That flopped. Then he brokered "Hope Now"”
(1-888-995-HOPE) which was designed to help the
banks and homeowners work out the details for a rate
freeze on mortgage resets. Paulson assured the
public that 500,000 homeowners would take advantage
of the program, which would dramatically reduce rate
of foreclosures. So far, the Hope Now hotline has
provided counseling to just 36,000 borrowers.
Representatives have suggested loan workouts for
fewer than 10,000 of them, a small fraction of
borrowers in need.” (Earlier Subprime Rescue
Falters; Wall Street Journal) "Only 10,000
homeowners; and Paulson promised 500,000? Another
slight miscalculation.
This week, Paulson
announced another new program, "Project Lifeline”,
which targets homeowners who are delinquent 90 days
or more on their mortgages. Here's a run-down of how
it works: (thanks to Calculated risk)
“"Project Lifeline
involves servicers sending letters to
borrowers--prime, Alt-A, or subprime, we're past
pretense on that part--who are very seriously
delinquent (90 days or three payments down or more).
The letter says that if the borrower contacts the
servicer within ten days, agrees to homeowner
counseling, and provides sufficient financial
documentation that the servicer can consider a
case-by-case, deep-analysis style modification of
the mortgage terms, the servicer will agree to put
the foreclosure process on hold for 30 days while
the workout is considered. If the borrower fails to
respond to the letter, foreclosure proceeds."”
At the very best,
the program just buys a little more time for the
homeowner to pick out a nice rental where he and is
family can live after the bank repos his home.
So far, all of
Paulson's solutions have been nothing more than
business-friendly”band-aides which fail to address
the core issues of rising foreclosures, falling home
prices, skyrocketing inventory, and tumbling sales.
Yesterday, at a press conference in Washington,
Paulson made this shocking admission in response to
a reporter's question:
Reporter: "Sir, is
the worst over, yet? Will 2008 have fewer
foreclosures?"
Secretary of the
Treasury Paulson: “"In terms of sub-prime and the
resets, the worst isn't over. The worst is just
beginning.... There's close to 2 million adjustable
rate mortgages where the rate is going to be reset
over the next couple of years. These loans are of a
vintage where there was the most lax underwriting.
So, this is the biggest challenge and this is why
this is so important.” (see the video at Calculated
Risk)
Paulson is right; it
is important. So, why is he wasting time with these
bogus public relations gambits when he should be
making serious recommendations?
Paulson's so called
"mortgage modifications" just don't cut it.
They're pointless They just put off
foreclosure until a later date. The only real
solution to the problem is renegotiating the
mortgages with the lenders so that people with
negative equity” have an incentive to continue
making their monthly payments. Otherwise, the number
of "walkaways" will mushroom and wreak havoc on the
entire industry.
This week's housing
stats from California illustrate how desperate the
situation really is. DataQuick Information Systems
said Wednesday a total of 9,983 homes were sold in
Los Angeles, Orange, San Diego, Riverside, San
Bernardino and Ventura counties last month, a drop
of nearly 50% from January last year.
50%. That is
unprecedented. California is in a housing
depression. Is a 30-day grace period really the
best that Paulson can come up with?
That's nuts.
California is a vital part of the US economy. In
fact, California and Florida combined represent
two-fifths of the nations' GDP. Is Paulson planning
to let California go the way of New Orleans?
For the last four
months, housing sales in California have plummeted
40% (year over year) At the same time, prices in
Southern California have dipped a whopping 16.7%.
The market is freefalling. So far, the only analyst
to come up with a reasonable solution is Professor
Nouriel Roubini who suggests a three year
rate-freeze and a reduction of the face value of the
mortgages by the banks.
Of course the banks
will scream bloody murder, but it's the only way to
stem the tide of foreclosures and prevent a crisis
that could suck the rest of the economy down a black
hole.
And, for those who
still doubt that a collapse in housing will batter
the broader economy; here's a video of Yale
economist Robert Schiller that drives the point
home. Schiller predicted the dotcom bust in 2000 and
is widely respected for his analysis of the real
estate bubble.
http://econvideo.blogspot.com/
"A HISTORIC HOUSING BUST"
Economist Robert Schiller: “
"We are in a
historic housing bust comparable to that of the
Great Depression. Prior to the Depression
housing prices only rose 19% (between 1921 to
1925) and then fell 30% The cycle we are going
through now, is a unique cycle; it will go down
as the subprime cycle. The excitement in housing
was unprecedented and the unraveling of that
(bubble) will have unpredictable
consequences....Real estate owned by households
is roughly $20 trillion and we've already seen
an 8% decline which means a loss of $2 trillion.
That has a powerful impact on the economy...The
losses are throwing peoples' balance sheets off.
So now household balance sheets are in bad
shape. People who used to be able to borrow
against their house are facing new constraints.
This is an ongoing thing that will last for more
than a year. So we have unfolding problems to
forward to.”
“We should be
thankful that we have Ben Bernanke, who is an
expert about the Great Depression at the helm. I
don't think he will make the same mistakes that
the Fed made that last time around... On the
other hand, it (the bubble) is a major
misalignment and cutting rates---when homes
prices have doubled in the last decade---won't
change that. The correction (in home prices) is
not going to be stopped by the Fed.”
“If this
isn't handled right, this could be a serious
recession."”
Notice how Schiller dismisses inflation as a major
concern and emphasizes the potential dangers of a
deflationary downturn. It's clear that he
would prefer to see Bush increase the $168 billion
than face an economy that is stuck in neutral. In
other words, he anticipates a collapse in consumer
spending.
Schiller
continues:
“"I am a big
believer that 'confidence matters'. What is
happening now, is that people are getting a
succession of scare stories and personal savings
are down... If you look at what happened before
the Great Depression.....there was evidence of a
sudden and sharp drop in consumer confidence and
people pulled back and stopped spending. And we
are seeing consumer confidence falling and I
expect that it could take a much bigger tumble
if we don't do something."”
Are you listening, Hank Paulson?
Consumer spending is
down (excluding food and fuel) and
consumer confidence is falling at the fastest pace
since the 1990-91 recession. Also, $2 trillion has
been wiped out from falling home prices and another
$600 billion will vanish this year from mortgage
equity withdrawals (MEWs). Traffic to the shopping
malls has slowed to a crawl and retail shops had
their worst January on record. Homeowners are
hoarding their earnings to cover basic expenses and
to make up for their lack of personal savings. The
spending-spigot has been turned off. America's
consumer culture is in full-retreat.
Everything Schiller
said is taking place right now. So, where's the
political leadership? Does anyone in Washington even
have a game-plan?
In the fourth
quarter of 2007, new foreclosures averaged 2,939 a
day, double the pace of a year earlier. Business
inventories are on the rise. This week's release of
the Institute for Supply Management's
Non-Manufacturing Index (ISM) showed steep declines
in all areas of the nation's service
sector---including banks, travel companies,
contractors, retail stores etc—The Business Activity
Index, the New Orders Index, the Employment Index,
and the Supplier Delivery Index have all contracted
at a historic pace.
These are the
classic signs of overproduction. The next shoe to
drop will be rising unemployment. Layoff notices
have already gone out in new construction, retail,
car manufacturing and financial services. This is
all the predictable outcome of low interest”
bubble-making. It invariably ends in a painful
deflationary spiral.
“"Confidence
matters," Schiller warns.
Yes, it does. But
the American people lost confidence in their leaders
long ago. So--like Paulson says--the worst is
probably just beginning.
LINK: Information Clearing House