Friday, December 07, 2007

Creating False Hope

Creating False Hope

“The program is only delaying the inevitable. If you’re in a home you can’t afford and/or are currently unable to refinance, chances are you’ll need a sharp increase in income, a reduction in principle or a reduction in your interest rate to keep your home long-term. Delaying the ‘ARM day of reckoning’ by five years is unlikely to make a difference for most home owners.” 5 Holes in the Government's Mortgage Bailout Plan

Yesterday the Bu$h administration announced its plan to assist homeowners who are struggling to hold onto their homes amidst the ravages of the current housing/mortgage/credit/monetary crash. Bu$h, his Treasury Secretary, the HUD Secretary and representatives from the lending industry, investors, mortgage counselors and loan servicers held a joint press conference to announce the details of a five year interest rate freeze. The move is essentially a PR gambit to give the administration the appearance they are on top of this situation and assuage the anxieties and fears of lenders, investors, Wall Street, a gullible US public and the global economic community. The White House is touting this initiative as a “private sector” solution, meaning there is no taxpayer bail out for Wall Street or the homeowners nor is it a government intervention to stop the sub-prime mortgage tsunami from devastating more US homeowners and taking the US economy under. The problem with this plan is, it is not a real solution to the problems. This “plan” will not help most of the people facing foreclosure or who are feeling the angst of ARM resets that will balloon their mortgage payments up several hundred dollars a month.
The plan called HOPE NOW Alliance will only assist a small number of people facing default or foreclosure. The problem is the meltdown is not just in the “subprime” lending arena. Go to and read the article entitled Some Straight Talk On the Mortgage Mess. Read it thoroughly and you will see why Bu$h’ plan is spitting into the wind. We must understand this is PR, strictly for show a total scam. The media focus is on “subprime borrowers” those folks supposedly with poor credit scores but as the article I asked you to read clearly points out, there are numerous other levels of borrowers who have higher/better credit scores who are also facing deep financial trouble not merely because they foolishly overextended themselves, but because the whole system is crooked from the top (Federal Reserve Bank, Wall Street, commercial lending institutions, the rating services, mortgage brokers) all the way to the bottom (straw or third party buyers, wannabee real estate moguls and speculators, folks trying to keep up with the Jones etc). The system is corrupt and crumbling and as the crisis worsens, more and more folks will feel the squeeze and succumb to the undertow. “Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.
The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower. Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out? The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!
The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI (C), Wells (WFC), WAMU (WM), Chase (JPM), National City (NCC) and Countrywide (CFC). We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.”
Do you grasp the implications of all this? There are folks who have refinanced their homes so much by cashing in on the “appreciation” of their homes which are now falling in value they now owe more than the house is worth! Most of these people are not getting caught up in the resetting of interest rates, they are losing their homes because they can’t afford them. “The wires are reporting that the White House is working on a plan that would freeze rates on adjustable rate mortgages for certain borrowers, in an attempt to help curb the rapid increase in home foreclosures expected in coming months. While it certainly will help the situation, consider a slide from Countrywide (CFC)'s Keynote Presentation at the 37th Annual Bank of America Investment Conference in September which showed the following: Causes of Foreclosure (July 2007) 58.3% Curtailment of income,13.2% Illness/Medical, 8.4% Divorce, 6.1% Investment property/Unable to sell,5.5% Low regard for property ownership, 3.6% Death, 1.4% Payment adjustment, 3.5% Other” Rate Freezes Won't Solve Foreclosure Problem .
The chickens are coming home to roost big time! People lost their minds thinking they could borrow and spend wantonly and their day of reckoning would never come. Alas for an increasing number of AmeriKKKans their day of reckoning is either here or fast approaching. “Having been miseducated to the point where they cannot think rationally, Americans began using their houses as cash machines, refinancing as they went. In 2005, private households raised $1.08 trillion through mortgages. Of this amount, they only spent $95.1 billion on higher-priced homes. Spending on goods and services rose in total by $539.9 billion, relative to an increase in disposable income of only $354.5 billion. In other words, about one-third of the increase in consumer spending was based on home mortgage borrowing. The real estate bubble began to burst in the third quarter of 2005, with mortgage borrowing peaking at $1.23 trillion per annum. Falling steadily, by the second quarter of 2006, borrowing on home equity was down to $819.6 billion. Some of this sharp decline was also caused by increases in consumer credit costs.” Economic Cannibalism
Each passing month more and more families face default and foreclosure. The last thing Bu$h and Co. want is a deeper economic collapse (depression) on their watch, hence the HOPE NOW PR scam. The fact of the matter is, this program will only help a small number of people on the verge of default or foreclosure. “This plan was purposefully and carefully constructed to help virtually no one but lenders. The very last thing the lenders want is to foreclose on homes that are hugely underwater. What Homeowners Benefit? This plan will benefit homeowners who meet ALL of the following requirements: The homeowner has at most 3% equity. The homeowner is not hugely underwater on current loan to value. The home is in an area where home prices are not apt to plunge over the next few years. The freeze will permanently prevent foreclosure. It takes all four conditions before homeowners will benefit. The plan has negative benefit for nearly everyone in the small select group of people that meet the carefully crafted eligibility requirements.” Hope is Now a Sucker Trap Mike Mish Shedlock
Bu$h and Co don’t have it in them to do anything really good for the un-super rich, middle class or working folks. As I said previously this is all PR, smoke and mirrors to keep the hell hounds off his tail until he can distract the masses with some other bogus issue. But sooner or later the real deal will become more widely known and Bu$h will be seen for the ogre he really is.



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