THE REAL LOSERS IN THE MORTGAGE DEBACLE

There was an announcement today about the government and the financial industry trying to come up with yet another possible solution to the disasters of the subprime mortgage scandal. It's getting more than a little frustrating to hear of these rescue plans, and worry that nothing good will come of them. The "financial stimulus" won't stimulate. The lower payments that will come from restructuring loans will affect only a tiny percent of borrowers. Everyone in Washington and every financial CEO has blueprints for a solution to help out the foreclosed buyers. But the real losers have yet to have their feet put to the fire. The real losers are the stockholders in the companies that made the bad loans in the first place. Yes, of course, the home buyers who got conned into signing papers they didn't understand might deserve some help. Less help, if any, is owed to the developers who built too many houses, the speculators who bought too many houses, and the real estate agents who encouraged the building and sale of too many houses. But no help is in the offing for the stockholders. They have to bite the bullet before this storm passes. When they acquired stock they were betting on the future profitability of the company. With that chance of profit comes the risk of a loss. And there's a lesson in that for all of us. Here's an example of one specific company involved in the subprime mess---Countrywide Financial. Their stock has almost fallen off the charts. Who cares? The top five officers and directors of the company (as listed by the amount of their shareholdings) own almost 1.6 million shares among them. The top 10 institutions (investment banks and the like) each own tens of millions of shares, ranging from 55 million at the top and 22 million at #10. The top 10 mutual funds own from about 25 million shares to 8 million shares at #10. How much they've lost is not calculable because we don't know how much the shares cost them. But the total losses, among just these entities, must soar into many billions of dollars. That was risk money. They risked. They lost. THE BIGGEST WORRY One swift slice of the sword that can ease their woes, and help millions of borrowers at the same time, has not, to my knowledge, been seriously addressed. That would be to put a moratorium on all interest rate increases that are built into all the mortgage contracts. The biggest worry in the financial world is that the interest rates on millions of loans will be "reset"---or adjusted upwards---in the next year or two, and that will throw even more loans into the trash. If those rate resettings were temporarily banned, say for one to three years, that would give the housing and mortgage markets a whole lot of breathing room, which in turn could give a substantial lift to the stock market. Foolish talk? Maybe. It would take an act of Congress, the blessings of whoever is President, and likely the concurrence of the Supreme Court. This is an election year, and 2009 will be an adjusting-to-the-new-regime year, so it's a tough time to get anything as complex as this done. Too many of those folks are too busy getting elected. 'WE NEVER THOUGHT THINGS COULD GET THIS BAD..." Plus, there's one influential group that wouldn't want to see rates capped---the stockholders. That's right. Those same stockholders who are sitting on billions of dollars in losses on their investments. Why? Because capping the rates will curtail the income to the lenders, which could push stock prices even lower. Poor guys, they're in a lose-lose bind. Tough. They might say, "We never thought things could get this bad." But the fact is, they can. And they have. And you should bear that in mind before you take your money from a safe harbor and put it where the water is too deep to see the bottom. That's the lesson for today. This article supplements Chapter 16, pages 448-451 of Personal Finance. Access the textbook by clicking on the box in the right column.