Bailout watch: Washington works in mysterious ways

Funny thing about government policy: Sometimes big changes happen with little public debate and no warning -- for example, the decision by Congress to lift conforming loan limits by $300,000 to help high-cost housing markets like California, quite possibly at the expense of other markets. You would think a momentous decision like that -- opposed by regulators, quite likely to mean higher interest rates for some borrowers -- would generate an old-fashioned debate in Washington. You would be mistaken.

My hunch is that a massive federal bailout of banks and lenders could happen the same way -- without much public debate or discussion, one day word leaks of secret, high-level negotiations, and pretty soon Treasury Secretary Henry M. Paulson Jr. (pictured) is standing in front of an imposing government building and announcing a wonderful new arrangement to refinance America's mortgage debt. As if it belongs to all of us. The president later grunts his approval while scooting toward a helicopter. "'Ain't a bailout," he says, shaking his head and wagging his finger, "It's a refi, a refinancing."

All this is a preface to another serious call for a widespread bailout, on the influential (still) op-ed page of the New York Times. Banker Howard P. Milstein encourages a bailout of the entire sub-prime mortgage industry, writing, "If banks of all sizes could regain their capital immediately and easily, it would be a tremendous benefit to the American economy.

"The federal government could make this happen by entering into an arrangement with American banks that hold subprime mortgages, in which homeowners typically pay a low interest rate for two or three years then face much higher payments. Here’s how it would work: The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their “teaser” interest rates on those loans in effect for the entire 15 years."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: LATimes.com

Comments

[Michael T]

I read a quite a few blogs. This sort of government behavior only encourages poor underwriting/risk. Supporting these kind of wide spread Wall Steet bailouts only encourages bad decisions.

I am so discouraged.

[NoWayinLA]

You think the government bailout package is still coming? I've got news for you... this IS the bailout package. The government will quietly instruct Fannie and Freddie to start buying up the mortgages that are killing the bottom line for these mortgage fraudsters and the Ponzi-scheming Wall Streeters who egged them on. When Freddie and Fannie don't get paid by the borrowers, they'll get paid by Uncle Sam.

Enjoy your $600 check, everyone, because it's going to cost you a fortune.

[NoWayinLA]

And now, having read the linked article from the good Mr. Milstein, I can only say, "Oh." "My." "God."

Who left the door open to the padded room?

Of course, he wants the government to guarantee the loans, but we've already covered that. We can't have banks actually being responsible for the stupid contracts they entered into of their own free will, can we? They only wrote them.

The proposal is dressed up to look like it solves a problem we actually do not have. As Warren Buffett said, we do not have a lack of available credit. We have a lack of available credit for people who obviously cannot repay it. What this proposal really does is save the architects of this mess for suffering for it.

Now, some owners will welcome the 15-year teasers and stay put. But what will the loan look like in 15 years? Let's just say it's not going to be paid. Now, normally you'd say, "So what? Nobody stays in a house for 15 years anymore. They'll sell." But the balance on that $800k loan for the $275k house isn't going anywhere in that 15 years. They're going to be underwater for a long time, and unless we have some amazing inflation (though that's looking less farfetched by the day) over an extended period, we'll be looking at another mortgage crisis in 15 years.

How many people here agree with Milstein's position that making people prisoners of their homes is worth it so he can magically fix his company's bottom line? Anyone?

[John]

It doesn't matter, the only way to get past a bubble is to let the air out of it.

The problem is that many new homers paid WAY TOO MUCH for their homes, and the banks let them do it.

The sooner prices come down, the faster we can get back on track.

Trying to build the bubble into the system through bailouts, etc. is going to be an even bigger disaster than the one they're trying to prevent.

Most of the Americans losing their homes in this mess shouldn't have been given money from the banks to buy homes to start with.

Maybe the government needs to do more about helping the banks and distressed homeowners sort things out, and make it easier to allow short sales / walk aways / etc.

But a 15 year bailout is nonsense.

[tarbubble]

Ohhhhh, this makes my head hurt. I'd better start learning Chinese.

[Tombstone Realty]

I guess the Feds haven't been reading all those stories about the American people being tapped out, and not able to make their own monthly expenses...

What should happen if future generations stand up and say "no, we aren't paying for you".

Like John said - most people aren't going to wait 15 years for their house to be worth what they remembered. And due to the tax loophole allowing people to walk away with no tax hit for the mortgage balance - - -

I'm tired of trying to preach to the choir as to why this is one of the dumbest things this government has done after Iraq. We all know it. Paulson is running scared. He knows it's much worse than what we've been told, and he's just hoping some paint will hide the rot.

[Joseph...The Real Estate Guy]

Rents are high!
In my humble opinion, the bubble is over. What we will see from now on is a more stable, gradual decline.

[Laker]

The $600 checks will do nothing, they would not make us rich nor will they be enough to pay the mortgage for next month. Eventually we'll pay it back in taxes in a year or two.
The big problem is having a government entity or government sponsored entity like Freddie / Fannie buy JUNK mortgages from banks and investors.
Mortgages that are worth .10 cents on the dollar will be bought by our tax money for full dollar amount (face value) This is huge problem. The housing in US is worth according to the inflated numbers about $21 Trillion. The true value after taking the bubble deflation effect is about $11-13 Trillion. What the government does is essentially increase its deficit by 8-10 Trillion.
I don't see why they didn't raise the conforming limit to $7,000,000. I mean based on . Banker Howard P. Milstein, the higher the house prices the better the economy. I "argue" that the median price of housing in LA should be $5,000,000 and no $500,000 and sure not $200,000. That will be "great" for the economy. People could borrow once again almost unlimited amount as their equity will be huge. The could probably live only on their house equity and stop working...

What kind of bull sh$# is that? How come they don't understand that mortgages needs to be paid by wages. wages do not support current prices so let the fri#$# market set the prices. Government, get your hands out of it!
How come nobody compensated the investors that lost huge money after the dot.com crash? Investment has risk, always had, and always will have.

[tew]

OK, this is outrageous, but let's keep a clear head.

Let's find a core fallacy in this reasoning: The implication that somehow banking is fixed - that the banks that exist now are all we have to keep our entire economy going. FALSE! There is nothing stopping new banks from forming. And there's capital enough looking for returns that new lending institutions can be built.

This argument is a fraud. He's telling hardworking people to bail out bankers unless they want to plunge into depression. It's a lie. Banking should be like any other industry - subject to creative destruction and survival of the most productive.

[Dankster]

No matter what they do, how are they going to prevent home prices from reverting to the long-term trendline, which closely tracks inflation?

There's only one way -- raising incomes -- and I don't see anyone proposing that.

All the rest of this is smoke and mirrors, and it is very dishonest. It's not as if only we blog-commenters realize that the fictitious "appreciation" from the bubble years needs to come off the balance sheet somewhere. The Treasury, the Fed and the banks know this better than anyone.

Sadly for those of us who aren't financial institutions or holders of inflated-value mortgages, apparently they're going to "cook the books" so that those who took the biggest risks feel the pain least.

[arroyogrande]

Look, things will get worse (remember those Option-ARM resets?), and the federal government will feel the *need* to 'bail everyone out' (including the banks and Wall Street).

The only thing that *may* prevent it is to start writing to your Senators and Congresspeople RIGHT NOW. Write them, fax them, or email them a simple and well thought out letter explaining why you may think that a 'bail out' is a bad idea.

It may seem futile...however, remember what happened to the 'comprehensive immigration reform package' of late 2007. That was a done deal as well, but a concerted letter writing, phoning, faxing, and email campaign effectively killed it.

Don't just sit on yer keester complaining about it. Do something about it.

- arroyogrande

[bulwark]

Savers deserve a bailout,too. We had money sitting in bank savings accounts earning 1.5% interest while Greenspan was saying there's no bubble, it's just "froth". Meanwhile banks lent multiples of our money at huge profit and inflated the bubble. Where's our share?

[MyLessThanPrimeBeef]

This banker guy, he made it seem like the whole mess is a case of pre-meditated bubble, well thought-out, carefully planned and flawlessly executed.

With this deus ex machina, we are entering his last act.

[amir]

Hey Joseph,
Rental prices are not high, they're going down as well.

Vacancy rates are approaching the heights of the great depression (Wall Street Journal) and when there's more inventory prices drop.

There are a lot more houses to rent. I've seen half a dozen NEW houses - that could not be sold and now are for rental - in Studio City alone.

Rental prices are dropping which is an accelerator to the real estate decline. Why own an expensive declining asset when you can rent a fabulous home from a desperate owner?

This is only the beginning.

[ScottQ]

So, the question really is: Who is going to pay for this mess? The people who tried to buy overvalued houses or who refied inflated houses to pay for toys? Or the bankers, mortgage companies, realtors who conned them into it? Heck, we can't have the rich people suffer, so let's make everybody pay, but claim we are doing it to help the 'little guy.'

Since bankers bought themselves a President in 1913, who gave them the license to print money, the value of the dollar has dropped more than 95 percent. The Fed is immensely incompetent, but they are experts at diverting the blame. This latest shell game will simply make us all poorer, but keep the financiers rich. Some of us will deserve the price we pay; most will not.

[CD]

Read Nouriel Roubini's blog. It's all there ...No need to say anything else. Decide what is the best course for yourselves. I know I have. I am out of the stock market and out of real estate . I sleep very well thank you.

[ExPatriate]

Until now I had been content to sit quietly on the sidelines here in Nebraska and be thankful that I got out when the getting was good. I ran screaming from a "great deal" that would have put me in a less-than-modest "fixer-upper" in Claremont that would now be costing me about 5 grand per month. I won't gloat about what I paid for my home here because it would be unseemly and I no doubt would suffer mightily at the hands of those "we don't care about your great out of state place because this blog is about LA Land, dammit" types. But now it seems that I will be forced to bear a share of the burden of all the fools who couldn't walk away and that really burns me up. Let the great invisible hand do its job and quit shoring up an industry that's broken and needs a good spanking.

[Michael Snyder]

Mystery? What mystery? There's no mystery. Folks on this blog have been kickin' around the handwriting on the wall for months. It hasn't been a discussion about whether there would be a bailout or for who, rather a discussion about how much and how this administration would try to cover it's tracks. How can anybody sit with a straight face calling for "fiscal responsibility" by cutting small business and the unemployed out of the loop while he passes on billions of dollars in "tax relief" to the very criminals who got us into this mess to start with? Passing on the interest cost to taxpayers just insures the inflated profit margins Mozilo used to finagle Countrywide's stock to start with. At least we've been able to remove all doubt. We now have the best government money can buy.

[jb]

I am with arroyogrande. I have e-mailed senators, clinton, chuckehead (he that shall not be named), Boxer, Feinstein. I even got a few responses, but they fairly were generic.

Perhaps someone with know-how could make a website with a cut-and-paste letter, and direct links to e-mail senators. (if you do so, make a donation jar and I'll send you a hundred bucks to start things off)

jb

[ckdg]

I completely agree with arroyogrande. The only way to avert such government actions is to have a voice. Instead of writing opinions on a blog we must write our Senators and Congressmen. It DOES work.Can anyone compose a list of addreses and emails to the appropriate people. It's a start, and a good one.

[orcadrvr]

While we are all hyperventilating about the theoretical "bailout" of the banks, let's remember that Herbert Hoover is still reviled by many for "doing nothing" to address the Depression that started on his watch. Paradoxically, Roosevelt is credited by many for "ending" the depression, though in fact many of his strategies were of limited use or even counterproductive.
Although from a purely theoretical economic point of view it might be best to just let this storm play out without intervention on behalf of either borrower or lender, political realities compel the conclusion that politicians will be unable to resist the urge to "do something" or risk being forever branded as asleep at the switch.
Probably many of the same people now decrying the "bailout" would be agitating for some sort of government action directed at their own personal situation.
There is simply no identifiable cohesive voting block militating for any free market solution to any current economic problem.

[Pat]

My wife asked me if members of Congress automatically went to hell when they died. I had to tell her that "Unfortunately, I don't think it works that way." Too bad.

[Alex]

It is time for the market to recorrect, it is simple. The housing prices went up like mad, and now they will go down like mad. The prices should be what they were in 2000, plus typical inflation.

[JohnnyB]

Quietly raising the Fannie/Freddie limits was the real reason for this package. Without this, propping up over inflated home prices would be impossible. The next illogical, il-conceived, fraud-perpetuating step is to guarantee all the peddled junk mortgages.

Regarding this next fraud-perpetuating step, the wrong-headed, big-bank supporting, middle class debt-servitude promoting, and already mega-wealthy Milstein writes; “…This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value…”

I have a better idea for the U.S.A. How about “suddenly assessing” those mortgages on bank balance sheets RIGHT NOW at their “original value”. Then we can all look at that enormous $ figure and collectively realize – you SCUM BAG CROOKS really outdid yourself this time.

Milstein writes; “…By solving the bank capital crisis immediately… fewer families would lose their homes… fewer neighborhoods would deteriorate… and… there would be less downward pressure on local real estate prices and property tax revenues.”

By subsidizing banks immediately with our tax dollars... more families would continue to be shackled beyond their means to an over-inflated debt post… fewer neighborhoods would require banks/lenders take some responsibility for maintaining their empty homes and appraising property values more accurately in the first place… and… the necessary downward pressure on local real estate prices will be prolonged to minimize the banks losses at the expense of the middle class.

Milstein writes; “…Anything that helps slow the price decline by reducing the supply of housing for sale will be good for our economy.”

This is just WRONG. Asset bubbles are good for banks/wall street. No downside on the backend of the bubble is good for banks/wall street. Deregulation and lax oversight is good for banks/wall street. Validating derivative hogwash and structured-collateralized crap is good for banks/wall street. What’s good for banks/wall street cream skimmers IS NOT good for the economy, for the middle class or for affordable home ownership in general. The nation has been collectively bamboozled and your “ILK” seek to perpetuate the bamboozlement.

Milstein writes; “…American banks could buy the securities at a discount to face value… and then, thanks to the government guarantee, hold them as capital assessed at their full value.”

Awe, isn’t that sweet… the ILK want to keep the carni shell game going. We sold this junk to you for X, now we will buy it back for X-Y, but fraudulently continue to value it at X. Hey middle class, would you mind picking up the “-Y” part of the equation? It’s only a few trillion dollars… No?, well no matter… your government doesn’t represent you anyway.

Milstein writes; “…I propose this idea not because it would benefit our bank... but only out of concern for the health of the global financial system.”

Yes, we know, banks/wall street love to move huge chunks of change around, skim the exchange rates, game global markets, convert the huge chunks into junk paper derived from proprietary formulas that amount to fixing a slot machine and then divert enormous, stupendous profits into off-shore accounts. It may be good for you and your ILK’s global system, but it’s NEVER been good for the U.S.A.’s middle class.

Milstein writes; “…It requires only that we believe in the future of the American economy and the value of American homes 15 years from now. I do, and this is a belief our government should share.”

You mean it requires that we agree with how you and your ILK have artificially raised property values across the country by quickly multiplying the housing demand side (millions more people competing for a relatively more limited ratio of homes) with many of those millions not previously able get a home loan let alone afford the mortgage they were signing onto.

YOU and your ILK want people to believe that your fraudulently appraised value of homes over the last 7 years should stand for another 15 years? The house that was $175K in 2000 should stand at the 2006 price of $650K because YOU and your ILK say so?

I think what your trying to say is if you continue to pee on us and if we could just “believe” it’s really rain everything will be alright.

You’re part of the problem pal not part of the solution.

[Trying hard to find a good rental]

I wish you guys were right because I'm dying to own a house. But I've been looking at rentals and they are NOT cheap, they are extremely expensive. I lived in LA a few years ago when you could rent an apartment for $1200. Now prices are $2000 for a crappy one bedroom apartment. I can't see prices on rentals dropping because there is so much demand in this $2000 one bedroom price range. I wonder at what point will rentals be in line with home prices. I can't see prices of homes going much below what one could rent one for minus the down payment. What does everyone think?