Bailouts Redux

Submitted by Rich Toscano on December 6, 2007 - 8:53pm

A few followup points on the bailout thing.

First, I hope this was clear, but the efforts I mentioned were not by any stretch intended to be comprehensive list of interventions either proposed or already underway. It was just a smattering off the top of my head. I even forgot to include the most appalling one of all: the allegation that Treasury Secretary Paulson was pushing to give taxpayer money to subprime lenders to compensate them for losses they would incur in working out delinquent mortgages. (I was unable to confirm that tidbit anywhere else, so I'm not sure if it's accurate -- hopefully not!)

Second, a reader wrote in to say that this (by which I mean the assorted monetary and legislative interventions underway) is about helping financial markets, not about helping individual homeowners. Now, if you're really going to follow the chain of intent to its end, I would argue that this is about buying votes or re-appointments by trading short-term problems for long-term ones. But that said, I do agree with my correspondent's general theme. By virtue of the ability to turn home equity into money (for a fee, of course), the housing market has come to play a crucial role in both the financial markets and the economy itself. Given that politicians and Federal Reserve members seem to have decided that it's their collective duty to prevent a recession from ever happening again, the bulk of these policies are probably less about helping kindly old ladies stay in their homes than they are about keeping the economy and financial markets afloat.

Third, I don't really want to dig into the guts of the new federal rate freeze because everyone else is doing it and, let's face it, it's kind of boring. But one line in this Bloomberg article jumped out at me:

To be eligible, borrowers must not be more than 60 days behind in their payments or have less than 3 percent equity in their property.


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Submitted by stringtheory on December 6, 2007 - 11:37pm.

This is totally pathetic. Since when did we become a socialist nation? Oh- that's right... the 1960s. How soon before the protected class pawns off these overpriced units to yet another generation of imbiceles. Just because the number of idiots has reached critical mass (politically speaking) is no excuse. This is a chance for the diligent to reach "The American Dream".

Submitted by Nozferat on December 7, 2007 - 12:12am.


Usually when you cannot confirm something, it is actually what is happening. I have no doubt in my mind that taxpayers will pay for this...just as we are paying for the war.

Submitted by Eugene on December 7, 2007 - 1:53am.

the allegation that Treasury Secretary Paulson was pushing to give taxpayer money to subprime lenders

i heard the exact opposite:

"Treasury Secretary Henry Paulson has been emphatic that no taxpayer money is involved. "

also to quote President Bush

"we shouldn't bail out lenders. And so -- in other words, we shouldn't be using taxpayers' money and say, okay, you made a lousy loan, therefore we're going to subsidize you."

Submitted by CA renter on December 7, 2007 - 2:19am.


Paulson (along with Alphonso Jackson?) did say that the FHA would be part of the solution & that lending standards would be lowered to such an extent that borrowers could borrow with less/no money down, bad credit, etc. Basically, trying to "quit drinking" by switching from whiskey to vodka.

The FHA **does** use taxpayer money to guarantee loans.

Additionally, where are all these "credit counselors" and workout specialists going to come from & who's paying to determine who does/does not qualify for the bailout?

Beware Hillary Clinton as well, as she wants to form a $5 BILLION fund to "help" the FBs.

Submitted by cr on December 7, 2007 - 11:28am.

It amazes me how incredibly short-sighted, ignorant, and just plain naive everyone from Paulson and Bernanke to Bush and Clinton are.

I sincerely hope this is nothing more than an election year act of smoke and mirrors, and feel good, pretend to be doing something, hogwash.

Alt-A and prime exotic mortgages are going to dwarf sub-prime problems in the coming years.

Submitted by DaCounselor on December 7, 2007 - 12:30pm.

The Bloomberg article quote, verbatim, is:

"To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property."

Does this mean that a borrower must have less than 3% equity to qualify for a freeze, or that a borrower must have at least 3% equity to qualify? Huge difference.

Submitted by Nancy_s soothsayer on December 7, 2007 - 12:32pm.

The "big freeze" solution called for by the government has something to do with all the delayed audited financial statements and CAFR's. The auditors and accountants were all wringing their hands, pulling their hairs, and having a tough time determining the valuations of CMO's, CDO's, and other such worthless garbage in everyone's highly inflated balance sheets, because they are no longer bought and sold in the credit markets (note to everyone: the Alpha Engines and SIV vehicles are dead - out of commission) and the crisis is causing or will cause a massive delay in the issuance of annual CAFR's and audited annual financial statements. Basically, the "big freeze" gave a pass to all external auditors that they can still give a PAR value to all the worthless crap. WHO ARE THEY KIDDING?

Submitted by AKguy on December 7, 2007 - 2:06pm.

Per Wall Street Journal, you must have *less* than 3% equity to qualify. In other words, if you're underwater, please, please, please stay in your house and keep paying on your mortgage.


"Those who can't afford the higher payments, and who have credit scores below 660 and less than 3% equity in their homes, will get the biggest break from the lenders. They receive a five-year extension on their introductory interest rates, with the possibility that the grace period will be extended. Such a rate freeze would be available only to people who live in the mortgaged properties."

Submitted by Rich Toscano on December 7, 2007 - 2:40pm.

Yikes, good catch guys... I misinterpreted Bloomberg's typo. I will add an update to the Voice article clarifying the issue...


Submitted by Eugene on December 7, 2007 - 4:51pm.

There is a lot of misinformation on this subject in the media. According to the ultimate source

WSJ is right. If you have 3% or more of equity, you're presumed to be able to refinance. If you have less than 3% of equity (either because your initial loan had LTV 97% or higher, or because your house has declined in value), you may be eligible for the rate freeze. Other than that, no one cares if you're underwater or not.

My favorite part

"As to Segment 2 loans eligible for a fast track loan modification, the servicer may make the following presumptions:
The modification maximizes the net present value of recoveries to the securitization trust and is in the best interests of investors in the aggregate, because refinancing opportunities are likely not available and the borrower is able and willing to pay under the modified terms."

Submitted by VoZangre on December 7, 2007 - 4:56pm.

How I read this Sentence

"To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property."

must NOT

a) be more than 6o days behind...
b) have less than 3%

If it's a typo... "must" should be reinserted post comma

Submitted by cr on December 7, 2007 - 10:06pm.

I tend to think it's intentionally confusing, but logically it would have to require of at least 3% equity, not the opposite. Right? Or is it the idea that if you have equity, you can sell?

Still, chances of any equity are slim to none. Is it true these don't apply to jumbo loans too?

Plus they have to prove they will lose their home if their rate goes up. They should have to use the inflated income they "stated" on their loan to determine if they will default, rather than their actual.

Submitted by temeculaguy on December 7, 2007 - 11:20pm.

Coop, you are right, it's just smoke and morrors to buy votes in an election year. There is no requirement and no "stick" if the lender doesn't play ball. They are trying to manipulate the MSM and they will quickly learn that the internet will defeat propaganda as it is the chosen source of news today. Hillary does scare me a little but even she knows that national health care will buy her more votes than selective mortgage salvaging of half million dollar homes. If (or when) she gets in office she will change her tune.

I am reminded what a good friend told me yesterday "people tend to forget the middle of the map." Only the coasts are really reeling from this mess, the middle of the country will be appalled at the very first story of government help going to someone in a half million dollar home, to them, that price range is for the rich.

Submitted by Arraya on December 8, 2007 - 9:04am.

This plan is to help investors not homeowners. Hence the less than 3% LTV. If you were an investor which property would you rather forclose on, one with a little bit of equity or one with none.. This is all to mitigate losses incured by banks and keep FBs paying on their over priced homes. As has been discussed on this site ad nauseum, it is better to walk away on an upside down property than to stay and pay. They are being tricked a second time, the first time being buying the house on the premise that it will go up in value for ever. Now that it is a good idea for them to keep paying.

Submitted by dontfollowtheherd on December 9, 2007 - 2:26am.

You guys are hitting the nail on the proverbial head. This is a huge political P.R., smoke and mirrors job designed to calm the panic in the marketplace. I read the other day that a lot of Republicans are scared about losing their office due to a recession during an election year. For one thing these financial institutions can only help about 1/4 of the 1.2 (1.4 ?) million people in default so that leaves another million or so twisting in the wind as of today. Someone at Countrywide was quoted as telling a friend it will take these firms weeks on each loan to determine on a case-by-case basis who is eligible. They can't just conjure up this info accurately in a matter of days. That puts a lot more people another 4-6 months behind. It isn't like everyone's going to run out and buy a house. Most of that herd is already toast. The stock market figured this out on Friday and will likely resume its see-saw downward spiral again.

Here's another interesting read:

Submitted by 34f3f3f on December 9, 2007 - 10:33am.

It would be interesting to know what the calculations were for the 3% and 60 days, and how much loss mitigation from miscalculation played a part in this, given the tough time accountants are having with CMO and CDO valuations. Somebody obviously decided that to tip the balance in favor of investors, was economically more sensible, and frankly I'm glad for that. No doubt we will be hearing in the media how the bail-out was woefully ineffectual. But I suppose we'd get upset if the government just stood around wagging a self-righteous finger.

It looks like there's an enormous task ahead in determining eligibility and administering bail-outs, and then as someone has suggested lenders aren't legally bound. When it comes to tax payers having to pay for this, I'm not clear what money is passing hands here. Isn't it more a case of lenders not getting what they were due, or is the government going to compensate them for losses? If it is, then if tax payers aren't to pay for this, where does the money come from, a loan?

Just the thoughts of another clueless imbecile.

Submitted by AKguy on December 9, 2007 - 2:27pm.


I don't believe there is any taxpayer money involved in this scheme. If it works as advertised, some investors will lose less than they might otherwise as some borrowers postpone the day of reckoning and pay their initial rates for a few more months. Since the plan is designed for borrowers with essentially zero or negative equity and since housing prices are continuing to fall in most places, it seems likely that many of the 'lucky' borrowers who qualify for the loan modification will eventually figure out that they are the chumps in this deal and will decide to walk away.

Submitted by Nancy_s soothsayer on December 9, 2007 - 5:32pm.

Finally, a great article came out in the San Francisco Chronicle today to continue connecting the dots in full circle the points I discussed above. Written by Sean Olender, an attorney, article talks about, in essence, financial shysters at the top of the financial Darwinism food chain continuing their creative engineering with this rate freeze to benefit them even more. Please google it. (Sorry, I'm too lazy to provide link!)

Submitted by Arraya on December 9, 2007 - 5:59pm.
Submitted by dontfollowtheherd on December 10, 2007 - 8:36pm.

SFgate article confirmation.

This from MSN's interview with Satyajit Das tells how the financiers made money by generating cash-flow and collateral during a flat interest-rate yield curve and it confirms the sfgate author's point about the trillions of credit risk shifted off their books and onto foreign investors.

Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.

The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.

* Talk back: Do you think a bear market is just around the corner?

He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
More from MSN Money
Traders © Colin Anderson/Jupiterimages

* What the big banks aren't telling you -- yet
* Bush's mortgage bailout just might work
* Banks' dark off-balance-sheet world
* Voodoo debt and the coming recession
* How analysts missed a meltdown

Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.

Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.

"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."

The liquidity factory

Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and create collateral during an era of a flat interest-rate curve.Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlays derivative securities many, many times their size.

Continued: How it worked

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