Print

Please login or register.
1 Hour 1 Day 1 Week 1 Month Forever
Login with username, password and session length

[Dennis Wiggins]

Required reading for this topic; the "3 page" plan.

Text of Draft Proposal for Bailout Plan
Published: September 20, 2008 NYT

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY
TO PURCHASE MORTGAGE-RELATED ASSETS

Section 1. Short Title.
This Act may be cited as ____________________.

Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.

Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.--The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.--The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.--The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.--The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.

Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.

Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.--The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
(2) Secretary.--The term “Secretary” means the Secretary of the Treasury.
(3) United States.--The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.

[Phillip_Graham]

dave stojan wrote on Wed, 24 September 2008 14:22

I got a close up look at one of those mortgage bums (no, it ain't me - the missus & I raised 4 kids in a miniature hovel that was within our means and is scheduled to be paid off the same day the Aztec calendar says the world will end). He's a decent, hard working fella that got him a nice place out in the sticks and was making his payments regularly & on time. Suddenly the notice came he needed to pay over half again as much because the interest rate changed - hard times hit home. So what's the solution? Obviously he was able to make the payments when the interest rate was reasonable, but when a Wall Street Whim takes a greedy turn for NO reason (I didn't see the FED or prime rates take wild jumps)

Dave, I am not sure how much economics you took, but it is important to realize that tiny changes in the Fed rate have HUGE leveraged impact down the lending chain.  So a half a percent here and there turns into much much more.  Fed lending rates are a classic cornerstone macroeconomic "knob".

Also, if your friend bought a house that requires him to pay more than 25% of his income on a 15 year fixed note, then you are overbought, period.

Anybody who got an ARM either:
1. Didn't have the credit rating for a better loan
2. Was overbought
3. Doesn't understand compound interest
4. Didn't realize that rates were at all time lows!

The solution to this is to allow people who overbought to refinance into a more reasonable mortgage.  A lot of people who would like to do this, however, can't, because they are upside down due to the decrease in the value of their property.

If you can stabilize the lending markets, and return credit supply, you can allow more people to come into the market and purchase properties.  If you define more stringent lending criterion, that in turn defines the borrowing power of the public, and then housing prices will tend (probably down) towards that purchasing power point.  That will stop the bleeding, even if there is blood all over before this point.  This is what Paulson is trying to do.

If you don't free up the credit markets there can be no lending, and since basically no one in the middle class can purchase a house outright, the prices will continue to fall without any cushion.  Paulson kills two birds with one stone.  He defines a floor for the mortgage financial products, stabilizing their value on the world debt market, and also frees up money for lending, helping stabilize the housing market.

In the end, there is a historical "invisible iron fist" for housing prices that ties them to some multiplier value of real income.  People may debate what that multiplier value is, but is a solid economic principle that people can effectively only purchase so much capital by going into debt.  Those that are upside down are upside down.  The fact that they can't afford to take the pricing hit during the refinancing process indicate they bit off more than they could chew to begin with.

And candidly, I don't like bailouts at all, and I gain nothing personally by supporting the Fed, and I feel the regulations will need overhauled in parallel with all of this, but i would hope people can understand the elements of wisdom in what Paulson and Bernake are proposing, even if you don't like/want/agree with them.

I like JR, believe we are at a critical lesser-evil, house-cleaning stage.

[dave stojan]

Phil,

My main concerns are :

1) What's been presented as an "emergency - gotta do it right now today" action was premeditated by months of planning.

2) Vagueness and imperious powers contained within the proposal.

3) All being presented on a "trust me" basis by an administration with a proven record of untrustworthiness.

Other than that I can't think of much to not like  

[Phillip_Graham]

dave stojan wrote on Wed, 24 September 2008 15:42

Phil, My main concerns are : 1) What's been presented as an "emergency - gotta do it right now today" action was premeditated by months of planning.

The fed has been making unprecedented maneuvers for almost a year now, with varying degrees of success.  Last Wednesday the Fed and Japan quietly dumped $300 billion of easy credit into the markets to get them to unstick in lending, and it didn't change a thing.  That is the emergency part!  The planning for the worst case I am sure has been discussed for a while, but it was last Wednesday's market behavior, and lack of lending, that required the "hurry up offense".

Quote:

2) Vagueness and imperious powers contained within the proposal.

Vagueness is a directly consequence of not trying to spook the markets into the abyss before the plan of action can be put in place.  That is SOP when it comes market plans, and even the previous AIG and Fannie/Freddie stuff.

This is also why FDIC employees play incognito at failed banks while they are hammering out the deals to prevent a run on the bank before another firm can assume the assets.  You leave Friday banking at Bank X, and Monday morning its Bank Y.  That is how you avoid speculative runs.

Quote:

3) All being presented on a "trust me" basis by an administration with a proven record of untrustworthiness.

Totally merited concern, though Paulson and Bernake are much less beholden to the administration than most.  The Fed has a large degree of autonomy, and the Congress's understanding of the details seems depressingly limited.

[Christian Tepfer]

From a distance I don't understand much of this crisis.

What I understand is:

1. interest and risk

1.1 high interest = high risk (and the opposite)
1.2 high risk means the money invested can be gone when a credit turns foul

We have a bank over in germany that sent 350 mio Euros to Lehman bros. at a time they where already broke. Quite a scandal here, because the bank is state owned.

I consider this the first german contribution to the money needed

Back to risk:

I notice a tendence to capitalize gain and to socialize loss both in banking and in companies.

[John Roberts {JR}]

dave stojan wrote on Wed, 24 September 2008 13:56

Yeah, a hair under 6% is artificially low and the mortgage company was fully justified in bumping it up to 10% 'cuz that's the going rate.

To repeat they didn't "bump it up.." the increase was negotiated in the original contract at the time the loan was written, probably based on something % relative to LIBOR, but not impossible to ballpark even a few years ago, if you bother. The process of packaging the notes means people at every step got paid for touching that mortgage, and blowing it a kiss as it went by. I doubt the interest on the capital was covered in the first period.

It's really pretty simple, don't sign loans like that... the seller was no worse than all those speaker wire salesmen. I consider it immoral to sell loans like that to people not smart enough to not buy loans like that. But to repeat if there wasn't a market for reselling the repackaged mortgages, we wouldn't be quibbling about the bottom feeders, feeding on the bottom dwellers. The flaw was much further up the food chain.

Life is an .....  etc.

JR

[Charlie Zureki]

   Hello Everyone,

 It seems the Issue of the day has reached the Basement Forum.

 There have been many very good points that have been made already.

1.) Mortgage Lenders need to follow the Law. They need to be accountable for selling Mortgages that cannot possibly be afforded by the Lendee.

2.) Home Equity Loans must be more closely scrutinized by their Lenders. They should not be used as a banking transaction for any purpose other than for the property itself.

3.) Selling and reselling of Mortgages should be more closely governed and should not be resold by the first Mortgage Company until a high percentage of the Loan has been repaid.

4.) Fraud has been rampant everywhere in connection to these Mortgages, someone must go to Prison. Using the present day common Idea (in America) that if the Mortgage has defaulted, someone else will clean up the mess... Must Stop.

5. Make it harder to clean up Individual Credit Records after Bankruptcy on Loans.

 If any of Banks, Investment Firms, Credit Agencies and Government Agencies claimed they were unaware of this simmering problem, they're LYING.

 A few short years ago they saw the writing on the wall, when they decided the Bankruptcy Laws on the books, must be Enforced. This was the First indication that something was wrong with the credit system in this Country.

 I don't think they realized, exactly, how big the problem was until recently.

The No DOWN PAYMENT Mortgages must stop. The First time Buyer 3% Mortgages Must Stop. The Interest Only Mortgages Must stop. The Non Fixed Rate Mortgages Must Stop.

 Finally, the Government Must bail out these Lenders and Investment Firms. BUT, this mess should never be allowed to happen again.

I've got five Homes on my city Block that are in Foreclosure/have been Foreclosed.  The Banks don't want them... they continue to loose money on them in regards to Taxes and Upkeep.(in a State that has lost over 500,000 jobs in the last five years) These homes are worth 1/2 of their value from 5 years ago.(Lost Money on the Books of the Lenders)

Someone needs to go to Prison... but who?  This is another Enron, But Larger.

Cheers,
Hammer

[Mike Butler (media)]

dave stojan wrote on Wed, 24 September 2008 14:56

John Roberts  {JR} wrote on Wed, 24 September 2008 19:43 His interest rate for the introduction period was artificially low and probably didn't even cover interest on the debt. Yeah, a hair under 6% is artificially low and the mortgage company was fully justified in bumping it up to 10% 'cuz that's the going rate.

Um, Dave, PLEASE pay attention to JR, he is right. If you can't listen to him, listen to me. In the eight years I was in the biz I wrote approximately 1 ARM (and thousands of fixed-rate mortgages). Why? Because I was against ARMs and denounced them as false bargain. Why??? Because the first year rate is DISCOUNTED!!! The loan contract for the typical 1-year ARM contains the following elements:
1) The Index,
2) the Margin,
3) the Caps, and
4) the Introductory (teaser) Rate.

The Index (on most 1-yr. ARMS) is the rate on US Treasury Securities interpolated to a constant maturity of one year (1-year T-Bill). Some loans use other indices, like LIBOR or COFI.

The Margin is the amount added to the Index (kind of like the profit margin or markup in a store) to determine the rate at each adjustment.

The Caps are the maximum amount the rate can vary from adjustment to adjustment and during the life of the loan. Typically 2% annual, 6% lifetime last I looked.

So for illustration, let's say you close today on a nifty 4.25% 1-yr. ARM and you think "Wow, what a deal!" What you might not have noticed was that this is the "teaser" rate, and is discounted below actual market rates. Let's just say the Margin (enumerated in the loan documents) was 3.0% and the current Index (1-yr. T-Bills) is running about 3.3%.

What does this mean, other than the loan originator spent two hours reciting some gobbledygook while you were thinking about where to put the new plasma TV that you're gonna buy for this new house? It means that  if nothing changes in the interest rate market one year later, your interest rate WILL go up! Not might, WILL! Simple math: 3.0%+3.3%=6.3%.

Now, due to the caps, it can't go up to the "Fully Indexed" rate in the first adjustment, it can only go to 6.25% this first time. So it is not the "whim" of some "greedy" Wall Streeter, it is the contract, and it is how adjustable rate mortgages are structured. I don't even know what some of the loans written in recent times had for caps, and it looks like the borrowers signing on the dotted line didn't know or care either.

Sooooo, you ask, why did I write so few? It is precisely because I would emphatically LECTURE people AGAINST adjustable rates when fixed rates were readily available and much safer. I would explain the Margin, Index, Caps, etc. and not just have them sign some boring-looking disclosure statement that they would never read. Maybe I was one of the few, but there was also no shortage of real-estate columnists in the newspapers saying the same thing. I was absolutely OPPOSED to adjustable mortgages then, and that was even before some of these wacky Option ARMs and other crazy kamikaze types of loans were invented.

Take a moment to educate yourself on how things work, before you cry "greed." And speaking of greed, what about these buyers who bought mini-mansions that their grandmother could have told them they couldn't afford? They thought they could get something for nothing? Maybe they never heard that there ain't no such thing as a free lunch, and if it sounds too good to be true, it usually is.

[John Roberts {JR}]

Christian Tepfer wrote on Wed, 24 September 2008 15:17

From a distance I don't understand much of this crisis. What I understand is: 1. interest and risk 1.1 high interest = high risk (and the opposite) 1.2 high risk means the money invested can be gone when a credit turns foul We have a bank over in germany that sent 350 mio Euros to Lehman bros. at a time they where already broke. Quite a scandal here, because the bank is state owned. I consider this the first german contribution to the money needed Back to risk: I notice a tendence to capitalize gain and to socialize loss both in banking and in companies.

Thank you for your contribution.

You need to get your talking points right. That class warfare screed goes "privatize profit, and publicize loss".

Yes risk correlates with interest rates, but risky borrowers were given a grace period before those interest rates came into full effect and now they are surprised. This was just bad practices all around.

JR

[Christian Tepfer]

John Roberts  {JR} wrote on Wed, 24 September 2008 22:28

Christian Tepfer wrote on Wed, 24 September 2008 15:17 ...I notice a tendence to capitalize gain and to socialize loss both in banking and in companies. Thank you for your contribution. You need to get your talking points right. That class warfare screed goes "privatize profit, and publicize loss". Yes risk correlates with interest rates, but risky borrowers were given a grace period before those interest rates came into full effect and now they are surprised. This was just bad practices all around. JR

Thank you for getting this right for me. I have to improve my english.

People do have to read contracts. Really.