The mortgage crisis and its impact on the economy as a whole

[bascule]

So, thoughts? I've posted about this pretty extensively in the past. A combination of some unsound economic policy and predatory lending has the Dow all bipolar with periods of excessive fear followed by reassuring bouncebacks. We have the fed injecting liquidity into the mortgage-backed bond market, which appears to be drying up as more become aware that mortgage-backed bonds may be worthless.

 

Is this going to be a case of a few parties being screwed (in addition to the millions of homeowners being foreclosed upon) or will it cause a larger effect on the economy as a whole? (by which I do mean the world economy, sans China who's making out like a bandit)

 

Also, what about Bush's reluctance to inject money into programs like Fannie Mae who would help homeowners saddled with subprime mortgages find a sustainable fixed rate alternative? Isn't the real way to correct this situation to pay off the predatory lenders and replace their unfair terms with ones that the unwitting mortgagors can actually manage? Isn't a not-for-profit federal program the proper resolution to this crisis? Furthermore, it wouldn't compete with private industry, as no reputable mortgage lender would want to take on a subprime mortgagor who's about to be foreclosed upon.

 

I'm certainly worried this will have a massive negative impact upon our economy, and that if we can stabilize the economy and let people live their dream of owning a home on reasonable terms that's the way to go.

[john5746]

Maybe we have to help them some, but I think the lendors and the homeowners should bear most of the burden. Just bailing them out will encourage more action like this in the future.

[ParanoiA]

I think the mortgage crisis is much worse than I originally thought. Bascule has been sounding the alarm consistently. Bailing them out is not an interest of mine, the quality of the economy is, so any action we take should be in the interest of saving our dollar, and subsequently our economy.

 

The value of our dollar, printing more money, and the control China has over it, is a more dire issue than people realize. And this mortage catastrophe is feeding it.

 

So, if putting money into fannie mae will correct this, I'm all for it. If there are smarter areas to put money in, I'm all for that too. But only in the interests of the overall economy, not to keep stupid people from making bad decisions.

[CPL.Luke]

the problem is that bush is a good ole free market guy who thinks the government shouldn't touch the economy. In a way it makes sense for him not to pump money in.

 

In a purely free market the only thing that keeps investors responsible is the threat of losing all of their money. for instance if the government bailed them out then their irresponsibility woulld have still paid off in a big way.

 

Also where would the government get the money to bail these guys out? odds are it would come out of the national debt which actually is about equivalent to printing money. So bailing out these companies won't do that much to help the dollar.

 

The problem with china is that they own 1.5 trillion dollars of our debt, and they are holding that over our heads so that we can'treevaluate they're currency and thus make trade a bit more equal between us and them.

[ParanoiA]

In a purely free market the only thing that keeps investors responsible is the threat of losing all of their money.

 

Which is definitely a better check than anything the government can come up with.

 

The problem with china is that they own 1.5 trillion dollars of our debt, and they are holding that over our heads so that we can'treevaluate they're currency and thus make trade a bit more equal between us and them.

 

Am I the only one who finds this incredibly disturbing? You all probably have a better handle on this kind of thing, but I've been trying to read more economics related material to get over my business weakness and this kind of thing just blows me away. Why isn't this a major political issue?

[iNow]

Why isn't this a major political issue?

 

It is. It's a major global economic problem, impacting trust in the dollar and the ability of lenders to get their expected return from borrowers, hence impacting their ability to pay their creditors... thus impacting their ability to pay their lenders... ad infinitum.

 

So... If A cannot pay B, then B cannot pay C. If B cannot pay C, then C cannot pay D. If C cannot pay D, then D cannot pay E... and you have this self-reinforcing economic crash.

 

 

Did you see Paris Hilton's new t-shirt. It's hot.

[Pangloss]

Chinese debt doesn't bother me too much, mainly because there's a lot of misconception about debt and what it means to the debters and debtees. The main problem there is perception, though I agree it's not just about the ABB crowd screaming "OMG!!!!111one". It's also about the fact that we're impatient and intolerant of minor fluctuations in the economy. We're not very good at ignoring the struggles of Jane Doe, a working mom with three kids in Des Moines, whose boss can't see fit to give her five years off with pay to give birth to her fourth. So I agree there's room there for China to crack the whip and have an impact that hurts us more than it hurts them. But there's a limit to the amount of whip-cracking they can get away with. They do have problems of their own, and they're not as far below the surface as some people think.

 

But that's a side issue -- I agree with the majority of posters above. I wouldn't bail out the fewls who took the bad loans, but I might take actions to reduce the damage in the future. I believe in a managed market economy.

[bascule]

I think the best way for the government to help subprime mortgagors in over their heads is in the form of the government or a non-profit taking on their mortgages and providing low interest fixed rate mortgages in their stead.

 

The government already does this through several different channels. For example I have an FHA loan. The real problem is that most of the current subprime mortgagors can't afford an FHA loan, and many are not competent enough to have a mortgage in the first place.

 

Perhaps an experimental program with slightly relaxed qualifications aimed at letting nearly-competent mortgagors to exchange their adjustable rate mortgages for federally financed (or through a government backed non-profit like Fannie Mae) fixed rate mortgage could be pursued.

 

Of course Bush would never do that.

 

Instead the government is trying to directly inject liquidity into the system by directly buying up mortgage-backed bonds, which are growing increasingly worthless due to massive foreclosures.

 

We're seeing a bailout here. It's just the government bailing out the lenders...

[Pangloss]

I guess the question that comes to my mind is, would that really be a bailout, or would it be an investment, stopping the paper from becoming worthless? And if so is that really just an excuse to promote another welfare program and bash Bush at the same time?

 

Not saying you're wrong; I don't know enough about this. Can you provide more information?

[bascule]

I guess the question that comes to my mind is, would that really be a bailout, or would it be an investment, stopping the paper from becoming worthless? And if so is that really just an excuse to promote another welfare program and bash Bush at the same time?

 

Well let me put it this way, injecting liquidity into the system by buying mortgage-backed bonds:

 

1) Doesn't help lenders who are holding worthless mortgages doomed to be foreclosed upon

2) Doesn't help mortgagors who are getting foreclosed upon

3) Isn't going to improve the value of those bonds, eventually the liquidity will dry up and the bonds will be worthless

 

Paying off predatory ARMs and offering federal loans on reasonable terms:

 

1) Gets the lenders their money back right way

2) Prevents foreclosure and helps mortgagors get affordable, reasonable loans. This could be combined with an education program to help these individuals manage their budget and ensure they're not at risk of foreclosure

3) Preserves the value of the mortgage-backed bond market

 

In the end the money that's fueling this entire market comes from the mortgagors. That's where we're seeing a massive, systemic failure. People who shouldn't have been eligible for mortgages in the first place got them, at rates they couldn't afford, due to predatory subprime lending practices.

[CPL.Luke]

I wonder what the cost of buying out all of those loans would be anyway? its entirely possible that fixing this problem would lead to a dramatic increase in debt, and I fon't think that we could find anybody to pick up the bonds. It also doesn't sove the problem of people simply not being able to pay the loan, for alot of these people you could cut their interest rate by a more than 25% and they wouldn't be able to pay the loan.

[Pangloss]

Well let me put it this way, injecting liquidity into the system by buying mortgage-backed bonds:

 

1) Doesn't help lenders who are holding worthless mortgages doomed to be foreclosed upon

2) Doesn't help mortgagors who are getting foreclosed upon

3) Isn't going to improve the value of those bonds, eventually the liquidity will dry up and the bonds will be worthless

 

Paying off predatory ARMs and offering federal loans on reasonable terms:

 

1) Gets the lenders their money back right way

2) Prevents foreclosure and helps mortgagors get affordable, reasonable loans. This could be combined with an education program to help these individuals manage their budget and ensure they're not at risk of foreclosure

3) Preserves the value of the mortgage-backed bond market

 

In the end the money that's fueling this entire market comes from the mortgagors. That's where we're seeing a massive, systemic failure. People who shouldn't have been eligible for mortgages in the first place got them, at rates they couldn't afford, due to predatory subprime lending practices.

 

I still don't see a link so how can I comment on these details? Did you take a job with the Federal Reserve Bank when I wasn't looking?

 

The problem I have with bailing out the mortgage holders who took out the stupid ARM loans instead of corporations is that you're making the standard left-wing mistake of assuming that penalizing corporations is just penalizing corporations -- it doesn't hurt real people. In fact you're just talking about harming a different group of people -- in this case holders of long-term investments and retirement funds which are invested in this market.

 

Of course the left will realize that once that group has been harmed by their action, and their solution will be -- surprise, surprise -- another bailout, no doubt at somebody else's expense -- probably mine. But hey, that's okay, right? Cuz I'm just The Worker. "I will work harder," said Boxer.

 

You'll solve this problem when you stop idiots from taking out idiotic loans on vast scales. I'm amazed nobody has made the comparison between this situation and the Savings and Loan Crisis, which started over exatly the same thing -- questionable real estate loans made in a regulatory vacuum. That one ended up costing us billions, but it would have cost many times more if it wasn't for the fact that we put the right money in the right place at the right time, and combined it with the right kinds of rules changes to stop it from happening in the future. We DIDN'T bail out every individual. That's what SAVED us, turning a monstrous problem into a little bump in a very long and prosperous road.

 

Rules changes. Not safety nets. MANAGED economy. Not socialism.

[bascule]

I still don't see a link so how can I comment on these details? Did you take a job with the Federal Reserve Bank when I wasn't looking?

 

You might have a look at Mad Money host Jim Cramer (who just had something of an onair meltdown over what bullshit this entire situation is) has to say:

 

http://nymag.com/news/businessfinance/bottomline/35813/

 

The problem I have with bailing out the mortgage holders who took out the stupid ARM loans instead of corporations is that you're making the standard left-wing mistake of assuming that penalizing corporations is just penalizing corporations -- it doesn't hurt real people.

 

Nobody's penalizing the corporations here. Offering federal loans to subprime mortgagors would, in fact, hand the money right over to the corporations! For the mortgagors, they could get loans on terms that are actually sustainable.

 

You'll solve this problem when you stop idiots from taking out idiotic loans on vast scales. I'm amazed nobody has made the comparison between this situation and the Savings and Loan Crisis, which started over exatly the same thing -- questionable real estate loans made in a regulatory vacuum.

 

Yeah, that was started by the same thing: deregulation. In this case it was Alan Greenspan, on the way out, pushing the dream that everyone should own a home. Then, he left, and nobody watched while predatory lenders swooped in, got a bunch of people to invest in that dream, gave a bunch of money to people who wanted that dream, pocketed the profit and left.

 

We DIDN'T bail out every individual. That's what SAVED us, turning a monstrous problem into a little bump in a very long and prosperous road.

 

I'm not saying bail out every individual. Start by bailing out those who don't have horrible credit and may actually stand a chance of paying off a loan if the terms aren't horrible.

 

Rules changes. Not safety nets. MANAGED economy. Not socialism.

 

Federal loans are socialism?

[Pangloss]

No, I was suggesting that bailing everyone out 100% is, in effect, is the sort of thing that might push us into socialism. But I'm not trying to put words in your mouth, I'm just expressing what my larger concern is. If you say you don't favor bailing out every individual, I believe you. I'll check out the Jim Cramer article you linked above.

 

I saw in a story on the news last night that one of the ideas being floated around at the moment is a federal home loan refinance corporation. This would seem to be in keeping with your second set of bullet points in post #10 above (the points that I thought were quite reasonable). I think the idea is that the (presumably very low IQ) holder of one of these high-rate ARMs would go get a loan from this company at a more reasonable interest rate, and the government would buy out the high-rate loan from the "predatory" company and you and I would eat the loss, supposedly because it will save us money in the long run.

 

I suppose that's a reasonable solution, and it's in keeping with what I said above about putting the right money in the right place at the right time, but it galls me to hell and back to have to do it. I'm sick and tired of footing the bill not only for your "predatory lenders" but also for the foolish idiots who want a piece of the pie but aren't willing to do what it takes to get it.

 

This story, unsurprisingly, lead off with a straw man about Jane Doe, a single working mom with three kids AND A JOB AS A HAIRDRESSER who bought a $350,000 condo with no money down and a 10.5% variable interest rate.

 

As far as I'm concerned, Jane Doe can rot and die, and the ONLY reason I'll bail her out is because it's good for ME.

[CPL.Luke]

agreed but pangloss as far as I'm concerned the lenders who knew these people couldn't pay the loans but gave them anyway so they could sell them to people who had no idea how the market worked except that they were getting a 10.5% interest rate.

 

the big problem here is the restructuring of the mortgage market, have you kept track of who your bill goes to over the past 10 years? I'll be that its changed hands alot.

 

about ten years ago they de-regulated how mortgages could be sold, so instead of having lots of guys who've been in the business for years and just wanted to make a steady profit off of reliable people, you ended up with new hotshots who were going to get as many high interest loans as possible and then sell then put them in big lots where they would be sold to another company for a big profit, the net result being that Person A gives a loan that he knows won't be paid, but sells it to person B in a batch large enough that they won't see anything but the interest rate.

 

personally I think both sides were dumb, however I think the guys who were selling air shouldn't get bailed out, and instead provide the cheaper more affordable loans to homeowners (although it should be noted that the prime rate is 8.25% right now and so cheap is still pretty expensive).

 

probably one of the best moves right now would be for the fed to dump some of the federal reserve back into the bankers hands and thus lower the prime rate on a grand scale.

 

btw the money equation is

 

(velocity)(money)=GDP(GDP deflator)

 

where velocity is the number of times a dollar changes hands, by dumping the reserve cash back into the banks, interest rates fall and velocity goes down more than money goes up and thus inflation (gdp deflator) should also fall.

 

this would be somewhat equivalent to bailing the banks out except that its still the bank money, every bank is required to put 10% of its cash into the federal reserve, so the fed could still dump money into the banks, it would just be coming from the banks.

 

(although this might be what they're doing now.

[bascule]

There's really 3 sides you have to look at.

 

There are two sides you can consider dumb, but it's not really stupidity, more like ignorance and falling prey to the third, exploitative party. These two sides were Wall Street investors who pumped money into companies like New Century Financial, and the borrowers who opted for mortgages they could not afford.

 

The third side is the executives of these companies, many of which were also investors. They not only reaped huge salaries (at its peak New Century Financial had a market cap of $1.75 billion, now valued at $55 million) but also sold their stock before the valuation crashed.

 

They're now under criminal investigation.