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The "unadjustable adjustable-rate mortgage"
Posted by: McQ on Saturday, December 08, 2007

Mark Steyn points out that for all our talk about the perils of the "Nanny State", it seems that when push comes to shove - especially after a good many of us have gotten ourselves into financial hot water - we're not at all averse to the nanny coming to our rescue. And just as interesting is the fact that it is a so-called "conservative" administration doing all the nannying:
So now the government has stepped in and said that, if you fall into a particular category of adjustable-rate mortgage (ARMs, in the biz) and you're worried that it's getting way too adjustable, don't worry: The Nanny State is about to readjust it well inside your comfort zone. By fiat of the Treasury secretary, your adjustable-rate mortgage is henceforth an unadjustable adjustable-rate mortgage. These new UNARMs will spread their healing balm across the land until it's safe enough for the housing "market" to once again be exposed to market forces.

The government has, in effect, nullified the terms of legal contracts mutually agreed by both parties – borrower and lender, Mr. and Mrs. Joe Schmoe and the First National Bank of Pleasantville.

This is a pretty remarkable act by a "conservative" administration.
You know, I've had both an ARM and fixed rate mortgages. When interest rates were through the roof, I had an ARM because I was still below market rates and if it went up, well, I was still below market rates. Of course if it went down, then I benefited there as well. Or said another way, having an ARM then was a no-brainer.

When I bought our present house, interest rates were at historic lows. In other words, the only way they had to go was up. So I bought (and even paid down) a fixed rate loan.

Now, I'm not a finance or economics major. That's just not a difficult concept to understand. When interest rates are at historic highs, ARMs makes sense. When they're at historic lows, ARMs don't make sense. Delayed gratification and saving, however, do make sense until you can actually afford the house you want under the conditions the market dictates for that time. But that seems, given this latest "crisis", to be something we just can't see our citizens doing any more. You know, waiting and saving. I'm waiting for someone to declare that "everyone has a right to a house". I mean if they have a "right" to health care, why is a house out of bounds? Nor do I doubt that somehow we who have actually done our homework, have done what we should and have no problem affording our housing, will end up paying for those who haven't.

So while I sympathize with those who stand to lose their house because they made an ill-informed choice, I don't understand why it is the government's job to rescue them from their bad financial decisions, do you? Is that the function of government?

Oh, wait, I forgot. It's an election year, and "conservatism" goes by the way-side in an election year.

Never mind.
 
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so-called "conservative" administration
If it wasn’t for the side situation of the Iraq and the WoT, this would be one of the most liberal administrations ever. Not entirely Bush’s doing alone. This is combo effect of this administration and the republicans in that controlled congress.

The almost laughable part is that Bush is depicted as super rightwinger. What’s not laughable is that Bush is depicted as a super rightwinger. Imagine the blood currdling screams if Reagan was in office today. The left has been allowed to redefine what is right and what is left and what is extremist right and what isn’t extremist left. In part because of Bush, but mostly from the Republican cheerleaders that won’t let anyone disparage Bush on any level.
 
Written By: jpm100
URL: http://
"I’m waiting for someone to declare that "everyone has a right to a house"."

I think your wait will soon be over. It may be unverbalized, as yet, but many people including, as you point out, Republicans already believe it. I know a Republican activist who thought something should be done about the high cost of homes and the low teachers salaries in our area because their newly graduated child could not buy a house on a beginning teacher’s salary. It was obvious and natural to this person that anyone with a college degree, even with no work experience, should be able to afford a house.
This is not an isolated case. There are constant complaints about the lack of ’affordable housing’, and the vast majority of these complaints refer only to the availability of single family houses. In some areas, local governments subsidize home ownership for public employees. Evidently apartment living is suitable only for welfare recipients, old folks, and other undesireables.
Already, as has been discussed here already, flood insurance seems to be a right. It is only logical that the object of that insurance also be a right.
 
Written By: timactual
URL: http://
"The almost laughable part is that Bush is depicted as super rightwinger."

Kind of reminds me of Nixon (PBUH)*.


*In this case, the ’P’ stands for Pox in the obligatory parenthetical.
 
Written By: timactual
URL: http://
1. Steyn not Stein

2. Was this done by fiat, or did the mortgage issuers agree? It was not clear from the article, but I don’t think the government could actually force the banks to accept this. The banks however, may decide they are willing to take the haircut so that the economy keeps moving along. Recession could push even their better clients into foreclosure.

3. Keep in mind places like Houston have cheaper housing because they have less regulation. So its not "impossible to do something about the cost of housing" without going full Nanny State.
 
Written By: Harun
URL: http://
I’m waiting for someone to declare that "everyone has a right to a house".
When they do, I think they’ll go further and actually say "everyone has a right to the house they want." Whether they can afford it, eh.
 
Written By: Linus
URL: http://
Because of things like this as well as speculation, the price of homes got out of control in many places. If we try to support these inflated prices, we will get cries of an affordability issues.

Let me guess, Nanny State back to the rescue on that one too.
 
Written By: jpm100
URL: http://
If I take on more debt than I can pay and make investments that go down in value, can I get one of these sweet government bailout deals too? Is it too late to get on board?

What’s sickening about this bailout scheme, as McQ points out, is that responsible folks who didn’t overextend themselves will end up subsidizing the irresponsible borrowers in the form of taxes and harsher lending standards.

I expect liberals to embrace the bailout as a wet dream come true. But what’s surprising is that there is near-nonexistent outrage from conservative politicians or the financial press. Has the WSJ written much about it? Has it been an issue on CNBC or Bloomberg? Any conservative politicians taking a hard stand over this?
 
Written By: Darrell
URL: http://
Maybe this will pave the way for the repeal of the Second Amendment, because most citizens just can’t bear their ARMs. :P
 
Written By: James O
URL: http://
The current ’bailout’ is a voluntary agreement that the lenders entered into willingly. It has no force of law, or penalty to any lenders that do not decide to follow it. So I don’t know if the nanny state argument really applies.
 
Written By: Dustin Vines
URL: http://
The current ’bailout’ is a voluntary agreement that the lenders entered into willingly.
Are you seriously suggesting that it is not "nanny state" behavior for the government to bail out lenders and borrowers from bad deals that they have made voluntarily?

If the government decides to reimburse consumers for gambling losses incurred in Las Vegas, would it be any less nanny state because the bailout is accepted "willingly"?
 
Written By: Darrell
URL: http://
The current ’bailout’ is a voluntary agreement that the lenders entered into willingly. It has no force of law, or penalty to any lenders that do not decide to follow it. So I don’t know if the nanny state argument really applies.
And the implied threat if they don’t "volunteer".

Coercion. It is the only reason for government to involve itself at all, because that is what government is.

And it avoids the question - is that a proper role for government?
 
Written By: McQ
URL: http://www.qando.net/blog
If I understand the current agreement, it isn’t really a ’bailout’. The government isn’t paying the lenders anything. The lenders are agreeing to a 5 year freeze on interest rate increases for people that live in their homes, face a payment hike of more than 10 percent, and have a credit score too low to qualify for traditional fixed mortgages.

So the gambling metaphor isn’t accurate. No one is reimbursing anything.

Given the state of the current real estate market, this is something that lenders want to do anyway. No lender wants to be holding on to foreclosed property during a housing glut. It is bad for business.

Honestly, I don’t think this is nanny state so much as politic games in an election year. Almost no one is going to qualify for the freeze anyway, there are too many requirements. (There are estimates that 150,000 people out of the 4 million or so sub-prime ARMs will qualify)

 
Written By: Dustin Vines
URL: http://
Well, from everthing I understand and have read about this the current "bailout" involves:

1) No government money besides the cost of hosting meetings.
2) No real change in the way mortgage companies are adjusting ARM loans.
3) A publicly agreeded upon standard to adjust mortgages which everyone hopes will result in less lawsuits from the bond investors against the loan servicers.

The core problem here is that the current way loans are funded leaves a large disconnect between the end bondholders and the borrowers, with the servicers in the middle. The servicers can’t adjust to many mortgages without the risk of being sued by the bond holders, the bond hodlers can’t see who the end borrowers are to determine if they’d be better off taking an adjustment than letting the loans get forclosed. And to add fun the servicing company likely makes more money in fees (from the bond holders) for holding a forclosed house than they would servicing the loan.

All I’ve seen so far from the administration is getting everyone in the same room to bang out a compromise in such a manner as to hopefully limit litigation. And head off congress jumping in with a even more horrible solution, like spending oodles of money to buy up the loans and hope they don’t default.

Calling what’s going on now a "bailout" is BS. You want a bailout look at Jesse Jackson’s Op-Ed in Friday’s WSJ. What you’ve got today is more facilitating a meeting.

And what’s the alternate solution? Let perhaps thousands of loans get forclosed because everyone’s to busy to get on the phone in time and scared of lawsuits to take actions they’re wiling to?
 
Written By: Ryan
URL: http://
So the gambling metaphor isn’t accurate. No one is reimbursing anything.
If that is correct, then we are in agreement. My understanding of this government program was that taxpayer monies would be used to subsidize the lenders and/or borrowers. I would like to know specifically whether or not the govt will be funding these subsidies.

Although I agree with McQ’s "implied threat" concerns, in this case I’m less concerned with the implied threat than I am with the idea of the government spending money to bailout lenders and borrowers.
 
Written By: Darrell
URL: http://
Although I agree with McQ’s "implied threat" concerns, in this case I’m less concerned with the implied threat than I am with the idea of the government spending money to bailout lenders and borrowers.
And I’m just as concerned with the threat.

That should not be the function of government as it pertains to markets and private business.

The law and its enforcement? Yes. That’s a power we give to the government for a very specific and narrow reason.

This doesn’t fall under that reason and is, in my opinion, a gross misuse of government power.
 
Written By: McQ
URL: http://www.qando.net/blog
Left wingers aren’t cheering, they’re laughing. For exactly the reasons that make this not an example of what Q is talking about, this remedy is as a leaf in a hurricane. It won’t stop the economic crunch due for two thousand and eight - a crunch that is just the dramatic end of six miserable years for everyone not in the top decile. It won’t save the GOP, that’s for sure.

The only thing it demonstrates is that Mark Steyn is a lazy, ignorant fool who can’t be bothered to check his facts.

The reason it’s a voluntary agreement, Q, is that the lenders making the agreement are going to lose more money when the house is foreclosed and sold for 30% of the mortgage value than they will with the voluntary rate freeze. The government had to get in because there was a collective action problem in making the agreements happen without them.

 
Written By: glasnost
URL: http://
The reason it’s a voluntary agreement, Q, is that the lenders making the agreement are going to lose more money when the house is foreclosed and sold for 30% of the mortgage value than they will with the voluntary rate freeze
Yes of course, because if big daddy government didn’t "guide" them to the "right" voluntary decision, those lenders and investors would have lost more otherwise.. Because govt. bureaucrats tend to know better than companies and investors with their own money at stake, right?
a crunch that is just the dramatic end of six miserable years for everyone not in the top decile
Oh brother, leftwing talking points right on cue. Altogether now: "It’s all Bush’s fault!" ..just like the Bush-created wildfires in California
 
Written By: Darrell
URL: http://
Assume I go borrow $500k and use it to buy GE stock. Next year it’s down 20%. Can I get a break on the margin interest rate? Hah, hah, hah.... I have to laugh because just thinking about this "solution" to a non-problem makes me want to puke. Doesn’t "sanctity of contract" mean anything?
 
Written By: Paul
URL: http://
Yes of course, because if big daddy government didn’t "guide" them to the "right" voluntary decision, those lenders and investors would have lost more otherwise.. Because govt. bureaucrats tend to know better than companies and investors with their own money at stake, right?
Or because they already had the exact same polocies in place and you’re falling for a "We did something" smoke screen.

Did the lenders change polocies? No.
Did they make the existing polocies public? Yes.

Will this change the outcome? Perhaps, depends on how much perception and concern were causing liquidity problems. But not likely.
 
Written By: Ryan
URL: http://
I am sure everyone is aware of the old saw that "If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem."

Its one of those cases where the banks salesmen lent a little too eagerly. Now, the banks have a choice. They can keep foreclosing property or they can give a bit of breathing space to their customers and hope to slow down the effects.

This is the exact same thing that happens when they have lent money to Mexico or IBM and things go south. The Bank can try to get pennies for their dollar or they can rollover the loans, etc. Or when a company gives 90 day open account payment terms. Its the risk on the seller not the buyer.



 
Written By: Harun
URL: http://
Its one of those cases where the banks salesmen lent a little too eagerly. Now, the banks have a choice. They can keep foreclosing property or they can give a bit of breathing space to their customers and hope to slow down the effects.
I agree. Standard banking practice is that if the homeowner can’t make the mortgage payments they foreclose. That’s fine if it’s just a few homes every year but the sub-prime problem is pretty massive. If the banks follow standard procedure then they are going to be stuck with a more homes than they can get rid of and the massive losses will cause them to fail. If the banks fail then we get to revisit the Great Depression of the 30’s. The banks are clearly at fault. They made a lot of questionable loans to people who didn’t quite understand the implications of Adjustable Rate Mortgages. Nobody wanted to put the brakes on it because bank execs were exceeding their quotas, builders were keeping busy, real estate agents were making record profits and the politicians got to crow about the great economy and increasing minority home ownership. Everyone was slapping each other on the back until the interest rates inevitably went up.
 
Written By: Bob
URL: http://
If this agreement is entirely voluntary, and in the best interests of the banking/financial institutions involved, why does the government need to get involved in the first place? It’s not like they have nothing better to do than solve a problem they claim will solve itself.
 
Written By: timactual
URL: http://
Treasury claims they needed to get involved in order to bring all the players to the table. The plan won’t really work if you don’t get close to universal compliance.

Foreclosed homes in a community drag down prices, so if one banker starts foreclosing on homes because he can afford the financial hit, it will snowball the other loans and then we’ve got a mightmare on our hands.

I opposed this as a kneejerk reaction but the more I hear the more sense it makes. That doesn’t mean it will come anywhere close to fixing the problem, but it’s not a real good example of government mandating a fix and billing the taxpayer.
 
Written By: spongeworthy
URL: http://
They made a lot of questionable loans to people who didn’t quite understand the implications of Adjustable Rate Mortgages.
What part of ’Adjustable Rate’ did people not get? Jeez man, when they put the paperwork in front of me, I said what happens in year 5 of my loan?’ The answer ’we adjust your rate’. I asked ’how much?’. Answer ’could be a lot’. So I said ’no thanks’.
 
Written By: meagain
URL: http://

 
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