With the first Bush Administration bailout attempt likely dead after Citigroup (NYSE: C) decided to put its troubled SIV assets onto its books killing the need for the Super SIV, you may be wondering what else the Bush Administration and Congress have up their sleeves to try to fix this mortgage mess. If Alan Greenspan has anything to say about it, it would be nothing. In an opinion piece for the Wall Street Journal he wrote, "The financial erosion will come to an end when the prices of homes and equity in homes stabilize, probably not before." Many conservatives and libertarians agree with that view and think the best move would be to do nothing, so that we don't delay the point at which house prices reach bottom.
Surprisingly, the American Enterprise Institute (AEI), a conservative, market-oriented think tank, believes we may want to revisit the work of the bailout federal agency, Home Owners' Loan Corp., which was created to help get us out of the depression in 1933 when thousands of banks failed and millions couldn't pay their mortgages, according to a story in the weekend Journal. This federal agency bought distressed mortgages from banks at a discount and refinanced them on easier terms.
Banks aren't failing yet, but there are millions on the brink of not being able to pay their mortgages. While we've talked openly about $2 million with ARM resets ready to go over the deep end, some believe we haven't seen anything yet, and credit card debt may send many more millions into trouble as the credit crunch continues to unfold.
While some fear this type of bailout could cost taxpayers money, if you look at the history of that bailout when the Home Owner's Corp. shut its doors in 1951, it actually returned a small surplus to the U.S. Treasury, Alex Pollack of AEI told the Journal. Wow a solution that could generate a small profit, sounds good to me. I agree with Pollack that model should be revisited as a possible contingency plan.
Former Treasury Secretary Lawrence Summers thinks, "Policy has been behind the curve for months now. The dangers of doing too little are much greater than the dangers of doing too much in this context," according to the weekend Journal story.
This past week, the Bush Administration did announce an initiative to freeze interest rates for some whose ARMs are due to reset, but only about a third of the people involved are even eligible, and many expect a far lower group will actually qualify as they apply for the freeze. The Fed did cut its short-term rate again and it also announced a plan to infuse more cash into the system by working with other central banks.
Congress is starting to move on bills that have been in the works. The Senate passed a long-awaited bill to expand the role of the Federal Housing Administration (FHA), which insures home mortgages against the risk of default primarily for low income buyers. The bill would raise the FHA limit to $417,000 from its current cap of $362,790. Final details are not yet known because the bill differs from the one passed by the House.
Other Congressional bills in the pipeline include provisions to make it easier for bankruptcy judges to help borrowers stay in their homes, tighten rules for mortgage lenders and brokers, and give Fannie Mae and Freddie Mac more leeway to help.
Basically, I agree with Summers, we need to do more. Yes a lot of greedy people have made huge mistakes and shouldn't be bailed out at all, but a lot people were steered to subprime loans with higher interest rates so brokers could make more money even though they could have gotten prime loans. A lot of people were promised they would be able to refinance in two or three years before the reset and now they can't given market conditions. Few predicted the real estate bubble might burst in 2007. That's the nature of asset bubbles when they finally do burst, it's a big bang and not a slow fizzle. And, a lot of people who were responsible borrowers are paying the price for those who made mistakes as they watch the price of their homes go down as well.
In the 1930s, the government did have to take action to pull us out of the depression. Do we really want to wait until we actually get into a depression to act? Wouldn't it be better to ease some of the pain and start working on programs that can ease the pain and begin to heal our economy?
Lita Epstein has written more than 20 books including the Complete Idiot's Guide to the Federal Reserve and The 250 Questions You Should Ask to Avoid Foreclosure.
Nuclear power is on the comeback trail
Apple backs AT&T in continuing spat with Verizon
Closing Bell: The recession is still over, still... do you feel it?
Reader Comments (Page 1 of 1)
12-16-2007 @ 3:25PM
Jerry Bluhm said...
Tax payers who live within their means will end of again, paying for the greed of others, and the ignorance of some. People must be held accountable for their actions. The government cannot fix everything, because the government gets its funds from tax payers. The greedy mortgage companies who sold poor products must shoulder some of the blame, and their mis-deeds should come to light, and the companies put out of business who mis-lead people. Still, ultimately if you are told something is too good to be true, then "buyer, beware".
12-16-2007 @ 3:16PM
SANTA'S HELPER said...
Re-set- Burst - Manage - Foreclosures - all words for 2008 But... homeowners want options: go to: www.loancomplianceadvisorygroup.com
12-16-2007 @ 6:42PM
william lindblad said...
Similarities can be found in many other points in time but I don't think that hindsight will be to much avail. True, a 1930's government agency worked than but finding the integrity in today's age may prove difficult. If the resolution trust of the 1990's is held as an example we can expect little more than greed and corruption - exactly the same recipie that brought the current situation about in the first place.
The main problem is that the mess is setting off a domino effect. First, we had uncontrolled building, lending, price esculation and people being allowed to purchase homes at prices well beyond their means. Now they are in trouble. Some have defaulted, some are in process and others are only a rate hike away. We also have to consider that during this 6 year period there has been more loss of decent paying U.S. jobs which adds to the turmoil. Now the bubble has burst. The first to the layoff line has been the people that were needed to write the mortgages. Next are the real estate agents and the building supply industry. By March, it will be the homebuilders and their contractors. It is quite reasonable to assume that all of the above have mortgage obligations and losing one's paycheck does not help.
As to bankruptcy and default? Federal intervention may not offer much since a large portion of this segment falls under Article 10 and is covered by State Law.
On the brighter side the stock market stills remains optimistic and that is the real key. If investor sentiment can hold the plus side and government seeks innovative ways to mitigate housing than things may not get too bad. I hope they do as the obverse would be rather bleak.
12-19-2007 @ 4:31AM
Mr.C said...
Deceptive Lending Practices are forcing Homeowners all over our country into foreclosures. I recently attended the March on Wall Street, NYC that was designed to send a message to predatory lenders.
"Save our Homes/Restructure Loans"
Wall Street executives, that took advantage of Homeowners nationwide are receiving millions of dollars in Christmas bonus money. I refer to them, as the Grinch that stole Christmas, it seems they could careless about anyone, including little children they may no longer have a place to call home because of this mortgage mess crisis.
Homeowners fight back, save our communities.
Options are available, Thanks Santa's Helper.
12-19-2007 @ 1:00AM
Mr.C said...
Thank You
12-19-2007 @ 11:45AM
silverfox said...
Lita states that in the 1930's the government " had to take some action to get us out of the Depression" . In reality it was World War Two that got America out of the Depression, not the actions of the Federal government prior to the war.
12-19-2007 @ 11:49AM
Lita Epstein said...
World War II was certainly a major economic boost to get our economy moving again, but if it weren't for the New Deal programs a lot more people would have been on the streets for a lot longer without jobs.
Lita
12-20-2007 @ 5:40AM
Frank Houttekier said...
Lita,
Please do not cite flawed studies as fact. The tenet that mortgage brokers' directed qualified conforming borrowers into sub-prime loans for additional profit belies the fact that you seemingly know very little about the economics behind street level loan origination strategies. For the past 7 years, this premise is absolutely false. Since the turn of the millenium, there has been far more profit in refinancing a sub-prime borrower into prime / conforming paper. The study that promoted the misconception that hordes of sub-prime loan originators actively directed potentially conforming grade borrowers into sub-prime loans simply to satiate their hunger for greater revenue failed to take into account the scores, and underlying debt ratios of the cases studied. This is simply an absurd methodology, and renders the conclusions void of credibility. I have 20 years of sub-prime loan origination experience (which may well make me akin to the devil in your eyes) and I can assure you, there has been more than ample economic incentive to steer borrowers in just the opposite direction as you have alleged. Brokers are by no means blameless in this sad section of American history, but they are far less of a factor than you infer. There were many actors taking stage for this tragedy.
12-20-2007 @ 5:45AM
Lita Epstein said...
Frank, Obviously you are an honest broker working for the best of your clients. I'm not sure you are aware of all the things that went on in the subprime mortgage lending firms that are now defunct where the worst abuses happpened. Many of these firms and these brokers started in the field less than 10 years ago. In 2002 only about $200 billion was in subprime loans. By 2004 that shot up to over $500 billion and subprime lending peaked at over $600 billion in 2005. It's now projected to be back to $50 billion by the end of 2007 with many of the most abusive subprime lending houses out of business and few investors that want to touch this market. Countrywide is facing a number of legal challenges to their lending practices. I am working with a number of people I personally know stuck in loans that some of these abusive lenders steered them to at interest rates about 2 to 3% higher than they could have qualified for. They are stuck with huge prepayment penalties, so I know first hand this happened. If you do believe this is a faulty study, please put in a link to a study that you think is not faulty and proves your point.
Lita