Subprime Mortgage Solution December 5, 2007Posted by pf in Expenses and Savings.
Tags: banks, bush, foreclosure, mortgage, mortgages, rate, subprime
By now, most of you have probably read about the tentative arrangement brokered between the Bush Administration and businesses within the banking / mortgage industry to provide some relief to the mounting problems related to existing subprime loans. A summary of the pending agreement is here from CNN Money.
Although I’m a bit unclear about some of the details (ex: participation is optional?), my general sense is this is a reasonable approach to a very difficult problem. Strangely, there is still a part of me that feels like the “suits” got off too easy. I have some notion that they should be punished for both their stupidity and what I perceive as taking advantage of unaware / lazy consumers of these products.
Don’t get me wrong, there will still be some financial losses, but I suspect nowhere near the magnitude or potentially catastrophic proportions that were initially envisioned as rates reset, mortgage payments increased by as much as 30% and an avalanche of foreclosures followed. Despite some of my internal struggles, I do try and be practical about these things:
1) Am I financially impacted by these actions? Yes, to a degree, but I think it is mostly a positive development. I no doubt own some stock in these companies and to the extent I believe the cure is not worse than the disease (I do), then those stocks should perform better than they would under the alternative. Even if you are a direct owner is bonds that are backed by this kind of debt, I think the rationale remains the same (better to be getting lower interest payments versus none at all). Further, I expect this development will be viewed as a positive for the economy and should result in “lifting all boats”. Finally, there is no taxpayer implication here…we are not providing any monies whatsoever to bail anyone out.
2) Are the owners of these loans helped by this solution? Undoubtedly. To the extent many of these borrowers would be unable to pay their mortgage at the higher rates, if they are able to pay for it now, then they will likely keep their home. Generally, I can only see that as an overall plus for our country.
3) Is speculation rewarded? As I understand it, this is a solid no. The agreement only pertains to owner-occupied homes. I like this from the vantage point that it maintains the element of business risk that should always be present when you are investing in ventures like this…so you think carefully before doing so and realize you CAN lose money.
4) Are the businesses who did not have good underwriting practices punished? As I mentioned earlier, I think probably not as much as they could have been…but certainly they will not go unscathed as they will receive lower interest payments for the next 5 years or so. In addition, there is no certainty about what the market will be like 5 years from now. The solution DELAYS the problem, but does not necessarily solve it (the terms will have to be reset at some point). The HOPE is that rising incomes, increased home prices, and / or a better market environment will make things more manageable in the future. Maybe it will…maybe it won’t.
So, in the end, I think the market behaved as it was supposed to (stocks down) and businesses reacted as they should (develop a solution that minimizes their losses). Assuming this all comes together, I think the result is increased stability in the economy and yet another lesson as to the pitfalls of any market getting too “frothy” and the cost is not commensurate with the risks.
I’d love to hear other people’s take on this. Agree? Disagree?