Results 1 to 2 of 2

Thread: yet more 'moral hazard' from latest 'subprime' bailout plan

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default yet more 'moral hazard' from latest 'subprime' bailout plan

    As expected, this plan rewards the 'subprime' borrowers who took on mortgages they could not afford ... now resulting in oustanding balance cram-downs and interest rate reductions for first AND second mortgages !

    In addition, this plan rewards the mortgage lenders who wrote the 'subprime' loans in the first place by paying them several thousand in taxpayer dollars as a 'fee' to rewrite the loans.

    Big loser #1 are the investors who will now officially take a loss on both the amount of principal to be paid back as well as the interest rate paid on that principal.

    Big loser #2 will be US taxpayers with incomes above $75k or so, who will bear the brunt of this additional gov't spending in one way or another.

    (snip)"Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor.

    Servicers will be paid $500 for each modification and an additional $250 annually for three years if the borrower stays current. Borrowers can receive up to $250 per year for five years to pay down their first mortgage."(snip)

    Also, outstanding mortgage balances will be 'crammed down' to 90% of the current market value of the property, which in itself is worth tens of thousands of dollars (in some cases hundreds of thousands).

    The kicker of course is that in order to qualify for these benefits, you must be underwater on your mortgage, behind in your payments, and your current income level must be low enough that your existing mortgage payments require more than 31% of that income.

    Arguably, the overall 'cash equivalent' benefits available from this program are likely to prompt a significant number of people to 'quit' their jobs / reduce their working hours in order to qualify for this program.


    On a different tack, but possibly even more important, is that this latest 'subprime' mortgage bailout program will for the first time set the precedent that the US gov't can MANDATE a change in contract terms (i.e. the mortgages and resulting mortgage bonds) WITHOUT a bankruptcy court filing. This is undoubtedly going to make future (foreign) investors very nervous about providing capital for future loans.

    Consider the real results here ... two years ago a 'Belgian Dentist' put up $100,000 to buy a US mortgage bond returning say 6% interest. Now the US gov't is mandating that his $100,000 principal will not be paid back in full ... perhaps just $85,000 (depending on how far real estate values have dropped). Additionally the US gov't is mandating that his 6% interest earnings must drop to 2%. Odds are that this 'Belgian Dentist' will never again loan money to America ! The precedent also carries over to potential worries about US gov't mandated modifications affecting other types of US bonds in the future, including treasuries.

    At the very least, this is going to make future mortgage financing even more difficult to obtain. At worst, this is going to make ANY sort of foreign financing more difficult and more expensive to obtain.
    Last edited by Melonie; 04-29-2009 at 03:52 AM.

  2. #2
    God/dess hockeybobby's Avatar
    Joined
    Nov 2007
    Location
    Canada
    Posts
    4,969
    Thanks
    1,811
    Thanked 597 Times in 382 Posts
    Blog Entries
    1

    Default Re: yet more 'moral hazard' from latest 'subprime' bailout plan

    Brought to you by: The Denizens of the Dollar Den of Doom.

    N. E. G. A. T. I. V.

    WTF WILL HAPPEN TO ME?

    N. E. G. A. T. I. V.

    OMG YOU'RE SCARIN' ME!!

    (everyone)

    SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME
    SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME
    SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME
    SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME SOCK IT TO ME


Similar Threads

  1. Replies: 0
    Last Post: 06-29-2011, 02:29 PM
  2. Replies: 2
    Last Post: 09-15-2010, 02:56 PM
  3. latest bailout plan directly benefits uber-rich
    By Melonie in forum Member Boards
    Replies: 0
    Last Post: 11-25-2008, 04:25 AM
  4. Replies: 0
    Last Post: 10-04-2008, 02:10 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •