Democrats urging new mortgage guarantees

The White House and congressional Democrats took turns today marching out ideas to either deal with the mortgage mess or prevent another one. Democratic support appears to be building for a new plan for the government to guarantee to as many as 2 million troubled mortgages.

First the administration, which focused its efforts today on avoiding mortgage problems in the future:  The secretary of the Treasury rolled out a series of proposals for tighter regulation of the mortgage industry.  The L.A. Times reported "... the package of proposals unveiled with much fanfare by the Treasury Department on Thursday was in large measure a call for greater self-policing by the financial industry. Treasury Secretary Henry M. Paulson Jr. portrayed the plan as part of a carefully calibrated push to bolster the system's sputtering regulatory apparatus enough to deal with rapidly changing and highly unstable financial and mortgage markets."

Then the Democrats, who announced "...a proposal Thursday for the government to guarantee as much as $300 billion in mortgages. In return, lenders would have to write down loan principals to reflect current values, which would help strapped homeowners afford their monthly payments. The measure is designed to help as many as 2 million troubled borrowers."

"The plan's authors -- Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee -- said their measure would not involve the direct expenditure of taxpayer funds. But independent analysts said the offer of a government guarantee would put Washington in line to spend taxpayer funds if borrowers couldn't make good on their mortgage payments."

The Wall Street Journal: "Congressional Democrats moved closer to a deal yesterday that would allow the federal government to insure hundreds of thousands of mortgages, even for delinquent borrowers, in an effort to revive the housing market."

More from the Journal: "Democratic presidential hopefuls Sens. Barack Obama of Illinois and Hillary Clinton of New York offered support for the proposal from the campaign trail."

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

Comments

[formerlahomeowner]

When I first read the Democrats' plan, I thought of bailout; however, after reading that it would "require lenders to write down principal to reflect current values" I breathe a sigh of relief. If this measure passes, I would be curious to see how many lenders would take such a deal. If lenders take the deal and cut the principal on 2 million mortgages, then it would just make the correction in housing prices much faster. Look out down below!

[Cal]

I'll have to read more, I read the high level text of the proposal but from what I read it is doable except for the hundreds of billions of dollar part and the lenders willing to take the haircut.

From what I understand, They have to accept a haircut of 15% of current appraised value and the borrower can spend up to 40% (yes 40%) of income on housing (must prove income) to qualify.

I think this proposal has some room in it to get passed. Realtors will probably cheer it not understand what this will mean to housing market in the bubble areas (continued low sales). But I think this has a much greater possibility of passing than other proposals. Whether the lenders will take advantage or not is another story but it could put a floor under the drop. Since many houses have the second lien going away, the first lien holder loss could be minimized (considering holding cost, property taxes and realtor fees). This would recapitalize some banking entities and leave the taxpayers holding the bag.

I give it a pretty good chance of getting passed in some form.

I think all these proposals give unrealistic hope to unrealistic sellers and drag things out. But that the end result will be basically the same any way you cut it.

[Laker]

boooooooooo democRATS.
Anyone who votes for them deserves them!
They are all working for interest groups and wall street. Non of them is working for us, the people!

Trying to force people to be in a house they cannot afford...
Crooks, hands off the market, you are disgusting and make me sick!

[brettdl]

But who is going to help the rest of us pay for the huge coming tax bill?

[DG]

I can't believe this.

My wife and I have waited and waited and waited and waited patiently for house prices in LA to come down. We acted responsibly as we always do with our money.

Back in 05' we KNEW we couldn't afford these overpriced crazy ARM loans even though the lender said we could. We KNEW better and we passed on getting a loan.

NOW our government wants to back these bad loans to irresponsible people and are asking the lenders to lower the base principle on their loan? That's FREE money to the irresponsible.

If this goes through it will be a slap in the face to every single responsible person that waited. The ones who waited WILL be paying for the mistakes of the irresponsible.

IT'S NOT FAIR and it sends a bad message. Why, why why is bad behavior rewarded these days. I just don't get it.

I want to find out who is for this legislation and then vote them out of office.

[tim]

How is this fair to everyone?? How is this fair to me?? So are they gonna guarantee all those cash out Refi's?? Because if they do I fully expect a check from Uncle Sam for the equity in my home so I can play too like the vast majority of these folks in trouble on their mortgages.

I WANT MY ESCALADE!!! Where is MY brand new house with a pool in a good school district??

WHY AM I SO ANGERED ABOUT THIS???

[Andrew Z]

I very well could have missed it in the midst of this whole thing, but has there been one single politician who has come out and said "this housing crisis is necessary" or something along those lines? Just something that says this is a capitalistic society and things like this need to happen, that a serious drop in housing prices will allow people like policemen, teachers, firefighters and nurses to purchase homes.

If anyone has a quote please provide, I'd love to see it. Thanks.

[arroyogrande]

Scenario: Two people with identically paying jobs buy identical houses for $400,000 using interest only loans and 100% financing. Over the next few years, house prices double. One of the home owners continually takes out "equity" in his house to the tune of $400,000 in cash (for $800,000 total debt). He uses the $400,000 windfall for cars, vacations, home improvements, jet skis, dinners out, cosmetic surgery, and ATVs. The other homeowner lives more simply, and takes no equity out of his home.

Then the loan resets come, and the prices for similar homes drop back down to $400,000. The 'frugal' person can barely afford the new payments; however, there is no way the 'equity extractor' can afford his. The banks come along and write off all loan amounts above 'the value of the house', and POOF, now both owners owe the exact same amount, and have the exact same payment through a new government guaranteed loan.

The only difference is that one of them was smart enough to spend $400,000 of the bank's money before getting "bailed out".

Additionally, the 'frugal' owner is now on the hook (taxes wise) for any future defaults as house prices continue to fall due to the lack of the easy lending practices that got us here in the first place.

Just teach your kids that "life ain't fair. Deal with it."

- arroyogrande

[LA-Architect]

I am a strong Democrat, however I am vehemently opposed to this proposed plan, nor any bailout. I hope these jokers are listening to their constitutents!

[amir]

By the time they do it, it will be too little, too late, but a catastrophic waste of money.

Mac is back.

[arroyogrande]

And since we are bailing out homeowners "in order to save the financial system", why not bail out investment banks?

AP
Federal Reserve pledges to supply cash

"The Federal Reserve said Friday that it has voted to endorse an arrangement to bolster troubled Bear Stearns Cos...It was seen as a last-ditch effort to save the investment bank, which on Friday acknowledged its serious financial problems after a week of denials. JPMorgan Chase is providing an undisclosed amount of secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York..."

And yes, I consider Fed loans and Fed garantees as "bail outs" and not "liquidity enhancers". The only reason that things like this are liquidity enhancers is that The Fed is taking on actual risk.

I can't wait to see what the tax rates will look like in 2011...

- arroyogrande

[CD]

Front page LA Times : SOUTHLAND HOME PRICES TUMBLE FAST.
Woahhhh, Peter, they woke up at the LA Times, they are talking about negative RE on front page,Front Page !!! incredible.....
Cheers to you Peter you woke them up big time !!!
Bear Sterns in the toilet like Thornburg, Carlyle Group and more to come......Are the big wigs worried now????
Every time a CEO goes on CNBC to say my company is flush with cash, it goes belly up the next week.!!!!! The Tsunami Times !

[Rob]

Unbelievable. History does repeat itself...itself.

Hold on Seller's you may get your 40% overvalued asking price yet...

[mark g]

This is amazing... I lack the words to describe this idiotic move to rewared those who got in over their head, regardless of who is to blame... shady brokers, appraisers, ingnorant buyers, flippers... whatever, they do not deserve a break...

[Michael Snyder]

In a cost cutting move the Labor Department has terminated internet service at it's field offices. Additionally analyst are held in quarantine and only allowed access to data approved by the Department of Homeland Security. As a result of these measures, the Labor Department has reported an "easing in the CPI indicating inflation is under control."

So here we have "I'll put anything (legal or not) on my Visa card" Barney Frank and "More dividends" Dodd trying to tell us that the government "insuring" failing loans and somehow this won't involve taxpayer funds... So these "geniuses" want lenders to write down principle while the government "insures" them against loss?!?? Perhaps what we need is drug testing in Congress.

The Stock market's actions this morning show that this administration's biggest fans aren't buying it anymore. An article on http://www.bloomberg.com reports, "Bear Stearns Cos. obtained emergency funding from JPMorgan Chase & Co. and the New York Federal Reserve as the securities firm said its cash position had "significantly deteriorated.''

The New York Fed will ``provide non-recourse, back-to-back'' financing for up to 28 days, JPMorgan said in a statement today. Bear Stearns said it was in talks with the New York-based bank ``regarding permanent funding or other alternatives.''

Bear Stearns plummeted $21, or a record 37 percent, to $36 at 10:08 a.m. in New York Stock Exchange composite trading, the lowest level in more than eight years. The shares fell to as low as $26.85 earlier today."

If the Fed's financial reporting machine ever had any credibility it's gone now. Having cooked the books to broth they now are reduced to painting posies on land mines so they can call them "environmentally friendly". Smart money has "Helicopter Ben" lowering the Fed's short term rates by 75 basis points next week and he will justify his stupidity based on this report. After all, the falling dollar and skyrocketing cost of food & fuel have been neatly removed from his consideration. Anybody remember the "Tucker"? Or are we back to, "Pay no attention to the man behind the curtain"? In another posting Bloomberg reports insurer's losses from subprime exceed hurricane Katrina. Call me crazy, but so far I count at least two Federal plans actively reaching into my pocket to bail out Wall St from their now reported $288 billion+ subprime woes. Somehow Ambaq's $15 billion in available funds seems a paltry sum when compared to the reported potential of $600 billion in subprime losses. Carlyle Fund collapsed yesterday in the face of subprime driven margin calls that were leveraged 32:1. Thirty two to one! Who said crack was a poor man's drug?

When Wall St. responded to their "crack hit" earlier this week Cramer predicted the "rush" would last a week. Well it seems as if the market's building a resistance because it's erased all of it's gains and is lurking below 12,000 at this posting. If Ben gives the market another "hit" next week we'll certainly see $4.00 a gallon gas before summer. Fundamentals support gold at $600 and it's over $1,000. Oil's well over $100 a barrel even though experts insist those same fundamentals only support 2/3 of that price. But don't worry folks, we can be happy our government has it all under control. Just ask them.

I just keep having this bad dream with George & Dick on a foggy runway saying, "At least we had Baghdad".

[MyLessThanPrimeBeef]

I hope the government will guarantee my loan to start a newspaper to compete with the LA Times with Peter as my managing editor.

It does not involve direct expenditure of taxpayer money either.

[baruza]

Forget about all that could be coming down the road--look at what's happening right now, TODAY. At this very moment, our government is socializing the losses of the banking industry. Bear Stearns, which will soon be bankrupt with JPM picking over the corpse, has just been given a NON-RECOURSE loan (that is free government money) to unwind on the way down. Want to get worked up? Get worked up over that.

[JohnnyB]

..."The measure is designed to help as many as 2 million troubled borrowers."

The measure is designed to help as many as 200 banks.

I have not heard one good argument from these pandering crooks on how this is actually going to help the middle class and long term, affordable home ownership.

And, I never will...

[Roger]

I consider myself a democrat and I am angered by this. 2million in foreclousre.....what about the more than 30 million people waiting, waiting, waiting to buy a first home. Don't their votes count? Why are they so nonchalant about spending our tax money? Spend, Spend, and then spend some more. I think someone ought to stop them from spending, and let the economy recover on it's own. It might take time, but at least it might put some common sense into the people to save money and live within their means. It just makes me wonder, as people have stated before, the economy is supported by banks giving away credit, left and right, and that's the only way to keep the economy growing.
I mean there is no growth in manufacturing in the US anymore. So how do you make the economy grow? You keep giving people money to spend, spend, and then you bail them out. But how long can this last? What happens in the end? Do the wages go down to as low as China, and then the corporations begin to manufacture shoes, chairs, pants again in the US? What does happen if this cycle goes on and on?

[jumby]

I agree with DG. I am sick of acting responsibly, saving, being good with my money, and for what? You either have to be poor, wealthy or stupid to buy a house. Middle-class responsible people have no shot.

[left of lefty]

"IT'S NOT FAIR and it sends a bad message. Why, why why is bad behavior rewarded these days. I just don't get it."

it's been that way since i was in kindergarten.

[Jonathan]

"I am a strong Democrat, however I am vehemently opposed to this proposed plan, nor any bailout. I hope these jokers are listening to their constitutents!"

They aren't. I wrote my democratic senator and she basically said she supports all the bailouts to help out the home owners who were taken advantage of.

I am voting Republican this year.

[sfvrealestate]

All of you posters that are indignant over a possible bailout, please stop for a second, and remember that we're all in this together, whether you like it or not. If the government allows the economy to fall apart, trust me, we'll ALL be hurting. And although this is an unpopular sentiment here, how about we all try to be a little more charitable to those who are (now) less fortunate than ourselves, hmm?

[wha]

Anyone know of any protests or organizations that oppose all of this govt intervention? We need to take this to the streets, get some publicity, news coverage and let it be known that the public DOES NOT support this crap. Make some noise!

[wha]

sfvrealestate: "how about we all try to be a little more charitable to those who are (now) less fortunate than ourselves, hmm?"

Would you like to ask that question to the fatcat wall streeters who got gajillions in bonuses for pulling a fast one on all of us? How about they make some charitable donations with all that money they made?
How about asking all the sellers during the boom who make a ton of cash to donate it back for the less fortunate. How about giving some back to all of the school districts who are laying off teachers because of budget cuts resulting from this bubble? There's plenty of goodwill that can be displayed here, and not just from the "indignant" people on this blog.