Friday, November 30, 2007

Rate Freeze Plan Came During a Brain Freeze

Today is one of those days that you learn something so infuriating and maddening that you feel you need to take a "timeout" and try to compose yourself. I will stipulate upfront that I am as fed (pun intended) up with the housing implosion situation's proposed remedy as is possible. My patience level is at zero, and my disgust meter is pegged over red line.

Rate Freeze Plan Came During a Brain Freeze
Where to start? I guess with the headline and snippets (from WSJ):
U.S., Banks Near A Plan to Freeze Subprime Rates
By DEBORAH SOLOMON and MICHAEL M. PHILLIPS
November 30, 2007; Page A1
WASHINGTON -- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations
.
Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.

First off, details are still "being worked out"? But the total package will be ready for announcement next week? Someone rushing a bit?
Second, I do not know where the writer got their figures, but whoever heard of a 7-8% introductory "teaser rate" in the last 4 years? I have never seen an ad or commercial advertising "start at a low 8%". The teaser programs I have seen were in the realm of 2-4% starting rate with the fully indexed rate jumping to 8-10%. That's is a huge difference and it seems the article is trying to lay ground work along the lines that the jump is even close in number. The problem right now is not an extra 2% on a mortgage, its an extra 5% that foolish people thought would never happen.
"Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.
At a meeting at the Treasury Department yesterday, coalition members told Mr. Paulson and other regulators that they are on track to announce the new industry guidelines by year's end, according to a senior Treasury official. Among those attending were representatives of Wells Fargo, Washington Mutual, Citigroup and the American Securitization Forum, a group whose members issue, buy and rate securities backed by bundles of mortgages.
"There has been a convergence of thought on this," said William Ruberry, spokesman for the Office of Thrift Supervision, which is also involved in the discussions."

Well I for one will sleep so much better tonight knowing the same imbeciles that brought this mess in the first place now have a "convergence of thought". You cannot make up comedy like this, it can only come naturally.
"Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: 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."
The sheer lunacy of the three group model is astounding. If you can pay more than some other fool, you will. If you cannot pay at all, bye bye. If you can pay at the low teaser rate, it will be fixed for maybe 5 years at that rate. Again, too funny. Who decides who can pay what? If I could pay more, I would now start to fall behind or some enact some financial distress to qualify for the freeze program!

Read the few articles out about this plan for yourself. There should be a few problems that jump right out at you that somehow the planners either did not see or think are not problems that are too bad.

Market for Adjustable Rate Loans Effectively Finished Immediately
If the government can step in and reset securities when they want to, there are two problems:
  • No investor group will ever (I mean Never) buy any product related in any way to adjustable mortgages. This will kill off a huge swath of entry buyers, and the housing market will rapidly collapse due to lack of funding
  • I woke in what I thought was the US, but as the day wore on I realised the Ruskies had won the cold war and we are communists.

Banks and Lenders are OK with Taking Massive Losses? Try Again!

Implicit with this plan is that the losses from the modified loans can be taken by the banks. That's a good one. The government obviously has some kind of major bailout plan for the lenders and holders of the fantasy paper. Where's that money going to come from? Printing presses of course! What that means for foreign investment and the dollar is probably not good long term. And again, this will stop mortgage lending almost immediately to all but the most qualified buyers.

Revenge of the Monthly Payment Mindset

This is the most important thing that jumped out at me thinking about this dumb move. We have gone over the "monthly payment" mindset that is the US consumer. The US consumer is also a jealous, competitive type to boot. Consider the following example that I have used before:

  • Person A-has a frozen teaser rate of 4% on a $300K home. The mortgage is $1200 monthly.
  • Person B-looking to buy a home. Due to new high lending qualifications and higher rates charged by the banks due to losses, his rate will be 8%. To buy the home at $300k, his payment will be an astounding $2400!!!!!

Now who in their right mind is going to rush up to the buying window with that ridiculous deal? The prospective buyer should only pay the same amount, and that means the new home price just became $150k. A 50% decline in an instant. If you are considering buying a home, and considering paying through the roof for the foolishness of others, you deserve your fleecing. With the Internet and all the information available, I envision people are going to be doing this kind of math and reaching the same conclusion.

Folks, we have reached a point now where things are going on that are so reckless and so ill conceived that something needs to be done. A poll on CNBC is showing over 80% of respondents are against any type of freeze program! Why is it so hard for all involved to simply see what needs to happen, and let it happen? The world will not end. The galaxy will continue to rotate. The grunions will continue their yearly spawning run. What's the big F##ing deal with a housing bust?

The only answer I can seem to find that makes sense is that the powers that be know the charade of the banking system requires the concept of "suspension of disbelief", and the housing bust will serve as the pin to pop the illusion. The Freeze program is outrageous and requires a total immersion in fantasy to even consider. The fact that the government, the banks, and the FED all support this plan says so much about how sorry this country has become in short order. Sorry for the especially nasty tone tonight, but I am disappointed and angry that it has come to this.

It is Friday, and I did not receive any rock blogging ideas in the comments, so I guess its my choice!

I am a slave to 80's glam rock. I love it and I am not ashamed!

Dokken "Alone Again Without You" amazing vocals, great power ballad:

Cinderella with "Nobody's Fool", fitting for today's news!

Poison with "Fallen Angel" the guitar solo is one of the best in all of Glam rock:

Have a good night!

40 comments:

GeorgeNYC said...

"nor shall private property be taken for public use, without just compensation."

There is is right in the Fifth Amendment. I really did not think that the government could just "freeze" interest in already agreed upon contracts (as opposed to an interest "cap" ahead of time) without paying someone compensation.

donut-san said...

I say let GWB do whatever the hell he wants, and watch the economy crash and burn. then the republicans will be out of office for the next 50 years, and we'll finally have another great depression and the economy can finally self-correct itself.

Anonymous said...

"If I could pay more, I would now start to fall behind or some enact some financial distress to qualify for the freeze program!"

Damn right! Momma how would you like to quit your job and stay home with the kids? I think we need to miss every other mortgage payment for awhile.

donut-san

Your out of your mind if you think this is only a republican issue.

Kevin

getyourselfconnected said...

Kevin, I agree totally. Every single fool up on capital hill and the halls of government are equally terrible, not just one side.
George, good point. I had not looked at it through that lens, thanks for the thought.

I going back to my beers now.

Anonymous said...

Hey all!

Guess what I did today? First one to guess right wins a cookie.

G

Anonymous said...

Guess what I did today?

Bought some gold

Kevin

PS I like peanut butter.

getyourselfconnected said...

Gold is broken right now and the dollar is rising. I am not sure what has changed, but the tide seems to have turned. Be careful G!

Anonymous said...

Guys I am not trying to be negative but if you look back over the last few rate cuts, the FED sent the dollar down hard and gold up fast. Don't get me wrong the metals and oil had a surge and this is a pullback but that doesn't change the situation that we are all in right now. Without going into a rant I buy on the dips and never sell. Also I did pickup some silver bars the other day on the dip. Sure the metals could continue to fall but I don't see the right things happening to correct the problems with the economy or the state of the country for that matter.

Buy physical and hang on to your wealth! Guys the confiscation of the Liberty Dollars Gold and Silver is only just a taste of what's to come from the govt.

Also one last idea for a blog entry:

What would happen to the USD and our country if the dollar was no longer the worlds currency? How would our lives be directly and indirectly affected? Would the EURO be next in line or would a North American Currency magically appear and save us all?

G

Anonymous said...

G

I posted this yesterday G

Short gold in '08, Goldman says

the 2008 top trades list, drawn up by Goldman's global markets team, suggests investors short gold priced in U.S. dollars in order to capitalize on a gradual relaxation of credit concerns in the financial sector over the coming months and as an avenue to benefit from the prospect of the U.S. dollar stabilizing. Bullion has been one of the main beneficiaries of the financial turmoil that began in August as investors sought alternative stores of value to the weakening U.S. dollar.
The team also makes its argument for shorting bullion on the basis of technical analysis. That, the team says, suggests that gold is topping out and that longer-term momentum indicators are turning lower. “We see scope for acceleration through $770 to re-test the $600-650 levels prevailing ahead of the summer,” the team said.

http://www.reportonbusiness.com/servlet/story/RTGAM.20071129.wgoldman1129/BNStory/SpecialEvents2/?page=rss&id=RTGAM.20071129.wgoldman1129

It is looking to me that we are headed into a situation simalar to 02 which was deflation, while I think long term gold will be the place to be G and you are certainly young enough to weather the storm in gold and I don't see anything negitive with that but I think gold and oil are going lower at least short term. one of the reasons for that is I think Japan and possibly opec are doing some intervention in the markets clearing the way for the FED cuts, with the US being their primary markets it is in their best interest to do what they have to even if it means they take a loss short term.

Man groups call is for 718 gold by March.
These are some of the big guys and they are pretty good at what they do.

Kevin

When do I get my cookie?

Anonymous said...

Kevin,

Here is your cookie


00000
0000000
0000P0000
0000000
00000

Note the P represents it's made with Peanuts.

G

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