An unlikely source has entered the mortgage crisis fray offering assistance to mortgagors (i.e., the people who took out mortgages to purchase their homes, not the lenders and others who hold the mortgages): the FDIC (Federal Deposit Insurance Corporation, for long), which is proposing to use $25 Billion of the $700 Billion TARP (Troubled Assets Relief Fund, for short) to prevent millions of foreclosures by offering incentives to banks to lower mortgage payments for homeowners. Naturally, Hank “Goldman Sachs and Morgan Stanley are My Co-Pilots” Paulson hates the idea:
Officials at the Federal Deposit Insurance Corp. yesterday detailed a plan to prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans.
The proposal, which has the support of leading congressional Democrats, would considerably expand the scope and force of the government’s efforts to stem foreclosures. Agency officials estimated the cost to the government at $24.4 billion.
FDIC Chairman Sheila C. Bair continues to face opposition within the Bush administration. Treasury Secretary Henry M. Paulson Jr. said Wednesday that he opposed funding the plan from the government’s $700 billion financial rescue fund, which has been used primarily to rescue banks and encourage lending. FDIC officials say they are still in talks with the Treasury, but proponents increasingly view the Bush administration as a roadblock with an expiration date.
“We think it’s essential that we actually strike at the underlying cause of the problems in the financial markets,” said Michael Krimminger, special adviser for policy at the FDIC. “We think it’s time to make a decisive difference in the housing markets on foreclosures.”
The FDIC proposal, which is scheduled to be announced today, goes farther toward helping borrowers than existing modification efforts. At the same time, the initiative is designed to be less expensive for mortgage companies because the government would pick up part of the tab. […]
“It is confounding to me why the Secretary of the Treasury and others refuse to understand that this is the heart of the problem,” [Senator Chris] Dodd said. “Until we solve the foreclosure problem, we will not have any hope of solving the larger problem.”
Many economists believe the economy will continue to suffer as long as the pace of foreclosures keeps home prices from stabilizing.
Hank “I can piss away BILLIONS with the best of them” Paulson and the Bush administration don’t want to help ordinary, everyday people in danger of losing their homes. They don’t want to prevent mortgage foreclosures which further depress the real estate market, cripple any chance of recovery by the construction industry and put families out on the street. They want to purchase shares in banks, and other financial institutions (like AIG) instead, institutions which aren’t lending the money which is being invested by the government, but which are taking those TARP funds and paying their executives Billions of $$$ in bonuses or using them to acquire other banks. How this helps the economy or solves the international credit crisis is beyond me.
What the FDIC officials are proposing makes sense. The best way to preserve the value of the homes which support these mortgages (and other homes in their neighborhoods whose value will decline if foreclosures continue) is to keep families in them. Families paying something on their mortgage debt is vastly superior to bank foreclosures and selling the properties at fire sale prices to speculators. Lowering mortgage payments for these families would also free up monies for other expenses (food, consumer goods, etc.) which would provide some benefit to the economy at large. Money not spent on mortgage payments would be recycled throughout the economy numerous times, and that could mean the difference between companies and businesses filing bankruptcy and/or going put of business (with the millions of job losses that would entail) or staying in business and preserving those jobs.
Color me stupid, perhaps, but don’t more unemployed people and more failed businesses mean less gross domestic product and therefore fewer good customers, consumer and corporate, for banks? And don’t those business failure and job losses prolong the recession/depression we are in and make the likelihood of a strong recovery less and less likely? Indeed, don’t increases in business failures and unemployment risk the further collapse of the international economic order with consequences too dire to contemplate? Like, say, a further collapse of global stock and equity markets, the inability of governments to raise monies in the bond markets, and even the return of the barter system in international trade?
I don’t know if the FDIC’s proposal, by itself, is enough to stem the tide of foreclosures roiling the US real estate market, foreclosures at the heart of the credit crisis, but it seems to me it represents a step in the right direction. I suspect we should also modify the current bankruptcy laws to allow bankruptcy courts to rewrite the terms of home mortgages so that both homeowners and lenders can benefit. Other measures such as a mortgage foreclosure moratorium may also be needed.
Still, at $25 Billion, the FDIC’s “big idea” seems like a drop in the bucket compared to the billions we are wasting each month to occupy Iraq, or which Wall Street’s mismanaged financial companies will pay from their government handout to “retain” their overpriced and incompetent “talent” otherwise known euphemistically as “senior executives” and “investment bankers.” I can’t see how giving the stupid, arrogant rich people on Wall Street more “free money” to play around with helps the economy half as much as helping out millions of members of the middle class on which our economy depends.
But then I’m not a Republican and former Wall Street executive masquerading as the Secretary of the Treasury, am I?
Bonus Question: This is for all you right wing defenders of unfettered capitalism and business libertarianism (as opposed to cultural libertarianism). Which would you prefer: “Socialism” for Wall Street (i.e., the Bush plan) or “socialism” for “Joe the Whatever” (the FDIC plan)? Or would you prefer that both Wall Street collapse and ordinary Americans lose their homes in the interest of ideological purity? Your call.
I don’t know if the head of the FDIC is a Presidential appointment, but I certainly think FDIC Chairman Sheila C. Bair ought to stay on the job, don’t you?
I’ll see you and raise you. How about giving her Paulson’s job? It has been suggested by a number of DFH bloggers, perhaps not the first choice but up there. Couldn’t possibly be worse than Paulson.
Very few people could be worse than Paulson. But then he wasn’t exactly Bush’s first choice. Quite a few more qualified people turned the job down rather than submit to life under Dumbya.
“I don’t know if the FDIC’s proposal, by itself, is enough to stem the tide of foreclosures roiling the US real estate market, foreclosures at the heart of the credit crisis, but it seems to me it represents a step in the right direction.”
First off, the FDIC needs funding. Under its present balance sheet how does it offer to guarantee GE’s $139 billion debt?
We’ve been scammed. Money is being printed in thin air and the thin air is getting heavy.
A careful listen to Hank Paulson’s interview with Bloomberg yesterday…he indicated it was the magnitude of the problem why he shifted gears…$700 billion (a figure he requested) is insufficient.
It’s not the symptom. It’s the disease. It’s still the derivatives that’s at the core of the financial crisis.
Those mortgages are no longer held by the originator bank! They have been bungled, securitized..made into trillions of derivatives, sliced and diced then sold to 100 + investors..institutions, pension funds, school boards, wealthy individuals. It’s no longer a question of whether the instrument is recourse or non-recourse. As the Chicago Fed noted, in 2005, derivatives are protected in a bankruptcy or default. OTC derivatives are private contracts…and many own a slice.
So with whom do you negotiate …who owns the mortgage? there are no lien holders…the original lien holder has been paid…the current lien holders are not registered against the title ( a precedent: Ohio court threw foreclosure cases..plaintiffs could not prove standing as lien holders).
What a mess! $600 trillion of OTC derivatives –one- on-one private contracts.
This morning’s read Insurers mull S&L status
Get in line. Before all this is over, we’ll have a new currency.
Which is why we need the power given to bankruptcy courts to cram down revised mortgage terms.
The other option is to do nothing and simply allow the defaults to occur, bringing down the whole house of cards.
The Chicago Fed noted Derivaties are protected from bankruptcy proceedings. [Caution: large .PDF file] THe focus was on OTC derivatives.
SO
that’s would be a dangerous precedent for investors – who would shun even USTreasuries which are nothing but I.O.Us?
Be prepared. The Federal Reserve has gone to QE – quantitative easing – printing money 25/8 – hyper-inflating away all debts.
Good point. Much of the analysis on bankruptcy v. bailout assumes that the court’s inability to deal with derivatives is inherent in bankruptcy. Why? Let’s change the laws and let the courts do this. I know unraveling these contracts is messy but the parties themselves aren’t able to extract themselves and I don’t trust government officials like Paulson or a Larry Summers (for e.g.). I would much rather have the court liquidate as quickly as possible.
Instead of bailing out the banks let’s give the money to the Justice department to prosecute fraud and crime and give it to bankruptcy courts to expedite the liquidations.
Let’s change the laws and let the courts do this. I know unraveling these contracts is messy but the parties themselves aren’t able to extract themselves and I don’t trust government officials like Paulson or a Larry Summers (for e.g.). I would much rather have the court liquidate as quickly as possible.
the magnitude of the problem that is a creature of America’s banksters: toxic OTC Derivatives, $600 trillion, sold worldwide to other banks, institutions and sovereign wealth funds… not something the U.S.Congress or the courts can resolve. And not having learned a lesson Derivatives are still being created as I write.
Derivatives connected to mortgages, the first to melt. Mortgage bond derivatives and the packagers caused the destruction of AIG and investment banks. Implosion No: 1
In view are the Derivatives connected to consumer loans: auto loans, credit card debt and student loans. Implosion No: 2
On the horizon Implosion 3. It’s mid-November and we read of Paulson’s biggest headache. Where there’s smoke. Just recall these were the same guys vying to take over Wachovia.
On the horizon, the lawsuits and regulation that’ll include the rating agencies..banks, hedge funds. They’ll disappear.
It’s Derivatives that will lead us to something worse than 1929.
Sheila Blair sucks. She’s another supply side Republican stooge. She’s just gutsy enough to put herself out there and propose stuff.
We need new thinkers who predicted this crisis in the first place. We don’t need more of the same.
It’s not at all clear to me that forclosures prevent prices from stabilizing. They may cause prices to drop faster than they otherwise would, but it’s clear that prices need to fall a good long way in many parts of the country before ordinary people can afford to buy one again.
There will be no stabilization of housing prices until the median income family can afford the median priced home. With unemployment rising and the remaining jobs paying wages that aren’t rising there’s still a long way to go. Besides, there are trillions of dollars in resets still to come. You can’t bail them all out.
It most likely doesn’t and if anything may simply delay the problem for later and make it worse. There is a recent paper by the Fed that concludes the same foreclosure moratoria and other foreclosure prevention acts in the 1930 had a similar effect.
These are all designed to help the banks anyway. Just to keep a few suckers paying a mortgage they are underwater on for a bit longer.
Should the “ordinary Americans” who’ve purchased expensive automobiles they couldn’t afford from no-credit-check sleazeball car dealers come to the rest of us to pay off their loans?
And should we do it?
Will the defaulted auto loans have a catastrophic effect on the nation’s economy?
foreclosures caused this massive economic collapse?
Judging from the ever-changing course this bailout is taking I’d say that nobody has any real handle on what’s the best way out of this mess.
But I do not believe that re-inflating the housing bubble is the place to start.
This isn’t about reinflating the bubble. It’s about stopping the bleeding.
Read this story and then ask yourself, whether it is best to help out only the greedy and amoral Wall Street bankers, or people stuck with mortgages they were fraudulently sold to create a market for CDOs, or to do nothing at all and just let the whole economy collapse.
The evils of capitalism?
If you’d like to institute a form of democratic socialism in this country just show me where to sign up. I’m ready. Let’s hang the robber barons out to dry.
But to selectively let some folks skate on obligations they either foolishly or greedily accepted is wrong.
Perhaps you don’t understand the legal concepts of fraud and unconscionability. When one party takes advantage of another because of their lack of information in making a contract, that’s unconscionable and permits courts to rewrite the deal to eliminate the unequal bargaining power.
In addition, when one party informs another that they qualify for a loan which they know the other party does not, that’s a deceitful act which qualifies as fraud. A fraudlent transaction can be reversed or otherwise reformed to make it equitable. What we had here was an effort by Wall Street firms and mortgage lenders to generate mortgages by any means necessary during a time when the housing market was being artificially inflated by low interest rates and shoddy lending practices. A few people do indeed qualify as speculators who don’t deserve any benefit, but many people were simply taken advantage of by the mortgage generators and the investment firms who took those loans and securitized them so that they would have “product” to sell to investors. It was all part of a massive fraud or gross negligence in my view, and arguably a a criminal offense under the RICO law. At least that’s what I get from reading the story on Portfolio.
Now we have a group of people who can have their homes foreclosed or who can have the loans rewritten to make them repayable without being completely a ridiculous burden on these people’s income. If you had read the article about the FDIC proposal you would have seen that it wasn’t intended for speculators but for people who had incomes and the ability to repay their debt if the terms were modified. Not only does this benefit them, it benefits homeowners whose property values suffer from foreclosures and empty houses in their neighborhoods, and as I pointed out, by reducing the money owed to lenders, it frees up more money to be used to purchase other goods and services, thus benefiting the economy at large to some extent and perhaps limiting the number of business failures and unemployment claims that will be filed.
Thus it is good policy for all of us who don’t make six and seven figure (or more) incomes from selling crappy investments, and a much better investment than simply handing cash to the largest banks on Wall Street to be hoarded to meet reserve requirements, pay off their own debt obligations or pay bloated bonuses and executive compensation.
Ed your argument is flawed,because if you bought an expensive car you can’t afford it doesn’t affect anyone but you and your credit rating. When a house is foreclosed upon, it effects the property value of all those living near the foreclosed house. And, the foreclosed house, by lowering the property value also lower the property tax base used to fund schools and other vital public services.
Great discussion, guys. Hashes things out well.
And if I don’t mow my lawn it lowers property values in my neighborhood also. Should I ask you to pay for someone to come cut my grass?
There are municipalities that will do that, or fine you for not cutting your grass.
But, you’re missing a key point. The object of foreclosure relief is not justice but broad economic benefit.
Paying off your VISA bill is no different from paying off a piece of your mortgage debt from the point of view of justice. But there is almost no conceivable economic benefit to paying off your VISA bill, while allowing you to stay in your home is a benefit to your entire community.
your homeowner association will probably sue you, to enforce one of those covenants in the title about not letting your house become a nuisance violator.
And once again you make the incorrect assumption that keeping housing prices elevated is good for the “community”. It may be good in the short term for current homeowners but it is not good for those people in the future that wish to purchase a home. Artificially propping up an asset like housing is foolish. That is partly why we are in the mess we are in.
Plus, you want our grandchildren to pay for this. That’s not good for the eonomy–leaving our children huge bills to pay because we privatized the gains during the housing boom but we socialized the losses.
in my home a benefit to my community? If I get foreclosed on someone else buys the house – presumably at a lower price than I paid. You still have an occupied house.
And maybe the new owner will even keep his grass cut.
you evidently do not understand the scope of the problem.
There are no buyers.
the prices fall their WILL be buyers.
Hmm, when 1 out of 5 homes in certain areas of Nevada are in foreclosure, it seems to me that the supply of foreclosed homes will far outweigh the demand. Mortgage lenders have already begun re-negotiating mortgage terms with troubled borrowers to avoid having any more empty houses on their hands than they already have.
all you have to do is look what happen to Japan. It had 18 years of falling home prices & stock market. I don’t want that for the USA
All insolvency effects the larger economy i.e. our neighbors. There is nothing special about houses. It’s the same with cars. GM is suffering because the scenario you mention, people not being able to afford car payments. Not being able to afford vehicles is happening on a macro level and that’s why the prices of cars are declining (the whole supply and demand thingy). Housing is just more localized and you will notice it more when you see that foreclosure comp in the neighborhood (although I bet some cars are more expensive in certain places–especially used cars).
But all insolvency has a multiplier effect on the economy. The damage in this case is already done and we are foolish to try to stop it. The time to stop it was when the bubble was forming. The government putting its finger in the dyke to keep housing elevated (to “save” us) is bound to fail and will probably have even more negative externalities than if it did nothing.
I agree with almost all of what you just wrote.
But, two points. If you are my neighbor, I could care less if the Repo Man comes and tows away your car, but I do care if your house is foreclosed on because it lowers the value of my property. You’re absolutely correct that your car insolvency will ripple out and hurt me, too. But that cost is shared broadly.
Second, any effort to artificially prop-up house values is doomed to failure, but that isn’t the goal of foreclosure avoidance. Or, it shouldn’t be.
A huge component of foreclosure avoidance is defining down the value of homes.
Fraud is alreadly against the law. And as you point out, Michael Lewis’ story in Conde Nast Portfolia (I think that’s what you’re referring to), there very well be some criminal actions that took place at all levels of the housing bubble–from the slimy mortgage broker and greedy Jane and Joe Sixpack all the way up to the Wall Street fat cats and government enablers. But I’m not holding my breath for anyone in the Bush admin to really go after that crime. We’ll see about Obama. This is why I said before that any bailout funds should substantially fund lawyers, accountants, and police to prosecute these criminals.
But on the whole you are wrong. This is an attempt, like all the government’s attempts thus far, to put its finger in the leaking dyke and prop up house prices. Sheila Bair has been trying to do this for a while. We’ve tried other similar proposals. ALL ARE DESIGNED TO HELP THE BANKS and to prop up current prices and keep the current suckers paying their mortgage. Those that can anyway. Just like all the other hamhanded meddling the government has done this will also make matters worse.
Bankruptcy cram downs are the solution. That is when we can modify a mortgage and reduce the principal. We should overhaul all of bankruptcy laws though. Not only do our bailouts favor the rich and corporations but so does our bankruptcy law. We need to restore bankruptcy to what it was before the Bush/Biden rape of the American consumer (the 2005 bankruptcy bill).
And why are homedebtors so important? Why can’t the government pay my credit card bills? Why is that fair to pick one type of debtor for the rest of us to bail out?
What lack of information?
If you have no job and no income and someone offers you a mortgage for a couple hundred grand you have plenty of information on which to say “no thanks”.
I don’t think you understand the nature of the fraud involved here.
Imagine that you go to a car dealership and you tell the salesman that you can afford $350/month in car payments. Then imagine that the car salesman tells you that you can have that cute little convertible VW bug for $350/month. But he doesn’t tell you that the $350/month will go up if interest rates go up, or he doesn’t tell you that it has a balloon payment at the end, where your payment will be $900/month.
And this is a deliberate deception, not some failure to communicate.
Ordinarily, a salesman has little incentive to offer you deal he knows you will default on and the banks, likewise and more so. But we removed those disincentivizing deterrents by allowing banks to sell off their loans to third-parties.
Once again, this type of fraud is already illegal and there are many people already suing and getting modifications based on allegations of such fraud.
But you are overstating the level in fraud in the typical transaction. Most people understood what they were signing. They knew they were paying XXX dollars for a home and were in an adjustable rate mortgage for 5 years and then went to a 25 year fixed, or whatever. They knew the terms. The problem wasn’t an understanding of the terms. The problem was the greedy bubble reasoning that led someone making, say, $75,000 a year, to purchase a home for over half a million dollars with hardly anything down and to assume that real estate always goes up at 10% a year. Sure, lot’s of these people were simply following the American Dream and doing what they thought was responsible. Some people thought that one purchased a home when they got to a certain age or level in life and some wanted that station in life even if they hadn’t earned it and most people didn’t want to be left on the sidelines while their friends were making a killing in real estate.
Fraud is bad and should be punished. If a mortgagee was lied to–let’s change the terms. But the main problem is that people knew their homes could go down in price but thought that was not going to happen. They made a bad decision.
And know you want us to go in and backstop these bad decisions and make it even more difficult for a hardworking saver to buy a house because the government is going to prop up houses and keep them unaffordable on a fundamental basis.
Is the balloon payment in the contract? Is the adjustable rate in the contract?
Do you understand that both signers of a contract are declaring that they understand and agree to the terms of that contract?
Lying salesmen have been a fact of life from the beginnings of civilization.
Caveat emptor.
you do understand that we are talking about fraud?
By your definition, fraud is impossible.
one party knowing more about the contract than the other party knows.
I agree with your general point that most mortgagees knew, or should have known, what they were signing. In fact, mortgagees were required to sign a form stating that the mortgage broker or other “professional” fully disclosed the terms to them.
As I said above I don’t think disclosure was the problem. Most people knew what they were signing. People just got caught in a huge asset bubble. Even smart, well-meaning, good people.
BUT, there is also a level that can be crossed even when a mortgagee knew what he or she was signing–and its called USURY.
I would be all for the Democrats bringing back usury laws for not just homedebtors but for many other debtors as well. But, in fact, I don’t think most “onerous” mortgages that we are discussing here can be defined as usury. The extreme examples I hear of involve rates resetting around 10%–which is far from usurious. In fact, that used to be the legal rate of interest. People routinely paid such rates in the past. Weren’t mortgages about 25 years ago almost 20% for prime borrowers? Credit cards, as a class, are far more usurious than some of these shady home loans as a class. So, yeah, if a mortgage rises to the level of usury then let’s just set some level of prima facie usury–say 20%??? Let’s do the same with credit cards. Modernizing usury is the most effective and least intrusive and fairest way for the government to intervene in these credit markets.
But I think we all know that the Democrats don’t really care about the “consumer” and usury and any laws on this front will be specifically designed to help the bankers and lenders–just as all these mortgage modification proposals are designed to help the bankers.
For who, the banks and auto manufactorers or the citizens. Used dealers and people looking for great used cars should do well expecially if they have the cash to pay. Financing is going to force households with two drivers to limit the cars they own to only two. Everything has to be rebalanced periodically.
For me and my way of thinking it is if the FDIC can make it a fixed rate the ppl would pay at a lower rate or otherwise. I think we have not heard the whole story yet. It is like the devil is in the details. It sounds too good to be real…and the old saying is if it is too good to be real then it aint real…I know I am just an old bitty, but I want to know the whole thing in detail. Sounds good though.
Read the whole article Brenda. It gives more detail. I don’t view this as a panacea. It’s a part of the puzzle, and maybe a small part at that, but it beats simply turning money over to Banks with little or no conditions on its use, which is the current “plan” by Paulson.
I have been hearing so many different numbers regarding just how many folks are in forclosure and also, how many are heading that way. Can someone point me to the latest figures available????
Thanks
Great post. If I can make one clarification – lender is referred to the “mortgagee” and the borrower is called the “mortgagor”. Just wanted to point that out.
Yes, you’re right. I should have known that. I plead early onsent senile dementia and now hurry to make the change.