Category Archives: Housing Crisis

Another Bailout Coming for the Banks Disguised as a Bailout for Homeowners

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From the WaPo:

Officials with the Treasury and the Federal Deposit Insurance Corp. are crafting a plan under which the government would guarantee the mortgages of as many as 3 million homeowners now struggling to avoid foreclosure, according to three sources familiar with the discussions.

Under the program being discussed, the lender would agree to reduce borrowers’ monthly payments, for example by lowering the interest rate or principal of a mortgage loan, based on the homeowner’s ability to pay. These reconfigured loans could help homeowners avert foreclosure.

To attract financial institutions to the program, the government would then guarantee to repay the lender for a portion of its loss if the borrower defaulted on the reconfigured loan.

The mortgage guarantee program would vastly expand the role of the Treasury Department in helping homeowners, while at the same time ensuring some return for lenders.

It would cost between $40 billion and $50 billion, sources said.

The program is being discussed as members of Congress are voicing frustrations that the $700 billion rescue program thusfar has been aimed at helping banks, but not homeowners.

While Treasury and FDIC officials have reached an agreement on the principles of the program, the White House is resisting, according to the sources, who declined to be identified because the negotiations are ongoing..

Wait, what? I thought the FHA Secure program was such a grand success, according to HUD.  Yet reports show that the true number of homeowners helped under that program was unfortunately low which I predicted in Aug of 2007. The July bailout bill gave us Hope for Homeowners, which requires voluntary principal balance reductions on the existing loans and gave the homeowner a new FHA-insured loan. Housing Wire reports that so far, H4H has few takers. But not for lack of interested homeowners. Instead, it’s the investors:

The problem, however, may not be lenders, who say they’re more than willing to begin processing the loans. Instead, the problem sits with third-party investors that have thus far proven unwilling to take the minimum 10 percent haircut required to put borrowers into the program, plus an upfront premium payment–losses are actually far greater for investors who participate, given that the 10 percent figure is based on a current appraisal, and not original LTV.

John Sorgenfrei, president of Florida-based Assurance Home Loan, Inc., said he receives calls from eight to 10 borrowers daily about participation in the program. For the time being, he has been forced to make them wait, as no investors so far have bought into the program..

We’re burning through the 700 billion Troubled Asset Relief Program (TARP) money pretty fast.  The 40 to 50 billion tossed out for this new plan seems sadly low.  Who is feeding the politicians the dollar amounts?  This is not nearly enough money. It may keep the banks alive for a few more months but to what end?

Do you think this latest proposal seems more like another bank bailout? It’s hard to say until we see the guidelines. With FHA and H4H, income must be fully documented and homeowners must qualify. Once again, this may shave off a fair number of homeowners who won’t be able to document income needed to qualify.

It might be wiser to just start talking about nationalizing the entire banking system at this point.  I mean, how many bailouts will it take before taxpayers own the banks?

Options for Homeowners Facing Foreclosure

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This is Part Two of a series of articles on the foreclosure process.
This article does not constitute legal advice.
Foreclosure laws vary from state to state.

Homeowners in financial distress should always hire legal counsel. Call your local state bar association for a referral.  Reduced or free legal aid may be available in some states. Ask for a referral from the state bar association or through a LOCAL HUD-Approved Housing Counseling Agency.

For homeowners who are facing financial hardship, denial is a warm, safe comfortable place to stay, where tough decisions can’t hurt and the decision-making process is put off one day at a time.  There is FREE help available from your local state non-profit agencies.

Local, HUD-Approved Housing Counseling Agecies received 1.5 million dollars from Washington State when Gov. Gregoire signed SB 6272. State agencies are already whining that they are “overwhelmed”. Hmmm. How much of that 1.5 million dollars was spent hiring and training competent counselors and how much went into executive salaries, high paid consultants and task force meetings?  There are plenty of out-of-work mortgage production people who are (at this point) probably willing to work at non-profit agencies. Put them to work.  Perhaps I am in denial as to the extent of the problem at our state agencies. If so, agencies: please enlighten me and RCG readers.  If the problems are with the banks and their ability to handle the calls, that doesn’t mean we throw more money at the state agencies.  In part five of this series, I will ponder about massive government intervention. For now, we’re left dealing with the problems at hand.

If you are a homeowner reading this article, that means you’re starting to come out of denial.  Maybe a friend or relative forwarded this to you.  Welcome to raincityguide.com  How are you? Don’t say “fine” through tears or clenched teeth.  Not so good, right?  Okay then. Is your financial distress temporary or long term?  THIS is perhaps the most important question you’ll need to answer. This is going to require that you get real with where you are in life.  Long term, permanent financial distress situations are going open up options that might be different for a homeowner who has a short term financial distress problem.  Let’s try to break things down even more.  Long Term: You’ve been laid off and have been unable to find work at your former pay level for along time and you have third party confirmation that the chances of being able to reach that pay level again are very low. Short Term: You’ve been laid off and have been unable to find work at your former pay level but your prospects are good or you’ve recently been re-hired at a similar pay level.

Reinstatement
If you are payment or two behind, which may happen with temporary financial distress, your lender will be thrilled beyond your wildest expectations to accept the total amount owed in a lump sum.  Reinstatement often happens simultaneously with a forbearance agreement.

Forbearance Agreement
Your lender agrees to reduce or suspend your payments for a short period of time.  These two options are good for people whose financial distress situations are temporary.

Repayment Plan
Your lender helps you get “caught up” by allowing you to take missed payments and tack them on to your existing payment each month until you are caught up.

If your financial distress is long term and will permanently affect your ability to continue making your payments:

Consider Selling
With home values going down, if you do have some equity remaining in your home, you may be better off selling NOW rather than waiting until next year when scads of REOs (already foreclosed-upon homes that the lenders must dispose of) will continue to hit the market, driving inventory up and home values down.  If you owe more on your home than what the home can be sold for in today’s market, you have probably already heard of the term Short Sales.  In this case, the lender is asked to reduce the pricipal balance and allow the loan to be paid off in order to facilitate a sale.  Most lenders are not radically motivated to approve short sales unless foreclosure is imminent.  This author does not recommend that you stop making your mortgage payment in order to force the bank to approve your short sale. All homeowners in financial distress should have an attorney holding their hand the entire time.  If you have assets, you do not qualify for a short sale. Short sales are reserved for homeowners with NO MONEY and you will be asked to provide proof that you have no money.  If you have money, this is a different kind of transaction. It’s called “Making Your Downpayment in Arrears” and you’ll be asked to bring that money at closing.  Don’t ask anyone to help you hide your assets. Doing so may constitute mortgage fraud which is now a class B felony in Washington State. I could go on and on about short sales. If you need more education in this area, we’ve covered the topic in these RCG articles:

Short Sales
—-
Question From Today’s Short Sale Class
—-
Should You Buy a Short Sale Property?
—-
Is a Short Sale a Bargain?
____
Why Do Banks Take So Long to Approve a Short Sale?

Maybe you would prefer not to sell. Consider taking on a tenant or moving out into more affordable living quarters and renting out your home.

Refinancing is a tough road for homeowners in financial distress. On the one hand, they have been hit by some kind of financial hardship and this typically affects their credit score, which means lender’s rates and fees will be higher.  In addition, tightening underwriting guidelines is something banks do in order to help stop the rising tide of foreclosures. People who hold mortgage loans today might not be able to re-qualify for that same loan if they had to requalify under today’s guidelines.  Income and assets must be fully documented. Find a licensed, local mortgage lender with FHA-approval to see if you might qualify for an FHA loan.  For people who made the conscious decision to state their income higher than reality are out of luck, unless they can prove that they were coached to do so by their lender.  Consult a local attorney for further guidance.  Since refinancing might only be yesterday’s dream for some, Loan Modifications are all the rage in my spam bin. We’ll cover Loan Mods in Part Three.

While doing research for this blog post, I stumbled upon even more money that went from our state government’s rainy day fund, into a state fund to help low to moderate income Washington State homeowners in foreclosure refinance into new loans through the Wash State Housing Finance Commission.  Read more here. I sent an inquiry asking the WSHFC how many WA State Homeowners have been helped this far by this new law and they said, emphasis mine:

Dear Ms. Schlicke:

Thank you for your interest in the Smart Homeownership Choices Program. To date, we have not made a loan to a prospective applicant.  The good news is that when we have talked to the delinquent homebuyers, it seems they have not been able to make contact with their lenders to discuss foreclosure options.  So, we have been able to facilitate getting them to the right person for loan modifications, etc.  There have also been homeowners who have not been pleased with the fact that the assistance is in the form of a loan and not a grant.  They believe the government should be giving them the money to save their home. While we cannot respond positively to these folks, we do send them to one of our homeownership counseling partners to help them with other options that   might be available.

If you know someone who might benefit from the program, please feel free to give them my contact information.

Sincerely,
Dee Taylor
Director, Homeownership Division
Washington State Housing Finance Commission
1000 Second Avenue, Suite 2700
Seattle, WA 98104-1046
(206) 287-4414

Part one: Foreclosure; Losing the American Dream
Part two: Options for Homeowners Facing Foreclosure
Part three: Loan Modifications
Part four: Government Intervention in Foreclosure
Part five: Foreclosure; Letting Go and Rebuilding

Joe Sixpack and the Subprime Crisis

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The Subprime Crisis is a broken promise to Joe “Sixpack”.

One Day in early 2006, Joe was feeling pretty darned good about himself. He was making $65,000 a year at a job he held for over 6 years. He had $30,000 saved up in the bank. He had no credit card debt. He owned his car free and clear. He looked at his pregnant wife and his 2 year old son about to outgrow the two bedroom apartment they were renting and said, heck…time for us to buy a house.

He didn’t need no granite counters or stainless steel appliances.  He just wanted a decent neighborhood and decent schools for his kids.  He needed a small yard for a dog and to throw a ball back & forth in with his son and to have a barbecue and a beer in with his buds once in a while.  His American Dream seemed within reach.  He read everywhere that mortgages were pretty easy to get, and interest rates were near all time lows at 5.5%.

Mrs. Joe picked the School District she wanted to live in, and Mr. and Mrs. Joe walked into a real estate office and said, “We’d like to buy a house in this School District”. Ms. Realtor pulled out a big questionnaire asking them to fill in all the things they wanted, while she left to figure out what they could afford.  She did a quick qualification in the back room of the office.  $65,000 a year divided by twelve times 33% equals a payment of $1,787.50 a month and at 5.5% interest rate that equaled a loan of $315,000.  She added the $30,000 they had saved, and came to $345,000. She wondered if that was a little high, but it was certainly the lowest price she could hope to find, so she found them a little old rambler in Kenmore asking $350,000.  They all went out to see it.  It had an old kitchen and needed some work but the couple hugged and said, “We can make this ‘home’ with a little hard work and some paint and curtains”.  Everyone smiled and went back to the real estate office to make an offer of $345,000, with the seller paying the closings costs.

The real estate agent called her favorite lender and put Joe on the phone with the lender while she typed the offer.  The lender faxed over a pre-approval letter for a purchase price of $345,000 to submit with the offer.  Joe’s agent called the Listing Agent of the little rambler who said, “We already have 3 offers, and we’re presenting offers at 7 o’clock tonight”.  It was 4:30 p.m.

Joe’s agent called the lender who shot over a new pre-approval letter for $375,000.  Joe’s agent added an Escalation Clause for $1,000 more than any one else’s offer up to $375,000.  She took out the seller paying the Closing Costs explaining that with multiple offers, that wasn’t going to fly. She took out the home inspection clause explaining that would strenghten the offer. She told them to up their Earnest Money Deposit from $5,000 to $10,000 to make the offer really solid. Mr. and Mrs. Joe  signed it, and the agent faxed the offer to the Listing Agent.  That night Joe’s family got the call that they got the house for ONLY $364,000!  WOO-HOOS and High Fives all around.  They WON!

Joe went to the lender’s office a couple of days later and made a full loan application.  He got a Good Faith Estimate saying his payment was going to be $2,646.47 a month. $1,937.36 on the first mortgage of $291,200 at 7% +$459.11 on the 15% second mortgage of $54,600 at 9.5% + $200 a month for real estate taxes and $50 a month for homeowner’s insurance.  Total payment $2,646.47 a month.  Joe started sweating profusely.  He called his agent and said, can we cancel this?  She said not without losing your $10,000 Earnest Money.  There was no home inspection contingency and the Finance Contingency didn’t have a little blank space to put in a rate cap.  There was no “legal out” for “OMG the payment is $1,000 more than I thought it was going to be”.

The agent called the lender and he switched the loan to an interest only on the first with a fully amortized 40 year second and added a two year pre-payment penalty.  That brought the payment on the first mortgage down from $1,937.36 to $1,698.67.  The fully amortized 2nd at 40 years vs. 30 years dropped that payment from $459.11 to $442.29. Total payment $1,698.67 + $442.29 + $200 + $50 is $2,390.96.

Joe scratched his head and asked, “Where’s the 5.5% lowest interest rate in years?”.  The lender explained that rate was only for people with credit scores of 660 or better, and Joe’s score was 640.  Also, that rate was for people whose ratios were 33/40 and Joe’s payment, even at the reduced rate of $2,390.96, was just over 44% of his gross income of $5,416.67 a month.  His ratios were “out” which made him SUB-PRIME.  BUT, here’s the good news! IF you can stick this out for 12 months…24 tops…and make your mortgage payment on time, you can RE-FI at the lower rates! The value of your house will grow so that the 5% you put down will be 20%, and you will have ONE mortgage at the low rate instead of TWO mortgages at SUB-PRIME rates.

Joe went home.  He was feeling a little sick in the stomach and he had a massive headache.  He looked at his pregnant wife.  She was packing and making yellow curtains for her new kitchen.  He kissed her on the forehead and went to the corner store and bought a sixpack.  Two weeks later they closed escrow, moved into the house and he and his son went out and bought a new puppy.

Joe worked hard for a year.  He put in overtime and drew down on the little savings he had left.  He was able to make his mortgage payment on time for 12 months.  He called the lender to get that RE-FI he was promised.  The lender said…oh, well…you really should wait another year because of that 2 year pre-payment penalty.  Joe said, I really can’t do this for another year.  The lender said OK, but I’m going to have to add the costs of the re-fi and the pre-payment penalty to the principal of the mortgage.  Joe asked how much the pre-payment penalty was and nearly fell off his chair.  He said, OK…I’ll stick it out for another year.  He went out in the yard where his son was playing with the dog and drank a couple of sixpacks.

6 months later Joe was told that he couldn’t get any overtime.  They were cutting back on expenses.  He opened his mail and there were those multiple offers for credit cards at ZERO INTEREST!  He got himself three of them.  He started charging stuff to make ends meet until he could get to 2 years and RE-FI his mortgage.  He went out with one of his new credit cards, bought his wife a box of chocolates, his son a new football, the dog a new collar and a case of beer for himself.

Finally…TWO YEARS had passed.  No pre-payment penalty!  Time to RE-FI! He called his lender.  Well Joe, I’ve got some bad news for you.  You did improve your credit score with all those on time payments for two years from 640 to 680, but the best rates are now going to people with scores of 700 or better.  The REALLY bad news is that because of your ratios, you were stated income-SUB-Prime…and those loans don’t exist anymore.  There is no re-fi for people with your ratio of payment to income.  Joe hung up the phone and went out in his yard and drank a couple of six-packs.

At first, Joe was only getting behind in his credit card payments.  He opened his statement and the interest rate jumped to 30%! Joe called around and said “Isn’t charging 30% ILLEGAL?”  Well Joe…it used to be…we used to have something called “Usury Laws”, but no more.  Usury Laws were part of RICO to get rid of Loan Sharks but in 1980 Congress elected to “deregulate” and exempted Banks from Usury Laws for the most part.  30% only seems fair, since you breached your promise to pay on time.  Joe wondered why breaching his promise demanded such a penalty, when those who breached their promise to him of getting a RE-FI and reasonable mortgage payments seemed not to matter.  He put his head down, grabbed a couple of six packs and headed out to the garage trying hard not to turn the motor on in the car.

Joe started getting behind in his mortgage payments.  He had the same job making $65,000 a year…in fact he got a raise to $69,000 a year.  Still he was falling further and further behind.  He called his real estate agent and said, I can’t do this anymore.  I have to sell this place.  The agent told him that prices were down, cost of sale was 8% or more, and there were those payments he was behind getting penalties and interest.  He was “upside down” and the new distressed property law scared her and she couldn’t help him. Meanwhile the mortgage company was calling him every day, sometimes 4 times in one hour.  They had no answers.  They just asked if they could post date a check for the $4,000 he owed them to next week.  He said “Do you really think if I can’t make my full payment again this month, that I can write you a fkn check for $4,000 today that is going to be good “next week” you fkn moron!”  Joe slammed the phone down, turned the ringer off and headed out to the garage with his little TV and a couple of sixpacks.

Joe drank his six-packs and watched all the Presidential Debates and Campaign speeches.  He heard someone talking about “Joe Sixpack” and wondered if she knew how “Joe Sixpack” got that nick-name, and what she was going to do about it.  He watched as everyone fought over the $700 Billion Bailout and wondered if that would help him…and hoped it would.  The Bailout passed, but his phone didn’t stop ringing.  The Credit Card Company was still charging him 30%.  The Mortgage Company still didn’t seem to have any answers.  He called his agent and asked again about selling the house.  She agreed to help him do a “short-sale”, but she didn’t quite know how that worked.  He went out to see where he might rent if he sold his house “short”, but no one would give him a rental, because his credit was now fckd…

He went back to the garage, popped open another beer and stared at the car with the motor off.

Will the U.S. Now Begin to Take Ownership Positions in Banks?

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From the NY Times: U.S. May Take Ownership Stake in Banks

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system …

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

Hat tip CR who says, “The proposal resembles one announced on Wednesday in Britain.”

Sounds like the Treasury is trying to work as fast as they can.

MILA's Bankruptcy

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The bankruptcy trustee in charge of MILA’s Chapter 11 case says there is evidence that MILA’s founder and CEO allegedly collected $32 million from MILA during the years before its demise, “improperly draining the Mountlake Terrace company’s assets as its fortune declined.”

From the Seattle Times:

“I think the executives at MILA knew by 2004 that this bubble was bursting and did their best to take out as much money as they could before it became obvious to everyone else,” says Brian Esler, who represents the bankruptcy trustee in the suit.

The suit claims Sapp, who owned about 90 percent of MILA, paid himself more than $10 million in dividends in 2004 and 2005 when the company was already “functionally insolvent,” meaning it had insufficient capital to continue normal operations and should have been preserving cash.

It also alleges he took $11.5 million in salary for each of those years, though “by March 2005, MILA was already delaying payments, even to important customers, to conserve cash.”

The trustee’s suit also claims that Sapp damaged MILA — and its creditors — in other ways:

He “surreptitiously seized” the mortgage software MILA developed and had another of his companies bill MILA for using it; charged MILA exorbitant amounts for his private yacht and business jets; and, in a “theft of corporate opportunity,” created separate companies to own a four-story office building and a parking lot that were leased to MILA, rather than having MILA buy the properties.

Sapp’s attorney, Jack Cullen, declined to discuss the allegations in detail but said: “We consider the claims nonsense. We don’t think they are founded in law or fact.”

Sapp did not return a call to his Hunts Point home.

Esler is asking the court to freeze $12 million in cash belonging to Sapp, to keep it available to creditors.

Bankruptcy Trustee Esler’s plan is to convince the court that MILA was technically insolvent for over two years before the company abrubtly closed it’s doors in April of 2007.  Esler cites improper accounting and a  twelve-fold increase in the number of loans MILA was required to repurchase from 2002 to 2004.

To protect creditors, the suit says, as early as 2005 “Sapp should have attempted to sell, liquidate or reorganize MILA at a time when it still had significant value, instead of continuing to manipulate and loot it for personal gain for another two years.”
The suit also takes a microscope to transactions among the various entities owned by Sapp. One example: The company that owned his 130-foot yacht billed MILA $395,374 over two years — although “MILA used that yacht only twice for asserted business reasons,” the suit says.

MILA’s creditor claims have ballooned up to 2 billion dollars.  By asking the court to freeze Layne’s personal assets, is the Bankruptcy Trustee is gathering evidence to try and make a case that the corporate veil was pierced? This means Layne might have co-mingled corporate assets with personal assets.  An example of that would be if personal expenses were paid for with corporate funds. This will be an interesting local case to follow.

Bankruptcy Trustee:
Miller Nash
Brian Esler
206-622-8484
Lisa Peterson or Bruce Rubin
360-699-4771

MILA Legal Counsel:
Jack Cullen
Foster Pepper
(206) 447-4689

The House Votes YES on the Revised Bailout Bill

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Watch live on CNBC here.  Speaker Nancy Pelosi addressing the House.
Voting on the AMDENDMENT now taking place.

So far:
263 Yea
171 Nay
218 needed

Update: Here’s the roll call.
Here’s how Washington State’s Representatives voted (district map)
Hat tip SeattleBubble:

YES:

  • District 2 – Rick Larsen (D)
  • District 3 – Brian Baird (D)
  • District 6 – Norm Dicks (D)
  • District 9 – Adam Smith (D)

NO:

  • District 1 – Jay Inslee (D)
  • District 4 – Doc Hastings (R)
  • District 5 – Cathy McMorris Rodgers (R)
  • District 7 – Jim McDermott (D) (voted YES first time around)
  • District 8 – Dave Reichert (R)

CNBC reporting rumor that Fed will do an emergency 50 bps cut after the bill passes …hat tip CR

Will the bailout bill do what it’s suppose to do: help “stabilize the economy?” Perhaps the markets have been rescued…for now.

Senate Votes YES on the Bailout

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Watching the Senate testimony and voting on the Bailout Bill via C-Span.  I hear that Maria Cantwell and Patty Murray are coming out against the bill from statements posted on their website. Hat tip perfectfire at SB.

Democrat Majority Leader Harry Reid is making a speech pleading for passage.

So far the Ayes are adding up very fast.
Cantwell votes NO.
Murray votes YES.

McCain: YES
Obama: YES

Yes: 74
No: 25

Now the bill will go back to the House.

Draft Proposal on Financial Rescue Regulation

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The House votes on Monday and the Senate apparently will vote on Wednesday.  Here is the “Draft Proposal on Financial Rescue Legislation”

From Office of Speaker Nancy Pelosi — Sept. 28, 2008
REINVEST, REIMBURSE, REFORM
IMPROVING THE FINANCIAL RESCUE LEGISLATION

Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets — including cutting in half the Administration’s initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers’ funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street

Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets

Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN

Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable — protecting American taxpayers and Main Street — and these elements will be included in the legislation

Protection for taxpayers, ensuring THEY share IN ANY profits

Cuts the payment of $700 billion in half and conditions future payments on Congressional review

Gives taxpayers an ownership stake and profit-making opportunities with participating companies

Puts taxpayers first in line to recover assets if participating company fails

Guarantees taxpayers are repaid in full — if other protections have not actually produced a profit

Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families

Limits on excessive compensation for CEOs and executives

New restrictions on CEO and executive compensation for participating companies:

No multi-million dollar golden parachutes

Limits CEO compensation that encourages unnecessary risk-taking

Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate

Strong independent oversight and transparency

Four separate independent oversight entities or processes to protect the taxpayer

A strong oversight board appointed by bipartisan leaders of Congress

A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse

An independent Inspector General to monitor the Treasury Secretary’s decisions
Transparency — requiring posting of transactions online — to help jumpstart private sector demand

Meaningful judicial review of the Treasury Secretary’s actions

Help to prevent home foreclosures crippling the American economy

The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year

Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures

Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks.

Brad DeLong has a better idea: nationalization and “it’s the best way to deal with the moral hazard problem.”

Paul Krugman agrees with Brad DeLong but ponders whether nationalization has broad political support.

Nouriel Roubini says the bailout is a “Disgrace and Rip-Off.”

This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer – the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

Seems like the only people who are happy with the draft proposal are the politicians. Seems like both presidential candidates are supporting it.

“This is something that all of us will swallow hard and go forward with,” Republican John McCain said in an interview with the ABC television network. “The option of doing nothing is simply not an acceptable option.”

Democrat Barack Obama said he was likely to back the package. “My inclination is to support it,” he told CBS television’s “Face the Nation.”
 

Update: Here is the 108 page PDF of the bill, now called the ‘‘Emergency Economic Stabilization Act of 2008’’.

The Bad Reputation of RMBS

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I was in Mill Creek earlier this evening having sushi with my daughters and everytime we drive down into Mill Creek I say the same thing: “I remember when this whole place was nothing but trees!” They’ve already heard the stories about how I use to leave the house at dawn with the neighborhood boys and play in the woods all day until dinner time.  But they haven’t heard the stories about the banks.  As I was driving back up the hill, I was stopped at a horribly long stop light which gave me time to ponder the bank to my left, a Wells Fargo, and educate my children: “That bank use to be a First Interstate Bank.  Before that it was an Olympic Bank.” Before that it was something else.

With so much shock and awe over the past few days about the possible imending doom headed our way unless we quickly pass Paulson’s bailout plan, and all the taxpayer backlash on the blogs as well as being reported in the MSM, the new question becomes, well what are some other worthwhile ideas for how to get us out of this mess?  Today, Dr. Krugman suggests that we consider anything coming out of Henry Paulsen’s mouth to be a lie.  This might be a good way to solve the financial crisis extremely fast.

“So, this morning Hank Paulson told a whopper:

“We gave you a simple, three-page legislative outline and I thought it would have been presumptuous for us on that outline to come up with an oversight mechanism. That’s the role of Congress, that’s something we’re going to work on together. So if any of you felt that I didn’t believe that we needed oversight: I believe we need oversight. We need oversight.”

What the the proposal actually did, of course, was explicitly rule out any oversight, plus grant immunity from future review. Read more here.

 
Want to see Henry Paulson in action? Watch this quick video. When he’s testifying, at the part where he says “I want oversight” watch his head go back and forth in a “no” motion.  I tend to believe people’s nonverbal signals over the words they say. 

The Paulson/Bernanke bailout plan details are starting to rise to the surface:

One thing is clear – something we all guessed correctly – is that the intention of the plan is to pay premium prices for troubled assets to recapitalize the banks. It’s still not clear how the price mechanism will work, and unfortunately Paulson and Bernanke are unable to describe how this will work..

This means the TARP plan would buy assets from banks at a higher price than what the banks could get if they tried to sell them at fair market value. Bernanke and Paulson believe the assets are being unfairly underpriced in the free market because of their bad reputation so instead, they’re proposing that the taxpayers subsidize the re-capitalization of the banks.

One analyst says it would take at least 5 trillion for the proposed plant to work.

Why not let the banks come clean and sell their assets at today’s prices, and we can spend taxpayer money building back up the FDIC insurance fund. Weaker banks will fail and stronger banks will buy the assets of the weaker banks from bankor from the FDIC after failure.  Big banks like WaMu could be split up into smaller entities which will be easier for many different banks to absorb. 

Eleua, a frequent commenter on this blog, has been working with a group of other like-minded individuals and he has penned an outline for a solution here:

There is a solution that costs the government nothing, eliminates “moral hazard,

Blog Roundup on the Bailout Proposal

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Calculated Risk
Paulson Plan: Will it Work?

The primary goal of the Paulson Plan is to get the banks to lend again – or “unclog the system” as Secretary Paulson put it. Secondary goals are to “protect the taxpayer” and hopefully minimize moral hazard.

Will the plan achieve the primary goal? I think the answer is yes. By removing these troubled assets from the balance sheets of the financial institutions, the banks will able to lend again without lingering doubts about their solvency and viability. At first glance, the size of the plan seems sufficient.

It is almost guaranteed that there will be unintended and unanticipated consequences, but the plan will probably achieve the primary goal. And making sure the banks continue to lend will minimize the impact of the credit crisis on the general economy.

Unfortunately the Plan fails to address the secondary goals….

Yves at Naked Capitalism:
Why You Should Hate the Treasury Bailout Propsal

the shockingly short, sweeping text of the proposed legislation has lead to reactions of consternation among the knowledgeable, but whether this translates into enough popular ire fast enough to restrain this freight train remains to be seen.

First, let’s focus on the aspect that should get the proposal dinged (or renegotiated) regardless of any possible merit, namely, that it gives the Treasury imperial power with respect to a simply huge amount of funds. $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it’s the ceiling on the outstandings at any one time. It’s a balance sheet number, not an expenditure limit.

But here is the truly offensive section of an overreaching piece of legislation: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Dr./Prof. Paul Krugman
Thinking the Bailout Through

…the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.
So what should be done? Well, let’s think about how, until Paulson hit the panic button, the private sector was supposed to work this out: financial firms were supposed to recapitalize, bringing in outside investors to bulk up their capital base. That is, the private sector was supposed to cut off the problem at stage 2.

It now appears that isn’t happening, and public intervention is needed. But in that case, shouldn’t the public intervention also be at stage 2 — that is, shouldn’t it take the form of public injections of capital, in return for a stake in the upside?

Let’s not be railroaded into accepting an enormously expensive plan that doesn’t seem to address the real problem..

Housing Wire
U.S. Taxpayers to Bail Out Foreign Debtholders too?

“Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets,