No money, no savings, no equity: Why bailouts won't work

Regular readers know I am a fan of mortgage broker/Fed watcher/pundit Lou Barnes, and his column this week is worth your time. The final years of the housing bubble were not complicated, he argues: Bad loans were made to financially suspect borrowers, by the millions. Excerpt:

"The elephant in the room, who cannot be mentioned in polite company: We gave mortgages to a few million households with deficient long-term financial behaviors, hopelessly incompatible with home ownership.

"That’s a hell of a thing to say about fellow citizens, but it is the case. 'Sub-prime' by definition meant below the minimum standards of the FHA. Roughly $1.5 trillion will default: half of sub-prime and a like amount of the worst of Alt-A.

"A year of all-out foreclosure prevention by traditional means has failed: recasting, forbearing, capitalizing interest, refinancing, canceling adjustment ... all. The new measures include writing down loans to the level of fallen market value and refinancing the remainder. Fairness aside (deeply unfair to families who tough out this cycle), two realities will defy the new efforts. First, write-down/recast will leave these households still with no equity, no up-side to defend, and new monthly payments still higher than rent on equivalent housing. That ownership-rent gap has gaped throughout the cycle; the good news for a foreclosed family: Replacement housing is cheap and plentiful.

"Those in authority demanding foreclosure rescue, Barney Frank and most of Congress, joined by compassionate Americans, cannot conceive the financials of a 575 FICO sub-prime applicant. A dozen or more late payments, several defaulted loans, and a large mass of consumer debt outstanding; poor job stability (temporary, seasonal, intermittent, commissioned sales); also no money, no savings, retirement or otherwise, often tens of thousands in consumer debt, huge negative net worth ... before purchase.

" 'But, you bailed out Wall Street -- why can’t you do the same for these people facing foreclosure?'

"Bear Stearns was not 'bailed out.' It was liquidated in an orderly manner.

"Wise, tough-love policies would encourage rapid recycling of foreclosures, enabling quick acceptance of short-sale offers by servicers terrified of value second-guessing, and above all, making financing available for strong households to buy the foreclosures. The marketplace can absorb the volume, but it needs help. Orderly liquidation.

"(Before you come after me with tar and feathers, know that my mother lost her Ada, OK., home as a teenager in the 1930s. I know what foreclosure means.)"

Your thoughts? Comments?
Photo Credit: AP

Comments

[Patrick Duffy, HousingChronicles.com]

Lou Barnes rocks! Also one of my favorite commentators on housing & real estate issues.

[pugtv]

Shock "Angry Blogger" G,

Put up or shut up. If you believe the market is so rosy, either show us your numbers or go buy a house.

Stop giving us your angry rants. It's not swaying middle of the ground people to see it your way.

[Cal]

Barnes is saying it is so simple to see why a bailout won't work now, but as short as a year ago he was whistling a different tune. 6 months ago he was absolutely screaming for one. It is amazing how much his opinion has matured over time.

The faster prices come back in line with fundamentals the better it is for the economy. It is that simple. If this was anything other than a house everyone in the world would be fine with that statement. But as soon as it is a magical "home" then people get insane and come up with all sorts of convoluted logic why prices and fundamentals have to remain out of whack.

[baruza]

Not that I'm supporting a bailout but there's a lot of things wrong with what Barnes is writing here.

First off, this isn't just a subprime problem anymore. Anyone who's been paying any attention should know we've moved way beyond that, so that's just a red herring.

Second, Barnes writes, "A year of all-out foreclosure prevention by traditional means has failed: recasting, forbearing, capitalizing interest, refinancing, canceling adjustment ... all." This is just so much make believe. That said, saying it doesn't make it so. Banks and originators/servicers have never engaged in systematic attempts to work out loans. It's probably too complex with the way the loans are securitizied, but no, there has never been some all-out effort. There's really been no effort at all, just a couple calls from legislators and regulators that banks should do voluntary workouts. A bit of loose talk is all that adds up to.

Thirdly, Barnes writes "Bear Sterns was liquidated in an orderly manner." I know Barnes is too intelligent to actually beleive this, and it really shows great disrespect for the reader. BSC's counterparties were bailed out, and BSC shareholders also got a pittance compared to the $0 they would have recieved in an actual liquidation. At the same time, the Fed has slashed rates and engaged in various lending facilities all designed to bailout Wall Street at the expense of main-street-crushing inflation.

And the rest of his optimism about this crisis fading is really just standard wishing. "Big-firm dominoes" won't crash? Why not? The bond insurers are no more solvent today than they were 6 months ago. Neither are the banks, which fell big on announcements they'd have to disclose just how terrrible their capital reserves really are. This is far from over.

[Laker]

Thank you pugtv.
Shock "Angry Blogger" G is probably angry loan owner with no or negative equity in his house. That's all.
I am waiting to see his numbers and facts that will counter mine.

[shockg]

Once again Speculator, Bubble blog operator laker girl has nothing but insults to throw when people don't agree with his agenda. Agenda = Sell your house, rent, talk down market, buy, rinse repeat.

[Stop the Housing Bailout]

All I can say is that Lou Barnes gets it - completely.

[shockg]

Laker and the rest of the brainwashed bubble head cult members of greed. Inventory flat all year, price reductions decelerating. Prices could still fall a bit but until we see a huge spike in inventory (like so many bears/speculators predicted) prices will not fall much more. And don't put words in my mouth, I never said things are rosie. I just dont allow myself to be attacked by the name callers here. I don't agree that the armegeddon is coming so Laker and his band of speculators attack. Why so threatened Laker?

On another note, If you want the truth about the housing market, go directly to Lakers Bubble blog. HAHA.

[sheila]

in the Times business section, the guy who is actually dealing, face to face, with the people who need the "bailouts" made the same observation i keep making:

"People who have a fixed-rate mortgage that was initially affordable and continues to be affordable don't walk away from their home, even when it's underwater. They are always willing to withstand the ups and downs of the housing market if their payments remain affordable."

The only "bailout" most of the people want is a normal interest rate reset to a fixed 6%. the paper value of their home is irrelevant to them, since they plan on living there, want the place and can afford the monthly nut.

Why is that so horrible to people here, selfish motivations aside? are you all trying to pay 13%? i said it before, i'll say it again, the only bailout should be a forced reset of ARMs to fixed rate 30 years at 6% for all. no re-fi, no re-appraisal. if people still default, THEN they couldn't afford the house, and let the chips fall where they may.

if they don't default, then they can afford their house, and they should be allowed to keep it because it was only a banking industry freakout that caused their trouble, not irresponsibility, fraud, overpaying, etc.

[sunsetbeachguy]

Well at least when Lou Barnes pays attention he can get something right.

I agree with the previous poster that reminded every 12 months ago lower interest rates could solve it (in Lou's world) and 6 months ago he was screaming for a bailout.

At least Lou is moving through the Kubler-Ross stages of grief quickly.

If the housing market moves through the grieving stages quickly we will all be better off.

Denial
Anger
Bargaining
Depression
Acceptance

Lou looks like he is leaving depression and entering acceptance. Lots of sellers, shockg and even relitters are still in Anger heading toward bargaining.

[Teresa]

I agree with Barnes.

Someone once told me that the Internet handed an instant social life to countless hermits, miscreants and assorted nuts who do not have the life skills to handle one. I can paraphrase that to say that Banana Republic subprime loans handed instant homeownership to countless ne'er-do-wells who didn't have the smarts or skills to handle owning something, let alone the money to pay for it.

[Nelcisco]

Well said Baruza,

[producer]

"Thirdly, Barnes writes "Bear Sterns was liquidated in an orderly manner." I know Barnes is too intelligent to actually beleive this, and it really shows great disrespect for the reader. BSC's counterparties were bailed out, "

Sorry, I disgree. BS was liquidated. Borrower bailouts do the opposite, they keep the borrower intact regardless of their possible fraudelnt behavior.

Sheila(Blair?), I do not disagree withyou entirely but the problem with an across the board teaser freezer is many of these borrowers would not have initially qualified for the loan if normal underwriting guides were used. Most of the folks I see are not credit worthy, have commited fraud and thusly will not qualify for a teaser freezer payment anyway. Our servicers and loss mitigation people should be focusing on the people we should help and let the investers foreclose (liquidate) the rest so we can vet this cycle out and move on.

[Laker]

shockg is saying i attack him on personal level and he is all but to the point..let's see:
"...Speculator, Bubble blog operator laker girl.....Laker...brainwashed bubble head cult...greed....be attacked by the name callers here....Laker and his band of speculators attack..."

Well, shockg, All i said is that you are a fool. And i stand by this. You truly believe that the best defense is offense and attack and that is what you're doing. I don't need to defend myself - that is why I'm not attacking....

sunsetbeachguy, you mentioned the typical stages of bubble popping and included shockg in the Anger stage.
You have a huge mistake here. Shockg is in Denial stage big time. Only at the beginning of the Denial stage.

Lastly, sheila your mistake is the fact that most of these "about to go to foreclosure/mail in their keys" could not, can not and will not qualify for 6% fixed rate 30 year loan. They used those teaser rate / IO/ Option ARM loans as affordability products that enabled them to buy the house...there is no way that they can qualify today for them, and even if given to them, they could not afford to pay them. Heck, they could only afford to pay minimum - less than interest on their loans. Even for the IO they only paid interest only. The 6% fixed 30 year includes principal...
1) If those could afford fixed but chose option arm just to save money - they should be able to keep their mortgages today since helicopter ben lowered the rates so much that any reset is meaningless.
2) If those only could afford IO or option ARM teaser loans, they have no business to keep the house.

[lynette]

'Sub-prime' by definition meant below the minimum standards of the FHA.

really? my understanding of sub prime is that, by definition, it meant below the prime lending rate, if only for a year or two.

the real problem here is unrelenting avarice and greed on the part of financial institutions, similar to what has happened with credit card and finance companies over the last decade or so.

[baruza]

producer, I said BSC's counterparties were bailed out. That's not BSC. It's their debtholders. JP Morgan got a 29 billion cushiion to make sure BSC didn't default on its its bonds and counterparty trades.