Only One Thing Can Fix the Subprime Mortgage Mess: Time

By now you've read all about the Bush administration's plan to help one million or so consumers by freezing, for five years, their adjustable-rate mortgage at the start rate. The idea is to help credit-impaired borrowers avoid foreclosure when their 2/28 and 3/27 loans adjust upwards.

The Bush "plan" -- outlined by Treasury secretary Henry Paulson (the former head of Goldman Sachs) in December -- isn't really a Bush plan after all. It's a private sector practice that Countrywide Home Loans and Wells Fargo Mortgage were already doing. Mr. Paulson grabbed the blueprints and pitched it to the rest of the industry -- that is, the firms that round out the list of the nation's top five largest servicers:CitiMortgage, Chase Home Finance and Washington Mutual.

Thanks to consolidation in the servicing business, these five giants control 55% of all housing receivables in the U.S., according to survey figures compiled by this newspaper and the Quarterly Data Report.

Pitching Countrywide and Wells on their own plan was sort of pointless. There were already giving some of their borrowers ARM relief. As for the other three, I'm not sure but I would guess they too had either implemented forbearance or were about to. So, what was the Bush "plan" all about? Here's a real shocker: it was about politics. The White House had to show that it is compassionate when it comes to the plight of the common man (and woman.)

Is the federal government throwing any money into this "plan"? Don't be silly. Money has to come from somewhere and that would mean legislation (something the Senate has given up on passing because so many of its members are busy running for president) or raising taxes, which would also take legislation. Raising taxes, particularly if you're a Republican, is a nonstarter. Republicans don't raise taxes. Period.

Then again, I'm not sure throwing money at this problem would do much good. You're already heard the arguments against a taxpayer bailout but I'll repeat them: the government should not bailout delinquents because it would reward ignorant homebuyers who were told by their loan brokers/LOs they could afford a $500,000 house in red-hot California even if they earned just $50,000 a year. It would also reward greedy investment bankers who were supplying "liquidity" to the market by financing non-banks making crazy payment-option ARMs, taking those loans and securitizing them and then selling the "BBB" pieces to foreign investors through CDOs.

Ah, but you've already heard my rants on the "blame game" before. Plenty of parties to blame. It's all Monday morning quarterbacking, I know. But if we don't learn from these mistakes of the past, we will repeat them again.

So what do we do? When it comes to federal intervention there is nothing to do. Let the Wells and Countrywide's of the world implement their forbearance plans. Yes, let the private sector clean it up. Let the lenders and servicers and Wall Street firms wield the mop. It's a mess they created and it's a mess they're suffering from by taking huge losses. Some will not survive. Too bad. That's what capitalism is all about.

One refrain I keep hearing from mortgage executives is that the cleanup would be easier if only home prices would firm up and start increasing again. I have news for you: home prices are not going to rise much the next three years.

Home prices need to come down in once red-hot markets like Southern California, Washington and Northern New Jersey (add your own hot market to this list). They were too high to begin with. Why do you think lenders pushed payment-option ARMs and other "exotics" that artificially gave consumers a low (or should I say manageable) monthly payment? By creating "affordability" products lenders helped consumers purchase or bid up the price of housing. As we all now know, many of those consumers should not have been buying a home in the first place.

This oversupply of cheap mortgage money created the bubble. And now that bubble is deflating, trying to find a bottom. Before a recovery can occur we need to hit the bottom of the well. Home prices have to reach a level where a typical working couple can afford a loan without "wild and crazy" financing that keeps the payment artificially low.

Sanity needs to return to the housing market. Owning a house is not a right. It's a privilege. We need to return to the days -- dare I say it -- when a family saves, sacrifices and scraps together a downpayment. When I started in this business 20 years ago you rarely heard about homes being purchased with anything less than a 10% downpayment. We need to return to those times. That means if Joe and Mary Sixpack want a house they need to give up the new HDTV and trips to Vegas.

As for fixing the housing finance system, that's a different matter. The conventional market isn't broken. It's the jumbo and nonprime sectors that need help. To some degree these niches need to be repaired and/or re-invented. A new model might be the old model: portfolio lenders who actually know their customer who (what a shock) lives within a few miles of the bank/S&L branch. It's a radical thought, isn't it? George Bailey, give me a call.

Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at Paul.MuoloSourceMedia.com.

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