Bush league reforms

By Carl


When history looks at the Bush administration from the perspective of the American people, it's overwhelming conclusion will be "who did the policy really benefit, since it clearly didn't benefit the citizenry?"

Too, with today's announcement of "mortgage relief for homeowners," we should anticipate history. An historian's job is not easy, and bloggers should assist him (or her) in any way possible:

The plan hammered out by the U.S. Treasury Department in talks with mortgage industry leaders would bring relief to many of the 2 million homeowners who took out adjustable rate loans with low teaser rates due to move sharply higher in the next year or so.

Officials fear 500,000 Americans are at risk of losing their homes.

The initiative is designed to temporarily hold rates steady for subprime borrowers who could not afford to stay in their homes otherwise. A senior White House official said Bush would discuss the agreement at 1:40 p.m. (1840 GMT) on Thursday.

"No one wins when a house is foreclosed on -- the homeowner loses; the lenders lose; communities and neighborhoods lose; investors lose; and the economy suffers," the official said.

Ah, let's take a closer look at that, particularly in light of Hillary Clinton's analysis yesterday:

Clinton said mortgage lenders and brokers who lowered underwriting standards were also deserving of blame for the housing market mess, as were regulators who failed to provide adequate oversight.

She pinned some of the responsibility on ratings agencies for giving high marks to securities later deemed to be much riskier, and on speculators who bought multiple properties in the hope of profiting from a strong housing market.

She also pointed out that a mortgage was no longer a mortgage, but an "asset" underpinning a securities (a derivative), which could be bought and sold like a commodity.

This action spreads the risk of the loss (see the article I originally quoted) amongst the business community, in particular, away from the banks who lent the money in the first place!

So the lender doesn't lose, meaning there's got to be a better reason why banks and mortgage makers would agree to a rate freeze.

The White House is touting that the agreement will help over a million homeowners who face enormous rate increases in the next twelve months (roughly two million), and many of the 500,000 homeowners already in default on their mortgages:

The official said the plan could help more than a million qualified homeowners with subprime loans avoid foreclosure over the next couple of years. However, private-sector analysts said the numbers would likely be much lower.

"In theory, the plan could help as many as 750,000 subprime homeowners," said Mark Zandi, chief economist for Moody's Economy.com. "In practice, my sense is that it will probably help at best about 250,000 homeowners."

And so how does this plan work?

Under the plan laid out by the investor group, homeowners who have shown they are a reasonable credit risk, but who could not afford their homes with higher rates, would qualify for "fast-track" loan modification and the five-year interest rate freeze.

Borrowers who can afford their current loan terms would get help refinancing, but those who cannot and were poor credit risks would probably still lose their homes.

Ahhhhhhhhhhhhh, there's the "benefit" to banks! The bill does nothing to wipe out the really bad lending decisions that were made by the banks, meaning they can write them off, taking a one-time hit to earnings, once the freeze is in place. This frees up future earnings (and by extension, their stock prices) and bolsters their balance sheets long-term by wiping out the calculations needed to determine the bad debt expenses associated with the truly exploitative loans.

In effect, what this reform is saying is, if you could have afforded your mortgage five years ago under these new terms, then you can keep your house. If not, tough luck, sucker! We take your house AND all the equity you've built up in it, and will sell it off to make our mortgage back.

Yea. Bush "reform"...

(Cross-posted to Simply Left Behind.)