Friday, August 31, 2007

FHA To The Rescue?

The White House has officially leaked some elements of what President Bush will announce later today about providing relief to delinquent mortgage borrowers. According to the NYT the FHA will provide its guarantee for an additional 80.000 low-income borrowers, beyond the 160.000 normally expected to use its insurance this year. If I understand it correctly, the plan will allow low-income borrowers who are 90 days past due on their payments to use the FHA's guarantee to obtain better financing terms. They would normally be precluded from doing so, because of their delinquency. However, I note that there are limits to the mortgage amount the FHA will accept: right now the basic standard limit for one family homes is $200.160 and $362.790 for high cost areas.

Secondly, the President plans to "jawbone" lenders into not foreclosing. Given the securitized nature of many, if not most, mortgage loans this will be a challenge. It is one thing to pressure a single banker into granting relief, quite another to get tens of thousands of bondholders dispersed all over the world to agree. If the administration attempts to squeeze the trustees of the various CDO's, CMO's, etc. it will run into the wall of their fiduciary obligations to their bondholders, i.e. if they agree to provide relief without the bondholders' consent they will be legally liable for damages.

This is my first impression, we have to wait for the official announcement.


  1. Given the track record of the Bush administration in breaking and fixing , I am afraid that any intervention from the White House is bad news.

    Besides, I assume that fixing the markets (at this point still) be FED's task.

    What happens if the WH and the FED initiate contradictory actions?

  2. It looks like the WH is trying to appear like it is doing "something", so as to avert political pressure.

    The Fed's task is NOT to fix markets - that's a gross misconception based on misinterpreting Greenspan's tenure and unfortunately it causes more problems than it solves (moral hazard).

    If too many religiously believe the Fed can make things right and then the Fed fails to do so, the resulting panic will be immense.


  3. So now we are heading for a fiscal stimulus (somebody will have to pay for these social measures) and a monetary sitmulus. sounds bad for the dollar

  4. Hellasious : a point to consider :
    the size of the CP market has decreased by about 244 bn for the last 3 weeks. Assuming that 1/2 of the CP finance the ABS (ABCP), may be we can roughly conclude that banks now have to finance the structure which was benefiting from the CP market, ie 122 bn $. Thas is a big amount in a tense credit market. the other consquence is banks cannot increase their assets for other businesses and companies financed by CP are squeezed.

  5. miju,

    Almost the entire amount of CP reduction is in fact ABCP. Thus the cash hole is ~$244 billion. Some is being replaced by standby credit lines or other securities (eg preferred stock), some is being cancelled outright by sale of assets (MBS).


  6. ok Hellasious for the 244 bn. but I have now another explanation : brokerage houses (citi capital markets for ex) who had created SIV and who cannot take on their balance sheet the due credit lines (as CP market for them is almost closed)are now (thanks to the Fed exceptional decision of last week) in the position to bring the ABS, through their deposit banks (here Citi) to the Fed and borrow indirectly from the Fed. That explains why the ABCP market is shrinking. Ok we have to wait to see the statistics fo the Fed and see if borrowings are at about the same levels (244 bn). if it is confirmed, we have a de facto bail out of the brokerages houses with potentially a "nationalisation" by the fed (the Fed has the ABS in collateral...)

  7. and finally : if you can borrow from the Fed at the discount rate rather at 6 and more % from the CP market why resist ? the only problem is that even if your borrow at the discount rate it is stil above the pre crisis level of the CP rate (5 %)
    Sorry for monopolising the blog

  8. Things that are way too expensive:
    -Socialized healthcare
    -free secondary education
    -saving the planet from warming/pollution
    -alternative energy
    -public transportation
    -retirement benefits

    Things we can afford without thinking twice about it:
    -bailing out Wall Street speculators & banksters
    -bailing out liars and subslime borrowers
    -wars of aggression half a world away
    -tax cuts for the super rich

    Did I forget anything?
    Good to see that we got our priorities straight. Got to wait and see how this bailout thing works. If there's any way I can get just one penny out of it I'll quit making my payments as well. Hell, I might even buy a bigger house, with no money down of couse. My favorite uncle is gonna pick up the tab, so why not splurge a little? It's OK to live beyond your means. It's your birthright as an American. Uncle Sam will pick you up in case you have to face the consequences of your actions. Don't worry! Now go out, have some fun and spend some (borrowed) money.

  9. According to the NYT the FHA will provide its guarantee for an additional 80.000 low-income borrowers,...

    Actually, if they really are "low-income", then just maybe being unable to afford a house should be seen as a not unexpected consequence of that.

    I remember reading once that something like 35% of the officially "poor" people in the US actually owned their home.

    I guess it's not the nicest thing to say, but I really don't care if people lose their houses or not.

    I could not be that different than a lot of people in that I've been able to buy a house for some time now. Not comfortably, but able. However, I rejected using an ARM -- never liked the idea of my payments rising unpredictably in the future. And to get the payments down to where I was comfortable -- no more than 30% of my net each month -- I would have had to either 1) part with a lot more cash than I wanted to for the downpayment, or 2) settle for a less desirable (expensive) house.

    So I haven't bought.

    But a lot of people did, and now it is apparent that they should not have. And I'm supposed to feel sorry enough for them to support some government measures that will enable them to keep a house/asset that they should never have been able to acquire in the first place, since they obviously cannot afford it.

    It's ridiculous.


  10. yoski:

    As the Clintons found out within hours of assuming the Presidency, anything that "the markets" don't like is considered off limits. Remember Hillary's passion for a national health plan back in the 90's? Greenspan killed it in one meeting with Bill. Mummble, Mummble, markets, markets, fear, FEAR!!, off the agenda it went.

    It's all written down for posterity in "Locked In The Cabinet" by Bob Reich, then Labor Secretary.


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