Obama: fines and bailouts

Good morning. Barack Obama wants to fine unscrupulous lenders to pay for a housing bailout. The Financial Times: "Unscrupulous lenders who deceptively sold subprime mortgages to millions of Americans should be fined and the proceeds used to help bail out borrowers facing a wave of foreclosures, according to Barack Obama."

Our first take on this is that it is likely impossible and probably not a serious proposal, and is a piece of posturing.  We'd like to be proved wrong on that, but how does Congress get money out of New Century Financial and scores of other subprime lenders that are out of business? Get in line in bankruptcy court? Who determines which subprime loans are "deceptive"? And, as commenter Tim K. points out, how do you separate the truly deceived borrowers from the speculators and flippers who were gambling on real estate with someone else's money?

From the FT: "Mr. Obama blamed lobbyists working on behalf of lenders for obstructing tougher regulation of the subprime industry, adding: 'Our government failed to provide the regulatory scrutiny that could have prevented this crisis.'"

More of our take: This is certainly true; it's also true that Sen. Obama and the Democratic Party were part of that government failure. Blaming lobbyists is a campaign theme of his -- a shrewd one, we think -- intended to paint Sen. Clinton in an unflattering light.

We'd like to give you a link to the entire Obama proposal -- an op-ed in today's Financial Times -- but it is behind an expensive pay wall, and L.A. Land is cheap. (What's up with that, writing about the American housing crisis in a British newspaper?) Here's the part that proposes a bailout:

"One way to protect innocent homeowners –- at least until this crisis passes –- is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud."

Your thoughts? Comments? Insights?
Hat Tip: Tex

Comments

[Tim K.]

This doesn't solve the problem of *who* is entitled to bailout rewards. You can't tell the difference between Joe the clueless homebuyer who didn't understand his loan documents and was lied to by his broker about what kind of loan he got, to Sally the clever flipper who just got burned trying to take on more house than she could afford.

Both Sally and Joe look *identical* in all objective measures that you can capture.

You can *bet* that more of the money will go to the Sally's than the Joes.

[Steve]

There is enough blame to go around. The lenders should not have been preying on borrowers who could not understand the terms of the loans. The lenders were often fronted by unscrupulous salesmen, who would do just about anything to bring in the loan. The borrowers, on the other hand, should be castigated for accepting the loans, for not getting help in understanding the loans before they signed. Moreover, most of them are responsible for getting themselves into situations where they need a subprime loan in the first place - relying on a rising housing market and taking on more and more debt is not a good financial strategy. Penalizing the lenders will not work, unless you also get the borrowers to should some of the responsibility, too.

[jemarqu]

At this point I don't know what is worse..

The government thinking that US citizens are too stupid to read a contract or citizens believe that the government should bail them out for making poor decisions.

These people in foreclosure were not tricked out of their homes. They were greedy and bought something they couldn't afford. Others were trying to make a quick buck in real estate and their timing was off. If something is too good to be true then the odds are its not true.

[Todd in WeHo]

For starters, here's the link to Obama's oped: http://www.ft.com/cms/s/0/6e23639e-557f-11dc-b971-0000779fd2ac.html

After reading this, I'm at a loss where to start with my tirade. How about Obama saying "The real victims in this crisis are the millions of borrowers who followed the rules, whose only crime was taking out mortgages that lenders told them they could afford." My response? Boo hoo! Enough about making it sound like everyone caught up in this mess is a poor single mother who's just trying to keep food on the table while working three part time jobs. Nobody held homeowners and speculators at gunpoint to sign any paperwork. Doesn't anybody still believe if something sounds too good to be true, it probably is? My stance is you bought it, now deal with it.

[sunsetbeachguy]

I am pretty firmly in the no bailout for anyone ever camp.

However, if Obama can get blood from a bunch of bankrupt turnips (how about personal income/bonus clawbacks from the mtg brokers) or get settlements from the Investment Banks (Bear Stearns, ala Enron's Investment Banker settlements) and use it as just a trust account with NO taxpayer funds, no problem by me.

That will actually accelerate the decimation of the housing bubble back to safe & sane prices supported by incomes because mortgage interests rates would rocket to the moon to pay for the fines/taxes.

Now the criteria for who gets help.

No, stated income loans with overstated incomes would be eligible. The test will be to simply compare the mortgage application with the prior years tax forms. If the forms don't agree no settlements for tax cheats and jail them for tax evasion.

No, largesse greater than $10-20K per homeower. This amount has to be successful in avoiding foreclosure or in re-establishing a renting household. This will "rescue" less than 5% of homeowers in CA since they are already underwater by greater than this amount.

The tangible net benefit to society must be measured.

Obama better get cracking with his dunning letters to mortgage brokers, lenders and investment banks. Since the forecasted 2.2M foreclosures at $20K a piece is $44 billion.

As soon as I see a trust account with $44B in it funded by the broker's, lenders, investment banks and billionaires advocating a bailout, I will drop my opposition to a bailout.

[Rob]

Senator, you mean in 3-5 years from now when a trickle of these shared "fees" are collected and everyone has moved on with their lives, you are going to rewards these wayward folks with making bad decisions? Senator, Senator.... Senator, can we please stay on topic.

Headline today, gone tomorrow.

-Rob

[Jax]

Obama is an "empty suit". He is highly educated but has no common sense and will say just about anything that he thinks is politically popular in order to get elected. (or was I talking about Hillary?) Oh well, it doesn't matter.....they're two peas in a pod.
His idea is too ridiculous to even debate.

[Rainman]

Any bailout proposal is posturing. As Pete mentioned, there's really no way to get the money from these now-cratered companies, and how do you prove who was taken advantage of and who wasn't? Obama and others would be better off promising to appoint regulators who actually regulate and not those who pretend that all of this couldn't have been predicted. The signs were there for anyone to see, like the saying about the time to sell stocks before the Great Depression was when your shoeshine boy was giving you stock tips. When companies are begging people to borrow money with no money down, that's never a good sign.

[Todd in WeHo]

Here's another idea for anyone dealing with the reset of an Adjustable Rate Mortgage: instead of making this month's house payment, use the money to buy MEGA Millions lotto tickets. Your odds of winning are just 1 in 175,711,536.

While we're on this topic, I also think mortgage lenders should be required to say something similar to what the California Lottery says:

“As the jackpots rise, the Acme Mortgage Company would like to remind players that home-owning (aka gambling) should be fun. If you think that you or someone you care about might have a home-owning problem, call the California Problem Home Owner Help Line at 1-800-GAMBLER.”

[MyLessThanPrimeBeef]

My vote goes to the candidate who said, THREE YEARS AGO, 'Our government regulators, at this moment, yes, right now, are failing to provide regulatory scrutiny for this mushrooming bubble!'

Is there such a candidate?

DId anyone looking to lead the nation now, said then as anyone with any common sense would and many actually did here and elsewhere, 'These suicide loans, these NINJA loans, these 120% LTV loans are nothing but trouble.'

Anyone who said it then, he or she's got my vote. Maybe I will vote for Cal or Peter...

[rob case]

It just goes to show how far out of touch the politicians are with the reality of the situtation.

Once again, too little way too late...

[Giacomo]

This is just more evidence that Mr. Obama will put forward almost any hare-brained scheme in an effort to pander to a few voters. He is attempting to built a coalition of voters who think of themselves as victims in an imagined rich-vs-poor class struggle (in which the "rich" are always defined as "the people who have more money than you.")

[V]

Too bad. Lenders were greedy and so were prospective homeowners. No bailout for them.

[Dan Moran]

Another Democrat Viles has found to smear with the mortgage crisis. Color me shocked.

Republicans controlled every branch of the government while this insane runup was going on.

[srla]

It's amazing how all these politicians are tripping over themselves to "rescue" people who took out careless loans and to attempt to prop up a horrifically bloated housing market.

Where were all these fools when the prices were escalating at clearly unsustainable rates? Back then, the effect of all this on consumers was being covered up by the use of "owner's equivalent rent" in place of actual housing costs in calculating the Consumer Price Index. And when housing makes up the largest part of the CPI, yet this cost was being underreported by a factor or 100-200%, it should have been clear to even the simple minded that something was amiss. But where were Schumer and Dodd and their cadre back then?

It seems almost everyone in government is responding years too late to the housing situation, and they are making the worst possible choices when they do end up acting. The only viable option now is to let the market self-correct and offer debt and/or bankruptcy counseling to the people who made seriously bad and ill-informed choices.

[shanty dweller]

let the law of the jungle rule without interference. The duplicitous brokers can go out of business, the greedy lenders and investors can take a bath, and the flippers and unworthy buyers can go back to being renters.

[Joseph]

More bailout rumblings:

http://www.thestreet.com/s/housing-bailout-chatter-gets-louder/newsanalysis/banking/10377008.html?puc=_tscs

Anyone know if this represents anything significant? Or just wishful thinking on the part of Bill Gross types?

[Joe, Santa Monica]

Is this a common lending practice? or indication of something else?

My brother was offered a first mortgage contigent on him taking out a second as well even though he had more than enough cash on hand such that he did not need the second. I think the second was a home equity loan. Seems odd to me that any lender would require that he borrow more money unless something funny was going on between the mortgage broker and the lenders.

Any thoughts?

[Dave P]

You already made the best point Pete, in that many of the lenders are already out of business with more to follow. Even the big fish are under such pressure that some loopy politico inspired judgement against them could push them under water. How can Countrywide write off all that bad debt AND absorb a $10,000 per borrower penalty?

And I don't really believe anyone was truly defrauded here. In my experience, most people knew one of two things: That they (or, fewer cases than the media would have you believe, someone else) lied on their application about their true income, or two, they knew or willfully avoided knowing that there is no way they could really afford a $500,000 mortgage with $30,000 per year in income and a 610 credit score.

Everyone wants to claim being a victim when thier shady doings go bad. But if the Real Estate RollerCoaster went up for two more years and they turned a tidy $150,000 profit with 0% down and bad credit, they would be whupping it up like their were Hero Geniuses.

The whole bailout talk thing is ill thought. If you can't afford your $4000 monthly payment on your $500,000 mortgage, what is $10,000 going to do? You're probably $12,000 in arrears before you can even apply for the bailout money, and unless the bailout comes with a big fat raise...

[jemarqu]

MyLessThanPrimeBeef wrote: "My vote goes to the candidate who said, THREE YEARS AGO, 'Our government regulators, at this moment, yes, right now, are failing to provide regulatory scrutiny for this mushrooming bubble!'

Is there such a candidate?"

Sounds like you would be voting for Ron Paul.

[Kathy]

Good luck squeezing the funds out of Angelo Mozillo and those New Century execs who made hundreds of millions off these scams. I think one or two small fry will be made an example of, but the big guys will get off scot-free. But if they did manage to wring a few bucks out, here's my suggestion for a means test for qualifying beneficiaries of the fund: any senior/retired person on a fixed income, below a certain level, gets first in line for any bailout.

[MyLessThanPrimeBeef]

Ron Paul said that three years ago?

[AnnS]

At this point I don't know what is worse..
The government thinking that US citizens are too stupid to read a contract or citizens believe that the government should bail them out for making poor decisions.
Posted by: jemarqu

Priceless!

And don’t forget to add that the lament of ‘oh the poor borrowers just relied upon the lender who told them they could afford the mortgage payment” – that payment that would get to the point of taking 50-70% of gross income.

What did they do? Flunk arithmetic 101 and e completely unable to figure out how much they spend on utilities, transportation, food and other things and how much was left for a mortgage, taxes and insurance?

I’ve never met anyone over the age of 18 who was that stupid who hadn’t been adjudicated incompetent and had a guardian appointed.

[are they crazy]

If pseudo victims really feel they were defrauded, why aren't they attempting to initiate criminal actions - going to the DA, contacting FBI, representative, etc.? Same thing for realtors, bankers or anyone else claiming fraud? The fact that some broker who makes their money by commission told them they could afford it, doesn't make them victims.

[DB]

Let's see if this gets posted. So far no luck! There does NOT have to be a bail out. Just have the State loan the money for housing at 5% interest. This would give the State revenue coming in (possibly lowering taxes) and help in keeping mortgage rates at a consistant rate. There are many reasons to have the State give loans for housing!