Anyone who's read my comments on the various Bush/Paulson/Bernanke mortgage bailout plans knows I consider them to be of two kinds: dumb and dumber.
Interfering in free markets is always a tricky business, especially when you intervene only during the needed correction, after ignoring the orgy of greed and ignorance that got the mortgage and real estate markets to the position they're in today. However, when the details finally came out on the Bush/Paulson subprime "freeze" plan, I was simultaneously pleased, amused, and horrified.
First of all, though I'm no fan of this administration, I was glad to see that the plan hadn't gone too far in abandoning the principles of a free market. The bailout it offered was fairly limited. It sets price controls on only a couple of million mortgages, tops -- although in practice, it will probably be far fewer.
Furthermore, it was, to a degree, brokered with the private sector -- though let's admit that this was a shotgun wedding. Banks such as Citigroup (NYSE: C ) , Countrywide Financial (NYSE: CFC ) , Wells Fargo (NYSE: WFC ) , and Washington Mutual (NYSE: WM ) don't just offer up rate freezes unless there's something in it for them. In this case, it was probably the belief that, if they played nice on this one, Congress would leave them alone and not hatch nuttier plans. I broached this topic yesterday, and I have more on it below.
Who qualifies? That's the billion-dollar question, and it was very tough to get answers yesterday.
Even after President Bush's handlers corrected the erroneous toll-free number he gave out, it was impossible to reach the "HOPE" folks at the other end. The lines were jammed, the voice mail boxes overflowing.
According to The Wall Street Journal, you qualify for a rate freeze if:
- You took out a subprime adjustable-rate mortgage between Jan. 1, 2005, and July 1, 2007.
- Your first rate reset occurs between Jan. 1, 2008, and July 1, 2010.
- Your loan has been packed into a security and resold. You do not qualify if the bank holds your loan.
There are more limitations, but let's stop for a moment with that last one: You qualify only if your loan has been passed along to some other bagholder. If the bank holds it, and if the bank stands to lose money on the deal ... sorry, Charlie, but you don't qualify for this program.
This is why I say the banks came to the table out of sheer self-interest. Clearly, they are looking to pass the costs onto others. Once they sold their junky loans off to Goldman Sachs (NYSE: GS ) -- Treasury Secretary Paulson's old haunt -- or Bear Stearns (NYSE: BSC ) to be packaged into securities and sold to other investors, they considered themselves free of responsibility. Apparently, they're making sure that any bailout guarantees them that status.
Some more restrictions:
- If you have good credit, you do not qualify.
- If your rate has already reset, you do not qualify.
- If you are behind in payments, you do not qualify.
Then, there are the unknowns:
- What's the definition of "subprime"? Hey, call your loan servicer, and it'll decide.
- I have read (but was unable to confirm) that the loan had to be worth less than the home -- something that would be highly unlikely given the no-down-payment craze, and the drop in home prices. (Of course, a crooked, inflated appraisal, such as those alleged to have been pervasive in New York, might help with that situation.)
There isn't enough cyber-ink on this page to fully explain the idiocy in this plan, so I'll hit the high points.
First of all, as is plainly clear from the restrictions, this plan punishes the more responsible people who took out loans they can't afford. Credit too good? Sorry, no reward for you. At the same time, it excludes the worst of the irresponsible borrowers. Already behind in payments? Too bad. Took out your loan early, and it's already reset? Tough luck. That means very few borrowers are actually going to get this government-imposed price control -- as few as a couple of hundred thousand, according to some estimates from the media.
But I think that's a plus. The less tampering with the needed real estate correction, the better. But it will spark a major backlash (indeed, it already has) among those who think that more people should get a free pass on their bad borrowing. Especially rankled are vote-hungry Democrats trying to out-bailout the administration by claiming that supporting the real estate bubble (that they never tried to restrain) is vital and necessary for our economy.
There are already bondholders out there grousing about being left holding the bag. A friend of mine who works in fixed income for a firm that does business overseas figures this move will destroy credibility in the U.S. markets. How is this any different, he points out, from when some tin-pot dictator in a banana republic unilaterally decides to stop paying on his nation's debt, or cut payments drastically, to suit the regime's socialist handouts? Who's going to buy mortgage bonds with that risk? At what price?
As I noted yesterday, much bigger waves of loans are coming up, from Alt-A "liars'" loans up to prime, that are going to reset, continuing into 2011. Many of these people will be in danger of losing their homes that they paid too much for, with little equity, and little fear of what would happen if the price didn't appreciate and they couldn't refinance.
In other words, even if this program were expanded, it wouldn't be enough to hold back the tsunami that's on the way.
Some commentators out there think the current Bush/Paulson bailout plan will only delay the inevitable by stringing along subpar credit risks for a few years until they can finally no longer afford their homes, and then just give up and sell or walk away. I no longer agree with that. I don't believe this program will salvage enough homes to avoid a massive housing correction.
Let the home prices correct, let the market clean up the distressed assets, and let us all move on, back to the future, where lending is sane, people save and put down payments on homes, and they don't spend 50% of their income just to rent an inflated asset from the bank.
Getting there would be, I think, a good thing. There's a groundswell among the silent majority of Americans who didn't borrow irresponsibly -- they also think this is a good thing. The question is, "Will pandering politicians listen?" And, "If they don't, how much will it cost the rest of us?"
Foolish final thought
Put it all together, and it's laughably ugly. With this subprime bailout plan, Paulson and the Bush administration have managed to simultaneously:
- Infuriate the majority of Americans who didn't gamble on expensive homes.
- Propose a bailout plan that will help only a handful of housing gamblers, and not those who are most deserving.
- Severely damage the credibility of the financial system that provides the capital used for making home loans.
- Set a terrible precedent for a bailout regime that can't possibly cope with what's coming down the line.
Heck of a job.