The Sub-Prime Bailout

[barondave]

(Well, the STrib didn't post my letter, and it's not long enough for a DailyKos Diary. Quotes are from Sunday's editorial.)

First, under pressure from campaign contributors, conservatives pushed through a new bankruptcy law making it harder for people to get out of an oppressive debt and pay off their creditors slowly. Second, those same greedy capitalists insisted on giving sub-prime loans to people who couldn't go bankrupt and pay off their debts themselves. Now, under the guise of helping people with "questionable credit histories", US taxpayers are bailing out "irresponsible lenders". Corporate greed is very expensive.

Comments

[davidwilford.livejournal.com]

It's not much of a bailout, evidently. More here from Calculated Risk's Tanta:

Bailouts and Bailins (http://calculatedrisk.blogspot.com/2007/12/bailouts-and-bailins.html)

IOW, it's more of an attempt to pump up the sagging mortgage lending market to keep home prices from flying like sheep. Who, of course, don't so much fly as plummet...

[barondave.livejournal.com]

The New Yorker has a good overview: Paulson's Plan (http://www.newyorker.com/talk/financial/2007/12/17/071217ta_talk_surowiecki)

[sethb.livejournal.com]

"insisted on giving sub-prime loans"? You mean, "made them available" don't you?

The problem is that the loans were packaged into bonds, and the bondholders are stuck. This wouldn't be a problem (they invested badly and lost money; tough) except that apparently a lot of those sub-prime loans were issued fraudulently (the borrowers lied about things like their income), and the bondholders can force the banks who issued the loans/bonds to make good for the fraud.

I think those banks should go under (pour encourager les autres) and some bankers jailed, but it would damage the overall economy a lot.

The "bailout" doesn't actually help, since failing to reset also lowers the value of the bonds, but it might leave it high enough to persuade the bondholders not to sue.

[barondave.livejournal.com]

No, I mean "insisted", as in "the hard sell". Remember, the (current) bail-out is only for those who might otherwise re-negotiate their loans with a real banker. The problem is a) many of these people were sold on "balloon" type payments, and were told the market would just keep going up and they could re-finance when their property was worth more. And b) bankers often re-negotiate loans to make sure they get something out of the deal, but too many of these sub-primes were sold as commodities to businesses other than banks.

Anyone who can't pay at all is SOL, and if you can hang on and pay your increased mortgage you won't get federal help (this time). This particular Bush plan only helps those who could pay off at their current rate but can't pay the increases. Instead of the option of a bankruptcy plan where you could payoff your debts while keeping your house, we now have a draconian bankruptcy law... and a big-spending Republican in the White House who just loves to give taxpayer money to his rich and stupid friends.

Since many of the businesses who might go under are not banks, having them go under (or consolidate or have a management change or whatever) would be less harmful than you might think. Of course, a lot of people will lose their houses. Without an actual bank to hold the foreclosure, perhaps a new set of businesses will arise...

[sethb.livejournal.com]

Check more carefully. Those who can refinance are not included in the bail-out. Only those who can afford their current rates, but not the increased rates, are eligible. (And depending on who the beneficial owner of the mortgage is, that might not be feasible, either; I know that if I owned mortgage bonds and the issuer told me I'd be receiving less interest because they were forgiving it, without consulting me, I'd be inclined to force them to buy back the bonds.)

Several banks have already gone under, as well as a number of mortgage companies.

Nobody is building houses in the current market. Foreclosures do not affect the number of houses in existence, only their ownership (and price).

Under the old bankruptcy laws, if you had a mortgage that you could keep current, you could declare bankruptcy and keep your house if you continued paying your mortgage (and you didn't have "too much" equity, which varied by state). That's still the case.

[barondave.livejournal.com]

Read what I said (which is what you said) and also the New Yorker article above.

The bailout is not helping people who had poor credit who talked a bank into giving them money for a house, the bailout is providing a cushion for bad business decisions. Not just bad lending practices, but bad financial decisions. In a more capitalist (or more libertarian) world, many people would lose their houses while a whole lot of big companies would go belly up. Ah, but Bush isn't a capitalist, he and his ilk are into oligarchies...

[sethb.livejournal.com]

You wrote: Remember, the (current) bail-out is only for those who might otherwise re-negotiate their loans with a real banker. It isn't. Those people can either refinance or keep paying.

The bailout is not helping people who had poor credit who talked a bank into giving them money for a house,

It will help some of them: those who can afford their current payments, but not the increase. (Note that "poor credit" is irrelevant, it's only ability to pay that matters.)

In a more capitalist (or more libertarian) world, many people would lose their houses while a whole lot of big companies would go belly up.

A consummation devoutly to be desired.

Most of the people who would lose their houses should never have been able to buy them in the first place. A number of them are cases of sheer fraud.

Ah, but Bush isn't a capitalist, he and his ilk are into oligarchies...

YM "kleptocracy"