I wanted to see what you think regarding the possibility of the US Government stepping in and bailing out either the borrowers or lenders (mortgage brokers/lenders) who are in default or late in payment of their mortgages because the borrowers or lenders "fudged" their income statement, adjusted the appraised value of the homes or other shady practices.
From the SF Chronicle:
Dumb: Buying a house you can't afford with no down payment and a loan whose monthly payments will explode in a few years.
Dumber: Lending money to people who can't afford a traditional mortgage, especially when they have lousy credit ratings and don't substantiate their income.
Dumbest: Bailing out dumb and dumber, especially with taxpayer money.
State and federal lawmakers, community groups and housing advocates are proposing schemes to prevent the victims of the subprime loan crisis from losing their homes. I hate to sound callous, but it's hard for me to know who the victims are in this mess.
If mortgage brokers or lenders used inflated appraisals or made false or misleading statements, they should be prosecuted or at least forced to restructure the loans. If borrowers lied about their income or assets to get a bigger loan, they too should be prosecuted.
But many people got into the subprime mess because they were willing to believe a fast-talking broker who told them they could buy a home, or a bigger home, or take more cash out of their home than they could with a conventional mortgage.
Keeping people in homes they had no business buying is wrong in many ways.
For starters, there's no easy way to bail out homeowners without bailing out the lenders and investors who were largely responsible for the subprime mess.
Many experts say we are in the early innings of the foreclosure cycle. If we bail out people today, will we be willing and able to help people who fail later in the game?
Propping up borrowers who took a gamble on a house and lost reinforces gambling.
"If people think they can take out a bad mortgage and they get bailed out, that's called moral hazard in social insurance and it's a very bad thing," says Thomas Davidoff, an assistant professor in the Haas Real Estate Group at UC Berkeley.
Bailout advocates say they want to help people who were duped, not gamblers. But even if you could separate the swindled from the speculators, there's no guarantee that people who get a bailout will keep their homes. It could be an expensive form of life support.
Nobody offered to bail out investors who bought tech stocks in 1999. Nobody bailed out Enron employees who lost their jobs and chunks of their 401(k) plans because the company was a fraud. Nobody offers to bail out credit card abusers.
But homes are different, advocates say. It's shelter, not an investment.
Hogwash. The government itself says owning a house is part shelter, part investment.
In calculating the housing portion of the Consumer Price Index, the Bureau of Labor Statistics uses rental costs for leased properties. For owner-occupied housing, it estimates how much homeowners would get if they rented out the house. If the monthly payment exceeds that amount, it is considered an investment, not a cost of living.
The growth in subprime loans made homeownership possible for many more people, including low-income and minority families. Bailout advocates say that door should not be slammed shut because people made mistakes.
The truth is, subprime borrowers could always get loans, but they had to pay higher rates and make a substantial down payment. If they ran into problems, and many did, the house could be sold and the loan repaid, protecting both lender and borrower.
In 2003, with interest rates at historic lows, investor demand for high-yielding subprime mortgages started heating up. To fill the pipeline, lenders started letting subprime borrowers buy or refinance with little or nothing down.
Of course, borrowing 100 percent of a home's purchase price makes for steep monthly payments. To lure or qualify them, brokers offered rates that were low for a couple of months or years, then shot up to normal subprime rates.
They added other features that kept payments abnormally low in the early years, such as interest-only or flexible-payment options.
These ticking time bombs were bound to blow up when rates and payments were adjusted. If brokers disclosed this fact, they told their clients not to worry because they could sell the house and repay the loan, assuming the home's value would go up.
If homeowners wanted to keep their homes, they could refinance the mortgage. This also assumes the value of the house would go up or the borrower's income or credit rating would vastly increase.
Some lenders stopped requiring borrowers to fully document their income.
An estimated 15 percent of subprime loans went to investors who did not plan to live in the home.
This layering of risk is what made subprime loans so toxic.
"Even if you have only two of those factors, you are in trouble," says Ken Rosen, professor of real estate and urban economics at UC Berkeley.
As competition heated up, name-brand lenders got into the subprime game. In 2006, Wells Fargo was the largest originator of subprime loans. It quickly sold most of those loans but retained servicing rights.
The explosion of what were called affordability loans contributed to the run-up in housing prices, which required ever-riskier loans in an upward spiral that came to a halt last year, when home prices stopped rising.
Late last year, lenders started reporting higher-than-expected subprime defaults. Many borrowers were defaulting in the first few months, before their loans had even reached the adjustment period.
Suddenly, investors got cautious, subprime lenders started closing the doors and subprime loans became harder to get, which exacerbated the decline in some areas.
A major fear among politicians is that rising foreclosures will drag down the value of all homes.
A new report from the Joint Economic Committee of Congress cites a study that said "a single-family home foreclosure lowers the value of homes located within one-eighth of a mile (or one city block) by an average of 0.9 percent."
The head of that committee, Sen. Charles Schumer, D-N.Y., has been a vocal proponent of a bailout of subprime borrowers.
"The federal government can send in an infusion of (money) to prevent foreclosure," he said earlier this month.
Many states are also considering bailout programs. Ohio, one of the states hardest hit by foreclosures, is planning to sell $100 million worth of taxable bonds to make new, 30-year fixed-rate loans at 6.75 percent to Ohio homeowners who can't afford their existing mortgage but have not yet entered foreclosure. The loan can be for up to 105 percent of the home's appraised value. To qualify, borrowers must live in the home and can't make more than 125 percent of their county's median income. They can have a slightly blemished credit rating but must go through four hours of counseling.
Rita Parise, director of programs for the Ohio Housing Finance Agency, says taxpayers won't be on the hook if the loans default. Borrowers must purchase private mortgage insurance for part of the loan. The rest will be insured by Fannie Mae.
For California, "we have proposed a $1 billion loss mitigation fund," says Bob Gnaizda, general counsel for the Greenlining Institute, an advocacy group. "Anyone who is low-to-moderate income who purchased a home that was their primary residence who was misled (about a mortgage) ought to be able to stay in their home."
And who should finance this fund? "It's up to a combination of the investment bankers and the banking industry and the state government if necessary to provide the funding or the guarantees of the funding," Gnaizda says.
"We've asked (state Treasurer) Bill Lockyer to use his persuasive power to convince the six to eight largest investment banks, all of (which) do business with the state, that they have a stake in California's growth and economy. Since they helped finance the subprime fiasco," he says, they ought to help solve it.
On a national level, the Neighborhood Assistance Corp. of America said this month that it will make $1 billion in low-cost fixed-rate loans available to refinance "the victims of predatory lenders."
The money is coming from funds that Bank of America and Citigroup had previously committed to the nonprofit group to make low-cost loans to first-time home buyers.
"We are defining predatory as a loan that will increase to around 10 percent or more," says Bruce Marks, the group's chief executive.
The rescue loans will be at the same rate (5.5 percent) and terms as the home-buyer loans, but "the (underwriting) standards on the refinance are different," Marks says.
"We don't look at credit ratings. We look at character lending. Let's say someone got a subprime loan, the teaser rate was 6 percent, but it's going to reset at 12 percent. If they are making payments on time, not increasing their debt, not borrowing on credit cards, if they can show us they could be making payments that are more than what they are making today," they could get a rescue loan.
"You can't blame the victims for this," Marks says. "This was an orchestrated scheme (by lenders and investment banks). This was not about homeownership. This was about temporary occupancy. They were using the house as bait to fleece and steal money out of hardworking people."
He adds, "I'm not one to say everyone should be a homeowner. The fact is, the people are in the homes, they had their assets stolen from them, the loans were set up to fail."
Last week, Fannie Mae and Freddie Mac jumped into the bailout game. Both said they would buy or insure tens of billions of dollars worth of refinanced subprime loans over the next few years. Fannie Mae and Freddie Mac are implicitly, though not explicitly, backed by the federal government. Mortgage experts say the increased risk will pose little threat to taxpayers because the newly refinanced loans represent a small part of the agencies' total portfolios.
Everyone would prefer a private-sector solution to the subprime problem than a government bailout. The problem is that most subprime loans have been sliced and diced and sold into mortgage-backed securities. Locating the owners -- many of whom could be offshore -- and persuading them to cut deals with struggling borrowers would be hard. But it would not be impossible.
What governments can do is prevent another subprime disaster by enforcing good underwriting guidelines and requiring clear, plain-English disclosures of the risks of exotic mortgages.
What's more, society could stop demonizing renters.
Owning a home has many advantages, but it's not for everyone. Our glorification of homeownership as the American dream has turned tenants into second-class citizens.
With or without bailouts, the subprime crisis is going to hurt many people. But it could have a silver lining. If it brings down home prices, more families could afford homes with realistic mortgages. And if it reminds everyone that buying a home is a risky proposition, so much the better.
Think of it as a forest fire. Painful, but in the long run necessary.
From the SF Chronicle:
Dumb: Buying a house you can't afford with no down payment and a loan whose monthly payments will explode in a few years.
Dumber: Lending money to people who can't afford a traditional mortgage, especially when they have lousy credit ratings and don't substantiate their income.
Dumbest: Bailing out dumb and dumber, especially with taxpayer money.
State and federal lawmakers, community groups and housing advocates are proposing schemes to prevent the victims of the subprime loan crisis from losing their homes. I hate to sound callous, but it's hard for me to know who the victims are in this mess.
If mortgage brokers or lenders used inflated appraisals or made false or misleading statements, they should be prosecuted or at least forced to restructure the loans. If borrowers lied about their income or assets to get a bigger loan, they too should be prosecuted.
But many people got into the subprime mess because they were willing to believe a fast-talking broker who told them they could buy a home, or a bigger home, or take more cash out of their home than they could with a conventional mortgage.
Keeping people in homes they had no business buying is wrong in many ways.
For starters, there's no easy way to bail out homeowners without bailing out the lenders and investors who were largely responsible for the subprime mess.
Many experts say we are in the early innings of the foreclosure cycle. If we bail out people today, will we be willing and able to help people who fail later in the game?
Propping up borrowers who took a gamble on a house and lost reinforces gambling.
"If people think they can take out a bad mortgage and they get bailed out, that's called moral hazard in social insurance and it's a very bad thing," says Thomas Davidoff, an assistant professor in the Haas Real Estate Group at UC Berkeley.
Bailout advocates say they want to help people who were duped, not gamblers. But even if you could separate the swindled from the speculators, there's no guarantee that people who get a bailout will keep their homes. It could be an expensive form of life support.
Nobody offered to bail out investors who bought tech stocks in 1999. Nobody bailed out Enron employees who lost their jobs and chunks of their 401(k) plans because the company was a fraud. Nobody offers to bail out credit card abusers.
But homes are different, advocates say. It's shelter, not an investment.
Hogwash. The government itself says owning a house is part shelter, part investment.
In calculating the housing portion of the Consumer Price Index, the Bureau of Labor Statistics uses rental costs for leased properties. For owner-occupied housing, it estimates how much homeowners would get if they rented out the house. If the monthly payment exceeds that amount, it is considered an investment, not a cost of living.
The growth in subprime loans made homeownership possible for many more people, including low-income and minority families. Bailout advocates say that door should not be slammed shut because people made mistakes.
The truth is, subprime borrowers could always get loans, but they had to pay higher rates and make a substantial down payment. If they ran into problems, and many did, the house could be sold and the loan repaid, protecting both lender and borrower.
In 2003, with interest rates at historic lows, investor demand for high-yielding subprime mortgages started heating up. To fill the pipeline, lenders started letting subprime borrowers buy or refinance with little or nothing down.
Of course, borrowing 100 percent of a home's purchase price makes for steep monthly payments. To lure or qualify them, brokers offered rates that were low for a couple of months or years, then shot up to normal subprime rates.
They added other features that kept payments abnormally low in the early years, such as interest-only or flexible-payment options.
These ticking time bombs were bound to blow up when rates and payments were adjusted. If brokers disclosed this fact, they told their clients not to worry because they could sell the house and repay the loan, assuming the home's value would go up.
If homeowners wanted to keep their homes, they could refinance the mortgage. This also assumes the value of the house would go up or the borrower's income or credit rating would vastly increase.
Some lenders stopped requiring borrowers to fully document their income.
An estimated 15 percent of subprime loans went to investors who did not plan to live in the home.
This layering of risk is what made subprime loans so toxic.
"Even if you have only two of those factors, you are in trouble," says Ken Rosen, professor of real estate and urban economics at UC Berkeley.
As competition heated up, name-brand lenders got into the subprime game. In 2006, Wells Fargo was the largest originator of subprime loans. It quickly sold most of those loans but retained servicing rights.
The explosion of what were called affordability loans contributed to the run-up in housing prices, which required ever-riskier loans in an upward spiral that came to a halt last year, when home prices stopped rising.
Late last year, lenders started reporting higher-than-expected subprime defaults. Many borrowers were defaulting in the first few months, before their loans had even reached the adjustment period.
Suddenly, investors got cautious, subprime lenders started closing the doors and subprime loans became harder to get, which exacerbated the decline in some areas.
A major fear among politicians is that rising foreclosures will drag down the value of all homes.
A new report from the Joint Economic Committee of Congress cites a study that said "a single-family home foreclosure lowers the value of homes located within one-eighth of a mile (or one city block) by an average of 0.9 percent."
The head of that committee, Sen. Charles Schumer, D-N.Y., has been a vocal proponent of a bailout of subprime borrowers.
"The federal government can send in an infusion of (money) to prevent foreclosure," he said earlier this month.
Many states are also considering bailout programs. Ohio, one of the states hardest hit by foreclosures, is planning to sell $100 million worth of taxable bonds to make new, 30-year fixed-rate loans at 6.75 percent to Ohio homeowners who can't afford their existing mortgage but have not yet entered foreclosure. The loan can be for up to 105 percent of the home's appraised value. To qualify, borrowers must live in the home and can't make more than 125 percent of their county's median income. They can have a slightly blemished credit rating but must go through four hours of counseling.
Rita Parise, director of programs for the Ohio Housing Finance Agency, says taxpayers won't be on the hook if the loans default. Borrowers must purchase private mortgage insurance for part of the loan. The rest will be insured by Fannie Mae.
For California, "we have proposed a $1 billion loss mitigation fund," says Bob Gnaizda, general counsel for the Greenlining Institute, an advocacy group. "Anyone who is low-to-moderate income who purchased a home that was their primary residence who was misled (about a mortgage) ought to be able to stay in their home."
And who should finance this fund? "It's up to a combination of the investment bankers and the banking industry and the state government if necessary to provide the funding or the guarantees of the funding," Gnaizda says.
"We've asked (state Treasurer) Bill Lockyer to use his persuasive power to convince the six to eight largest investment banks, all of (which) do business with the state, that they have a stake in California's growth and economy. Since they helped finance the subprime fiasco," he says, they ought to help solve it.
On a national level, the Neighborhood Assistance Corp. of America said this month that it will make $1 billion in low-cost fixed-rate loans available to refinance "the victims of predatory lenders."
The money is coming from funds that Bank of America and Citigroup had previously committed to the nonprofit group to make low-cost loans to first-time home buyers.
"We are defining predatory as a loan that will increase to around 10 percent or more," says Bruce Marks, the group's chief executive.
The rescue loans will be at the same rate (5.5 percent) and terms as the home-buyer loans, but "the (underwriting) standards on the refinance are different," Marks says.
"We don't look at credit ratings. We look at character lending. Let's say someone got a subprime loan, the teaser rate was 6 percent, but it's going to reset at 12 percent. If they are making payments on time, not increasing their debt, not borrowing on credit cards, if they can show us they could be making payments that are more than what they are making today," they could get a rescue loan.
"You can't blame the victims for this," Marks says. "This was an orchestrated scheme (by lenders and investment banks). This was not about homeownership. This was about temporary occupancy. They were using the house as bait to fleece and steal money out of hardworking people."
He adds, "I'm not one to say everyone should be a homeowner. The fact is, the people are in the homes, they had their assets stolen from them, the loans were set up to fail."
Last week, Fannie Mae and Freddie Mac jumped into the bailout game. Both said they would buy or insure tens of billions of dollars worth of refinanced subprime loans over the next few years. Fannie Mae and Freddie Mac are implicitly, though not explicitly, backed by the federal government. Mortgage experts say the increased risk will pose little threat to taxpayers because the newly refinanced loans represent a small part of the agencies' total portfolios.
Everyone would prefer a private-sector solution to the subprime problem than a government bailout. The problem is that most subprime loans have been sliced and diced and sold into mortgage-backed securities. Locating the owners -- many of whom could be offshore -- and persuading them to cut deals with struggling borrowers would be hard. But it would not be impossible.
What governments can do is prevent another subprime disaster by enforcing good underwriting guidelines and requiring clear, plain-English disclosures of the risks of exotic mortgages.
What's more, society could stop demonizing renters.
Owning a home has many advantages, but it's not for everyone. Our glorification of homeownership as the American dream has turned tenants into second-class citizens.
With or without bailouts, the subprime crisis is going to hurt many people. But it could have a silver lining. If it brings down home prices, more families could afford homes with realistic mortgages. And if it reminds everyone that buying a home is a risky proposition, so much the better.
Think of it as a forest fire. Painful, but in the long run necessary.
