From Caroline Baum at Bloomberg:
"We learned last week that Treasury Secretary Hank Paulson was working with the mortgage industry and major financial institutions to craft a plan to freeze introductory teaser rates on certain subprime mortgages that are due to reset higher, as specified by the original terms of the loan.
. . .
According to the broad outlines of the plan, the Treasury will divide subprime borrowers into four groups.
. . .
Group 4 includes those who can continue to make their mortgage payments if the teaser rate stays in effect or the maturity of the loan is extended. For this category, and this category alone, help is on the way.
How do you spell b-u-r-e-a-u-c-r-a-t-i-c n-i-g-h-t-m-a-r-e? If fraud was widespread during the housing bubble, the current plan has its own set of incentives.
``People will come up with eight ways of rearranging their finances to stay in Group 4,'' said Ram Bhagavatula, managing director at Combinatorics Capital LLC, a New York hedge fund.
More to the point, ``this policy solution smells of the tenets of Marxism: from each according to his ability to each according to his need,'' he said.
. . .
If you think getting mortgage servicers and investers to agree on an outcome is tough, just wait until the lawyers get involved.
``The modification of existing contracts, without the full and willing agreement of all parties to these contracts, risks significant erosion of 200 years of contract law,'' said Joshua Rosner, managing director at Graham-Fisher & Co., an independent research firm in New York."
57 comments:
Why would BHs be against this proposal given that the BHs have repeatedly said that lenders were irresponsible in making loans that couldn't be repaid and the resulting defaults on those loans would end up costing the rest of us in terms of effecting the economy in a bad way?
This proposal lays the costs squarely on those "irresponsible" lenders. It makes them responsible. I.e., they made a loan which couldn't be repaid on the terms laid out and now they will only be able to recoup what was possible.
I don't understand the BHs displeasure at seeing the responsibility for the lending industry's loose lending practices handed back to them?
Can anyone explain whay this is not a good and fair solution?
because instead of letting market forces dictate a final price to housing using real supply and demand, it will enable the government to artificially hold housing prices steady by removing supply (ie foreclosures) in an attempt to wait until wages catch up to housing prices making housing affordable to everyone again. In essence, the government is placing a floor on housing prices that will keep the economy in low gear for a number of years (like in Japan during the 90's) instead of letting it fall into recession for a year or two where prices could reset and enable new buyers to enter and reignite the economy. If this does go through, those on the sidelines should buy immediately!
"Can anyone explain whay this is not a good and fair solution?"
At this point there is no such thing as a "good and fair" solution.
There were two sides to each of these bad loans. The lender that made the loan, and the borrower that signed on the dotted line.
It is hardly "fair" to allow those who bought more than they could pay for to keep a house at below market rates simply because they can't afford to pay.
Doing so effectively penalizes those who were more prudent with their money and didn't over spend.
What are the criteria for determining who "can" pay?
What do you tell people who were careful to buy no more than they could pay for and don't get the benefit of government intervention to lower their payments?
"sorry, you were smart with your money. Call us back when you have leveraged yourself up to your eyeballs."
This plan rewards the wrong people for the wrong behavior.
I wouldn't mind seeing a plan that encouraged subprime borrowers to refinance into fixed rate mortgages at market rates.
If you can pay, pay. If not... start looking for a rental and try to learn the lesson of your mistake.
Prices will still fall, just not as fast. This only removes about 20-30% of the problem.
The speculator inventory and the homes that dont qualify for this program will still end up being sold at discount.
Christopher said:
"If this does go through, those on the sidelines should buy immediately!"
Even if this doesn't go through, some other action will inevitably be taken to ensure that homeowners are assisted. There's nothing new going on here. Got popcorn?
Doug, I agree with your assessment, but I disagree that it will address the percentages you cite. This is just political window dressing that is tinkering around the edges. It will effect a very, very small percentage. Nothing will stop this decline.
For your next Fairfax County list:
11366 SENECA KNOLL DR
Great Falls, VA 22066
List Price: $1,725,000
Prior Sale: $2,125,000 05/19/06
Listing Date: 03/31/07
-18.8%
"Even if this doesn't go through, some other action will inevitably be taken to ensure that homeowners are assisted. "
There is no avoiding the will of the market's invisible hand.
It might be possible to delay the inevitable price correction, at the cost of prolonging the bubble's damaging effects, but there is no way to permanently disconnect housing prices from incomes.
Its a scam by the powers at large. If these powers say they have a plan for the "good" people who pay thier bills, then they get a few more people to make a payment or two before Christmas or into next year. This provides hope into the spring buying frenzy(sic). They MAY have some program, but I doubt it will cover very many people. And if they can get to spring without blood in the streets, they can blame the election year as the problem, and then force whoever is voted into office to fix the problem.
Harriet,
The Economist's blog has an interesting discussion about Clive Cook's recent article in The Atlantic. [Subscription req'd for The Atlantic's website, but not for The Economist's.] The premise of Mr. Cook's article is that home ownership produces negative externalities insofar as it reduces the mobility of labor, which is a bad thing. I think it would make for an interesting discussion here.
Link: http://tinyurl.com/2nev69
Once a lending institution reneges on its contractual obligation to pay the promised interest to the investor who supplied the money, confidence in the market will be shaken. Investors will take their money elsewhere and the credit crunch will worsen. So the proposed solution, if it goes past legal challenges, will make the credit crunch even worse, and prices will fall even more.
Lance is daydreaming as usual.
TedK said...
"Once a lending institution reneges on its contractual obligation to pay the promised interest to the investor who supplied the money, confidence in the market will be shaken."
Ted, it sounds like you know your stuff from textbooks only. What you say sounds good on paper. However, in the real world businesses are constantly re-negotiating the terms of their agreements. Business people (including investors) are practical people who don't lose sight of their end goals. And consequently, they know it is better to collect "something" rather than "nothing".
As Doug earlier did a great job of explaining. It is in no one's interests to see houses foreclosed upon.
leroy said:
"but there is no way to permanently disconnect housing prices from incomes."
Have you ever thought about the fact that in many countries, for example India, the vast majority of individuals are unable to own their own homes? Why is it given that most people must be able to afford to buy?
What we have here in the US is the exception and not the rule. Even in countries where incomes are on par with the US (eg the UK) there isn't the widespread home ownership we see here. And what has made 70% homeownership possible in this country? The same "loose" lending practices which I keep hearing lambasted on this blog. I guess you don't realize that there once was a time in this country when 20% down and a 30 yr amortization would have been considered "loose" lending? In many developed countries it still is. In places such as the Uk and France, one is required to put down a lot lot more than 20% and the max amortization schedule of their loans is closer to 10 or 15 years max. And funny enough, despite their relatively "tighter" lending practices, house prices in places such as these (eg the UK) are higher than here.
I have better solutions to this problem, ones that will benefit taxpayers rather than penalize them.
Basically the government assumes the loan and refinances it to current "prime" borrower rates. The refinance charges are added to the principal.
Any loans that are still defaulted on, the government collects from the lender institutions in the form of increased taxes on pre-tax profit. If the institutions fail to post a pre-tax profit, it gets rolled over until they do.
The government collects the interest and returns it as tax breaks to the rest of the US.
"Have you ever thought about the fact that in many countries, for example India, the vast majority of individuals are unable to own their own homes? Why is it given that most people must be able to afford to buy?"
Have you ever thought about the fact that India is a third world country with a per capita(purchasing power adjusted) average income of $3800, and a population density of 380 people per square km.
That is compared to the US at $43,000 and 32 people per square km...
Do you ever wonder why people don't take you seriously?
"What we have here in the US is the exception and not the rule."
So you are saying things are different in some other countries. That is very insightful.
"Even in countries where incomes are on par with the US (eg the UK) there isn't the widespread home ownership we see here."
So? The obvious implication of these comparisons is that the US might somehow become "like" India, or the UK... which of course it will not anytime in the foreseeable future.
"And what has made 70% homeownership possible in this country? The same "loose" lending practices which I keep hearing lambasted on this blog."
On this blog huh? Read a newspaper lately? Watched the news? Spoken to anyone? Been outside?
The consequences of the loose lending that allowed the bubble to form are going to be very damaging to the US economy and many many individuals.
Your track record on this matter speaks for itself.
You didn't understand how people were qualified for ARMs. You didn't believe there would be significant losses by investors if foreclosures increased... you believed the risk models were accurate... you are completely discredited and rightfully so.
"I guess you don't realize that there once was a time in this country when 20% down and a 30 yr amortization would have been considered "loose" lending? In many developed countries it still is. In places such as the Uk and France, one is required to put down a lot lot more than 20% and the max amortization schedule of their loans is closer to 10 or 15 years max. And funny enough, despite their relatively "tighter" lending practices, house prices in places such as these (eg the UK) are higher than here."
There is really no point for me to continue trying to educate you on these matters. The above except of your post contains more errors than I care to correct at this point.
Here is a letter to the editor in today's WaPo (local fish wrapper):
Wednesday, December 5, 2007; A28
"Regarding Jamie Lynch's Nov. 30 letter to the editor, "When Home Sellers Live in Denial," about "greedy" home sellers.
I am one of those sellers.
Mr. Lynch is not alone in his view. He is correct in that this real estate market is difficult. But there are two sides to every coin, and from my perspective, Mr. Lynch represents the current greedy home buyer. I have had several lowball offers, including one buyer who bid almost $50,000 below my asking price ("around 5 percent"), then expressed indignation when the offer was not accepted, much as Mr. Lynch did. Does he really have to ask why his offer was rejected when he was undercutting the seller's price by that amount, knowing full well that the seller probably had already reduced his asking price a substantial amount?
There are many reasons a home seller might not capitulate to a buyer who thinks he is entitled to take a property for nothing. Renovations, debt, the purchase price, job considerations and many other factors are relevant to such a decision.
When it comes to an individual sale, the "market" is a market of one. I, too, will bide my time and wait for a reasonable buyer with a reasonable offer.
THOMAS R. SERRANO"
I believe this is the property he is trying to sell.
http://www.trulia.com/property/34122954-3815-Moss-Drive-Annandale-VA-22003
It is a standard brick rancher. Purchased in March 3, 2003 for $369,900. It is listed now for a bubble price of $534,900.
Seems that 50k less ($484,900) was quite a fair offer and far more than he will get in the future unless he waits till 2023.
THOMAS R. SERRANO"
I believe this is the property he is trying to sell.
http://www.trulia.com/property/34122954-3815-Moss-Drive-Annandale-VA-22003
God, I love the internet.
But Thomas is right. It's ridiculous for buyers to get angry because someone won't accept their offer. Just move on to another home.
"But Thomas is right. It's ridiculous for buyers to get angry because someone won't accept their offer. Just move on to another home."
According to this he was previously trying to get $624,900
http://www.weichert.com/search/realestate/PropertyListing.aspx?P=16462856&src=Trulia&seg=VAF&keyword=ANNANDALE
Like you said, find another place and make another offer. These neighborhoods have dozens and dozens of brick ranchers for sale and nothing is moving.
Speaking of the Washington Post
after reading this article
It's Not 1929, but It's the Biggest Mess Since
by Steven Pearlstein
http://www.washingtonpost.com/wp-dyn/content/article/2007/12/04/AR2007120402186.html?hpid=topnews
Who feels that now is a good time to buy RE?
"It's Not 1929, but It's the Biggest Mess Since
by Steven Pearlstein"
No no no, this is a "normal cycle"
...
Hi, I am a reporter at the Washington Post working on a story about the reaction to Paulson's proposal to freeze subprime rates. I am looking for homeowners who would consider such a move a bailout of people who made bad financial decisions. If you are interested in being interviewed please drop me an email: merler@washpost.com. Thanks, Renae Merle
Solutions like this is how the S&L crisis happened. In the late '70s, S&L's were in big trouble because deposits earned more than the loans due to rising interest rates.
The predecessor to the Office of Thrift Supervision created incentives to encourage healthy thrifts to buy sick thrifts. OTS and FHLBB (now part of FDIC) entered into contracts with the acquiring healthy thrifts that permitted the use of the negative value of the acquired sick thrifts (which was called goodwill, and was amortized over a negotaited term, usually 20 years) as "capital" to satisfy regulatory loan/capital requirements. About 10 years later, Congress realized that many thrifts did not have any capital to support their loans and outlawed the practice of using goodwill to satsify regulatory capital requirements. After that, many thrifts failed because they could no longer satisfy their regulatory capital requirements without this goodwill. Google Winstar v. US if you want to know more. The failed banks prevailed under a breach of contract theory rather than a taking.
There is still "Winstar" litigation ongoing at the Court of Federal Claims. This scheme looks even worse.
Hi, I am a reporter at the Washington Post working on a story about the reaction to Paulson's proposal to freeze subprime rates. I am looking for homeowners who would consider such a move a bailout of people who made bad financial decisions.
Meanwhile, her colleagues Maryanne and Elizabeth of the Real Estate section are writing stories about how lawn ornaments help sell homes.
"Maryanne and Elizabeth of the Real Estate section are writing stories about how lawn ornaments help sell homes."
It's really sad and embarrassing that Haggarty and Razzi's state of denial about the housing correction is causing them to miss out on reporting what will surely be the biggest real estate related story of their lifetimes.
Whereas Steven Pearlstein has been saying since 2004 that housing has been in a big bubble and would burst, Haggerty and Razzi lost their objectivity because they are themselves homeowners giddy about all their paper wealth.
I recall a Post chat where someone asked Haggerty about Pearlstein's bubble views, and she dismissed it, saying he was the only one in the news room who was so worried about it. Through her words, she also implied that Pearlstein was just a colleague (hinting to readers perhaps she was just as senior as him in her position), so his views weren't necessarily better than hers.
Almost all of my bosses at work were saying in 2004 that housing prices wouldn't fall when I insisted they would. If only position or power could grant rationality!
"If only position or power could grant rationality!"
If only rationality actually helped get people into power.
"Almost all of my bosses at work were saying in 2004 that housing prices wouldn't fall when I insisted they would."
2004?
Mr. Sarrano seems to believe that the market, buyers, cares about things like his debts, his employment, and how much he paid for his house.
Someone needs to tell him that the buyers do not cares a bit about his 'issues'. He is a fool to think otherwise.
He may figure it out, after his home is on the market for another year without finding a buyer who cares about all of Mr. Sarrano's reasons for listing his house above the market price.
Nothing is sold based on what the seller needs to get for it.
Susan said:
"Nothing is sold based on what the seller needs to get for it."
Susan, a very simple basic fact has eluded you. Fair Market Value --- or what a property (or any item for that matter) sells for --- is at the point where both seller and buyer feel their needs are being met. As such, the seller's needs--- including what he paid for it and his debts --- do get factored into the equation. If he doesn't feel those needs are being met, there will not be a sale at all. I think another common basic falicy of "people waiting it out" is that all sellers must sell at any price. They forget that the vast majority of sellers can just choose not to sell at all if the current market isn't satisfying their needs.
Incidentally, "distress sales" occur when those seller's needs are not being met. That is why distress sales do not get included in "comps". They are not normal transactions expected to recur with any regularity since most sellers are not in a position of having to sell without their needs being met.
Now if you are a buyer waiting out all sellers suddenly having to lower their prices to distress levels like the bank re-sale mentioned earlier, you are setting yourself up for disappointment if you think the average seller will also have to sell at any price. Ditto if you believe the banks would let themselves get into a situation of having to do this with a flood of properties. No, rather than allowing this to happen, they will come up with alternatives such as participating in the Bush initiative we are currently seeing played out.
"I think another common basic falicy of "people waiting it out" is that all sellers must sell at any price. "
Today's Post reports on a sobbing or angry BH,
Darren McKinney, 48, a renter in the District, said he has been waiting for housing prices to fall so he can buy a condo without resorting to a dubious loan. He turned down an opportunity to buy his 600-square-foot apartment for $310,000 in late 2004 because he thought it was "absurdly overpriced."
Now the government is rewarding people who made irresponsible decisions and bought homes beyond their means, he said.
"There are those of us who purposely sat on the sidelines during the course of the last three years while the senseless frenzy was going on, and we presumed the free market would be allowed to correct itself," McKinney said. "The government is now meddling in the market and looking to prop up lenders and borrowers alike, and those of us who wisely bided our time get screwed."
Hey, don't say Lance didn't warn you.
"Susan, a very simple basic fact has eluded you. Fair Market Value --- or what a property (or any item for that matter) sells for --- is at the point where both seller and buyer feel their needs are being met. As such, the seller's needs--- including what he paid for it and his debts --- do get factored into the equation."
Time to go back to econ101 lance.
Nobody is entitled to make a profit. You have made this mistake before.
Yes, obviously he doesn't have to sell his house for less than he wants to, but in practice that means he has to hold it.
If he wants to sell, he will have to sell for something near the market price.
This is a lot like the lemonade stand where the kid is selling lemonade at $1 million a glass with the idea that this way he will only have to sell one glass.
Sure, he may only need to sell one, but it is never going to happen so he might as well take his sign down and go home.
He certainly shouldn't complain when someone offers him something near market price for a glass of lemonade. Because that is all he is going to get...
"I think another common basic falicy of "people waiting it out" is that all sellers must sell at any price. They forget that the vast majority of sellers can just choose not to sell at all if the current market isn't satisfying their needs."
People rarely list their houses on a whim lance. If they have decided to sell it is usually because they perceive a need to do so. Obviously some of them can just decide not to sell and instead stay in their house, but many of them will be forced to sell for one reason or another.
The same is true of buyers of course. They don't NEED to buy, and they certainly don't NEED to buy a particular house. They can always wait, and many are now doing so.
The market is set at the margins. It doesn't matter what a handful of stubborn would-be sellers do. They are simply wasting their time. The sellers serious about selling will be able to sell their houses while people who overprice aren't going to get a penny.
"Incidentally, "distress sales" occur when those seller's needs are not being met. That is why distress sales do not get included in "comps"."
Incidentally, "distress sales" have absolutely nothing to do with a "seller's needs." Distress sales refer to properties that for one reason or another typically sell below market rates.
Foreclosures, flood or fire damaged properties, etc.
If some buyer has to sell at a loss or for less than they feel meets their "needs" that doesn't make it a distress sale.
"Hey, don't say Lance didn't warn you."
Yeah, here is some of lance's "analysis."
"If I were looking to buy, I would accelerate the process. Pressures are going to come to bear to start driving prices higher again very very soon. And of course, if interest rates go anywhere, it will be up."-lance March 1 2007
"Trillions of dollars of ARM reset in the next two years not relevant?"
Again, not relevant because and every one of these lenders was qualified and found to be able to afford their loans even if interest rates happened to rise to the highest allowable under the loan contract terms. So, how many actually hold these ARMs is irrelevant to your argument since ALL of them should be able to afford any resets." - lance
July 06, 2006
I don't know what that particular person's situation is but it sounds like they are behaving like a rational adult. What should they have done? Used shady financing to leverage themselves into something they couldn't afford at the edge of retirement?
Try using your head KH. A 600 sq foot condo conversion in the District for $300K+? Think about that...
However rightfully pissed this person is that the government is trying to bail out the greedy and the ignorant he is still better off not having bought.
If only the general populace had the good sense to ask themselves what they could afford before racing out to buy at any price this mess would never have arisen.
Leroy said:
"If only the general populace had the good sense to ask themselves what they could afford before racing out to buy at any price this mess would never have arisen."
What mess? Personally, I like the appreciation I've seen over the last 7 to 8 years. I invested in my country's future and it paid off handsomely as a rising economy has raised property prices along with it. If you're one of those who didn't see this happening and bet on the economy not doing well ... Well, you got it wrong. Now deal with the present. You're just deluding yourself if you think time can be turned back.
The 48 yr old renter is obviously still living in a dream. $300K for 600 sq feet is what a condo in a very good area in the District goes for. If he doesn't want (or can't) pay $300K for that desirably-located 600 sq feet condo, he should then be looking in less espensive parts of the District or maybe out in Prince William were he will get a lot more square footage for that kind of money. No one is entitled to be able to buy whatever they want wherever they want it.
"What mess? Personally, I like the appreciation I've seen over the last 7 to 8 years. I invested in my country's future and it paid off handsomely as a rising economy has raised property prices along with it."
Heh... lance, let me say that for the first time in quite a while I actually believe you are saying what you are really thinking.
No more... "a house isn't an investment" No more... "homeowners contribute to the community" No more... "homeowners are true citizens"...
You just think you made some money.
Which is funny because you bought at the top and haven't really made much and by the time this is done may not have made any.
"If you're one of those who didn't see this happening and bet on the economy not doing well ... Well, you got it wrong. Now deal with the present. You're just deluding yourself if you think time can be turned back."
This has nothing to do with "time" being turned back, just prices. Time only moves in one direction. Prices are something else completely.
There have been numerous real estate busts in the past, and in no case that I am aware of did time flow backwards because prices fell.
Leroy said:
"Which is funny because you bought at the top and haven't really made much and by the time this is done may not have made any."
1996 was the top? You can't seem to understand that the vast majority of homes bought during the period you consider "the top" (which I'm not sure what you mean as prices will always climb longterm) were bought by people who already had homes (and equity.) Yeah, I was one of those people who bought in the District back when Barry was still mayor and the suburbanites were saying "Why would I ever want to live there?"
Another aspect of markets, and I have not seen it mentioned in this discussion is psychology. After all it was psychology that led to people in 2004/2005 to engage in bidding wars over properties for it seemed the market was destined to go up 15% a year, and the fear of being ‘priced out of the market’.
No psychology has changed, foreclosures, sub-prime mess, sub-prime contained, sub-prime not contained and that the general corporate credit markets are frozen, is what has contributed to where we are now. Just this morning I heard one of these radio spots by John Shilbey of Lenox Financial, talking about a market decline of 30% over the next three years. Between reading blogs, and hearing such statements, not to mention the large number of for sale signs, that have had little to no activity, and most activity is changing to for rent, the whole market psychology has changed.
Probably the single greatest factor, and one not talked about too much on this blog is the turmoil in the credit markets and how mortgage backed securities (MBS) and collateralized debt obligations (CDO)have massively diminished in value as assets and with respect to those CDOs backed by sub-prime paper have become worthless. Case in point look at the recent deal in which Citadel paid E-trade $.27 on the dollar, that’s right 27 cents on the dollar, or a 63% haircut, on E-trade’s portfolio of CDOs that were rated as AA or better securities. I am not a financial expert, but this does not bode well for the housing market, easy financing is what fueled the boom, it was the ability to take mortgages and package them as securities and sell them through the investment banking houses that drove up housing prices, since liquidity was widely available. Go take a look at mortgage lender implode-o-meter and you will get some sense of the carnage that has occurred in the mortgage banking industry.
The psychology has changed, liquidity is drying up, end result prices are headed down, it is time to let the market correct itself, plain and simple.
No one is entitled to be able to buy whatever they want wherever they want it.
As someone who thinks prices are going to fall significantly over the next couple of years, I still absolutely agree with this statement.
The entitlement from buyers is getting kind of annoying.
If you think a great home for super cheap is just going to fall in your hands you're fooling yourself. Especially only a couple years into the downturn.
If you're a buyer, be patient and be diligent. And eventually you'll find a good deal. But don't think you deserve a good deal, just because you didn't buy a home in 2003.
Who's this Lance people are talking about? Is he the moron who pissed away all the equity he made off the condo he bought in 1996 by buying at the top of the peak in 2005? And now 20009 is down in both average and median price since then?
That poor stupid schmuck.
And who's KH, the even bigger loser who actually tries to talk up that pan-global shmuck? Wow, that guy is so pathetic. Poor stupid KH.
"He turned down an opportunity to buy his 600-square-foot apartment for $310,000 in late 2004 because he thought it was "absurdly overpriced.""
Well, unless that aprtment was renting for $1800 or more, that was absurdly overpriced. You'd have to be in the very heart of Georgetown to justify $500 a square foot, and I'm being very generous even on that.
The good news for this guy and all the smart people who thought for themselves and didn't follow the pan global idiots: This "bailout" doesn't amount to much. Basically, the poor subprime people who took out loans that start at 8% and that are scheduled to go to 10-13% get to keep their loans at 8%. The investors who hold these crappy loans figure it's better to take the 8% at a lower rate of default than risk the consequences of having the loans reset as scheduled.
So DC still has plenty of falling to do. Maybe Anacostia won't fall as hard, but I don't think any of the smart people here who knew better than to buy in 04-06 were planning on buying there anyhow.
So the prices are still falling and Lance is still stupid.
Yep ... you can tell the Bubbleheads are getting nervous when they have to resort to insults.
And correct Keith, the few people with already high mortgages who are going to be allowed to keep their homes isn't going to make a hill of beans difference. But what does matter --- at least from the Bubblehead viewpoint --- is that the one and only thing which could (with the farthest stretch of the imagination) be interpreted as meaning a coming collapse of real estate prices, has been completely nullified.
So Keith, where can BHs now hang their hopes of doom and gloom for homeowners? What's going to spark the real estate pricing collapse you have banked on?
Harriet,
Is name calling such as the following, acceptable or not.
"Who's this Lance people are talking about? Is he the moron who pissed away all the equity he made off the condo he bought in 1996 by buying at the top of the peak in 2005? And now 20009 is down in both average and median price since then?
That poor stupid schmuck.
And who's KH, the even bigger loser who actually tries to talk up that pan-global shmuck? Wow, that guy is so pathetic. Poor stupid KH."
Please tell us if name calling and referring to sexual organs is acceptable.
lance said
"So Keith, where can BHs now hang their hopes of doom and gloom for homeowners? What's going to spark the real estate pricing collapse you have banked on?"
Liquidity is drying up, the ability of borrowers to take out loans to prop up housing prices is likewise diminishing. The ability of large Wall St. Banks to convert mortgages into securities, which was the financial spigot that made loans available has been turned off, due to questions regarding the value of the mortgage backed assets. Case in point E-trades mortgage backed assets, all of which were rated at AA or better, being sold at 27 cents on the dollar, yep thats right a 63% haircut. Not to say that you could extrapolate such a loss to housing prices, but prices are going to be in for a downward adjustment, simply due to the availability of "easy" credit to dry up.
You are entittled to your belief system regarding housing prices, but it is just that your belief. However, the facts, in terms of what is going on in the credit, banking, and mortgage industries do not support your belief of maintaing current prices, or peak prices of 2005/2006.
"Try using your head KH. A 600 sq foot condo conversion in the District for $300K+? Think about that..."
ah? OK.
Darren McKinney, 48, a renter in the District, said he has been waiting for housing prices to fall so he can buy a condo without resorting to a dubious loan. He turned down an opportunity to buy his 600-square-foot apartment for $310,000 in late 2004 because he thought it was "absurdly overpriced."
Without getting into the pan-global aspect of the District (which Lance got right), the concentration of wealth, the jobs, the life style, and just thinking about that specific BH and that specific 600 sq ft condo.
He couldn't buy a $310K condo without without resorting to a dubious loan??
He's 48 and can't scrape together $65K? He doesn't have that in his 401(k) or stock investment account?
Some HHs have that in their checking account.
Over 20 years, their PITI stays essentially level at $1,100 and their direct deposit salary increases from $2,500, to $5,000, to $8,000 a month or more. When they notice that there's fifty or a hundred grand in their checking account, they write a check to Fidelity.
This is the converse of the sub-prime problem. While it is a real problem, for every sub-prime, there are many Lances out there, HH who bought 10, 15, 20, 25 or more years ago. Some have paid their places off, many have their expenses well under control, capped at 1996, 1990, 1985, 1980 rates.
Certainly some have looted their home equity for vacations, boats, granite-stainless kitchens but not the majority.
The majority have quietly paid down their mortgage, gradually built their savings and investments, and lived a good quality of life.
So prudent folks who realized that teaser loans were improper vehicles and did not buy lose out. Those of us waiting for home prices to adjust to normalcy as a consequense of the ARMs reseting now will NOT be able to purchase, as the interest rate freeze will stabilize prices--artifically high. In other words, those who took on too large of a loan are being rewarded for their risky behaviour. What a precendent this is.
Prices are headed down, no amount of Government intervention direct or indirect is going to change course. The Titanic has hit the iceberg folks.
Credit, or more appropriately credit creation and widespread availability is what fueled the housing boom. Credit conditions are significantly different, now, and most likely going to get worse.
If anything this plan will set the bar for who is going to get immediately foreclosed upon. This plan will do little if anything to improve things for sub-prime borrowers. Investors have gotten scared off of mortgage backed securities and CDOs. Who would want to invest in such assets when E-trade just had a fire sale on the highest rated assets AA or better at 27 cents on the dollar. CITI bank had widespread exposure to subprime and other MBS CDOs and is possibly borderline insolvent.
Let lance/kh and others crow for now. But there is a lot of downward momentum, and this is just the beginning. Robert Shiller, who is far more of an authority on these things, than any on this blog, has indicated we could be looking at 50% drop in real estate prices, if prices revert back to the mean.
http://money.cnn.com/2007/11/26/real_estate/Case_Shiller_index_drops/?postversion=2007112711
Something else for all of wealth through real estate crowd to consider
Jason Zweig, Money Magazine senior writer/columnist Question: So how rich can you get on real estate?
Robert Shiller Answer: From 1890 through 1990, the return on residential real estate was just about zero after inflation.
http://money.cnn.com/2007/04/09/real_estate/shiller.moneymag/index.htm
enjoy!
"Let lance/kh and others crow for now. ... Robert Shiller, who is far more of an authority on these things, than any on this blog, has indicated we could be looking at 50% drop in real estate prices, if prices revert back to the mean."
No crowing from this blackbird.
If prices plunge 50%, my taxes will drop, so be it, great, thank you very much.
I don't believe that prices will drop more than 10% in my area and I would be quite pleased by a 15% drop.
50% drop? Alexandria? Arlington? Never happen. It's a nice fantasy though.
You guys are still fighting about all this? Read up - the "government" bailout is anything but.
- Won't cost tax payers a penny. Government is not paying for anything. The lender MAY lock the interest rate for 5 years.
- Doesn't apply to most loans...look at the conditions!!
Pulled from Mish's econ blog :
a. First lien owner occupied residential adjustable rate loans (ARMS) with initial fixed rate for 36 months or less.
b. Must be originated between 1/1/05 and 7/31/07 and included in securitized pools with reset date between 1/1/08 and 7/31/10.
c. Not more than 30 days delinquent and not more than one 60 days delinquent in last 12 months.
d. LTV must be GREATER than 97%.
e. FICO must be less than 660.
f. FICO score cannot be more than 10% higher than origination.
g. Servicer must determine that owner cannot afford higher payments.
- LENDER VOLUNTARY
I mean, READ THIS SH*T! It blew my mind when I first saw it.
To me, this is just lenders giving some borrowers the ability to lock for 5 years. Believe me, the lender will only do it if it is in their best interest.
I still do not see this having much effect on price movements. The prices are going to come down in NOVA for another couple years.
You can copy-paste that line and date it if you want. I'm even putting my money where my mouth is by waiting to buy again. :) Sorry to disappoint, this "BH" bought at the bottom, sold at the peak, and plans to buy up with the loot.
"Sorry to disappoint, this "BH" bought at the bottom, sold at the peak, and plans to buy up with the loot."
Maybe.
There are people with millions in cash who are ahead of you in line and will bid against you.
Remember what happened at the Parkside 47% off auction. Nothing sold at a substantial discount. Places went for close to asking.
I hope you do OK but I'm also hoping that the economy surges forward. I am hedged both ways so I do well no matter what happens.
I hope so KH, it is a bit of a gamble. I think the odds are on my side though.
Oh, and a comment about the parkside THs auction. The auction sheet shows 10-15% off asking price. That is not "close to asking" and who knows what other incentives (paid closing costs, upgrades, etc). Gotta wonder what their original asking prices were. :)
The real fun will be watching the actual closing and watching the values a year or two from now.
The blogger makes mention of "easily" flipping the places for a $40K profit! Unbelievable!
alexa,
Thanks for posting the details; Tanta's post on Calculated Risk was outstanding, given the short amount of time that she had to draft it.
The so-called bailout is targeted at two groups: (1) those who have decent credit and equity and can repay a loan if it is refinanced at market rates; and (2) those with equity and less than prime credit, but who can afford to repay the loan at the pre-reset rate. Group (2) is subprime, so their pre-reset rate is still high, i.e., 7-8%. The most aggressive buyers, such as the flippers or others without means to repay the loan at market rates, receive no protection.
The proposal is really designed to assist the financial markets, which are experiencing a liquidity crisis. The proposal is fashioned to let the air out of the bubble more slowly than it otherwise would. In this regard, the banking system lacks the infrastructure to process so many foreclosures. Furthermore, the powers that be are trying to convince the jittery credit markets that the current sense of panic is overstated; the hope is that confidence will return if the toxic stuff is foreclosed and disclosed, the marginally bad stuff is restructured but repaid, and the good stuff stays on the right path.
Lastly, this is entirely voluntary -- and you are correct that no government money will be used to bail out borrowers. Not yet. IMHO, the proposal is a mere bandaid over a deep gash. It won't do much. The current liquidity crisis won't pass until the markets are confident that all bad debts are accounted for and properly reflected on corporate balance sheets. We're not even close to that point, yet.
Terminator-x, the more I read, the more I'm worried about the "not yet!" adder when speaking about government money. Maybe the gov will offer to buy and backup these subprime loans that have been locked? What a wonderful way for lenders to turn risky, high interest loans into NOT risky, high interest loans! They win because they make good money off of it (7+% interest rates which can adjust up after the freeze) with NO risk! If the borrower doesn't pay, the lender gets the loan amount which is more than likely going to be higher than the homes value. Hahahah...just think about THAT for a moment!
Post a Comment