Why is the US prolonging subprime misery?
Hope Now has ostensibly been set up to support US subprime borrowers facing a huge jump in mortgage repayments. It looks more like a misguided policy destined to prolong the US-housing led slump forever, says Adrian Ash.
HOPE NOW is a British-based charity, founded in 1985 to spread the good news of Jesus Christ, working primarily in the former Soviet state of Ukraine.
Its recent good deeds include buying new boots for inmates at Stari Babbani Prison to wear when they're breaking granite.
At least those prisoners might hope for parole. But from Oct. '07, Hope Now is also the name of 'an alliance between counsellors, servicers, investors, and other mortgage market participants' founded to prolong the United States' current housing-led slump forever and ever, Amen.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Hope Now exists 'to spread the word that hope is but a phone call away,' according to US Treasury secretary Henry Paulson. And to date, the good deeds of Hank's evangelical mission amount to the dopiest government project since British taxpayers spent $800 million on 'cost controls' for the 2012 Olympics in London initially forecast to cost $4.1 billion; now set to cost $18.7bn at the very least.
The Hope Now Alliance is urging US mortgage lenders to contact borrowers 120 days before their adjustable-rate loans reset. 'Reach them early, before their mortgage problem becomes overwhelming,' says Hank Paulson, pretending that a couple of letters and a toll-free phone call are all it will take to forgive the sins of lazy and greedy lenders as well as greedy and stupid home-buyers between 2002 and 2007.
Taxpayers foot the bill for poor lending
Next comes Paulson's 'teaser freeze', extending the initial interest rate for another two, three or maybe even seven years if Hillary Clinton gets her way...prolonging the Bush administration's idiotic, tax-funded meddling well into her second term (God help you, America!).
And to help cover the interest due on all the mortgage-backed bonds sold against these ARMs interest that will evaporate if the home-buyers' rates don't reset Hope Now wants Congress to give tax-exempt status to municipal bonds underwriting subprime refinancings, rather than just first-time buyers and purchases in distressed areas.
A neat and tidy Washington scheme, in short the perfect partner for savage rate-cuts from the Federal Reserve and just what 'Bail 'em out' Bush promised from the Rose Garden in August:
- The Federal Housing Administration will guarantee loans for delinquent US borrowers up to half-a-million on Paulson's math through its new FHA Secure program;
- 'Homeowners who finally find relief [by either foreclosing or reducing their mortgage] shouldn't get put back in financial straits because of the tax code,' says Paulson, repeating another of Bush's key pledges of August. Congressional approval is still pending;
- The Treasury and Housing & Urban Development department (HUD) will identify home-buyers at risk of defaulting between now and 2009 (or even 2014 it seems), creating 'more favorable' loans by working with private lenders and insurers to reduce rates in the market.
Bibbidy-bobbidy-boo! You shall stay in your home, Cinderella. Never mind that the Dollars in your pay-check will turn to dust at midnight.
Creditworthy taxpayers lose out
Forget too that 'a bailout is nothing less than a wealth transfer to those who made ill-advised credit decisions from creditworthy, fiscally responsible taxpayers,' as Steve Berger an investment manager in Boston noted for Mises.org way back in the spring, 'postponing hard choices into the future and props up faulty credit.'
And also forget that 'foreclosure holidays are equally flawed,' as Berger went on, since 'such laws in one fell swoop eviscerate contractual agreements and contravene the impairment of contracts clause of our Constitution.'
This is about hope. Hope now.
But the trouble with hope as with all faith in the future, including 'credit' itself (from the Latin: belief, trust) is that it keeps needing a fresh lick of paint on the lintels if it's going to keep finding new buyers.
Tomorrow can only improve on today if yesterday's problems get fixed-up first. And yesterday's troubles in this case, the mountain of idiot loans made to home buyers who just couldn't afford to buy sit a long way from Hope Now's tax-funded solutions.
'It's a big misconception to think that [mortgage] resets are responsible for the delinquencies,' according to Andy Laperriere, managing director of ISI Group in Washington. 'What's driving the delinquencies is that people can't afford the initial payments,' he told Caroline Baum at Bloomberg on Tuesday.
That's why one-in-four subprime loans made in 2006 but not due to reset until '08 is already delinquent. The best Eric Rosengren, president of the Boston Fed, could say about his data this week is that 55% of borrowers with subprime ARMs around 1.2 million home-owners have yet to miss a payment this year.
Locking higher-risk buyers into new, longer-term teasers will also bring wider social costs, too. 'The effect of propping up sub-prime borrowers, so they can stay living in homes they couldn't afford when they bought them,' as David Nason notes for The Australian newspaper, 'is to keep property prices artificially high.'
But that's assuming success and 'what little data there is,' says the Lex column in the Financial Times, 'suggests 35% or more of such modified loans default within two years anyway.'
So why bother? Well, 'this is the most serious housing downturn since the Great Depression,' as Mark Zandi of Economy.com told the Office of Thrift Supervision's National Housing Forum on Monday. And residential investment accounted for 5% of gross domestic product between 1996 and last year, adds the Mortgage Bankers Association. Which is why the Hope Now Alliance is also busy explaining to the lenders themselves that foreclosing on non-paying debtors can prove costly, and thus self-defeating.
But rather than leaving the lenders' self interest to address the two million resets looming between now and 2009 (or beyond...!) Hank Paulson thinks they need a little charitable help, too.
'While increased industry funding is very important, we also need to do our part to support non-profit mortgage counseling organizations,' Paulson told the same conference that Zandi addressed on Monday. 'For this public outreach campaign to be successful there must be enough trained mortgage counselors to answer the phone when homeowners call.
'[So] the Administration requested funding for NeighborWorks America and other non-profit mortgage counseling operations in its budget. But the appropriations bill has yet to be finalized; Congress needs to get it done quickly.'
Keep the homebuyers buying
Why the rush? Because hiring extra staff to review, advise and decide on changes to outstanding mortgages won't come cheap. Not now the profits made by lending money to home-buyers with no hope of repayment have dried up entirely. Not now that 196 major lenders have gone kaput on ML-Implode's count since Merit Financial blew up in May 2006. Not until asset-price deflation in US housing slips into wage-price deflation for home-loan call center staff.
A clutch of tax-funded call centers in the meantime might just help support the lenders. And without solvent lenders, joined at the hip to the solvency of their debtors...who are also to be supported by tax-payers' dollars, freshly printed municipal bonds and more savage cuts to Federal Reserve interest rates...how can US home-buyers keep buying?
Perhaps that's why the Federal Home Loan banks stepped up their loans to Countrywide, the nation's biggest mortgage lender, to the point where by Sept. 30th it had borrowed one-third of all outstanding advances from the FHL's Atlanta division according to SEC filings.
At $51.1 billion, the Atlanta FHL's loan to Countrywide is almost as great as Northern Rock's debt to the Bank of England here in London. But Northern Rock is a global laughing-stock, the first British bank to suffer a run in 130 years. It also stands on the verge of nationalization by a desperate and panicking government and that could never happen in the free-market United States, right?
Still, let's not harp on about the costs, absurdities or risks of governments meddling in real-estate bubbles when they burst. This is about hope. Hope now.
Let's worry about tomorrow some other time.
Adrian Ash is editor of Gold News and head of research at www.BullionVault.com
Join more than 165,000 subscribers and keep yourself informed with the latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Adrian has written all things gold related from if it’s worth buying, what the real price of gold should be and what’s the point of gold for MoneyWeek. He has also written for other leading money titles on his gold expertise including Business Insider, Forbes, City A.M, Yahoo Finance and What Investment Magazine. Now Adrian is head of the research desk at BullionVault, a physical market for gold and silver for private investors online.