L.A. Times sees the big bailout coming

The L.A. Times finally warms to the "big bailout is coming" story this morning, reporting in a front-page story, "Housing bailout gains backers."   The story by business ace Michael Hiltzik summarizes recent developments nicely and concludes the Barney Frank plan is "perhaps the one with the most political clout behind it."

Agreed: When Congress is through with it, the Frank plan will become a Christmas Tree in July bearing all manner of goodies for the homebuilding industry (tax incentives to buy now!), local governments (money to create new bureaucracies to buy and manage foreclosed properties!) and on and on.  The biggest giveaway will likely be to the biggest industry, financial services, which will unload bad mortgages at subsidized prices and probably get massive tax breaks on past income.

The story repeats one of those Washington half-truths ("border security!") that politicians seem to believe will somehow become true if only repeated again and again: "Any relief program will have to be carefully fashioned to focus only on deserving homeowners whose financial ills are no fault of their own."

A worthy but unrealistic goal; anybody in need of government help at the moment -- borrowers, lenders, builders, investors -- is there at least in part due to their own financial mistakes and miscalculations.  No one's in this sinking boat through "no fault of their own."

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

Comments

[amir]

Once more, seething with anger...

No matter. Guess what, it won't work. They'll spend all this tax payer money and it won't do a darn thing. It will be as successful as other government bureaucracies, not at all. It will however create unintended consequences and a whole new level of corruption in who gets to suck of the government tit.

[LA-renter]

Without knowing the details, I think that Representative Frank's big picture is practical. Let's face it, we just want the housing market to deflate sooner rather than later.

Then again, let's be cynical --which, for government legislation, is being rational-- about what is "debated" and becomes law.

Importantly, the lenders are the most culpable and must feel the most pain. The lost money was their money. Loans were their risk. A buyer could only dream about overpaying for a house if not for the lenders and lax standards.

Those involved, in their own minds, are victims. You'll turn yourself blue trying to assign fault.

[andree]

Just remember that there were lot of us who didn't get into this madness.We chose to save more for down payment,not be speculators and decided not to buy into homes we were sure we can never pay.
What did we do wrong? Why we can not get a tax break??? Why not congress help renters also ? If they plan to bail out with my tax money , I will appreciate that I be given a piece of it.
This is free market and people bet on making money and of course living free when I paid my rent and they were speculating on making cool few hundred grands.
Why do I , me and you have to stand to lose, may be should be making ourselves heard too.

[SJ]

This is total BS and a slap in the face of responsible people who did not participate in the housing hyper inflation.

Many of the home buyers in the last 5 years who are whining for a bailout either

a) lied on their loan to get a mortgage
b) bought a home well beyond their means of paying off the debt
c) used up their equity and refinanced vacations, flat screen TVs, new cars
d) gambled that their home would increase in value thus allowing them to refinance

This irresonsibility led to an over priced housing market and the current bubble we are in.

If we bail these people out, how will they learn their lesson???

The price of homes is simply going through a much needed price deflation. The market should be allowed to correct itself.

Keep your Tax payer money away from bailing out irresponsible people. Let the free market work!

Contact the following and let them know your displeasure:

Barney Franks - 202-225-5931
Chris Dodd - 202-224-2823
Jane Harman - (310) 643-3636
The Fed - 202-974-7008

[bulwark]

Exactly right. This "bailout" is for banks and speculators (and maybe LA Times advertisers). More people would be able to afford housing through rent control than a government-subsidized mortgage payment.

[yourkillingmelarry]

Well IMO the next decade or so is going to suck. There will be some kind of bailout, and as we have seen with the FED slashing rates the net result will be that of pushing on a string. They are going to inflate there way out of this mess. Bill Gross might as well just say as much......Inflation is Our Friend. If you are sitting on the sidelines renting as I am don't read too much into this. Home prices both real and nominal are falling and will continue to fall. The best outcome of the bailout is to manage how much home prices overshoot the mean to the downside. We are going to be dealing with the effects of this debacle for many years not many months.

[John]

Peter,

When is our government going to accept the basic fact that the home price correction is not going to stop until home prices come back into line with household incomes?

How can you bail out a completely rational economic phenomenon?

Why should responsible people have to pay higher taxes because their greedy neighbors made some bad decisions?

Luckily, our government is terrible at getting things done, so by the time they get their act together, the idiot homeowners will have become renters again, and the frugal renters will be able to buy fairly priced homes.

[Ann]

Before your readers throw thier ususal fits, some very important limitations on the Frank Bill were omitted from the LA TIme - and then again from your commentary:

(1) It would be a separate progam run by the FHA - distinct from its usual loans. (That means these loans would be identifiably in the deed registry by the name of the loan program. and that means it would be a comp for an appraisal.)

(2) Only those whose Debt To Income (DTI) ratio for their mortgage was currently more than 40% of gross income could refinance.

Please note the minimum for the current DTI of 40%.

(3) The refinance would have to result in substantial change in the afforability of the mortage.

Please note the word substantial.

(4) The usual lending criteria of the FHA apply - 31/41 on DTI. (31% of gross to mortgage, 41% of income to all fixed debts)

(5) Where the new loan would be marginal (say slightly more than 31% DTI but less than 40% DTI), the borrower has to make 6 months of timely payments or there original lender has to take it back. (Consider it a trial period)

(6) There are 2 scenarios when the borrower sells:

(a) If the borrower sells for 5 years have passed and sells for more than the loan amount, out of the profit, the FHA gets:

Year 1 - 100%
Year 2 - 80%
Year 3 - 60%
Year 4 - 40%
Year 5 - 50%

OR

an amount equal to 3% of the loan - which ever is greater

(b) borrower sells after 5 years. FHA gets and maount equal to 3% of the original amount of the loan

(7) The new loan is based upon a CURRENT appraisal.

(8) Old lender gets 85% of that amount, and the new loan is for ONLY 90% of current value. (Basically, old lender is 'paying' 5% to the FHA for them to do a new loan.)

So LTV cap will be 90% of current appraisal.

(8) It ONLY applies to loan made after Jan. 1, 2005 through July 2007.

So, taking that $500000 house purchased in 2005 where the buyer has a $60,000 income and it is southern CA with that 14% drop to date. The loan was an interest-only and they have been making the minimum payment.

Current value = $500,000 x .86 = $430,000

Loan = $430,000 x .9 = $387,000

Payment on $387,000 (6%, 30 year taxes, insuraance) = $2906

$2906 = 63.47% of income. They don't get the refi and the house goes to foreclosure.

Same house at $500,000, borrower's income is $112,500. Current loan has a higher interest rate that makes the current payments $3937 (42% of gross.) They can refi if it only appraises for $430,000, and the loan is $387,000. That takes a 14% drop in value.

__________

Okay, the result is the lenders eats some huge losses.

Some, but not many, borrowers can refi into a loan with a lower primcipal and lower payments. Prices haven't fallen far enough to substantially lower the payments for those who have mortgages that are 5, 6 or more times incomes. Bascially this only works for those who are "little" in over their heads (like maybe 4.4 times income) and not a "lot" over their heads (5, 6, or 8 times income.)

Now the more values fall, the more people will qualify for the special refi with the lender right off. But values have to fall a pretty long ways for the household with a mortgage that is 7 or 8 times income to be able to get down to a mortgage where the payment is not more than 31% + of income.

Since it is a special loan program, it is easily identifiable in the land records y the name of the program and can be used as a comp. Just take the loan amount and divide by .9. There is the value.

[Andy Eppink]

Awfully honest for the latimes. Have the eds. been replacer w Martians?

[sunsetbeachguy]

Timely, orderly liquidation facilitated by the government. OK

Bailout that benefits Wall Street, get out the pitchforks.

[anon1137]

Where does all the money come from? Schools are failing, health care is unaffordable for most citizens, the social security system is going to run out of money, but we spend tens and hundreds of billions to make rich guys richer and to allow middle-aged adolescents to play war games in Iraq.

I remember the old days when the federal deficit was at least discussed in the news occasionally. Sooner or later the bill for all this stuff is going to come due.

[liz]

I just read the entire article on latimes.com...speechless...

I can't believe what is going on...I'm in the business and I saw all these "borrowers" take out loans knowing they could afford it. There is not one single borrower that was a victim in all of this, not one.

Let them walk away and go RENT, what's the big deal. They aren't entitled to real property.

SOOOOOOOOOO ANGRY!!!!

I don't care if the big banks fail, so what....the loss is there, all the feds are doing is transferring loss, you can't get rid of it.

[Michael Snyder]

"If Washington gets off its high 'moral hazard' horse and moves to support housing prices, investors will return in a rush" to prudent government- and agency-backed securities, wrote Bill Gross, chief investment officer of the Newport Beach-based bond investment firm Pacific Investment Management Co., or Pimco, in a recent note to clients.

Translation: We need Washington to continue to blow smoke into our bubble. Our over leveraged positions cannot be unwound without uncovering the corruption rife within the real estate finance market. Let's face it, if our clients knew who we were really giving loans to for the past four years nobody in their right mind would give us ten cents on the dollar for these bonds. But thanks to the creativity of Wall St. we've been able to pawn this junk off as AAA rated investments.
We have absolutely no intention of allowing any resemblance of transparency and accountability to return to the financial marketplace. After all, there's really no money behind these instruments we're peddling but I can leverage what funds there are up to over thirty to one so I can collect my commission as I click my mouse. As long as I can find another sucker, I mean investor It'll all be good.

So now Barney "spend along with me" Frank competing with Billary "just give the tab to your children" Clinton in a competition to see who can throw more money we don't have at a problem they were instrumental in creating. Let's face it, if even a modicum of oversight and common sense had been applied to the financial sector for the past decade we wouldn't be in this mess. Sadly the only lessons learned out of the Lincoln Savings debacle were, don't use e-mail & if derivatives are good then
derivatives of derivatives are even better. After all who needs money when you have leverage?

It's frustrating to not only know a bunch of bloggers have a better handle on the economy than most of the "experts", but in their arrogance these experts don't want to hear what any of us has to say. It's patently apparent that our "representatives" at the federal level are completely indifferent to the plight of the average citizen and only interested in propagating their "legacy", what ever that is.

Right now I'm placing my hopes in folks like Warren Buffet who's entering the bond insurance market with a vengeance. Warren's reputation for personal integrity and common sense may just preserve a safe haven for investors who share those virtues. After all, what ever credibility was left in Treasury backed securities was given away last week and the Fed has rendered most savings vehicles worthless. Mr. Buffet will make a lot of money as municipalities and blue chip corporations rush to buy his product, and he deserves it. Somebody has to restore credibility to the bond market & he's one of maybe half a dozen folks on the planet with the track record and wherewithal to do it.

[David Raether]

Two things:

1. Hillary's argument that if the US can give $30 billion to bail out a bank, it can give $30 billion to bail out homeowners is valid... to a point. And then you realize the mortgage industry is worth trillions and former Labor Secretary Robert Reich estimates that the banks have at least another $100 billion to write off. So, whatever... if this dupes people into believing that the goverment gives a crap about "the family home" then go ahead. It's not as if the government hasn't wasted $30 billion in the last month or so on Iraq.

2. These big banks richly deserve every piece of bad news coming to them. All these years we've been hearing about the "genius" of the markets and about the "geniuses" devising new and better securities.

Turns out they're all idiots! Complete and utter morons. These investment bankers with all their Ivy League degrees are total screw-ups who just blew hundreds and hundreds and hundreds of billions of dollars. Next time one of your kids tells you they want to go to Harvard or Princeton or Stanford, warn them off the idea. They're cranking out knuckleheads.

The one thing this disaster has proven is the emperor has no clothes. So the next time one of your libertarian friends in the banking industry starts going on and on about getting the government out of our lives (and their pockets): two words for him "Bear Stearns".

That oughta shut them all up.

[sfvrealestate]

Andree, just to clarify on your question about tax breaks, although I'm sure this is beside the point: homeowners do get a substantial mortgage interest tax break. It roughtly amounts to $1 back for every $3 in interest paid.

And not to make any of you out there feel worse than you already do, but: If the government doesn't take your anger about the Iraq war seriously, presuming you were angry in the first place (about no-bid contracts, a cost that will grow to a trillion dollars, almost 4,000 soldiers dead and hundreds of thousands of civilians dead, etc., etc), what makes you think they'll take your anger seriously about anything else?

[CD]

I keep checking on foreclosure.com and it does not let up, it keeps coming and coming, more and more foreclosure and NOD every day, it's mind boggling the scope of this disaster....People just want out ...The problem is that people do not want help, they want out...
They want help with inflation and price of gas...

[NationalBubble.com]

There is an online petition to try to stop the bailout.
I encourage everybody to use it.

http://tinyurl.com/ywkfvj

[CD]

Republicans know already they will not get elected, so it is now or never for them to help themselves with the tax payers money. Now until the elections we are going to see much more "bail outs" for Wall Street and friends. The Governor of New York should have known: when you oppose the big boys down on Wall Street and ask too many questions, you better keep your pants zipped up...

[Hula Girl]

Ann--"Before your readers throw thier ususal fits, some very important limitations on the Frank Bill were omitted from the LA TIme - and then again from your commentary":

Jeezus, Ann. Say it, don't spray it. Readers throwing usual fits? Umm. You must be speaking of yourself. At least you're consistent. Please, buy yourself a clue and an editor.

And check those spelling errors of yours - not unlike the ones you gleefully point out in other blogger's posts.

Get off yer F'n high horse before it throws you into black lagoon from which you emerged.

[Don]

The basic problem is that people are now looking at housing as a risk free investment rather than as a place to live. They were incentivized by a favorable tax structure and the availability of leverage (debt) that allowed for little or no personal investment (sometimes even getting money back) and pushed by greedy realtors looking for an exorbitant commission. The realtors would tell people how to work the system and had no downside risk themselves or their actual client, the seller looking for a windfall (both have now scooted away with the money). Now we are told that if people are upside down on their mortgage (as was inevitable) then we have to in essence “give” them equity (that most never put in) or they will walk away from the mortgage. What ever happened with living up to your agreement, even if your gamble may not pay off?
Several problems with these bailout proposals:
1. Gamblers are rewarded, whether they were flippers or intended to live in the home. Personal responsibility is thrown out the window.
2. Responsible parties are made to look like fools for not joining in on the house buying party.
3. All the responsibility is being put on the lenders. The borrowers shouldn’t get to keep any money on a sale until everyone is paid back.
4. What about the realtors and sellers? If a company received such ill-gotten gains they would have to pay them back. Why is this being ignored?
Perhaps a more equitable solution is to revise the home loan to a somewhat lower interest rate (reduce payments), lengthen the principal amortization to 40 years and have an equity kicker for the lender as a percentage of the sale proceeds up to the deferred or forgiven amount. Since these borrowers are looking at the lenders as equity partners they should no object to sharing the proceeds.
By the way, Bear Stearns was not bailed out. Their “counterparties” or customers were those guaranteed that their contracts would be fulfilled. The stockholders are only getting $2 a share (for stock that was selling for over $160 last year) likely to avoid the complexity of a bankruptcy filing with all the complexity and delay.

[Jason Hoppe]

%*&$@$#%@^(*&^&$#@$!$#!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[Kiet]

Don: Bear Stearns WAS a bail-out. If it weren't for the FED, JP Morgan WOULD NOT buy it. WE, the tax payers guarantee the 3 billions that JP Morgan (or any other firms) would want to put up. Who cares about Bear Stearns stock holders? It happened to other stock holders of the like of Enron, AG Edwards, etc...Did the government put out any money to save those firms?

Kiet

[jb]

I dont get it - the bailout is so unpopular and the politicians are all jumping on board? They are all whores to rick investment bankers and we need to remove them from office. How about someone starting a list of politicians that do not back any bailout? Lets find em an support em (p.s. long time democrat ready to cross to the dark side over this...)

[LeavinLA]

You all gambled just as much in your own way by sitting it out. Now you want a "bailout" of some kind, too, to celebrate your self-restraint.

Have a good cry, then get a grip on reality. Pathetic.

[Herb]

This article makes me sick. It is really wrong to the people who did not participate in this housing mess. Why should they be punished? Any govenment bailout is totally wrong.

I am prepared to vote Republican if the Democrats sponsor a bailout.

For once, George Bush is right. Let the market correct itself. The government does not belong in this mess.