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Isn’t the Proposed Borrower Bailout Program by Paulson Really a Lender Bailout as Well?

Paulson came out Monday in a news conference aired on CNBC and stated that the "freeze" plan is nearing completion, yet I can see this is not just a supposed bailout of borrowers as it also is a bailout of lenders, something the government has been saying they would never do.

How so, you say?  Simply this.  By "freezing" rates and keeping some homeowners, those who meet the undetermined criteria (more on that later), in their homes because they can continue making current payments, you are basically prolonging the inevitable, foreclosure. 

That also means the lenders do not need to foreclose on that property right now and can spread their "losses" over several years, thus bailing them out even more so than the homeowner the government is trying to help.

You see, lenders are facing foreclosures of epidemic proportions, so any slack they can get, they will certainly take.  By freezing the rates at the "affordability" level, the banks can stave off some of their losses, maintaining increased liquidity and staving the high costs attributable to foreclosing on the property.  This is something many lenders, like Countrywide, desperately need.

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So, if the program goes through, as flawed as it may be, it will appear as a homeowner bailout program, but reality is not always as it appears.  This reality will be a lender’s bailout program in disguise.

Written By

Writer for national real estate opinion column AgentGenius.com, focusing on the improvement of the real estate industry by educating peers about technology, real estate legislation, ethics, practices and brokerage with the end result being that consumers have a better experience.

5 Comments

5 Comments

  1. Jeff Brown

    December 5, 2007 at 8:47 pm

    Robert — You make some pretty solid points. I’ve agreed with you in writing already.

    How many of the the resetting loans are option ARMs?

    The spread between teaser rate and indexed rate IS NOT frozen.

    In five more years, the family who bought their $200K home in the spring of ’05, and has their teaser rate frozen, has this to look forward too.

    Their original $180K loan balance is already almost $200K. At the end of the five year freeze, it’ll be a hair under $255K.

    What then? Their home has already lost some of its value the last couple years, but let’s assume it didn’t. Is the average home in the country gonna increase in value 27.5% in the next five years? If it does, will the lender be OK with their loan having zero equity in front of it? Will they then reset the loan at the contract rate?

    What are your thoughts?

  2. Shailes Ghimire

    December 5, 2007 at 8:52 pm

    Sounds like a win win to me. Sure lenders benefit, but there is no actual public money being handed out. That’s a plus.

    Homeowners benefit in the sense that they now have time to work out a plan. A lot of things can happen in the ensuing years. New jobs, more savings, improved credit, increased home value etc. etc. Hopefully these homeowners will take positive actions and in a few years will be in a position to refinance or sell their homes.

    We can sit here and try to figure blame and all that stuff. But at the end of the day the problem needs to be solved. So, I think it’s a good thing. In my view this is the most logical step. More laws and regulations doesn’t help in the long run. Bailing out homeowners and/or lenders with public money is not going to help the problem.

  3. PeterT

    December 5, 2007 at 9:25 pm

    This does make sense as a backdoor lender bailout, but I’m not convinced the plan will work at all. I think this is just more PR, throwing something against the wall and hoping it will stick while they pray that the problem works itself out on its own.
    This gang isn’t known for competence and they have to deal with a lot of moving parts for this bailout to work.

  4. Jeanne Breault

    December 5, 2007 at 9:29 pm

    I have two trite, overused things to say about the “borrower” bailout:

    A rose by any other name…

    and

    Follow the money!

  5. Robert D. Ashby

    December 5, 2007 at 10:12 pm

    Jeff – More good points. My thoughts are that the lenders want something like this for the reasons I mentioned. It spreads the losses over years versus taking them right now. With SIVs and everything else turning to “junk” quickly, many more lenders and even some big name banks will be facing extinction, or at least bankruptcy.

    As for the homeowner, I see it simply delaying the inevitable. If they cannot afford the loan to reset now, why will the future be any different? Are they all going to win the lottery or something?

    Shailesh – I agree that it would be nice for the government to help those that truly deserve it, but that is not likely to happen. Betting on improved credit, new jobs, etc. is a long shot to say the least, though. Additionally, when has the gevernment ever stepped in without screwing things up more?

    Peter – PR is the key (elections approaching). It will fail to have the intended effect (just like the SIV bailout plan).

    Jeanne – Good points.

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