We'll be looking at the
reactions from various experts over the next several weeks. One of the first problems, experts say, is that bank cooperation is optional:
WASHINGTON — President Barack Obama's new effort to use Wall Street rescue money to halt the soaring rate of mortgage foreclosures nationwide encourages refinancing of homes that are now worth less than their mortgages and provides incentives for lenders to lower the debt load on struggling homeowners.
Like the failed efforts under the Bush administration, however, Obama's $275 billion plan — announced on Wednesday — doesn't compel banks and other lenders to modify troubled mortgages. Instead, it provides a menu of incentives that may or may not prove sufficient in reaching the goal of helping 9 million homeowners.
"It's a bold plan and that's encouraging. But at this moment, we don't have enough detail, and unfortunately with the foreclosure mitigation plans, the devil is in the details," said Elizabeth Warren, a Harvard University law professor who heads the Congressional Oversight Panel charged with monitoring use of taxpayer bailout funds. "There have been big headlines in the past and the details never caught up with the early promises."
[...] The third and trickiest leg of the Obama plan involves using $75 billion in Wall Street rescue funds for a shared effort to help as many as 4 million distressed borrowers who are behind on their payments or facing foreclosure. Obama wants lenders to lower interest rates and extend the length of loans to make monthly mortgage payments no more than 38 percent of borrowers' after-tax income.
Then, the government will step in and split the cost, dollar for dollar, to buy down those monthly payments until they account for no more than 31 percent of borrowers' after-tax income.
Obama committed to publishing standardized guidelines for mortgage modifications and additional detail by March 4 — an aggressive timetable.
"This sounds good but I'd have to see more," said Harlan Platt, a finance professor at Northeastern University in Boston. Platt has proposed an even more ambitious plan that would involve more aggressive write downs for banks in exchange for a greater percentage of gains when home prices rebound.
The third leg of Obama's plan wouldn't be a permanent fix, but a five-year subsidy designed to stem the rising tide of foreclosures.
"It recognizes that we've got to stop foreclosures, not just for families about to lose their home but anybody who owns a home" and is seeing home price declines, said Ellen Harnick, the senior policy counsel for the Center for Responsible Lending, an advocacy group in Durham, N.C.
Consumer advocates applauded Obama's plan. The response from lenders — which would receive $1,000 payments to refinance mortgages, a $10 billion insurance program and other financial incentives — was lukewarm at best. Republicans sided with banks.
"Among the concerns we have is that it seems to offer little help to borrowers whose loan exceeds their property value by more than 5 percent. This will limit the plan's success in some of the hardest hit areas in California, Florida, Nevada and Arizona, as well as some areas on the East Coast," said John Courson, the president of the Mortgage Bankers Association, in a statement.
Obama's answer to that complaint riles lenders. If lenders aren't willing to write down some of those so-called underwater mortgages, he said Wednesday, bankruptcy courts may soon be able to do so. This is called a mortgage cram-down. Obama supported congressional efforts to authorize bankruptcy judges to write off the difference between what a borrower owes and the home's value.
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It seems to me that writing down the value of mortgages is a dangerous path to go down. Many people will let their mortgages go into defuault in hopes of having their loan written down. There may also be other unintended consequences. It may keep the value of homes artificially low in some areas where home prices might have risen. I'm no expert but it appears to me that the best solution is to convert these mortgages to fixed rate at the current market rate (say 6-6.5%) and extend the amortization to 40 or even 50 years to reduce monthly payments. Even allow minimum amortization for the first few years to also reduce monthly payments. This will enable people to pay their mortgages and when home values eventually rebound they can begin to build equity. If at some time in the future the borrower wishes to convert back to a 30 year amortization schedule and pay full principal payments they can chose to do so. Staying in their homes and being able to afford their mortgage should be the goal of this plan and it would be fair to the majority who are and have been paying their mortgages on time for years. This seems like the obvious and equitable way to handle this crisis. Can someone enlighten me as to why this does not make the most sense?
because it's simple, allows for no gaming, is fair, and would work.
a 50 year mortgage amounts to two generations....who wants to pay on a loan for two generations?....also it adds about 20 more years of interest payments amounting to hundreds of thousands of dollars more to pay ON TOP of the already "upside down" amount owed on the house. How is that incentive to keep someone from just walking away?
As far as being fair to the majority of folks who have been paying their mortgage on time for years...I have this to say:
Those of us that have jobs and are able to pay our mortgages should be thankful for that, not bitter because those who can't are getting help. We are all ultimately in this boat together no matter what our situation is. Personally, I do not want the value of my home to slip any further....so I am all for helping people find a way to stay in their homes so that the foreclosures do not keep dragging us down. Many people are in this position through no fault of their own....others aren't....it is just one of those pills we have to swallow. Think of it as a sacrifice for the greater good.
Where were you when I lost $150K when the Internet bubble burst? Why weren't you clamoring for me to have a payoff and get my money back for the greater good?
There are two different people affected by this crisis. The first are those that should never have been given the money in the first place. If they didn't qualify for a loan using the rules in place in 1999, then they shouldn't have been given a loan in 2000-8. If there is a way to help these people keep their homes, we should look at a way to do that. They were suckered in to a purchase and we should attempt to help them keep it.
The second kind of person is that asshole who used his house as a bank. While I was being responsible and paying down my note, he was pulling money out for toys (new boats, new cars, etc) and vacations. If he loses his house, tough crap. He still has the toys and the memories of what he did on those vacations. Vacation I didn't take because I was responsible. He has his toys (although tey may be broken and used) toys I didn't get becuase I was responsible. He was the idiot that decided that the rules of basic finance didn't apply to him. He put his domicile at risk for pleasure, and he deserves to pay the price for it.
Keep in mind that cramdown can only happen in the context of bankruptcy, and Obama is not talking about changing that fact--only allowing bankruptcy courts more cramdown powers than they currently have.
That means that a homeowner who exercises this option will still have a bankruptcy on their record and will therefore have a great deal of trouble getting credit in the future.
To me, this is an additional positive feature of the proposal (which I now note is *not* in fact part of the just-announced plan, but is instead a future measure under consideration). I have been deeply concerned about the amount of debt that this country has been amassing--public and private--for quite some time. In fact, I opposed the stimulus, simply because the price tag was too steep for what it appeared to offer (and the stock market's reaction to its passage in many ways bore that out). Allowing cramdowns in bankruptcy, however, would (a) eliminate a great deal of "paper" debt that would likely never be collected anyway, and (b) handcuff irresponsible borrowers going forward with a giant red flag on their record that will make it hard for them to overextend themselves in the future. In other words, less debt now in the mortgage market (which is too overburdened with it) and less debt in the future in hands of whose who had unrealistic expectations about their own ability to service such obligations.
So you think that only two kinds of people are affected by this crisis? Really? Are you living in a bubble right now? We are ALL affected by this crisis!!!
Sure you can pin point individuals who were greedy and acted irresponsibly but this is about ALL of us. My home is not worth what I paid for it two years ago. I might as well have flushed the $50K down payment down the toilet. My 401K and savings are shrinking rapidly. My husband's practice has seen a sharp decrease in business....thankfully we are still afloat...but for how long?
We are responsible people...we live within our means and pay our bills too...but I don't take for granted that things could change for us or that we are immune to this crisis. So I am willing to give those who played dirty a pass or a break if it means that you and I can maintain our livelihoods and feed our families and send our kids to college and retire before we're 90.
I lost over 40% in my IRA. But since I am not retiring right now, I guess I'll continue putting money into it like I have for the last 20 years and hope that income averaging STILL works.
And my home, I have lost about 35% of it's value from it's high, but then again I bought in 1995 and lived through a housing value drop before. When I bought it was at a high, and the value dropped 25% before it started to rise again. But my home wasn't an investment property, it was a place to live and raise my family. It is a roof over my head. If at the end of this I get all the money I put in back out, and lived there and raised my kids there, then it did what it was supposed to do and when I get my money back out I'll be a great deal better off than if I had rented for the 30 years I plan on living in it.
I'm glad you are willing to give those that bought the toys and took the vacations a pass. Feel free to go to them and start paying their mortgage. I don't feel they deserve squat.
As a Democrat (and I have been one for over 40 years) I am all for giving those in need a hand up. There are many who deserve it. But the yahoos who gambled with their domiciles don't. There is this little thing called "personal responsibility". I believe that those that treated their primary residence like a piggy bank deserve to find out what it's like to spend some time living in a cardboard box. Maybe next time around they won't be greedy slobs. I would rather spend that money creating better housing for those that have been left behind for years. I would rather spend that money developing jobs creating housing for the people already living in squalor.
The housing market is elastic and will straighten out with supply and demand. It was overheated by demand from people that shouldn't have been able to get the loans to get into these homes. It will drop, and then after some time it will regain equilibrium and recover. It may take years to do so, but it will.
I would rather focus the billions of dollars that are going to be wasted on saving precious false equity on providing a level playing field for kids in education. Investing in our schools and better housing for the poorest among us. I would rather invest in after school programs in inner cities. I would rather invest in green technology so that those kids will have a place to live, and their children too. So that they will have the jobs of the future.
You seem to be saying "hey, if I help them I'll help me." If there is a choice on where to spend that money, I would rather spend it where it does long term good and creates immediate opportunities for those willing to take them. I would rather spend it where it will help the long term future of many than the short term benefit of a few who took risks and don't want to accept the consequences of their actions.
I didn't expect anyone to come bail me out when I risked money and got caught in the bursting of the Internet bubble. If I didn't have the ability to play in that game and take that risk, then I shouldn't have played. The people who treated their homes like the home was an endless piggy bank should pay the same price I did when I lost my assets in the market.
There were many others who lost a great deal more than me. They didn't understand the basic rule. Don't put at risk what you can not afford to lose. So they played with margin accounts and when the bottom fell out they lost more than they could afford.
Now, I agree that there were some number of people that got taken to the cleaners by unscrupulous characters selling bullcrap. They weren't able to get a home, but they bought one anyway. They wouldn't have been able to buy a home under the 1999 loan requirements, but they were able to do so when the banks started what was no more than a ponzi scheme. Yes, we should allow them to refinance the debt at a fair rate, rewrite the loans at prime through fanny and freddie. If they can make a go of it, great. If not, well they had the best fair chance they could be given and now they are going to be renters again.
So, let's help the first time home buyer who was sold a bill of goods with a fair program. 30 year flat at prime rewrite with no points or fees for whatever is owed on the FIRST. But if you don't fit in that slim criteria, if you were flipping property, if you took out the money and played with it because you thought the domicile was a big piggy bank first and a home second, you can become a renter again. I think there are much better uses for my tax dollars than to reward their greed and failure.
we are ALL in the same boat. Your problems are not unique to anyone else's. And hey, as a fellow democrat I would love to have all of this money poured into the same programs you do...we can agree on that! If only we had invested all of the money spent in IRAQ into those programs....what a different world this would be right now!
And I think Obama made it VERY clear that his program was not going to help those who were flipping properties and behaving irresponsibly. I think there IS going to be a slim criteria in place and it won't help everyone. You are portraying this as just a big, sweeping, across the board, wipe the slate clean, everyone gets a free pass bail out. I didn't get that impression when I looked at the plan. That guy who bought his house 20 years ago and then when the value went up he decided to use it as an ATM...is still going to be screwed. But what about the guy that did everything right but then lost his job? Or the guy like you said who "got taken to the cleaners"?
Yes, there were people who bought homes in 2003 who would never have qualified in 1999...I have worked in banking/finance (with a community credit union) for 15 years....I would pre-qualify a customer for a purchase price/monthly payment that was within their means and send them out house shopping....only to never see them return with a contract. Then I would call them back to see how things were going only to find out that their realtor (who was doubling as a Mortgage Broker) convinced them that they "could afford way more than that" and then took them for a ride like a sleezy used car salesman. And when the customer would explain that they won't be able to afford that balloon payment on a $500K house the realtor would just say "don't worry the house will be worth twice that by then so you can just sell it and make a profit....it is a smart investment!" So that realtor walks away with a fat commission and those honest homebuyers just got conned. I saw it so many times! And this was Miami, FL so we are talking big money....homes appreciating by $100Ks a year. And I don't think these folks should just get a free pass either- because like you said - they were willing to take the risk...and an irresponsible one at that...but I think that something must be done for the greater good of the rest of us...whether it is cram downs or modifications or something else...and that is just my OWN greed talking here because at some point I have to think about myself and if all of the houses in my neighborhood are in foreclosure and all of the businesses in my neighborhood are shutting down and all of the jobs in my neighborhood are gone...that affects ME.
If this was ONLY about the housing market/bubble...I might agree with you that yeah, let the market straighten itself out...supply and demand...yada yada...but this is much bigger than that. There IS no demand because people don't have jobs and ones that do are battening down the hatches and the banks aren't lending anymore and there are just so many more factors at play that make this MORE than just a housing issue.
But anyway Met00...I completely appreciate your frustration. If I was close to retirement I would probably be just as angry as you. You are totally getting screwed and you did everything right in life. I have another 30 working years to ride this out. But we all need to take a breath...we all have a hand in this pot. Peace~
I am already retired. I retired at 46. I was a CTO at one of those Internet thingies (no we didn't go public, I just took a golden parachute and sold back my stock after the job almost killed me [heart condition - angio]). Today I'm a full time dad and and operate one of the largest on-line discount school supplies stores as well as doing business process regeneration consulting. My guess is that we aren't that far away from our official retirement years.
My frustration stems from two things. First is the reward/consequences principle of education. If people don't pay a consequence for their failure to do things right, but are instead rewarded, they don't learn the lessons of their actions and won't change their behavior. There are two motivating factors that drive us all. They are pleasure and pain. We will do more to avoid pain than we will do to get pleasure. If there is no pain at the end of this lesson, then they will not learn to fear the actions that led them in the wrong direction and will not learn from it (think of a child touching hot stove). So, I don't stand behind this attempt to soften the blow.
In response to the downturn effecting the overall economy. The State should make programs available that create jobs. If there are jobs people will continue to spend. If there are jobs people will continue to visit businesses and they will make money creating more jobs. The businesses in your neighborhood will still be in business, and once the housing market returns to some level of sanity there will be new people that will be able to buy those foreclosed homes and while the property values will have dropped, they will stabilize and recover.
The key is to let those who failed fail. But to also keep the economic engine running so those that want to work can find work and do work and maybe they can become the new homeowners.
I like your plan too cinnamon but i don't trust our banks to carry it out.
I suggested below the government create a bad bank for the people to manage delinquent and dangerous mortgages. They did it for the banks (with our money). Why not do it for us?
Curt...I just put two and two together between your name and your graphics in the subject line. Hilarious!
Thanks ruff. You're the first I've seen comment on it.
I think it was back when the House was working on it's stimulus package, that Republicans suggested giving incentives to banks to refinance mortgages, and FORCE Fannie and Freddie to then buy them. My concern was that banks would have no disincentive, since they get a fee while F&F take the risk. I'm not sure what's changed.
As far as the "do nothing" GOP (Grand Obstructionist Party) is concerned, they'd like nothing more than for this country to go under so they can seize back control. Ain't gonna happen. People KNOW that the Bush and his enablers (Congressional GOP)are TOTALLY responsible for this economic nightmare.
I'm thrilled to see how the 3/4 of americans who care about this country are taking up the cause of unseating these thugs in congress. The MSM also sees the handwriting on the wall. Hitch your sail to a lying fraud and cheat and you go down with him.
Ads about these obstructionists as well as early campaigns for 2010 are taking form right now.
If bank cooperation is optional - is there any point to the legislation? That's laughable.
*
Off topic - sorry but I am soooo thrilled to see that UBS has been under investigation and will now disclose some 19,000 tax cheats who used offshore accounts to hide their money.
I'm thinking Bremmer and Bush for openers.....Cheney and Rummy are sure to be in there, too and the "pizza Box" generals who had pizza deliveries of $50,000 per pizza box of our money whose wives aided and abetted their offshore hiding of this motherlode.
Disclose them to the government, but keep them private from the public I'm sure.
These are very important people we are talking about. There are different sets of rules for them.
Is this just another bailout for the banks in disguise?
When loans are re-written, there are a bunch of costs associated with the loan that the banks will be happy to earn them again, such as closing costs and points.
when bank's investment became worth less than what they bought them for, the government gave them cash and guaranteed the bad investment.
When the government gives homeowners help because their investments are worth less than what they owe, it just extends their terms, modifies bankruptcy laws.
This government is for the corporations first.
That's how it reads. If it is the plan that is brought forward, this plan will not help anybody with mortgage probs---just more cash for the bank. Yippee. And banks jumping in are optional? WTF?
look at the campaign contributions and you'll see clear as day who's pocket obama is in.
in the words a wise man once spoke:
"fool me once...shame on...shame on you? yafool cant get fooled again"
had any intention of helping homeowners who are having problems, they already would be. Optional? Ya, right.
(n/t)
If the government were serious, they would create a bank, run by the government, that deals with the delinquent mortgages and foreclosures. This would accomplish two things:
1. It would insulate the banks from some of their further losses.
2. It would prevent the banks from having another opportunity to fleece those who are most in need.
They created a bad bank for the corporations (using the people's money), but there is no way they will do it for the people.
they'd force bankrupt financial institutions to go bankrupt and shit would suck for awhile then get better.
instead we're going to continue to pretend asset value never drops and keep people stuck in (probably mostly) fraudulent mortgages. basically creating a debt-slave class instead of making the banks pay for their crimes/bad financial decisions.
the only way out of this is to realize our losses and pick up the pieces. putting a band-aid on the broken levees aint gonna do it.
Damn this makes me furious.
We already have two bad banks that have been bought and paid for by the people, but the government has no say in what they do. These banks are Bank of America and Citi.
These banks have already had their bad loans guaranteed by the government. Now the government is going to re-guarantee them by re-writing the terms on a bad asset that has already been back stopped.
Keep in mind that even if the real estate market does not turn around, with this bill the banks are in for a couple of great years because there will be hundreds of mortgages being re-written on their terms.
my stomach is turning thinking about it
Everyone watched what happened after Lehman was allowed to fail, one of the few times when the Bush administration arguably did in fact stand on free market principles and allow the market to work its will, even on a jewel of the glitterati. The short-term fallout was severe. The next time a major financial institution teetered, the Bush administration blinked, with bipartisan support. Obama is continuing in that vein, despite the apparent ineffectiveness of the first half of the $700 bank bailout.
...a couple of those signing statements that Georgie did, where he changed a couple of teensy things - gotta read that fine print.
The new "Busherized" versions are:
"We hold these truths to be self-evident: that all Corporations are created equal, and their sole purpose is to prevent the People from pursuing life, liberty and the pursuit of happiness."
And, of course, "that the government of, by and for the Corporations, shall not perish...."
Shouldn't that be Multinational Corporations? I don't think they meant for just any old corporation to hold us hostage.
Just watched the clip. NBC news is worthless. So one provision is borrowers will have to go through mandatory credit counseling courses?
Why don't the banks have to go through mandatory credit counseling? They over-extended themselves big time.
The BANKS WROTE THIS PLAN!
i gotta go lay down
...they didn't "over-extend" - they were involved in gambling, fraud and criminal activity - they were/are being INTENTIONALLY greedy.
And, guess what? - it worked - 'cause we're giving them ALL of the money (our wealth and future).
The Ceo's and financial institutions were spending $31 dollars for every real dollar they have.
If this is not a crime then you try to do it to your bank or a business organization..
Especially trillions of dollars... Which of course the a average American citizens would never have the funds or connections' to do this.
These crooks deserve jail time not to put their debt on our grandchildren's credit card.. This is a crime of our elected officials.
Bush , Cheney and the republicans with the support of the democrats have given the elite and Global (monopoly) corporations
Everything on the demand and wish list..
Destruction of the unions , their workers pension funds , their health benefits , cut their wages , shipped manufacturing & jobs overseas to foreign countries for higher profits / no job standards / not income tax and power over the ability of workers to complain or strike against..
This government is not the American workers , seniors and poor government , it is own / controlled and by Global corporations and foreign countries.
Suppose that if you sold everything you owned, you'd have about $10,000 in cash. Suppose you then got accepted to Harvard and, being poor, had to borrow everything you needed to go there (say $40k/yr for $160k total). You'd have a leverage ratio of 16:1. Suppose you went to Harvard Law School immediately after that. Tack another $120k on, for $280,000. You're at 28:1 right there, just as a single individual. And yet, people do that kind of thing because they think that Harvard law degree is worth that much over time.
Investment banks did much the same thing, only the things that they thought were Harvard law degrees were actually just certificates of course completion from the Community College of West Mordor (i.e., worthless).
I agree that there should have been restrictions on how heavily these institutions should have been able to leverage themselves, but I think screaming for jail time is counterproductive. There's nothing inherently evil about leverage, even when it's deposits of others' assets you're leveraging. (My modest savings account at my regional bank probably supports quite a few loans, even in this constricted credit market.)
I just hope after all of these 'bail-outs' and the softening of the blow, that maybe just maybe the American Consumer, both corporate and individual will slow down, and only buy what they can afford.
It bothers me that extreme greed and short sightedness got us here, both on the banks and the individuals. I know that when I got my mortgage I was pre-approved for loans that there was no way I could afford. But I knew that, and I didn't go for the biggest loan possible.
I know that others are in different situations, I know there are people who have lost their jobs and there but for a couple unlucky breaks go I, but there are also people who just wanted to buy the shiniest, biggest house that they could get money for. That is what needs to change in this country.
Some understanding that unchecked consumption has a penalty. Both for the lender and the borrower.
There is plenty of blame to go around. No we need to fix it, and I really don't see any way but to help everyone, especially the individuals and share the pain.
responsible buyers get to finance the bailout of irresponsible buyers. more of the same from the ones drinking the obama kool aid.
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