Tuesday, November 20, 2007

Mr. Freeze

From the Sacramento Bee (hat tip anon1137) (updated link):

In an unprecedented move designed to save thousands of California homeowners from foreclosure, Gov. Arnold Schwarzenegger announced a deal Tuesday with four mortgage lenders to freeze adjustable interest rates for some of the state's highest-risk borrowers.
From the East Bay Business Times:
The agreement announced Tuesday calls for the servicers - Countrywide Financial Corp, GMAC, Litton Loan Servicing and HomEq Servicing - to do three things: reach out to borrowers who may be in danger of defaulting on loans; streamline the process through which they determine whether a homeowner with adjustable rate mortgages can reasonably expect to make mortgage payments once the loan resets to a higher rate from an initial teaser rate; and cap those initial teaser rates for as long as five to seven years for homeowners whose adjustable rate mortgages are current, but who may be unable to make payments once their loans reset to higher rates.

These four lenders service more than 25 percent of subprime loans.
From Reuters:
"I think it's safe to say we would consider five years to be reasonable," said Countrywide spokesman Rick Simon. The company said the state program principles closely matched its plan announced last month to help more than 80,000 borrowers.

Litton Loan President Larry Litton Jr. said a five-year extension of current rates for some borrowers was justified given the housing market's slump, financial hardship in many households and anxiety among mortgage investors. "At the end of the day we're able to align the borrowers' interests with the investors' interests, saving everybody money," Litton said in a telephone interview.
From the SF Chronicle:
It was unclear for how long the loan servicers would freeze the interest rates. "The word that was chosen is it's for a 'sustainable' period of time," said Mark Leyes, a spokesman for the California Department of Corporations, which oversees nondepository lending institutions. "What does that mean? The answer is, it depends. It could be two years, five years, even seven years. The idea is until the housing market recovers. At that point, housing values would be restored; equity is restored, refinancing becomes an option. But nobody knows how long that's going to be."
News 10 Video

From Gov. Schwarzenegger's press release and video:
No one wants to have all those homes be dumped in the market, because that would just drive the price down even further. No one is gaining from that. What we want to do [has] an upside for everybody.


Still Waiting said...

Another great example of how the govenment and society love to reward individuals who are careless and irresponsible, while punishing those who act reponsibly, and prudently. GMAFB. I guess we are the fools - my 30-year, 6.5% loan, modest home...could have been a macmansion, at 1-3% interest. WTF?

Max said...

I would get my outrage shackles up, but we all know this won't work. "Freezing" interest rates for existing borrowers won't make any difference in house prices. All it will do is keep these people in an upside down house forever. They'll never be able to sell, and they'll always owe more than what it's worth. Ditto for the bond holders.

This whole plan is a sham designed to make the governator appear to be "doing something."

Patient Renter said...

"This whole plan is a sham"

It also allows the loan holders, servicers, etc., a chance to collect more money on the loan that they wouldn't otherwise receive if the "owner" just let the house go into forclosure. Even if they delay things just a year or two, that's plenty more money the lender will bring in.

Of course, once the plan is given up on, the house is still lose and the value at that point is less than if it were just lost now. Truly, the only real benefit is if house values bounce back before the plan is ended. Not sure that'll happen though.

Tyrone said...

Totally agree with Patient Renter. Total sham. Home prices were much too high to start with. Delaying a rate adjustment simply makes your bank the landlord, the "owner" being the ultimate renter. The genious of it is that the "owner" continues to make substantial payments on a depreciating property, while their principle grows.

Jacob said...

The idea is until the housing market recovers. At that point, housing values would be restored; equity is restored, refinancing becomes an option. But nobody knows how long that's going to be."

Well besides the fact that the deflating of the housing market is the RECOVERY this won't do much imo.

So you pay sub prime for the next 5 years which just means you owe even more on the home. Housing prices keep going down and even when that stops it will be flat appreciation for several years.

This only applies to people living in their homes so there are still tons of specuvestors to foreclose on. Also it won't necessarily keep people in their homes since they can still walk and rent for less. Or keep paying less than they owe on a depreciating asset so the amount they owe keeps compounding upwards.

Tyrone said...

One more thing; delaying some foreclosures gives them time to process others. If they get flooded with foreclosures, and can't turn the homes around fast enough, they could fall into disrepair, get vandalized, etc, becoming virtually worthless.

sacramentia said...

We're all just pawns in the game:

So the big banks chop up all the sub-prime loans into tranches, and end up only being able to sell the high risk, high rate tranches. The big banks like Citi and Merill get stuck holding most of the tranches on their balance sheets because they can't turn down the fees for creating the CDOs... The fees are so good, that anything is funded and continues and drives the RE market into the stratosphere.

And then, oh crap, too many people start to default and all of these complex CDOs are hard to value, worse than that there are multiples worth of insurance betting on who will pay.

So how do you fix the problem if you control the system?

1) pump a ton of liquidity into the system fully knowing this will cause inflation in the long run (august)
2) get together with all your fellow bankers and agree to revalue the L3 assets representing these CDOs by 20% ( 180B of 900B ) writedown.
3) Only release the losses 1/3 at time over the next 3 quarters starting in (Oct), continuing through Q1 and Q2.

In the meantime....
4) Drop the Fed rate the .75% like after LTCM and in 87, hope this keeps the economy out of recession
5) Lock in the rates on adjustable mortgages for the next few years and hope that by the time they readjust the nominal values and debt ratios are taken care of by the inflation created by #1 and #4. (today)
6) Hope that #5 provides enough of strength in the income of subprime notes to justify not taking the next 2 1/3's of writeoff (hasn't bear stearns taken 1.2 2x already - they were the first )
7) Since the bankers would know that the #5 is coming 3 months ago, they would just hang on to foreclosures and be stubborn over the last 3 months, or if you're countrywide basically not execute on the foreclosure process and wait .
8) The Fed releases low inflation number BS from the meeting today to get everyone to quit worrying about it - nevermind gold is at $800 and oil at almost $100.

9) As long as the holiday season is good you don't have to lower the rates any more and get closer to the death spiral of the dollar.

10)Spend some time on the hill and try to get congress to get religious in a hurry about overspending to restore trust in the dollar.

If it all works the party continues, the bankers get richer and all of us pawns go back to watching news on E!

Tyrone said...

hehehe. We are, indeed, just pawns in this game.

Diggin Deeper said...

"If it all works the party continues"

Sacramentia...I don't think you left anything out..

A classic form of price controls is in the making here. Past civilizations have tried and proven that anytime prices get fixed the net result is much worse than if the market were left alone. From Egypt to Rome to the American Revolution to as recent as the US in the 1970's...wage and price controls have been used and failed miserably. A great book on the subject is "Forty Centuries of Wage and Price Controls: How Not to Fight Inflation," by Robert Schuettinger and Eamonn Butler.

Inflation is the monster in the closet and the dollar is the culprit causing it. You can only save the dollar by extinguishing debt and balancing trade. Imo, neither is likely to happen anytime soon.

Cmyst said...

I have no problem with a truly free market. The problem is that business and politics become entrenched and intertwined to the detriment of almost everyone who ISN'T in the top tier, and the brilliant little businesses who can truly compete on an even field are stamped out by regulations and tax incentives that favor the big corporations.

Sippn said...

Keep in mind the Gov is quoting the overblown numbers from Realty Trac in his press release:

"Seven of the top sixteen metropolitan areas with the highest rates of foreclosures in the nation are in California, according to the latest data from RealtyTrac. In the Stockton, Riverside/San Bernardino, Sacramento, Bakersfield, Oakland, Fresno and San Diego metropolitan areas, there was an average rate of approximately one foreclosure filing for every sixty households in the last quarter. The Governor made his announcement this morning at a meeting with San Joaquin Valley elected, business and community leaders in Fresno, which ranked 13 on the list. . . ."

There are more filings per forecloure in CA because the process is different here. Only 20% result in actual foreclosures.

You put garbage data into the system, you may not get what you want.

So when you hear 1 filing for every 60 households, that really means 1 foreclosure for every 300 households.

Cow_tipping said...

If this succeeds, it will partially push the crash to 2013 or so, and that will be right in time for the Boomers to try to unload their 70's and 80's crap boxes into the crash and will create a 40 year dead market.
I am sure the crash will right now be severe enough to make it very very painful too. So, slightly less pain now, for tons of prolonged pain later.

anon1137 said...

I think this could significantly prolong the deflation of the bubble. It sounds somewhat limited right now, affecting only 25% of subprime borrowers, but if it's successful all around, if it works for the borrowers as well as the investors, there's nothing to keep them from offering it to anyone with an ARM, including investors. It's just business - it doesn't sound like the State has any investment in it. It's sort of like amortizing these loans over 40 years. I don't think these homes will have any more value in 5 or 7 years, but the borrowers income will probably be higher and they may be able to refi at that time. In the meantime, they get to stay in their homes and make babies.

I said before this is going to be a long correction. Now I think it's going to be a long, long, long correction.

Gwynster said...

The state needs property taxes to survive.

That said, an announcement that the state is going to team up with mortgage lenders to divert the foreclosure crisis is like screaming "Governor says California RE is a bad investment" from the front page of the
LA Times.

At some point, Arnold had to decide what was more important: shoring up investor sentiment or saving what tax flow it has left.

This is a blow to buyer psychology that should have the CAR livid.

Diggin Deeper said...

Sippn...I think you're picking your figures to your advantage. Only 57% of households in California own homes(ranked 49th in the country) so that number you're pushing is a bit skewed...you can't foreclose on
43% of those that don't have a mortgage. If you have approximately 10 million households in the state and 5.7 million are homeowners, there've been approximately 32,000 foreclosure to date. That's pushing under 1 in 180 for the entire state. And most of this activity has occured over the initial 1/3rd wave of foreclosures.

David said...

sacramentia said..

"10)Spend some time on the hill and try to get congress to get religious in a hurry about overspending to restore trust in the dollar."

Like get us the @#$% out of Iraq so we can stop spending 100's of Billions each year there. The Government needs inflation to wipe out that huge debt too.

Patient Renter said...

"10)Spend some time on the hill and try to get congress to get religious in a hurry about overspending to restore trust in the dollar."

There's at least one Presidential candidate who is very serious about inflation and monetary policy reform, including doing away with the Federal Reserve. There is hope.

Real said...

"5) Lock in the rates on adjustable mortgages for the next few years and hope that by the time they readjust the nominal values and debt ratios are taken care of by the inflation created by #1 and #4. (today)"

Yes, debt investors LOVE inflation! Time to go get your brush up on econ at Sac State because you don't make a lick of sense. I think this is a very interesting plan by the Gov and support it. While you angry renters want foreclosures and a 'surge in crime' so you can buy, the Gov has enough sense to know this is bad for California. As pointed out, this keeps the owners on the margin in their homes - paying property taxes, maintaining their property and a sense of community. Sorry angry renters, looks like you better sign that 2 year extention because you won't be buying anytime soon. And before any of you start whining about 'tax dollars out of your pocket, etc' realize that the 60% of the households in Cali that actually own homes pay 90%+ of all taxes so you aren't bailing out anyone.

Diggin Deeper said...

Who's angry? People are just licking their chops and waiting to pounce.

Inflation will eat up whatever margin was left. Those that were prone to fail will most likely fail anyway. Dollar's down 10% this year alone. That'll buy fewer huevos than last year. Import prices are up 9.6% since last year, but we all know that won't transfer into higher prices at WalMart. No, they'll suck it up and eat the increase.

Hell, there's even a pretty good chance that Countrywide and GMAC might not even be around long enough to send out those "Let Us Help You" letters.

Oh and thanks for the education on high finance. It really had some depth to it and I can hardly wait to see what you come up with next.

SheWrestles said...

Wouldn't it be better to let the bottom fall out now and then rebound in 2-3 years?

sacramentia said...

real - let me try again:

Once somebody is going into to foreclosure they don't have enough income to cover the bills. Their Debt-to-Income ratio too high, and they can't refi because LTV too high.

By locking in the rates you help out the debt-to-income ratio in the short term. And inflation will increase income over time also.

For the LTV problem, over time the Value will go up with inflation (in theory - at least demonstrated by the last 30+years of data).

Therefore, Some inflation would be good for the housing situation. And I am speculating that is the bet being made - the best of all the bad options.

Moral Hazard, absolutely....

for what it's worth I own my home and have a dusty econ degree.

Patient Renter said...

Keep in mind this isn't a free lunch (there is no free lunch..., you know the rest). It appears that the difference between the "frozen" rate and the rate that was to be will be negatively amortized onto the loan. Yes, what a great benefit this is to owners to go even MORE negative while values are declining.

SacramentoCrash said...

Bail out the idiots and the liars.

Interest rates are going up to 8% on 30 year fixed loans because the buyers of the packaged mortgages will run scared that all the states will get loan servicers to bow down to the idiot and liar buyers.

Prices will drop another 10% as a result.

The Fed will drop rates again.

The dollar will crater even more where the Euro = $1.75 or more.

Oil prices will top $100.

All this started with the housing bubble and the crap in the loan portfolios.

Yeah some ownership society huh?

SacramentoCrash said...

Go to the SacBee and post comments. Most of the SheepLe reading the Bee wouldn't know their ass from a hole in the ground.

Patient Renter said...

"Go to the SacBee and post comments"

I'd say they're not bad. Aside from the people who are praying that this little bailout will benefit them, the rest of the comments are rightfully skeptical and/or critical of the plan.

Patient Renter said...

By the way, there's a bigger article on Sac Bee as of this morning, replacing this one, with many more comments.

jmf said...

To my way of thinking the Gov's bailout has less to do with his powers of persuasion and more to do with short-sited business decisions. If you are Country Wide and face a choice of repo and re-sale at $25k to $100k loss per property or covering a mortgage payment shortfall of $100 to $1000 per month, they are choosing the option that allows them to stay in business. However that option plays out poorly if housing doesn't recover or salaries don't rise significantly...or even that choice drives them out of business.

This rate freeze has another impact - it will provide upward pressure on interest rates. Country Wide is essentially tying up their capital in bad investments making less money available to borrow - lower supply of capital = upward pressure rates. Our Governement is also about to be competing for that capital since we are starting to struggle to peddle our debt overseas.

Ignore Real - the economic comments on this blog are spot on, and I am pleasantly surprised at the astuteness of commentary.

Patient Renter said...

"This rate freeze has another impact - it will provide upward pressure on interest rates"

Ahh, so true. You bring up a good point, this signals a last act of desparation on the part of the lenders, to be willing to shoot themselves in the foot in order to survive. Countrywide in particular recently cried to the ratings agencies that a downgrade would do them in.

paranoid renter said...

If it all works the party continues, the bankers get richer and all of us pawns go back to watching news on E!

Great post, Sacramentia!! I think you covered all the points really well.

However, I think global markets will bring the party to an end. Nobody wants to be holding on to worthless dollars.

SheWrestles said...

Bush's illegal war is also to blame.

Diggin Deeper said...

PR...bingo! We rely on the global markets to pick up our debt. And now they're buying debt that turns to s**t overnight.

This train keeps on rolling in the direction its going until all the bogus, super leveraged junk is siphoned through the system.

Too many companies and people are affected all over the world. Now the insurance companies are getting into the write down act. Swiss Re just dumps a couple more $Billion into the bowl.

The world's not going to stand by and purchase our AAA bonds if they cannot be completely assured it's AAA. There's too much risk for the paltry interest rate being paid.

It's become like a shell game on a street corner for most debt buyers. Just pick the right one and you'll be ok.

Wall street has dressed this pig in diamonds but they just can't get enough make-up on it to sell it as any different.

If Helicopter Ben won't put a stop to the printing presses, the rest world will. It's beginning to look like the US really doesn't have much to say or do about this problem.

Cow_tipping said...

Anything like freezing interest by the governator will result in ... massive amounts of CDO's being renegged. rememebr, these were packaged as fixed income securities, and any threat of change in the terms can cause them to demand a full reversal. Ergo, you're better off staying with the original deal, even if the home debtor goes into default and even if you're taking the house back than to have to alter the terms with the people that you sold the bonds to. The Governator is going to be sorely disappointed and is going to come to realise that he shouldn't meddle around in sheite he does not comprehend.
On a related note, bad loans and bad paper will have to be replaced by good paper. As in a house that a debtor defaults on a 6% 500K loan will go back to the bank, and they will gladly sell it at 400K if interest rate sare now 8% or at 250K if interest is at 12%. They get the same amount of money in the end. However at 250K you'd not default on that loan cos you think your house is going up in $$. Ergo, bottom is good for business, you replace outright higher price with a higher interest.
Meddle around by freezing interst, and the current interest rate will sky rocket.

RMB said...


How is this freeze a bailout for homeowners?

1. It will affect around 10% of subprime borrowers. Big deal the other 90% will still continue to crash the market.
2. At best this a bailout for the banks, to allow them to stretch out the foreclosure mess. Just wait until the lawsuits from the owners of the debt come in. Notice the freeze talk about these 4 companies servicing the debt. Big difference between servicing and owning.
3. At worst this will constitute debt servitude as FB are forced to pay the overpriced mortgages for the rest of there lives.

So no matter how you look at it this is too little too late and will be nothing more than a speed bump on the high speed trip to the trendline.

Now go crawl back under some "For sale" sign in a tract neighborhood and stay their. Adults are talking and we'll call you in about 15 years when the infants make another run at California bubble real estate.

paranoid renter said...

I too disagree that this is a bail out for home owners. It is simply a scheme to buy some time, perhaps until the next November, after which things get _really_ messy! That's when they will stop trying to pretend there is no crises.

lexi said...

Seriously Real, a lot of us have
a take it or leave it attitude.
If housing doesn't fall we'll happily keep on renting. Yes,
I said "happily". I'd rather rent
for a few more years and bail out
of California at retirement than
be saddled with a home that is
depreciating but think what you
want, by March 2008 it will be
clear the housing market is toast.

HOUSE2008 said...

This is something akin to pinching the hose while it's on full blast. Like the cartoons, the bulge in the middle will grow and once you let go of that pinch....

PeonInChief said...

Unfortunately I don't fall into the "bitter renter" camp, as I'm not planning to buy in Sacramento or anywhere else. And I'm not a free marketeer either. (I have a poster of Che Guevara on my living room wall.)

Dean Baker said some time ago that a sharp, steep drop would be easier to deal with than a long, slow fizzle (which is what has happened in Japan). With a quick collapse, people have enough information to decide whether to tough it out or bail. With a slow fizzle, people don't know what they're in for until it's too late. So someone might decide to stay and renegotiate the mortgage, need to move at some point in the future, and discover that she can't sell the house for anything close to the mortgage amount.

I think it's interesting that the powers what be have gotten interested in the issue as the apparent incomes of the potential victims have increased. When they thought that the only people who would get trapped in these mortgages were making $30,000 a year, they weren't nearly so interested as they became when they discovered these folks had incomes close to $100,000.

Diggin Deeper said...

rmb...I agree about the bailout of the banks comment. I also believe Gwyn's comment concerning tax revenues to the state come into play. As for timing(just a guess) it's too late.

Let's face it. This bubble, which was to remain contained within strict borders, has jumped the fence. The whole issue about rate fixing sends me a signal that indicates things are about to get out of control. Both GMAC and Countywide are in serous trouble. GMAC's got about a month to stop their net asset value decline or their financiers will be knocking on the door. GM owns 49% of GMAC and they'll be collateral damage if things down't work out. That's one reason GM took that huge hit on their books this quarter. Countrywide's problems are well published. They're making daily trips the Fed's discount window for a handout as they're having a helluva time with cashflows and debt service.

Foreclosure King said...

This is hilarious -