Foreclosure vs. Renegotation in Non-Standard Home Mortagages

No money down!

Steven Pearlstein - 'No Money Down' Falls Flat - washingtonpost.com: Which of these products do you think makes sense? (a) The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due. (b) The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation. The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan. (d) The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment. (e) The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years. (f) The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments. (g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced these "innovations," but it has also begun to combine various features into a single loan and offer it to high-risk borrowers. One cheeky lender went so far as to advertise what it dubbed its "NINJA" loan -- NINJA standing for "No Income, No Job and No Assets." In fact, these innovative products are now so commonplace, they have been the driving force in the boom in the housing industry at least since 2005. They are a big reason why homeownership has increased from 65 percent of households to a record 69 percent. They help explain why outstanding mortgage debt has increased by $9.5 trillion in the past four years. And they are, unquestionably, a big factor behind the incredible run-up in home prices.

Now they are also a major reason the subprime mortgage market is melting down, why 1.5 million Americans may lose their homes to foreclosure and why hundreds of thousands of homes could be dumped on an already glutted market. They also represent a huge cloud hanging over Wall Street investment houses, which packaged and sold these mortgages to investors around the world....

Instead of packaging entire mortgages, Wall Street came up with the idea of dividing them into "tranches." The safest tranche, which offers investors a relatively low interest rate, will be the first to be paid off if too many borrowers default and their houses are sold at foreclosure auction. The owners of the riskiest tranche, in contrast, will be the last to be paid, and thus have the biggest risk if too many houses are auctioned for less than the value of their loans. In return for this risk, their bonds offer the highest yield.It was this ability to chop packages of mortgages into different risk tranches that really enabled the mortgage industry to rush headlong into all those new products and new markets -- in particular, the subprime market for borrowers with sketchy credit histories.

Selling the safe tranches was easy, while the riskiest tranches appealed to the booming hedge-fund industry and other investors like pension funds desperate for anything offering a higher yield. So eager were global investors for these securities that when the housing market began to slow, they practically invited the mortgage bankers to keep generating new loans even if it meant they were riskier. The mortgage bankers were only too happy to oblige.

By the spring of 2005, the deterioration of lending standards was pretty clear. They were the subject of numerous eye-popping articles in The Post by my colleague Kirstin Downey.... But it wasn't until December 2005 that the four bank regulatory agencies were able to hash out their differences and offer for public comment some "guidance" for what they politely called "nontraditional mortgages." Months ensued as the mortgage bankers fought the proposed rules with all the usual bogus arguments, accusing the agencies of "regulatory overreach," "stifling innovation" and substituting the judgment of bureaucrats for the collective wisdom of thousands of experienced lenders and millions of sophisticated investors. And they warned that any tightening of standards would trigger a credit crunch and burst the housing bubble that their loosey-goosey lending had helped spawn.

The industry campaign... did delay final implementation of the guidance until September 2006, both by federal and many state regulators. And even now, with the market for subprime mortgages collapsing around them, the mortgage bankers and their highly paid enablers on Wall Street continue to deny there is a serious problem.... What we have here is a failure of common sense. With occasional exceptions, bankers shouldn't make -- or be allowed to make -- mortgage loans that require no money down and no documentation of income to people who won't be able to afford the monthly payments if interest rates rise, house prices fall or the roof springs a leak. It's not a whole lot more complicated than that.

The horse is out of the barn, and Steve's true point that the door should not have been left open is not enough to deal with the current situation. In those states of the world in which the economy slows and interest rates rise and millions of homeowners begin missing their payments, what should be done? I can see one constructive thing that bank regulators can do: they can publicly note that foreclosure is an appropriate response to individual cases in which payments are not being made because idiosyncratic things have gone wrong with individual household's finances, but that foreclosure is not an appropriate response to a systemic problem triggered by macroeconomic risks that have come calling. The appropriate response when it is an aggregate rather than an idiosyncratic shock is to renegotiate the loan--not to foreclose on a homeowner. And banks that do the second rather than the first are not fulfilling their responsibility to the system of which they are a part.

Comments

[Bupa]

Finally, a Washington Post article that is well done.

What wonders will happen next?

p.s. I already read this on Roubini's site yesterday.

[bakho]

This is a return to the company store. The banks have figured a way to own everything.

"You haul Sixteen Tons, whadaya get?
Another older and deeper in debt
Saint Peter don't you call me cause I can't go
I owe my soul to the company store"

--Merle Travis

[Cranky Observer]

All (well, most) of those loans make sense for /someone who understands them, chooses one appropriate to his situation, and can accept the risk/. The problem is that the mortgage industry shoved those loans down the throats of people who did not understand them and were not prepared to handle them financially or in risk terms.

But what really frosts me is that after 10 years of basterdizing the word "risk" (merging its plain-language and technical-finance definitions and using the resulting unclear hybrid to lay smoke screens everywhere) and /collecting the cash premiums for high risk investments/ the mortgage industry is crying foul because **some of that risk came due, and they have to pay**. Hello - that is what RISK means! There is _risk_ in its plain-language meaning hidden inside your hybrid "risk" word - and sometimes you get bitten by that risk. Welcome to life. Please don't run to John McCain or Alan Greenspan for a bailout on this one.

Cranky

[Donald A. Coffin]

Piggyback loans do make sense, in well-defined circumstances--you're buying House A and selling House B. The closing on A occurs before the closing on B, so you borrow for just long enough to get the proceeds from your sale, ay which point you pay off the "piggyback" loan on A. I've done that twice.

In other circumstances, however, it seems like a recipe for disaster.

[Winston]

Lots of these loans, especially balloon mortgages and piggyback loans make lots of sense for borrowers in certain situations. The problem is that everybody got too greedy and started acting stupidly by using inappropriate products. The best way to prevent this from happening in the future is to NOT bail anyone out. Let people pay for their greed and stupidity.

Borrowers who took out loans that they should have known they couldn't afford deserve, at the very least, to have their houses taken away. Those who misstated their income on so-called "stated income loans" deserve to be prosecuted for fraud as do the mortgage brokers who conspired with them to do so. If anything, many states, such as California, which are "non-recourse" states, meaning that you're only on the hook up to the value of the home, are far too generous to borrowers.

As for the investors who bought these bonds. They're adults who play this game for a living. If they loose their shirts, well, they knew the job was dangerous when they took it.

This is a case of people making bets that somebody would bail them out if things went bad. We see this with lenders consolidating and selling off their risk, we see this with borrowers over-extending themselves to live above their means. Let them pay the full cost of their imprudence.

[Winston]

Cranky,

When the bubble started up, one of my friends who worked to match his $90k/year salary to his debt service payments suggested I talk to his mortgage broker. He told me that he could get me into a house that was about 3 times as expensive as I had any business getting into. My sense of rationality overcame my greed. Nobody shoved anything down my (or anyone else's throat). People who took these loans were greedy and didn't feel that they should have to work for the stuff they wanted. Most of the people being foreclosed on right now richly deserve it.

[Tabitha]

People accepted debt in exchange for housing/a lifestyle they could not afford otherwise.

Businesses made risky loans, and ostensibly charged a risk premium doing so.

The shakedown in the subprime and some of the prime markets is simply a natural consequence of these actions. Bad business decisions and poor personal finance decisions are something that people will come to understand can carry consequences. Unless we have another taxpayer bailout, that is.

[Cranky Observer]

> Nobody shoved anything down my (or anyone
> else's throat). People who took these loans
> were greedy

By definition, anyone reading Brad DeLong's blog is capable of handling themselves in a mortagage situation and should suffer the consequences if he isn't. I would guess the average reader here has at least an MA if not an PhD, MBA, etc.

However, I know quite a few people who are generally smart, well-educated, etc who get bedazzled and flustered as soon as the topic of finance comes up. Put them in a room with an ex-mattress-salesman turned mortagage broker and they will be lost within a few minutes. And they are the otherwise well-educated ones; how about the starry-eyed 23 y.o. couple with no college education?

At one time our society had understood boundries against "sharp dealing" and taking advantage of those less capable than oneself. The areas where this was not true were well-defined, such as the used car lot or Maxwell Street. Today the sharp dealers run the industries that were once thought to be safe havens.

While New Century Mortage may be chosen as the whipping boy for this cycle, I somehow seriously doubt that any of the big Wall Street firms will suffer the consequences of _their_ bad judgement on this one.

Cranky

[jim]

The trouble with calling for renegotiation rather than foreclosure is there's no-one can make the decision. These mortgages aren't held by the bank around the corner who can call in the borrower and talk to him/her. They're serviced by one bank (who takes a quarter percent out of the interest portion of the payment for its trouble and passes on the rest); another, warehouse-type bank however owned the investment, but bundled it up with a whole bunch of other loans into a pool which it sold to a Wall St. firm who then created the tranches (which are derivatives of the pool, not subpools) which it then sold to investors.

The borrower deals with the servicer. The servicer has some leeway in loss mitigation (can extend time to pay, for example), but can't go too far, certainly not to the point of renegotiating the loan. The investors down the chain don't really trust the servicer, and they're the ones who "really" own the loan (the manager of the pool is the beneficial owner of the mortgage, I think). None of them can renegotiate the loan, either (it's an interesting question if any of them could locate the original file).

The only way in the system for this to work would be a refinance. Close out the original loan; write a new one.

Problem 1: the house is no longer worth the value of the original loan, so cannot stand as collateral for a new one.

Problem 2: the borrower cannot afford to pay market rates of interest on a new loan, can never afford to pay such interest.

I used to think that renegotiation would, in fact, happen, rather than massive foreclosure. But I now think it's institutionally estopped.

[Winston]

Cranky,

One of the things I've noticed in my decade in the workforce is how attitudes of the $10-15/hour factory worker types toward debt have changed. 10 years ago, most were fairly afraid of taking on debt and only did so when it was really worth it to them. I suspect that was because many of them were around during the last downturn when you could get in trouble with too much debt. Now, the younger guys are much less afraid of debt. It's always strange to me to see the guys who are making $15/hour driving more expensive cars and having more toys than guys who are making $45/hour. I think that the only way this is going to change is if a number of people (of all strata) are allowed to experience the natural consequences of their actions. We need to treat people as adults so that they will act as such.

[thermar]

I have an interest only line of credit of 45K on a building I bought, and am fixing up. The building is the collateral for the line of credit.
Recently my bank called with some "great news" they were willing to lower my interest rates if I switched it to a 300K line of credit.
I told the guy, Um... I make about 26K at best.
He called me back a few days later: No problem, we'll just switch the collateral to the house you own.
Yes they were willing to give me an interest only line of credit for more than 10X what I make in a year.

[David Lloyd-Jones]

One of the worst forms of discrimination against the poor is the array of limitations placed on their (currently our) access to risk. Often government run, and hence criminally overpriced, lotteries are the only risk instrument available to people in the bottom decile of asset ownership. This decile, btw, had an overall negative net worth in the US, and damn near that in Canada, the last time I looked.

One of the nice things about frisky mortgages is the fact that they give the poor the chance to become slumlords. This incidentally gives large numbers of the homeless the opportunity to escape the claws of the social work profession. That's just gravy.

Hence "g," all of the above, looks like a no-brainer to me.

Now if we could just do something about the fact that the American mortgage-interest income tax exemption is almost useless to the poor. Either abolish this rip-off by the rich, or else supplement it with a refunded, i.e. paid out, tax credit.

Ralph Reed, are you out there?

[jim]

To add:

"the mortgage bankers and their highly paid enablers on Wall Street continue to deny there is a serious problem"

But to them, at their level, there isn't.

Understand how this works: I take out a loan I can't afford; a year or so later I stop making payments; my servicer sends me a notice of default and forwards less interest to the manager of the pool my loan was part of; the pool manager shrugs his well-tailored shoulders and sends less money this month to the holder of his BBB tranche; the BBB tranche-holder shrugs his equally well-tailored shoulders because he hedged against this in ABXs.

The actual risk of my delinquency has been passed to whoever was the counterparty to the hedge fund on the ABX transaction. Who has no idea that I even exist, let alone have a loan.

[JonF]

Re: None of them can renegotiate the loan, either (it's an interesting question if any of them could locate the original file).

Yes, actually we can. in fact we are extremely careful about making sure we know where original documents are kept (generally, though not always they are entrusted to a custodial agency) Without the original note it's not possible (or at least not easy) to prove ownership of the loan, and foreclosure for default is problematic to initiate, to say the least.

[mort_fin]

jim

On nationalmortgagenews.com the FHA commissioner is talking about rescuing hundreds of thousands of subprime borrowers via FHA. On your point 1 (the loan would exceed the collateral) all you need is a flexible appraiser to do the FHA refi (if your loan is less than 87% of the conforming loan limit, which is the FHA loan limit). lord knows there are plenty of flexible appraisers out there. On your point 2 (the borrowers can't afford the monthly nut) a lot of the subprime stuff resets to hideous rates, so an FHA at 6.25% (plus another 0.5% for the insurance) for 30 years would have a lower payment than a subprime at 8.5% for 27 or 28 years. Borrowers could get current, for awhile at least, no pesky Congressional action or appropriation would be required, and if the borrowers can't stay current and fall behind again that's the next administration's problem.

JonF - of course most servicers know where the documents are, but it doesn't change the fact that a lot of the securitized stuff is awfully hard to coordinate for loss mitigation. The lender and the owner of the security and the servicer can all argue with the pool insurer over what the appropriate loss mitigation strategy might be.

[Dean Baker]

I don't object to trying to help some of the low and moderate income homebuyers who got snookered (hang the lenders). But, how about helping the low and moderate income people who were smart enough not to be homes.

If we're going to have some sort of bailout for low and moderate income homebuyers, how about some credit (e.g. 25 percent) for renters with incomes under $1,000. After all, these people were smart enough to ignore all the politicians and preachers of homebuying and made the right decision for themselves and their families. Shouldn't they get something?

[bill]

Great point Dean.
My Granny has a nest egg of $40,000 that's supposed to supplement her Social Security for the next 15 years. The nest egg will certainly be reduced as it was invested in a bond mutual fund that held mortgage securities. And she rents.
It's not like we're putting people in debtor's prison. They'll just go back to renting. And they can look back fondly at the 24 months they spent living in a house. Even if it hurt a variety of Grannys.

[christofay]

One result of Greenspan's forcing the Fed rate to 1% while trying to save W's job was that it drove investors especially conservative investors to seek yield. Greenspan created an environment where investors had to get riskier or see their nest eggs shrivel under the Fed's liar CPI rates. I say the Fed Gov's liar stats certainly helped create the liar loan environment. There was a lot of support on this blog for Mr Magoo's policies; now we're approaching the superfund clean-up phase of those policies. Remember who Mr Magoo worked for, is it any wonder it's gonna be a mess?

[Jonathan Goldberg]

"This is a case of people making bets that somebody would bail them out if things went bad."

You mean:

This is a case of people making bets that somebody would bail them out WHEN THINGS GOT bad.

It's also worth noting that a lot of the loans taken out by high income, sophisticated types were predicated on the notion that the rising real estate market would bail them out.

[JonF]

Re: JonF - of course most servicers know where the documents are, but it doesn't change the fact that a lot of the securitized stuff is awfully hard to coordinate for loss mitigation.

Yes, I deal with these exact issues at my job. There are some headaches and snafus. And yes, the volume of foreclosures is beginning to multiply them. But no, it's hardly a hopeless situation. I don't come home from work and pour myself three straight vodkas on the rocks to get over it. There are workable procedures in place and we are dealing with it.

Re: One result of Greenspan's forcing the Fed rate to 1% while trying to save W's job

This is a silly assertion. Interest rate cuts are a standard tool in the Fed's arsenal to combat a recession. Those cuts would have occured no matter who was in the White House and (probably) no matter who was in charge at the Fed. And Greenspan did not save Bush's job: 9-11 did that. Had the economy been the main issue in 2004 Mr. Bush would long since have been writing his memoirs in Crawford.

[Dean Baker]

Ah yes, Mr. Greenspan. Who could forget that are beloved former Fed chairman encouraged people to take out ARMs instead of fixed rate mortgages back at the peak of the boom in 2003? This was also a time when the fixed rate was near a 50-year low.

Greenspan doesn't think that controlling asset bubbles is in the Fed's job description, but in my view this is a serious mistake. (The law says "price stability," it doesn't say which prices.) At the least, the Fed's job should not include promoting asset bubbles.

[Mr. X]

JonF: "Had the economy been the main issue in 2004 Mr. Bush would long since have been writing his memoirs in Crawford."

No, Bush would be clearing brush from his ranch; Max Boot, Ann Coulter or Michelle Malkin would be doing the writing.

[a different chris]

>I used to think that renegotiation would, in fact, happen, rather than massive foreclosure. But I now think it's institutionally estopped.

This (and other posts on the topic) were quite interesting to me. Because I think it is undeniable that the last thing the financial people want is to be stuck with your stupid home, and I was wondering why some sort of renegotiating strategy wasn't the first, second, third, and maybe fourth reaction of a lender.

Now I see some aspects of why.

As per Dean's remarks, I do think I've commented more than once over the last few years that, in America, homeownership is not a proper risk. The politicans will always show up to bail out the imprudent.

Yeah, I don't like seeing people turfed out on the street anymore than any other liberal, but when you think about how unfair the subsidies and protections given to homeowners are to those that do not get them, maybe it's the more humane thing for society as a whole.

Because these people buy things they cannot afford, especially at inflated prices, the bailout cash makes an almost direct line from the taxpayers to the pockets of the wealthiest.

[divadab]

The Piper Must Be Paid. Bush's profligacy is the American People's profligacy. I mean, collectively, we have all the attention span, restraint, self discipline, suggestability, and emotional maturity of a three year old (well, ok, a five year old). Hence boom and bust cycles with a much greater amplitude than those in Europe (except the UK).

Mr. Delong thinks financial institutions should have a sense of social responsibility, and act for the greater good. American corporate financial institutions? Come on - if these guys could make money by selling bad stuff to imbeciles they would put it in their prospectus and all other considerations go hang. Let the greedy bastards lose money; the unfortunate latecomers to the housing market Ponzi will lose their houses and learn a lesson. (And thanks to the new bankruptcy laws, be indentured for a long long time). Didn't you know that exploiting the poor is not only all right, it is commendably Christian in the new Conservative order of things?

[Maynard]

How does the recent tightening of bankruptcy law figure in? If in the case of default on a mortgage loan you had a relatively easy bankruptcy procedure for the borrower, which forced the lender to absorb the bulk of the cost of extending low quality loans, that's one thing. But if at the same time the financial industry is pushing subprime loans, it is also tightening up bankruptcy standards so that the borrower absorbs most of the costs instead of the lender... And then if people like Alan Greenspan speak out in favor of the bankruptcy law at the same time they're advocating borrowers take out more subprime mortgage loans... Urgh.

[Matt]

Housing for the middle and lower income groups are the biggest property values that are restructured under the Amercian conservative economic policy.

For all the micro-details, the underlying economic push is to spread out the people-property distribution, make the older property density curve broader and lower. (Assuming the curve normalizes before thing breaks).

So, after the Republican tax function is convolved over the people-property density curve, at the bankers rate of 3%, we see a transfer of private property to government property, a reduction in normalized private property, and a smearing of the function.

We are half way through this inflation driven, government expanding convolution operator, it is now about to move into the highest part of the density curve, forcing the rapidest rate of property "smearing".

After 30 years of trying this, with the savings and loan fiasco under Reagan, we should figure this out.

Since the mortgage lenders made the mistake, I propose the mortgage lenders take partial ownership of the devalued property. They buy back a portion of the property at pre-deflation prices. Lenders could do this via aggregate means, house buyers get a letter of partnership and reduced deflation liability.

However, the problem will not go away until you stop the conservative tax operator running across the density curve; and push it the back other way.

[Bruce Webb]

Cranky and Winston made most of the right points.

Each and everyone of these loan products makes sense if you have a defined plan, control of your budget, and a sound understanding of your market. Few people do, and a little tightening of underwriting standards combined with a softening of certain markets is shaking out.

But let us get one thing clear. Mortgage originators are not in the business of writing loans to people who are living out of their cars. Just because they write the loan 'stated/stated' (stated income/stated assets) doesn't mean they have no idea of what your actual income and assets are. There are too many tools out there. You don't even have to have access to the credit bureaus, you can put together a pretty sound picture of someones financial future just through public record. Those deeds of trust are recorded documents and increasingly are available online. If you want a wake-up call go to your local recording agency (in Wash State the County Auditor) and punch in your name. Lenders have access to all that and much, much more.

These lenders did not fall off the turnip truck. They make money each and every time they write a loan. As does the lender that advances the money and packages the loan. The same can't always be said for the investor that bought the package of loans. Then again rich people losing money is only a crisis to subscribers to the Wall Street Journal.

I am still waiting for a detailed analysis broken out by SMSA and owner occupied vs investor owned. I don't know how much of sub-prime is actually represented by investors buying rentals, what I do know that very little of this was big hearted people just wanting to move renters to houses. A lot of people made a lot of money over the last few years. Now some of them are losing their jobs.

Well that is life. I had a real estate deal fall apart and lost my job. Oops. On the other hand the salary checks were cashing just fine right up to that point.

We saw this with the S&L crisis. The ordinary depositor was always fully covered. The bail-out was 100% directed at the uninsured larger deposits and the S&L owners. Don't get fooled again. This isn't about people losing life savings. These loans are not collateralized by much if any cash to begin with. People, and more often as not people with means, made a bet on real estate. Some people bailed out too early, some stuck it out to the end. And certainly there will be some spillover. But before we jump it will be nice to have some quantification. 1.5 million foreclosures does not mean 1.5 million owner occupiers losing houses. In a lot of cases you are looking at banks taking over rented out units and who are one call from a local Property Management company from having a performing asset.

Yes real people are losing real houses. On the other hand real people have always been losing real houses. You lose a job, you have unexpected medical bills, you have a drug habit and boom you are living out of your car. I don't recall a bunch of storm and angst over THAT in years past.

Rich people losing money is not a crisis. And I have yet to be convinced that the anxiety over the collapse in sub-prime is being driven by much more than a concern by other rich people that they might be faced with losing money too.

[Steve Jung]

Whenever Paul Krugman or someone like him points out that the economy is not doing well for the average working American (even though "average" income is up), some conservative wag counters with the rise in the rate of home ownership as proof of how average Americans have benefited from the Bush economy.

I should have known.....

[JonF]

Re: Because I think it is undeniable that the last thing the financial people want is to be stuck with your stupid home, and I was wondering why some sort of renegotiating strategy wasn't the first, second, third, and maybe fourth reaction of a lender.

Here's another reason, IMO: in saner economic times when lensers csreened their loans better, foreclosures usually happened because a borrower had some sort of life event catastrophe: long term job loss, chronic health crisis, divorce, etc. In those circumstances the borrower is in such desperate straits that renegotiation makes no sense: he can't afford to keep the house no matter how generaous the lender might try to be. Hence lenders have no real experience in or policy for renegotiating. In todayt;'s crisis though most borrowers haven't lost their income; they're making the same income they made (maybe even morw) at the start of the mortgage. The problem is the mortgage not the borrower. But the lenders cannot grasp this fact because for, say, 60 years this was never the case. So they go straight for foreclosure since that's all they know how to do. At this point perhaps some pressure (if not outright regulation) from above might prod lenders into experimenting in this area.

Re: Let the greedy bastards lose money; the unfortunate latecomers to the housing market Ponzi will lose their houses and learn a lesson. (And thanks to the new bankruptcy laws, be indentured for a long long time).

Foreclosure should be the end of it in most cases. These loans are almost certainly covered by PMI (required when there is less than 20% down) which, except in very unusual circumstances, will make up the difference, so the borrower will be off the hook for any remaining amount after the foreclosure sale.

Re: Each and everyone of these loan products makes sense if you have a defined plan, control of your budget, and a sound understanding of your market.

I disagree on the matter of "liar loans". If lenders want to make loans to people with inadequete income, let them, but there should be no formal pretense that they are doing anything but that. Lying on a loan application is fraud, even if both parties are winking knowingly at each other, and it should be dealt with as the law allows.

[christofay]

JonF:

Of course saying that Greenspan drove the Fed rate lower and held there longer simply to save W's job is hyperbole. I do say that the rate was lowered and held lower longer to be accomodative to W's chances to be re-elected was Fed policy. The Bush adminsitration was promoting the talking point that Greenspan's policy was unfriendly to W's father when that president unfortunately served through the slow phase of the business cycle. That mistake was not to be repeated, all parts of the government must follow the wishes of the unitary executive. Greenspan was giving up part of the Fed's independence when he was making those 3-1/2 visits a week to the White House up from 1-1/2 per week in the Clinton administration.

It's as simplistic as the Republicans are pro the magic phrase 'pro market,' therefore the economy must do well during a Republican adminsitration. A good inflation makes people feel more prosperous; that's what we had during the housing bubble.

It's a trifecta, the administration that ran the worst Pentagon, ran the worst Justice dept also has run the worst fiscal policy. Fed independence is a Washington D C urban legend. It's one of the things that changed on 9/11.

[craig tindale]

I like your second option, if the lenders have systematically made poor credit decisions then we should compound this by lending them some more, if its an individual problem then sell me up if its a broader problem well hell lend them some more, the problem is that it just doesnt add up individually, if you look at the financial postion of your average distressed Alt-a or sub-p borrower refinance can only happen if you ignore basic credit standards, that is you get even riskier , trouble is that lending practices are tightening so those looking for refinance do not qualify.

This generation of economists and central bankers are going to taken down to the shed by the next generation, history is not going to be kind Bernankes and Co's helicopter drops on asset classes, the communists failed in their attempt to impose centrally managed production , now we are witnessing the failure of centrally managed consumption.

[JonF]

Re: That mistake was not to be repeated, all parts of the government must follow the wishes of the unitary executive.

The Fed is independent of the "unitary executive" and I doubt Dick Cheney at his evil best could have compelled Greenspan to go where he did not want to go. Again, I see nothing sinister in the lowering of interest rates in 2000-2001. This is simply standard recession fighting doctrine (and at the time there was some concern that in fact it was not working) and it would have been done even if Al Gore had been president. Now, I like the Bush bunch bo better than the rest of you, and I would have sooner voted for a ticket of Anna Nicole and Courtney Love, but I don't think we should strain implausibly to blame Bush for everything.

Re: if you look at the financial postion of your average distressed Alt-a or sub-p borrower refinance can only happen if you ignore basic credit standards,

Left out of this discussions, IMO, is a big piece of the underlying problem: housing prices are over-inflated (relative to median income) and too many people would not qualify for under traditional credit standards, not because their FICO scores are too low, but because their income is not appropriate for the size mortgage they would need. Greenspan's recent comment (that all would be well if housing prices would appreciate another 10%) is dead wrong. The best thing that could happen in this mess is for housing prices to fall back to levels that match income (thus making traditional credit standards viable again) and if a bailout of the mortgage industry and individual borrowers is needed to achieve that, then go for it.

[Matt]

Just the rich?

The sub-prime problem was detectable and led to differentiable opportunites in housing futures. A few of us missed mortgage payments, but many more delayed home sales, a lot of carpenters began long range career plans, and some of us sold in the peak, capturing valuable notes.

The market mis-signaled, bankers failed to accurately measure risk, hedge funding was non-transparant.

Long term market signals mean a lot in real estate; and when they go wrong entire neighborhoods can change hands.

Regarding insurance?

No good if market signals mis-signalled both insurance bonds and housing futures. Was this insurance fund invested in a decorrelated property market?

Ultimately we need to replace inflation banking with negative property banking, keep a smooth transfer between bank property and private property; making inflation a free variable. Bank risk will be adjudicated by the measure of its property holding.

The originating lender carrys some declining property liability to originated notes.

Monopoly Bank System?

As an accounting system the monetary bank should be paid for physical expenses; building, lights and hourly wages. The bank is nothing more than a data collection device.

If the accounting system worked, each enterprise would have its measured, accurate P(z) with a separable (S1(z); Sticky function and S2(z) shareholder corrective function. Everyone have this same accounting model, individuals, corporations government monopoly businesses.

Then, with inflation invariant banking, bank property is simply another property, except it is 99% correlated with all other P(z). The bank can pick up a 1% operating fee from accounts, and otherwise risk mitigation is defined as minimizing the delta P needed to normalize the property-density curve and the amount of bank property held, including second moments on these.

Each year the central nak goes to congress and educates then on current levels of bank property. Congress can make slight tiltes on the broad income tax, tilting up slightly to reduce government property and visa versa, both of which should allow controls on bank property. Congress always making sure the P(0) (first moment of P(z) density curve is close to normal.

Dump tax accounting and force all enterprises to adopt a NASB compliant accounting practice that includes the first three moments of P(z). The remainder terms will be mitigated in the open market for property futures.

All enterprises, means break the federal accounting into de-correlated business unit. Do socialist accounting (S2(z) - Shareholder corrector time constant of about four election cycles. S1(z) Stickiness, high frequency content.

Second rule of New Libertarianism - All economic process resemble, on long enough integration times, P(z) operating in a perfectly free market.

[Holden Lewis]

JonF,
Your following assertion is, unfortunately, incorrect:
"Foreclosure should be the end of it in most cases. These loans are almost certainly covered by PMI (required when there is less than 20% down) which, except in very unusual circumstances, will make up the difference, so the borrower will be off the hook for any remaining amount after the foreclosure sale."

To explain why this is inaccurate, I'll make a distinction that far too few journalists and commentators are making. A mortgage to someone with poor credit is a subprime loan. A mortgage to someone with good credit, but who does not want to document his or her income, is an Alt-A loan.

Generally, lenders don't write stated-income loans to subprime borrowers.

Subprime loans are not covered by mortgage insurance -- at least, not on the level of an individual loan.

Alt-A loans usually don't have mortgage insurance policies. There might be exceptions, I'm not sure. Most Alt-A borrowers can't put 20 percent down, and they get piggyback loans to make up the difference. Piggyback loans eliminate the need for mortgage insurance.

Why don't MGIC, Radian and the other MI companies insure subprime and Alt-A loans? Because they're not stupid.

It will be important, from now through at least 2012, to make the distinction between subprime and Alt-A loans. The Alt-A foreclosure crisis will be bigger than the subprime foreclosure crisis, according to First American mathematician Christopher Cagan (in a report that will be issued Monday the 19th). Frankly, the Alt-A customers who lose their homes will deserve less sympathy than the subprime customers.

[PSP]

Bankruptcy used to provide a solution. Chapter 13 used to permit mortgages to be crammed down to the value of the collateral, and impose a reduced interest rate too.

The banks didn't like that much, and managed to insert the limitation "other than a claim secured only by security interest in real property that is the debtor's principal residence" to the appropriate sections. We can't blame the the recent "reform" however, Congress did it in 1984.

The IRS constitutes a BIG problem for would be negotiators. Forgiven debt is income. So, if you convince the bank to cut the loan to the reduced value of your property, the bank will send you a 1099, and you will owe taxes on the reduction. A negotiated short sale can be very expensive.

[Albrt]

Lenders are already "mitigating" very heavily in cases where renegotiated loans make sense. Similarly, mortgage brokers are slow these days so refinancing is easy if the loan makes sense.

The problem now is not really a macro problem, except in the sense that it is very large. There are many, many cases where loans were made on terms that did not make sense unless the lender wanted to end up owning the house sooner or later, with an unknown number of refinances or sale transactions intervening.

These houses (most of California and lots of other places) are just too expensive for the pool of borrower/buyers. Renegotiated loans are not feasible. The only feasible solution is many foreclosures and sales at drastically reduced prices.

[a]

"But that foreclosure is not an appropriate response to a systemic problem triggered by macroeconomic risks that have come calling..."

Sure it is. The IBs should end up with the houses that they so generously lended money for. The real tragedy is that too many are encouraging the poor borrower to try to fend off the foreclosure, thereby throwing good money down the toilet, to the benefit of the IBs. Pay the mortgage and put more debt on the credit card. Pay the mortgage and forget about Junior's need for medicine. Pay the mortgage and do without eating once or twice a week. NO! Don't pay the mortgage, stay in the house as long as you legally can, and then, when finally forced out, go off and rent, as you probably should have done in the beginning. All this crying for home ownership only serves to stop the Wall Street IBs from losing the money that they so richly deserve to lose - which, methinks, is the real reason behind it.

[Holdie Lewie]

Word, a.

And when Chris Dodd makes populist noises about bailing out borrowers who face foreclosure, he's masking his true aim: bailing out lenders, investment banks and investors who want the taxpayers to pay for their lost wagers.

According to opensecrets.org, 17 of Dodd's top 20 contributors in the 2006 election cycle were financial services companies.

[Person]

a: One should consider the impact to one's credit report, which affects ability to find a rental, when considering that option.

Thought it would be interesting to see what would happen if borrowers "unionized" and withheld payments. As the old saying goes, "If you can't pay back the bank $10,000, that's your problem. If you can't pay back the bank $10 billion, that's the bank's problem."

[EnTrust]

Even bankruptcy laws now make it more difficult for a homeowner to protect equity and stop foreclosure

[homeloans]

Home ownership, tough for many today. Yes the alternative is to rent, but that could be classed as dead money?
Whereas buying your property,albeit 25+years to actually own it, of course if you live that long, is a conditioning of our modern society.
However, the big question is how many people will lose their homes this year?
What if nobody paid their mortgage?
Are the banks going to repossess all these properties?
And if so to whom are they going to re-sell them?
Maybe someone out there has answer.