|“… the housing and credit disruptions have slowed our economic growth, and the housing downturn remains the greatest risk to our economy.”|
|2007-01-07 Treasury Secretary Henry Paulson defended the mortgage rescue plan for the U.S.|
|“By preventing avoidable foreclosures, we will safeguard neighborhoods and communities, and fulfill our primary responsibility of protecting the broader U.S. economy,” Paulson said.About 2.8 million mortgage loan defaults will occur in 2008 and 2009.|
Santa must have been wondering when Hank Paulson, US Treasury secretary announced the deal he had brokered among representatives of mortgage-security investors and mortgage-service companies to freeze interest-rate resets on some loans…. and on top he announced this was voluntary.
The HOPE NOW alliance is a coalition of mortgage industry companies which are seeking to reach at-risk borrowers to help them avoid foreclosures.
Unfortunately, from now on, every mortgage foreclosure will be seen as proof of the policy’s failure. Why well let us give you some facts you probably already know but might have forgotten:
- 1) Some 1.8m of the mortgages recently granted to subprime borrowers (ie. those with pooor credit) have adjustable rates and are due to reset in the next two years,
2) The Paulson plan bizarrely confines its promised assistance to borrowers with poor credit histories. More than 1/3 of mortgages currently in foreclosure were granted to prime borrowers. Of thise, more than half were adjustable-rate loans (about 1/6 of the total have therefore adjustable-rate loans and are prime borrowers - those with good credit ratings)If these prime-borrowers get into trouble once their teaser rates are being reset, the have to try to refinance. If they fail they are on their own because the Paulson plan does not help prime-borrowers.
The above means that those people who struggled to improve their credit scroes before taking out their mortgages are going to feel aggrieved. In fact, in some cases the reward for their efforts will be eviction because the Paulson plan helps those with subprime borrowers only.
The massively distorted and mismanaged US housing-finance market is going to get more so. Worst is that taxpayers had better prepare to be mugged.
Totting up all the costs of these programs one’s mind begins to reel. The tax deduction alone is nearly $80bn a year. And it is getting worse.
On top of the above, David Dodge (Bank of Canada) Jean-Pierre Roth (Swiss National Bank) Ben Bernandke (US Federal Reserve), Jean-Claude Trichet (European Central Bank) and Mervyn King (Bank of England) announced steps to make cash more readily available to banks.
The Fed is forming a new liquidity facility that will auction loans to banks, accepting a wide range of collateral, including housing related securities in return. Two actuions of $20bn each in one-month loans this month. The ECB and the Swiss national Bank have entered into so-called swap arrangements with the Fed to auction $24bn in dollar funds to banks in Europe. The Fed is open to provide more funds to banks in Europe if required.
Risk-Taking - it is getting worse for 2008
As with Paulson’s scheme outlined above, this one as well would make one believe those banks that were taking on big risks by lending long and borrowing short are being rewarded with additional liquidity from the Fed. The Fed has has then validated those strategies, after the event ….. that illustrated these strategies were the wrong ones to use.
Also the bigger the rescue today, the more likely some quarters will ask for more stringent regulation of financial institutions down the line. This will especially be true in the case where estimated default numbers and costs will turn out to be too low.
The current housing correction was inevitable and necessary following five years of an unsustainable boom which saw sales and home prices hit record levels in the U.S.
2007-01-08 Paulson in fact made it clear that additional financing would be needed to avoid disaster and a further economic downturn. By now the White House is mulling enlarging the mortgage freeze program to include prime rate borrowers.
AN NO, it is not over yet. A slide in home sales expected to complete in the next few months and a much higher than expected quarterly loss for one of the biggest US homebuilders - KB Home - reinforce the gloomy outlook for the US housing industry for 2008 as well as 2009.
These developments point to continued pain and continued significant impairment charges for financial markets due to the subprime crisis in the upcoming earnings season.