Finally: A RE blog gets some respect

No, it's not this blog -- It's Diana Olick's Realty Check blog at CNBC.com. As Diana and her legion of followers were debating this week whether it makes sense for lenders to freeze rates on some mortgages, surprise, surprise: A top federal regulator spoke up on Diana's blog, explaining the administration's thinking on the topic.

The regulator is FDIC Chairman Sheila Bair, and here's part of what she blogged: "My loan modification proposal targets a specific set of borrowers: those that are in subprime hybrid adjustable rate mortgages (2/28s and 3/27s) who have been current on their payments at the starter rate but are unable to make their resets. If it is determined that they can make the reset payment, then they will be bound to the terms of their contract. Because of weak underwriting, however, we believe that the overwhelming majority will not be able to make the reset, which typically results in a payment shock increase of 30 – 40%. The FDIC currently estimates that 1.2 million borrowers who are facing resets in the next five quarters may be eligible for this proposal.

More: "One last important point I would make is that this category of borrowers is typically already paying between 7 – 9% at their starter rate. This is well above prime rates for a typical 30 year fixed mortgage. The vast majority of borrowers who took the conservative route will still be paying a lower interest rate than the targeted borrowers receiving this modification."

A big, unanswered question: Is the plan now being worked out between Treasury and major lenders the fundamentally the same as Bair's plan? The White House, ever vigilant in shedding light on financial policy decisions crucial to millions of Americans, said this morning it would be premature to discuss any of this.

Your thoughts? Comments? Insights? E-mail story tips to peter.viles@latimes.com

Comments

[Rob]

What? We are just not warm and fuzzy enough for prime time...

[Paul Hiller]

The part of the plan that I think will be the most problematic is that a large number of subprime borrowers are upside down on their mortgage. Most levered in at the peak, and even the NAR admits that prices have fallen. Will they just modify the note and ignore the devalued security? How enthusiastic is the borrower going to be, knowing that their payment is most likely twice the rental price of similar neighborhood homes, when their home value is tanking?
Sometime back the forestry service realized that fires served a purpose, and that holding them back at all costs was bad policy. Will we need to learn the same lesson?

[are they crazy]

Who is included - there are too many that shouldn't get any help - 2nd home owners, flippers, speculators, people that had a decent mortgage but refied or HELOCed and spent like there's no tomorrow, people that lied about it being a primary residence or lied about their income on their application. And who decides if the loan holder can afford the reset or not? How is that formulated? What expenses are included? If the loan holder has spent their way into credit card hell - is that a legitimate expense? Vacations? Fancy cars or SUVs? If people thought the last few years of the bubble were full of scams and graft, wait 'til they see the bailout.

[alvin]

actually - "because of weak underwriting standards" - many people who should not be homeowners are. And freezing rates at 7% to 9% may be "well above prime rates for a typical 30 year fixed mortgage," they're also well below the rate that such high risk borrowers would otherwise be able to get.

A few things come to mind.

One - moral hazard. There is no such thing as too much risk when uncle sam will be there to bail you out.

Two - This only delays the inevitable. Some will be able to keep their homes through the downturn, but they are likely the ones least in need of government's help anyway. For many more, this only buys time. You are a subprime credit for a reason - you are more likely than others to default. You pay a higher rate today because in the future, there is a greater likelihood you will stop paying altogether. 9% may keep you in the game a little longer, but it doesn't change your underlying risk of ultimate default. It does hurt the lender's profit though, making them less likely to lend as much in the future (tighter credit).

Three - Bureaucratic Nightmare. As others have already mentioned, how does one even begin to administer this to those for whom it is truly designed? Seems like a recipe for fraud. Fraud played a huge role in getting us into this mess - why add to it?

[Don]

Don't worry about delaying the inevitable. This is all about some sort of regulatory and/or tax reduction for the lenders. The bailout is just a smokescreen. Few if any borrowers will be bailed out under this program.

[jb]

In addition to bailout plans (the true effect is debatable as above, but will have some effect on propping up prices), the Fed will continue to cut rates, ruthlessly sodomizing savers by trashing the dollar even further.

Bernanke is a spineless wimp who is owned by wall street

[Hula Girl]

Hey! Will they freeze my health insurance? My rates used to be "frozen" in the $300 range and because I had the audacity to turn 40 and be female, I pay almost $800 - the price of a mortgage in some fly-over states.

Gee, I'm in peril of losing my health insurance because it reset to higher rates. Please GW and FDIC, won't you bail me out and freeze my health insurance rates? And while you're at it freeze gas, electricity, and the stratospheric prices at the pump.

C'mon - I want a bail out too. Where do I sign up?

One last thing: How much is this costing the taxpayers?

Ms. FDIC Chairman conveniently left that tiny little detail out of her (welfare) plan. Yeah, I'm mad as hell about this tax sponsored Trojan Horse - if the Feds were so smart in the first place, none of this would've happened,

[l.a. guy]

"One last important point I would make is that this category of borrowers is typically already paying between 7 – 9% at their starter rate. "

That's the teaser rate?! What are these resetting to, 20%?

Seriously, if the initial rate is 7-9% and these are ARM's, then shouldn't they stay the same or actually reduce on the reset (assuming the Fed keeps cutting the prime rate and mortgage rates eventually come down too)? What are the rates on these loans pegged to, the inflation rate in Venezuela?

[Michael Snyder]

Shelia Blair seems surprised the economy is reacting as if it’s under pressure from inflation. She said the numbers don’t support its’ (the economy’s) behavior. In making that statement she confirmed her credentials as a G. Bush lackey. If she examined a realistic accounting of consumer costs she’d find inflation knocking on double digits. But being a mouthpiece for arguably the most corrupt administration in history she has to toe the company line. That means living in complete denial of the effects of fuel prices tripling and doubling the cost of food in the six years since the Fed decided food and fuel were too volatile to track in their “core inflation” figures. Since most folks vote their pocketbooks this administration is desperate to maintain the status quo in order to give their party a fighting chance next November.
To be sure the sub-prime debacle has been fueled by loose underwriting, but there is no bail-out / easy solution for this one.
The stock market surged almost three hundred points Wednesday behind a rumor that the Fed may lower interest rates again. A rumor!! With results like that the Fed will have rates at .001% come next November but consumers will still be paying 9% for a non-conforming loan.
Since most of these failing / exploding loans are owned by Wall St. hedge funds, bailing out distressed homeowners is simply more Bush payola for Wall St. Dropping interest rates are not showing up in consumer credit lines or home loans (particularly jumbos). So what the Fed is really doing is increasing lenders margins. This is proof positive the Bush Administration can’t see beyond the stock market for the oil wells.
It’s nice to see Ms. Blair checking on a blog that is populated by her fellow Republicans ( I’m Independent) but I’m absolutely sure whatever “solution” she purposes will come out of my pocket.

[Keith]

"That means living in complete denial of the effects of fuel prices tripling and doubling the cost of food in the six years since the Fed decided food and fuel were too volatile to track in their “core inflation” figures."

Huh? Gas hasn't been $1.10 a gallon in a long time, and I'm not sure where food prices have doubled.

No doubt gas has gotten higher, but tripled? no. Food doubled? no.

FYI, Sheila BAIR was an appointee of both Bush AND Bill Clinton, and has held various high level posts in financial organizations for about 20 years.

Who cares about G. Bush, he's almost out but I guess we'll be hearing the shrill about him long after he's gone.

It's just so worn out.

[debrap53]

Kudos to Michael Snyder. He has it exactly right. There is no limit to the level of chutzpah, deceit, and corruptness of Bush's cadre of criminals.

[CM]

Regarding the person who feels that gas prices haven't doubled and food prices are reasonable, I am sure HE doesn't do the shopping!

Milk has increased more than 50% in less than a year. Gas prices have increased 50% in a year and a half. If you included these so called "volatile" products we'd be having double digit inflation!

[Michael Snyder]

Keith,
The Fed started cooking the books over six years ago. Since then the US dollar has been on a steady decline, particularly against the European benchmark currencies. It’s recent nosedive is a direct result of a global crisis of confidence brought on by the policies I’ve been so vehement about. If you think this has little or no effect on you, you’re either very wealthy, the victim of a California education or both.
Granted we're all a bit done with "Bush bashing", but it's necessary to call it like it is and these guys make the company of Nixon, Agnew and Tuttle look like pikers. We all need to remember Dick Cheney's response to Wolf Blitzer’s query on poll results indicating over seventy percent of Americans opposed the war in Iraq. His response? "We don't care about polls. We're not running for anything".
So much for a government by, for & of the people.

[alvin]

Michael Snyder:

I think there is some confusion as to how inflation numbers are reported and what they mean. The BLS doesn't excluded food and energy from the CPI - the Fed does when factoring inflation expectations into monetary policy. The "core" inflation number gets so much attention because Wall Street obsesses over any clues as to what the Fed is going to do, and the inflation number is a big clue. And the Fed didn't just arbitrarily start doing this six years ago.

No doubt that higher gas and food prices sting, and it's something we see and experience daily, but they aren't the biggest part of most people's budget, so just because they may be up double digits year over year doesn't mean everything is, as the headline number demonstrates.

The headline number is what is used by the rest of government and the economy in setting budgets, wages, benefits etc. And there is nothing that the President (Bush or otherwise) can do to manipulate either the reported headline or core inflation numbers.

[Keith]

Michael,

The problem is you have your facts wrong, about everything. And it's all to support some political picture that you wish to paint, for what reason who knows.

As for some of the pointed barbs about myself:

I'm a middle class Californian (or upper middle class, according to Obama and Ann), I split the shopping duties with my wife or we go to Costco together, I hold a professional position in a nationwide company that's NOT in finance or real estate, but rather in environmental services. I have three seperate degrees from two different nationally well known accredited universities that both have outstanding football teams.

[TonyD]

I suggest that all homedebtors that take the tax payers bail out go to this site
http://www.SubtleConfessions.com and confess
their sin of taking our money to pay for your greed. How do you sleep at night!?

[Keith]

Actually Michael, here's the transcript -

"Well, Wolf, the business that George Bush is in, being President of the United States, and those of us who work for him is to do what we think is right for the country, and to make tough decisions. The last thing you want to do is to read the latest poll and then base policy on that. There is probably a new poll every day in the country, and Presidents are generally ineffective if they spend all their time reading the polls and trying to make policy accordingly. We're doing what we believe is right. We're convinced it's right. We're convinced that, in fact, we'll achieve our objectives. And, frankly, we don't pay a lot of attention to the polls."

I don't want a poll driven gov't myself.

Anyway, I'm out, this is being hijacked a bit.

To make it relevant, either everybody accuses the gov't of doing nothing or doing something, I think assisting people a bit doesn't hurt, but it will be more for show than substance, and I certainly don't want the taxpayers to shoulder the burden.

What really concerns me is if any concessions will be made to the banks to
that ultimately transfer the load to the taxpayer, such as tax credits.

I also believe this is a bi-partisan thing, there are certainly no Democrats or Republicans standing up and saying "Let these homeowners drown" in this circumstance.

[CeW]

Airtalk had a segment on the "Mortgage Meltdown" yesterday; probably the best I have heard so far (although I missed about 5 mins in the middle) First guest is Chris Thornberg.
http://www.scpr.org/programs/airtalk/

[Michael Snyder]

Alvin,
Thank you for both providing clarity on the source of these numbers and making my point. It’s really about manipulating the stock market; not about preserving equity in single family homes or helping home-owners who were foolish enough to hop onto the band-wagon without reading the fine print.

[Michael Snyder]

Keith,
I understand; it must be difficult supervising janitors after spending so many years in school. I do hope your government contracts keep you busy.
My position has nothing to do with partisan politics, rather an application of common sense to a situation to whit; if it walks like a duck & talks like a duck, it must be a duck. If you can't see the connection between fuel and food cost and much of the discussion on this blog, you wasted too much time on football.
My point is simple; it's the working person busting their butts every day for ever decreasing wages that drive the economy. These increased costs are squeezing them to the point of desperation. As they restrict their spending small businesses are beginning to fail. Soon we’ll have the retail numbers from Christmas and we will see a decrease from last year. The only question is how much.
Sarcasm aside you should know when the plankton are gone, we won’t be far behind. Food chains make a great economic analogy and based on those same principles, disruptions at the bottom will eventually work their way to the top.
Squeezing money out of taxpayers pockets to bail out investors who jumped at large projected margins without exercising due diligence is just plain wrong; and if you think any of these bailout plans are geared to aid stressed homeowners you’re badly mistaken

[LA-renter]

A few years back I said to myself --really--, can't wait for the blame-game. It was a waste of time sharing these thoughts with anyone other than my wife because everyone was a zombie believing in the new paradigm, things are different, house prices can only go up. To suggest otherwise, you were in denial, a pessimist and an anachronism.

Our present problem was completely foreseeable, and neither political party did something when it would have help. Even if either party did something, their action would have been political suicide because the zombie voters would have been angry about suppressing their easy --undeserved-- property wealth.

Pointing fingers at one party or the other is silly. But their solutions will have different flavors. The Republicans will help squeeze the last dime out of borrowers, and Democrats will hire out-of-work real estate agents as resolution counsellors.

[alvin]

Michael,
Now there seems to be some confusion on how markets work. Securities trade with an expect return relative to risk. When lenders and investors are asked to "freeze" rates on existing mortgages that would otherwise reset higher, they are essentially being asked to accept below market rates (relative to the risk) on their investment. This means those investments are now worth LESS, not MORE than before. How is that a bailout for the lender/investor? After all, if it were in their best economic interest to do so in the first place, why would they need the government's direction to make it happen?

[Michael Snyder]

Alvin,
There is always a quid-pro-quo, and given the track records of the participants in this discussion (Fed vs lenders) I see no reason to expect these zebras to grow spots.