Subprime Bailout In The Works
According to an article in this morning’s Wall Street Journal, the Treasury Department is close to a deal with a coalition of major U.S. lenders known as the Hope Now Alliance that would freeze—for the time being—interest rate levels on some subprime loans. While details are scant, under one version of the plan, introductory “teaser”…
According to an article in this morning’s Wall Street Journal, the Treasury Department is close to a deal with a coalition of major U.S. lenders known as the Hope Now Alliance that would freeze—for the time being—interest rate levels on some subprime loans. While details are scant, under one version of the plan, introductory “teaser” rates could get extended for some peope for up to seven years. Members of the coalition include such heavy hitters as Citigroup, Wells Fargo, Washington Mutual and Countrywide Financial as well as a number of so-called mortgage service companies. The one group of stakeholders that’s been less enthusiastic is the investor community, but The Journal reports that investors are coming around to the idea that “it’s better to get some interest than none at all.” Do you think this is the right thing to do? Do you think this kind of bail out risks creating a moral hazard that could lead people to make the same mistakes next time around?
U.S., Banks Near A Plan to Freeze Subprime Rates [WSJ]
Photo by Meghann Marco
Here’s another story that came out on Sunday to show the scope of the problem. No matter what band-aid solution are presented to the public to obscure the real cluprits, the wheels are in motion for things to keep getting worse:
http://www.nytimes.com/2007/12/02/business/02every.html?_r=1&pagewanted=all&oref=slogin
I hope someone rads this, the shit just hit the fan in the UK.
This FUCKING BIG. Banks are stuck on stupid.
Pleas for rate cut as interbank loans dive
The sterling interbank market has collapsed at the fastest rate in modern history, prompting pleas for immediate rate cuts from a chorus of top British economists.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/03/cnrates103.xml
Remember when the fucktards was happy US rates fell. However, most mortgage rates are tied to the LIBOR rate. Say goodbye to your equity.
The What
Someday this war is gonna end……
“The thing to be worried about is whether this morphes into a bail out of the banks as well. Of course the Fed is doing it’s best to handle that anyway…”
The hope that the banks would be bailed out died the day Fannie and Freddie disclosed that they are indeed exposed to the sub-prime mess already and are currently hemorrhaging capital. Add new accounting practices that go into effect early next year and you’ll see the tide of bank failures come to light. This is the reason why some of the big players are trying to broker deals to get more capital before that happens and to try and restore some confidence and try and stem the tide of investors exiting their investment instruments.
Bernake wants Fannie and Freddy to up their limits to the 1 million dollar mark. This is a particularly dangerous move as it will then affect average homeowners as of now not affected the sub-prime mess. If Fannie and Freddy’s limits are increased to million dollar jumbo loans, the banks would then be able to offload worthless junk mortgage derivative that will soon bring down those two institutions once the losses are all calculated.
At that point, it is clear that the US tax payer would be required to cover the “losses” as Fanny and Freddy are quasi governmental entities. But the consequences of raising their lending limits will have the effect of sustaining these ridiculously over inflated housing prices AND might even create a new wave of speculation leading to a much bigger problem in the coming years.
A correction is sorely needed in that overextended banks need to shutdown and housing prices HAVE to come down 30 – 50% or more. That is the only way these problems will be overcome. Anything short of that will only throw fuel on the fire of a coming depression.
My hat is off to you 5:24. That’s the whole deal, in a nutshell.
I think we have some huge problems. I hope we can come thru this OK.
The What
Someday this war is gonna end…
Deutsche Bank link:
http://www.nytimes.com/2007/11/15/business/15lend.html?ref=business
BTW, here’s a lesson in mortgage financing many of you just don’t know or haven’t figured out yet:
1. The ‘lending’ institutions have nothing to ‘lend’ and are only required to have 10% actual assets in order to ‘lend’ out the remaining 90%.
2. Once you sign your mortgage, they illegally endorse it like a check and add this IOU as an asset in their balance sheet. The check they give to the seller then becomes a credit entry on the seller’s bank account where it will stay until the seller demands part of all of this “money.” This rarely happens and the seller usually only draws against his account to pay his expenses at any given time.
3. The aggregate mortgage payments that come in become the banks income and those draws against the check they cut to the sellers are usually covered. If need be, they can turn the FED for short term loans to cover additional or month to month expenses.
4. To keep the whole game solvent and make a fast buck, the lenders takes a bunch of mortgages (IOU’s/assets) and combines them and sells them to the greater investment market as Collateralized debt obligations and usually for far more than they are worth.
In a nutshell, that’s exactly how the “system” works. You literally finance your own loan and make the bankers and their investment buddies rich in the process.
How the “subprime” mess factors in is that it tarnished a great deal of the CDO market and a loss of confidence in this system ensued. Think of old fashioned bank runs. Ultimately, the big banks are the ones that exposed themselves to this mess because a lot of the credit originated with them and them divided to the mortgage lenders.
So ultimately, who do you owe your mortgage to? You were never “lent” anything and you’re paying the bankers the principal and the interest for the whole deal and for 30 years, ha!
The subprime mess exposed the whole system to the light of day. Formally the ranting of conspiracy theorists now have been fully exposed as facts.
Don’t believe me? Recently, suit bought by Deutsche Bank against lenders it was planning to foreclose one was thrown out of Ohio Federal Court.
Under Full Disclosure and Fair Credit act, the lender must disclose what they are lending (originator) and who they have transferred the note to when in fact they do transfer it. In essence, it is illegal for a bank to extend credit as a “loan” and when a lender collateralizes your promissory note, he is violating various state and federal banking regulations.
Guys! EVERYBODY is missing the point. The ‘subprime’ debacle is just a small section of the overall problem. It is the convenient whipping boy of the investment banking industry because THEY are the ones that messed up big time by sell off these debts as CDO’s and other exotic snake oil.
This was a ponzi scheme of the biggest magnitude because the bond rating agencies might have been complicit in the peddling of these instruments.
The “credit” crunch comes from hedge and money markets trying to offload these instruments back to where they came from and these institutions (Bear, Citi, ect..) don’t have the cash to accept them. How’s getting some people to continue paying mortgages on deprecating property solve the problem that the over-valued CDO’s bring to the equation?
CDO’s and other derivatives were the new “roaring 20’s” instruments that were designed to fall as the top tier that unloaded them first made out like fat rats. No amount of negotiating with lenders and banks is going to restore the confidence in the investment banking sector as long as “creative” financing keeps hiding behind the sub-prime boogeyman.
Question, how did the credit crunch extend all the way to Asia and beyond if it was just a mortgage issues? Answer, it didn’t, the CDO’s, SIV’s and other pyramid investment vehicles now turned junk bonds permeated world wide. Nothing is going to stop the impending tide of nastiness that is about to ensue.
Keep whipping the sub-prime excuse without focusing on the bigger picture and you’re sure to be lost in the come deluge.
There is nothing wrong with this program as currently intended. The lenders having been trying to work out loans on an individual basis. The problem has been the task is far too massive to accomplish this way and the loans are bundled in a way to make work outs impossible. The treasury is establishing a system to work out the loans that have a chance to be saved en masse. The only negative is that the formula worked out will not be perfect and some will get a work out when they should not (and vice versa). This is a very acceptable flaw. The thing to be worried about is whether this morphes into a bail out of the banks as well. Of course the Fed is doing it’s best to handle that anyway…
I feel for those who were forced to take 2nd mortgages in the last few years, due to illness and other unfortunate circumstances. Help is needed there, but it’s a mixed bag.
I don’t care for those who “cashed out” (taking aggressive ARM, balloon, piggyback mortgage programs, etc.) in order to buy luxury cars, additional real estate, etc. I feel more disdain for the mortgage institutions that fueled the frenzy, as it looks like taxpayers will ultimately pay for the mess.
If the fed. government tries to fix the problem by giving passes and reducing interest rates, there will be a counter effect, since money is a conservative object. Eventually the market will compensate somewhere (correct); i.e., devaluation of the $, recession, greater economic polarization, depression…
Too bad for the rest of us NYers who continue to rent and save for a brighter tomorrow – as the market will remain ridiculously inflated.