Mortgage Freeze

We’ve found ourselves in the uncomfortable position of being part of a large chorus of skeptics of the Bush administration’s plan to forestall foreclosures through a combination of fast-tracked refinancings (mostly aimed at people who would be better off defaulting and moving into a rental) and freezes. We prefer to take contrarian, controversialist stances but the risks of this plan seem overwhelmingly obvious.
If you’ve got a brighter picture of the plan to paint, please email us your ideas or leave them in comments. Even if it’s just a link to a likely best-case scenario we’d like to read it. In truth, we’re so uncomfortable with being in the majority that we start to re-think our position. But even on second and third thought we don’t like the plan.
This morning we learned of Peter Schiff’s argument that the plan will dampen demand for housing by depressing credit availability. It’s so totally obvious that once you see it spelled out for you, you almost imagine you had already thought of it. But you hadn’t.
“Without question, the Bush administration’s mortgage” rescue plan will exacerbate, not alleviate, the problems in the housing market. As the plan will sharply reduce the ability of new buyers to make purchases, it really amounts to a stay of execution and not a pardon,” Schiff writes. “Although there are mountains of uncertainty as to how the plan will be structured and implemented, there is no question that as lenders factor in the added risk of having their contracts re-written or of being held liable for defaulting borrowers, lending standards for new loans will become increasingly severe (higher down payments, mortgage rates, and required Fico scores, lower loan to income ratios, and perhaps the death of adjustable rate loans altogether). The result will be additional downward pressure on home prices, despite the fact that in the short term fewer homes will be sold in foreclosure than what might have been without the rescue plan.”

The Mother of all Bad Ideas
[Euro Pacific Capital]

We began our quick analysis of President Bush’s loan modification plan yesterday by calling it a bailout. Today we hearing from all over that the plan is not a bailout. In fact, Felix Salmon has issued a public plea for everyone to stop calling it a bailout. And, more recently, he’s began recording a “bailout hall of shame” for those who have called this a bailout. This morning, Edmund Andrews emphatically insisted on the point in the New York Times. “At least one thing is clear about President Bush’s plan to help people trapped by the mortgage meltdown: it is an industry-led plan, not a government bailout,” Andrews wrote. And this afternoon the madness that is Jim Cramer unloosed itself on Erin Burnett to the same effect.
The main argument against calling this a government bailout is two-fold. First, it is said that the terms of the plan were set by the mortgage industry and Wall Street firms rather than bureaucrats. Second, it is stressed that the effort is voluntary on the part of lenders, borrowers and loan servicers. As comforting as it might be to consider this an outcome of market processes rather than government fiat, we’re not persuaded.
[More after the jump]

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The Bush Freeze: What’s In It For Lenders?

“Why is it good for a lender to be forced to make concessions to borrowers?” Floyd Norris asked last night.
It’s a good question. On the face of it, the Bush administration’s plan to freeze mortgage rates would seem to place a burden on lenders by restricting them from exercising their contractual rights. What’s more, if a freeze doesn’t burden lenders–if it benefits them–why would we need a government organized plan to bring it about? Shouldn’t the self-interest of mortgage lenders have arrived at this through the action of the free market?
But few, if any, lenders or investors are complaining. Indeed, most seem enthusiastic about the plan. Stocks of lenders such as Countrywide rallied on the news. This implies that the Bush freeze is good for at least some lenders. We’ve got our own ideas about this that we’ll revisit later today (hint: it’s a collective action problem.) But for now we want your opinion. In comments, leave your answers to Norris’ question. And, after the jump, feel free to vote in our poll asking whether Floyd Norris and investors buying up shares in lenders are right: is the freeze good for lenders.
Would You Like a $1 House? [New York Times]

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