Subprime: everybody start whinging: Part 2, what’s your beef?
[Continued from Part 1.]
As I wrote yesterday, the mortgage industry debt-relief proposal should help roughly 1,200,000 households, at a stroke, moving them from future default into ongoing viability. This is a huge thing, to be applauded.
It should reduce the default pressure by roughly forty percent — and that’s in everyone’s interest, as observed by the perspicacious and ornery Nouriel Roubini:
As for the across-the-board approach versus the case-by-case approach to the mortgage restructuring again the claims that the former approach is an unfair – or substantially illegal - process are wrong. As I discussed before the experiences with a dozen financial crises in emerging market economies, is that when millions of small agents (households with foreign currency denominated mortgages whose real value has sharply increased following a currency devaluation, small and medium sized enterprises with foreign currency debts, and even larger corporate firms when you have a systemic corporate crisis) are financially distressed it is altogether impossible to follow a case-by-case approach as neither the bankruptcy court system nor the creditors are able to expeditiously restructure on an individual basis millions of separate debt contracts.
Where then is the praise? Not in the Wall Street Journal, which found no shortage of people ready to complain:
I don’t like it!
The agreement, which was hammered out with investors and mortgage companies under the auspices of the Treasury Department, is the centerpiece of the Bush administration’s free-market approach to the mortgage crisis and may be as far as it is willing to go in the direction of a full bailout.
The sooner you fellows agree, the sooner you can put your clothes on
Allow me to be exasperated once again.
I’ll be exasperated too
While the Administration is to be commended for convening a forum and giving the lenders political and legal cover to do something manifestly in their own interest, the Administration has, in fact, done nothing but use its power of convocation. No money, no subsidy, no extension of credit, no new laws.
This isn’t a complaint, but to say this ‘may be as far as it is willing to go’ implied that it went somewhere … and, at this moment, it hasn’t.
As Mr. Roubini put it:
The Treasury plan also does not involve – so far - any use of public money; thus, it does not represent a “bailout” of either borrowers or lenders/investors; investors are not bailed out as there is no transfer of public resources to them; if anything they have to accept a haircut – in NPV terms – on the initial value of their claims; but such investors are also better off under this scheme as – under the alternative of massive defaults – the losses and NPV haircuts would have been much larger; debtors are not really bailed out either as many of them would have defaulted anyhow on their mortgages and would have thus obtained eventually greater relief by defaulting than by keep on servicing their mortgages at the lower frozen teaser rates.
[Perhaps Mr. Roubini could be encouraged to use more periods and fewer semicolons in his prose — Ed.]
Note those magic words ’so far.’ As Mr. Roubini rightly flags, additional relief may be forthcoming, from government, in one form or fashion.
But pressure is likely to increase as housing and the economy move to the top of the presidential-election agenda. Candidates such as Hillary Clinton, Barack Obama and John
Vote for me and I’ll give you more!
They’re not in office now, so of course they can go further. Promises from unelected officials cost nothing!
Rep. Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said he is concerned that the plan sends the wrong message by not helping borrowers who have maintained good credit scores. These scores can run from 300 (bad) to 850 (ideal). According to the plan, homeowners scoring 660 or above will be considered fit to pay their mortgages. Such a rule would punish people who have tried to avoid taking on debt they couldn’t handle, Mr. Frank said. He called the decision a “grave error.”
Mr. Frank, meet Mrs. Clinton.
Is she out there?
Mr. Frank thinks it’s too generous, Mrs. Clinton thinks it’s too chintzy.
Under the new plan, Humberto Goncalves would be on the cusp. The electrician took out an adjustable-rate mortgage when he bought a home in
Indeed, it is borrowers like Mr. Goncalves for whom the plan was designed.
At its most basic level, the Bush-supported proposal is aimed at stopping and reversing the real-estate market’s spreading turmoil. As foreclosures have increased, they have added to the number of houses for sale, depressing prices. Falling prices encourage more people to stop paying their mortgages and go into default, because their homes are worth less than their loans. More homes go into foreclosure.
The program aims to assist borrowers able to keep up with payments at their introductory rates but who will likely fall behind and face foreclosure if their rates go up as scheduled.
According to the plan, homeowners would contact credit counselors or their loan-servicing companies, who would sort them by their credit and payment history and ability to pay. Those 60 days behind on more than one mortgage payment over the past year would most likely receive no assistance, other than credit counseling to talk them through the loss of their homes. In the triage of the mortgage industry, they are considered largely beyond help.
What kind of subprime borrower are you, young man?
Even with a broad plan, there must still be a screening system. I suspect that furious work has been done behind the scenes to assure that the four major loan servicers have expert system computer software to walk them through the Q&A with borrowers seeking to avail themselves of the relief.
This effort will also result in a massive amount of data being collected, so there’s every reason to think that in a month or two, there may be another form of group relief offered to a second or third tranche of borrowers, those outside this round of eligibility but for whom some other program, perhaps slightly less favorable, will be designed.
“If the sheriff is at your door hauling out your furniture, and that’s the first time you call your lenders, then you’re probably too late,” said Steve Bartlett, president of the Financial Services Roundtable, a trade association of the country’s 100 largest banks, mortgage servicers, insurance companies and mutual-fund companies. Treasury Secretary Henry Paulson asked the group to coordinate the industry negotiations, in a forum called the Hope Now Alliance.
The alliance estimates that 600,000 of the subprime borrowers whose rates will reset in the next two years fall into this category. They are likely to lose their homes, or, in Mr. Paulson’s words, “become renters.”
Out go the first 600,000; they’re in trouble. As Mr. Paulson notes by his artful phrasing, loss of ownership does not mean homelessness; rather, shifting tenure is one of the elements of a major restructuring.
The 1.2 million borrowers relatively current in their mortgages will be considered for the government-endorsed program. They will pass through the next set of screening to determine whether they can refinance at more-favorable mortgage rates. Some 600,000 borrowers are expected to qualify. These borrowers are expected to be offered counseling and a fast track to secure refinanced mortgages.
The remaining 600,000 won’t qualify to refinance their existing mortgage, the alliance estimates. Such borrowers’ loan servicers or counselors would determine whether they can afford to pay the higher interest rates once their introductory rates expire. The servicers will assume that those with better credit scores and more equity can afford to pay when their existing loans adjust upward. They would receive no special assistance.
In the manner of St. Peter, the credit screeners keep sorting those sent to heaven, those denied entry, and those kept waiting at the pearly gates.
What is your credit score and your loan repayment performance?
Those who can’t afford the higher payments, and who have credit scores below 660 and less than 3% equity in their homes, will get the biggest break from the lenders. They receive a five-year extension on their introductory interest rates, with the possibility that the grace period will be extended. Such a rate freeze would be available only to people who live in the mortgaged properties.
A middle group, who may or may not struggle with the increased interest rates, will have to negotiate individually with their loan-servicing companies to secure a rate freeze, repayment holiday or other relief.
Think of this whole system like a customer-service hotline. Those whose problems are unfixable are rapidly told so. Those for whom a straightforward patch will do are quickly identified and helped. Those whose cases are more complex are referred upward, to a higher-level supervisor, where individual deals may be worked out.
Mr. Bush, speaking in front of a White House fireplace mantel festooned with greenery and gold ornaments, sought mainly to calm homeowners. “The holidays are fast approaching, and unfortunately, this will be a time of anxiety for Americans worried about their mortgages and their homes,” he said.
He said the initiative was focused squarely on borrowers, not on investors. “We should not bail out lenders, real-estate speculators or those who made the reckless decision to buy a home they knew they could never afford,” Mr. Bush said. “Yet there are some responsible homeowners who could avoid foreclosure with some assistance.”
Treasury Secretary Paulson addressed some of the criticism about the plan’s scope. “The approach announced today is not a silver bullet,” he told reporters yesterday. “We face a difficult problem for which there is no perfect solution.”
I recall somewhere that a good compromise is one that disappoints everybody roughly equally. Judging from the roundup of complaints by the usual suspects, this must have been pretty equitable legislation.
Now, you critics know the drill, read the standard complaints on the card
The program will be closely watched in markets around the world, where subprime defaults have triggered steep write-downs and constrictions in credit markets. Many banks and investment funds invested in complex securities backed by subprime mortgages, which promised high returns but are now battered and difficult to value.
The rescue package suggests that most investors prefer to give up some interest revenue rather than carry out expensive foreclosures of thousands of homes.
Gee, do you think?
But the plan won’t reduce their losses by much. Analysts at Barclays Capital Research said in a report that the Treasury’s plan could reduce cumulative losses from subprime loans by 0.6 to 1 percentage point, “which is not much relief when losses could reach 13% to 15%.”
The point is not to reduce losses, it’s to avert their increase and the increase of market disruption.
Investors who hold mortgages, meanwhile, would still bear the risk of the loans under the plan, said Doug Dachille, chief executive of First Principles Capital Management in
“There ought to be costs to both the borrowers and lenders, but right now you’re just giving a freebie to homeowners,” he says. “They still get to live in their house and benefit from any appreciation in the value of the house over the next few years.”
Mr. Dachille is correct that this is, as he inelegantly puts in, “a freebie to homeowners.”
Should we weep for him and his fellows?
Freebies to homeowners?
[Continued tomorrow in Part 3.]
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