The bailout bandwagon: Ex-Clinton aide is on it

Good morning. There is another proposal being floated for a big government rescue of the mortgage market. This one comes from former Federal Reserve Vice Chairman Alan Blinder, who was also an economic adviser to President Clinton, and was floated in The New York Times:

"During the  Depression, President Franklin D. Roosevelt and Congress dealt with huge impending foreclosures by creating the Home Owners’ Loan Corporation. Now, a small but growing group of academics and public figures, including Senator Christopher J. Dodd, Democrat of Connecticut, is calling for the federal government to bring back something like the HOLC. Count me in."

The idea is that Son of HOLC would purchase troubled mortages and refinance them at terms more favorable to borrowers, to the tune of $200 billion to $400 billion. Blinder proposes that speculators and those who lied on loan applications would be ineligible, and some troubled homeowners wouldn't make the cut: "... not all bad mortgages can be turned into good ones. Where families simply can’t afford to be owners, the new HOLC should not be asked to perform mortgage alchemy."

A couple of quick thoughts: The owners of the mortgages -- if you can find them -- have no idea which mortgages belong to speculators who lied on loan applications, and which belong to those who lied about their income.

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

Comments

[sunsetbeachguy]

The great depression had high unemployment and bread lines.

Now we have the President boasting of our strong economy and lines at Starbuck's for $4 coffee.

The analogy doesn't work.

Save the bailouts for when we really need them and not for the extra big drink right before last call.

[DF]

Another puzzling point is the observation that "when families cannot afford to be homeowners, the HOLC should not be expected to perform mortgage alchemy". If a family (or an individual) can afford a mortgage, they need no additional help from the government. If they only way they can afford the mortgage is with government aid, that means they can't afford it. I can't understand how the entire project of a massive bailout for failing homeowners is not 100% "mortgage alchemy".

[Michael Snyder]

What is is with this country's fascination with reviving bad ideas? Being a former Clinton adviser, Alan Blinder was on board for the decision to bring NAFTA into law and we can all see how well that's working. This is just the kind of "thinking" we need to be sure we make Japan's real estate troubles our own. But it will bail out the very miscreants who have brought us to this precipice.
When are our "leaders" going to get it? This is not a "subprime mortgage crisis". The mortgage meltdown is but a symptom of a much larger problem rooted in a "credit system" infected with fraud at the highest levels of management; and until those problems are addressed no amount of government manipulation will provide a solution.

The rates banks pay for funds are at all time lows, mortgage rates are rising and consumer interest rates make the Carter years look like a bargain. Sure there are some great rates advertised, but very few can qualify for these advertised rates and the rest are quickly redirected to more expensive products as soon as they apply. (sound familiar?)

Buffet's got this one right and he may arguably have more influence on the credit market than the Fed. The impact of bond insurers and the ratings they carry cannot be underestimated. We're dealing with a crisis of confidence at the top levels of the market where multi-millionaire investors are licking their wounds and pointing accusatory fingers at each other on the links. I'd imagine a few foursomes have broken up as this crisis deepens. Since these bozos have now realized there is indeed no honor among thieves, they need "assurances". That's where the bond insurers come in.

Any investment in credit that can't be traced to the credit worthiness of the borrower is inherently & fatally flawed. To rate such investments as "top tier" or AAA is nothing shy of criminal. You're going to go a long way to convince me a room full of MBAs couldn't recognize risk so blatant that when I explained how a CDO worked to a seventeen year old she asked why anybody would do that. She called it "just plain stupid."

This CDO/SIV junk bond/Ponzi scheme needs to be allowed to take it's natural course. To be sure a few foursomes will be broken up at Boca Dunes but the overall effect on the market will be beneficial. Sort of like lancing a boil. Mozilo, Nardini , O'Neill and a few other top predators need to go to jail and forfeit their ill gotten gains not to the government, but to the shareholders who've seen their retirements evaporate in the face of these peoples unrivaled greed.

As long as this country's fiscal policy is based on a "profit at any cost" mentality this crisis will only deepen. The plethora of bailout plans that have been purposed by our government will without exception exacerbate the problem. Just like that boil, the cure is going to hurt. But O' the relief when we're healed.

[Laker]

It is impossible to weed out the speculators from regular home owners. You can sometimes match the income tax/social security address to the house address but some smart flippers change addresses. I think the only way to check this is to pay a visit to the home and knock on the door...I wonder if they have the man power to do that....

About the liar income, that is very easy. Ask every borrower for his 1040 income tax. After you get it, verify it with IRS. If the borrower refuses to show his 1040, just report his stated income to the IRS, and let uncle sam knock on his door...wonder what happens when Joe flipper make $70,000 income and submits a stated income of $400,000...

[TC]

Is it too late for me to do a cash out refi and get in mortgage trouble so I can receive government aid for being irresponsible??

I guess what I should do is go back to me house, an 1800 sqft 1950's fixer upper, get in my used car that is paid off, and drive over to the new neighborhoods with the new cars in the driveway and compare my income to those people who are about to foreclose and drive away from their 2500sqft pool homes in a new SUV after milking the property dry for 5 years. That was a run-on sentence, but you get my point.

Ugh. Just let the housing market collapse already so we can get back to reality.

[NationalBubble.com]

Well, all they will be doing is postponing the inevitable. Prices have come down and will come down further to attract new buyers. Look at what the Realtors reported today: "The national median existing-home price for all housing types was $201,100 in January, down 4.6 percent from a year ago when the median was $210,900. "

And by the way, long term interest rates are going up despite the Fed lowering short term rates.

http://www.nationalbubble.com/

[Tombstone Realty]

Thing is, during the depression, people were losing their homes through no fault of their own. The economy collapsed.

This time, it most certainly is "mortgage alchemy".

The number of "bad" loans, the number of "upside down" properties, and the number of people just walking away will be too high. The ones who *really* want to keep their homes are the ones who can't afford to. The government can try and stop it, but they can't. There's a wholesale breakdown in the process, and the more people realize that the banks can't even prove who owns what, the less likely people will stay.

But what really keeps me up at night whether or not our government has enough spare change to bail out these banks to begin with.

[Maggie Knowles]

Here's another "bail out" idea that has some promise:

http://money.cnn.com/2008/02/20/
real_estate/OTC_refinance_plan/index.htm?
postversion=2008022016

http://tinyurl.com/2mrcq2

The Office of Thrift Supervision (OTS) is urging the federal savings and loans lenders under its authority to refinance loans by reducing mortgage balances to the current market values of the homes. Thanks to falling home prices, many homeowners are now stuck with mortgages that are actually worth more than the houses themselves.

But instead of having lenders forgive the difference between the old mortgage and a house's current resale value, called a short sale, the OTS advises that lenders issue a warrant or "negative amortization certificate" for the difference. If a home regains its market value and is then sold, lenders have first claims to the profits.

"If a house has a $100,000 mortgage originally," said Bill Ruberry, a press spokesman for the agency, "and the fair market value is $80,000, there's $20,000 in negative equity. The lender could refinance for $80,000 and a warrant [for the $20,000 in lost value]."

If the house later sold for $100,000, the lender would collect the $80,000 mortgage balance plus the $20,000. If the sale realized more than $100,000, the certificate holder might even get interest on top of the $20,000. Any profit beyond that would go to the borrower. The warrants could be publicly traded.

Home prices still falling

The hope is that this plan will help prevent foreclosures while minimizing the hit that lenders will take, all without putting any burden on the taxpayers.

(click link above for the whole article.)

[Lewis Cabeza]

I will repeat. It is offensive beyond words that Bank of America bought Countrywide, and then a couple of months later wants an enormous subsidy.

Maybe if their mortgage brokers had been paid employees, rather than 100% commission salespersons, they would have had some incentive to not lie on loan applications. Are we really going to pay for all this fraud?

Is it our fault that they cannot even prove that they own the loans upon which they are trying to foreclose?

[pugtv]

Here is a simple bailout plan that works.

- Homeowners who can't afford their mortgages shortsell at prices that the market is willing to take.

- The National Association of Realtors, lending institutions and government (taxpayers) contribute to a fund that absorbs the hit to the banks.

- The NAR and lending institutions should contribute sizably (80% of the bailout) because they fattened themselves up with excess profits over the mortgages.

- The government should contribute (20% of the bailout) because it benefitted from the excess property tax on the overpriced market.

[Vicente Barraza]

Aren't "bad" mortgages just that? To the extent that people bought what they could not afford or overstated what they could, the entire system of mortgage brokers, appraisers, and lenders facilitated the fantasies and falsehoods that now fester in the bellies of our nation's creditors. The more they talk about QUALIFIED bailouts the more I think we should just let it all play out. The bottom line is that an unregulated free market brought this upon itself (and us). To the extent that homeowners and borrowers suffer, it is probably a good thing in the long run for all of us to witness that equity and credit are not sustainable forms of buying power, and that which is too good to be true is in fact just that.

[Smurf]

Now that he didn't make it for president thing are much diffrent now. We will remmember him next time around when he want to run again for president.First he claim it was predatory lending now he singleing out

[Mike]

Typical and predictable. When the little guy is getting squeezed like when they change the bankruptcy laws to protect the interests of the big banks, you don't hear anything. But now this. It has nothing to do with helping people keep their homes, don't think for a second Blinder and his pals care about that. It has to do with purchasing mortgages made by the big banks so they don't lose money.

In short, this is all about letting banks flip mortgages to the taxpayers.

[amir]

Just when I was going to vote for the Democrats, they go and open their mouths!

They always ruin my best intentions.

[TheTruthHurts]

I'm so pissed by all of this. Housing prices have to fall. Why doesn't anyone get this. It doesn't matter if you refinance them all. Mobility is dead. House prices are going down and everyone will be frozen in place. Renters will be the only ones able to move. No bailout will fix that. No bailout will fix that because these cheapo mortgages are GONE. If they're gone, the ability to sell at these inflated prices are gone. That means that until prices make sense with reasonable lending standards, they will go down. After a bailout people will still be underwater with the government/taxpayers holding the bag.

[JustPlainReal]

The plain truth is that the rich get richer because the America's biggest problem is not enough govt. support or protection for the working class it is that they are:
S-T-U-P-I-D.

Instead of stopping and doing the math ( probably not taught well enough in our public schools) they do what they think is cool until they are all in fact "DUPED" as Obama wristfully declared last week in Austin.

Humans are the only species that don't allow only the best, strongest and brightest to survive. This event should demonstrate that Free Markets can not absorb mediocrity.

[TheProblemWithCaring]

just report his stated income to the IRS, and let uncle sam knock on his door...wonder what happens when Joe flipper make $70,000 income and submits a stated income of $400,000...

Posted by: Laker | February 25, 2008 at 07:41 AM

nothin'

[Mike P]

Let me make sure I understand this... the government jumpstarts some huge bloated bureaucracy (costing millions yearly, I'm sure, to maintain), then takes billions in our tax dollars to buy up junky toxic loans that no one wants.

BWAHAHAHAHA!!!

Yet another bailout for banks and lenders, courtesy of Sen. Dodd. You can tell they're getting desperate, as the ploys become more transparent and obvious.

Hey Connecticut, do us all a favor and recall Dodd.

[MyLessThanPrimeBeef]

I think alchemists would tell you, alchemy is not about physical or material transformation, but inner, spiritual transformation - no Philosopher's Stone can turn junk mortgages into gold, but you can change yourself from a debt addict, a spendthrift to a niggard (hey, look it up), a Scrooge.

[Laker]

TheProblemWithCaring,
If IRS is to do its job, there is no need for an audit.
Simply send a bill to the Joe flipper. The bill will include tax on the unreported income of $330,000 plus penalties and interest!

If IRS does not do that, i don't see why we need to file income tax at all.

[Ann]

"Blinder proposes that speculators and those who lied on loan applications would be ineligible, and some troubled homeowners wouldn't make the cut: "... not all bad mortgages can be turned into good ones. Where families simply can’t afford to be owners, the new HOLC should not be asked to perform mortgage alchemy."

A couple of quick thoughts: The owners of the mortgages -- if you can find them -- have no idea which mortgages belong to speculators who lied on loan applications, and which belong to those who lied about their income."

___________

Ah yes those nasty nuisancey little details.

Only thing that would work would be to start the loan underwiriting from scratch on each an every loan that this 'agency' would be purchasing. That means

(1) current appraisals based upon comps including short sales

Oh well, there go most prospective borrowers......houshe won't appraise for what they owe . Of course the lender trying to off-loas the loan could accept a 'short refi' - bascially a refi version of a short sale.

(2) Documented income.

Oops - more prospective borrowers are in trouble. Someone might compare what they claimed as income on the first loan to what they can prove as income on the 2nd loan.

Studies have shown that on NINJA-liar loans, 90% of them lied and inflated their incomes and over 50% inflated their incomes by more than 50%.

Nasty little problem of committing felony obtaining money by false pretenses with the first loan plus some federal banking fraud (also a felony.)

(3) Debt::income ratio caps.

How many of them could have the mortgage refinanced so that the mortgage, taxes and insurance did not exceed 31% of their documented income AND their total debt payments (mortgage etc; car payments; credit cards; student loans etc) did not exceed 41% of documented gross income?

No matter how you slice it, the incomes can not support the prices they agreed to pay for the houses.

Those annoying details on implementing some idea again......

BTW, on speculator versus primary home? It is easy. Run their driver's license, voter registration and pull their tax returns. And, oh yes, the records of all property they own and on which one they claim a homestead exemption (and if they claim more than one, now they have criminal state tax fraud......) Easy enough to find out the info.

[Michael Snyder]

Ann,
I'll second your motion and add a codicil or two.
First; all packaged debt must be traceable to it's source. In other words, investors must have an accounting of the specific loans they are purchasing along with the credit information on the borrower and an appraisal of the property. Adherence to this bit of "common sense" would have contained this crisis.
Next we need to change the basis of executive compensation in America. The use of stock prices as a definitive indicator of managerial performance is fundamentally flawed. I'm all for performance based compensation, but to see the likes of Bob Nardini walking off with a $232,000,000 severance package while the stock in the firm he's leaving (Home Depot)tanks to the tune of 50% is a gross injustice to all of the hard working folks who vested their 401(k)s in their employer. In many cases the employees of a company have to invest their retirement savings in their employer's stock in order to qualify for their retirement program. This is nothing more than funding a severance bonus for top management while the workers are left to discover gourmet cat food as a protein source.
To assume this crisis is solely the fault of the flippers, liar loans & greedy Realtors is a fool's errand. I place the blame squarely on the shoulders of Mozilo & his ilk who baited the hook and tossed it into the water. I'm not saying the "lower end" of this crisis lacks responsibility for it's actions, I'm saying that without the approval and direction of top management in any of these "troubled institutions" none of this would have ever had a chance to happen.

[Ann]

"To assume this crisis is solely the fault of the flippers, liar loans & greedy Realtors is a fool's errand. I place the blame squarely on the shoulders of Mozilo & his ilk who baited the hook and tossed it into the water. I'm not saying the "lower end" of this crisis lacks responsibility for it's actions, I'm saying that without the approval and direction of top management in any of these "troubled institutions" none of this would have ever had a chance to happen.

Posted by: Michael Snyder "

Michael -

"Against stupidity, the gods themselves contend in vain."

Friedrich Schiller, "Die Jungfrau von Orleans (The Maid of Orleans), Act III, sc. vi " (1801)

Add the words "avarice", "greed", "cupidity" and foolishness" to that sentence after "stupidity" and one pretty much sums up the behavior of all participants in this debacle.

The borrowers were greedy for homes they couldn't really afford were "foolish" about money management; and exhibited a great deal of cupidity (inordinate desire for wealth) for things beyond their financial reach.

The realtors were avaricious with respect to their commissions and duplictious in steering their customers into questionable loans.

(We made an offer on a charming 12 room inn. For more reasons than it is worth typing, I knew that my local banks would not lend against the business until I had increased the profitability and that would take at least 3 years so the seller would have to do owner-financing until then - as they had offered. I informed their realtor that my banks wouldn't touch it with a barge pole with its current receipts and that my offer was 50% of asking based upon revenue projections. He said 'oh those banks are too conservative - I can line up lenders who will finance it at 100% of asking. price. I informed him that those lenders must be mathematical morons as there was no way a place that, on current receipts, would net $12,000 a year after operating costs would be able to pay a $600K mortgage - and I was not discussing it any further. Seller was, and still is in fantasy land, and they still own it. Oh well. Maybe I'll buy it later when they come out of their dreamland. My bankers howled with laughter when I told them what the realtor said and my response.)

So yes, the realtors were just as culpable. Dollar signs appeared before their eyes and common sense went out the window.

THe 'buck stops' with the Wall St wizards who are now wailing for rescue. Cupidity, avarice, arragonce, greed, -- all those apply.

All snake oil salesmen really do know they are selling snake oil - they just figure they will be long gone when everyone else figures out they are selling snake oil.

THe Wall St wizrds did bait the hook with the fake worm; the realtors, to feather their own nests, steered the fish to the bait; and the fish, sufferring from an enormous lack of common sense combined with greed, bit.

When I would be waiting in court for my cases to be called on docket, I heard a lot of criminals entering pleas and being sentenced. Every single one of them did the 'step and shuffle' routine of "I'm so sorry - ah made a mistake and did wrong to all these people and ah nevah meant to hurt anyone by stealing their money (or forging the check or.....) .....ah promise Judge ah've learned my lesson and iffen you jsut give me another chance.....blah blah blah.......

Sure sounds a lot like the drivel coming out of Wall St and the major corporations.

Here's an idea. Any CEO (and upper level management) who is paid more than 40 times the median wage of the employees of the business has the amount that is in excess of the 40 times median taxed at 90%. Bet you would see some wage raises for the worker bees real fast. (40 times median was the typical ratio in 1980. Now it is more like 300+ times median wage of a business.)

Maybe also taxing their golden parachutes at 90% if during their tenure (1) they cut employees or (2) the business lost money or dropped in profits would work too.

BTW, sorry about all the typos up above. I have the laptop propped upon my knees while curled up in the recliner - peering at this blasted screen through graduated bifocals is not conducive to keyboard accuracy or proofreading.