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 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
 Rep. Kevin McCarthy (R-Bakersfield), pictured, tells the L.A. Times that his constituent mail on the Barney Frank mortgage rescue plan was running "50 to 1: 'Don't bail these people out.' " McCarthy voted against the bill.
Other interesting tidbits from Richard Simon's piece on latimes.com about how the House vote unfolded today on the mortgage rescue bill:
--One California Republican, Rep. Gary G. Miller of Diamond Bar, voted for the bill. Otherwise, the vote in the California delegation split along party lines, with Democrats supporting the bill and Republicans siding with the White House in opposition.
--Miller said Frank "helped win his support by adding a provision that would permanently raise the maximum mortgage the Federal Housing Administration can back to $729,750 from $362,790." (Aside: Did anyone ever believe that increase would be temporary?)
--Three Californians skipped the vote: "Reps. John Campbell (R-Irvine), Laura Richardson (D-Long Beach) and House Speaker Nancy Pelosi (D-San Francisco) did not vote. By tradition, the speaker seldom does."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo: kevinmccarthy.house.gov
 The rush in Congress to agree on an emergency housing bill appears to have given way to a three-way muddle, with the House, the Senate and the White House staking out different positions. A muddle is not necessarily a bad thing, but that's where we are:
The AP today: "The Bush administration announced new steps Wednesday to help more homeowners head off foreclosure. The Senate, in the meantime, worked to complete a bipartisan housing bill the White House says would worsen the mortgage mess."
The new White House proposal could be called Dodd-Frank Lite -- a limited and voluntary version of the widespread mortgage write-downs and new guarantees favored by Sen. Chris Dodd and Rep. Barney Frank: "It is a more modest version of a concept Democrats have recently been pushing to respond to the housing crisis, which would have the FHA back from $300 billion to $400 billion in restructured loans for distressed borrowers if lenders were willing to take a substantial loss on the mortgages. The administration's idea, however, would reach far fewer borrowers than the Democrats' proposal -- roughly 100,000 rather than between 1 million and 2 million -- without requiring lenders to take large losses."
The administration laid out its most explicit criticism of Dodd-Frank, saying it would "'essentially put taxpayers on the hook for a large number of non-performing loans." The administration also criticized the Senate's proposal for grants to allow local governments to buy foreclosed homes, calling it "a costly bailout for lenders and speculators.''
Your thoughts? Ideas? E-mail story tips to peter.viles@latimes.com
Photo Credit: AFP/Getty Images
The L.A. Times this morning explores the issue of whether the government should offer mortgage aid -- a bailout, for lack of a better word -- to the "undeserving." Peter Gosselin's front-page article observes that, in previous crises, the government has erred on the side of helping the overall economy rather than trying to determine who deserves special aid and who doesn't.
"And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore."
A couple of thoughts: You would think it goes without saying that many oppose these mortgage aid packages for very specific reasons, but it doesn't -- so I'll say it: Many Americans oppose mortgage aid right now because they believe lenders and borrowers participated in an unsustainable housing bubble that drove up prices, enriched millions, gave the economy a false appearance of prosperity, and made housing unaffordable to those who refused to take foolish mortgage risks. This argument is particularly potent in Los Angeles, where soaring housing prices long ago lost touch with income levels, and home ownership levels lag well behind national rates.
Many of these bailout critics also argue -- they argue it here daily -- that government attempts to prop up housing prices will ultimately prolong the housing crisis rather than shorten it. In other words, there are two arguments here: the first is fairness, the second is whether a broad bailout provides "a benefit to society as a whole" -- whether it will work.
Will a widespread bailout help the reckless and the undeserving? Probably. Here's PIMCO economist Paul McCulley: ".. The inequities smell to high heaven, and that is one of the huge problems in dealing with it. It runs against the streak of basic fairness in a lot of Americans. You’re going to provide a handout to the fool. The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool. When all I did was exactly what I was supposed to do. Where is the fairness here? It’s a hard question to answer."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
 It appears Treasury Secretary Henry Paulson's brief tenure as the administration's chief critic of foreclosure bailouts is coming to a quiet end.
You will remember it was Paulson (pictured) who called bailout plans a "nonstarter," saying "absolutely not" to talk of direct government aid to homeowners. Well, that was then.
This is now, from Bloomberg News today: "Treasury Secretary Henry Paulson indicated the Bush administration is willing to consider congressional plans to stem foreclosures by expanding government guarantees for mortgages. 'I think you will continue to see flexibility as we learn and go forward,' Paulson said in an interview with Bloomberg Television in Beijing."
More: "Paulson's housing comments are a shift from last month, when he said proposals to use government funds were a 'nonstarter'' and played down concern about homeowners whose houses are worth less than what they owe on their mortgages."
Diversion: I knew this little dance reminded me of something, and then it hit me: The very end of one of the greatest scenes in Hollywood history, the Joe Pesci "Funny how?" scene in "Goodfellas." The part of the scene everybody remembers is when Tommy DeVito (Pesci) browbeats Henry Hill (Ray Liotta), demanding: "Funny how??? I'm a clown??? I amuse you??? Funny how???"
DeVito ends the scene by saying: "I wonder about you sometimes, Henry. You may fold under pressure!"
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: AFP /Getty Images
 First developing news: The Republicans in the Senate, evidently fearing voter backlash, have agreed to work with Democrats on a big housing bailout. From The New York Times: "With both parties in Congress voicing a new urgency to help millions of homeowners at risk of foreclosure, the Senate voted overwhelmingly on Tuesday to move forward with a package of housing legislation."
The L.A. Times: "The breakthrough came after lawmakers returned from a two-week spring
recess during which the federal government stepped in to rescue
investment bank Bear Stearns Cos. and the country's economic troubles
dominated the presidential campaign."
Now part of the bailout you haven't heard much about: tax breaks for homebuilders. "Corporate homebuilders -- including those responsible for the mortgage and housing crisis -- would receive billions of dollars in tax breaks under a provision of the Foreclosure Prevention Act currently pending in Congress," the Laborers' International Union of North America argued in a news release today.
More from the union: "Under the bill's little publicized 'carry-back' provisions, builders would get billions in tax breaks. The carry-back provision would allow homebuilders to apply losses from 2006 and 2007 as far back as five years against taxes paid on profits."
Bloviation: When Congress is through with the omnibus foreclosure prevention legislation, it says here it will resemble the world's largest Christmas tree, with boxes of bailouts, goodies and giveaways for every Who down in Whoville and every interest group and corporate lobby remotely connected to the business of building, buying or financing houses. Don't be surprised if the homebuilders find two piles of goodies under the tree: carry-back provisions to reduce taxes, and new tax incentives to encourage buyers to purchase new homes.
The tipping point in this debate was when the Fed backed the bad assets of Bear Stearns. Whether that event is most accurately described as a bailout, a liquidation or a burial is irrelevant. It opened the floodgates. "If we can bail out Bear Stearns, we can certainly provide aid to... (fill in the blank)."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: Los Angeles Times
If you're up for some pragmatic, pro-bailout, big-picture thinking, check out this interview with PIMCO economist Paul McCulley. I'll summarize and highlight, but encourage you to read it for yourself.
McCulley's take on real estate right now is that no-money-down, underwater homeowners are making a rational business decision by walking away from their mortgages (where have we heard that before? From readers of this blog). "When you have no skin in the game ... it’s eminently rational to go into early payment default." This, McCulley argues, is creating a deflationary spiral in home prices.
One problem with a deflationary spiral like this, he argues, is that smart buyers (of homes) refuse to buy into it. Who wants to catch a falling knife? So prices continue to fall. But won't investors buy the homes as rental properties at some point? McCulley says prices are so far above that point that the decline would be hellish: "That would conceptually be your
floor, but that is so far away from here that the economy would have to
go through absolute hell to reach that point."
The solution? Like many others, McCulley looks favorably on the Barney Frank proposal, in which banks would write down problem loans rather than foreclose, and then the government would guarantee new loans at lower amounts, in hopes of keeping underwater buyers from walking away. Is it a bailout? McCulley says it is -- it puts taxpayers are risk in the likely case that the re-written loans go bad. McCulley: ".. The inequities smell to
high heaven, and that is one of the huge problems in dealing with it.
It runs against the streak of basic fairness in a lot of Americans.
You’re going to provide a handout to the fool. The fool is going to be
rewarded and I, the taxpayer, will be put at risk at the margin for
that handout to the fool. When all I did was exactly what I was
supposed to do. Where is the fairness here? It’s a hard question to
answer."
Thoughts? Comments? Email story tips to peter.viles@latimes.com.
Hat Tip: TW
Recently I had a conversation with a fellow journalist about government efforts to ease the mortgage crisis. I was explaining to this person that mainstream media accounts of the issue very often ignore the anti-bailout sentiment that dominates blogs like this one. The journalist was confused. Opposition to a bailout? Here in liberal L.A.? On a blog on the L.A. Times website? "Your readers must be rich," she told me. If I had been drinking coffee, I would have spit it out. I explained that, no, as far as I know, that's not the case. In fact, many of them can't afford to buy a house in Los Angeles, and they're upset (not the word I used) at government efforts to support inflated housing prices in one of the nation's least-affordable housing markets. With that conversation in mind, I pass along an e-mail I received this morning: "Along with NationalBubble.com and Patrick.net, I invite you to join our efforts to stop the planned government bailout of the housing industry. We believe that it is not the government's role (i.e., not the taxpayer's burden) to bailout irresponsible lenders, brokers, and borrowers. "Accordingly, we have created a website www.StopTheHousingBailout.com (currently hosted on NationalBubble) that is designed to be a clearinghouse of information for a movement against the bailout. The website is in its infancy, but currently consists of a statement why the bailout is wrong and several links to efforts to stop the bailout (e.g., a petition, a pledge, anti-bailout apparel, links to contact political representatives, etc.). "We ask that you consider joining forces with us to stop the bailout. A band of bloggers against the bailout can be a powerful political weapon. Moreover, a united front will present a newsworthy story for the media. By banding together against this ill-advised bailout, we can be heard beyond the readership of our collective pages and make a difference. Together, we can present a stronger message than the sum of our individual voices." Your thoughts? Comment? E-mail story tips to peter.viles@latimes.com
 Sen. Barack Obama joins the housing speech parade today with what appears to be a difference-splitter: more government action and intervention than John McCain proposed this week, but not as much as Hillary Clinton favors.
Read the entire Obama speech here.
Reuters, via CNBC: "Democratic presidential candidate Barack Obama called for greater government regulation of the U.S. financial system Thursday and proposed a new $30-billion economic stimulus plan to help homeowners. ... He proposed a $30-billion stimulus plan that would provide relief to areas hardest hit by the housing crisis, and an extension of unemployment insurance for those out of work."
L.A. Times: "Democratic candidate Barack Obama ... called for reform of the nation's regulatory system, immediate relief for homeowners caught in the sub-prime mortgage crisis and a $30-billion stimulus package to boost the economy. 'If we can extend a hand to banks on Wall Street, we can extend a hand to Americans who are struggling through no fault of their own,' he said."
On this language, McCain, Clinton and Obama agree: They support aid to the blameless. Who doesn't? The idea that there is some discrete group of blameless, faultless borrowers is a convenient piece of Washington fiction that ignores recent history. Everybody in this mess made mistakes. Borrowers took out loans they didn't understand to buy houses they couldn't afford. Some borrowers understood the risks they were taking; some didn't. Lenders made spectacularly bad loans because someone (Wall Street) was stupid enough to buy the loans. Washington witnessed the entire train wreck and declared it a good thing as it was happening, and only now sees the wreckage.
It's hard to see how an intelligent government response will somehow emerge from collective ignorance of what happened.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Getty Images
 Important speech from the Treasury Secretary (pictured) today: "Housing prices need to fall further to permit shell-shocked housing markets to stabilize and policy-makers should not interfere with that process, Treasury Secretary Henry Paulson said on Wednesday."
More from Reuters via LATimes.com: Treasury Secretary Henry Paulson "... said regulators including the Federal Reserve were 'vigilant' and doing everything they could to minimize damage to the economy but played down the value of a more direct government role."
The entire speech is here:, but I've taken the liberty of cutting and pasting the section in which Paulson addresses housing prices:
"The housing downturn and the surrounding uncertainty are significantly impacting our financial institutions and capital markets. However, we should not lose sight of the fact that this downturn was precipitated by unsustainable home price appreciation which was particularly pronounced in a relatively few regions. A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and housing will again contribute to economic growth. Having stability in housing markets will in turn contribute to better conditions in credit markets for mortgage-backed securities.
More, "Data releases every month create headlines about declining housing sales, starts and prices. Yet, declines are exactly what we should expect during a correction. It takes time to work through the excess inventory – and we are. The question many are asking is how deep the correction will be and how long it will last. ...
Read more Paulson: Let housing prices fall »
 Sen. Hillary Clinton (pictured) made a political speech today about the foreclosure crisis, and as a political effort, it may prove fairly successful for her. But, thankfully, this is not a politics blog, so my analysis can largely ignore politics and stick to housing and economics.
Of the three presidential candidates, Clinton's fix is the most aggressive -- the biggest bailout, if you will. That makes it the most offensive to those who believe the solution to artificially inflated housing prices is, yes, a period of declining housing prices. Instead, she says the government should get ready to start buying mortgages: "... I believe the Federal Housing Administration should also stand ready to be a temporary buyer -- to purchase, restructure, and resell underwater mortgages."
She also proposes a freeze on foreclosures and a $30-billion fund so that cities and states can start buying foreclosed and "distressed" properties for possible resale or rent (Imagine the bungling, the fraud, and the favoritism, if the city of Los Angeles -- which can't even keep track of foreclosed houses -- gets a pile of federal money to start buying them).
The headline-grabber was the suggestion that the president assemble a group of economic geniuses -- an "emergency working group on foreclosure." She suggested, evidently with a straight face, that the group would be led by "nonpartisan" economic leaders like former Treasury Secretary Robert Rubin.
Now, Bob Rubin is a smart guy and all that, but he served in a Democratic administration, which his not a bad thing, but is not "nonpartisan." Further, he works for a company, Citigroup, that, as Fortune recently reported, "has written down more than $24 billion in losses due in large part of greed, cynicism, and bad judgment." Citi has been so wounded by the mortgage mess that Rubin had to jump on a plane and fly halfway around the world to ask the government of the United Arab Emirates for money. This is a nonpartisan figure capable of objectively analyzing the mortgage crisis? This is like putting Snoop Dogg on an anti-drug panel.
Clinton manages to acknowledge that reckless borrowers bear some responsibility for the housing mess, but can't bring herself to call it what it is: the inevitable unwinding of a bubble of unsustainably high prices and disastrous lending against those prices.
Read more Hillary on housing: Clinton's foreclosure bailout plan »
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.
 A bit off topic, but worth noting: Former Fed Chairman Paul Volcker (pictured) is raising questions about the Fed's rescue of Bear Stearns.
Volcker's chief questions: Why is the Fed rescuing a non-bank that it does not regulate? Isn't that a job for Congress? Why is the Fed guaranteeing bad loans? The Fed regulates -- and lends to -- banks, not investment houses.
Volcker calls the Bear bailout "... a new departure. And at some point, the government ought to — in my view, the government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.
In other words, rescuing companies other than banks, and guaranteeing bad loans, is a job for Congress and the White House. You want to bail out Carlyle Capital, or Chrysler or K-Mart? Go ahead, knock yourself out. Just don't ask the Fed to do it, because it's not their job.
Of course, potentially catastrophic failure was imminent and the Fed evidently felt it couldn't wait. Volcker: "… They stepped into a vacuum, and I think quite appropriately, it’s a judgment they had to make. But is this what you want for the longstanding regulatory support system? My answer is no."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo credit: Associated Press
 The Bush administration's oft-stated opposition to a housing bailout for lenders and borrowers is under assault from many corners today. The Fed-backed, administration-brokered weekend bailout of Bear Stearns' debt makes it nearly impossible for the administration to continue to argue against more government aid to borrowers.
Reuters: "Federal Bailout of U.S. Housing Gaining Momentum" ... "'There is no question but that there will be a federal
bail-out of subprime mortgage loans this year," Linda Lord, the
top lobbyist for Swiss bank UBS, wrote in a memo last week."
David Brooks, resident non-liberal at The New York Times: "It makes sense to try to find some circuit breakers so the housing
market doesn’t totally collapse.... First, no bailout for the true greedheads: the speculators, the
flippers, the people who bought second homes they couldn’t afford. Help
only those who can stay in their homes with a modest amount of aid.
Don’t succumb to lenders who want the government to buy up their bad
paper."
Paul Krugman, one of many resident liberals at The New York Times: "Let’s talk about why a bailout is inevitable.... We probably need something similar to the Resolution Trust Corporation,
which took over bankrupt savings and loan institutions and sold off
their assets to reimburse taxpayers. And we need it quickly: things are
falling apart as you read this."
Comments? Thoughts? Email story tips to peter.viles@latimes.com.
Hat tip: Cal
Photo Credit: Treasury Secretary Henry Paulson, by Getty Images
I saw this headline and I thought it had to be a typo: "JP Morgan to buy Bear Stearns for $2/share."
It is not a typo, it is true, and it is a shocker, a bottom-dollar buyout that was brokered and backed by your government. Shares of Bear Stearns traded at $159 last April, and $57 on Thursday. Even after the investment bank effectively failed Friday morning and was bailed out by JP Morgan and the Fed, Wall Street's smart guys believed the company was worth $30 a share. Man, were they wrong.
The ultimate take-over price -- $236 million, or not even enough money to sign a decent baseball free-agent these days -- is stunningly low. It means Bear Stearns was very close to worthless, a realization Wall Street did its best to avoid all day Friday.
It also means the financial fallout that began with the the crisis in the mortgage market -- yes, the same fallout the Bush administration repeatedly assured us was "contained" -- is not contained and is almost impossible to quantify at any given moment. You can safely say this: it is bad and getting worse.
Why a Sunday deal? The New York Times: "The talks between the companies, which were overseen by the Federal Reserve and the Treasury Department because of their potential effect on financial markets, were rushed in an effort to reach a deal before stock markets open in Asia at 8 p.m. Eastern time."
The bailout angle, from the AP: "The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
 Sometimes the Brits say it best. Here's how BBC business editor Robert Peston is describing the joint rescue of Bear Stearns by J.P. Morgan and the New York Fed: "Since J.P. Morgan is saying there is no risk to its shareholders, this represents a central bank bailout of Bear Stearns."
Well put.
"This is America's Northern Rock," Preston added, referring to the British bank bailed out by the Bank of England.
Other takes: The New York Times headlines its story, "JPMorgan and Fed Move to Bail Out Bear Stearns."
The L.A. Times: "Bear Stearns Cos., one of Wall Street's biggest investment banks, got an emergency loan from the Federal Reserve today to help it stay in business, a dramatic development that threatens to take the global credit crunch to a dangerous new level."
In the sound-bite logic of American politics, the Bear Stearns rescue makes a massive housing bailout more likely. Today's sound bite: "If the Fed can bail out wealthy investment bankers at Bear Stearns, the government can certainly offer aid to struggling homeowners." We are halfway down the slippery slope to a full-fledged government rescue for just about everybody with a grievance or a problem that involves a mortgage: banks, lenders, borrowers, the whole crowd.
Your thoughts? Comments? Send story tips to peter.viles@latimes.com
Hat tip: PS via e-mail.
Photo credit: Getty Images
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
 Since there is so much opposition here to the idea of using taxpayer money to bail out borrowers and lenders who made bad choices, it's worth facing the facts: a stealth government bailout of the mortgage industry is well underway, and a bigger, more ambitious rescue plan appears more likely every day.
Today the Fed is gladly accepting as collateral mortgage-backed securities that are so toxic the private sector can't even put a price tag on them. As John Cassidy wrote recently in Portfolio, "This is the same toxic paper that institutions like Citigroup and Merrill Lynch have been unable to sell or even value because the market for it has dried up."
Or, as The New York Times columnist Paul Krugman wrote, "In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities." The problem is, Krugman made that estimate before today's new lifeline from the Fed.
Fed Chairman Ben Bernanke's latest dollar-dumping mission (they don't call him "Helicopter Ben" for nothing) is the latest chapter in what Cassidy calls "The Bankers' Bailout." It's too late to write your congressman to protest -- the bailout began last summer: "'It is no exaggeration to say that the
mortgage market was effectively nationalized" in the third quarter,
BNP Paribas economist Richard Iley wrote.
Quickly and quietly, risk has been shifted from the private sector to the Fed, Fannie Mae, Freddie Mac and the FHA. The only question now is how much more risk will be offloaded onto the government, and how Congress will structure the various lifelines, rescues and giveaways. And lastly, what maddening acronyms they will dream up as a patriotic cover for the whole thing. (HOPE NOW! The SAFE Act! The HOME Act!)
Feel free to send in your favorite acronyms for future bailouts and rescue plans.
Photo Credit: Fed Chairman Ben Bernanke, by Bloomberg News.
 News item: Republican Sen. Kit Bond of Missouri (pictured) today proposed a $10 billion-plus housing bailout plan that includes $15,000 tax credits for buyers of foreclosed homes and tax breaks for mortgage companies that have lost money recently.
Details of the Bond proposal:
-- State housing finance authorities would issue $10 billion in bonds to refinance distressed mortgages.
-- A $15,000 tax credit to buyers of homes "in or approaching" foreclosure.
-- So-called NOL carryback tax provision to "help firms that suffered operating losses lower their tax burden."
Folks, it appears the bailout auction is beginning. The Democrats are preparing a big bailout plan. The banks have been lobbying for what the New York Times called an "epic rescue" plan. And now Republicans are joining the bidding at $10 billion.
Photo credit: Associated Press
You can read the entire Bond proposal below.
Read more Bailout watch: The Republicans are coming »
 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/
Another must-read tonight from the New York Times, under the headline, "Step by Step, Bush and Fed Move on Mortgage Rescue." The article tallies up all the steps the administration has taken to prop up the mortgage and housing markets, and argues convincingly, "However much they might oppose it on ideological grounds, the Bush administration and the Federal Reserve are inching closer toward a government rescue of distressed homeowners and mortgage lenders."
The story reports it is possible Fannie Mae and Freddie Mac will soon be buying "liar loans" made last year: "The two companies are now trying to decide how to guarantee the bigger and potentially riskier mortgages. Both want to exclude 'no-documentation' loans, but Congress authorized them to buy up big mortgages going back to last July — when a high percentage of such loans were approved without verification of the borrower’s income. As a result, company executives are debating whether to buy up at least some 'no-doc' loans made last year."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Hat tip: PJ via e-mail.
 Good morning. Before you tee him up like a Titleist, give the Fed chairman some credit this morning: he acknowledged the elephant in the room, the one no one else in Washington wants to talk about. Bush, Obama, Clinton, Paulson -- none of them has faced the facts on this one.
The elephant is this: aided by incompetent lenders, many hundreds of thousands of recent homebuyers borrowed too much, paid too much for their homes, and can't possibly pay back the amount they owe. It doesn't matter if you freeze or reduce the interest rate, or lengthen the mortgage to 40 or 50 years, they can't pay the money back. If banks really want to stop the foreclosure train, Bernanke said today, it makes sense for them to take a deep breath and to reduce the principal on some of these loans.
The AP: "The Federal Reserve chairman, Ben S. Bernanke, called Tuesday for additional action to prevent more distressed homeowners from falling into foreclosure. ... One of the suggestions Mr. Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. 'Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,' Mr. Bernanke said."
This is a tough one, bound to be unpopular. Banks and lenders, who presumably know whether this is a smart course of action, appear to be hoping for the tooth fairy instead -- a bailout that won't hurt as much as write-downs would.
Write-downs would also infuriate some of the neighbors -- why do the Wilsons get a special break so they only have to pay $350,000 for their house, but we still have to pay $500,000 for an identical house? E-mailer JG writes, "This is the most sickening suggestion I've ever heard. If I understand him, he is saying 'Go ahead and buy something you can't afford and the person who lent you money to buy it should just cut the amount you owe.' ... Why work hard to achieve anything in this country? The greedy and stupid people will be rewarded, and the hard-working people that save and live within their means will be punished."
Bernanke knows this kind of backlash is coming: "... we want to help borrowers in trouble, but we do not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalized."
Read the whole speech here and let me know your thoughts. E-mail story tips to peter.viles@latimes.com.
Photo Credit: Bloomberg News.
 Blogger's note: A reader, C. Benedicto, e-mailed this commentary.
"I lost my house to foreclosure after the 1994 Northridge Earthquake. At the time, the house I purchased in 1989 for a premium was worth less than the mortgage, plus I needed to come up with additional funds for repairs to the damage caused by the earth movement.
"Losing a home, which was my family's major investment, was painful, and to date my wife and I are still trying to recover financially and emotionally. However, despite the grave loss we feel, we believe we have no one to blame but us -- for being so stupid buying a house just to keep up with the Joneses and as an investment. We now stay in a modest abode and live a lifestyle within our means.
"When a Realtor neighbor encouraged me during the height of the real estate frenzy to go aboard the bandwagon and buy a piece of property, which I believe was overpriced, because, she said, I could make a hefty profit within a year, I asked her how possibly I could afford to pay the mortgage once the teaser rates expire. To my amazement, she looked at me in disbelief like I was stupid.
"These banks and speculators knew exactly what they were getting into. Many of them made a lot of money flipping houses like burgers when the market was going higher into oblivion everyday. Now that the housing market turns against them, they want me to help them out and pay for their greed. No way, Jose!!!!"
Thanks. A reminder, the blog is an open forum. If you'd like to defend bailout proposals, now is your chance. E-mail story tips to peter.viles@latimes.com.
Photo credit: AP
 As banks lobby for what has been described as an "epic rescue plan" for the mortgage industry, President Bush today hardened his oppostion to bailout plans he said would help "lenders and speculators." Bush said such plans would be unfair to millions of homeowners who pay their mortgages on time.
USA Today: "Echoing Treasury Secretary Henry Paulson, Bush says a Senate proposal to deal with the foreclosure crisis would 'do more to bail out lenders and speculators than to help American families keep their homes.' "
Update: It's worth noting the specific objections the administration has to the Senate bill on foreclosures. From CNN Money: "Earlier this week, the Bush administration said the president would veto the Foreclosure Prevention Act of 2008 if it passes Congress because it objected to two key elements. The first is a provision that would change the bankruptcy law to let judges reduce the amount of principal and interest due on mortgages of those filing for bankruptcy. ... The administration also objects to a provision in the bill that would provide $4 billion to let state and local government buy and rehabilitate foreclosed homes, and improve disclosure of subprime mortgage loans in hopes that borrowers won't be surprised by big payment increases."
Commentary: It's impossible to separate politics from principles here. The president knows that bailouts are unpopular, so he argues the bankruptcy changes -- which have nothing to do with a bailout for lenders -- are part of a bailout for lenders. Ah, very clever. Very cute. And completely consistent with the lack of intellectual honesty that dominates American politics at the moment. If you don't like changes in the bankruptcy law, why not step up and say so?
It's also disappointing that, at today's news conference, none of the reporters bothered to follow up on this.
Still, Paulson's comments (see below) were pretty clear. Paulson shot down talk of a real bailout for lenders. So, some politics, some principle.
The president's comments came a day after his Treasury Secretary dismissed called for a massive rescue plan for the mortgage industry. From the Wall Street Journal: "The Bush administration is hardening its opposition to the chorus of Democrats, bankers, economists and consumer advocates calling for a big-money government rescue program for struggling homeowners."
This would be the "epic rescue plan" cooked up by Bank of America that the New York Times reported on last Friday.
More: "In an interview yesterday, Treasury Secretary Henry Paulson branded many of the aid proposals circulating in Washington as 'bailouts' for reckless lenders, investors and speculators, rather than measures that would provide meaningful relief to deserving, but cash-strapped, mortgage borrowers."
From Smart Money: "President Bush and other administration officials have voiced skepticism before about a major government effort to ease the burden of the nation's housing slump. But Paulson's comments are the most explicit to date in laying out the administration's opposition to the recent spate of rescue plans.
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo credit: Reuters
A quick, important news item tonight from The Wall Street Journal: "The Bush administration is hardening its opposition to the chorus of
Democrats, bankers, economists and consumer advocates calling for a
big-money government rescue program for struggling homeowners."
This would be the "epic rescue plan" cooked up by Bank of America that The New York Times reported on last Friday. More: "In an interview yesterday, Treasury Secretary Henry Paulson (pictured) branded
many of the aid proposals circulating in Washington as 'bailouts' for
reckless lenders, investors and speculators, rather than measures that
would provide meaningful relief to deserving, but cash-strapped,
mortgage borrowers."
Thoughts? Comments? Email story tips to peter.viles@latimes.com.
Photo Credit: AP
 A new L.A. Times/Bloomberg poll about the economy indicates only one in five Americans support Sen. Hillary Clinton's call for a moratorium on foreclosures.
Highlights, from the LATimes: "Most Americans are planning to spend their stimulus rebate checks to
pay down existing debt or add to their savings, not to fuel the kind of
consumer spending that would bolster the economy, a new Los Angeles Times/Bloomberg poll has found."
On foreclosure: Asked whether they support the Clinton anti-foreclosure plan (a moratorium on foreclosures and a rate freeze) or the Obama plan (tax credits for homeowners and a fund to help borrowers refinance), the results tilt heavily toward Obama:
The question was phrased, Which proposal do you prefer?
--Moratorium on foreclosures: 20%
--Tax credits/refinancing fund: 50%
--Both equally: 3%
--Neither: 13%
--Haven't heard enough: 6%
--Don't know: 8%
Asked whether the Bush administration "has taken sufficient steps to aid the housing industry and ease the affects of the mortgage crisis," or "has not done enough," most respondents (57%) faulted the administration for not doing enough.
The bloviation part: I've complained before about polls that presuppose the government should be aiding homeowners, and then ask respondents to choose the best way to do it. That's the problem with this poll -- it pushes respondents to pick the best government policy, rather than asking the larger question of whether the government should be intervening at all. I suspect I know the way most of you would respond on that issue.
Thoughts? Comments? Email story tips to peter.viles@latimes.com.
Photo Credit: AFP/Getty Images
A couple of quickies this morning on what government might do to slow the tide of foreclosures:
The New York Times, which has been on the cutting edge of reporting and commentary about government bailout plans, awakens today to an important part of that story: Many, many Americans are strongly opposed to bailouts for struggling homeowners. "People struggle to buy homes in this city, for sure,” says Mark Ellerbrook, who manages a government homeownership program in Seattle. “And then you have what looks, on the face of it, like the city giving money to people who made bad decisions.”
The L.A. Times reports that Senate Democrats are pushing for changes in federal bankruptcy laws that would allow homeowners to renegotiate their mortages in hopes of keeping their houses: "The proposal, part of the Foreclosure Prevention Act embraced by leading Democratic lawmakers, would allow judges to ease the terms of mortgage loans during bankruptcy proceedings."
The bankruptcy change raises a number of issues, and I'd like to hear your thoughts. Say a judge does in fact reduce your mortgage. Does that constitute a sale of the house, with reduced property taxes, and a new, cheap comp in your neighborhood? How does the judge decide what the house is worth -- only what you can pay?
Much more important: How many people facing foreclosure are likely to go into bankruptcy to get a new mortgage? And what is the likelihood that, if bankruptcy laws are changed, they will make timely payments on the new, reduced mortgage in the future?
I'm reminded of the words of mortgage broker and Fed watcher Lou Barnes, who wrote recently that attempts to prevent foreclosures are a waste of time. He doesn't mince words: These are "weak financial households" that purchased homes only because of disastrous underwriting. They can't be saved.
Barnes: "The sad reality: The vast majority to suffer foreclosure today were weak financial households to begin with. ... The few households suffering temporary bad luck (job loss, health, divorce) deserve all the 'workout' help the system can provide. The inherently weak households will defy every effort. Even extraordinary re-writes will beget re-default, the poorly maintained house creating deeper loss in the ultimate foreclosure, the troubled inventory overhanging the marketplace and preventing recovery."
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Blogger's note: This is an edited version of a previous post. The editing change is explained below.
On the topic of letters to Congress, commenter Bobc writes, "Let the world see your letters." This blog is happy to help by publishing letters and emails to Congress. Feel free to submit them as comments.
Below is the letter a commenter* sent to both U.S. Senators from California:
"Honorable Senator Feinstein
750 B Street, Suite 1030
San Diego, CA 92101
"Dear Senator:
"I feel I must express my outrage that a taxpayer-funded “bailout” for
the huge financial institutions (e. g. banks, Wall Street investment
firms) is being considered by Congress. These corporations made their
billions by entering into mortgage contracts with full knowledge of the
risks involved. That the gamble has not played out in their favor is
just too bad. Even with these sour loans, none of the banks will fail.
Their assets are far greater than the loan amounts they actually hold
because the banks sold the vast majority of the loans to Fannie Mae or
Real Estate Investment Trusts.
"Do not be seduced by Wall Street lobbyists telling you that “the sky
is falling” – nothing could be further from the truth. I bought my home
because the previous owner sold short. Many other potential homeowners
are waiting for the same type of opportunity. As irresponsible
borrowers walk away from foreclosures, those of us saving our pennies
are eagerly waiting for the chance to invest in our own futures.
"Sincerely ..."
For the record, this is an open forum -- if you write Congress supporting a bailout, I'll publish that too.
*Why was the post edited? The original version was signed by a commenter using a fictitious, and humorous name. This version strikes the name, which the curious can find in the comment thread.
Photo Credit: Commons.wikimedia.org
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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: 
