Unintended Consequences of Bush’s ‘Teaser-Freezer’ Plan

In a free and democratic world where the ‘freedom of speech’ is what some swear by, US President Bush is told to skip the ‘jargon’ and speak English. English my man, English…

Quoted from http://www.foxbusiness.com/markets/economy/article/unintended-consequences-bushs-teaserfreezer-plan_397858_3.html:

Unintended Consequences of the White House’s ‘Teaser-Freezer’ Plan

Friday, Dec. 7 2007

In English, Please

Unintended Consequences of the White House’s ‘Teaser-Freezer’ Plan

By Mark Lieberman, Senior Economist FOXBusiness

Among the terms economists like to use is the phrase “unintended consequences” — and there are plenty of them in the so-called “teaser-freezer” plan unveiled Thursday by President Bush (as an uncomfortable-looking Treasury Secretary Hank Paulson looked on).

For the record, the plan covers borrowers with adjustable-rate mortgages scheduled to adjust between January 2008 and July 2010 who meet the following threshold tests:

The loans must have been originated between January 2005 and July 2007;

The scheduled interest rate adjustment will increase the monthly loan payment by at least 10%;

The loan must be current, that is the borrower isn’t behind in any payments on the loan, plus the borrower cannot have been 60 days late more than once since the mortgage was first made;

The borrower’s credit score must be below 660 (which is considered a borderline “good” score) and must not have improved by more than 10% since the mortgage loan was first made; and

The borrower’s equity in the home has to be no more than 3%.

In an interesting twist, the loan itself has to have been sold by the original lender and packaged into a security that was then sold to investors. Loans still owned by the original lender are typically easier to refinance, since the lender can set its own rules for refinance transactions. One of the sticking points Bush, Paulson and company had to deal with was getting the faceless owners of the loans to accept a lower interest rate – and thus income – than they had anticipated when they invested in the loans.

The architects of the plan estimate 1.2 million are generally eligible, meeting the origination date and adjustment date thresholds, but only half of them will meet the other tests.

That’s where the first “unintended consequence” kicks in. For those troubled borrowers who don’t meet all the tests, lenders can apply their own sets of standards to determine if the borrower can’t afford the new higher payment and thus needs some rate relief. Determining affordability means lenders can set their own rules and apply their own judgments about what household expenses they will or will not allow. Some banker might determine a visit to Starbucks each morning is too expensive or that, instead of taking in two movies a month, a borrower should be paying the mortgage – at a higher interest rate.

The government itself isn’t getting involved – directly. There’s no government funding to replace the income investors will lose, but the government is helping lenders recoup losses.

Bush, in announcing the plan, was insistent in describing who would not benefit.

“We should not bail out lenders, real estate speculators or those who made … reckless decisions to buy a home they knew they could never afford,” the president said. “Yet, there are some responsible homeowners who could avoid foreclosure with some assistance.”

Here’s unintended consequence number two: the lenders who process the applications for the rate freeze will impose a fee for the privilege, a fee which will be rolled into the mortgage loan, increasing the outstanding balance. The lenders who made the loans – and sold them – will be able to increase fee income and will be encouraged by the government to do so.

And, what about the overall housing market? According to Maury Harris, chief economist at UBS securities, the freeze plan could delay a recovery in the housing sector. He said the plan would make it “very hard for entry level (home) buyers to get credit” as lenders fear rate freezes in the future and, in response to the history of bad loans, have tightened lending standards. With a reduced pool of buyers (“demand” in economics speak), builders will have a more difficult time clearing their backlog of unsold homes and reducing inventories.

Another consequence: the rate freezes will expire in 2013, automatically making them an issue in the 2012 presidential campaign. An intended consequence? Perhaps not.

Employment Report Mixed

There’s an agreement – a “protocol” in Washington jargon – that the executive branch of the government will wait at least an hour before issuing official comment (or spin) on statistical releases such as Friday’s employment situation report — which showed the nation’s economy added 94,000 new jobs in November. Perhaps more significantly, the report showed 696,000 more people were working in November than in October.

Perhaps because of the mixed signals, the executive branch was relatively silent and not rushing to proclaim successes based on Friday’s numbers.

The first number comes from a survey the Bureau of Labor Statistics conducts of 160,000 businesses with about 400,000 locations each month (the “payroll survey”). The second comes from a survey of 60,000 households each month (the “household survey”). Which should we believe?

The answer is both.

Suppose you work full time at Fox News but to supplement your income take a part time job flipping burgers or as a cashier at your local supermarket. You would be counted twice in the payroll survey but only once in the household report. Indeed, the report Friday showed the number of people working part time increased by 165,000 in November (after falling by 549,000 in October), accounting for almost one quarter of the increase in the number of jobholders.

For some observers, the count of jobholders is more important than the number of jobs, and there’s some arithmetic on their side, according to the BLS.

“An over-the-month employment change of 104,000 is statistically significant in the establishment survey, while the threshold for a statistically significant change in the household survey is about 400, 000,” the BLS says.

The establishment survey, too, gives us a reading on the direction of the economy — at least in terms of which industries are thriving and which are not. From Friday’s report, we saw strength in the retail sector with the first month-month increase in retail employment in three months.

But the concern from the establishment survey is that the quality of jobs — not quantity — remains troublesome. Lower wage jobs (under $24,000 per year) accounted for 85.7% of the new jobs in November. Year-over-year, 37.4% of the new jobs were in low wage industry sectors which overall account for just under 30% of jobs; one year ago 23.3% of job gains came from those same low-paying sectors (retail, leisure and hospitality, and other services).