Subprime: everybody start whinging: Part 1, what’s on offer?
Almost as if they had been looking for an excuse to pounce, critics wasted no time in assailing the Administration-induced mortgage industry subprime homeowner relief package.
As reported by the you-would-have-expected-them-to-be-sympathetic Wall Street Journal:
Over Mortgage Plan
We’re bringing out the big guns
Who got relief and who didn’t?
Stop right there.
“Picking winners and losers”? Before we go any further, let’s be clear what this proposal is and is not.
The proposal is a blanket amnesty option or unilateral programmatic relief offered by the industry. Consider each element in turn
So — the major lenders have come together and agreed on a set of terms they will offer to a set of borrowers. Nobody is giving them any quid pro quo, not even a nice Chianti.
“Quid pro quo, Clarice. Where is my quid pro quo?”
Under the deal, formally released yesterday, the industry would voluntarily help as many as 1.2 million homeowners who are heading for trouble paying their subprime mortgages but aren’t yet lost causes.
As I’ve posted, the industry proposal includes all the principles of AHI’s sketch, in particular the emphasis on borrowers who are making diligent efforts.
Readers will recall that, way back in April, I urged borrowers to find ways to stay current:
Conclusion: outrun the bear. The old woodsman’s joke is of the two hikers who come upon an angry bear that makes to charge. One reaches for his rifle; the other puts on his track shoes. “Why?” asks the first hunter. “You can’t outrun the bear.” Answers his companion, “I don’t have to outrun the bear. I just have to outrun you.”
One of us is in trouble
To a borrower, default is all-consuming, a unique and emotionally wrenching experience, but to a lender, it’s all in a day’s work, one of dozens or hundreds or thousands of case files.
Yes, I have your case right here
Every morning, the lending officer chooses whom to attack, whom to cajole, whom to ignore, and whom to accommodate. She picks, in large part, by whether the borrower is part of the solution, or part of the problem.
Be part of the solution. As Churchill said:
Similarly, as I posted in previewing the plan, it concentrates on borrowers where the intervention will make a difference, by averting failure and turning it into success.
Those who can continue to make their payments even if rates rise
Those who can’t afford their mortgages even if rates stay steady, and
Those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates.
Only the third group would be eligible for help.
This is classic triage, following precisely along the lines we suggested in my two-part advice to borrowers post: Why are you in trouble? and What’s the best way forward?
The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.
If the borrower has equity, then the lender shouldn’t have to take a loss. The home should be sold.
The published plan follows this triage approach:
For some homeowners, loan-servicing companies will agree to freeze mortgages at their low introductory rates.
Some people thus get a straight extension of terms they are currently paying: in effect, converting a variable-rate loan into a fixed rate.
In other cases, credit counselors or loan servicers will walk mortgage holders through refinancing processes.
Where a cheaper refinancing alternative is available (such as FHA or Fannie/ Freddie) the originators will steer people into those cheaper, stabler loans.
The deal won’t provide relief to many subprime-mortgage holders.
That’s inaccurate: the borrower doesn’t hold the mortgage; the borrower makes the mortgage. The lender holds it.
Who isn’t helped?
It’s hard to call any of these people ‘losers,’ even implicitly, yet that’s how the Journal chose to frame the program. Of the five categories, only the last two have any kind of implicit-equity offer, although I suspect that given their profiles, they are likely to be able to tap a market-oriented solution (e.g. a normal refinancing). If that is so, giving them relief would make it too easy for them.
Suggestions for those who can refinance and maintain equity
Remember, folks, this is a unilateral offer by the mortgage industry. Nobody else is providing any quid for the quo. Why then are the lenders doing it?
Each of these benefits is exogenous to the individual borrower. That is, heading off massive defaults has an additionality value, helping the ecosystem do better.
Thus, at the risk of sounding like a mortgage-industry apologist, what is on offer is clearly good for the qualifying borrowers, is being provided by the industry with no help from anyone else, and will benefit the country as a whole.
The agreement covers homeowners who have taken out subprime mortgages, those offered typically to high-risk borrowers. About 1.8 million subprime loans are adjustable-rate mortgages, or ARMs, that carry low introductory rates that are set to expire in the next two years and adjust upward. These ballooning mortgage payments would threaten to produce a wave of foreclosures and a spiral of lower home prices and tightening credit.
You can get hammered by the wrong ARM
The housing crisis is spreading beyond this relatively small subprime universe, causing turmoil on Wall Street and raising the specter of an economic slowdown.
In fact, it’s no longer a subprime mess, or even a housing crisis. Rather, the global capital markets are comprehensively re-pricing risk.
For a decade and a half, the markets have under-priced risk, and not been punished, any more than the roofless man suffers when it does not rain. That bred over-confidence, and that bred ever-laxer underwriting standards, and borrowers whose financial eyes were much bigger than their economic stomachs.
I can afford it, really!
In the third quarter, home foreclosures hit their highest rate since at least 1972, according to the Mortgage Bankers Association. Prime adjustable-rate loans — not covered in the industry’s rescue plan — accounted for 18.7% of mortgages starting foreclosure, the second-highest proportion behind subprime adjustable-rate loans. The overall delinquency rate is the highest since 1986, with some 2.64 million borrowers nationwide behind on payments for their first-lien mortgages for residences.
1986 was a really bad year for real estate (among other things, because of the Tax Reform Act of 1986). These are worrying benchmarks.
Nouriel Roubini, an economist at
Roubini works on the margins
I highly commend Mr. Roubini’s blog. He’s entertaining, no-nonsense, clear, thorough, and pointed — as well as largely agreeing with me:
Nouriel Roubini |
I have already commented before on why an across-the-board (like in the Treasury/banks plan) rather than a case-by-case approach to sub-prime mortgage restructurings makes sense. Moreover, the attempt to distinguish between those who are insolvent and would default anyhow (even after a freeze of the reset rate), those who can pay and don’t need debt relief and those who are illiquid but solvent (i.e. can likely keep on servicing their mortgages if the teaser rate is frozen for a while) also makes sense. Of course, the Treasury plan may or may not provide enough relief to enough homeowners depending on how it is implemented. But its basic conceptual approach is sound.
Who could object to that?
I demand to be heard!
Why, lots of folks!
But it also sets what promises to become a battle line as the subprime crisis plays out over the coming election year. Some critics, especially Democrats, say the plan doesn’t go far enough to protect vulnerable homeowners against foreclosure.
What resources are the critics bringing to the party?
Others, including some homeowners, as well as those who have watched from the sidelines as home prices have soared in recent years, charge that the plan amounts to a bailout for financially reckless borrowers.
What are their complaints, and do they have any valid basis?
Mine! Mine! Mine!
[Continued tomorrow in Part 2.]
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