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Subprime Bailout: Putting another bullet in the mortgage industry

So just a couple hours ago the details of the administrations proposed "sub-prime bailout" plan were released. Bloomberg article below:

Subprime Rate Five-Year Fix Agreed by U.S. Regulators

Basically the proposed idea is to freeze ARM resets for five years for a select group of sub-prime mortgage borrowers. Ok, here's the big problem, these sub-prime mortgages are backing mortgage backed securities (MBS) that have been sold to investors. The investors holding these MBS's range from pension funds to money market funds to investment banks to foreign governments (China). Freezing resets would require breaking contractual obligations which are part of the MBS's.

"One challenge will be to craft a deal minimizing lawsuits from investors in bonds backed by the mortgages being rewritten, analysts said. The longer that lower rates are extended, the more risk posed to the bonds' values. Republican Representative Mike Castle of Delaware has proposed legislation offering a ``safe harbor from legal liability'' to mortgage servicers. "

Sorry, it ain't gonna happen, the lawyers will have an absolute field day with this. And, on off chance they did happen, it would permanently destroy the mortgage industry as we know it. Why? Because the mortage industry is 100% reliant on investors buying mortgage backed securities and the CDO's they're packaged into to function. Granted the market for these is pretty dead right now, but once the standard is set of the legally binding obligations behind the securities being broken, investors won't touch them with a ten foot pole.

Update:

Bloomberg just published an article with a similar analysis...

Paulson Plan May Make Mortgage Bonds a `Hot Stove'

"Treasury Secretary Henry Paulson's effort to get banks to freeze payments on some subprime home loans may permanently cut demand for new U.S. mortgage bonds, reducing available financing for even the most creditworthy consumers, a former Mortgage Bankers Association chairman said. "

Update #2:

When the official guidelines were released it appears they avoided all the troubles above. Instead they made the guidelines totally voluntary for lenders to follow. The fact of the matter is lenders would have already done it if it suited them, and if it doesn't they won't. So the net effect of the sub-prime bailout is a lot of political grandstanding and headline space being sucked up, with zero actual action.

Posted by Matt Heaton on 12/06/2007 12:27 AM

Comments (58)

58 Comments on Subprime Bailout: Putting another bullet in the mortgage industry

DEC

2007

They just need it to look like they're going to do something. It will never fly. You called this one correctly Matt. I commented on another similar post today because they thought this WOULD come down. Good post.

Political grandstanding on both sides of the aisle plain and simple. The number of borrowers this would apply to is extremely small, and would have effectively no impact on the number of foreclosures.

Yep. Preciesely. I wrote the same thing about a 1/2 hour ago. But, I believe it goes farther than that.

I had a feeling you'd be posting on that news.

I don't have anything great to add, but I'm glad I read your post and these comments.

This is all about PR. It sounds good on paper but few homeowners will actually qualify. I think the investors would go along with it if it got to that point. It would be a mess untangling the ownership rights, but they would go for something now if it took foreclosure off the table.

I agree with you, the bail out is BS. I think they should just change the industry so it doesn't happen again. Do you really think anything will be passed anyway or are they just going to act like they are trying and then they'll point fingers when they can't get anything done?

But someone will be looking to get paid. They freeze the teaser rate. Ok. But the lender sold those loans. Somebody's getting a phone call. I wrote about this earlier as well; seems to be the hot topic tonight. I think you are dead on; it has very little chance of succeeding. Also, we could barely get water to the Superdome, why should I believe the Govt can fix this.

It's all smoke and mirrors.The politicians can SAY they've solved something, but somehow there's never any real change.

I can't add anymore than those above have already said than to say "yep thats what I think too"

I would rather see the fed lower interest rates than a bail out for borrowers with teaser rate mortgages.

Your right, if the government is going to move on this our whole mortgage system could be in jepordy.

Take care!

RJH

Well, this has been uplifting...

Buying votes is just toooooooo complex any more. Politicians should have simpler ways to grandstand.

Kissing babies, maybe?

As I said earlier in another post today. All eyes to Nevada, one of the earliest caucus' and bearing a big brunt of this. Both parties are just pandering. Like you said, this would kill the mtg industry as we know it.

Well gee, they have to do something just to show that they ARE working. Guaranteed not one of those lawmakers got caught in a subprime loan or a negative am. They don't understand how easily someone can get sucked into this abyss and don't feel like real relief is needed except for the economy

Great post Matt. You hit the nail squarely on the head. Whichever of Bush's spin guys came up with this one should ask for a window seat on the flight out of Washington!

I call it the 30/60 plan. Going back to 2005 to this June = 30 months. The Freeze is going to be for 5 years = 60 months. That's a long time away and it sounds like it will only affect a few. Silk screen.

Are they serious???

Matt...I did a post over at Agent Genius about this and my take on it. Rather than write the whole thing here, click the link if you want to check it out.

Isn't the Proposed Borrower Bailout Program by Paulson Really a Lender Bailout as Well?

The bailout plan just doesn't make sense. It will cause more problems than it will solve. I've been reading several posts and I think most ar members think that it is mostly political posturing and will effect a very small group of people.

This plan will never fly!

Does anyone have any idea of what the future really holds for the mortgage industry and the effect it is going to have on home sales, which directly effect us as real estate agents?

Matt,

It is amazing how they think that they can just freeze the rates like that for 5 years with no repercussions! If I had bought any of those investments, I would demand to get paid what I was told that I would get and not 1 penny less. I am sure that these investors all over the world will feel the same way. Just my 2 cents!

DEC

2007

China is THE largest buyer of US Mortgage Securities from the US. They just announced that they will not buy as many US mortgage securities as they have in the past because they want to buy only securities from countries that have a stable economy. If that happens, interest rates in the USA going to go WAY UP! I think we are going to have a hell of a time for the next 2 to 3 years; maybe longer. Sorry folks. Better get your rate today because it seems the rates are bound to go up a hell of a lot higher.

Dick Piehl Senior Mortgage Banker Indymac Bank 952-885-5653 Direct 800-444-5007 Ext 5653 Toll Free dick.piehl@imb.com

We may see the end of mortgage backed securities...

This is a very sensetive issue that you are adressing , Lets put it this way , If there is a way for someone to get out of an Subprime Mortgage , than God Bless him . If not , Make it work and wait till the Housing market is getting back up , It may take some years .

Interesting developments Matt...thanks for keeping us informed...

Bloomberg just published an article with a similar analysis...

Paulson Plan May Make Mortgage Bonds a `Hot Stove'

A great example of how governement's attempt to help one problem creates a whole new set of them.

Matt- Great post! As several people stated above- the Government needs to look like they are doing something! My gut tells me the Government should be putting their energy into something else that will make a bigger impact on the overall health of the economy.

Matt - Well written and informative. Mortgage brokers and banks have done this harm to themselves by allowing sub prime rates....something they should never had done to begin with. Why should they have made loans at high rates and no money down to people with already poor credit and NO money. It doesn't make since. It's their own fault, the way I see it. I don't think I ever sold a home with a subprime loan. I didn't want my buyers to have a foreclosure...because that is where it is headed. I can't believe a lender will give $150,000 loan to someone who can't make the payments. Doesn't make sense.

Matt, you may wait weeks between post but they're always good ones =)

Shall we all start looking for something else to do for our livelihoods? At this rate the industry is due for a major shake-up, if not total obliteration.

Thanks Matt. Am a marketing guy, not a financial type, and appreciate you making this so clear. Mostly all of this banking/securities buzz I gloss over, only getting the broad context of it's a real problem our industry must withstand until it gets better. Appreciate you putting the short-term fix into something so easy to understand.

best

It's only for a selected group who actually would qualify. They should just lower the rates 2 points and change them all to fixed rates if they really want to help.

There so many solutions out there. Would it not be better to implement something right away rather then discuss it to death. The wheels have to move a little faster.

Thanks for your insight. I have been following this on the news and online but as a Realtor and not a lender it's hard for me to get true picture of this effort and your post has provided some great insight and conversation!

Neal,

Yes, it's a very small group that actually qualify. What you propose raises a significant moral hazard, why do the people that got themselves into crappy loans get bailed out. Shouldn't I get 2 points lowered off my mortgage too???

Besides the moral dilemma it can't be implemented in most circumstances. You have to get permission to whoever owns the mortgage backed securities to change the loan terms. In many cases they've changed hands many times, and what investor is gonna go, sure go ahead and devalue my intestment. The only places where it is possible is where the bank still owns the mortgage which in this day and age is fairly rare.

Thanks for getting this out. Like Gary I don't follow this so closely down into the trenches so I appreciate getting the different takes on how this ends up affecting our industry overall.

Great analysis. Makes perfect sense everything you said. And I agree, the politicians are just trying to look like they are doing something, when they know anything they do will make the mess even worse. Thanks for such an insightful article.

Tinkering with the free market system always has unintended consequences; you've pointed out a couple of the major ones.

Matt... I just came back to this today after posting on it last night. A news org called to interview me about my comment here and my take on this proposal. I said exactly what you just said about those who CHOSE to get themselves into bad loans deserve to experience the natural consequences of making childish choices in an adult world. I don't take part in any transaction that isn't in the best financial interest of my client(s), as I see it. There are 7000 other agents in my area who might. But I won't willingly be a party to stupidity. Unlike this administration!

Great post Matt! Glad you brought this to the table.....

Maybe I am little naive about how things work - but I see this as something that will help. One of the things I noted was that the coalition involved INVESTORS. So I would think that their concerns were represented and addressed in the planning of this rate-freeze.

I can't see how this hurts them really. If the homeonwers are able to stay in their homes and maintain the ability to make their payments, its a win for everyone.

I think someone previously mentioned that this would better than taking a total loss. While it is true that that the investors lose the gains they WOULD have gotten at the resetting rates, they will at least MAINTAIN the money stream at the frozen rates. I undestand that MANY people were qualified for these ARMS at the lower rates, but in a lot of cases no one looked at what would happen when the rates started adjusting.

I think that smart homeowners facing resets, could certainly use the breathing room and time to refi into a fixed rate mortgage.

I have a tendency to try to find the positive in everything. I see the possiblity that the rate freeze will help many people to stay in their homes. (Reducing Inventory). Will refinance into better mortgages (hopefully). And in turn create a more stable market. I see it as good news. At least for the time being.

Just one new guy's outlook!

I am curious as to how this will play out over the next decade. Change is scary but necessary.

Renee "Both parties are just pandering."

Randy "A great example of how government's attempt to help one problem creates a whole new set of them."

You guys pretty much summed it up. I don't think I really need to post one of my normal tirades. Go ahead, Renee, spank me again ... I'm saving up for a big one ;)

Matt - If the Government wants to help, it could start by doing something about the price of Oil...of Gasoline. This is as much an economic situation as anything. The prices of the very utilities we need to live are through the roof. That's another post all together though I suppose.

I feel for consumers who were hoodwinked and they should take the proper action and get the proper help if they were indeed unknowingly put in a bad position with a high cost loan with a false sense of equity position. Yet, as you pointed out, the % of individuals this would actually help is probably very small. What the Government is doing is basically saying to Lenders & Consumers, "You signed a mutually binding contract, but hey.....just forget about all that legal stuff." If they want to save the world so to speak, this isn't the answer. If they want to kill the Mortgage Industry, this just may be.

Matt, your blog helped me understand what Lenn Harley and Janet G have been saying. My argument on the issue is the that broken contract or not, if nothing is done the bonds will have no value due non-performance.

Frankly, these mortages should have never been packaged the way they were and law-suits will likely come into play no matter what.

Political grandstanding or not, it's a mess that could have been avoided had there been more oversight over what was and was not packaged as "securities".

Being a new agent and not knowing too much about this subject, I just want to say that your post has illustrated the need for individuals and special interest groups such as mortgage and Realtor lobby groups to make their positions known, particularly the former. When was the last time anybody wrote, called, or emailed a congressman? I know I haven't in a long time. These kind of political debates should be held in public forums such as AR but need to be moved to Washington by way of the people who are so closely affected.

If something like this goes through it's total BS. But if it does, I sure hope the IRS gets serious about checking into the income claimed for those borrowers who lied on their loan apps. You hear so often that God invented stated income loans because self employed borrowers actually earn much less than their tax returns show.

Thanks, Matt, for outlining how this will impact lenders and the mortgage industry. It is far easier to see the trees (struggling homeowners) than the forest (long term impact of freezing the rates).

Brian Brady and I were called free market cowboys this week. I was accused of being heartless. But I continue to believe this policy has the potential to do a great deal of harm.

I have already suggested that rates could go way up (to cover the losses taken by lenders, or to compensate for the risk that investors could once again be left holding the short end of the stick)

I have also suggested even more stagnation in the real estate market since a frozen rate will not encourage anyone to move into the house they can actually afford, and out of the one that they cannot...

I see the administration of this as a true nightmare....complete with potential for an enormous amount of fraud.

And what a horrible precedent....and a horrible burden to the next generation.

PS.....Stated income, adjustable rate and 100% financing...this was the lethal combination when value began to decline. This is NOT really about people with bad credit, or any one of these factor individually.

It is about lending guidelines that were too loose in combination with declining values. Michael T.....rates that were already at 7-9% would most likely not be adjusting anyway.

That's what I'm wondering, will it do more to help the subprime borrowers, or more damage to the lending industry?

Chances are that the subprime borrowers will just postpone their problem so Probably the latter... What a world we live in..

Homes for Sale in Syracuse Utah

Homes for Sale in Brigham City Utah

I think as usual - the congress comes up with the band-aid approach without really taking a look at how to best address the problem -- and how to help mitigate all of the losses and the residual effects -- Nice analysis and you make some very important points -- also enjoyed Lenn's analysis on this topic as well.

Thanks for your post Mat.... I just can't see this helping the home owner only a few home owner will benefit from this...... in the end someone has to pay..... I think I'm missing something on this......who will pay if the rate freeze for 5 years..... I think we have to look at this more closely.....

Too little too late is what I'm hearing from the pundits. It also does nothing for those already or nearing foreclosure.

Lets hope they can improve on it!

Mike:

It seems like you love what you do! I'd say, keep up the good work.

God bless,

Elisa Choi

yet more waisted time and money by the government.

Too much, too soon. That is what the pundits SHOULD be saying. The governement is wading into something here and they shouldn't. EVERYONE in this crisis stepped into the role with a contract. Now, the government wants to change the terms so that they can look like they are doing something. I don't even know if I can knock this out in one post... much less a comment.

I can't get over the "you must never have missed a payment part" when just about all the lenders will not help you if you call them and say trouble is coming. They actually tell you they can't help you before you are two payments behind.

This will continue to be interesting to watch and see what transpires.

DEC

2007

I came across this article

http://www.bitsofnews.com/content/view/6547/

It goes over a number of problems the subprime bailout could cause.

Michael T. : I am not stating that rates could not have been 7-9% on a subprime loan

I am saying that if the rate began that high, the reset (which is tied to a current index) probably would not be resetting any higher OR the reset would be small. Those that got a 7-9% loan 2 or more years ago had really horrible credit (because this rate is 3-4 points higher than what rates were then) and they are a small minority, and are not what this is all about. In fact, I would say the probability of foreclosures on these kind of loans is high anyway, because they were given to those that had already demonstrated they cannot manage credit.

Those that have huge payment increases, and have been painted into a box, are people who began their loans at 5 %. At reset time, current index plus margin took them all the way to 8% or 9%. These people come under the so called subprime umbrella not for bad credit...for the fact they did 100% financing.

They are in the worst shape because they are upside down and cannot refinance...due to the 100% loan in combination with declining values. Someone with a 7%-9% loan AND equity should be able to refinance into a lower rate assuming qualification under new stricter guidelines. But even if they can't, if rates continue in the same area, their payment should be managable.

Matt,

The freeze is not a good idea in the big picture for the reasons you outline here. It'll eventually do more harm than short-term good to the housing and mortgage markets. Countless lawsuits are being contemplated by investors as we speak. And interest rates will rise a notch or two.

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Subprime Bailout: Putting another bullet in the mortgage industry

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