Here comes the subprime bailout. . .
 

http://money.cnn.com/2008/03/26/news/economy/bailout/index.htm?cnn=yes

The next bailout: Homeowners

Federal government help for Bear Stearns and other Wall Street firms increases the chance that assistance for those facing foreclosure will be approved.

By Chris Isidore, CNNMoney.com senior writer
March 26, 2008: 2:13 PM EDT

NEW YORK (CNNMoney.com) -- The federal government is keeping Bear Stearns out of bankruptcy. Are you next?

Momentum for federal assistance to struggling homeowners, a non-starter with the Republican administration and many members of Congress only a few months ago, has picked up steam in Washington.

The tipping point came March 16, when the Federal Reserve agreed to back up to $30 billion in Bear Stearns (BSC, Fortune 500) losses as part of JPMorgan Chase's (JPM, Fortune 500) fire sale purchase of Bear Stearns. (The Fed cut its guarantee by $1 billion earlier this week when JPMorgan boosted its offer for Bear.)

"I think there's a growing populist feeling that if you're going to bail out Bear Stearns you better bail out individuals," said Greg Valliere, political economist with the Stanford Group, a Washington think tank.

The Bear Stearns deal isn't the Fed's only direct exposure to the problems in the financial markets either.

The Fed also announced earlier this month that it would make billions in loans directly to Wall Street firms at the Fed's so-called discount rate, a right previously reserved for commercial banks. In addition, the Fed has said it will now accept troubled mortgage-backed securities as collateral on up to $200 billion in loans to Wall Street.

But some economists think the Fed's moves are only the beginning. Mark Zandi, chief economist with Moody's Economy.com., said he thinks the Fed is telling the presidential administration that more needs to be done to fix the mortgage mess.

Using FHA to help borrowers

Valliere said that the idea gaining the most support is a plan from Senate Banking Chairman Chris Dodd and House Financial Services Chairman Barney Frank. Both are Democrats.

The proposal, likely to be introduced soon after Congress returns from the Easter recess next week, would have the Federal Housing Administration guarantee hundreds of billions of new, lower-cost loans to troubled homeowners. Many borrowers would see their total principal on these new mortgages reduced under this program.

According to an outline of this bill, homeowners could receive $30 billion in mortgage interest subsidies. But it's uncertain just how much this proposal will ultimately cost taxpayers because it depends on what will happen to the housing market going forward.

The bill would also benefit mortgage lenders and investors in many mortgages since it could prevent a wave of foreclosures. While lenders and mortgage holders would receive less than what is currently owed on the loans with the biggest risk of default, they would receive significantly more than they could hope to recover if the loan goes through the foreclosure process and the home is sold at a sharp discount. In other words, something is better than nothing.

With this in mind, some economists believe the Dodd-Frank proposal could cost more than $100 billion. This is obviously a pretty large number and because of this, there is a debate over whether taxpayer money should be used to bail out the relatively small percentage of homeowners that have run into problems paying their mortgages.

Some opposition to bailout

A poll by CNN in December found Americans almost evenly split on the idea of using federal dollars to help out struggling homeowners, with 51% supporting some kind of help and 46% opposed.

The poll also found that 51% believed the borrowers who were in trouble had only themselves to blame, while 46% believed they were victims of bad lending practices. The tide was overwhelmingly against helping out mortgage lenders, with 72% opposed and only 26% supporting.

But that poll was taken before job losses and other signs that the U.S. economy had fallen into recession. Congress has also stepped in since then with at $170 billion economic stimulus package that won wide bipartisan support, while the Federal Reserve has slashed interest rates three times this year to try and get the economy back on track.

On March 17, the day after the Bear Stearns deal was announced, Dodd told reporters he believed there was now "a greater deal of receptivity to this idea" from the Fed and presidential administration than there was before the Bear Stearns bailout.

The support for the mortgage bailout won't be as widespread as it was for the economic stimulus package, nor will it be enacted nearly as quickly as that bill, which went from early discussions to being signed into law in just about a month.

"It's going to be a tougher sell, just because this is messy, complicated. Giving a tax rebate is simple," said Zandi. "But it may be just as important if not more important, to the economy."

Where the administration stands

The idea of mortgage lenders agreeing to cut the amount owed to them has already won support from the Office of Thrift Supervision, the agency which regulates savings and loans firms. Fed Chairman Ben Bernanke also said in a speech earlier this month to community bankers that he is in favor of such a plan.

But neither the OTS nor Bernanke called for the FHA or other federal agency to take a direct role in negotiating new mortgages.

The administration hasn't commented directly on the Dodd-Frank plan. But President Bush said Tuesday that if there needs to be further action taken to help the economy, the administration will take it.

Treasury Secretary Henry Paulson expressed some caution Wednesday over some of the proposals now being floated by Democrats. But he said the administration is interested in finding solutions to help homeowners who can't afford mortgage payments that are resetting higher.

Paulson also suggested the administration is looking for ways to deal with the Democratic-controlled Congress on the issue.

"We will continue to pursue policies that strike the right balance: that do not slow the housing correction, yet also help avoid preventable foreclosures and unnecessary capital market turmoil," he said.

What the presidential candidates think

Sen. Barack Obama is one of the co-sponsors of Dodd's bill, and his rival for the Democratic nomination for president, Sen. Hillary Clinton, said she also supports it.

However, Clinton proposed a step beyond his plan Monday. She suggested having the FHA become a temporary buyer of so-called "underwater mortgages" -- loans where the principal is now more than a home's value.

Clinton has also talked about a new housing stimulus package to provide $30 billion directly to states and local governments to buy foreclosed or distressed properties. The cities and states could then resell the properties to low-income families or convert them into affordable rental housing.

Sen. John McCain, the presumptive Republican presidential nominee, also expressed a willingness to look at Democratic proposals in a speech about the economy Tuesday.

"I will not play election year politics with the housing crisis," he said. "I will evaluate everything in terms of whether it might be harmful or helpful to our effort to deal with the crisis we face now."

McCain cautioned he wasn't ready to sign onto a bailout, though.

"I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," McCain said.

But Zandi, who is an economic advisor to McCain, said he believes McCain will support some kind of assistance to homeowners and borrowers.

"I think he...understands that the problems in the housing market are broad and deep and threaten the broader economy, and that there may be a role for the federal government to stem those losses," said Zandi, who cautioned he was not speaking on behalf of the McCain campaign.

Stanford Group's Valliere also said he doesn't believe McCain will be able to resist the growing tide to support federal help to troubled homeowners.

"You have to respect McCain's intellectual honesty on this but the Frank-Dodd bill is a steamroller that can not be stopped," he said.

we're so hosed...

Privatize profit, socialize risk...

Given that we are in an election year, some form of homeowner bailout was always assured. But 30 billion is nowhere near enough to stop this freight train. I see it as lip service so that politicians can say they 'did something.' Ironic that the 30 billion proposed for 'main street' is the same as the FED tossed to JP Morgan as 'non-recourse loan' (gift) in buying Bear Stearns. 30B for one company (not including 400B loaned out at discount window so far), and the same for the all the homeowners.

That should tell you whose interest they are really going to protect.

Incidently, BS had 80 billion in assets and controlled 13.4 trillion, approx. equal to US GDP. Guess that didn't work out so well. They are not alone.

Buffett: ' Derivatives are weapons of financial mass destruction'

I wonder what those number would be if the Govt said "Ok, if everyone sends us $1,000 we can use that to bail out the people in trouble."

So can I not start making payments on my new mortgage? Youse guys will just pony up the money for me?

Following the money:
I could not find Bear Stearns in the following link.

Bush Contributors Exposed
http://www.knowthecandidates.org/ktc/bushcontributors.htm

The industry as a whole is well vested in the GOP though. I bet they own Hillary too.

Bush and Republican Contributors Grouped by Category
http://www.knowthecandidates.org/ktc/RepubContrib.htm

What about ME? LOL... can I get some money? Why should I pay my entire mortgage?

Although I feel sorry for some of the people who HAD TO BUY a house that is now "underwater" because of a move, I don't think we should bail people out who overbought or speculated on the housing market. It's a mess.

If we do bail them out, then I want there to be a provision that the US govt gets some share of the profit should ANY homeowner sell with X years.

Who has ever HAD TO BUY a house?

No kidding. This is BS.

gimmmeee gimmmmmeee!

Open Secrets is an awesome website. Republicans may have lost the lawyers, lobbyists and unions but they do have the overwhelming support of the most important industry in the US- the beer makers and distributors.

That was the source for my links, just did a search.

http://www.opensecrets.org/industries/indus.asp?Ind=F
http://www.opensecrets.org/industrie...p?ind=F&type=A
http://www.opensecrets.org/industrie...p?ind=F&type=P

Looks like they are betting on the Dem's to win in 2008.

You're right. That was a kind of a figure of speech. I was picturing someone that bought a house well within their means and are now 100K underwater because the market tanked around them. Sure they should have had Wayne's foresight, but not everyone is as smart as Wayne.

If the house was well within their means, the market price slump is irrelevent. Unless they are looking for someone else to eat their (temporary) loss of equity by handing in the keys.

McCain article in NYTimes

http://www.nytimes.com/2008/03/26/us/politics/26mortgage.html?_r=1&ref=business&oref=slogin

HI guys I have a great house for sale in northern westchester county n,y one of the supposed riches county's in the country anybody want to buy i'm losing 50 large at my sale price of 345000 but it's not really the banks in my instance nobody is talking about the sky rocketing TAXES I SAY TAXES that are being imposed on us hard working blind american public ..............

He says, "“Some Americans bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates,”

wtf? How does that work?

Easy. Teaser rate adjustable rate mortgage, negative amortization mortgage, or low to no down mortgage was used to squeeze into a home. The homebuyer would never be able to afford the home under traditional mortgage guidelines. The bet was that home prices would increase to a point at which the owner would be able to refinance into a fixed rate mortgage or be able to sell and take a profit.

Multiply by a few million, and that's your housing market 2003-6. It worked until it didn't. Insert finger pointing and a dash of the blame game. Fast forward to today.

Sorry, I still don't understand. I totally get the selling part...but that isn't what he said.

If somebody can just barely afford monthly payments with the low introductory arm, they are in trouble. Odds are no matter how high "prices" go, a fixed rate isn't going to drop to that level. I don't see how a rise in prices is necessarily going to drive down a fixed rate.