Continuing the Subprime Bailout

Continuing the Subprime Bailout

The biggest problem facing the subprime housing market in 2008 is the imminent resetting of adjustable rate mortgages (ARMs) that subprime borrowers snatched up during the housing boom. And while it’s true that a number of these ‘teaser rates’ reset this past October, the vast majority have yet to switch over. And until that happens, these remaining homeowners will most likely be craning their necks to stare at the anvil hovering above them – hoping against hope that they don’t get crushed.

But wait…here comes the Bush Administration with a plan…to make the subprime situation even worse.

It’s called the ‘teaser freezer’ program. The discussion so far, as we understand it, is to ask for voluntary cooperation from the mortgage lenders. They are supposed to let the teaser rates ride…for people who can’t afford an increase.

“Deal in the Works to Freeze Rates on Subprime Loans,” says the Washington Post. Of course, if such a deal made sense, lenders and borrowers could work it out on their own. And if it were possible to eliminate the problem – or even ease it – by government decree, it would be a very different world than the one we live in. When people owe money and can’t pay it back, someone is going to take a loss. You can diddle with the details all you want…all you’re going to do is shift the loss from someone who deserves it onto someone else.

The great innovation of the recent credit boom was to create a stick that was long in the middle and short on both ends. On one end, the borrowers are now losing their houses. On the other, the investors are losing their money. The financial intermediaries – notably Goldman Sachs – are sitting pretty. They made their money by putting the two dumbbells together. And now, the Bush Administration is taking the time-honored tradition of pushing more of the losses away from the borrowers…and towards the other end of the stick, that is, towards the lenders. Why? Hey…where have you been, dear reader? We live in a democracy. One man, one vote. How many subprime borrowers are there? How many subprime investors are there? You do the math.

Continuing the Subprime Bailout: Going out with the tide

The credit cycle peaked out this past spring…and the great wash of cash and credit is now ebbing.

But if we’re right, we’d expect to see asset prices go down. So far, housing prices ARE going down. The last figures we saw showed U.S. housing prices down 13%. Robert Shiller, who knows a great deal about housing cycles, says they’ll probably go down 30%-40%. In Britain, houses just registered their third losing month in a row – with many more to come.

You can count on lower housing prices – at least in real terms – because there is no way that the average house can remain out of reach of the average buyer for very long. Houses are consumer items, not investments. They will fall in price to a level where the consumer can afford them.

Continuing the Subprime Bailout: Who says government can’t be a positive force?

“World War II was the last government program that really worked,” George Will used to say. And we’re not even sure about that one. In Europe, we defeated one monster…but saved one that was just as bad, or worse.

Well, now we have another chance. This time, we’re going to rescue Americans from the evils of predatory financing. That’s right. The evil predators hunted for poor people. People who had no money, and often, no jobs either. And then, the predators got ahold of them – duping them into accepting a check for $100,000…$200,000…maybe even more.

Then they moved into a brand spanking new house. They enjoyed their new digs – they spilled beer on the carpets…broke the handles on the cabinet doors…left hand prints on the walls…

…and now, wouldn’t you know it; those evil predators want their money.

Of course, these people can’t pay what they don’t have…so they’re being forced to pack up and move out. How’s that for a national tragedy? Is there nothing that can be done?

Articles about the subprime mortgage mess…

Subprimed to Lose Lots of Moneyby The Mogambo Guru
Peering through his perpetually bloodshot eyes, the “angriest guy in economics” sees a giant wave of problems threatening to wash most of us away…and take the rest of us out with the tide. So why is he telling us to let our guard down? Read on to see the Existential Side Of The Mogambo (ESOTM)…

Betting Against Subprimeby Bill Bonner
“Hedge funds must be one of the dumbest asset classes ever invented. It is like getting someone to put coins in a slot machine and then splitting your winnings with him… but occasionally, you can get lucky.”

A Prime Example by Jamie Ellis
“Subprime mortgages have definitely been a problem for the entire credit industry. Jamie Ellis explains that just when you thought the disease had been contained, certain prime mortgages are now also being infected. What happened, and how did this get so out of control?”

Just Close Your Eyes and Hope for the Bestby Christopher Hancock
“…Our colleague, Dan Denning, reports that a majority of these ARMs due to reset held initial rates that ranged from 6-9%. This represents subprime territory. And the folks who hold these ARMs, based on Denning’s research, will be facing increases of 30-50%…”

Addition resources about the subprime mortgage market…

‘Subprime’ Named US Word of the Year
“The winning word is one that has increasingly sent shudders through financial workers and home owners alike – ‘subprime’.”

The Mortgage Lender Implode-O-Meter
“Tracking the housing finance breakdown: a saga of corruption, hypocrisy, and government complicity”

Subprime Blame Game
“Some 2.4 million homeowners are in danger of losing their homes, many because of bad subprime loans.”

Subprime Housing Game is Over
“Witness the huge gaps seen recently in the subprime sector, where problems seem to have arisen out of the blue – although they have been easily foreseeable…”

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