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http://www.nytimes.com/aponline/business/AP-Risky-Mortgages-Modifications.html?hp

Federal regulators have developed differing proposals for what to do about the problem. Sheila Bair, chairman of the Federal Deposit Insurance Corp., has been urging mortgage servicing companies to agree to widespread, permanent conversions of adjustable-rate loans to fixed-rate loans for homeowners who are current on mortgage payments but unable to afford loans at higher rates.

However, Bair's proposal met resistance from the industry. Critics say companies would face lawsuits if they permit modifications that are not in the best interest of investors.


Sounds like a good plan to me. Of course the industry, that loan-sharked in the first place, then passed bad loans off on investors, who thought they were getting a free lunch, would be opposed.

Treasury Secretary Henry Paulson and federal banking regulators are working out the details of a plan to extend lower, introductory interest rates on home loans before they reset at higher levels.

Now this, of course, is a great solution. Extent teaser rates and put off the day of reckoning.
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Federal regulators have developed differing proposals for what to do about the problem. Sheila Bair, chairman of the Federal Deposit Insurance Corp., has been urging mortgage servicing companies to agree to widespread, permanent conversions of adjustable-rate loans to fixed-rate loans for homeowners who are current on mortgage payments but unable to afford loans at higher rates.

However, Bair's proposal met resistance from the industry. Critics say companies would face lawsuits if they permit modifications that are not in the best interest of investors.


I guess I'm having trouble with the idea that "it's better to have a whole group of loans default than to modify the loans". Greedy men doing foolish (i.e. against their own best interests) things because they have a contract.

Hedge
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I guess I'm having trouble with the idea that "it's better to have a whole group of loans default than to modify the loans". Greedy men doing foolish (i.e. against their own best interests) things because they have a contract.

I wonder how distanced from real people's lives these finance folks are. As I see it, people who are likely to default now aren't going to be any better able to pay in a year or two. They bought houses they can't afford at sub-prime rates. So, you either figure out how to help these people pay a mortgage over a long time with lenders getting some share of the appreciation, or you have to sell the house for a big loss. Former looks better to me.
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Treasury Secretary Henry Paulson and federal banking regulators are working out the details of a plan to extend lower, introductory interest rates on home loans before they reset at higher levels.

Now this, of course, is a great solution. Extent teaser rates and put off the day of reckoning.


Yes, but depending who pays for this, there may or may not be a moral hazard. If the Treasury is subsidizing this, then the American taxpayer is , and that's wrong. If the note holders agree to allow the renegotiation in a way that the cost of the lower interest rate comes out of their pockets, then fine.
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Yes, but depending who pays for this, there may or may not be a moral hazard. If the Treasury is subsidizing this, then the American taxpayer is , and that's wrong.

So, we should flirt with a depression to avoid a moral hazard? Sorry, but I just can't get my hands around the thought processes that arrive at that result.

Hedge
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So, we should flirt with a depression to avoid a moral hazard? Sorry, but I just can't get my hands around the thought processes that arrive at that result.

Yes, because that kind of logic- rewarding unreasonable risktaking- is exactly what put us in this situation in the first place.
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Yes, because that kind of logic- rewarding unreasonable risktaking- is exactly what put us in this situation in the first place.

So, shoot 'em all and let God sort it out. Nice.

Hedge
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Sorry Hedge, but the last time I looked, I didn't cause this mess!!! Why it should be my responsibility is beyond me. I didn't buy the house I couldn't afford, and I didn't sign my name for a toxic mortgage. I also didn't agree that somewhere along the line I'd bail out those who did....or the slime bags in the "funny money" industry who were at one time profiting so handsomely.

So, yes, in other words, let them eat cake!!!!
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Amputate the limb to save the patient.
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So, yes, in other words, let them eat cake!!!!

If you can find a way to limit the cake eating to just "they", then I'm all for it. Unfortunately, the problem is not only global, but it has infected funds in 3 states that we know of. For example, Florida schools are having problems meeting teacher payrolls today. The problem isn't limited to just "they". It affects you, as well.

Hedge
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Amputate the limb to save the patient.

And if it's all four limbs, do we just rename him "Matt" and roll him out the door?
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[Bobcatkitty:]Sorry Hedge, but the last time I looked, I didn't cause this mess!!! Why it should be my responsibility is beyond me. I didn't buy the house I couldn't afford, and I didn't sign my name for a toxic mortgage. I also didn't agree that somewhere along the line I'd bail out those who did....or the slime bags in the "funny money" industry who were at one time profiting so handsomely.
____________________________________________
I didn't do any of those things either.

But it's still in my best interest - and yours - for this mess to be worked out without an epidemic of banks and brokerages going into receivership, and houses all over my town - and yours - with "For Sale" signs on them, due to foreclosures.


Bill
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If bond investors have any common sense left, they will build an additional "government meddling" risk premium into their future bond purchases.

This, your final comment at that link, probably comes to the crux of the problem. As part of its mandate, the Federal Reserve is required to keep inflation low and stable. This low and steady policy has taken a large risk premium out of the market. This results in day-to-day operations by, both the large and small, that would not even be considered in a market where the risk wasn't being held artificially low. Everyone in the nation has benefited from this low risk premium. It should come as no surprise that everyone will now have to help pay for the problems it has caused.

The Fed and the government must first fix this problem. Since the problem extends out to the normal life of a home mortgage loan, the fix must extend for that same lifespan - 8 years. It's not going to be over in a hurry. In a nutshell, it's easy for the fed to lower rates precipitously, but it absolutely Must Not raise them at the same pace. The market uses the short term funds rate to set long-term rates. The rise of Fed Funds rates needs to account for this, or the Fed/Congress needs to put some other system in place to control runaways like we have seen in the mortgage market.

In addition to whatever fix is put in place, the Fed needs to back off on its control of inflation and allow a more normal rate of risk to go back to the general market. This may require a legislative change of the mandate for the Federal Reserve.

Hedge
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But it's still in my best interest - and yours - for this mess to be worked out


+++++++

And those that don't learn from history are doomed to repeat it. How many of us have told our children there are consequences to your actions? Whether the topic is homes you can't pay for, credit card debt or auto loans, we all make our own beds. I've had to make mine a few times, and learn a lesson I did.

If and until all those who are mired in this mess realize their mistakes and learn a few of lifes hard lessons, this cycle will simply continue.
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If and until all those who are mired in this mess realize their mistakes and learn a few of lifes hard lessons, this cycle will simply continue.

Are you saying that you personally didn't benefit from low rates and the economic boom that followed from easy money? I find that hard to believe. Or are you just saying that you got the benefit, but you feel no responsibility for beating everyone else off the wheel who are now stuck with paying for your gains?
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HUH???? Until 2006 when we bought a new home in Arkansas, we didn't have a mortgage for 10 years. What benefit I've ever gotten was a VA loan in 1970 to buy a house for $21K. Today, my DH is a disabled Viet Nam Vet.....yea, that's some benefit.

Furthermore, what gains I have is because my DH and I worked d*mn hard, saved our money, invested it well, spent well below our means and now we've been retired for 14 years, and we're 62 y/o.

So, don't give me your song & dance version of a dog and pony show. The people who spent well above what they could afford for a home have no sympathy from me. Neither do the greedy people working in the banking arena who saw a get rich quick scheme.
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Furthermore, what gains I have is because my DH and I worked d*mn hard, saved our money, invested it well, spent well below our means and now we've been retired for 14 years, and we're 62 y/o.

Another "poor me" post. Your argument is less than persuasive, and I'm simply not moved.
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Nor am I moved by your liberal "take care of everyone" posts.

We shall simply agree to disagree.
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Nor am I moved by your liberal "take care of everyone" posts.

We shall simply agree to disagree.



amen
fiscal conservatism is simply gone in this country, replaced with the idea that the government can help take care of any problem.
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fiscal conservatism is simply gone in this country, replaced with the idea that the government can help take care of any problem.

When an agency of the people creates a problem, it is reasonable to expect the people to shoulder the burden and help solve the problem. If you can look in the mirror and absolutely convince yourself that you didn't benefit from lower costs and increased productivity engendered by low Fed Funds Rates, then I absolve you from all blame. I, for one, can't quite convince myself that I can look a Florida teacher in the eye and say that it's they're fault they're not getting paid. Nor will it help by pointing a finger at whatever state agency contributed to opening the fund or setting its investment process. The teacher still won't have a paycheck.

Hedge
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I, for one, can't quite convince myself that I can look a Florida teacher in the eye and say that it's they're fault they're not getting paid.

are there no trustees overseeing the fund that lost money?

there is a chain of accountability that stops somewhere short of "society at large" being responsible.
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OK, I can't let this go without one more parting shot. Having lived in Florida for years, and still owning a home there, I can say the teachers may finally be getting for pay exactly what they qualify for.

Kids who graduate high school who are funtionally illiterate, can't make change, or need to sell burgers on machines that have pictures on them, have not had teachers who are doing their jobs.

That topic however deserves a thread of its own somewhere else.
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<<fiscal conservatism is simply gone in this country, replaced with the idea that the government can help take care of any problem.>>

When an agency of the people creates a problem, it is reasonable to expect the people to shoulder the burden and help solve the problem. If you can look in the mirror and absolutely convince yourself that you didn't benefit from lower costs and increased productivity engendered by low Fed Funds Rates, then I absolve you from all blame. I, for one, can't quite convince myself that I can look a Florida teacher in the eye and say that it's they're fault they're not getting paid. Nor will it help by pointing a finger at whatever state agency contributed to opening the fund or setting its investment process. The teacher still won't have a paycheck.


The reason they are having problems getting paid is because the localities (read "school boards") attempted (and some succeeded) to withdraw *all* the money they had in the fund rather than just the amounts necessary for the week/month/pay-period. Only a small percentage of that fund is invested in impaired-debt instruments. In essence, the main problem is the "run on the bank" not the bad investment.

Where were your complaints 9 months ago when the teachers weren't being paid (or being paid incorrect amounts) due to a faulty computer system that was ineptly contracted and installed by those very same local and state governments? As far as the teachers are concerned, they had the exact same problem as they have today!
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In essence, the main problem is the "run on the bank" not the bad investment.

It's always a run on the bank that causes the problem when the bank (fund in this case) has deposits that are perceived to be worthless. They may very well be worthless, since I believe it contains some MBS'es. But it doesn't do the last guy any good to know the reason for his loss. His risks only differed from the other fundholders in that he was the one left without a chair.
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<<In essence, the main problem is the "run on the bank" not the bad investment.>>

It's always a run on the bank that causes the problem when the bank (fund in this case) has deposits that are perceived to be worthless. They may very well be worthless, since I believe it contains some MBS'es. But it doesn't do the last guy any good to know the reason for his loss. His risks only differed from the other fundholders in that he was the one left without a chair.


Right. That's why they "closed the bank"!! If I were in charge, I would open it up just a little (enough to pay essential bills like the teachers salaries) until the turmoil subsides.

Mark [lives in Florida]
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Yes, but depending who pays for this, there may or may not be a moral hazard. If the Treasury is subsidizing this, then the American taxpayer is , and that's wrong. If the note holders agree to allow the renegotiation in a way that the cost of the lower interest rate comes out of their pockets, then fine.

I think that's exactly what the FDIC plan is: serious renegotiation to make payments affordable for the long haul, with some cost to the lenders and lots of responsibility for the borrowers.

Paulson is just putting off dealing with issue, not exactly new from this administration.
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Right. That's why they "closed the bank"!!

Except the vault is over half empty at this point.

Mark, would you consider this sort of fund a joint venture or an opportunistic adventure? Recall that this fund was financed by a number of similar institutions. In the case of a run on the bank, the bank becomes little more than a ponzi scheme gone bad.
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I'm a fiscal conservative and I don't think it's that hard to solve this problem.
1st, you can not reward people for stupidity. If they took out a loan for a home that they could not afford at the prevailing marker rates, they should not be allowed to profit from those mistakes. Living in a home above their means would be profiting.

If it's a matter of people being able to stay in their homes by dropping the interest rate below where it should be, go ahead and do that, setting up a reverse mortgage scenario, where all the profit in a future sale or death of the owner, goes to the lender in an amount equal to their monetary sacrifice, prior to the occupant getting anything, and allow no further equity withdrawals.

If they cannot afford to make the payments, sell the home at a loss and let them re-locate to affordable housing and give them access to a college type loan for the loss, that is paid out of future equity build-up in the new residence.

There are other ways, but as usual with the government , logic is not their strong point.

piranha1
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I'm a fiscal conservative and I don't think it's that hard to solve this problem.

And I don't think you really understand the scope of the problem. If there were only 10,000 mortgages, then it would be solvable by normal economic means - punish the miscreants. But, when we're talking about hundreds of thousands or millions, then the problem starts affecting everyone, teachers, laborers, people who have no debt and have never had debt, people whose only investments are their savings accounts or 401ks, everyone.

Hedge
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Mark, would you consider this sort of fund a joint venture or an opportunistic adventure? Recall that this fund was financed by a number of similar institutions. In the case of a run on the bank, the bank becomes little more than a ponzi scheme gone bad.

I don't understand what you are getting at? The way I understand it is that it is a fund where various localities in the state put cash temporarily. The fund, presumably run by the state, invested 4% of its assets in bonds that cannot currently be valued and are being assumed to be worthless currently. A Ponzi scheme is something completely different in which old investors are paid using new investors money.
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I don't understand what you are getting at? The way I understand it is that it is a fund where various localities in the state put cash temporarily.

As such, the fund is a mutual benefit fund, except that there was no enforcement of the "mutual" part.

The fund, presumably run by the state, invested 4% of its assets in bonds that cannot currently be valued and are being assumed to be worthless currently. A Ponzi scheme is something completely different in which old investors are paid using new investors money.

Strictly speaking, yes. But, in a ponzi scheme, the last ones out the door lose in a big day, just like with this fund. I'm sure that everyone is within his contract rights. No moral obligation, of of course. If it's not clear, this is one part of our "rule of law" that I'm not proud of.

Hedge
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<<The fund, presumably run by the state, invested 4% of its assets in bonds that cannot currently be valued and are being assumed to be worthless currently. A Ponzi scheme is something completely different in which old investors are paid using new investors money.>>

Strictly speaking, yes. But, in a ponzi scheme, the last ones out the door lose in a big day, just like with this fund. I'm sure that everyone is within his contract rights. No moral obligation, of of course. If it's not clear, this is one part of our "rule of law" that I'm not proud of.


That isn't the problem in this case. The problem in this case is that the fund, as soon as it realized that some of its assets are worthless, should ave revalued the "per share" value - like every other mutual fund out there does every single day (and some even every hour). Then, if anyone wants to withdraw funds, they would withdraw 94 cents instead of a dollar.
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That isn't the problem in this case.

As a practical matter it is. I would think that this type of fund is now officially dead; at least in Florida.
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As a practical matter it is. I would think that this type of fund is now officially dead; at least in Florida.

Probably dead, but it won't make any difference. Instead, the localities will invest their own funds (very likely at higher average cost) and eventually some of them will "reach for yield", and when those higher yielding/more risky instruments fail, they will also lose 4% (or maybe more because of less diversification) of their investment.
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That isn't the problem in this case. The problem in this case is that the fund, as soon as it realized that some of its assets are worthless, should ave revalued the "per share" value - like every other mutual fund out there does every single day (and some even every hour). Then, if anyone wants to withdraw funds, they would withdraw 94 cents instead of a dollar.

Agreed. I hardly consider this issue one of fraud (and I am a FLA resident).

This appears to be the same issue that is hitting all the other funds (be the mutual funds, MM accounts, etc.). Namely, everyone invested in the mortgage backed securities thinking they were safe. In reality they had no idea what the risk of default was nor the contents of the investments.

I primarily blame the rating agencies for investing these MBS's with AAA ratings. I will also put a little blame on the buyers for not knowing what they were buying.

Everyone needs to remember that AAA does not mean 100% safe.

I hope in the future that anyone setting up or seeking a 100% safe fund to store short term cash will limit themselves or the fund to something that provides the security they need.

Splotto
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I primarily blame the rating agencies for investing these MBS's with AAA ratings. I will also put a little blame on the buyers for not knowing what they were buying.

And some poor towns in darkest Norway.

http://www.nytimes.com/2007/12/02/world/europe/02norway.html?hp

I blame the finance industry, the finance media, and the politicians who take bribes from the finance industry.

It goes back to the same issue, about which I feel very personally because I, a relatively smart and sophisticated guy, got conned.

Buyer beware is indeed the correct slogan for anything involving finance, annuities, and so on. It doesn't mean everyone involved is a crook, but the industry is clearly set up in a way that consumers have to work from the assumption someone is out to cheat them, just like most of us assume buying a used (excuse me, Pre-owned) car or a rolex from a guy on the street corner.

But the industry sells itself as a profession, like medicine or law or plumbing, with standards. It isn't that there aren't bad doctors or lawyers or plumbers, and there certainly are reasons for doubting the self-policing of these professions, but most of us do not start from the assumption that we are likely to be cheated, and we feel pretty comfortable relying on local reputation, passing the bar, board certification, etc.

At this point, the finance industry, media hypesters, and so-called regulatory bodies and politicians, would rather the industry continue to make money from con games than to worry about the what happens if consumers really do take a buyer beware attitude. So far, most people (not just in this country) have no sufficiently taken buyer beware to heart. We have. And I sometimes feel sorry for the finance people who participate here, like Dr. Tarr, who are, I believe, professional in every sense of the word, because they do operate in a world of pre-owned car salesmen.
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"I sometimes feel sorry for the finance people who participate here, like Dr. Tarr, who are, I believe, professional in every sense of the word, because they do operate in a world of pre-owned car salesmen.


In the country of the blind, the one-eyed man becomes king.

In the country of the greedy, the honest man becomes poor.
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In the country of the blind, the one-eyed man becomes king.

In the country of the greedy, the honest man becomes poor.


The first may be a universal truth, but the second is not. Warren Buffett appears to be pretty honest.
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