Jawboning That Works

The TigerHawk tells us of a White House led deal to keep the sub-prime mortgage market afloat by extending teaser rates:

The Wall Street Journal is reporting that the White House is near to a deal with the big banks and, perhaps, the investors in subprime mortgages to temporarily freeze interest rates on mortgages that otherwise would "reset":

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.

MarketWatch adds little, so let me ride with the TigerBull:

Meanwhile, the dollar is stronger notwithstanding new chatter from the Fed on interest rate cuts, gold and oil are down, and the stock market has now been up three days in a row for the first time since September. A lot of different people are registering new confidence that catastrophe is not in the offing. Are we going to dodge this bullet?

Hmm.  Let's just say that there are a lot of things that could go right for Bush in the next year - for starters a deal to help homeowners may silence John "Two Americas" Edwards for a welcome thirty seconds.  And I am picturing a world with falling oil prices and stability in Iraq (how about democracy?!?) as we run up to November '08.  Maybe not a bad time to be Rudy Giuliani.

Of course there is a lot that could go wrong, so keep hope alive, Dems.

MORE:  Did you buy bond insurers yesterday?  They are up on reports of this deal, as well they might be.

Comments

[Other Tom]

Very nice piece by the outstanding Victor Davis Hanson on the Democrats' war dilemma. Keep the date of April 19, 1997 in mind--that's the day Harry Reid said "this war is lost."

I'm hoping to see GOP ads featuring that statment all next summer and fall. Granted he's not on the ballot, but he spoke for the Democartic Party. Let the candidates distance themselves from him however they can--it's going to be ugly in any event. It is dawning on a lot of people now that these people really were hoping for defeat and surrender, and are disappointed now that it's not happening. Could be extremely interesting.

[glasater]

Well Mr. TM you've hit on a very topical post. In listening to CNBC this morning--that's the main topic for the day.
What is comes down to is that this plan will hurt fixed income folks.
The Fed will lower rates on the backs of those who've saved and earned.

[coolpapa]

OT -

"Keep the date of April 19, 1997 in mind--that's the day Harry Reid said 'this war is lost.'"

1997? What war was he talking about?

[Other Tom]

Creeping senility--it was April 19, 2007.

When you're having a good time, the decades run together like the contents of a spitoon.

[bgates]

I moved to San Diego fresh out of grad school in 2004, and the only way I could have afforded to buy was with one of those ridiculous loans. I thought I was being smart to think ahead three years and realize the rate reset would kill me. Turns out I would have been smarter to realize no one else would think ahead three years, and I should have jumped on the free money and waited for the government to bail me out. Well, I'm young. Best to learn now what a mistake financial responsibility is.

[TigerHawk]

Thanks for the link, although I admit to hoping that "TigerBull" does not catch on.

[Elliott]

I hope that on November 5th of next year, we can look back and fondly recall November 16, 2007, the day Hillary Clinton would have been elected President.

[Rick Ballard]

The article provides enough info to run a few scenarios concerning the scope of the problem and cost of the solution. Assuming a 20% foreclosure rate (wildly unprecedented) and an 80% asset recovery through sale, the capital loss on the $447 billion would be $17.88 billion. A 30/70 outcome would be $26.8 billion. The proposed interest rate haircut will result in income reductions of $5.7 billion to $15.4 billion based upon the total portfolio being restructured.

The Black Swan becomes an ugly duckling smaller than the S & L "crisis" back in the late '80's.

The speculators will still be wiped out (the few who are left) and lending practices will return to being "reality based". The gov ought to announce a fraud crackdown at the same time and go after real estate broker, appraiser, mortgage broker rings in Phoenix, Las Vegas, Sacramento, Riverside County and Miami. They aren't hard to find and they would be easy to roll up. Then tackle the underwriters who wore blindfolds while shoveling money at crooks.

[Semanticleo]

"And I am picturing a world with falling oil prices and stability in Iraq (how about democracy?!?) as we run up to November '08. Maybe not a bad time to be Rudy Giuliani."

Never misunderestimate the power of denial.

BTW, Maguire, Santy Claus is coming.

[Jane]

So does anyone else think just maybe Hillary is behind this hostage taking thing (probably being discussed somewhere I have yet to find)

[hit and run]

Other Tom:
Keep the date of April 19, 2007 in mind--that's the day Harry Reid said "this war is lost."

Well, and my favorite is actually April 12, 2007--the day Harry Reid said that the Dems would pick up seats in 2008...that Senator Schumer had showed him numbers that were compelling and astounding.

The pronouncement that "this war is lost" has EVERYTHING to do with polling that showed him that making such a statement would help the Dems at the ballot box.

[Semanticleo]

"this war is lost" has EVERYTHING to do with polling that showed him that making such a statement would help the Dems at the ballot box."

Is there a problem?

[cathyf]

What is comes down to is that this plan will hurt fixed income folks. The Fed will lower rates on the backs of those who've saved and earned.

It doesn't really work that way... The fundamentals are about the real value of the savings and earnings of those who've saved and earned -- if they don't get haircut by the falling rates, they get shorn via inflation. It's not that there is a free lunch which the Fed gets to distribute. There is no free lunch.

[glasater]

To paraphrase--Cathyf, your logic is impeccable--we are in grave danger--:-)
I'm really all for helping these folks out in this manner.
The thing that is galling is that the government has been telling banks to make loans to credit risks for a very long time. It just reinforces financial bad behavior.

[coolpapa]

Rick Ballard -

"The gov ought to announce a fraud crackdown at the same time and go after real estate broker, appraiser, mortgage broker rings..."

Unfortunately, "the gov" is already doing that, and its becoming a bigger part of the problem.

In Ohio, the Democrat administration calls it Senate Bill 185. A key provision is that lenders are now responsible for the borrowers' ability to pay. Even if a borrower provides fraudulent information to secure a loan, the lender is guilty.

The natural effect of the law has been to chase most quality lenders and loan products out of the state. They just don't want to accept the risk, and who can blame them?

So, to tackle a 20% problem (wildly unprecedented, and I agree), these dolts have killed the 80% of the market who weren't. Be careful what you ask for when you're asking it from "the gov" because you'll get it, high and hard.

Now, apply this same principle to national health care:

"Oh, gangrene on your big toe? Got just the thing. We'll just put a bullet through your head."

POW!

[Rick Ballard]

"The thing that is galling is that the government has been telling banks to make loans to credit risks for a very long time."

I've got that at 137 on my galling list. Way up towards the top ten is the use of notional amounts coupled with partial information provision by business writers and editors who desire to inspire fear and uncertainty in order to peddle more product.

This WSJ piece wasn't too bad. It would have been much better to provide the numbers of total mortgages extant and total amount owed in order to get a feel for scale. There are about 51 million mortgages on owner occupied homes at the moment, the total number of subprime mortgages is estimated to be around 2 million. Total owed on the 51 million is around $11 trillion.

Coolpapa,

I don't generally ask for "new" laws and I didn't in this instance. The Ohio law you cited is an example of why I don't. Twenty high profile enforcement actions involving existing laws will be sufficient to provide the necessary warnings.

The market has been punishing the lenders - it's just a shame that it's so difficult to get rid of incompetent boards.

[GMax]

Government has proven time and again to be able to do two things exceedingly well. The first of course is : Nothing. Which is not always such a bad thing. The second though is : Overreact. They do it all the time. Baby bath water pity lather rinse repeat.

[GMax]

Government has proven time and again to be able to do two things exceedingly well. The first of course is : Nothing. Which is not always such a bad thing. The second though is : Overreact. They do it all the time. Baby bath water pity lather rinse repeat.

[coolpapa]

Rick -

"I don't generally ask for "new" laws and I didn't in this instance... Twenty high profile enforcement actions involving existing laws will be sufficient... it's just a shame that it's so difficult to get rid of incompetent boards."

There's the rub, isn't it?

The same "gov" who in one hand has a gun that you want used for "high profile enforcement" is getting it's other hand greased by the "incompetent boards" who tell it who to shoot. And "gov" does, without shame.

[Rick Ballard]

That's a tad bit too conspiratorial for me. What I meant by "incompetent boards" are boards without anyone on them competent to bring management up short on its overreliance on "black box" quants touting unexplainable algorithms matched to unexplainable derivatives to arrive at "never fail" strategies that ignore the basics of underwriting. Mortgage brokers, appraisers and real estate brokers recognized the display of ignorance and carted off sacks full of loot.

Some speculators let greed overcome fear and the game of musical chairs got out of hand in six or eight markets.

Whom would be hurt should this plan go through? You have to be up to date on your payments to qualify, so the moral hazard equation is minimal. It looks like the lenders take the hit and it seems a rather elegant way to stabilize the market. Removing the uncertainty about where the "floor" is allows the the proposed action to become the point of inflection.

What am I missing?

[Semanticleo]

"What am I missing?"

Nothin'. Nice tooth.

[Rick Ballard]

Additional info

Reaction at US News and Investor's Business Daily

The Dems are chomping at the bit to claim the "fix" - this is really an interesting election year play.

[Larry]

I don't understand the problem. Lender forecloses on property they staked at 80 to 90% of the original selling price. At worst, they now own said property for 90% of its value. In many cases, like where I live, values have gone ape in the last 4 or 5 years. Lender takes my originally $100,000 house that's now worth, say $200,000. They make $100k on an $90k investment. Looks like a good deal for the lender. The borrower screwed him(or her)self. What am I missing?

[MayBee]

Larry- One thing you're missing is how hard it is for people to get financing to buy right now. Many mortgage companies are too skittish to approve even good loans.
The other thing you're missing is that people that have been foreclosed upon have a hard time buying something else (and with no equity to pay for something new, to boot).

[Georg Felis]

Larry - Second thing you're missing is the Lender doesnt get to keep that extra 100k you referenced. If there is $99k (plus charges and fees remaining) on the $100k mortgage, and the bank sells the house for $200k, the owner will get the remainder. Where the problem hits is that $100k mortgage on a house that may not sell for $110k, and may take 9 months to get sold. For those 9 months, the bank makes zippo, and is paying people to get the house off the books, paying insurance, paying utilities, paying taxes, paying interest,etc. So if they make money on the forclosure they break even, and if they lose money they lose money. It takes a lot of good mortgages to make up for one dud in the thin margin world of banking.