the borrowers had to document income, assets, expenses, debts, blood type, sexual orientation, and whether the carpets match the drapes. These loans didn't have intro rates of 4 percent or lower; those generally were I/Os."
I would make the case that most of these loans are/were IO and most were not income documented, based on analysis made available.
merde, how much will I have to pay to un-piggyback my FICO score?
CR,
"Tanta, what if there is a neg-am feature to the Freeze? Say the rate was going to jump from 7% to 9%, and the 200bps is a Mortgage PIK? (Payment in kind). Then the investors don't lose any money on paper (at least for 5 years)."
I was hinting at that in a post to previous.
The point here is that this is just a way to force the subslime borrowers into a kind of debt prison, where the investors can grab oodles of caish at the coming Fed cut to refi their short term debt, while holding the subslime debtor to ridiculous rates.
I suspect that the PTB think that those in subslime iwth
I read a couple of weeks ago that goldman was closing out a lot of its profitable ABX positions. You can see that the ABX turned up. I wonder why? Think goldman had a wink hint what might be coming.
Also, seriously, who here for a second believes this narrow progam is the last we'll see. This is the example that will be used to justify the government coughing up huge sums, you know, since industry already made their contribution to society with HopeNow.
This is a massive debacle unfolding before our eyes.
Historical studies of loan modification show that about 40% of modified mortgages re-default within 2 years. A recent study by Joseph R. Mason (Wharton) suggests there will be a much lower success rate on recent mortages, since some 70% of mortgagors are believed to have exaggerated their income by 50%. Probably the best predictor of default is home equity, and most of the recent subprime borrowers have little of it if any.
Nobody mentions in the current debate that perhaps 50% of recent subprime was cash-out refinancing. Hard to feel sorry for anyone who bought a hummer on his house's appreciation and now wants a handout.
Ok, so each company has a proprietary database. They do what is said above and go pro-active. How does their data get transferred? Do they do the refinace? Who audits it?
If they forward the data to some gov. agency to sign off on, how does it get processed? With what software? Where does the staff come from?
poszi | 12.05.07 - 8:57 pm
You beat me to it
Thanks blogger:
I suspect that the PTB think that those in subslime with these mortgages will jump on board readily as they are just stupid poh people. That elitist War Shreik attitude may about to be tested.
Cheers,
NY Times - Deal Reached on Freezing Rates on Some Mortgages
- NY Times
Nova,
"If they forward the data to some gov. agency to sign off on, how does it get processed? With what software? Where does the staff come from?"
Almost all of this data is in an ODBC compliant manner. And in all likelyhood is Oracle or MSSQL. This ain't hard.
Cheers,
Coming soon: Credit Impairment Companies. "Too good for the bailout? Lenders holding you to the terms you agreed to? No Problem! Let us here at No Hope Now dot com turn things into Hope Now! We will teach you how to game the system just like that greasy neighbor whose Hummer, Harley and RV are constantly blocking your Tempo as you drive to your second job. Act now before you are priced in forever.
1. No servicer will be asked to violate anything in the pooling and servicing agreements.
If this is the case, why is the federal government involved at all? Maybe the Bushies just want to look like they are doing something which would be classic Bushie behavior.
Tanta tomorrow - if a 'qualified' homeowner receives a mod and then sells the home/collateral afterwards how is the payoff calculated and what will the tax consequences be for a gain or loss on sale? I'm assuming payoff quotes will be at the adjusted freeze rate ignoring prior or future rates and tax consequences for now remain the same under current IRS rules. Thanks.
Historical studies of loan modification show that about 40% of modified mortgages re-default within 2 years.
The purpose of this ARM reset reprieve is not so much to keep homeowners out of foreclosure, but to support real estate values by slowing down the flood of REO properties coming onto the market.
those investors are being asked to forgo 10% (the reset rate) and take 7.70% (the current or start rate)
That's a funny definition of "ask".
Holden -
I agree with everything you wrote.
I think you misunderstood my point. What I meant is that it doesn't make logical sense to "help" subprime borrowers by encouraging capital flight. Without that capital, there won't be any money left to fund a whole range of non-prime loans. If the ultimate goal of these concerned politicians is to only fund prime or near-prime loans in the future, then I guess the consequences are intended. I doubt that's their desire.
That kills capital formation. That reduces money... at least in the current system. That discourages liquid transfer of notes between capital institutions (i.e., reduces velocity).
I fear that people who mean well will end up causing more harm than good for everyone... borrowers (stuck with a bad deal), investors (lost return/unpriced risk), the citizenry (ex-post facto contract redefinition by the state) and the economy (destroyed capital).
Tanta, I cannot see, from the basic outline, how this so-called plan helps do anything beyond postponing the inevitable. It seems to me that most of the borrowers in that subset are going to end up in foreclosure anyway.
I don't think that this is strictly a "Bushie policy" but a policy that would be enacted by any politician period. Note that the Bush plan sounds a lot like what Hillary has been proposing. Politicians in general want to be seen doing something for the "little people" i.e. people that vote, yet offering very little in terms of real help. More posturing than substance. That's what politicians do, and usually to ill effect.
From the USG that brought us immensely successful programs - Social Serurity, Medicare, Welfare... and voila, Hope Now!
What a mess. Dubya's "legacy" is evolving from a disaster to catastrophe.
Well, I guess this ought to be a lesson to those of us with high FICO scores, a fixed rate mortgage we have no problem paying, and savings in the bank.
We are just idiots in this country.
Notice the gray area in this graph, from month 13 to month 31. I wonder what portion of that area equates to the targeted loans for this bailout?
Entrepreneur
The future you describe is now. It is not a potential future danger that might be brought about by future actions, it is a pile of stinking moral hazard that we stepped in over the past six years.
The crisis is here, now. Blown trust. Lack of credit and credibility. If not capital flight, then clearly capital avoidance (China putting its money elsewhere), etc.
Lack of sound govt regulation got us here. If only GWb were more interested in surveillance over the financial markets than listening in on our phone calls . . . but hten he would not have been GWB.
Joe
I'm just a plain old California land use lawyer. If anyone fresh out of law school or more knowledgeable about the Constitution wants to talk about the "impairment of contracts" provision of Article 1, I'd very much want to read it.
Ah, I see, E. Yes, we're in accord.
I guess Paulson et al believe (hope?) that investors' losses from this rate freeze will be dwarfed by other losses, like the Adams Square CDO that was liquidated today, so that investors will conclude that political risk isn't much to worry about.
That's the intention, anyway.
It's sorta like if a teenager sneaks out dad's car in the middle of the night and crashes it. He returns the dented car to the garage, wondering how he's going to explain the damage in the morning. Then the house catches fire that night, and the kid casts his eyes heavenward: Thanks, God -- now maybe Dad will be distracted by the loss of the house and won't notice the damage to the car!
A terrible analogy, but it's past bedtime.
The purpose of this ARM reset reprieve is not so much to keep homeowners out of foreclosure, but to support real estate values by slowing down the flood of REO properties coming onto the market.
To some extent I think its a case of trying to head off the Democrats from inflicting greater damage but like all such proposals, consider the Homeland Security Dept the all in one answer to the terror threat, it becomes a political football and the way it bounces is dificult to control, clearly the political reality says they cannot sit on the sidelines and debate the issue but produce something no matter what the value.
I gather the thinking is that this will shaft the mortgage holders (whoever they might be) some, but that that is better than shafting them completely with a mortgage gone sour and foreclosure. I suppose it is worth a try, but as others have surmised, people who can't pay the new rate will probably also not be able to pay the old rate for long. And definitely not if we have a hard landing recession.
Some years back, I worked on a transaction in Belarus, and I wondered why our client would want to invest there at all. The ultimate problem was that you couldn't trust any of the institutions of government, let alone the business entities (which, though purporting to be privatized, were staffed by corrupt government officials).
Having just read the glowing language in a prospectus for a SIV that is now imploding, I am coming to realize that we are not really that much different, maybe only in degree. Who in their right mind would invest in anything Goldman or Citigroup sell, no matter how much lipstick they apply to it?
They are just trying to postpone the fiasco till the next President.
This is no freaking solution.
"Problem" is that houses are too expensive to people's income.
"Solution" is for house prices to drop.
Since Francis asks, I will try to explain the "impairment of contracts" clause.
Article I, sect 10, cl 1 of the Constitution states that no state may pass a "Law impairing the Obligation of Contracts."
The key word there is "state" (the second key concept is "pass a law") -- this prohibition does not apply to Congress, which may impair contracts, subject only to the Takings Clause which is concerned with "property" not with "contracts".
Indeed, if you think about it, what is bankruptcy but the organized and perfectly legal impairment of contracts?
Therefore, even if there is state action here (which isn't obvious, as being a broker to a negotiation or even twisting arms informally -- which incidentally is not "passing a law" either -- is not going to rise to state action, and without state action the Constitution doesn't apply), the fact that the feds may have impaired contracts is not a constitutional problem unless the act can fairly be characterized as a "taking". Which I doubt this can.
Okay, so they are going with FICO scores under 660 which have not risen at least X% since the deal was done-now are these true FICO scores or manipulated FICO scores? Whole 'nuther soap box, I know, but, again, one of my huge pet peeves about credit repair. Anyway, they take that "qualifying" borrower-yeah, you know, the one guy that fits, and they freeze his rate and then. . .oops, he can't pay-NOW, after that does he still get the benefit of the cram down modification to the BK rules? (assuming, of course, that it gets passed). Geez, that is like, what; a triple bail out of the same person that bought more house than they could afford?
Sorry for ranting but this sht is pssing me the f*ck off.
Tanta,
"Thus the operative choice for investors/lenders is not 7.7% vs 10%, but 7.7% vs foreclosure (whatever return that brings)."
No, there is a third possibility.
Many of these mods will default. Given declining house prices, the severity on those mod foreclosures will be greater than today's foreclosures.
So, its 7.7% and 70% severity later on some portion of the mods, vs. 50% severity on foreclosures today.
"Somebody did the math, and somebody concluded that freezing a rate that is still about 200-250 bps over the 6-month LIBOR isn't going to be a disaster (at least not compared to having to foreclose these things)."
Isn't going to be a disaster for whom? If I'm holding a highly leveraged position in P/O strips, I might disagree.
Class warfare (or should we call it tranche warfare?) is such a bitch.
I guess the attorneys posting here forgot the Blaisdell case?
Home Building & Loan Assn. v. Blaisdell
What about those businesses that promise to crank up crdit scores? What will they be doing? An about face - We can drive down your credit scores!
Barely- don't get me started on those companies-hell, yeah, they will do whatever you need. Trust me, if they can figure out how to fck the system in the first place, they can certainly figure out how to unfck the system-ya know what I mean.
DP- absolutely some of these mods will default, then what? We will be surprised? or maybe, we could have never predicted it?
So, we bail out the dysfunctional borrower and the responsible borrower sees no benefit? Why? Because, the responsible borrower DOES NOT NEED TO BE BAILED OUT! Big fat DUH!!
Again, sorry for ranting, but I have been doing mortgages for over 20 years-yep, damn near as long as BD has been alive, and I am sick of this crap. You try to get companies to do what they should, and they bitch about the cost; you try to get borrowers to do what they should and they bitch about the cost. . .frankly, they deserve each other!
Unfortunately, it is we who will bear the cost.
Consider this, the reason that the loans start to adjust after a 2 or 3-year period of time is NOT so that the lender can collect the inflated rate, the reason they adjust is to force the borrower to refinance. When a sub-prime borrower qualifies with a 45-50% debt ratio at 7.9% and the 1st adjustment takes the rate to 10.9% its note hard to imagine the borrowers reaction, especially when the rate continues to increase by 1% every 6 months until the rate is around 13-14%.
This is why I have been preaching for months that these loans are designed to be refinanced, not kept, AND THERE IS NO SUCH THING AS A TEASER RATE ON A SUB-PRIME LOAN. The Idea of a teaser rate assumes that the investor wants to keep the borrower on his books, which is not the case here. The borrower gets two years to straighten out their credit and then they get the H%$L off the banks balance sheet, the increasing rate is just a cattle prod to get them moving.
The reason investors like two year terms on sub-prime loans is that a sub-prime borrower tends to keep making the same stupid mistakes that got them into an inflated rate to begin with, and keeping that individual on the investors books exposes the investor to too much risk. As a result, this freezing of the interest rates doesnt hurt the investor in the way that most people think. The investor gets the shaft because-
1.\tThey dont get the payoff on the loan, freeing up the capital.
2.\tLonger exposure to the borrower increases the banks risk dramatically.
3.\tPreviously, the sub-prime borrower has been a sort of renewable resource for the bank to sell every two years or so.
All three of these things are presently mute points so freezing the rates is probably somewhat of a no-brainer for the bank, in fact Id say if the bank is pushing back at all its because they want more free money from good old Bend-Over-Bernacki.
CTAN
So it seems that half of the commenters here are bemoaning the fact that subprime borrowers are getting a sweet deal by deferring rate increases, and the other half are saying that theyre being ripped off by paying greater-than-rent rates on a depreciating asset and will be on the street five years from now.
Cant have it both ways, folks. Or can you?
Perhaps both perspectives are true. Subprime borrowers will be able to stay in their home by continuing to pay barely affordable monthly payments. As a result a train wreck of REOs wont hit the market and blast a hole into the home value of entire neighborhoods (homes jointly owned by the residents and the ML investors).
And perhaps after five years of paying above market rent (in the form of mortgage payments) they will be foreclosed on and lose their home. But for five years they will have had a home, and an opportunity to turn things around, both in their personal finances and for home values to find a level likely lower than today, but not so low that jingle mail is the best solution.
Steve,
"Historical studies of loan modification show that about 40% of modified mortgages re-default within 2 years."
That's exactly it.
Let's imagine the number is 60% now just based on fraud regarding owner-occupied.
So if severities are going to increase in the future, its not clear mods are a good deal for investors.
I know it sounds cruel, but come on! A subprime borrower can rent for half the cost of owning the home (at an 8% interest rate). So why not rent? Everyone benefits: the borrower can afford his home, and the new home buyer gets a more affordable price. Tell me again why we are fighting that outcome?
Unfortunately, my suspicion is that freezing the rates will only draw out a situation that will inevitably end in foreclosure for the sub-prime borrower and the Banks know it. (I dont think the government knows it yet though, based on what Ive seen from them lately Im seriously questioning their capacity for logical thought, I cant believe some of those people are actually in charge of something other than keeping track of their Superman lunch box). If it were not for the economy teetering on collapse I would say its probably best just to rip it off like a band-aid and get it over with. People can start over, I know I will.
The sad fact is, these folks mostly couldn't make their mortgage payments if the rate was set o 0% for infinity...they are poor decision makers and the true bail out will be to let them draw $500 each month on a second mortgage line of credit.
This is about making headline scanners feel good and thus continue spending.
I am not a disaster forecaster, but this is destined for failure.
Let the foreclosures proceed. We bottom fishers will buy, fix, improve and bring back to market at a realistic price that moves the property to a realistic owner...life goes on. Let the dreamers, hopers and idiots who think they can sell their castle at 2005 prices molder on.
demand cut for MBS:
Paulson Plan May Make Mortgage Bonds a `Hot Stove' (Update1) - Bloomberg.com
David,
Oh I agree that mods are not in investors' interests for these types of loans. Better to get 60% today than 60% or less a few years down the road. But my guess is that Paulson's plan won't have more than a marginal effect on fc's. Everybody will get together in Hope Now'' tee shirts and singI'd like to buy the world a Coke'', but unless the servicers get a blanket indemnification from Uncle Sam they'll be just as quick on the trigger next year as this year. Let's try to remember that the incredible foreclosure rates this year stem mostly from people still in the teaser rate period. Foreclosures won't drop, but the rate of increase will slow a little.
You also may be old enough to remember WIN (`Whip Inflation Now') and how well that worked.
Tanta: "they are the "payment rate" on an Option ARM. ......It's just that the borrower still makes the payment (until recast) based on that low "teaser" rate.) "
so DSL and FED and the like will also enjoyu this by continue to book Neg-Arm as profit for the next 5 years ?
Here's what I don't get...
Tanta has already made the case that the major servicers don't have the staff to handle the NODs & FCs that are already coming at them. Soooo, how in the hell are they going to suddenly find the people who are supposed to proactively identify, contact and qualify people for this plan???
btw, DSL - anyone watched the great manuvare by hilltop ? I wonder how much they made ?
My guess is that to maximize profit someone could do this:
boght 600 of deep ITM PUTs the day before yesterday)
Tanta,
This is a very insightful post. It seems like your argument has satisfied most of the commenters above.
Even if the FICO buckets are really a way to isolate loans with rates that are already high, I still think the obvious lay person's reading of this is "people who don't pay their debts and aren't particularly responsible (those with low FICOs) are first in line when the gov't is organizing a bailout." It seems like a clear example of the strong carrying subsidies for the weak, and I think that creates a moral hazard. I find it very disappointing.
Chris
What's absurd about this whole thing is: why would anyone want to try to salvage the house when it is depreciating so markedly? If I'm 125 or even 100% LTV, I have absolutely NO INCENTIVE whatsoever to try to work it out. Why should i? I have no skin in the game.
Jingle mail is the only realistic solution. This plan is a scam to artificially prop-up fictitious capital schemes and nothing more. You are wasting your (impressive) prowess giving this any more than a cursory consideration.
Question: If the homedebtor can't make the adjusted payment, is the homedebtor going to be able to maintain the property for 5+ years? What will that to the collateral in the face of rapidly falling prices? What will a poorly maintained house do the property values around it in a time when inventories are skyhigh?
Also, will said homedebtor be able to pay property taxes?
One question has been on my mind about modifications - why don't the mortgage modifications utilize more sophisticated/variable terms to trade off the short term loss against a long term gain.
In other words, why not say "we will give you a mod, but we are going to watch your income and we reserve the right to increase the payment later" or "we will give you the mod, but it will cost us X dollars and we get first claim to the first X dollars of profit when you sell."
My impression is that most people, especially subprime people, are financially unsophisticated and desperate to keep their houses. If they bought into the ARM in the first place, couldn't you sell them on these kind of complex terms?
Is the fear that these borrowers are going to be wiser the second time around and choose to default rather than accept the onerous terms? I suspect you could sell a lot of these people a bad deal the second time if you dressed it up, and I don't understand why the banks don't do that if it they can make more money that way. They were clearly happy to sell the people an overly complex and expensive mortgage the first time, why not do it again?
Thanks,
Chris
What's wrong with ownership society?
picosec:
So it seems that half of the commenters here are bemoaning the fact that subprime borrowers are getting a sweet deal by deferring rate increases, and the other half are saying that theyre being ripped off by paying greater-than-rent rates on a depreciating asset and will be on the street five years from now.
It's not about helping the borrowers. The Bush Administration hasn't all of a sudden gotten interested in the welfare of poor people. It's government of the suckorz by the playaz for the playaz same as it ever was.
It's not especially about "ripping off" overcommitted borrowers, though to the extent that does happen it's a feature not a bug.
The clue is that all this intervention is to be reset- triggered. What it is about is fewer foreclosures in 2008 at less distressed prices, and more time for RMBS-exposed institutions to find an escape hatch.
That is, "relief" is to be offered to borrower X, not to help her or to exploit her, but to keep her house off the market, and her mortgage on the books at face value.
If the Senate would pass an equivalent to HR 3915, then we would have a legal definition of "subprime." So far, only the House of Representatives have passed something.
http://www.house.gov/apps/list/press/financialsvcs_dem/press102207.shtml
I'm not all that certain that HR3915 will be useful.
First off, I'd say that the US economy is pretty ripe for some sort of recession. The irony is that both this coming recession (hopefully small and short lived!) and the last seem to have at root over-zealous investors. The main difference seems to be that the last time the investors had something to whip them into a frenzy (i.e. the explosion of computer use and usefulness), while this just seems to be that things have been going a little too well for a little too long and greed was really starting to set in.
I would say in the end that the house buyers are to be blamed along with the loaners. Anyone looking to invest in a house in the middle of a price bubble is asking for trouble. They should have seen that when things cooled down they would be left with an investment that they payed to much for.
Now the creditors just drove the nail in the coffin. Offering mortgages to anything that moved, and not just your standard mortgage that a dog could figure out, but the ARMs and other more complicated loans was a shady deal. Anyone who offers a mortgage these days pretty much knows that they can sell it to another institution and wipe their hands of the whole mess. And that's because mortgages are usually a very safe loan. So when the big dogs scooped these up, they had no idea what to expect, which they are responsible for.
In the end, blame can be squarely aimed at all the parties involved. But who is going to have to bear the burden of cleaning it all up? Since using fiscal policy to clean up a mess like this, I'm keeping my fingers crossed that the Fed is looking far enough into the future to help us through this in a way that isn't just a shot in the arm.
Basically, why have the house sitting empty as an REO for the next five years getting stripped when you can collect something on it for at least part of that time and still sell it in five years? It's a more reality based version of the refusal to mark financial assets to market "because the market is illiquid".
This isn't a government bailout. What the Feds are going to do is help the big guys collude and do this all at once. If One lender did this they'd be pummeled by investors, they all do it at once with a pretty banner and a press conference and everybody's happy (and if you aren't whatta ya gonna do about it, they're all in on it). Plus they hope it takes some wind out of the sails of the Congresscritters who might try to push through a real honest to goodness bailout. The only "takings" will be Congress exempting them from liability from the investors whose coupon just shrank.
Before the FICO constraint leaked, I was reading numbers like 12% of Subrime borrowers would be helped by this, now I'm sure the number will be somewhat lower. It'll make some difference on the margin but by and large everything is still on the same track it was a month ago.
Just because it needs to be said again:
So, we're Venezuela now! How is this BS any different than their government stepping in and nationalizing the oil companies over there? In both cases, the government has decided it can change written, legal contracts on a whim to benefit various corrupt organizations. So, we're now using 3rd world nation style legal agreements, where people keep their obligations only so long as it is easy for them.
If this goes through, if I were a foreign investor, I'd dump every chunk of investments in this nation and be putting my money someplace else.
I also like how the prudent workers will be punished by this (continued dragging out of the housing market to prevent affordable housing, high inflation that punishes our savings, etc.) while the bums will be rewarded (living at least a few more years in their unearned McMansion before defaulting.)
From each according to his abilities - savers have to give up their savings - and to each according to their needs - bums that "need" a McMansion, a Hummer, etc.
Please. Don't write anymore. That was perfect.
So if I go out and act irresponsibly by opening up LOTS of new credit accounts,going over credit limit and missing payments thereby beating down my FICO I can get to the head of the line?
I'm all over this. What a brilliant plan!
you can't make people buy white elephants, ain't gonna happe
this will mark the 1st thing GW & Co. have gotten right in the last 7 years..............
won't it?
WON'T IT?????????
"The 2/28s and 3/27s in question aren't interest-only loans, and the borrowers had to document income, assets, expenses, debts, blood type, sexual orientation, and whether the carpets match the drapes. These loans didn't have intro rates of 4 percent or lower; those generally were I/Os."
I would make the case that most of these loans are/were IO and most were not income documented, based on analysis made available.
REBanker | 12.05.07 - 9:21 pm | #
I stand corrected, REBanker. You're right, at least about stated-income.