Home : Blogs : Ed Rybczynski : For What it's Worth!

Five Years : A Desparately Long Time Indeed!

You've heard the news by now, the Bush Administration has revealed its plan to rescue housing markets. The idea is to save certain consumers from themselves and to save the economy at large from the grips of ruination. While I dislike everything about the proposal, it's the length of time that introductory rates would be frozen that disturbs me the most. Five years is a very long time!

The American Civil War lasted only four years, yet the epic struggle redefined the fabric of our society.

John F. Kennedy was in office less than three years before being assassinated, still his vibrant presidency changed forever the way an entire nation perceives itself.

It took five years, from 1929 to 1933, for the collective economies of an industrialized planet to collapse into a Great Depression.

It's hard to get excited about a proposal that does little more than create a "welfare state" for the benefit of a select few. We know that sub-prime lending is but a single factor in the foreclosure crises overall. Why then did President Bush choose to isolate and extract such a limited subcategory of borrowers for financial favoritism? Some would say that the plan rewards a limited number of borrowers who made bad choices. It could be said that the new plan effectively punishes those who didn't make bad choices. It could be said that other groups of borrowers who are equally at risk to lose their homes should have been included.

Yes, the Bush initiative appears uninformed and misguided overall. But, it's the five year aspect of the plan that confuses me the most. That's a very long time to artificially restrain anything in a supposedly free market. Then again, it could be argued that federal intervention in the form of a decades worth of reckless monetary policy was the primary cause of the problem. Federal intrusion in capitalist endeavors is rarely a good thing for consumers or investors.

The Associated Press reports that the five year freeze represents a compromise between banking regulators and the lending industry. The regulators wanted a stay of seven years. Seven years? The deadliest conflict in history, World War II, barely lasted that long.

All of this is just a little hard to digest in one sitting. Never did I expect a bailout to last longer than eighteen months.

I'm starting to suspect that the president's economic advisers have access to data that we have yet to hear about. I'm starting to suspect that the problem runs deeper than we've been led to believe.

Five years is a very long time indeed!

Don't you agree?

Posted by Ed Rybczynski on 12/07/2007 02:18 PM

Comments (33)

foreclosure crises, housing crises, subprime lending

33 Comments on Five Years : A Desparately Long Time Indeed!

DEC

2007

Indeed. The five year duration of freezing instruments that were originally purchased for a 1-2 year period seems so extreme, it defies logic.

If the collective they know something we don't know, this isn't going to help. It affects such a small number of folks in trouble, subprime borrowers, that it couldn't make any difference in the overall economy, in my opinion, which lately has shown to be either out of sinc or just plain incorrect.

Somehow, that doesn't stop them from coming.

Thanks Ed. Another thoughtful peek under the covers of the worst real estate market that I can remember.

I'm still trying to digest what this policy actual means. I sure hope you are wrong about this being an indication that some other negative data may lie deeper below the surface...

As a Personal Mortgage Consultant, I build my practice by always striving to make the right choice for my clients. I sure hope our government does the same.

I don't know what scares me more: The five year time table, 9-11 was only 6+ years ago and we are still trying to get a handle on that. Or Lenn's statement "Another thoughtful peek under the covers of the worst real estate market that I can remember." It's getting hard to see the light at the end of the tunnel.

Ed, ugh. Five years... scary. I wonder if they do have access to what we don't ?

Lenn - Thank you. I was going to remain silent on the issue, but decided to explore the implications of anything with a five year duration. It's a staggering length of time.

Sean - I think funding sources will ultimately lose confidence in the system and make it very difficult to borrow money.

Dena - I'm more confused now than I was before the plan was made public.

Missy - I'm thinking that economic advisers to the president are painting a very bleak outlook during closed meetings.

It's putting a tiny bandaid on a huge severed artery. Why would we want to reward people who don't know how to spend within their means, and penalize those who budget wisely? I agree, 5 years just allows the bad habits to continue.....

I think this would be a bad move. Maybe for 6 mo to a year, but 5 years would be way to long.

Rich - I think we're talking about a tiny band aid trying to cover a huge wound.

Dave - Five years seems to make no sense at all.

Ed, I just don't know what Bush and his advisers are thinking. 5 years is nonsense. I just read a post that brought up a great point. What happens when these folks get a rate freeze for 5 years which effectively is saving them big bucks AND their property ends up appreciating in value and they sell out for a huge profit? Does the government get to recoup any of the subsidy? Interesting thought.

Bryant

That was my first thought when reviewing the terms of the plan. Here's the deal, the feds are apparently convinced that housing values aren't coming back in the next five years. If they felt otherwise, there would be a recapture provision in the plan. We're in deep on this one.

We are not only "in deep on this one", we are being led down the primrose path to a pit full of vipers.

This agreement does nothing to stem mortgage fraud.

What are the accountability standards for this rinky-dink plan?

Is the government going to be the "resourse of last resort" for mortgagees whose mortgage holder or servicer or investor will not agree to alter the terms of the contract?? If so, how much is that estimated to cost.

If the note holders go under or servicers go under, what happens?? Will the government bail them out to preserve the bail out??

If real estate values continue to fall, and I believe that they will, how will the home owners refinance??? Is the government going to be the mortgage company of last resort for these select few??

What happens if a TBE divorce? What happens of a Joint Tenant moves out and stops making payments on their "frozen loan"?

Geez. If I weren't already over my limit for posts this week, I'd post this thing.

I keep listening to the government, the analysts, the bankers, the financial experts and I keep thinking, "Fool, you don't have the foggiest idea about the real world of real estate".

Oh well.

My recipe is lower everyones rate by 2 points or more and change them all to fixed rates with no prepays.

Ed...I think it's all for show.

I was reading that this could dry up the investor market and make borrowing that much more difficult...therfore penalizing good buyers!

DEC

2007

Lenn

I'm glad you're "weighing in" on the topic as much as your are. It has helped the crystallization of my own thoughts on the topic. I was flustered last night after hearing news commentators share their views on housing. They are completely uninformed as is the Bush administration.

Unquestionably, the new initiative addresses minor symptoms while completely ignoring the causation factors.

Neal - I like your plan better than the one proffered by the oval office.

Joan - Unquestionably we're dealing with a ploy by the Bush administration. The problem is that there is no easy answer. It still doesn't excuse Bush from being uninformed.

Ed.. I'm betting there is more to this then meets the eye.. The inmates have been running th asylum for way too long..

Kaye

The proposed bailout shows a real lack of understanding by the Bush administration. It's a real heart breaker for very many people.

Ed, now that you've introduced this notion, it makes frightening SENSE. What on earth would be the motivation for a five year period other than the anticipation that it reflects a timeline established? Because of the restrictions of the "bailout", I am failing to see an impact- but clearly, someone does.

Laurie

It seems to me that some very bright minds with access to very good data believe that a correction could last five years. While the overall plan seems misdirected to me, it's the five year aspect that appears to have an empirical basis. I think that the Bush administration is desperately worried about the situation and doesn't know what to do.

Ed, those "in the know" will develop a five year plan?...YIKES. Except, it could be a real window of disastrous opportunity for those that can somehow figure this mess out. Keep talkin'. And, thank you.

DEC

2007

Ed,

You're right on more than one account...the problem is deeper...this is a band aid, and a small one at that...and we have evolved into a democratic oligarchy...rule by the few!!! Thanks, Fran

DEC

2007

Apparently the only people that will be "bailed out" are those that could have "afforded" the loan in the first place...even more perplexing.

Ed - not having read all my learned colleagues may have typed above, I will jump in just the same.

This is just one more mess this administration is not bothering to think about before acting upon. Leaving other administrations the cleanup and consequences is unconscionable.

As you said - this "bailout" should never have occurred to begin with and five years just adds to the mess!

Ed, I kind of had the same thought as you about this, that they're punishing the people who made better choices. If I compared loans carefully, went with the fixed rate thinking it was best for me, then I hear that my neighbor is going to get special treatment because he had the same opportunity to choose and went with something that might have gotten him in trouble -- I just don't like that.

Also, five years is a very long time. Most of us would move during that time period ... but wait. If my neighbor has a special rate in that house, what's his incentive to move? Why not hang tight until the five years is up, THEN see how his equity's doing. He knows his payment will be higher if he moves, so why do it?

Tell me how this is going to bring back a vibrant market if nobody wants to move?

Fran - I really don't understand the fed's segregationist mentality on this one. It makes no sense.

Rebecca - I find the entire proposal to be perplexing.

Matthew - I agree. The current administration seems to be reacting without evaluating all options. I hope I'm wrong.

Sarah - I agree. Suppressing interest rates for a select few would impact markets. Most importantly, lenders could become reluctant about lending in the future.

Ed, OK, I'll take the other side, because it seems that everybody else wants to agree with you.

As I understand it, it is a forebearance on the rate increase, not a bailout. The idea is to staunch the flow of foreclosures. This may represent a small portion of the market overall, but it does represent a major portion of the defaults.

In five years these people have the opportunity to "heal" their credit and experience some appreciation in the value of their home before they are "forced" to refinance in order to repay the lender for the forebearance. It is NOT a gift or a bailouot.

Unless it is all of us that are getting bailed out by reducing foreclosures. If you want more foreclosures I've got to ask, "what kind of a person are you?"

Bill Roberts

DEC

2007

What is our government going to do in 5 years when these loans are due to reset and the borrowers STILL can't afford the homes they are living in? Make another deal? They are just putting off the inevitable.

Don't be fooled guys. This freeze is not about helping homeowners or the common people. Sean Olender from the San Francisco Chronicle does a very good job of explaining the motives behind this "deal".

http://tinyurl.com/2a5pr8

Rita

Thank you, I'll take a look at the article. I can't decide if the new proposal is a patent example of senseless policy or if there's an ulterior motive that's yet to be revealed. Maybe it's a hybrid of the two evils.

Bill

Very well said and I always appreciate a dissenting opinion. Still, I can't avoid the fact that the new plan appears to create a financial advantage for a very select few. I called it a "welfare state" in the original post.

I'd love to hear what you think about the article Ed. I''ve subscribed to your blog, it looks very interesting.

Bill, no one wants more foreclosures but foreclosures, bankrupcies, auto repos etc. are a natural consequence of (among other things) poor money management. Many of those going in to foreclosure did not (either intentionally or otherwise) do their homework to learn about the largest financial decision they would ever make. I would ask "what kind of person" gets into a loan they should know darn well they can't afford? Especially when so many of them have their own children to think about.

I'm a single parent and as such, could not afford to buy a home over the last few years in the area I want to live. I have a pulse. I could have gotten into a loan but I knew that with my income, I could not afford the mortgage payments in the long term in the area I want to live (South Orange Country). I didn't want my kids to experience the stress of a very thinly stretched family budget or a forced move (foreclosure) so I've tried to be patient and wait until I can afford to live where I want. It hurt my pride to rent when everyone else seemed to be making scads of money from the equity in their homes but I had to think of my kids' welfare. What kind of person doesn't?

Rita

At the end of every lecture, I advise members of the audience to make professional decisions as if they can see their own reflections in the eyes of their children, or a child that they know and love.

Adding innocent children to the decision making model is a sobering prospect.

DEC

2007

"At the end of every lecture, I advise members of the audience to make professional decisions as if they can see their own reflections in the eyes of their children, or a child that they know and love."

Ed, I love that statement and the power it yields! If you truly believe in what your are presenting and have laid out the logic of why someone should make a choice/decision, it really packs a punch loaded with emotion.

Sean

Thanks for the comment and personal insights.

Leave a response…

Name:

Email:
(optional)

Comment:

What does the graphic say?