Rate freeze is bullshit

[archenemy]

lame

 

I'd like to hear from the econ experts here because I don't understand this. WTF? You take out a loan you can't afford and the gov't steps in to save your ass? How is this different that the millions of idiots who charge up their credit cards too high and can't pay them off? When did it become expected or accepted that the gov't should bail people out?

[tvashtarkatena]

I't complete Nanny State: but not the nickel and dime Welfare version; it's the spend-the-next-two-generation's-worth-to-keep-stock-prices-up-for-another-quarter "pro business" version.

 

Utter

 

 

fucking

 

 

bullshit.

[chucK]

Who's money is getting spent? Obviously it will be those who hold these securities. They won't be getting the higher payments that they had counted on. I assumed this would be banks and junk-bond holders and such. Seems like this will make stocks go down and not up. Unless of course, I'm misunderstanding something here.

 

 

[tvashtarkatena]

Financial stocks go down when that sector takes a hit. Right now we're experiencing a collapse in the home construction and financial sectors. This is a stop gap measure to artificially bouy those sectors under the guise of 'helping struggling homeowners'.

 

Federal insurance means the fed's involved. Anything that affects interests rates, directly or indirectly, also affects our enormous debt burden.

[Hugh Conway]

http://online.wsj.com/article/SB119662974358911035.html?mod=hps_us_whats_news

 

An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.

 

 

In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half -- 55% -- of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are. The study by First American LoanPerformance, a San Francisco research firm, says the proportion rose even higher by the end of 2006, to 61%. The figure was just 41% in 2000, according to the study. Even a significant number of borrowers with top-notch credit signed up for expensive subprime loans, the firm's analysis found.

 

 

[Recycled]

This astounds me. You would figure that when making the biggest financial decision of their lives, people would take the effort to become at least marginally financially literate.

 

I also think homeownership is way overrated. It has always been presented as an integral part of the American dream and, as a result, has caused many people to overreach to try to grab that piece of that pie whether it makes sense or not. The combination of easy loans, financial illiteracy and being bound by that dream has screwed a lot of people. Not that they should be bailed out now...

 

I love reading about the schmucks that lied on their loan applications, bought several condos with the intention of flipping, then were fucked when the market slipped. Blanket subprime bailouts that help these assholes really piss me off.

[archenemy]

totally agree with you

[chucK]

Not that I don't agree with you guys, especially the part about bailing out home-flippers, but couldn't this be something similar to when they closed banks and or the stock market in crazy times to prevent a stampede that would cause total collapse?

 

Seems like when homes get foreclosed then it pushes a vicious cycle: values drop, which makes mortgage holders panicky, which causes them to be more agressive on their own foreclosures, which causes values to drop more, etc... If they put a freeze now, then at least all loan holders (partly at fault for all this in terms of predatory lending practices) suffer equally, but all stay afloat. Perhaps the system doesn't totally collapse?

 

Anyway, just trying to see it from the other side. I agree it seems quite distasteful, but perhaps it's the best option of a bunch of bad ones?

[archenemy]

No, I don't think it is the same.

 

The stock market has a certain % it has to drop before the system automatically triggers a shutdown.

 

There is no panic here, and there shouldn't be. If anyone is responsible for panic, it is the fucking media.

 

This market adjustment (and possible recession) is a normal part of the business cycle. But if people don't suffer a bit, they don't learn.

[archenemy]

I feel like Americans act like they should be able to buy whatever they want and damn the consequences. Then having the gov't bail them out tells them that this is okay.

 

Our job market is healthy. Therefore, when foreclosures start to happen, people who are ready will step in and buy those homes. Things will right themselves after a while. But artifically messing with the market in a manner like this just causes more problems later. I am not saying that intervention isn't appropriate at some times and at some levels; but not right now. The sky is not falling.

[JayB]

I'm not totally convinced that this will materialize, since I doubt that all of the bondholders will roll/bend over and take the loss, and there's no way that the folks who issued the securities or are servicing the loan can cover the yield-spread between what the bondholders have been promised, and what they'd get under the terms of the rate freeze. Look for people to start clamoring for the government to assume responsibility for the delta between the rate specified by the loan documents and the "frozen" yield.

 

If it does go through, look for:

 

-The availability of credit, and the rates charged for the provision of such to increase massively for everyone in the future, since they'll have to price this kind of uncertainty into the rates they charge those who want to borrow money to buy a home.

 

-Holders of Alt-A and Prime mortgages with adjustable rates to clamor for the same treatment when the Alt-A and Prime adjustable party gets rolling in 2010-2012. I think the total volume of adjustable Alt-A and Prime debt is at least as great, if not greater, than the amount of adjustable subprime-debt.

 

I think that the combination of tighter lending and higher rates that this move will likely result in will do more damage to the housing market than letting all parties take their medicine now. TANSTAAFL, baby. It's just a matter of who pays.

 

IMO until the tax-adjusted cost of renting and "owning" are roughly equal, home prices have nowhere to go but down.

 

 

 

[tvashtarkatena]

The system won't totally collapse. Most loan holders will be fine. The irresponsible pricks who either tried to game the system or tried to live too large will get fucked. Couldn't happen to a nicer group of folks.

 

This is a desireable outcome for the long term. It serves as an historical sanction for such behavior in the future. It corrects the value of a bunch of overpriced properties. They'll get sold again; just at prices that more accurately reflect their true value.

 

Let the bloodletting begin.

[archenemy]

-The availability of credit, and the rates charged for the provision of such to increase massively for everyone in the future, since they'll have to price this kind of uncertainty into the rates they charge those who want to borrow money to buy a home.

 

When you say massively, what numbers/percentages are you thinking?

[JayB]

Might as well bundle the folks who got a royal pounding when the stock market bubble collapsed, if we've collectively decided to bail out speculators when their bets go wrong, IMO.

[Recycled]

Banks have traditionally avoided foreclosure when possible as they lose a big chunk of money when they repo and then remarket a less-than-appealing property at a loss, particularly in a falling market. I don't remember the average percentage of bank loss, but it is a bag chunk. I've bought a fair number of fixer/repo houses and have seen the financial damage first hand. By the time the properties were marketed they had been empty for months, sometimes vandalized and always with a lot of deferred maintenance. The note holders were pretty much out of luck. The consolidation and reselling of notes has probably changed this, but I don't know how much.

 

The real problem appears that simply restructing loans won't help a lot of these people. If your income is $2.5k/mo and your payment under a 20/30-year ARM is $3k/mo, then you are screwed. Period. You shouldn't have done it in the first place and no manner of rate fiddling is going to help you short of a massive subsidization from the feds. My fear is that in the bumbling attempt to help those folks, there will be a push for interest-only or negative-amortization loans which just put them in deeper water. It's far better for people to walk away from the house & loan and start over (older and wiser).

[archenemy]

Agreed. I have no interest in helping these people, just as I don't expect someone to come help me when I overspend (which I actually don't do; but it could happen some day). Just the acceptance of this makes me nervous. Its not like these folks are going to be homeless, they just have to move to an apt or in with family. There is so much more fuss over these folks than over the people in our country who honestly do not have a home to go to that it makes me want to puke.

[chucK]

Thanks for your replies folks. Much more illuminating than Tvash's original conspiracy theory post....

 

but speaking of such, as you guys have convinced me that this is a pretty F stupid thing to do, what then is the motivation here? Why are they even considering it?

[archenemy]

I think Tvash hit it on the head about the motivation.

[tvashtarkatena]

Thanks for your replies folks. Much more illuminating than Tvash's original conspiracy theory post....

 

Excuse me, shitstain? Exactly what conspiracy theory did I put forth?

[Recycled]

Gotta keep the party going. For elected officials it's about making reassuring noises about helping people, getting votes, pumping up the housing starts, keeping your financial supporters happy.

 

For me? I've already sold most of my houses. Now it's time to stock up on ammo, shack up in Archy's cabin, and wait for the "poor to each the rich." Good times, baby.

[JayB]

Banks have traditionally avoided foreclosure when possible as they lose a big chunk of money when they repo and then remarket a less-than-appealing property at a loss, particularly in a falling market. I don't remember the average percentage of bank loss, but it is a bag chunk. I've bought a fair number of fixer/repo houses and have seen the financial damage first hand. By the time the properties were marketed they had been empty for months, sometimes vandalized and always with a lot of deferred maintenance. The note holders were pretty much out of luck. The consolidation and reselling of notes has probably changed this, but I don't know how much.

 

The real problem appears that simply restructing loans won't help a lot of these people. If your income is $2.5k/mo and your payment under a 20/30-year ARM is $3k/mo, then you are screwed. Period. You shouldn't have done it in the first place and no manner of rate fiddling is going to help you short of a massive subsidization from the feds. My fear is that in the bumbling attempt to help those folks, there will be a push for interest-only or negative-amortization loans which just put them in deeper water. It's far better for people to walk away from the house & loan and start over (older and wiser).

 

Also, even if they get a rate freeze, I have to wonder how motivated people will be to scrimp and sacrifice, work multiple jobs, etc - to service a mortgage on a property that's waaaaay underwater, and will be for years.

 

If people are struggling to preserve a gain for themselves, they'll behave much more differently than if they feel like they're only working for the bank's benefit.

 

Big psychological difference between servicing debt on an appreciating vs depreciating asset, even though you're forking over the same amount of money each month under both circumstances.

[archenemy]

Gotta keep the party going. For elected officials it's about making reassuring noises about helping people, getting votes, pumping up the housing starts, keeping your financial supporters happy.

 

For me? I've already sold most of my houses. Now it's time to stock up on ammo, shack up in Archy's cabin, and wait for the "poor to each the rich." Good times, baby.

Everyone is welcome. It rains a lot there though, and the river is flooding right now. But come on over. The newbie always gets to chop the wood.

[octopuswithafez]

"When you owe the bank a $100, its your problem. When you owe bank $100 million dollars, its the banks problem"

[Recycled]

Deal - I love splitting wood. I used to live in the foothills west of Baker, but eventually had to move. It rains twice as much there as in Bellingham and eventually SAD did me in. Couldn't handle it. That and being stranded due to floods really sucked.

[matt_warfield]

Even in the wake of the subprime debacle, I have before me an invitation for a 1.75% initial rate loan. And a Senior Rate Reduction Specialist is waiting to assist me!

 

As soon as I bend over of course.

 

Personal responsibility. Two words that have increasingly little meaning in modern America. All good things are because of "our" doing but all bad things are somebody else's fault.