The Republicans seem to be the major opposition to the bailout bill. Seems they don't want to go home to their constituents and tell them that they helped the Bush administration ram through a $700 billion bailout package. The package isn't as bad as it sounds--but anything more complicated than "I'm giving you money" is hard to explain from the stump.
Of course, we don't actually know exactly what's in the package, except that the Democrats seem to have put Paulson on an installment plan. So it's hard to know exactly what they're turning down.
By walking out, they get to hang the responsibility for the package on the Democrats--it probably won't be much more popular with their constituents. But without the Republicans, the plans costs are certain to go up considerably, including, probably, giving bankruptcy judges the power to rewrite mortgages. This sounds wonderful--until you realize that this means mortgage rates will go up for everyone, probably quite a bit. And that this will further strain an already weak industry. Why use jinglemail, or struggle to meet your payments, if you can pay a lawyer $1,000 and magically transform your mortgage into a prime loan?
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Grrr - no posts all day then three all at once? WTF?
It's a slow rainy day at the office - you need to even out the flow so we can spend the day discussing each one.
MEGAN: The political posturing around the bailout is unpleasant, but inevitable as we're talking about essentially extending FDIC insurance to the shadow banking system, ex post a run on it.
Given the situation, and the fact that prices were inflated by cheap credit, don't you think mortgage rates *should* go up? Don't you think the possibility of a BK cram down sets exactly the right incentives for mortgage issuers?
Conversely, don't you think home prices are too high? Don't you think they will mean revert, now that the credit bubble is gone? If they do mean revert, it will mean that 40% of housing in the US is underwater, and a cram down is cheaper than jinglemail in this situation.
-winterspeak
OK, let us get this straight - having a bad loan rejiggered so the owner can actually pay the loan and not default is going to make other people's mortgage's go up?
But the alternative - having people default on their loans, which will cost the bank much much more than rejiggering the loan will - is somehow not going to make mortgage rates go up?
Sorry, but that makes ZERO sense.
Maybe you should call one of your professors to get some more opinions before making yourself look like a dunce again.
giving bankruptcy judges the power to rewrite mortgages. This sounds wonderful--until you realize that this means mortgage rates will go up for everyone, probably quite a bit.
The current real estate valuation crisis is going to do this anyway. We face a situation where the main assumptions underlying the exemption of home mortgages from the cramdown procedure other secured creditors have to face in bankruptcy are just not operative.
Letting bankruptcy judges do cramdowns on a borrower's home is an invitation to all kinds of borrower mischief in a normal market. But in a rapidly deflating market (i.e. right now...Estimates are that median home prices in California will drop 40-55% off their peak before this is over) doesn't it just force creditors to confront the reality of the situation? Right now we have a situation where lenders are postponing foreclosure action on major delinquencies until the borrower gives up and actually walks, because foreclosure forces them to realize the losses on their balance sheets.
until you realize that this means mortgage rates will go up for everyone, probably quite a bit
God, let's hope so!
Not only should mortgage rates be going up, but we ought to be severely tightening the lending standards. Nobody with even moderately bad credit ought to get a mortgage. And there should be a legal requirement that all borrowers put 20% down.
The entire problem is that banks have been given out mortgages for nothing to any j*ck*ss who walks into the bank. Tell all the people who can't afford mortgages to go away -- gee, they'll have rent, sob, sob -- and the mortgage industry might get out of this mess.
"K, let us get this straight - having a bad loan rejiggered so the owner can actually pay the loan and not default is going to make other people's mortgage's go up?
But the alternative - having people default on their loans, which will cost the bank much much more than rejiggering the loan will - is somehow not going to make mortgage rates go up?"
Correct me if I'm wrong, but banks already have the ability to 'rejigger' loans when doing so will, in the end, save them money. No? So if a bankruptcy judge is doing it, the bank has theoretically already decided that foreclosure was more financially sound for them than a 'rejigger'.
What the hell is "jinglemail?"
Also, here's an idea I'd like to bounce off folks: interbank -- mostly short term -- lending seems to be the activity that we're trying to support. So, I'd like to know if there's any merit to having the government guarantee -- even if it's not on a permanent basis -- interbank lending. I rather suspect such an approach -- in addition to recapitalization efforts when necessary -- might give a lot of bang for the buck.
Extending hundreds of thousands of dollars of credit to people with a history of abusing and mismanaging credit was always an extremely stupid idea, ditto with loaning them money without any meaningful downpayment. If you put no money down on a house, you've got nothing invested in keeping it, you've basically been paying rent and have none of your own equity invested in it, so nobody should be surprised that these folks have simply walked away from their loans and their houses.
Similarly, extending hundreds of billions of dollars in credit or loan guarantees to people with a history of abusing and mismanaging the billions they've already gotten ahold of is a similarly bad idea.
What the hell is "jinglemail?"
Mailing the keys to the house back to the mortgage servicer, often accompanied by a statement that the borrower is surrendering the property and/or refuses to pay any further on the debt.
Designated "jinglemail" in the jargon of employees of mortgage service companies because of the noise the contained keys make when the envelope is carried, opened or disturbed.
Consider for a moment that the Federal Government moves forward with the bailout. It buys up as much of the mortgage backed mess it can. Then once it has its hands on all that sub-prime toxic waste it launches aggressive home owner relief programs (judges, cramdowns, jinglebells, whatever...) that immediately begins reducing the level of sub-prime defaults.
Folks we are less than 2 months from the election and the map is turnng more blue each day. The Republicans will not accept the fact that they would be taking a huge political hit while handing the Dems an opportunity to increase their brand by turning the bailout into a profit down the road while saving the desperate homeowner from foreclosure.
I too have no idea what the hell jinglemail is. Please explain
c. gray: Thanks.
Neither here nor there, but the English language is really capable of coming up with apt, colorful, and rather pithy neologisms.
Sorry Megan,
But I'm not going to fall for your chicken little pronouncements. I will not agree to any package made in a sausage factory. Ya'll such hypocrites. You cry and scream for transparency in the financial sector, and when we really need transparency with THIS bill you don't care.
Has there ever been a phrase so descriptive, on so many different levels, as "cramdown"?
The problem with the bailout is it does nothing to reduce the risk.
What happened is that cost of living went up, but incomes didn't. When people's expectations aren't met, they can't save or eat the foods they're used to, their big house seems less worth it.
People need to realize that there is no such thing as a risk free rate of return. There is no magic investment that will produce a return with out actually doing something. People need to get their money out of commodities and invest in people doing things.
What happens with the bailout? We get more inflation and money moving out of capital investments and into government paper.
As with the pseudo-libertarian endorsed Iraq Invasion (et al), Bailout Crisis is being sold as an immediate threat and must be addressed nownownow. Kind of like the Iraq threat. No one has explained specifically why it can't wait at least a bit to explore alternatives or at least discuss it a smidge, maybe let the public in on the details. Also, I heard that Paulson was the head of Goldman Sachs for a little while. Is that relevant?
Apparently the Pubbies object to the usual Christmas Tree goody-bags being handed to the usual suspects: ACORN and NACA.
Fine. All that must get done is to establish a value, ANY VALUE, for the CDOs, GSE bonds, and MBSs held by banks. When a value is established, the banks are able to solidify their balance sheets and resume interbank lending.
The point: do a deal which is 1) simple and clean--no foodaddle, no Christmas Trees; 2) transparent; and 3) focused on establishing value.
brooklyndodger said, "the map is turnng more blue each day."
Please identify which red state has turned blue in the past week? It's not obvious to us.....perhaps because Obama isn't being part of the solution here.
jwh - New Mexico, Colorado have turned blue.
Dad29 - what were they trying to get for ACORN and who put it in?
i wish you cared about people as much as you care about the animals you refuse to eat.
the uws really played a number on you. public school for one year and a solid european vacation would have done you a world of good.
The Paulson plan would have been an easier sale if Dems didn't, simultaneously:
1) Blame the whole mess on Wall Street (as opposed to taking responsibility for their role in inflating the housing bubble via the GSEs, etc.);
2) Call the bill a bailout of Wall Street. Wall Street firms are going bust left and right. The point of the bill is to stabilize the financial system.
3) Ridiculously claim that there was deal that the House Republicans were going to sign onto but they changed their mind when McCain sat at the table in the White House.
Dems may not like that they are closer to George W. Bush on this issue than the House Republicans are, but the smart thing to do would be to make a deal with the House GOP. A good starting point would be to nix the idea of giving 20% of any government windfall from the rescue fund to the leftwing agitators at ACORN. That's a nonstarter. In turn, the GOP House can drop requests for suspending the capital gains tax. It's not as if their constituents don't have plenty of losses to offset their gains these days anyway
The Iraq analogy is silly.
The Iraq war was a no brainer. Saddam had been a threat to the region which prevented growth and development throughout, he used the implied threat to bully neighboring countries, al qaeda types and other small minded anti-americans saw allowing Saddam's aparent (real or not) transgressions as taking face from America, and Saddam's large army and the uncertainty of WMD made taking on Iran impractical.
We had pocket Aces, the flop was two Aces and a King. Saddam was bidding up the pot and bullying his neighbors suggesting he had a full house. What are we supposed to do, fold? We have 4 aces, it doesn't matter whether or not Saddam has the boat. If he wants to go all in, you take him all in.
And this, when the economy was stagnant and people were willing to lend to us for practically free.
House Republicans aren't going to vote against the final bill. At least, not en masse. Pelosi will get her 100-Republican-Umbrella.
But the final bill will be considerably better than the bloated bill the Democrats turned the Paulson proposal into.
At least, that's my hope.
And Iraq wasn't exactly rushed. I expected them to go in in the fall. It was really drug out.
Megan-
I'm sorry, I have to ask what you mean. Is it not as bad, meaning the taxpayers will play less than $700B? Meaning it is better than the administration has presented it(namely, a profit making alternative to absolute ruination.) I think Arnold Kling alone has raised enough concerns that I don't understand how you can say that.
I am not sure this is the forum for this discontent, but I have always found your viewpoint independent and insightful. While you may have good reasons to support the bailout, repeatedly dropping lines like this without support has really turned me off.
Of course, you will say that is my choice and you don't write this for me. But I am sure many commenters, as well as readers like me who have not heretofore been regular commenters, lament the lack of thoughtfulness and independence this crisis seems to have inspired.
"Correct me if I'm wrong, but banks already have the ability to 'rejigger' loans when doing so will, in the end, save them money. No? So if a bankruptcy judge is doing it, the bank has theoretically already decided that foreclosure was more financially sound for them than a 'rejigger'."
Mike S. gets it right (though in the mortgage business they usually call it "modifying" the loans instead of "rejiggering" them). This was also part of my humble proposed solution to the big mess.
"The package isn't as bad as it sounds"
I heard some pretty good things about this blog so I had to check it out. It is unfortunate that you subscribe to the quote above. It is utter nonsense to say it is not as bad as it sounds. Where does the $700B come from? It demonstrates a total lack economic understanding.
Symptom masquerading as problem: People spending more than they have.
True problem: Never ending printing of money by the Fed. Tinkering in the market by the Fed. Flooding the market with fiat money is the true disaster that has befallen us.
If this passes, the pressure on the dollar will increase. To put it more bluntly, all of the money the average person currently has will be worth less and inflation will continue unabated.
If anyone would like to read more about what is actually going on, I submit this link:
http://mises.org/story/3128
ERe: 3) Ridiculously claim that there was deal that the House Republicans were going to sign onto but they changed their mind when McCain sat at the table in the White House.
I guess President Bush has switched parties because the Administration also claimed a deal had been reached. Apparently the GOP leadership was on board, and the deal was scuttled by a cabal of politics-first fanatics who would not want to cut deal with Democrats if the planet had been invaded by aliens and the future depended on it.
Larry Kudlow has a heartening update here:
http://kudlow.nationalreview.com/post/?q=ZTNjODI0MjQ0OTBkOWEwZGM1MDQ5NTQ0ZjNjNWU0Mzk=
The gist is that the House GOP is on board with the general structure of the bail out. Hopefully they will get something done soon.
"Also, here's an idea I'd like to bounce off folks: interbank -- mostly short term -- lending seems to be the activity that we're trying to support tktktk"
Bad idea jasper. Bank A is in trouble. Bank B doesn't want to lend to them. But the government assumes the credit risk. That makes Bank B happy. So Bank A gets cash -- lots of it -- that may well not sufficient to keep it solvent. They could even use the money to make more dodgy loans... but who cares? The government and its magic money machine are responsible.
"But the alternative - having people default on their loans, which will cost the bank much much more than rejiggering the loan will - is somehow not going to make mortgage rates go up?"
She never said that loan defaults wouldn't make mortgage rates go up.
It is perfectly plausible to me that rates would go up under both scenarios.
You should read more carefully.
"The package isn't as bad as it sounds"
You're right. It's worse. I don't believe for a second that this will end with the first $700B.
Suppose we apply a correction factor based on our experience with the savings and loan crisis.
What was the final cost of the RTC vs. the initial estimates? IIRC the ration was roughly 2:1.
I am not convinced yet that this bailout is worse than simply doing nothing.
"Apparently the GOP leadership was on board, and the deal was scuttled by a cabal of politics-first fanatics who would not want to cut deal with Democrats if the planet had been invaded by aliens and the future depended on it."
The House GOP was never on board, but no one had bothered to ask them. If their interests are taken into account -- getting rid of the ACORN slush fund, re-writing bankruptcy law on the fly, etc. -- the end result will be a better bill.
If you want to see "politics first", look at the execrable Harry Reid. First he says John McCain's help is necessary, and then by the end of the week he says John McCain showing up set everything back. Sounds like cover for the stunt Obama allegedly pulled in the White House meeting.
One thing that must be an amazing wake-up call for McCain is to see how meaningless all those good relationships he thought he had with Congressional Dems and the D.C. press were.
That makes Bank B happy. So Bank A gets cash -- lots of it -- that may well not sufficient to keep it solvent. They could even use the money to make more dodgy loans... but who cares?
Dan: one could say the same thing about the $700 bailout in general. I'm asking if, in the context of ideas about how to spend any taxpayer money allocated for purposes of shoring up the financial sector -- spending some portion of it (NOT additional money) to guarantee interbank lending passes cost/benefit analysis. Obviously if one is against the idea of a government bailout in general, one is not likely to favor such an idea.
But I wouldn't allow the government to make a guarantee of a "troubled" bank's interbank borrowings. I'd like to see an FDR-style examination of the books of all banking organizations. The idea would be if you're solvent -- or you allow yourself to become solvent via selling equity to the government -- we'll give you the gold seal of approval and guarantee (again, perhaps just temporarily for the next couple of years once this crisis is sorted out) not only your debts to depositors, but also your debts to other banks.
It's true there might be some temporary extension of moral hazard associated with such a plan. I mean, ideally, you don't want solid banks to be lending funds to financially shaky banks. But through an audit process shaky banks would be folded up and liquidated or sold off quickly, leaving only solid banks standing. At that point you could gradually phase out the program.
My point is that the proximate cause of bank-related trouble in the wider general economy is unwillingness to lend to one another. My idea would directly address this problem -- and I think it might prove to be a cost-effective supplement (but not replacement for) the capital injection plan making its way through Congress.
One further thought: I read a lot of discussion of and a lot of concern that this or that plan doesn't address "the underlying causes" of the crisis (typically these are identified as falling real estate prices). And the usual prescription for fixing such underlying causes is a suggestion to prop up the property market (perhaps by rewriting mortgages, or changing the bankruptcy laws, or getting the government into the landlord business, etc.).
Well, I see this as exactly the wrong approach. At the end of the day, the one task that not even the mighty US government can undertake is setting prices. That, I'm afraid, is something only markets can do. So, in general I want to see any government action be as narrowly focused, and as tightly targeted, as possible. Hence, if lack of interbank lending is the phenomenon that's wreaking havoc in the general economy, why not deal with that, and let the market (in the fullness of time) take care of complicated stuff like determining house prices.
I've got a ARM that I got from a coworkers wife and she was very sincere ... but I didn't know the 6-3/4 was a teaser rate and only when I dug into the docs and did google searches did I realize I will never see 6-3/4 again. We did modify the mortgage but it only bought us time in that it rolled up the late payments and taxes into a 440K loan on what is now according to my realtor on a 300K house.
I can only see a foreclosure in the future with a 200K was deficit that in no way I can repay. The mortgage company will not seriously do a short sale or deed-in lieu
The threat of a cram-down might be the only way to get them to do aserious mortgage modification or fore go a foreclosure and accept a short sale or deed-in lieu
It's insane to hand out the power to rewrite mortgages.
The whole idea of the bailout is that the government is going to buy $700 billion in mortgages; the government can refuse to foreclose on any or all of them if it wanted to, grant better terms, whatever. You don't need a judge for that.
On the other hand, if the judges get to rewrite non-bailout mortgages, then you've just undercut the value of every single mortgage in the country by making them all even more uncertain investments. Which means you've just made the mortgage crisis that much worse.
Fred, you should still be able to refi and lock in something close to that. I got a call last week, someone wanting to refi me at 6.5%. I entered my mortgage a year and a half ago at 6.25% fixed though. I thought about telling him to call me when he wants to lend to me at 4%.
Refi will cost you a couple grand, but it might be worth it.
Problem is high rates relative to flat or falling incomes and rising cost of living. People really have just gotten too greedy. Every one expects a high return, but guess what, growth has been miniscule for years. You can't expect returns higher than increases in productivity and growth. We're turning our economy into a negative sum game.
Jasper,
I agree that the government shouldn't set prices. I agree with most of what they shouldn't do in the "underlying causes" part of your post, with the exception being rewriting the bankruptcy laws to make it easier for judges to enforce haircuts.
It's fair given the corporate welfare our government is filled with and might actually lead to more "correct" mortgage pricing (banks would be less willing to lend to unfit borrowers). Megan is wrong that one would simply pay $1,000 to a lawyer and get a cheaper loan... there would be hurdles to be jumped. If it was demonstrably the case that i could make the payments i'd agreed to, then no haircut for me. The judge should make me pay the lenders court costs, too.
I disagree that we're talking about a temporary moral hazard. I see this is as the mother of all moral hazards.
You write:
"Hence, if lack of interbank lending is the phenomenon that's wreaking havoc in the general economy, why not deal with that, and let the market (in the fullness of time) take care of complicated stuff like determining house prices."
The lack of interbank lending is a symptom of reality. But guaranteeing such loans by the government WOULD be interfering with the setting of loan prices. That's not an argument against your proposal, but it does expose a flaw in your internal logic.
If the government is going to guarantee any loans, it should be making them directly to the banks in question and take the equity if it doesn't get paid back. I'd prefer that to some interbank guarantee.
There is going to be a credit crunch. There has to be after what we've gone through. Jobs are going to have to be lost. We are going to have a recession. Not political smart for the pols to make this case, but i see the role of government here as helping to build a stronger system over the long term, that will help our recovery when the recession ends. Papering over the situation with, at root a ballooning deficit, just makes the eventual medicine more bitter.
The government should pay market rates for the debt they buy, not rates that reflect some fictitious idea about what the loans and underlying property "should" be worth (i'm pretty sure we're in agreement here). There should be different standards for primary residences and 2nd, 3rd and 4th speculative Florida swamp-land condos. As much equity as possible should be destroyed for mismanaged banks -- if the government/tax payers are going to take on risk, they should get the reward, and sell the cleaned up banks etc... to the highest bidders later.
What else? We should end our expensive and ridiculous foreign entanglements (cost of Iraq and Afghanistan to date is about 1 trillion -- running costs for the two now are at least $10 billion a month, though a recent book by Joseph Stiglitz had it at $16 billion a month. That's a couple of AIG bailouts a year).
We should get rid of the $16 billion a year we spend on subsidizing agricultural commodities (we should take the backhoe off the back 40 and bulldoze the whole department of agriculture while we're at it). The government has to reduce spending, lets start doing it in the right places (i understand the two things above are when pigs fly ideas, but there is insufficient debate on what we're going to do about our unsustainable levels of spending in Washington amid all this talk about handling the "crisis mode" we're in, as La Palin puts it).
Fred, you should still be able to refi and lock in something close to that.
He can't refi, because he owes $440K on a $300K house. What bank is going to loan him 150% LTV on a currently depreciating house? You may not be able to do it at any interest rate.
Problem is high rates relative to flat or falling incomes and rising cost of living.
Mortgage rates are still at or near historical lows. The problem isn't the interest rates people are currently getting. The problem was loaning money to people that could not pay it back absent being able to sell their house a couple of years later for 20-30% more. Now that banks realize that they can only loan money to people they can afford to pay back, all of the sudden we have millions who aren't qualified to purchase homes.
Yes, I didn't notice the 300K part. Is it really down that much?
Anyway, good luck Fred.
I've got a ARM that I got from a coworkers wife and she was very sincere ... but I didn't know the 6-3/4 was a teaser rate and only when I dug into the docs and did google searches did I realize I will never see 6-3/4 again.
What? Did you just say you didn't read the loan docs before signing?
Yes, I didn't notice the 300K part. Is it really down that much?
In most of coastal California, the market is down somewhere between 25 and 40% from peak, depending on neighborhood and type of home....and its expected to fall further. Possibly more than 60% for condos in marginal neighborhoods.
It's pretty bad.
In most of coastal California, the market is down somewhere between 25 and 40% from peak...
It's pretty bad.
On the bright side, the homes are still worth something. Good conservative lenders (the ones that got 20% down) lost some money on some homes and risky lenders lost a lot of money some homes. That doesn't mean we have to have a government bail out. It just means banks and investors have to recognize their losses and move on if they can, or get bought out (before or after bankruptcy) if they can't. I do think the government has a roll in backing up the FDIC guarantees if needed, but not much above that.
What needs to happen is housing prices need to fall to something working families can really afford. $700 billion dollars won't help bankers and others face reality but it may delay the day of reckoning and prolong the crisis.
Given that A plan is necessary, Ryan's (House Pubbies) plan makes a lot of sense.
Indemnify the banks for a premium paid to the USTreasury. Allows re-valuation of the possibly troubled loans back to par value (100% of cost) thus re-liquifying banks for lending.
No cash sent to moronbankmanagers, USTreasury only has to pay out if a loan goes bad--and that's only about 5% of total mortgage debt.
Frankly if you're on the edge of a mortgage, screwing with the interest rate probably won't save you.
We will never have victory in Iraq. We lost when Shock and Awe tragically began, when our invasion and occupation of the unfortunate Iraqi people bankrupted us and ruined our reputation. If McCain wins, the world will not soon forget.