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Forget Instarefi: Here Comes Instaloanforgiveness
As if the main rumor of the prior week, that the government was going to automatically push rates on all mortgages down to market rates (which as of today hit a fresh record low of 4.49%) was not enough, today James Pethokoukis reports that the latest iteration in the "let's make Fannie and Freddie broker than ever" rumor mill is that the "Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth." As readers will recall, we highlighted a few days ago that the number of underwater mortgages is at least 14.7 million (and likely far more), and amounts to just about $770 Billion in underwater equity. In other words, if the rumor is true, the US taxpayers are about to subsidze over three quarters of a trillion in underwater equity (and bail out banks on the hook for over $2 trillion in impaired debt). There is no indication if the "instarefi" plan contemplated by Morgan Stanley and Merrill Lynch has been scrapped, but what is certain is that the two plans target two very distinct beneficiary groups: the former plan would mostly benefit middle and upper class mortgage holders who are likely preoccupied to bother with a 200-300 bps refi differential. The loan absolution plan, on the other hand, focuses squarely on the poorest 15 million US households of society. While it is distinctly possible that Obama, in all his economic lunacy, will pass both plans, his advisors have likely done the math and are now convinced which way the negative IRR to the taxpayer will be greater: that is certainly the plan that will be undertaken.
Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.
Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.
But that is not happening. What is happening is that the president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.
This latest bout of fiscal insanity is happening just as the government is passing yet another $26 billions state bailout package.
U.S. Senate Majority Leader Harry Reid said Thursday the Senate will vote in the late morning to pass a $26 billion aid package to help budget battered state governments with their Medicaid expenses and to retain about 100,000 school teachers.
In remarks on the Senate floor, Reid said the Senate will take up the package at 11 a.m. ET, hold a brief debate and then vote on several procedural motions before passing the bill.
The Senate voted Wednesday, 61 to 38, to end the debate on the bill.
The bill the Senate will pass Thursday provides $10 billion to states to prevent teacher layoffs and $16 billion for the Medicaid health insurance program for the poor.
At this point one thing is certain: as long as the Treasury can keep issuing trillions in new debt without a glitch, there will be nothing to stop the administration, now in its pre-midterm death throes, from throwing the kitchen sinks, and 9 other it bought on margin, at every imaginable problem. The Obama administration is about to take this country down in flames by spending hundreds of billions, trillions, tens of trillions on anything and everything, just like your garden variety drowning man clutches at straws. And as long as the Fed has the bond vigilantes locked up, kneecapped and ball-and-gagged in its basement, there is nothing at all that can be done: we suggest leaning back in your favorite made in China chair and watching the nation''s slow motion collapse as it unravels before our very eyes.
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I have equity? Not so much
I'd also recommend Zoloft with your mortgage plan- but I think everyone is already on the stuff.
Economic fusion in the US : Milton Keynes at work
if this pos legislation? (dictatorial decree) is passed after i paid for my home in cash i will be to put it mildly - rather flumoxed.
events seem to be unfolding quickly toward something big.
BP plugged the well. Kenneth Feinberg needs a new job.
Every cent of forgiven debt will be added to the stated income on the IRS submission. And the IRS WILL get its money.
@spigot
If only that were the case. The IRS suspended the imputed income rules for mortgages modified under the HAMP and HARP programs. In Obamanomics, this happy bullshit falls under the category of "Social Justice".
The gov can, and does, do whatever
it pleases. ANY rule/law can and
will be changed as needed.
I see this as a trap. The Regime
needs lots and lots of debt/tax
slaves.
First, bait the hook, then reel
them, etc.
Don't be angry. Be glad your smart
enough not to be sucked into the
trap.
I beg to differ:http://www.irs.gov/individuals/article/0,,id=179414,00.html
@Nixon
"Under the Mortgage Forgiveness Debt Relief Act of 2007, the forgiven debt may be excluded from income when calculating the federal taxes you owe, but it still must be reported on your federal tax return"
http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea04.shtm
As I understand it, the exclusion only applies to mortgages modified under the federal programs. Private debt forgiveness is still treated as income by the IRS.
If it's debt secured by your principal residence it qualifies according to the IRS. You do have to report the amount of the forgiven debt on the tax return, but it's not taxed.
I'm waiting for free shopping day where the govt (future taxpayers since the present ones technically have no money...or maney worht anything) subsidizes the shopper...especially after sales missed bigtime today.
Total of 12 misses, 1 in-line and 9 beats
Unless we are really talking about nationalizing assets without paying for them (Chavez style), unilateral loan forgiveness could be done only with GSE debt (mortgages) that is actually government owned, since the agencies themselves and their sponsored CDOs have outside investors, right?
So....
Are Muni bonds are about to implode?
Not if they put their state aid package through.
They already are exploding.
it seems a lot more logical from their point of view to raise taxes, (the bush tax cuts were a miserable failure if you just look at what has transpired) and subsidize consumers directly, because the tax system extracts most of it anyway, as Forbes claims, we are double and triple taxed on every dollar. It makes sense to give people money and then take most of it back through taxes. Such is the illusion of goverance.
double post
Indeed. The benefit of inflationary policy is that tax increases can be explained away by, ahem, "Free market forces.
Ahem. ahem. ahem... Pardon me, I got a little bullshit caught in my throat.
I suspect we will see attempts to end Obamatard.
err, in addition to the moral outrage of something like this, isn't this also a bit of a Constituional crisis? can the executive branch just "order" that an agency under its control expend (or what amounts to actually spending) $770B without a vote from Congress? that Fan & Fred & GM & AIG are under govt control means that any "order" for those companies to piss away an asset for social engineering purposes is no different than a spending bill. but the executive branch doesn't have the power of the purse.
Winning in the mortgage foregiveness program is like winning in Vegas. The IRS man is always standing by to take its cut. Problem is, the people who take advantage of it may not be able to cover the taxes due on the foregiveness (income). That is however remote but it's a possibility. Any "foregiveness" should result in a change to recourse loan IMO, there has to be a downside to this.
Now, since there's a whole population of people out there who own their home outright and don't have a mortgage, what's the administration going to do to make this equitable for them?
basically i think it just plain stinks. Let the chips fall, you made a bad decision you take responsibility for getting yourself out of it.
Food Stamp (SNAP) recipiants reach 40.8 Million for May....4 months ahead of the original prediction of 40.5 Million by Sept 2010....or 6.4 million more than May 2009.
The pennies used to be copper. They are all zinc now.
It won't change until the majority understands, that the loans they are slaving for is due to themselves signing up for a payment plan, securitized at the reserve ratio by so called bank 'capital'.
Geez. Your 'signature' is THE MONEY!!! Withhold it and 'money' will not be created in the commercial banking sector. Give it, and you will be charged interest on your 'own' ass(et).
It's really no wonder the bankers have it wrapped up.
Wake me up when this all blows up... I don't want to miss the mushroom cloud.
Set your alarm no later than November 2, 2010 (Election Day)
Surprise, bitchez!
Well, we did bail out the banks, now it's the time for main street, and no matter how much people don't like it here - it will help every1 .
I don't think any1 will benefit from people to go balistic or have riots in US ( including those who thinks they made the right decisions before)
I would say give a free house to every1 but first we need to take care of Iran and Federal reserve.
You idiot, this is another bank bailout
"Every cent of forgiven debt will be added to the stated income on the IRS submission. And the IRS WILL get its money."
Even if they have to foreclose on your home!
I haven't read anything in the last year that has pissed me off as much as this. (And there has been much to be pissed about.) This could be the final fucking stupid act that lights the fuse under people. I want to believe that there is still a slim majority of citizens who believe that everyone should be treated equally. Maybe this will be the time when Obammy realizes that he's gone too far... disgusting.
What rough beast, its hour come round at last,
Slouches towards Bethlehem to be born
I'd settle for articles of impeachment.
If this plan is enacted then all homeowners who accept assistance should automatically lose any future capital appreciation of their home values. This is fucking class warfare.
Sonfagun, it did just get crazier:
http://www.informationweek.com/news/software/integration/showArticle.jhtml?articleID=226500202
That's part of all the "jobs created or saved" thing, you got the memo, right?
A question:
In the case that portion of mortgage was forgiven would this:
a) Debt creation causes an increase in the money supply. Since this would be considered debt de-creation, would this produce an instantaneous decrease in the money supply
b) Wouldn't this also cause an almost immediate drop in all real estate
c) Isn't this deflationary?
There must be more to this as it would reflect an almost 180 policy shft for the Fed.
@win
This is just a trial balloon -- which means they haven't fully explored the intended consequenses. The unintended consequences come later, "unexpectedly".
NO this is called freeware as we hash out the fkn flaws.
Open source governance. Tally up the opposing #s and adjust policy as appropriate.
@ Win,
You have good questions, when "investors" recoup their losses, they typically sell their stocks, perhaps that is what happens here. I can now proceed to sell my house.
My question is what happens to bonds?
Crap, how do I get in on this scam? Is it too late for me to refinance my home for 110% if it's 2007 market value?
If I quit my job and run up a gambling bill, credit card bills, maybe a loan shark or two, you think the government will socialize those debts too?
My suspicion is that anyone qualifying and accepting the principle forgiveness will also be refinancing under different terms. No more 15 or 30 yr fixed mortgages but instead 2 or 3 year locked (10 yr UST yield + constant) but at a premium just like every other developed country. This protects and rewards the banks in furture when the Fed Funds rate rises.
..and in other news...the Senate approves a +$26 Billion bailout for the states...w
here did the money come from?"Supporters say the bill will not add to the deficit because it is paid for by closing tax loopholes, eliminating advance refunds on the earned income tax credit and ending stimulus funds for food stamps earlier than expected."
http://www.reuters.com/article/idUSN0514165220100805
Take it from the taxpayers and the hungry of course.
Lots of selfish, right wing loonies on this site. There is nothing wrong with government bailouts. All the money is borrowed and it doesn't have to be paid back. Besides, if people stop lending us money, we can just print more or take it from the rich.
I shouldn't say anything and just let you play, still, you're silly.
It is already in the land of the absurd, I'll give you that Heyóka.
ahhhh I think you just broke a cardinal rule of successful trolling: don't be too obvious!
Can't believe you've been a member of this site for 30 weeks and have made such an absolutely uninformed post, devoid of any value, information or concept of reality.
Irresponsibility will be rewarded. Remember this maxim for future decisions.
seems that Calculated Risk thinks ZH is a tinfoil hat site (is that a compliment?)
Nonsense Rumor on Fannie and FreddieMake a steel (ferrous metal) beanie instead to absorb all those magnetic fields!
the rage inside is begining to bubble a little bit
You still have to remember, that it is the final demand signature (yours) that is securitized through the commercial banking system (at the reserve ratio).
Anything branded belongs to the owner. I.e. don't melt the coins. Includes all of them. The catch 22 has a long history. Especially when the 'brand' is planted on the mind.
According to the Karl at the Market Ticker.... "Yeah, I know, Turbo Timmy allegedly "can" take "unlimited" losses in Fannie ...through the end of next year." For some reason I am lead to believe Barney Frank may be behind this.
Look, you can only sharpen a pitchfork until it can slice an FRN, then you're just wastin' your time!
"Time flies like an arrow, fruit flies like a banana!"
Interesting SP500 chart ...
http://stockmarket618.wordpress.com
There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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