I May Have to Regard Arnold Schwarzenegger Not as an Empty Suit but as a Man

Given the history I have lived through during the past five decades, it goes against the grain to regard any Republican at all as a sophont possessing functional organs of generation. But I may have to regard Arnold Schwarzenegger not as an overpromising empty suit but as a man. This looks well done--if it holds together. Matthew Garrahan and Krishna Guha report in the world's best newspaper, the Financial Times:

FT.com / In depth - California homes deal to avert defaults: Arnold Schwarzenegger is once again leading US states to action on policy reform ahead of lawmakers on Capitol Hill. The California governor... has now moved to slow the rate of home loan defaults brought on by the collapse in the subprime mortgage market. Mr Schwarzenegger’s deal with four of the state’s biggest mortgage lenders – Countrywide Financial, GMAC, Litton and HomeEq – is “nothing less than jaw-dropping in its ambition and implications.”... Under the scheme, the four lenders will extend for a “sustainable” period their low introductory rates on adjustable subprime loans to homeowners at risk of foreclosure. That would address a serious headache for policymakers – the large number of adjustable-rate home loans taken out at low introductory rates and due to reset at higher rates in the next few years.

Adjustable rate mortgages (ARMs) make up about 30 per cent of all US home loans and are more prevalent in the low-quality subprime market. More than $350bn (£170bn,€236bn) in ARMS will reset to higher rates in the next 18 months. Analysts and ratings agencies alike say these resets will increase the frequency of loan defaults as falling house prices leave borrowers with negative equity and no chance of refinancing. That could hit consumer spending, with knock-on effects on the US and world economies.

Attempts to avert such a scenario by encouraging mortgage lenders and servicers to renegotiate home loans have not gone as far as policymakers would hope. While investors generally agree that in many cases everyone is better off if a loan is restructured rather than going into default, there is great resistance to standardised work-outs based on simple criteria such as type of loan and status of borrower. Many investors feel such standardised solutions will benefit borrowers who can afford to make higher payments, and want to proceed instead on a case-by-case basis, albeit with the aid of standardised systems....

California has not promised any financial or legislative incentives to the lenders, says a spokeswoman for Mr Schwarzenegger. “This is a public-private partnership that does not involve public dollars.” Instead, the agreement is backed by “safety in numbers”. “If only one of these companies was modifying its loans . . . they would lose out to the competition and [house] prices would keep falling. It would be a double whammy,” she said. However, with four mortgage lenders representing 25 per cent of subprime mortgages signing up to the plan, the risk to the lenders has been minimised. The agreement with the lenders will cover only those homeowners “making timely payments”. Beneficiaries will also need to prove they cannot afford a rate rise.

Comments

[wood turtle]

What exactly is the deal? You didn't say what the lenders get for extending the low rate periods, or are they doing it out of the goodness of their hearts?

[Jay]

Yes! Bail out the speculators and those that bought homes that they realistically could not afford.
If I ever need to move to California, I know what I'm doing. Buying an ARM. I know I can count on the governor of that state to bail me out if my payments jump beyond what I could afford to pay.
Rewarding irresponsibility. Truly an American Democratic trait.

[Emma Anne]

Unlike most repubs, Arnold does seem to be capable of learning. I still can't stand the groping jerk though.

[Winston]

This is a good deal for all concerned. Lenders don't have enough staff to handle the volume of defaults they're seeing and to determine if it is better to restructure the loans or to foreclose. This gives them time to catch up on their paperwork and hire more staff, while claiming to be doing a public service. This also might slow down the drop in value in some of the hardest hit markets. For Arnold, it provides evidence that he's doing something, while preventing or at least delaying the legislature from doing something truly stupid. Kudos to the Governator. Once again, he's making the best of a bad situation.

[Charles]

Arnold is willing to do anything to become Senator.

Even behave like a human being.

[eaes]

One effect of this deal is that the current prices in the Bay Area will be locked in, leaving people such as myself who thought that these ARM's were dumb actually the fool. The moral hazard such a plan causes is huge. If these goes through then I should have taken too large of a loan and waited to be bailed out. Without foreclosure the prices will remain truly unaffordable to the middle class. The people foreclosed will not be homeless, only back in the rental market where they prolly belong.

[piotr]

eaes: perhaps the situation is not as dire as you think.

As I read about the deal, the relief will be offerd to those borrowers who cannot afford making timely payments but who make them even so.

As Winston noted, most probably the lenders did not agree to do anything that they would not do in any case. I read some "horror stories" how families are forced to default on mortgages. What was missing were the evictions. People stop payments, and the lenders do not have the capacity to quickly throw them out, so they purely loose money. Actually, evictions would probably be even worse. It is better for them if people pay less than nothing, and that's regardless of what the competion is doing.

Perhaps a more rational policy would be to make foreclosures, but give the ertwhile owners the option to rent their former properties, perhaps for the amount similar to mortgage payments at the "promotial rates". But management of rental properties requires some extra staff and organization.

[eaes]

But what about the moral hazard? this bubble was created by greed, from the lenders looking for commissions to the borrowers whom did not have a real look at what they could afford. Furthermore, these people were the market makers in the bubble, their actions created the prices that people were paying from 2000 to 2006. I believe that >50% of the mortgages in SF during 2006 where ARM's. If there are not in the market imagine what the true price of housing in SF would have been.

If either lenders or borrowers of ARM's are protected then the inflated prices will be locked in, making the case that people such as myself, whom thought that buying a house with an ARM was stupid, were the foolish ones.

Looks eviction sucks, but the cost to the general society if we feed moral hazards are arguably greater.

[david]

I prefer own to rent, but Arnold's people are, within the confines of what they can think about, definitely thinking.

[trotsky]

Why would Arnie want to be a senator? The allure of sitting on the Commerce Committee for this megalomaniac is ... what?

[Dan Ancona]

Devil! Details!

[pgl]

Dan wants the devil in the details? So do I as in how much will this cost the California government. Then again - our governor is a believer of spend and borrow as he's the typical Republican on the issue of whether to raise taxes or not. Why are Dan and I such cynics? (Dan - this is a rhetorial question).

[wcw]

The governator isn't any good, but after the succession of abysmal governance from, well, anything post-Eisenhower but most especially Pete Wilson on down, you can forgive our host for feeling all warm and fuzzy for anyone who's not simply out to get all he can for him and his.

As for Bay Area prices, they are what they are. That ain't Arnie or moral hazard: that's the market. Check out http://www.countrywide.com/purchase/f_reo.asp (that's Countrywise's REO page). Punch in a state where CFC did a lot of business (CA springs to mind), then compare the number of REOs in, say, Anaheim vs, say, San Francisco. Then notice how few of the SF properties are in parts of the city you actually want to live. Supply and demand always matter. Always.

Full disclosure: I rent, quite happily. Ah, the magic of rent control. Vacancy decontrol doesn't matter if you don't move, you like your landlord and you have a nice view/

[kaleidescope]

Except all of the mortgage companies claim that what der Gropenfuhrer is claiming credit for is what they have always done and had been doing with no prompting from him.

Isn't it nice to live in a state where we have a governor who has taken it as his personal responsibility to make sure that the sun rises in the east each morning.

What a mensch.

[kaleidescope]

Except all of the mortgage companies claim that what der Gropenfuhrer is claiming credit for is what they have always done and had been doing with no prompting from him.

Isn't it nice to live in a state where we have a governor who has taken it as his personal responsibility to make sure that the sun rises in the east each morning.

What a mensch.

[Charles]

Trotsky, I believe that Schwarzenegger believes we will amend the Constitution to allow him to run for president. A seat in the Senate would simply be a step on that path.

As for why he would want to sit on the Commerce Committee, tell me why Fred Thompson wanted to sit on Government Affairs.

True, maybe he thought it was designed to arrange them.

[DILBERT DOGBERT]

All,
Take a run over to Calculated Risk and read Tanta's Ubernerd posts. As details, the little devils, come out I am sure Tanta and Calc will educate us - bore us to tears about those devil details.
Charles,
I would be happy for Arnold to run for president, if when the constitution is amended, that Big Bill Clinton gets to run again.
This is somewhat akin to my support for a Flag Burning Amendment where included in the amendment is a section prohibiting the display of any of the traitorous flags of the Confederacy.