What if Jeff and Brian are right? What if it is preordained in the cards that a federal bail out of Countrywide is an absolute necessity and a foregone conclusion should the behemoth lender fail? While Jeff certainly provides a well reasoned and thrilling John Grisham version of a Countrywide rescue; why wouldn’t we look at some other (less plausible no doubt) bail out options?
Let me say this first and foremost: I don’t support a bail out of Countrywide. Period. I think its a horrible idea for all the same reasons bail outs in the past have been bad ideas – they reward the wrong-doers. Why do we reward the Mozilos and their billions of dollars while punishing the American public? If I am forced to accept a bail out, I would rather it be a bail out of the American public rather than a few rich puppeteers overlooking the pacific ocean from their posh Malibu homes.
Here are a few outrageous ideas that probably won’t work for a million reasons, and have a shot longer than you do of being hit by an asteroid tomorrow morning; but just for fun lets float a few out there. My bail out options to keep from rewarding the greedmongers:
A couple of general guidelines:
- Bail out options apply only to loans secured by primary residences; and maybe even just to owners of one property.
- Bail out options apply only to those loans underwritten with full income documentation (maybe stated income for self-employed borrowers)
Bail out options for the American public (hey, if my tax money’s going to anyone, I’d rather give it to my neighbor):
- Pre-payment waivers: Anyone with a prepayment penalty on their existing mortgage receives a voucher to refinance with out being penalized. This could be financed by individual lenders, Wall Street banks, or investors.
- Voiding of pre-payment penalties: Alternatively, the government could pass legislation nullifying all pre-payment penalties allowing borrowers to refinance immediately with out paying the fees associated with the penalty.
- For those that paid a pre-payment penalty between June 2006 and today – a tax credit for the full amount of any pre-payment penalty paid for the purposes of selling their home. No limit on the one-time deduction, applicable to this year’s tax return.
- Mortgage rescissions – Borrowers found to have been duped by unscrupulous lenders would be entitled to 100% rescission of their existing mortgage and be awarded the ability to find new financing. This would be decided by a specially appointed division of the Federal Reserve and/or HUD.
- Piggyback rescissions – Rescissions of all piggyback mortgages totaling 95-100% at the lenders’ expense to reduce high-cost debt burden.
- Forgiveness of accumulated deferred interest – Borrowers in Option ARMs would be forgiven any deferred interest (at the lenders’ expense) and would be eligible to refinance in to a fixed rate loan with out penalty.
- Borrowers who sold their home between 2006 and today would receive a 100% tax credit for the amount of deferred interest that was added to their loan balance and that depleted their equity during the course of holding the loan.
Let me restate two very important things:
- I am not in favor of any type of bail out.
- I know there are a million reasons why these ideas won’t work.
So what do you think? Should Countrywide be bailed out, or should we give our money to our embattled neighbors instead? If there has to be a bail out who are you pulling for? Frankly, I’m done pitching in my hard-earned money to save the big guy – screw Countrywide, if my tax dollars MUST go somewhere I want my fellow American to keep their home.
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Brian Brady says:
I don’t think my bailout lines the Mozilo mansions in gilt; the premise was to save jobs and stave off a recession.
I think the American homeowner got a perfectly good subsidy while CFC was buying the market with artificially depressed rates misaligned with the risk the American homeowner presented.
I’ll be accused of “trickle down” economics but a healthy lending community is healthy for borrowers.
August 20, 2007 — 11:03 pm
Jeff Brown says:
Morgan – On principle, I too do not favor a bailout, and have never written a post lobbying for one. My post’s scenario actually gets us out of this without mentioning the word ‘bailout’. So we agree there.
That said, I wasn’t for Chrysler’s bailout either. Brian’s observation of the gov’t guaranteed loans having worked, was true. There are almost always exceptions to the rule.
As far as your suggestions, I share them with you for the most part. They come from the heart. They address those for whom the burden of failure will surely be the heaviest.
After reading this post I know one thing for sure – I wanna be on your Christmas list. 🙂
August 20, 2007 — 11:11 pm
Brian Brady says:
Jeff is correct. I’m the only one crazy enough to propose a bailout.
He’s always said “lenders lend; when the cease to lend, they cease being lenders”. I’m just trying to get people to talk about the problem.
Great post, Morgan
August 20, 2007 — 11:15 pm
Morgan Brown says:
Jeff – I did like your solution because its not a bail out – no tax dollars used and it wraps up nicely. Hence my John Grisham reference – if he does a mortgage book re: a large lender being gobbled up by another one you have an IP case.
There are many flaws in my above reasoning and will surely give rise to plenty of claims of being unfair (which it is, necessarily so).
I am not one for raining money down from the sky, but if its coming anyway lets get it to the people that need it most.
My capitalist brain is in awe that my typing fingers have gotten away with this much blasphemy already!
August 20, 2007 — 11:18 pm
Morgan Brown says:
Brian – i think avoiding a recession is vital. i also think that countrywide going down is a much bigger deal than anyone realizes – only because of how they prop up the rest of the industry (smaller banks, big banks, credit lines, etc.)
they are a large hub supporting many spokes and smaller hubs across the economy and their failure would be devastating.
August 20, 2007 — 11:21 pm
Jeff Brown says:
Morgan – Your suggestions are aimed at those in the most need. If only we could all pull the rabbit out of the hat to implement them.
The only flaws in your remedy is that it has as much chance of becoming reality as the Kansas City Royals have of being in the World Series this year.
August 20, 2007 — 11:33 pm
Ron says:
Morgan, there is something I don’t understand in your post. I am not a real estate pro so it is probably just my ignorance. But…since one of the main problems of the subprime mess is that people got loans for more home than they could afford, and since interest rates are now higher than they were a year or two ago, then how would allowing an owner to refi (without penalty) help? Wouldn’t they just turn their low-rate-can’t-afford mortgage into a higher-rate-but-still-can’t-afford mortgage?
How does refinancing in a higher-rate environment help out someone who couldn’t afford the house in the first place?
August 21, 2007 — 6:43 am
Phil Hoover says:
I still think that CW will be acquired by a major bank that is diversified with other types of lending, i.e. commercial, credit cards, consumer, etc.
But, it’s also possible that the banks are going to exit mortgage lending too and that may leave a real mess with no takers for CW or anyone else.
One solution is for the questionable loans to be restructured so as to avoid a wave of foreclosures.
August 21, 2007 — 8:18 am
Kurt Van Ness says:
Ron,
Don’t worry…I am a real estate pro and still wasn’t sure how to spell rescission. LOL:) I’ll leave that to the mortgage side. Anyway, all very true. Even if mortgage rescissions were made available to those who were duped, the process to determine who was truly officially duped and deserving of a rescission would be a craaaazy mess.
Morgan, Great post.
August 21, 2007 — 8:43 am
Morgan Brown says:
Ron,
You are right – some people who got in over their heads would not be saved by the pre-payment waiver; however, many more would. Here is how the pre-payment waiver would help save home owners:
1. It would allow them to immediately refinance in to more homeowner-friendly loan. Many people are losing their homes due to adjusting mortgage rates and payments. These are especially devastating to people in a 2 year fixed loan with a 3 year prepayment penalty (yes, it does happen) and others with prepayment penalties during adjustable rate periods. While payments may be higher than the teaser rate, they would most certainly be below the adjusted rate. If they can qualify for that higher rate while not suffering the brunt of a full adjustment it could help save a large percentage of home owners.
2. Many mortgage originators got lazy over the last few years. They put borrowers in short-term subprime loans when those borrowers could have qualified for a FHA loan. Allowing subprime borrowers out of short-term ARMs immediately may give them the room (LTV) they need to refinance in to a low-rate FHA loan. FHA loans have low rates and no pre-payment penalties. These could be very helpful.
3. It would allow low-income borrowers to apply for and receive support and new financing through state programs such as CalHFA which provides government subsidies (see they’re in existence already) to low income home buyers and owners. These assistance programs can go a long way to providing affordable housing solutions to lower income borrowers.
There isn’t a silver bullet and these remedies mentioned above could only go a part of the way in helping families; however, I believe that mitigation is a better option than none. The above, mixed with aggressive loan modifications on the behalf of mortgage servicers (as mentioned by Phil) could take a big chunk out of the problem. I hope that answers your question.
August 21, 2007 — 8:56 am
Brian Brady says:
“it has as much chance of becoming reality as the Kansas City Royals have of being in the World Series this year”
Note that I didn’t say that, Chris
August 21, 2007 — 8:57 am
Jeff Brown says:
Oh sure, I sneak it by him, and you show up and throw me under the bus. 🙂
August 21, 2007 — 9:09 am
David A. Porter says:
I am very much against any bailout of any mortgage company. I know that sounds harsh, but the simple truth of the matter is that our industry knew full well that these were ridiculous loans. To top that off, some companies found themselves addicted to these ridiculous loans.
Any reasonable person, with an understanding of what our industry was doing, would be scratching their heads thinking that a wave of insanity had struck the industry.
There is no reason in the world that the average guy on the street should have to pay for this greed. There is also no reason that Countrywide should receive any special dispensation simply because they are the largest. They got caught up in the greed just like many others.
I owned a small mortgage company in Michigan. When these loans came out, I didn’t think they were good for America, or my clients. I therefore did not offer the “stated income” loans and limited my companies exposure to the Alt-A loans.
Am I brilliant? No..hardly so. I simply set a few simple ground rules in my company, years ago. These loans did not fit into my “ethical compass” so I did not play the game. Many thought me an idiot at the time, many asked me to keep my mouth shut two years ago. But now look what has happened. I am ashamed of my industries behavior.
Life is full of decisions. Those decisions have results. Countrywide had a hard time back on Black Monday as well because locks were not covered. Rather than eat a 3% increase in rate (which would have taken them out) they decided to renege on the rates.
This whole thing was insane. Crazy loans and people buying homes they can’t afford. Holy bat crap batman!
The markets will clean this mess up.
As for the homeowners…I am not clear. On one hand, they should have been more careful in choosing their mortgage professional. The consumer was clearly guilty of greed as well?
If there is going to be a bailout, which I would not support, then let’s give it to the consumers in some fashion.
August 21, 2007 — 9:52 am
Robert Kerr says:
There was a time when we accepted normal repricing cycles and corrections because we understood that they were necessary to create healthy, sustainable, long-term growth.
We accepted that companies which made horribly bad, risky business decisions could fail and go out of business and that their wiser, stabler competitors snatched up their customers and business.
We believed in corporate darwinism. We believed in survival of the fittest. We believed in free markets. It’s what made us great. It’s what made our industries evolve into stronger, better, wiser entities.
It’s what made us a world economic power.
Those days and beliefs are apparently long gone, replaced with CEOs and investors banging their tin cups on the Fed’s door, begging for federal handouts and corporate welfare.
August 21, 2007 — 11:23 am
Robert Kerr says:
Brian – i think avoiding a recession is vital.
Why? Recessions are normal! Recessions provide natural and necessary pruning of the corporate trees.
Avoid it? I say we should prepare for it and embrace it.
Why are we so scared of a recession?
August 21, 2007 — 11:29 am
Morgan Brown says:
Robert – You raise a good point. A recession is a necessary pull back allowing our economic cycle to reset and grow again; so I guess I am not afraid of a recession – I would just prefer to mitigate its effects so that it doesn’t spiral out of control.
More like a controlled burn of underlying brush rather than a raging wild fire.
August 21, 2007 — 2:59 pm
Ron says:
Morgan, that does answer my question, thanks very much! And to all the posters at Bloodhound Blog, thanks for an awesome blog!
August 21, 2007 — 7:24 pm
Chuchundra says:
Instead of talking about a bailout, why aren’t we asking which of the actors in this fiasco should be going to prison for fraud?
August 21, 2007 — 7:56 pm
RE Investor says:
I have to agree with the loan modifications. A lot has been said about lowering the fed rate. That would not help a lot of people in the 2 /28 loans. The reason is that a lot of those loans track to the LIBOR and not the fed funds. That even would not be a problem for some. The REAL problem is the TERMS of the loans. The devil is always in the details. Most 2/28 100%LTV loans had teaser rates that were about 3% margin to the LIBOR, then in 2 years some were set to reset to as high as 6% over the LIBOR. The margin is the problem not the rate it tracks to. The only way to fix this is a loan modification. Giving the borrowers a new loan when the price of their house has dipped to the point where the borrower would have to inject $60,000 in to the loan just to refi would not be possible. Loan mods would benefit the investor in the security because they would not have the loss of principle, court costs of foreclosure and RE Agent fee to sell in a buyers market not to mention still earning a decent yield (not outragous). It would benefit the borrower because they would get to stay in their home, and have a mortgage that makes sense. And it would benefit the taxpayor because we as a nation would not have to bail anyone out. Pretty simple and everyone wins. I am not sure why more is not being emphasized on this rather than the rhetoric that is around the talking heads currently. Am I missing something here??? I understand that their may be legal issues with the terms under which some of these loans were sold on the secondary market, but if I invested in large amounts of this paper, it would make more sense to earn a yield for another few years rather than take a loss by keeping the same stupid terms and have the borrower walk…0% on $210,000 is still not as good as 7% on $300,000. Common sense seems to have taken a back seat here.
August 21, 2007 — 10:09 pm
Jeff Brown says:
RE Investor – thank the Lord I’m not the Lone Ranger. 🙂 Obviously there are tons of folks who see the wisdom in your thinking. I keep telling folks who call me with the problems you mentioned, that they need to speak to the lender. I tell them the lenders literally abhor REO’s, short sales, the foreclosure process, all of it. Yet, as you imply, the lenders/investors don’t seem, at least so far, to be acting in their own self interest.
We’ll see pretty soon though, won’t we?
August 21, 2007 — 10:15 pm
Morgan Brown says:
RE Investor –
I agree with you. Loan modifications are the easiest path out of this mess. It causes losses to occur with the investors who purchased the paper and allows home owners who could afford loans at the initial rates stay in their homes. I’ve talked to several servicers about why more modifications aren’t done (luckily my neighbor runs a large servicing operations group so I have a captive audience). Here are the problems with loan modifications as it currently sits. (Let me say that none of these seem so overwhelming to the point of preventing a long-term solution via this avenue).
1. Loans are held by multiple investors. One mortgage can be in many different tranches of debt, which are then sliced up further and sold to investors. Each investor agreement specifies what is or is not okay in terms of modification. Servicers default to the most stringent modification agreement to ensure they are not in default of the agreements they’ve signed with the investors who actually own the loan.
It is easy to say mandate the investors allow all modifications, but if you look at who owns the loans as investors do you want to go tell China that they have to accept all modifications to loans they hold? It’s not that easy.
2. Current servicing regulations in place, in particular Reg B of ECOA and Sarbanes Oxley essentially make modified loans non-compliant with current federal law (this is a simplistic statement, but the details deserve a post or 8 on their own). This legal and regulatory quagmire makes modifications difficult.
3. Automation. Modifications take analysis, and a case-by-case critical review and discussion human to human about the need for a modification and factors for and against granting a mod. Most large corporations don’t like this style of doing business; they like the process, decision tree, system outsourced to India where a call center rep can follow a flow chart to find the right answer. In modifications they don’t work that way and the system isn’t set up to handle them well, (or cost effectively for the servicer).
4.Volume. Loan modifications used to be a once in a while thing; now they are a daily deluge. Staffing is lacking. Bear Stearns is holding a job fair here in Irvine to hire 100 loss mitigation people. Amazing.
5. Experience. Servicers aren’t used to loan modifications. They are good at foreclosures (which also lend themselves to automation) and servicers that are only used to the good times are inept at modification agreements.
So there you have it – the reasons why modifications are currently slow to catch on. That said I think they are an important part of the home loan landscape that need to be supported in an effort to reduce the casualties of the impending and ongoing calamity.
August 21, 2007 — 10:36 pm
Morgan Brown says:
Chuchundra –
I think the reason we’re not talking about culpability is because the prevailing opinion is not one overly exciting to discuss. If it is anywhere in line with my opinion that is.
And here’s my two cents. In any bubble or run up there is a large amount of fraud and malfeasance. Those can only be vetted out case by case. Litigation and lawsuits are like water looking for the lowest ground, they find their way to the guilty and to the scape goat/poster children.
The laws surrounding lending abuses are well constructed, just poorly enforced. We will see the legal system grind through the morass and come up with the proper amount of justice for those guilty of the most egregious of acts.
August 21, 2007 — 10:39 pm
cher says:
Morgan, I really like your suggestions.
“forgivness of accumulated deferred interest” Oh, for a roll back and the chance to start over with a fixed rate. That is a dream proposal and would put allot of folks I know in a much better position.
The problem with the fixed rates that lenders, such as WaMu are offering for a small fee is that the payment in many cases is out of reach…sometimes over twice as much because of the deferred interest.
August 21, 2007 — 10:52 pm
JeffX says:
Is it a bailout when the bondsman acquires 17% of your worth?
August 23, 2007 — 5:04 pm
Garth Farkley says:
Bailout? Sure.
Angelo’s sold so much stock he’ll certainly be able to make bail.
August 29, 2007 — 8:58 am
Rick says:
Let them all sink! Reward the people that spend within their means. The American people need to be responsible for their own actions and not look to the government for help because they aren’t able to balance their checkbooks.
September 9, 2007 — 7:54 pm
Shawn McDonald says:
Right on Morgan, well put! If you come across any interesting articles on the current government attempts to “assist” the market, send them my way. We are compiling a list of articles to keep our readers up to date on the changes going on…. Kudos my friend!
September 27, 2007 — 5:00 pm