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Addenda on the Subprime Rescue Plan

Yesterday, we posted some thoughts about the subprime rescue plan under development among the Treasury, some leading servicers, other regulators, and some investors (most notably Freddie and Fannie). A few additional items:

We had commented that the plan would be limited to only borrowers who were current on payments. That appears to be incorrect, or at least up in the air. Other reports indicate that borrowers would be eligible if they have missed a payment or two. As readers pointed out, that may raise issues of moral hazard, particularly if borrowers believe that tangible proof of their distress would improve their odds of being included.

Also, we had reported that the Wall Street Journal story over the weekend on the plan was largely favorable. However, the online version (the one we read) had the header, “Rate Plan Has Skeptics, Fans.” The print version had the headline, “Some Investors Fault Plan to Aid Home Borrowers.” That puts a different coloration on things.

True to form, the Financial Times coverage was more pointed than that of the Journal:

Several mortgage experts also said catagorising borrowers would be difficult, given that their financial information might never have been collected before. Also, a large percentage of adjustable rate subprime loans have already been sold to investors who would have to accept lower payments as part of the plan.

There could also be political backlash if any final plan did not help the most strapped borrowers. Any plan that did not include such help could face opposition from prominent Democrats including Barney Frank, a representative from Massachusetts, and Charles Schumer, a senator from New York.

Mr Schumer said: “This is the first time that the Bush administration is working towards a solution that meets the magnitude of the problem. But there is a $64,000 question: will investors go along with this plan? And if not, can they be compelled to?”

And if the powers that be rescue subprime borrowers, doesn’t that mean they have to bail out option ARM debtors when those adjustments hit? This isn’t a strong group of borrowers either. Certainly they are deserving of assistance too, right?

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9 comments

  1. newsman

    We all know the expression “Too big to fail.”

    It normally applies to giant corporations said to play indispensable roles in our economic welfare.

    In this case, it appears to apply to the borrowers, and this could be unprecedented. The borrowers have strength in numbers: collectively, they have become too big to fail, and the guys in suits can’t figure out a way to save themselves without saving the borrowers too.

    By “rescuing” the borrowers, we enable them to continue to pay a significant portion of their wages into the system. If we let all those overstretched borrowers fail, those payments stop, and a lot of paper becomes just that, paper.

    All that remains is to find out if some critical mass of the ultimate holders of that paper are willing to play nicely and accept less than they were promised by banks and brokers and bond ratings agencies and fund managers and so forth. And that is no small or simple question.

  2. Anonymous

    Re: True to form, the Financial Times coverage was more pointed than that of the Journal:

    Several mortgage experts also said catagorising borrowers would be difficult, given that their financial information might never have been collected before. Also, a large percentage of adjustable rate subprime loans have already been sold to investors who would have to accept lower payments as part of the plan.

    What I find interesting of late, is that the best news is coming from offshore, from London or Asia; guess one needs to follow the money! Its sad that we have such low standards these days in regard to American free speech and thus jounalism which in this stage of crisis, should be doing more and digging deeper! The reporters simply fail to have The Watergate passion! Sad!!

  3. newsman

    I’m a reporter myself, on a minor sort of stage. But like most reporters, by the time I get to the fire, there isn’t much left but a soggy, smoldering ruin, with firemen spraying water on the last few hot spots.

    I suspect we’ll eventually get all kinds of excellent in-depth reporting from the major media on the subprime mortgage affair after it’s too late to do us much good, except as a cautionary tale that some may remember the next time.

    The Watergate analogy is apt, I think. We elected and re-elected Richard Nixon before the press figured out what he was capable of.

  4. Anonymous

    Isn’t this just another way to keep the housing bubble from bursting, more of a bandaid to buy more time. The values need to come down, bottom line.

  5. Yves Smith

    newsman,

    Good point about too big to fail. Hadn’t occurred to me to frame it that way. I may use it and give you credit.

    constantine.

    Fair comment, but wonder how much of that is due to Citi/Abu Dhabi as opposed to this plan?

    This is one where the devil will lie in the details, and until the target borrowers are more clearly defined, it is easy for observers to project their wishes upon it. I’ll admit freely to being skeptical and bearish, but research shows that the vast majority of people are optimistic, so they are likely to assume the best until they have cause to think otherwise.

    Oh, and research shows that pessimists are much better at assessing odds than optimists.

  6. Anonymous

    I think the bailout of banks on subprimes is headed into trouble:

    No Purchased
    Loan permits the release or substitution of collateral if such release or
    substitution (i) would create a “significant modification” of such Purchased
    Loan within the meaning of Treas. Reg. ss. 1.1001 3 or (ii) would cause such
    Purchased Loan not to be a “qualified mortgage” within the meaning of Section
    860G(a)(3) of the Code (without regard to clause (A)(i) or (A)(ii) thereof).

    Re: (vi) UCC Financing Statements for filing in each of the UCC Filing
    Jurisdictions described on Exhibit XIII hereto, each naming Seller as “Debtor”
    and Buyer as “Secured Party” and describing as “Collateral” all of the items set
    forth in the definition of Collateral and Purchased Items in this Agreement,
    together with any other documents necessary or requested by Buyer to perfect the
    security interests granted by Seller in favor of Buyer under this Agreement or
    any other Transaction Document;

    (vii) any documents relating to any Hedging Transactions;

    (viii) an opinion or opinions of outside counsel to Seller, substantially in
    the form of Exhibit XIV;

  7. Anonymous

    “Several mortgage experts also said catagorising borrowers would be difficult, given that their financial information might never have been collected before.”

    Contemplate that sentence for a second. It really does say a lot about how we got to this point, doesn’t it?

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