Monday, February 9, 2009

BAD BANKS ARE A BAD IDEA


Bad Bank Q & A

Q: What is the bad bank?
A: The "bad bank" would be a government-run entity set up to buy assets that a re weighing down the balance sheets financial institutions. By replacing these assets, many of them mortgage backed securities, with cash, Treasury hopes to free up the banks to begin lending again.

Q: What's so bad about the "bad bank"?
A: It's not the bank that's bad, it's the assets the bank will purchase. Some are non-performing, meaning that they are based on mortgage loans that borrowers have stopped paying, others are illiquid, which means they may be valuable, but no one wants to buy them in this uncertain economic environment.

Q: Why is this being considered now?
A: The money the banks already took helped them stay afloat, but it didn't solve the fundamental problem: Too much of the banks' money is tied up in these problem assets. It could potentially restore stability to the financial sector.

Q: What are the advantages to the bad bank concept?
A: Many economists say the "toxic assets" are the fundamental problem at the bans, and until these are removed from the balance sheets, banks will remain unstable, making it difficult for investors and others to understand how much the banks are worth.

Q: What are the downsides of the "bad bank" plan?
A: It is extremely difficult to determine how much the government should pay for these assets, since there is no market for them right now. If the government pays too much, it will waste taxpayer dollars. If it pays too little, not enough banks will want to participate and the program won't do any good. Also, accounting rules state that all asset prices have to be set at the current market value. That means that without rule changes, any lowball prices the government offers could be applied to the assets the banks choose not to sell, forcing them to take massive writedowns that would reduce their overall worth." (From the Register Guard)

ACCOUNTING RULES???
Seriously? If the banks were operating under Accounting rules, we would not be in this sub prime mortgage mess in the first place! Whether the bank itself, or a subsidiary, or vendor pool they do business with was engaged in predatory lending, by not scrutinizing what it was they were buying or trading or otherwise becoming the owner of, it is theirs to own.

My biggest contention around this banking/mortgage mess is that they created the problem.
If you get greedy, and sloppy and or predatory- taking advantage of elderly, or otherwise new to mortgage purchase people, then the loss or default is the bank's to own.
I argue that if taxpayer dollars are used to "rescue" the banks, from their own shoddy, self regulated practices- they learn nothing, they lose nothing, and We the People, take the financial hit for their gross mismanagement and mistakes.

For banks that really abused the system, and failed to make sound business decisions, then just like in the private sector, they should go out of business, or be subject to take over, by a more stable bank. For those who played in the sub prime, junk mortgage game, set up a mandatory requirement to refinance those homes. For people with steady payment history, redo the loans with an affordable payment. The banks would STILL be making money- just at a slower pace and longer term. Too bad if it is not a hand over first money fest. They bought those loans, and it should be their job to make them viable. If taxpayer money is needed, in part to help them in the transition, I would be open to that- but ONLY if it comes with the strictest of regulating. The transition LOAN money would need to be paid back.

Another potential scenario is let the banks who did not engage in this sub prime mortgage nightmare take over the loans, being allowed to rewrite them in a way that people can afford them, and give them more assets to do so.

I also favor a new set of mortgage rules.

• Put a 5 year moratorium on ARM- adjustable rate/balloon payment, and Variable rate loans.
The people who sell these mortgages are trained (just like the car salesman) to emphasize-
You could be paying just $600 a month for mortgage!!!! But failing to complete the sentence, but in XX amount of time you will pay more than double that amount.

Same deal with Variable rates.... they tend to push these kinds of mortgages when interest rates temporarily drop- but as they fluctuate, so does your mortgage payment. You want to roll the dice on what the roof over your head loan will cost on any given month?

Even with conventional loans... I think there needs to be even more strict uniform, standardized truth in lending format that spells out everything.... and like in days of old, tight guidelines on what percentage of income is allowed for housing costs.

• Giving mortgage loans that set people up to fail, because they would not have enough money to live on is not responsible lending either.

Tax & insurance costs should be included in monthly payments. Cut out all hidden or extra expenses, eliminating costs that could potentially make a homebuyer default on the mortgage loan.

I also wish the government would go after predatory lenders. Those who sought out elderly people on fixed incomes & took them out of a stable mortgage situation, and sold them the ticket to foreclosure. Either make them have to rewrite & carry the new loans, or have them fined to the fullest extent of the law - also making them pay the legal fees of the people who have to retain a lawyer, to keep their homes.

The idea of the Federal Government creating a new bank with all bad assets sounds like a really bad idea to me- because if and when it too goes bad, guess who pays?

5 comments:

Mortgage refinancing said...

Mortgage is the root of our economic crisis.So it is really important to be updated...because everything we do in this business are critical

Annette said...

From what I am understanding this is not what they are going to do, but are going to do like they did with the S&L back in the late 80's & 90's the RTC or whatever it was...lol That was supposed to be a good thing... I don't think the bad bank thing is a good idea either... In fact I haven't found anyone who does...lol

Fran said...

The bad bank idea is still floating around, taking the toxic loans and consolidating them seems like a horrible idea.

If mortgages are only locked in traditional loans- no ARM's or Variable rates, and have no penalties for early payment. Borrowers who do want to make a balloon payment still can, or pay it ahead slightly, but it does not obligate them to do so, cutting the default risk considerably.

Certainly older people on fixed incomes should not be given variable rate loans.

The banks themselves should take the hit for the bad loan practices, and I like the idea of creating mortgage pool money for responsible banks & lenders. Businesses that did self regulate, and did not engage in the greedy/sloppy lending practices should be given the opportunity to restore reasonable mortgages with definite formulas for determining the loan qualifications. In other words, don;t put people in houses or loans they cannot afford.

The banks are better off rewriting the loans & having an income stream, than to have a ton of foreclosures that actually costs them money in legal, processing, tax & maintenance fees.

Let the bank make them non-toxic loans, put the onus on the lender. They took the risk THEY take the hit or fix (rewrite) the mortgage to make it viable.

enigma4ever said...

great post...very helpful...

so hmmm, I wonder...is my mattress a bad bank ?

Fran said...

Is your mattress fireproof?

I used to put a little into a 401k @ work, but not anymore. I can (mis)manage my own money!