Bailout watch: Here come the Democrats

From Reuters: "As the U.S. government edges toward a more forceful response to the housing market crisis, a senior Democrat on Wednesday said a bill being created may call for federal purchases of distressed mortgages."

More: "House of Representatives Financial Services Committee Chairman Barney Frank (pictured) said the bill from House Democrats may be unveiled next week to tackle what he called the worst housing slump since the Great Depression of the 1930s."

This has the makings of an odd and potentially powerful alliance: Democrats who want to take aggressive action to stop foreclosures and banks and lenders that want the government to buy the bad mortgages that are poisoning their balance sheets.

Commentary: The anti-bailout argument is probably strongest in Los Angeles, where housing is expensive relative to income, and home ownership levels are relatively low. That's not because Angelenos don't want to own their own homes -- it's because housing is expensive here and many of you are smart enough to figure out when a mortgage doesn't pencil out.

The financially cautious and patient have every right to be angry about plans to use government money to bail out those who inflated housing prices here through foolish loans and foolish decisions. There is no reason to believe a government bailout would be applied with any sense of fairness. Yes, it might help the economy. It would also aid the reckless at the expense of the cautious.

Enough bloviation. If you want to read something smart, check out Stephen Roach's cautionary essay in the New York Times, warning that we are at risk of turning Japanese -- in a bad way: "Like their counterparts in Japan in the 1990s, American authorities may be deluding themselves into believing they can forestall the endgame of post-bubble adjustments. Government aid is being aimed, mistakenly, at maintaining unsustainably high rates of personal consumption. Yet that’s precisely what got the United States into this mess in the first place — pushing down the savings rate, fostering a huge trade deficit and stretching consumers to take on an untenable amount of debt."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: www.house.gov/frank/

Comments

[Todd in WeHo]

I know Barney Frank personally and am respectful of his opinions. However, I am ardently opposed to this latest proposal for a bailout as it is only postponing the inevitable correction (yes, correction) in real estate, particularly here in southern California.

[LA-Architect]

Any bailout of any kind is ridiculous. Those underwater made bad financial decisions. They need to face up to the consequences. Prices need to fall significantly and once the government stops interfering with the market process you will see sales increase and the system will begin to work again.

I don't remember during the frothy days of 20% year over year gain (and that's conservative in L.A.) any call for a government backed equity gain collection to share with the tax payers. THat windfall was solely left to homeowners and flippers etc... who spoken endlessly about how much their house appreciated in 6 months.

Many more people have been pushed out on the sidelines and are waiting for prices to come back down to earth. Why do we only hear about the far lesser number of people who are about to lose their houses. I'll tell you, it's because the crux of the credit crunch is defaulting home owners whose houses are worth less than what they paid for. Actually the real CRUX of the problem is that the government was truly lax and turned a blind eye to all of the shenanigans that went on these past three years.

Unfortunately the problem is too big for the government to provide any sort of bailout. It's got a costly war to fund, to name but a few obligations!

[Laker]

Barney Frank is a crook being funded by NAR/CAR/NEHB and other good guys.
Like most democ- RATS they only care about getting rich by fooling the poor people into believing them about their help and compassion. Nancy Pelosi, if you so much care about the people in middle class, the poor. WHY DON"T YOU ACT TO MAKE HOUSES IN CA MORE AFFORDABLE???

WHY ARE YOU DOING THE OPPOSITE????

I call here all the democrats and there are a lot of them here int he blog (Michael Shnyder, etc) to write to their reps and tell them they will vote for republicans and oust the dems out of their seats! That includes votting for Mccain too!

[mbob]

Bloomberg News has a pretty tart vid interview w/Marc Faber when he was in Chicago within the last couple of days.

He excoriates Greenspan, Bernanke & Bushco for doing exactly the wrong things. Why should the Dem's miss that big idiot parade?

Faber's interview video quality is, to be polite, junk. But the message is clear. We are sooooo exquisitely scrod.

[Uncle Billy]

Check this out. There's a real estate / economics lesson in here somewhere, and it connects nicely with Bill Gross' (pimco) Plankton Theory

NYTimes: Math Explains Mysterious Midge Behavior
http://tinyurl.com/22eo58

Pimco: The Plankton Theory Meets Minsky
http://tinyurl.com/2v4xbo

[LA-renter]

First, lower the pitch forks and torches please...

Peter you're too quick to stoke the bonfire:
"This has the makings of an odd and potentially powerful alliance: Democrats... and banks and lenders."

Read carefully. You will see that Representative Barney Frank is no ally of the banks and lenders. He's "our" friend.

Frank says: the lenders [have to] accept the fact that many of these mortgages have to be substantially written down... We would then be prepared to... purchase some of the written-down mortgages."

Frank wants to lenders to accept their losses NOW, and he only wants re-written loans that could reasonably be collected.

It is Treasurer Paulson who is working for the banks:
"[Paulson] reiterated opposition to a government entity to buy distressed mortgages... he would prefer continuing to rely on private-sector initiatives... in which mortgage lenders work out troubled mortgages with easier terms, one borrower at a time."

Either the lenders are in denial, or they just want to squeeze every last dime out of upside-down loan-owners with a conscience. Yeah, I said with a conscience because, let's face it, like Paulson himself said, speculators and fraudsters have or will just mail the keys.

Will Franks plan filter out speculators? Maybe not. But, compared to Paulson's efforts, it'll clean up the mess faster, and it won't prop up bubble prices.

[Michael Snyder]

Laker,
Please do not put words into my mouth. I have a size 11 foot and I can insert it where-ever and when-ever I deem appropriate. To call me a Democrat, or Republican for that matter is both incorrect and just a bit insulting. I've written both Senators from California and I've yet to receive any acknowledgment from Sen. Feinstein. Sen. Boxer's web site automatically generates a form letter response to your comments, but I don't think a real human being ever casts eyes on the actual communication.

[Fourth Generation]

No bail out, no mortgage amnesty and no socialize risk. Just check the other piece of "news" Peter presented today. If Countrywide (the cesspool of the mortgage industry) still dispenses its executives with generous pay packages, that is the unmistakable signal that they are following business as usual policies. Not until the lending institutions responsible for this debacle are held accountable for their misdeeds the public should be made to pay.

[Fourth Generation]

Another point I will like to make. If the government wants to use taxpayers money to buy distressed mortgages; then the gov will set the price at which it will buy said mortgages. I might not be an economist but I do have common sense and my common sense tells me that any "amnesty" should be at the year 2000 prices (i.e., pre bubble market prices) as an example. May be someone else can give a more accurate year price comparison. Nothing short of that will be remotedly palatable. Not that any amnesty is palatable at all !!!!

[arroyogrande]

"Frank wants to lenders to accept their losses NOW, and he only wants re-written loans that could reasonably be collected."

And, thereby leave the FHA and the taxpayers on the hook for losses later. If you believe that housing prices are going to stabilize and go up right after this plan is enacted, then yes, it's a bank/investor cram down, and they get the pain.

However, if you believe that house prices still have YEARS to go down, then you have a taxpayer funded bail-out of the banks. As in "take your medicine now, I'll have my constituents (taxpayers) take care of any future losses."

If house prices are stabilizing so soon, there would be no need for this program...so guess what the future will hold.

- arroyogrande

[Brian]

Americans withdrew 800 BILLION in home equity in 2005 alone. Do you think that this is the primary reason why people are underwater?

I am so glad that the Democratic party (including the 42 co-sponsers of the proposed bankruptcy cram-down legislation) are so quick to allow the taxpayers (yes, the costs will end up being shouldered by the responsible) to pay for the cosmetic surgery, Hummers and vacations these people enjoyed uring the boom years.

[amir]

There was an excellent article by an economist in the Wall Street Journal yesterday (sorry subscription required) about the benefit of foreclosure.

It states that people that can't afford their houses should be encouraged to leave by tax incentives and no recourse. Only banks can sell the houses in a price that is market based. After price discovery the market can recuperate. With the right prices there will be buyers.

[mike]

i pay my taxes and i feel i deserve to have this government help me after they set up a false lending system. i am facing forclosure and a bailout cfan't come soon enough for me. all you patient people should have bought when the buying was good and you would want a bailout as well. i have been living great on the profits and gains from my house in reseda for 5 years and now it's worth nothing thanks to the government. thay should take some responsibility for their actions.

[dilbert dogbert]

Tanta has pointed out that no one on the lender side is staffed up to handle the quantity of work outs that are required. None of the current "bag holders" want any part of the job fixing these loans that is why you also hear crys from lenders for the government to buy the loans.
We solvent taxpayers are going to foot the bill for this mess. We are fragmented voices, and dollars, compared to the financial businesses who need the bailout.
We are so screwed!!!!
BTW Thanks for the PIMCO link about Minsky.

[jb]

I am calling for a removal of Barney Frank from office. We need to let our politicians know the punishment willl be swift and severe when they line their pocket with NAR money at our expense. Run this crook out of town.

[amir]

mike,
I'm sure that everyone will pile on you. Here's why:
everybody makes financial mistakes in their lives, but nobody expects the government to save them. Nor should you. The government did not set up a false lending system. You signed for a loan you couldn't afford or didn''t understand. You speculated with your credit and you lost.
You wrote you bought when the buying was good? Wrong. You actually bought when the selling was good.

When I speculated in the stock market, nobody came to my rescue. If you can't afford the house you live in, you should not expect me, or any other tax payer, to save you from your foolishness.

[areles]

Hey, Laker, "democ-RAT" is pretty cute, but what's your clever word for Republicans calling for a bailout? How about "Republi-CONS"? Is that cute enough?

[mike]

amir

the lending agencies were using PREDATORY lending practices. the realtors and the lenders told me that i could buy a house and make money on it, then the lenders told me that i could keep getting more money because i was MAKING more money. if it wasn't for a false run-up in real estate that the government created with super low interest rates i wouldn' t have these problems. this can't be compared to stock speculation. that id a fools game. i bought a house with the best intentions and now i am screwed by government, lenders, and the government. they OWE ME!!!!!!!!

[Raul]

Politics is like Relijion, they are based on beliefs. At the beginning, the preacher and the politician, use our emotional needs, to make us believe what they want us to believe. After that does not matter, how wrong, or out of touch with reality our beliefs are......, they are part of us. And is very hard to change, just look at what the neo-con believed: we had the power to take over the world, and we had to use that power.....now we are stuck in Irak. Our Republicans friends believe in less regulation, now our greedy brothers at the top have created a big mess, some of us blame the poor suckers at the button, that now are holding the load...Our Democrats friends champions of the poor and the middle class, with their actions are telling us: we want you to pay more for housing, we do not care about inflation, we dont care if food is so expensive, we want you to (pay) bail out the Big Boys in the Banking industry. We have a message for you: It does not matter what we believe, we are getting tire of this B%@* S#!t.

[Jason]

Mike,

So you bought your house based on what the salesmen told you? Do you normally not do your own research before committing to make such a huge financial decision?

[EG]

If there is bailout why shouldn't government force banks to accept regulations that will prevent this sort of volatility and institute payback plan where the banks owe the government a percentage profits for the next 10 years. I say the government should have retroactive oversight over executive compensation as well. If they are going to bail the companies out, the government should be able to recoup money from the executives that created this mess. There should be some payback mechanism to the bailout and some method to prevent the current situation from happening again. The bailout shouldn't be free money with no strings at the very least. You can have your bailout banks, but it is going hurt and hurt for a long time. Of course, there really shouldn't be a bailout at all.

Where was the regulations in this mortgage mess? I am not entirely clear. Was there a derth of regulations in place that allowed this, or were the existing regulations not enforced by the administration? I know in the energy fiasco of 2000, the Bush administration prevented FERC from enforcing the regulations that were in place. Was there a similar situation with mortgages?

[areles]

" the realtors and the lenders told me that i could buy a house and make money on it, then the lenders told me that i could keep getting more money because i was MAKING more money. if it wasn't for a false run-up in real estate that the government created with super low interest rates i wouldn' t have these problems."

Here's where CRITICAL THINKING comes into play, Mike. Failing to critically examine - or even lightly question - claims that realtors and lenders make is like taking a used car saleman's word for it that the rusted out '84 Ford Escort will be worth a fortune if only you pay 200% over blue book on it and slap a new coat of paint on it.

Realtors and lenders are SALESPEOPLE. When a salesperson presents you with an offer you can't refuse, here's what you do: YOU REFUSE IT.

[Spencer]

Mike,

Your victim mentality makes me want to deport you to France. You lived well for 5 years on your foolish speculation and now you want me to pick up the tab because you still expect your free ride??? It was your ignorance that brought you to your current situation. It was your blind trust of lenders, Realtors and the government that got you into the mess you're in. You must take responsibility for your actions and quit blaming everyone else when things don't go your way.

A bailout is would move America closer to socialism. We must take ownership of our lives by accepting the consequences of our actions. Besides, we can't even afford a bailout right now. Inflationary pressures are already high and they would go through the roof if the government set another entitlement precedent that taxpayers will be paying for in the years to come in taxes and depreciation of the dollar.

We must call for a return to the free market and capitalism. If you want to play victim and look for a handout... move to France.

[LA-Architect]

Hey Mike,

Before this annoying crash, during the heady days of huge appreciation, how much of that windfall did you give away to charity???

You gambled. You were up, yet you didn't get out in time. No taxpayer bailouts for you because your gamble went bust.

[LA-renter]

Let us pray...

Please, Lord, speak to Mike... Let him know that your followers have avoided the unclean livelihood of real estate agents, mortgage lenders or housing market analysts. They speak not the Goods News... Move Mike to forget turning his cheek but rather pull away before he gets pummeled by Treasurer Paulson and his false Hope Now... May Mike do unto others as he would have them do unto him, remembering that they may not reciprocate.

Amen.

[MyLessThanPrimeBeef]

The Plankton Theory is pretty good.

But I also like my Basilisk Theory - for Basilisks, otherwise known as Jesus Lizards, can walk on water. I believe we all have to be Basilisks in order to survive this mess; we all have to be able to walk on water.

[NoWayinLA]

Anyone remember those commercials for that totally rapacious home lenders that kept repeating the mantra, "I'll give you CASH NOW"? I can't help but think of it when I read this.

This is a proposal I don't totally hate. Paulson has already told the banks to take their medicine and write down the loans. This gives them an incentive... write down the loan, and the government will buy it from you, giving you the CASH NOW you need to meet your margin calls and generate new business. Meanwhile, the government has basically done something I've supported, bringing back the New Deal era Home Owner's Loan Corp in a new form. The homeowners get to keep their homes, the Fed makes money, the banks can stay liquid, and the market price of real estate is shoved downward. Everyone wins.

I just wish I could trust the government to properly evaluate these write-downs and the owner's ability to pay before buying the loan.

[Uncle Billy]

We let ourselves spend trillions on wars, and care little enough to let our schools fall into little more than day lockups -- then, then, we cast scorn on the graduates when they lack the skills and "critical thinking" necessary to function in the grown up world.

It's impossible to tell how many people signed dangerous loans knowingly, but they *are* out there -- people who really didn't understand what they were getting in to. I'm not in favor of bailing these people out as that would be teaching them the wrong lesson, but I'm certainly not going to scorn them. Others who knew what they were doing -- scornocopia.

[Laker]

"a used car saleman's word for it that the rusted out '84 Ford Escort will be worth a fortune if only you pay 200% over blue book on it and slap a new coat of paint on it."

Typical RE Agent in 2001-2007

[Carolina]

Mike,

"i have been living great on the profits and gains from my house in reseda for 5 years and now it's worth nothing thanks to the government. "

Stop thinking of yourself as a victim. You beat the system. You “have been living great on the profits and gains” from your house. I’m assuming you took out additional loans on your home “profits and gains” to finance your lifestyle. You shrewdly used investors money naively secured by an overvalued asset. This permitted you to extract real value from fake bubble appreciation on your house and live in the property at the same time.

You win this one at the expense of the investors when you walk away. The mortgage investors are the real victims.

[Robbie Fields]

Peter,

I am so against the bail outs being proposed. Kindly note that not one proposal mentions increased taxation to pay for any bail out.

Also, it seems patently obvious that the Government are comfortable with debasing the currency sufficiently to pay for the $10 trillion plus national debt and to reduce trillions of future government liabilities. Once again, no mention of increased taxation to solve the inflation "problem".

But I do have a bail out plan of my own to propose :

Instead of handing us a bunch of hundred dollars, Uncle Sam should create electronic vouchers that entitle any taxpayer vested in social security to obtain a no qualify GSE backed mortgage for $200,000, fixed at 6%. At the same time, the Feds must end the almost free ride for the oil lobby. Gasoline should be taxed at European type rates. Yes, an extra $5 of tax per gallon! Tax aviation fuel. End the crippling distortions in the economy where taxpayers are forced into Exurbia.

But for the moment, the Trotskyites are in chrage of running the economy.

[Kathy]

A government bailout is simply unfair to those of us that didn't take the risk. Should people that invest in the stock market and lose also be bailed? Ridiculous

[Lester]

Lest those who think people opposed to the bailout are a bunch of heartless Republican aholes who go on and on about "personal responsibility," I am a liberal Democrat who agrees with much of what Rep. Frank says, but I couldn't disagree more with his bailout plan. As more politicians get on board with similar ideas I am seriously considering leaving the party. Such a bailout would simply be fundamentally unfair to millions of Americans living within their means. Since when did America go from being a country to being an economy?

[peter m]

flippers and speculators have already trashed and destroyed large parts of inner LA and surrounding areas thru quick fix and flips and now we are going to bail out these jokers.

HA HA HA!! The politician-hacks are either clueless or are simply being greased by the REIC -wall street Monkeys. Just like the Moronic Lenders back in -2005-2006 giving out $900,000 no -questions- asked loans on 3/1, 80 -year old, POS crapshacks in gang- infested hoods in maywood, pacoima or Inglewood.