Mortgage Rescue Plan July 28, 2008 5:00pm by Barry Ritholtz Sadly amusing . . . via Slate Spread the wealth. twitter facebook linkedin What's been said: Discussions found on the web: JustinTheSkeptic commented on Jul 28 Gee, I think I see Paulson somewhere smashed on the ground! lol John commented on Jul 28 Barry, you know that old Chinese proverb: “It is better to light a candle than to curse the dark.” The mortgage assistance and foreclosure parts of the Housing bill are only going to have a marginal effect on the housing market I agree, but if they keep a few hundred thousand folks in their homes that might have lost them, it’s a net gain in my book. You and I are comfortably off living on the shore of Long Island sound, but some of these poor buggers are hanging by their finger tips perhaps trying to bring up single parent families, etc etc. It’s easy to sneer at this effort as it was at the $1200 checks but there’s a place for it. Sorry, Barry you are usually on the money but this is a bit of a cheap shot really. John commented on Jul 28 Justinthesceptic: Paulson has emerged from this with enormously enhanced stature actually. He’s effectively setting the domestic agenda in the dying days of this admin unless you’d noticed. Rich Shinnick commented on Jul 28 “I agree, but if they keep a few hundred thousand folks in their homes that might have lost them, it’s a net gain in my book” Johh, I sort of agree with you, but as with all things structured by the government, it will probably cost three times as much as intended and help 1/3 the number of people it is supposed to and some clever folks somewhere will find a way to manipulate the system to insure that 10 times as many people who DO NOT DESERVE help get it-including the usual fraudsters. And…of course the “cure” is late (about a year) and the “prevention” is well….never was. Funny how you could read about this festering problem every day in 2005 and 2006 on blogs like Barry’s but government officials 98% were completely “shocked” by it. So, we create a whole new federal bureaucracy and maybe someone somewhere gets to keep a house. Government at its best! Yipee! mhm commented on Jul 28 John, The point is how much it costs to keep these “poor buggers” in a place that they could not afford to start with. The second point is why should anybody else bear that cost while living in a rental place because s/he was not stupid to buy an overpriced house. Call me heartless but the numbers are too large to care about individual tragedies. Specially when each tragedy was caused by the parties in each contract, unlike say a flood which is an external event. Mark E Hoffer commented on Jul 28 John, excuse the acronym, though, FBM.. “In addition, this legislation will work to stabilize the housing markets and reform and strengthen our housing sector,” he (Dodd)added. Obviously, this bill is an expensive one and it has to be “paid for.” That’s where small business comes in. (Or, where Congress thinks it can get more money from.) The bill includes a provision that would mandate information reporting to the Internal Revenue Service (IRS) on merchant payment card payments. “Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee,” according to a Senate Finance Committee document outlining the measures to “pay for” the bill’s tax provisions. (The government estimates this “tax gap” reporting mandate would raise $9.802 billion over 10 years.) Essentially, the bill establishes a mammoth system for collecting almost all credit card, debit card and electronic payment transactions made in the United States – and these will be reported to the IRS. Many in Congress claim the mandate won’t cost small businesses anything – in real dollars or compliance costs – but who are they kidding. Credit card companies, banks and the electronic payment industry are not going to do this for free – the costs will be passed down to small businesses. The small business merchant also gets a copy of the total transactions sent to the IRS. And what if there are mistakes in reporting transactions (can you imagine reconciling hundreds, and even thousands of transactions)? I don’t have to go any further there…… http://sbecouncil.blogspot.com/2008/07/does-housing-bill-create-new-burdens.html KnotRP commented on Jul 28 Ah, I see that the high-prices-relative-to-income trampoline has been positioned to rebound homeowners onto a new trajectory of hope! Rob Dawg commented on Jul 28 Is Bernanke up in the building pushing them or using a pitchfork? JustinTheSkeptic commented on Jul 28 None of you people think big enough. This whole debacle was engineered by some government think-tank, knowing that China et. el., will clean our collective economic clocks if we don’t tear-down our system and re-build it aknew. And the only way to bring this about is to totally distroy the system through bad policy decisions via the FED, Congress, Excutive, etc… We are headed for terrible economic times, but down the road our Pheonix will rise again. John commented on Jul 28 mhm/rich; you’re making all kind of assumptions based on zero data. Since refinancing these mortgages is going to require the lenders taking a haircut it seems likely they are only going to do it for those that can keep making payments. The govt’s involvement is relatively marginal. Is it perfect, no, but then no solution is going to be perfect. At the end of the day I think it’s good public policy to try and keep some of these folks in their homes both in the interest of shoring up the housing market and for humanitarian reasons. I just don’t like these simplistic, one shoe fits all, generalisations that are so popular. As with most things the devil will be in the details. John commented on Jul 28 Mark: “the acronym, though, FBM..” What’s this got to do with housing? It sounds like one of those other provisions that’s been slipped in the bill like hiking huts in Wisconsin, shooting lessons for the disabled, and so forth. Since a majority of Republican senators voted for it and a Republican president is signing it I assume they can live with it. Who knows maybe it was slipped in by the Republicans. Don’t ask me to defend the entire lawmaking process. ToddinFL commented on Jul 28 Folks mentioning the cost of what it takes to keep “those buggers” in their homes should consider the unconscionable massive misappropriation of taxpayer money in Iraq. The U.S. Government has been so mismanaged over the past 8 years; to the extent that not much but a complete overhaul of the system will correct any of these failures. Given that backdrop, you can’t fix the incredible massive screw ups all at once, so you must address that one at a time. And I’m a registered Republican … God help us all. Marcus Aurelius commented on Jul 28 Everybody thought hey were “well off” at one point in the recent past. Some think they are immune. Reminds me of John Donne: No man is an island, Entire of itself. Each is a piece of the continent, A part of the main. If a clod be washed away by the sea, Europe is the less. As well as if a promontory were. As well as if a manner of thine own Or of thine friend’s were. Each man’s death diminishes me, For I am involved in mankind. Therefore, send not to know For whom the bell tolls, It tolls for thee. What’cha gonna do when your dollars are worth pennies? Marcus Aurelius commented on Jul 28 Everybody thought hey were “well off” at one point in the recent past. Some think they are immune. Reminds me of John Donne: No man is an island, Entire of itself. Each is a piece of the continent, A part of the main. If a clod be washed away by the sea, Europe is the less. As well as if a promontory were. As well as if a manner of thine own Or of thine friend’s were. Each man’s death diminishes me, For I am involved in mankind. Therefore, send not to know For whom the bell tolls, It tolls for thee. What’cha gonna do when your dollars are worth pennies? Marcus Aurelius commented on Jul 28 Everybody thought hey were “well off” at one point in the recent past. Some think they are immune. Reminds me of John Donne: No man is an island, Entire of itself. Each is a piece of the continent, A part of the main. If a clod be washed away by the sea, Europe is the less. As well as if a promontory were. As well as if a manner of thine own Or of thine friend’s were. Each man’s death diminishes me, For I am involved in mankind. Therefore, send not to know For whom the bell tolls, It tolls for thee. What’cha gonna do when your dollars are worth pennies? Marcus Aurelius commented on Jul 28 Everybody thought hey were “well off” at one point in the recent past. Some think they are immune. Reminds me of John Donne: No man is an island, Entire of itself. Each is a piece of the continent, A part of the main. If a clod be washed away by the sea, Europe is the less. As well as if a promontory were. As well as if a manner of thine own Or of thine friend’s were. Each man’s death diminishes me, For I am involved in mankind. Therefore, send not to know For whom the bell tolls, It tolls for thee. What’cha gonna do when your dollars are worth pennies? Mark commented on Jul 28 http://www.businessspectator.com.au/bs.nsf/Article/NAB-will-shock-Wall-Street-GV4M7?OpenDocument&src=sph A view from down under pmorrisonfl commented on Jul 28 John writes: > Since refinancing these mortgages is > going to require the lenders taking a > haircut it seems likely they are only > going to do it for those that can keep > making payments. The problem I have with this is that when the (%10-%15) haircut is applied to a house that’s %20-%50 overpriced, and the reduced loan still carries a payment higher than historic income-price ratios, it only looks like a problem has been solved, temporarily, at great expense to people who pay taxes and save. And it doesn’t really help the resident of the house either; what they need is a payment they can afford, which is predicated on a house price that works with people’s incomes. In my opinion, this ‘solution’ actually will enslave more people to more debt, and put a false floor under house prices that hurts anyone not in the money business. If you project pre-00’s house prices to the present, by whatever means you choose – rents, income, history – it looks like housing still needs to take a big price cut to fall back in to normal ranges. This bill slows that process. Argue that it’s good for systemic risk, but please don’t argue that it’s good for individuals. Steve Barry commented on Jul 28 I know Larry Kudlow loves this blog…and tonight his opening theme is eerily similar to my comment from a few days ago… The housing bailout will have unintended consequences…if actually used by the banks (and I don’t think they are forced to do so), by letting borrowers off the hook for higher rates, banks are ensuring they will never get all the cashflows they projected when they made the loans…thus all the derivatives off those loans will not be worth what they thought(we already knew that anyway). But now there will be no way to avoid taking the marks…unless accounting obfuscation bill is passed. Posted by: Steve Barry | Jul 24, 2008 9:57:09 AM I think Larry deserves some credit for getting off his Goldilocks schtick for a minute. Vince Farrell on the other hand, is a lost cause. SeamusAndrewMurphy commented on Jul 28 Oh John, you make me insane. Not you really, but what you’ve written. It’s all about “protecting the innocent”. I’m one of those schlubs who paid down on my mortgage in the past five years. I saw what was coming, knew it would explode the economy, know a number of folks who didn’t buy a home knowing damn well the prudent move would be to wait until prices returned to pre-bubble status. Guess what, we all work for a living IN A MACHINE SHOP. We’re not financial geniuses, nor are we wealthy. We play be the rules. And now I get to help subsidize every last S.O.B. who bought in. I want F & F to die. I want every sub-prime loan to fail. I am sick and tired of paying the cost to prop up everyone else. You know why? My wealth is vastly diminished by not being an a-hole. Cripe, who didn’t see this coming? AAAGH! I’m seeing my small holdings turned to garbage now and down the road by every damn opportunist I get to help recover. Gosh, I guess it’s for the best though. Screw that. mock turtle commented on Jul 28 Rob Dawg wrote at 5:51 pm Is Bernanke up in the building pushing them or using a pitchfork? —- actually i think i heard big ben on the sidewalk below yelling , jump, jump, jump, jump (note snark meter at 10) Short Man commented on Jul 28 May 5th, 2008 (74 days ago): SINGAPORE (Reuters) – Merrill Lynch & Co Inc sees no need for more capital as the subprime crisis nears an end, but expects U.S. banks with large exposure to consumers to be the next problem area, its chief executive told a Singapore newspaper. John Thain told the Business Times he does not foresee the need to raise more capital, after the biggest U.S. brokerage raised billions of dollars, including from Singapore investment firm Temasek, after suffering massive subprime-related losses. “Right now, our equity capital is $44 billion, which is just a little under its record high,” the paper quoted Thain as saying in a report published on Tuesday. The Straits Times, which said Thain was in Singapore to meet the local banking regulator and clients, quoted him as saying Temasek no longer has any paper losses on its Merrill investment. – – – – – – – Well, it’s good to see that the subprime crisis is near it’s end and that Merrill is well capitalized and does not need to raise any more equity. Oh, wait, what’s this coming across the news wire….$8.5 bones; ok I guess he changed his mind after all. Well, I’m sure on his next trip to Singapore Thain can reiterate how strong Merrill’s balance sheet is. Obviously having to raise $8.5B knowing full well that usurious repricing provisions will kick in (30% haircut) does not indicate poor financial health. Great to see Temasek is willing to plow in another $3.4B, I wonder where they are getting the money to do that… Steve Barry commented on Jul 28 I was way too nice to Larry…he just asked Meg Whitman if an Obama election would cause a depression. I take it back…his trip to rationality was short-lived. Mark E Hoffer commented on Jul 28 ” The govt’s involvement is relatively marginal. ” ” generalisations that are so popular. As with most things the devil will be in the details. ” ” Who knows maybe it was slipped in by the Republicans. Don’t ask me to defend the entire lawmaking process. ” John, you’re right, it doesn’t have anything to do with housing..everything to do with false premises. http://www.thefreedictionary.com/premises Steve Barry commented on Jul 28 Hey Larry: Your hero and mine Volcker is on Obama’s team of advisers…interview him instead of Meg Whitman. johnnyvee commented on Jul 28 LOL. That net is way too big. It should be a bucket of water. LOL Bruce commented on Jul 28 John, Enjoy your comments…lots of thinking going on…However, if this bill will have a “marginal effect”…what is the point? Really? I am afraid it will indeed have only a marginal effect…and this may mean that Uncle Sam is becoming increasingly marginalized… I am not a fan of Kudlow…I think I would rather listen to long fingernails on a chalkboard..but I did listen to the first 15 minutes of his show today, and the points that were bandied about about why the markets went down and why the financials got killed (again) on the day the latest bailout bill was enacted were pretty eye opening… Comment? Bruce in Tennessee equtz commented on Jul 28 After tonight’s news, Larry will have to change his mantra from Drill! Drill! Drill!, to Dilute! Dilute! Dilute! I appalaud MER for coming clean, however it puts pressure on the rest……. Stuart commented on Jul 28 It’s all artificial. Just like this. MER financing 75% of Temasek’s purchase of their stock… Desperation at its finest. Temasek must be ramming MER up the butt at the same time. Who’s your Daddy MER? BN 14:29 *MERRILL LYNCH TO PAY TEMASEK $2.5B :MER US BN 14:28 *MERRILL LYNCH SAYS TEMASEK TO BUY $3.4B STOCK :MER US BN 14:28 *MERRILL LYNCH TO PROVIDE FINANCING FOR 75% PURCHASE PRICE And yet less than 2 months ago Thain said they didn’t need to raise any further capital. Merrill CEO: No need to raise more capital: report May 5, 2008 10:42 PM ET (Reuters) – Merrill Lynch & Co Inc sees no need for more capital as the subprime crisis nears an end, but expects U.S. banks with large exposure to consumers to be the next problem area, its chief executive told a Singapore newspaper. http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20080505&id=8592243 Thain is either a liar or incompetent. So much for crisis nearing an end. Time for a new crystal ball. Where’s the SEC on Thain’s outright lie to the public. Pat G. commented on Jul 28 Ahmadinejad is right; we are a “sunset power”. Not because we can’t still kick some ass around the world. No, we used to stand for justice and now we don’t. Real power comes from within. Bruce commented on Jul 28 Well, explain where I am wrong here… We export our deficit spending overseas, and now countries like Singapore and China,etc. have Sovereign Wealth Funds…tired of merely buying more treasuries, they now own a considerable portion of Merrill Lynch…(through their sovereign wealth fund)…Uncle Sam, now with the biggest budget deficit in history, will have an even bigger deficit next year…more money into more sovereign wealth funds…more Citibanks, Merrills, other until recently grade A businesses more and more owned overseas… Does this fable have a happy ending? (of course it is not just the foreign governments that are buying these companies at fire sale prices…) Bruce in Tennessee Vermont Trader commented on Jul 28 One of my first priorities at Merrill Lynch was to strengthen the firm’s balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments and our announced sale of Merrill Lynch Capital.” (December 24, 2007 — Thain in a statement when Merrill announced a $6.2 billion capital raising) “…These transactions make certain that Merrill is well-capitalized.” (January 15, 2008 — Thain in a statement after selling $6.6 billion of preferred shares to a group that included Japanese and Kuwaiti investors) “We’re very confident that we have the capital base now that we need to go forward in 2008.” (January 18, 2008 — Thain as quoted by the New York Times). “…Today I can say that we will not need additional funds. These problems are behind us. We will not return to the market.” (March 8, 2008 — Thain in an interview with France’s Le Figaro newspaper) “We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.” (March 16, 2008 — Thain in an interview with Spain’s El Pais newspaper) “In 2007, we lost 8.6 billion dollars after tax, but we raised 12.8 billion dollars in new capital. We raised significantly more capital than we lost. And we did that on purpose so that we could say to the marketplace that we raised more than enough capital. We replaced all the capital we lost. We have plenty of capital going forward, and we don’t need to come back into the equity market. The goal is to maintain our current ratings. No more capital raising; I’m sure we have enough capital.” (April 4, 2008 — Thain in an interview with Japan’s Nihon Keizai Shimbun) “We deliberately raised more capital than we lost last year … we believe that will allow us to not have to go back to the equity market in the foreseeable future.” (April 8, 2008 — Thain to reporters in Tokyo, as reported by Reuters) “John Thain has been very clear that we have sufficient capital and don’t have a need to raise additional common equity for the foreseeable future. When we raised this capital in January, we had a lot of demand so we went beyond what we needed.” (May 12, 2008 — Merrill President Greg Fleming in an interview with the Times of London) “Today on a pro forma basis we have about $44 billion of equity capital, which actually isn’t very much below the all-time high that Merrill ever had. And our philosophy about this is that we are well-capitalized. We’re comfortable with our capital position. We, like everyone else, are deleveraging our balance sheet.” (June 11, 2008 — Thain on a conference call hosted by Deutsche Bank) “Right now we believe that we are in a very comfortable spot in terms of our capital.” (July 17, 2008 — Thain on a conference call after posting Merrill’s second-quarter results) John commented on Jul 28 pmorrisonfl– (different “John” here) but Ditto. I think your post is Spot On. Home prices (in my view) still need to fall another 25-40% before they hit trendline price/income levels, or before the inventory excesses are wrung from the system. We also have tightened credit standards among the various lenders, and Freddie Mac showing 30-year fixed rates at 6.63%. Some key provisions of the Bill: “Housing Bill Has Something for Nearly Everyone” (http://www.nytimes.com/2008/07/25/business/25money.html): —The amount of the new loans can be no more than 90 percent of what their property is actually worth now. — The loans in question must be on your primary residence. Vacation homes and investment properties are ineligible. You will also need to verify your income, which many borrowers did not have to do in recent years. — As of March 1, 2008, your monthly housing payment (including the principal on all your various mortgage payments, interest, taxes and insurance) has to have been at least 31 percent of your monthly household income. —Lenders, however, ARE NOT REQUIRED to give you a better deal under the new law, even if you do meet the qualifications. They may not be willing to negotiate unless they think you are truly on the cusp of foreclosure. —If you manage to get a new loan, you cannot take out a home equity loan for at least five years after you get the new mortgage. You will also have to pay a 1.5 percent fee each year on the remaining balance. Finally, you have to hand over no less than 50 percent of any appreciation on the home to the government once you sell. Sell the house in less than five years, and you will have to turn over as much as all of the gain. With these provisions in mind the key questions I have is that if your expectation is that Home Prices will decline further– and a Declining Stock Market coupled with elevated Food/Energy Prices could be said to reinforce this Expectation– what is the actual incentive to restructure your mortgage– Anytime Soon– from the lenders standpoint and that of the borrower? What also will be the pressure(s) put upon the Appraiser when it comes time to have these Home Appraised in Value and given the tighter Lending Standards? As I understand the Bill it seems as though it could involve one Helluva alot of paper work to rework a mortgage, especially in this economic enviroment. The new Bill does not go into effect until October 1, 2008. With uncertainty over the outcome of the Presidential Election certain to weigh on the Stock Market in coming months, I think this Bill may, and I mean “May”, eventually slow the pace of the declines in Home values, but just prolongs the Inevitable (needed) Correction. Mich(^IXIC1881) commented on Jul 28 I am sick of my 401K choices. There are about 10 funds (and another 10 funds of funds), all of which except money market fund are down for the year. I have no choice but to keep them in that money market fund. They talk about diversity but all funds are so correlated (large, mid, small stocks, international, growth, income) they all fall and rise together. Where is diversity when I cant have funds in gold, oil, gas, foreign currencies, foreign bonds, etc??? Also, why do companies hire TRowe, JHancock when ETFs pretty much do the same thing? If US decides to come clean out of this mess, I bet a dollar that 50% of the fund managers will be jobless (why buy a fund when you can buy an ETF), and all the expense rates will be significantly lower Barry, good man, bring it up in one of your TV appearances please.. Thanks in advance. Mich(^IXIC1881) commented on Jul 28 Sorry all, that was kind of off the topic message there, but I was checking my account and got pissed off the choicelessness I am sure there are many finance people reading this blog, some with entrepreneur spirits. I believe there is a ton of money to be made being the first one to create an investment firm that handles corporate 401Ks that offer select ETFs, therefore keeping expenses low, and choices large. I promise I will lobby at my company to make the switch… there is gotta be somebody out there willing to make millions, come on financial entrepreneurs!! pmorrisonfl commented on Jul 28 Other John: thanks for the kind words. My tin-foil-hat worry about this bill is becoming: Fed prints (to the debt limit, easily revised), hands money to Treasury Treasury hands money to Fannie/Freddie F/F buy lots of AAA-rated CDO’s and RMBS from banks hither and yon F/F become the broom that sweep up tons the garbage in the system, and stores it under the taxpayer’s rug. Chuck commented on Jul 28 Hey dips**t, I mean John, What about us poor buggers who chose not to buy into this insane housing market, didn’t heloc our homes, paid morgtages down, rented an apartment, saved, invested, etc…? What do we get from this bill? We get screwed. Housing prices need to decline, foreclosures need to happen, banks need to fail, investors who made poor decisisons need to lose money, etc… Poor decisions need to be rewarded with failure. The government will never be able to fix these things without harming someone else. There will always be poor buggers who make stupid decisions and feel they deserve something for nothing now until the end of time. Go to hell you leech. Patrick commented on Jul 28 None of you people think big enough. This whole debacle was engineered by some government think-tank, knowing that China et. el., will clean our collective economic clocks if we don’t tear-down our system and re-build it aknew. And the only way to bring this about is to totally distroy the system through bad policy decisions via the FED, Congress, Excutive, etc… We are headed for terrible economic times, but down the road our Pheonix will rise again. I agree with this. Sure things are pretty screwed now but in 2-3 years people will wake up and realize that we’re the Reserve Currency for a reason. 2011 will be a great Bull for the Dollar. I hate to say it but as long as our military reigns supreme there’s not much in our way (other than inflation ;p). Not that the US can’t be beaten… but, c’mon, the richest, most expansive, strongest empire in the HISTORY OF MAN doesn’t just fall in 20, 30, 50 years. 100, maybe, but seriously, look at the big picture here. Read this next.August 16, 2005 Extraordinary ReleaseFebruary 11, 2010 Bernanke’s Greatest Hits February 5, 2009 Extensive Interview with GE’s Immelt Posted Under Credit Real Estate Previous Post House Prices: New York City Next Post What Housing Market Turnaround?