On The Mortgage Bailout Plan
By Pejman Yousefzadeh Posted in Economy | Mortgage Bailout — Comments (6) / Email this page » / Leave a comment »
Alan Reynolds points out the myriad problems with the new scheme. An excerpt:
If risky subprime borrowers were actually supposed to be the main beneficiaries of such refinancing assistance, then it would have been the height of irresponsibility for President Bush to suggest greater involvement of the Federal Housing Administration, Fannie Mae and Freddie Mac. Shifting default risk to U.S. taxpayers could be very costly.
In reality, the only financial aid in this plan goes to those who qualify for the five-year freeze on mortgage rates -- a curiously selective little group, estimated to number between 145,000 and 360,000.
Read on . . .
When it comes to resetting mortgage payments below the level borrowers agreed to, why give a special deal to Sam but not Suzie? On the day the plan was unveiled, the Mortgage Bankers Association reported that 0.78% of mortgages went into foreclosure in the third quarter, and that 5.59% were far behind in their payments. Neither group qualifies for any help under the Bush plan. Neither does anyone with imperfect timing -- those who took out a mortgage before 2005 or after this July. Among the few lucky enough to slip through that narrow window, the primary criterion for a rate freeze is a weak credit rating, below 660. And what happens after five years? Presidential contender Sen. Hillary Clinton is already talking about stretching it to seven years, and that bidding war has just begun.
On the face of it, these criteria for political favoritism seem only marginally more sensible than limiting special loan terms to, say, short people or redheads.
Is it a bailout? The stock market sure thought so. Stock prices of mortgage companies and homebuilders soared on the news. After all, the plan was designed by and for those same companies -- key members of the "Hope Now Alliance."
Treasury Secretary Hank Paulson describes the arbitrary rewriting of financial contracts as a win-win situation for everyone. If that were true, the government would not have to get involved. In a win-win deal, Sen. Clinton would also not have felt compelled to threaten legislation to prohibit lawsuits from unhappy owners of mortgage-backed securities. If this "changing of the rules in the middle of the game," as many have described it, becomes a precedent, future funding will dry up quickly and permanently -- particularly for low-income borrowers. Why buy a bond that can have its terms changed by political whim?
Sadly, answers to these questions do not appear to be in the offing.
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On The Mortgage Bailout Plan 6 Comments (0 topical, 6 editorial, 0 hidden) Post a comment »
...but if your friend is running a large cash income that she isn't reporting, is she not violating the law in a rather flagrant way?
Why in the name of all that is holy would anyone buy a 400,000+ dollar home at an interest rate that is 9.25 at its best and 12+ at is (current) worst?
Solution: SELL! And pray that she makes enough to pay it off. Then get an apartment and wait to buy until she can actually afford it. Meanwhile, she should start declaring and paying taxes on her "real" income and stop trying to cheat the IRS.
If this scenario is what has gotten so many people into trouble then I have no sympathy for them.
For somebody that has to go stated income because she doesn't pay her taxes. Seems like she is getting off light just paying 12.25% on her mortgage. She could have much bigger problems if the IRS caught on.
Wouldn't she have to also have a credit score < 660, anyway?
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
If the data I saw in Kudlow & Co. is accurate, and my memory is as well, over 40% of subprime ARMs are in delinquency. That's a huge issue. Kudlow demonstrated tonight that although subprime ARMs only constitute around 8% of total outstanding mortgages, they have the largest share of delinquent mortgage notes. If I am reading this correctly, it seems Pres. Bush is attacking the most serious problem--the subprime ARMs--and is letting the markets sort out the rest.
I caught these figures while I was fixing dinner, so its possible I read them wrong, but I think my #'s are in the right vicinity.
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And statesmen at her council met
Who knew the seasons when to take
Occasion by the hand, and make
The bounds of freedom wider yet
- Tennyson, _To the Queen_
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
I spent a few hours this afternoon helping a friend navigate the new mortagage program. Our first phone call determined that she indeed did qualify for trhe program, in that her payment history was fine. However, there is one HUGE problem which I haven't yet seen addressed anywheres.
Here are the parameters. Her subprime mortage..it's now 9.25%, and resets to 12.25%, and the mortage balance is 425,000, and the property is perhaps worth $475,000..it was written as a no-income verification mortage, which may have been the reason why it was a subprime one.
But in order to qualify for the freeze program, she must produce documentation to show sufficient income to cover the mortage, taxes, insurance, fuel, etc. IOW..the program requires that they meet the requirements of a traditional full income verification process.
She's self-employed, legal, hard working, but has a large cash income (read "unreported") from her service business. She would probably have to show a taxable income three times what she's reported in the past in order to qualify for the mortgage freeze program
I'd suspect that a great many people trapped in the subprime mess also went the no income verification process, and will not be able to show sufficient income. Or if they now do so, they may have income tax and other IRS consequences.
It's going to be interesting, to say the least.