Mortgage Subsidies Equal Kinder, Gentler "Bad Bank" Plan

The warm air has no left the area! Fun while it lasted. Tomorrow is Friday, and I have Monday off! Leave some Friday night rock blogging ideas in the comments if you have a good tune.

Markets Rally on Handouts and Nothing Else
For the past year the only time markets rally is when some kind of new bailout, guarantee, cash injection, surprise interest rate cut or some other gift is bestowed upon the markets. When one cannot do for oneself (grow on fundamentals and sold growth) one is relegated to waiting for others to give them something. Here is today's action in the DOW:

The possible giveaway today was the vague announcement of some kind of Federal subsidy for some mortgages. I will cover that in a moment. Right now I want you to think about what these kinds of rallies mean.

Wall Street is banking on the fact that the US government will rip off you, the taxpayer, in order to support an entire financial system meant to do one thing: make those in the industry rich. Forget all this "systemic risk" garbage. If the FED used 3 trillion dollars for loans made at 5% every single "small business owner and average family" would have all the access to credit they would ever need. The truth is all these bailouts and rescues are meant to support an over leveraged facade that the big banks have created. I need NO OTHER PROOF than the ridiculous rallies that occur every time another bailout plan is announced.

Mortgage Subsidies Equal Kinder, Gentler "Bad Bank" Plan
Treasury head Timmie G had a rough go of it the other day. His detail deficient bank plan was met with laughter and bemusement by almost everyone. No details and no real plan. The "bad bank" idea also is DOA because the banks do not want to face insolvency and because the government does not want to be seen as obviously giving taxpayer money away to banks that were foolish.

The financials were crestfallen (love that word!) at the prospect that their toxic mortgage assets would not be scooped up by Washington. Timmie G, not wanting to be a total loser in his first prime time week on the job did what the best political types do when confronted with a terribly unpopular course of action: He phrases it another way!

The whole "We are going to buy up worthless mortgage backed assets at prices far above what they are worth and stick the taxpayer with the losses" was universally rejected. Chants of "No Way! We will not give away cash to support fat cat bankers at the taxpayers expense!" were common. But now the Treasury has a new and improved message: "We are going to give homeowners in trouble a new, cheaper deal so they can afford to stay in their homes!" I mean that is just pure brilliance. It is all in the packaging.

I refer you to the DOW one day chart above. It is obvious that some kind of giveaway occurred today. And indeed one did. Just what do you think "TOXIC MORTGAGE BACKED ASSETS ARE?" If you guessed that those very assets are underwater mortgages, you just won a free one year subscription to the blog "Economic Disconnect". Oh, it's free already? Well, buy a lollipop or something.

This is a clever way to play the bleeding heart line about keeping deadbeats in their homes. Who do you think is going to pay for this subsidy? Why the taxpayer of course. We will pay inflated prices for homes instead of inflated prices for mortgage backed securities. Some deal. I may note that at first blush the old deal was set at 500 Billion to 1 trillion dollars. The new deal is set at around 50 Billion. I am not quite sure those square with the market euphoria.

I try not to use CNBC except for "breaking news" type things (which they are the #1 source for) because their journalistic skills are, shall we say, lacking. Start with this piece out and see if you can spot the massive disconnect:

Stocks Claw Back as Market Cheers Details
By: Cindy Perman, CNBC.com | 12 Feb 2009 | 04:37 PM ET
Stocks staged a comeback in the final hour of trading Thursday following news that the Obama administration is mulling a new plan to subsidize mortgage payments for homeowners in jeopardy.
In other words, the market finally got what Treasury Secretary Geithner failed to deliver: Details.

Ok, so there is some real details to be had from the Treasury? Sounds great! Let's dive into another article on CNBC with the particulars:

US May Start Subsidizing Some Mortgage Payments
By: Reuters | 12 Feb 2009 | 05:56 PM ET
The Obama administration is hammering out a program to subsidize mortgages in a new front to fight the credit crisis, sources familiar with the plan told Reuters Thursday, firing financial markets.
In a major break from existing aid programs, the plan under consideration would seek to help homeowners before they fall into arrears on their loans. Current programs only assist borrowers that are already delinquent.
Under the evolving plan, homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test, sources said.
Bank regulators have used 38 percent of gross income as a benchmark for one mortgage relief program. If a homeowner is spending more than that amount on housing, they may qualify for a streamlined loan program, but the Obama administration may choose a lower percentage as a trigger for relief in any new plan.
The Treasury Department was not available for comment Thursday afternoon.

Are you able to process all those details? I mean there were like 1/2 to 1 real facts in that story. I am glad the markets rallied on all the details!

I could pick this mess of a plan apart, and when there actually are some real details I will. For now, just consider:
- A reappraisal is going to be ugly. The hardest hit bubble areas are likely to be 25%-50% lower than the purchase price. What can really be done about that that will not cost huge dollars?
- If 38% of gross income is too much to pay, then the entire East Coast, West coast, Florida Coasts, Phoenix Metro area, and Las Vegas Metro just qualified for the plan. Good luck with that paperwork!
- The vast majority of problem mortgages are held by the people that scammed the lenders by doing stated income loans and other tricks. How does this plan address mortgage fraud? If someone bought a $500k home and their gross income is $45K, are they going to get a deal for a home now priced at $150k, what they can actually afford? Who decides? Where is the cutoff?

See, lots of details! I will include a few choice comments I saw on this for the close.

From the good friend of Economic Disconnect, Lisa at Capitalist Preservation has this post up today:

Are You Kidding Me? Subsidize Who's Mortgage?
Submitted by Lisa on Thu, 02/12/2009 - 15:52
in Market Views & News
Apparently, the Obama Administration is planning to subsidize mortgage payments for borrowers who have "problem loans" (?) and who's homes have fallen in value. These borrowers would be subject to an affordability test before they become delinquent. Fannie Mae and Freddie Mac will be in supporting roles of this new drama.
So, in essence, Miss X has worked her butt off and saved her money to buy a home. She struggles to make the payments, because her raise has been delayed due to economic conditions, but she pays. Next door is Mr. and Mrs. Y. They have always lived beyond their means, and are now so debt-laden that they are having trouble making payments on all that debt, including the mortgage.
But, not to worry! Now, Miss X will be paying more in taxes to help Mr. and Mrs. Y make their mortgage payment!All of this is to try and keep housing prices from falling.
Are you kidding me? There is NO ONE in charge in Washington, D.C. No one...

She has it dead on. I would just love to know that my neighbor is getting a 30% mortgage reduction while I am not. Life is nothing, if not fair. Oh, wait...

From the comments section of this article at Clusterstock:

John said:
Feb. 12, 4:23 PM
This is amazing...I did not buy a house for years because I didn't think the pricing made any sense. Now the government is going to use my tax dollars against me be trying to reinflate the market. I am not paying taxes anymore.

I love that whole "using my tax dollars against me" theme. Spot on.

I would caution the government here. Amorphous handouts to big banks in amounts that really do not mean anything to the average person (what is a Billion anyway?) do engender some angry outrage, but it is muted because the screw job is not tangible. Start letting one half of a neighborhood street get sweetheart deals while the other half has to eat it and like it may not have the kind of effect we would want. As if the government needed more reason to stay the F away from meddling, starting a war among neighborhoods is the usual unintended consequences that we have come to expect from government intervention.

Have a good night.