the sheridan report
The Belated Bailout
By Matthew C. Sheridan
Just a few weeks prior to Christmas and only a month before the first presidential primaries and caucuses of the 2008 election, President George Bush rolled out his plan to stem the flow of foreclosures occurring across the country. Riding to the rescue of homeowners, the administration’s plan, spearheaded by Treasury Secretary Henry M. Paulson, Jr., called for a five-year rate freeze for subprime adjustable rate mortgages that originated between January 1, 2005, and July 31, 2007, which are due for a substantial rate increase in the next two and half years.
While the credit crisis burst onto the scene back in August of last year, it was just last month that Paulson cobbled together support from leading banks, Wall Street firms and mortgage companies in an attempt to assist imperiled homeowners facing foreclosures, bring some stability to the world’s credit markets and maybe even stave off a recession.
With housing prices dropping across the county and almost 1.8 million foreclosure notices filed last year alone, the plan intends to assist up to 1.2 million subprime ARM borrowers who will be eligible for affordable refinanced or modified mortgages. However, the plan excludes borrowers who have already refinanced, are in foreclosure or just behind in payments. This means millions of homeowners will be excluded and will likely face foreclosure. The rescue plan also could exclude homeowners with relatively good credit scores or who could afford higher reset rates.
Asserting that the plan is a private-sector effort, using no government money, Secretary Paulson said in a statement that, “We all know that it is in everyone's interest—homeowner, servicer, investor—to develop a market-based approach to avoid foreclosures that are preventable.” It is Paulson’s hope that the guidelines will be adopted as a “reasonable and customary standard practice across the entire servicing industry.”
Reaction to the plan was swift—some called it inadequate, including presidential candidate Hillary Clinton, who called for a 90-day moratorium and a five-year freeze on adjustable rates, while others labeled it as governmental intrusion into the private sector and a bailout of irresponsible homeowners.
The Wall Street Journal slammed the plan in its editorial pages, warning that it will drive up risk premiums demanded by investors and in turn push the cost of all mortgages up. “The U.S. economic and legal systems are built on the sanctity of contract, and even the hint that government is compelling investors who now own these mortgages (the banks having sold them as bundled securities) to take less money puts the U.S. on a very dangerous road,” wrote the editors of the Journal.
Doug Bibby, president of the National Multihousing Council, called the current crisis completely foreseeable and preventable. “The mortgage market meltdown represents a failure of government oversight and regulation, and despite repeated warnings, nothing was done to prevent it,” Bibby claimed. Asserting that the government pursued homeownership at any cost, the NMHC head believes the American people “were enticed into houses they could not 
afford, and they forgot the rarely spoken truth that there is such a thing as too much homeownership.” He added, “We have been warning policy makers that pushing homeownership so aggressively could be disastrous, not only for the hardworking Americans lured into unsustainable homeownership, but also our local communities and our national economy.”
Meanwhile, despite the Federal Reserve Bank’s ongoing moves to lower interest rates in its efforts to stabilize financial markets and jab some life into the housing markets, just days after the administration announced their rescue efforts last month, the mammoth Swiss-banking giant UBS announced huge losses from its subprime divisions. UBS revealed massive write-offs, and announced—in an attempt to pump funds into its struggling business—an infusion of cash from Middle Eastern and Asian investors.
According Mark Levine, vice president with PNC ARCS, these foreign investments are a bad sign and show desperation on the bank’s part. “It really shows how bad things really are out there,” commented Levine, who believes the losses from the subprime mess are not insignificant. He also says the president’s plan to bail out homeowners sets a bad precedent. “It’s bad for the industry,” said Levine, whose firm specializes in multifamily loans. “The mortgage crisis is a lot worse than any one else is saying; it’s just huge, and will be bigger next year.”
Many economists warn that the Paulson plan will just postpone the inevitable: the loss of one’s home. “A lot of these borrowers don’t really belong in homes they can’t afford,” commented Edward Leamer, director of UCLA’s Anderson Forecast. They got pulled into the market with teaser loans and it won’t do them any good to struggle with debt in the years to come. “It’s better for them to bite the bullet now,” reflected Leamer, who says the real cost to homeowners is how much they will lose as prices continue to go down.
Leamer, a professor of management at UCLA, does see some good news on the horizon. He does not believe the ballyhooed “R” word is on the way and remains optimistic about the nation’s economic health. Historically, there is connection between housing and the labor market, with the perception that they are tightly linked. “The labor market is percolating along just fine,” reported Leamer. Manufacturing jobs that were lost during the last recession never returned, so there are few jobs to shed, he asserted. “We’re already seven quarters in to the housing adjustments, and recessions usually follow two to three quarters after a housing downturn—that’s a pretty unique scenario.”
The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or SF Apartment Magazine. “The Sheridan Report” does not make any guarantee, warranty or representation as to the completeness or accuracy of the information contained herein. Matthew C. Sheridan is the editor of SF Apartment Magazine and the East Bay’s Rental Housing magazine. Copyright © 2008 by SF Apartment Magazine. All rights reserved.