Now that the default rate on subprime mortgages has hit 20% -- is there any reason to believe it won't go higher,possibly to 30%, with the slowdown in the economy and a recession on the horizon?
One million subprime mortgages are already in default, and there are only 5.2 million subprime mortgages out there.
At the same time, 2 million subprime ARMs are due to reset in 2008 and 2009. The bulk of resets will occur thisyear, with the unemployment rate inching up and house prices declining.
Instead of addressing the downturn in the housing sector , which is pulling the economy into a recession, Congressand the Bush administration are preparing to send $800 to $1,600 checks to taxpayers to stimulate the economy andscare away the recession.
This election-year gimmick will certainly make a lot of people happy. President Bush probably can't wait to resurrectthe "Texas White House" stamp that was printed on the $300 to $600 rebate checks back in 2001.
| This election-year gimmick will certainly make a lot of people happy. |
But it doesn't make much sense to send checks indiscriminately to people who may or may not need it and may ornot spend it -- when so many people are in danger of losing their homes.
Plus, this legacy check from the Bush White House is not going to inspire much consumer confidence if the housedown the street sprouts a foreclosure sign in the front yard.
In the cramped ideological mind of Mr. Bush, providing assistance to homeowners is simply a "bailout"for lenders and speculators. It would only reward people who were foolish and penalize the prudent.
An assistance package can be structured, however, so that lenders take their lumps and many, though not all, familiescan stay in their homes.
During the Depression, the Roosevelt administration created a three-year program to purchase defaulted mortgagesfrom lenders at a discount and then refinanced the borrowers into safer mortgages.
The agency rescued 1 million homeowners, and it was liquidated at a small profit to the federal government.
Instead of a bailout, a rescue fund could be viewed as recompense for the regulators who didn't regulate legislatorswho didn't legislate and an administration that championed homeownership with no limits or safeguards.
President Bush cheered as the homeownership rate went up, and now he acts as if the homebuyers are solely responsiblefor their plight.
It is as if we are supposed to believe hundreds of thousands of consumers walked into a mortgage store and ordereda 2/28 ARM: "I want one of those 2/28s with the double-barrel payment shock." Most people don't knowwhat a 2/28 ARM is.
These loan products were push-marketed. Wall Street conduits paid lenders and brokers high premiums to steer borrowersinto 2/28s that carried an initial rate of
| These loan products were push-marketed. |
6% or 7% for the first two years. In the third year, the ARM resets and the interest rate jumps to 9% or 11%.Wall Street securitized 2/28 and 3/27 ARMs and collected a fee. Then it recycled them into collateralized debtobligations and collected a fee. When the borrowers had to refinance in two or three years because they couldn'tafford the higher payments, Wall Street profited again.
But that was not enough. They also created huge pools of subprime mortgages, financed with asset-backed commercialpaper, to artificially increase the supply and demand for these subprime mortgages.
When house price appreciation stopped and defaults starting mounting, the good times stopped too.
That's why the Merrill Lynch and Citigroup and other bastions of high finance are reporting billions of dollarsin writeoffs and losses today.
And that's why the financial system is under such stress. The Wall Street firms polluted the credit markets withbad paper, and now no one wants to drink the water.
While all this was going on, regulators and legislators talked about the benefits of subprime lending in termsof increasing homeownership and democratizing credit.
It would have been refreshing to hear one official say: "Subprime lending can be beneficial, except for theways the majority of loans are structured and originated."
Consumer groups warned regulators and lawmakers for years about the destructive impact of subprime lending on minorityand low-income neighborhoods.
But the economists and mortgage industry lobbyists were always on hand to remind legislators and regulators notto interfere with the workings of the free market.
| It's a shame economists can't tell the difference between a free market and a rigged market. |
It's a shame economists can't tell the difference between a free market and a rigged market. But I digress.The purpose of this column is to persuade the reader that a portion of the economic stimulus package should beallotted to foreclosure rescue funds.
So far, President Bush has offered a few tax code solutions -- rebate checks for taxpayers, repeal of the tax penaltyfor debt forgiveness, and expanding a tax-exempt bond program so it can be used to refinance mortgages.
Treasury Secretary Henry Paulson has succeeded in mobilizing the servicers to adopt fast-track procedures and toquickly refinance struggling subprime borrowers or simply freeze the ARM rate before it resets.
But the "teaser freezer" plan really needs rescue funds to deal with the mortgages that need to be restructured-- particularly underwater loans where the amount of the mortgage is greater than the value of the property.
But as long as the White House feels it can use lenders and speculators as straw dogs, it ain't going to happen.
