Credit Crisis Expert Says Proposed Plan to Bail Out Delinquent Homeowners May Face Too Many Problems to Succeed
By William Patalon III
Executive Editor
Money Morning/The Money Map Report
A tentative Bush Administration plan aimed at keeping as many as three million homeowners who are behind on their mortgages from losing their houses will be difficult to administer, and could end up costing the country hundreds of billions of dollars more than the plan’s architects expect, a Money Morning contributing editor and credit-crunch expert said yesterday.
R. Shah Gilani, a retired hedge-fund manager and
Money Morning contributing editor who is emerging as an expert on the worldwide financial meltdown, noted that the plan was apparently still that – a plan. Even so, he said that “any bailout plan that directly addresses foreclosures is political posturing that will ultimately be overwhelmed by inevitable economic realities.”
The New York Times carried the first reports of the Bush Administration’s new housing rescue new proposal yesterday (Thursday). According to the newspaper report, this program would be the most sweeping and direct government initiative aimed at home-loan borrowers since the financial crisis started last year.
As proposed, the federal government would incur half the loss on a home loan if the mortgage company that controls the loan agrees to lower the borrower’s monthly payment for at least five years. On any given loan, the mortgage company would reduce the payment borne by the homeowner by writing off part of the loan balance, reducing the loan’s interest rate or changing other loan terms, sources told
The Times.
The newspaper said it could not name the three senior officials who provided details of the plan because it was still being worked out.
In this case, the devil truly will be in the details: Trying to take a massive rescue plan – and matching the benefits up with individual homeowners – may be just too much to ask, Money Morning’s Gilani says.
“Who will be eligible, how will that be determined, what will happen when prices continue to fall and mortgage holders eventually walk away” are just some of the tough questions a workable plan would have to answer, Gilani said. Plus, “is the government going to shackle them to their mortgages the same way they’re shackling taxpayers to all these other ill-begotten bailout schemes?”
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The plan – which would be part of the $700 billion banking-system rescue plan the government approved early this month – would cost $40 billion to $50 billion, with the money being used to cover future losses on loans that are deemed eligible for federal support.
That price tag is likely to be very much on the low side, Gilani says.
“The $40-$50 billion price tag could only have been plucked from thin air,” he said. “The real gravity of the problem will weigh in closer to $500 billion – at least.”
Officials with both the U.S. Treasury Department and the Federal Deposit Insurance Corp. (FDIC) are collaborating on the proposal, and insiders believe that an announcement may be made sometime soon. FDIC Chairwoman Sheila C. Bair – a leading proponent of such a plan – publicly discussed the possibility a week ago.
Bush Administration officials clearly want to stabilize the U.S. housing market. But that’s easier said than done. Even at a time when roughly one in every 10 mortgages was either delinquent or in foreclosure – as was the case this summer – companies have been highly reluctant to aggressively reduce payments for two key reasons:
- They’re afraid the borrowers might default again.
- And they fear that the buyers of mortgage-backed securities might sue.
By offering to incur half the losses, federal officials hope that the U.S. housing market – and the accompanying market for mortgage loans – might finally settle out, which could also ease the financial crisis even as it provides a bit of a boost to the U.S. economy [For a related story on the U.S. economy – including a look at third-quarter gross domestic product (GDP) – check out this report elsewhere in the current issue of Money Morning.]
There’s one key challenge, however: If the economic slump ultimately ends up being deeper and longer-lasting than anyone right now predicts, the housing program could end up being much more expensive than planned – dumping still more unexpected debt onto the U.S. balance sheet. And the plan – or, at least, the details that have leaked out so far – doesn’t seem to address the one key problem with the U.S. housing market: Housing prices keep going down.
“Tragically, there’s no guarantee the plan won’t collapse on homeowners and taxpayers as it does nothing to stem the continuing slide in home prices, which is the real problem,”
Gilani says.
Treasury Department spokeswoman Jennifer Zuccarelli told
The Times that it would be premature to discuss a plan that policymakers were still working on.
“As we said last week, the administration is going through the White House policy process to look at ways to reduce foreclosures, and that process is ongoing,” she told the newspaper. “We have not decided on a particular approach.”
News and Related Story Links:
- The New York Times:
Government Said to Be Discussing Plan to Aid Homeowners. - Money Morning News Analysis:
Banking Bailout Becomes Law With House Vote, Bush Signing. - Money Morning Credit Crisis Investigative Series:
Heads They Win, Tails You Lose: Why the Bailout Plan Will Fail U.S. Taxpayers.
- Money Morning Special Investigation of the Credit Crisis (Part I):
The Real Reason for the Global Financial Crisis…the Story No One’s Talking About. - Money Morning Special Investigation of the Credit Crisis (Part II):
The Credit Crisis and the Real Story Behind the Collapse of AIG. - Money Morning Special Investigation of the U.S. Credit Crisis (Part III):
How Complex Securities, Wall Street Protectionism and Myopic Regulation Caused a Near-Meltdown of the U.S. Banking System. - Money Morning Special Report: How to Fix the Credit Crisis (Part IV):
Dear Hank: Here’s How to End the Credit Crisis at No Cost to Taxpayers. - Money Morning Special Investigation of the U.S. Credit Crisis (Part V):
Heads They Win, Tails You Lose: Why the Bailout Plan Will Fail U.S. Taxpayers. - Money Morning Special Investigation of the U.S. Credit Crisis (Part VI):
Credit Crisis Update: An Inside Look at the Commercial Paper Debacle. - Money Morning Special Investigation of the U.S. Credit Crisis (Part VII):
Inside the Credit Crisis: How the Fed’s Efforts to Lower the Fed Funds Rate May Leave it Powerless to Stop the Financial Meltdown. - Money Morning Special Investigation of the U.S. Credit Crisis (Part VIII):
How U.S. Missteps Triggered a Spiral of Worldwide Margin Calls and Deepened the Financial Crisis. - Money Morning Special Investigation of the U.S. Credit Crisis (Part IV):
Fears of Mortgage Rate Re-Sets May Fuel LIBOR Manipulation and Mask Deeper Banking System Problems.
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Comment by c.castanza on 31 October 2008:
Over a year ago ,in a discussion with a financial planner I indicated that the gov. should freeze the sub-prime housing market and roll back the interest rate to the period of time that the houses were bought and change the variable rate to a fixed in so doing you take the house off the market and from the bank, put the monthly payments to the banks who in exchange can now loan money to business but at an interest rate that the market can bear: in so doing the building market can get started up again and all the corresponding industries will then come into play once again, but it’s a year later and we’re trying to do what should have done a year ago, my feeling is to freeze the whole industry and put the plan into effect clean up the mess so that the people can get a sense of stability along with the nation as a whole. The banks have to put their weight and help even at a cost to them and the rest of the financial market will have to survive the best they can… they really are the cause of this blow-up the sub-prime market is the results. As far as the people who wanted a home and could not afford it… well let me put it this way…I IF YOU SAW A $100 BILL ON THE GROUND AND NO BODY WAS AROUND TO CLAM IT WOULD YOU LEAVE IT THERE AND WALK AWAY OR PICK IT UP AND PUT IT IN YOUR POCKET. ….WHO WAS LESS ETHICAL THAN THE BUYER…YOUR KNOW WHO … FROM THE SELLER RIGHT UP TO AND THROUGH THE WHOLE CROOKED GREEDY FINANCIAL INDUSTRY.
Comment by chris erickson on 1 November 2008:
am verIy p/o ed the banks instead of helping main street john q public are fatting up at our expense & raiseing rates instead of lowering them .. they dont adjust the loans that are going into foreclosure instead they would rather take a loss on them get free money from the tax payer then get a tax write off for their losses from the goverment… what needs to be done is fix housing & they way to do this is to lower the national instrest rate to 4.5% fixed for 30 years on al existing loans .. consoladate 1st 2nd 3rds to keep people in the houses.. not use the money from the bail out to buy more banks or businesses.. I have said this before .. what should happen now is give the banks a choise..If they want the bail out money then help..I have said this many times ; in these forms/resopnces , so I have to agree with c.castanza
Comment by chris erickson on 1 November 2008:
well it looks like 2 banks mayfinialy get it ; I just hope that they do it right , not just the bad loans but alos the good loans should get help also , we will see if jp morgan & b of a
get it right..in helping out the home owners ????? or are they just trying to help them selves
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[...] Credit Crisis Expert Says Proposed Plan to Bail Out Delinquent Homeowners May Face Too Many Problems to Succeed - By William Patalon III – A tentative Bush Administration plan aimed at keeping as many as three million homeowners who are behind on their mortgages from losing their houses will be difficult to administer, and could end up costing the country hundreds of billions of dollars more than the plan’s architects expect, a Money Morning contributing editor and credit-crunch expert said yesterday. … Even so, he said that “any bailout plan that directly addresses foreclosures is political posturing that will ultimately be overwhelmed by inevitable economic realities.” - Money Morning/The Money Map Report [...]
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