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

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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.

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.

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.

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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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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…<<<<<

#CarsonHUD

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Economic News

Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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Economic News

Gas prices are down, so are gas taxes about to go up?

Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.

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Gas taxes and your bottom line

Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.

Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.

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Supporters and opponents are polar opposites

Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.

Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.

While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.

The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.

Is a gas tax politically plausible?

Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”

Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”

Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.

Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.

“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”

Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.

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