The "Man" & his SubPrime Plan

A few posts ago, I linked to Nouriel Roubini's blog, commenting on how I vibe with his strategic thinking. Well, he just posted a piece on the subprime plan that I completely disagree with. I had planned to stay away from this topic, but since I already implicitly endorsed him, I might as well clear the air. I have a lot of respect for his prescience and foresight in calling the real estate bust (because he agreed with me:-), but...

I thoroughly disagree with the good Doctor on this subprime thing. Most of my points have been covered by others in the comments on his blog and others, but a major one seems to be continuously missed by all, including our current administration - This was never a subprime problem. It was a bad underwriting problem. These defaults that you see in subprime, are now manifesting in Alt-A, prime and everything in between. Not just housing either - consumer finance, auto, boats, credit cards, you name it. Consumer asset prices are trending down. The government, following its logic, will have to open this program up to borrowers of all credit ratings of all loan amounts. That's right. That doctor with the 1 million dollar house may be part of the plan as well. If one forecloses on a house now, they will get significantly more than if they foreclosed on a house two years from now or probably 5 years from now. "They" includes the homeowner and the mortgagor. So, yes, this will end up in less valuable securities for the investor and a worse outcome for the homeowner. If a workout is in the best interest of the servicer/investor, they will pursue it out of selfish interest (greed), and do not need government intervention to coerce them.

If the government really wishes to get involved, they should go after those who were victimized through being fraudulently induced into applying for mortgages and home sales that weren't in their best interest. Make the perpetrators of that fraud make the victim whole, which takes no government funding (many of the perpetrators themselves may need funding, though). Fraud was prevalent in the boom, but unilateral fraud on the part of the vendor is where the government should focus its resources. The market should be allowed to sort out the rest.

For more on the ill thought out consequences of this plan: "I hate to say it, but this thing is going to be ugly, and we are a good 2-3 years from even thinking about the bottom. We finally started reaching critical mass with 'subprime' foreclosures, but we haven't even begun to hit the alt-a and a-paper sham loans. They are starting to pop up, but they will take longer. Most alt-a and a-paper borrowers were doing 5, 7, and even 10 year ARM loans." See the overly optmistic post for the rest of this post.

Comments

[JQ]

I agree Reggie. It was very disconcerting to see Roubini, who I respect, so wholeheartedly endorse this charade.

After looking into the plan, my conclusion is that its purpose is essentially political - Bush et al want to appear to the public to be doing something - anything - about the crisis. At some point they may expand the program at which point it might become truly a bad thing, but at this stage, as stated - well, it's not the worst program the government ever proposed (but that isn't saying much).

By the way, on CNBC today, didn't Hank Paulson look during the entire press conference like he had the runs and was squirming around until he could make it to a bathroom? I've never seen a public official before exude such a sense of panic in his mannerisms. Even the Iraqi Defense Minister put up a better show.

Oh well, the stupid plan had its desired effect - the market jumped up on the news. Next pump will be the rate cut.

[Reggie]

By far the most astute analysis I have seen on this come from the bankers at Calculated Risk - http://calculatedrisk.blogspot.com/2007/12/plan-my-initial-reaction.html

[rob]

I agree this is pure politics. What is so magical about a "subprime" borrower as against an Alt-A or Prime borrower?

I agree with Reggie that the program will have to be extended at some point next year because people who don't qualify for the current program will be screaming so loudly.

[Jim Brickman]

RE; Subprime bailout
The sub prime bailout isn't about "logic" it’s about politics -just like most ideas from DC. There is no way the bailout is fair. The plans requires people that didn't borrow recklessly pay for those that did. The problems does not address the second lien loans made on top of sub prime loans or a host of other exotic loans offered by greedy mortgage brokers to idiot borrowers that thought a house was an investment vehicle rather than a place to live.

[Al]

It's hard to believe that anyone but the lenders would endorse this plan. For a 'homeowner' with a mortgage valued at more than the house and payments far larger than rent, a foreclosure is likely their best financial course of action. Let the lenders take the hit for the difference between the market value of the house and the inflated mortgage amount. Freezing interest rates at the intro, the lenders can keep the payments coming in for 5 more years before the inevitable foreclosure.

[Reggie]

As stated earlier, this is more about politics then helping people. Those that cannot afford the property (cash flow insolvent) should foreclose as quickly as possible in order to capture as much value as they can before market values decline further. That is, unless the economic prospects of this country look to improve enough to increase real wages at a pace that exceeds housing value depreciation. If this is the case, the homeowner and investors are assisted by this plan. Since we can all agree that this is not the case though, foreclosure is the next likely remedy. Nearly all members the plan targets who are eligible are balance sheet insolvent, for they probably have negative equity due to the LTV and the year they bought (at the bubble height). Pushing foreclosure off further into the bubble bust will simply yield less of a return for all involved and exacerbate the effects of the actual foreclosure.

[Reggie]

I recieved the following as an email:

THIS IS AND ALWAYS HAS BEEN A SUPPLY AND DEMAND CRISIS AND ON ITS WAY TO DEPRESSION

We have 5 houses for every buyer. Collateral is falling to 30% today and will be 50% less value by next March. By getting rid of all loans that aren't fixed (supposed subprime fix) now IF YOU DO FIND A BUYER THEY CAN'T GET FINANCING.

The powers that be treated us for colon cancer (subprime) and we are having a heart attack (supply and demand)... Accounting 101, too many properties too few buyers...............now the fix for that is the ABSOLUTE OPPOSITE THAN THE FIX FOR BAD LOANS, SUBPRIME, UNDERWRITING OR WHATEVER YOU CALL IT.


These people would be selling their homes before they turned them back in IF THEY COULD, THEY CAN'T.

So now when you see the real problem, YOU SEE THE BIG DANGER LOOMING. 38% of all investments in the world are MORTGAGE BACKED SECURITIES................oooops, that means when "A" continues to fall (good loans are already falling that is why the reserve situation is so dire for the banks) the pooch is screwed. These loans are littered worldwide, they are in your pensions they are in your mutual funds, etc. This is going to be awful and I am the most positive person you will ever meet. I write a political column for my local paper and I always want to be right, I PRAY THAT I AM DEAD WRONG ON THESE PREDICTIONS BUT EVERYTHING I SAID LAST JANUARY IS COMING TRUE BEFORE MY EYES, IT IS SO SCARY AND NO ONE IS PREPARED FOR IT.

The bailout they are talking about can't and won't work. People that don't know what is going on are trying to fix the wrong problem.

I think Suntrust, Washington Mutual, Wachovia, Countrywide are gone unless total government bailout. I think Hovanian, DB Hortan, KB Homes, Lenner are all gone unless they merge to their deaths.

Who knows on the investment side, Merrill, Citi, Goldman they are all full of this crap.

In history when the housing fell everyone got into stock. When the stock market fell, everyone got into housing,

TODAY THOSE TO INDUSTRIES ARE HOLDING HANDS AND JUMPING OFF THE CLIFF TOGETHER, THIS NATION HAS NEVER SEEN ANYTHING LIKE IT...........................

Unfettered building of units for 14 years is what caused this and it is going to rewrite our banking and mortgage history. I think the government will bail this out in many ways to the tune of 10 trillion dollars (I said that in September, could be more now) and save 5 or 6 banks and they will be responsible for doing all the mortgages from here on out.

Oh yeah they will be doing the trillion dollar bailout RIGHT WHEN THE FIRST BABY BOOMER GETS HIS CHECK IN FEBRRUARY.

This is very ugly and going south daily.

[CapitalGain]

I couldn't care less about The Plan. It was, however, nice to see Paulson looking like someone had shoved a live snake up his ass.

[CapitalGain]

I couldn't care less about The Plan. It was, however, nice to see Paulson looking like someone had shoved a live snake up his ass.

[The Tech Guy]

"If one forecloses on a house now, they will get significantly more than if they foreclosed on a house two years from now or probably 5 years from now."

That pretty much sums up why the freeze is likely to fail. If I was a investor owning MBS, I much rather liquidiate the weakest mortgages now, rather take a chance that the borrowers will be able to keep on paying and being forced to liquidate in an even more weak market.

With the economy slowing and very likely heading into a recession, the risks for borrows losing jobs or falling behind increases. Better to get out now, than prayer for better days. As property values fall, more and more homeowners will owe more than their property is worth, which also increases the risk that the homeowner will simply walk way. There is nothing for the investor to gain by delaying foreclosure and everything to lose.

It should be interesting to see how investors react. A knowledgable investor will obviously see the critical flaws in the Freeze, but then again, knowledgable investors avoiding investing in MBS in the first place. I don't think the freeze will add much delay to a national foreclosure crisis. The Super SIV went no where, and perhaps well see more of the same with the Freeze.

Even with the Freeze in place, the foreclosure rate will almost certainly rise, caused by a weaker jobs market, falling real estate prices, slower wage growth, and tight lending for both consumer and commericial. Tighter lending practices means less easy Credit card debt for consumers and less corporate borrowing, thus less spending.

Predictions:
1. Paulson will resign or announce his resignation by the end of June.
2. Real Estate prices decline for more than a decade. (Banks and investors are unlikely to return to their liberal lending practices anytime soon)
3. Gov't Bailouts in 2008 when unemployment soars.
4. Dollar declines by 1/3 before 2009.
5. 2008 with be a very interesting year, but not in a good way.
6. Much, Much higher taxes by 2010.

Best of luck to everyone in most unfortunate times!

[Chuck]

Reggie - one error/clarification:

"It was a bad underwriting problem."

Should be:

"It was a problem brought on by intentionally bad underwriting."

Clearly, the people at the Ratings Agencies (sic) and the I.B.s knew that their "models" did not include borrower Debt-to-Income. It would have hurt sales & fees..

[David]

We finally started reaching critical mass with 'subprime' foreclosures, but we haven't even begun to hit a-paper sham loans. They are starting to pop up, but they will take longer. Most a-paper borrowers were doing 5, 7, and even 10 year ARM loans.

[ferragamo shoes]

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[huntington beach chiropractor]

That's right. That doctor with the 1 million dollar house may be part of the plan as well. If one forecloses on a house now, they will get significantly more than if they foreclosed on a house two years from now or probably 5 years from now.

[quail hill homes]

Fraud was prevalent in the boom, but unilateral fraud on the part of the vendor is where the government should focus its resources. The market should be allowed to sort out the rest.

[mission viejo chiropractor]

So, yes, this will end up in less valuable securities for the investor and a worse outcome for the homeowner. If a workout is in the best interest of the servicer/investor, they will pursue it out of selfish interest (greed), and do not need government intervention to coerce them.

[quail hill homes]

I thoroughly disagree with the good Doctor on this subprime thing. Most of my points have been covered by others in the comments on his blog and others, but a major one seems to be continuously missed by all, including our current administration - This was never a subprime problem.

[turtle ridge homes for sale]

I might as well clear the air. I have a lot of respect for his prescience and foresight in calling the real estate bust (because he agreed with me:-)