Congress Tackles the Risky Loan Shortage

Here's the New York Times summary of the housing legislation Congress is on the verge of approving:

The centerpiece of the Senate package is a rescue-refinancing plan aimed at stemming the tide of more than 8,000 new foreclosures a day that lenders are filing across the country. The plan would allow distressed borrowers and their lenders to stem losses by allowing qualified owners to refinance into more affordable, 30-year fixed-rate loans with a federal guarantee.

The legislation would also provide benefits for first-time buyers, who would receive a refundable tax credit of up to $8,000, or 10 percent of the value of a home, on purchases of unoccupied housing.

As part of a regulatory overhaul of Fannie Mae and Freddie Mac, the mortgage finance giants, the bill would permanently increase to $625,000, from $417,000, the limit on loans they can purchase from lenders in expensive housing markets, making it easier for borrowers to obtain mortgages at discounted rates.

Problem: Lots of people took out loans they could not afford to buy houses that subsequently declined in value.

Solution: Bail out borrowers and lenders, putting taxpayers on the hook for the bad loans; increase subsidies for home purchases; and make it easier to take out big mortgages.

What could possibly go wrong?

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  • ||

    Is there anything congress can't do...please...tell me there's something congress can't do!!!

  • ||

    My experience is that 30 year fixed-rate loans carry a higher interest rate than adjustable loans. For the same principle, they should have higher monthly payment than a 30-year adjustable loan? My impression is that the vast majority of sub-prime loans were 30 (or 40) year adjustable rate loans. How can these new loans be more affordable than the loans they are replacing?

  • Ben||

    Please RC, you are only a little person and just because you don't understand it does not mean that Congress has not made it so.

    Maybe Bush vetoes this? Someone please tell me that Bush will veto this.

  • robc||

    RC Dean,

    For most sub-prime loans, the teaser rate (rate before the first adjustment) was HIGHER than 30-year fixed rates.

  • ||

    R C Dean said:

    How can these new loans be more affordable than the loans they are replacing?


    Because the ARMs in question have already adjusted their rate beyond the existing market rate for 30-Year Fixed mortgages.

    I know someone who got buried by an ARM. I also know that it was 100% their own fault.

  • Jozef||

    Solution: Bail out borrowers and lenders, putting taxpayers on the hook for the bad loans; increase subsidies for home purchases; and make it easier to take out big mortgages.

    ...and keep housing prices artificially inflated, preventing more fiscally responsible people from purchasing houses at fair market values.

  • robc||

    MP,

    Because the ARMs in question have already adjusted their rate beyond the existing market rate for 30-Year Fixed mortgages.

    I know someone who got buried by an ARM. I also know that it was 100% their own fault.


    Yep. For those unaware here is how the process went:

    Bank: We have loose standards
    Sub-Prime Borrower: okay, give me that 3-year arm. In 3 years, I will be able to refi right?
    Bank: Sure.

    (2.5 years pass)

    SPB: I would like to refi before my rate changes.
    B: No.
    SPB: What?
    B: Havent you heard, the housing market has peaked, foreclosures are going up, we have had to tighten up our standards.
    SPB: But I cant afford to pay the adjustable rate.
    B: Get in that foreclosure line over there.

  • Colin||

    Even if it's filibustered or vetoed, President Obama will gleefully sign it and many others like it into law.

    The day of the proletariat quickly approaches!

  • PC||

    "...and keep housing prices artificially inflated, preventing more fiscally responsible people from purchasing houses at fair market values."

    Housing prices, college tuition, health care, corn prices etc.

  • Kyle||

    Lost_In_Translation,

    Congress can do anything it wants. Why? Because if this blows up in their face, the public will simply blame the President (whoever it is). It's a nice system for them really, since someone else always gets the blame.

  • ||

    I think Congress should declare the Jubilee, and just get it over with.

  • Congressman||

    Moral hazard? Moral hazard?! I'd say throwing these people out on the street is a "moral hazard"!

  • ||

    I was just thinking how awesome it would be if Congress could find a way to artificially raise the value of a house. It would have been much better if Congress had passed legislation prohibiting the listing of a house for less than 5% over its last sale value, and require any interested buyers to bid on and eventually buy that house.

  • ||

    Nice post title.

    My neighborhood went nuts during the bubble and our property tax evaluation went through the roof. They were buying $250,000 houses and tearing them down to build 5,000 sq. ft. mini-mansions on 10,000 sq. ft. lots and try and sell them for $1M.

    Currently, in my 32 house block, 3 mini-mansions have been for sale for over a year, 5 other houses have been foreclosed on and sit vacant and for sale, 3 private renovated homes for sale (bought as flippers), and 4 houses are now rental properties.

    Both the banks and the idiots who bought houses they couldn't afford are to blame. Bail-out none of them. And cut my goddamn property taxes.

  • Brett||

    This won't set irreversible precedents now will it? I'm sure we'll learn from our mistake and this will be a one time thing, right?

    ha...

  • Guy Montag||

    The most recent adjustment on my mortgages gave me a lower interest rate, but I need to look into this and see if I can get an even better deal.

    All loans should be from the government, right? Just like the system they have in Cuba. Perhaps we can get their healthcare system too.

  • ||

    Funny how congress thinks it's its job to try to "do something" about the price of gas, oil, corn, food, milk, basic materials, etc. - but when it comes to housing, somehow to "do something" about the price somehow means to make it less affordable?

  • ||

    Don't worry. We'll finance it with "windfall profits" tax on those greedy oil companies.

  • Guy Montag||

    Reinmoose,

    But homeowners are not EvilBigOil, we are innocent victims in the clutches of EvilBigBanking.

  • Brett||

    As a renter am I now allowed to villify the selfish and greedy BigBorrowers, or was it the Homeowner Industrial Complex?

  • ||

    If the price of corn continues to rise, and the price of houses continues to fall, the "crisis" will self-correct; in the Midwest, it will become worthwhile for farmers to buy up houses in order to demolish them and return the land to its prior agricultural use.

  • Guy Montag||

    Brett,

    Great, now that AngryRenter.com banner will be back.

  • Guy Montag||

    P Brooks,

    But only if they use traditional farming methods and do not become slaves to BigOil and BigAg, with genetic freak corn and all of that.

  • ||

    First thing we need is a national gag order on saying bad things about ARMs and the real estate market. Then we need to institute a national "middling wage" that is enough to support a fixed rate mortgage, i.e., employers would immediately be required to raise middle class employees' salaries by the amount their ARMs went up. Then we could punish the mortgage speculators by imposing on them huge amounts of filthy lucre.

  • ||

    GODDAMNED FUCKING GOVERNMENT

  • ||

    Don't sugarcoat it Warren. Tell us how you really feel.

  • ||

    I was watching a news report on the current spate of FBI PR arrests, the other night. It was funny (in a sad, ridiculous sort of way); the newsperson was trying to tell me the G-men were rounding up evil mortgage brokers who had funneled vast sums of money to individuals with no means to repay it because they had "defrauded the borrowers."

  • Kent||

    Lamar,

    Congress will decree that all workers must make at least the average wage.

  • ||

    1990's Democrat: "We want to reward those who work hard and play by the rules"

    New Millennium Democrat: "You bought a modest house on a 30-year fixed rate loan and now you're upset you've got to bail out the greedy homeowners and banks who weren't as prudent as you? SUCKER!"

  • Kolohe||

    who would receive a refundable tax credit of up to $8,000, or 10 percent of the value of a home,

    Is this whichever is greater? It seems like a weird cutoff. There aren't a lot of $80K homes, and even less in the places that are most affected by foreclosure (MI possibly excepted, but their problems are unrelated to the housing bubble)

  • ||

    serious questions.

    How do we deal with the 8000 dumbasses a day that could become homeless without robbing the smart to bail out the stupid? How do we, as a nation, require real personal responsibility, without going through a complete societal and economic breakdown?

  • ||

    It's truly awe-inspiring to watch people who haven't yet wondered whether millions of foreclosures could have consequences beyond those experienced by the borrower and bank chortle about how everybody else is clueless about economics.

  • Waterhouse||

    How do we deal with the 8000 dumbasses a day that could become homeless without robbing the smart to bail out the stupid? How do we, as a nation, require real personal responsibility, without going through a complete societal and economic breakdown?

    There are these things called Less Expensive Houses, as well as Apartments.

  • ||

    brotherben said:

    How do we deal with the 8000 dumbasses a day that could become homeless without robbing the smart to bail out the stupid?


    They can still rent. They won't be homeless because they're not jobless.

    a complete societal and economic breakdown


    Not a likely scenario.

  • ||

    brotherben,

    By realizing that the bust in the housing market is really a boom in the rental market disguised.

    But really, the smart bailing out the stupid seems to be the American way. Congress will bail out both just enough to take the sting out the lesson, and the whole thing starts all over again. And the financial prudent sigh, and begin unbuckling their pants for another rampant ass fucking.

  • ||

    "How do we deal with the 8000 dumbasses a day that could become homeless without robbing the smart to bail out the stupid?"

    A popular thing around here is the buy and lease back. I buy your foreclosed house, then rent it back to you. It really doesn't change much. The person renting the house is renting it from a person instead of "renting" it from the bank.

  • Waterhouse||

    It's truly awe-inspiring to watch people who haven't yet wondered whether millions of foreclosures could have consequences beyond those experienced by the borrower and bank chortle about how everybody else is clueless about economics.

    Yeah, one of those consequences is that the newly-competitive marketplace forced my rent down by 20%, while at the same time forcing the company to drastically renovate the building.

  • Invisible Finger||

    Because the ARMs in question have already adjusted their rate beyond the existing market rate for 30-Year Fixed mortgages.

    Expect 7.5% to 8% 30-year rates within 12 months. Inflation alone is going to do that, plus the increased demand for loans coupled with a decreased supply of investor money makes a continued rise in the 30-year mortgage interest rate more likley.

  • ||

    joe said:

    It's truly awe-inspiring to watch people who haven't yet wondered whether millions of foreclosures could have consequences beyond those experienced by the borrower and bank chortle about how everybody else is clueless about economics.



    Get a grip. Who's denying that there won't be economic fallout from this process of unwinding bad mortgages? So we're in a time of economic contraction. Big deal. Is that supposed to be some sort of mind-blowing new event?

  • Guy Montag||

    brotherben,

    Yea, what some others said. They will probably become rentors and not homeless at all.

  • ||

    Why do we weep for these former homeowners? They were "renters" the entire time.

    They were in houses they couldn't afford. They paid money every month to live there. When they could not afford the payments, they had to leave. That sounds like every rental agreement I've ever seen. If you can't afford to buy, you rent. That's true even if you thought you were buying. You have no equity in the place, you can't afford the payments and you never owned the house in the first place.

  • ||

    From a while ago.

    J sub D | September 6, 2007, 10:53am | #
    Who am I supposed to bail out? People who took mortages out on houses they couldn't afford, or those who gave them the mortages? To both groups my response is "You made your bed, now lie in it."
    Oh yeah, "And quit whingeing."


    I guess the answer is both. Who wants to bet the default rates for these guaranteed loans will not be 25% higher than industry average?
    Don't all speak at once now.

  • robc||

    joe,

    It's truly awe-inspiring to watch people who haven't yet wondered whether millions of foreclosures could have consequences beyond those experienced by the borrower and bank chortle about how everybody else is clueless about economics.

    Do you not read? As Ive pointed out to you multiple times before, we realize there are other consequences, we just think those people (including myself) deserve it too. Why the fuck didnt I sell my WaMu stock before it crashed? Because Im a dumbass and got what I deserved.

    All "we"s in the previous paragraph are possibly royal.

  • ||

    I buy your foreclosed house, then rent it back to you.

    You vulture, you!

  • ||

    It's truly awe-inspiring to watch people who haven't yet wondered whether millions of foreclosures massive transfers of wealth from the prudent to the imprudent, and the injection of still more moral hazard into the banking system could have consequences beyond those experienced by the newly enriched borrower and bank chortle about how everybody else is clueless about economics.

  • Kolohe||

    By realizing that the bust in the housing market is really a boom in the rental market disguised.

    Yes and no. Most places rents have gone down as well, as people are trying to hold on to their homes longer until the crash subsides. Renting them out in the interim is putting new capacity on the market.

  • Guy Montag||

    robc,

    LOL

    A filter is easier, or just ignore.

  • ||

    Expect 7.5% to 8% 30-year rates within 12 months.

    Let's hope it stays there. Those aren't historically-high figures.

    But the era of absurdly-cheap credit is over. Hey, it got us through the last cyclical recession without too much harm, and the 90s ruled. If we can pull off a soft landing from this financial recession we're in, things will have worked out quite nicely overall. But that's a big if.

  • ||

    "You vulture, you!"

    I'm the Emilio Butragueño of real estate!

  • robc||

    Guy,

    Nah. On some issues joe is intelligent. This is not one of those issues.

  • robc||

    joe,

    If we can pull off a soft landing from this financial recession we're in, things will have worked out quite nicely overall. But that's a big if.

    Even with a fairly hard crash it will have worked out nicely overall.

  • Bingo||

    They don't become homeless, jesus christ. It's not like they are thrown into the streets. There are these things called "apartments" you know. I've been living in one for the past 6 years and, believe it or not, its not too terrible!

  • ||

    robc, MP,

    Until my comment, the only postulated outcomes from this problem were 1) "stupid people" get what they deserve, and 2) the weakness in the homeownership market will be balanced out by increasing strength in the rental market.

    But now, we're getting somewhere.

  • Guy Montag||

    robc,

    To each their own, of course.

    Perhaps better city planning and more prudent zoning will solve this whole mortgage thingie.

    There could be forclosure-free zones, and other solutions that we just have not thought of . . .

  • robc||

    joe,

    Until my comment, the only postulated outcomes from this problem

    Only if you treat threads in isolation. Plenty of other postulated outcomes from the 47,000 other threads on bailouts.

  • ||

    Isn't that what the gubmint is doing? Putting big ole poofy pillows under the falling economy? Shouldn't we all praise their actions as the self interest for the greater good that they are?

  • ||

    Even with a fairly hard crash it will have worked out nicely overall.

    The problem with crashes is that cause damage above and beyond what the aggregate numbers you're looking at show.

    It's certainly true that the the boom was strong and long enough that we could give back a large amount of the gains, and still come back ahead. There is a long way to drop from, say, Q4 1999 before we're back to 1992.

    But that doesn't take the damage from the shock into account.

  • ||

    joe said:

    But now, we're getting somewhere.



    Whatever. Last I checked, every discussion didn't need to follow joe's optimum path of where a discussion should lead.

  • robc||

    Outcomes:

    1. Stupid people get what they deserve
    2. Weakness in housing market balanced out by strength in rental market
    3. My WaMu stock crashes
    4. The Amish dont notice

    In this case, by not participating, the Amish made a very smart decision. The rest of us are dumbasses who deserve whatever happens to us.

  • ||

    How do we deal with the 8000 dumbasses a day that could become homeless without robbing the smart to bail out the stupid?

    They weren't gonna be friggiin' homeless. They would have been forced to move into a 2 BR apt that they can afford and their credit rating will be justly trashed. Those holding the paper would have faced reduced profits or losses due to their imprudent lending/investment decisions. Perhaps some would have faced stockholder revolts.

    That would have been justice. I'm a very pro-justice sort of guy. See my comment upthread.

  • ||

    A filter is easier, or just ignore.?

    Apparently, not easy enough.

    Ohai, Gai. I'm in yr hed, ubsessin yr thawts.

  • Guy Montag||

    brotherben,

    What falling economy? Do you mean that growth not accelerating as fast as it was before, but still growing, means falling?

  • Neu Mejican||

    As someone who is as far from expert on this as you can get, it seems to me there are fixes here that don't involve a "bailout" at all.

    e.g., If stupid lender X gave a mortgage to stupid borrower Y using the affordable (but adjustable) rate Z, then adjusted that upwards to rate FUCK causing Y to default because s/he couldn't make the payments...the fix is to renegotiate that loan to a payment that Y can afford. No one needs to give Y extra money, no one needs to give X extra money. So if there is a federal role in this it seems it would be limited to saying that Y has a right to renegotiate the loan rather than default, and to, perhaps, provide some guidelines about how that process should proceed. No taxpayer money need be involved.

    What am I missing?
    (I am sure I am missing something)

  • robc||

    joe,

    Shock is a short term negative and a long term positive.

    Ive said it before and I know I cant prove it, but I still contend that boom/bust cycles are stronger in the long term than controlled steady growth.

  • robc||

    Ohai, Gai. I'm in yr hed, ubsessin yr thawts.

    You really shouldnt post like that without linking to an appropriate cat image too.

  • ||

    Last I checked, every discussion didn't need to follow joe's optimum path of where a discussion should lead.

    Heh heh heh.

    You must not have checked many threads.

  • joe_troll ||

    Jeez folks, I'm jus' trollin.

  • robc||

    NM,

    You arent missing anything. Apparently the banks think foreclosing is a better deal than renegotiating. I know banks are going slower on foreclosures and giving borrowers more chances to catch up, but for some reason, refiing at an affordable rate doesnt seem to be an option.

    I dont know why either, but hey, its their call.

  • ||

    Please, somebody be more specific about what the possible fallout is from the government doing nothing to "soften the blow." I keep hearing that there will be consequences, major consequences, if we don't bail out the borrowers/home "owners." But please, to those who insist there will be these major consequences, please explain further.

  • kinnath||

    In other news, Illinios sues Countrywide . . .

    In its lawsuit, the state alleges the Calabasas, Calif.-based company engaged in "unfair and deceptive practices" in the sale of mortgage loans, The Wall Street Journal reported Wednesday, citing a draft of the complaint.

    Illinois officials also say Countrywide relaxed its underwriting standards, put together loans with risky features and used marketing and sales tactics that motivated employees and brokers to push loans regardless of whether borrowers had the resources to repay them, according to the newspaper.


    Can you say "tobacco settlement 2.0"

  • ||

    Guy Montag, I'm assuming the fall is occuring based upon government intervention in so many aspects of it. That could just be my pubic high school education at work.

  • ||

    robc,

    I still contend that boom/bust cycles are stronger in the long term than controlled steady growth.

    I'd say, up to a certain point. I doubt you'd argue that a crash as severe as the Great Depression was a net positive in the long term.

    But in principle, I'd agree. Steady 2-3% growth every single year forever is less desireable than some turbulance. It's not acheivable, anyway.

  • Ravac||

    Until my comment, ...

    I see joe's ARM is limber enough to pat himself on the back all the time.

  • ||

    Why the hell is home prices coming down considered a bad thing. The "American Dream" costs less without this bailout of undesrving borrowers and lenders.

    Housing prices decline as the mortgage holders sell at reduced prices.

    Rental prices go up as people move from mortgaged property to rental property.

    Others in rental properties see their rent go up and home prices decline.

    They buy a home.

    This reduces the upward pressure on rental prices.

    Everbody wins except those who foolishly borrowed, lent and assumed the overvalued paper.

    What is wrong with this?

  • Guy Montag||

    Please, somebody be more specific about what the possible fallout is from the government doing nothing to "soften the blow." I keep hearing that there will be consequences, major consequences, if we don't bail out the borrowers/home "owners." But please, to those who insist there will be these major consequences, please explain further.

    The end of life on this planet as we know it. This crisis is greater than Global Climate Change.

    How's that?

  • ||

    somebody be more specific about what the possible fallout

    Your friendly neighborhood Sandinistas, who have been getting so much political traction from bleating about "affordable housing" will have to find something else to boo hoo about, as housing actually becomes more affordable.

  • ||

    joe,

    I think you're entirely wrong. A bailout rewards risky behavior. Lenders have substantial blame in all of this, but a large number of the borrowers got themselves into trouble, gambling on an ever-increasing price and on perpetually low rates. I don't have a problem with consumers suing lenders over any fraudulent practices, but a legislative bailout is stupid. I'd say that the S&L bailout in the 80s had no small effect on the risk tolerance of the lenders in the Oughts. And so it goes. . . .

    I leave out any discussion of whether it is fair for me, someone who lives within my means, to subsidize those who don't. The spike in foreclosures is a middle class problem, too, not a poor-people problem, because, all told, banks don't generally lend money to buy houses to people with extremely low incomes. That goes for subprime lenders, too.

  • robc||

    joe,

    The Great Depression was part of a long term positive. It, itself, was a negative, but it was only the negative part of a positive trend.

    The Fed and people supporting bailouts are wanting controlled steady growth. They are strongly discounting the postive aspects to chaos.

    Hail Eris!

  • Neu Mejican||

    robc,

    but for some reason, refiing at an affordable rate doesnt seem to be an option.

    I don't know why either, but hey, its their call.


    That call is the "predatory" call that some consider a problem, if I am understanding things correctly.

    Stupid lender X above is actually predatory and savvy lender Xprime and knows that he could fool Y out of some of his/her money and eventually get the house back to sell to the next sucker. Savvy Xprime also knows that his company can weather the crash by renting it until it is worth enough to sell again. That is why I am saying the role of government here would simply be to say to Xprime, sorry you should have known that Y couldn't afford this rate if you adjusted it up, so you don't get the house back...you have to renegotiate rather than foreclose...or something. Again, no taxpayer money seems to be involved.

  • ||

    The government created this mess by pushing looser credit so that people could "afford" to buy houses at heavily inflated rates. So what do they do to try to fix it?
    Tighten credit? NO!
    Make it even more easy for people to take out bad loans that they can't afford, only this time the federal government is taking on the risk!

  • Invisible Finger||

    Let's hope it stays there. Those aren't historically-high figures.

    True, but hardly anyone under the age of 35 has experienced it. And if you can't afford your ARM when it adjusts to 8.5% now, you likely won't be able to afford an 8% fixed 30-year mortgage either.

    Foreclosure is the best long-term option for these borrowers, instead they're being encouraged to continue to make payments on a reduced-but-still-excessive mortgage.

  • ||

    Countrywide relaxed its underwriting standards, put together loans with risky features and used marketing and sales tactics that motivated employees and brokers to push loans regardless of whether borrowers had the resources to repay them

    Another self-correcting phenomenon: after Countrywide goes broke, because nobody will provide capital to idiots, other lenders will look harder at their loan apps.



    I know- I had trouble typing that, I was laughing so hard.

  • Russ 2000||

    In this case, by not participating, the Amish made a very smart decision.

    There are actually a few cases where the Amish made gobs of cash by selling their land in an inflated market an relocating to areas where the prices were still sane.

  • robc||

    NM,

    That is why I am saying the role of government here would simply be to say to Xprime, sorry you should have known that Y couldn't afford this rate if you adjusted it up, so you don't get the house back...you have to renegotiate rather than foreclose...or something. Again, no taxpayer money seems to be involved.

    I see no reason to get the government involved at all. I see nothing predatory on foreclosing on someone who doesnt pay their payments. There are very few savvy Xprimes. The companies that bought these loans are getting killed, not making profits off of this. They are trying to minimize losses, not maximize profit.

  • kinnath||

    Having a leg cut off is traumatic, but dieing from diabetes-induced gangrene will ruin anyone's day.

  • ||

    Those shifty Amish fellas...

  • ||

    ARMs are the big problem today, much more than the subprime crisis we keep hearing about. The subprime hit had a lot more to do with a small increase in defaults that blew holes in the securitized portfolios in the secondary market. And the leverage off of those. It was a bubble, too.

    Incidentally, the government capped subprime rates for the more risky borrowers at rates far below those indicated under any rational risk-based pricing model. The federal Home Ownership and Equity Protection Act and the various state "predatory lending" laws played no small role in creating this mess. Oops.

    The increase in housing prices may have happened for the same reason that tuition goes ever upwards--cheap and sleazy credit.

  • ||

    We were prudent about what we could (barely) afford, and now we're stuck, upside down in a lousy house in a neighborhood we'd like to move out of.

    Others who were imprudent, who bought into better, more expensive neighborhoods, are going to get bailed out.

    Goddammit.

    Congress could have at least thrown a free pony in there for the rest of us.

  • robc||

    Those shifty Amish fellas...

    Is it the Amish that are descendents from the Swiss or is that the Mennonites?

    Okay, they were originally Swiss Mennonites, if you can trust wikipedia. They learned their crafty, money-making ways from the Gnomes.

  • ||

    Congress could have at least thrown a free pony in there for the rest of us.

    You'll get your pony when gas hits $5.50 per gallon; you'll need it, to get to work.

  • ||

    The Amish pay cash- what an odd antiquarian lifestyle.

  • Kent||

    The Great Depression led to FDR's election and the New Deal - not exactly a net positive in the long term. You are spot on this time, joe.

    "I doubt you'd argue that a crash as severe as the Great Depression was a net positive in the long term."

  • ||

    Neu Mejican said:

    Savvy Xprime also knows that his company can weather the crash by renting it until it is worth enough to sell again.



    Savvy Xprime is finding out that they are holding on to giant piles of horseshit. Apparently, they're not so savvy.

    Look, let's say you buy a house for 750,000 and you finance 5% of it (sounds crazy, but that's why we're in this mess). So you have 37,500 into the house. Now, the house drops in value to 650,000 and your mortgage payments go up 50% because that cheap ARM hit its trigger. So now you can't afford the payments (especially while you're getting killed at the gas pump and with your home heating oil bills). And even if you sold, you'd owe the bank...a lot. So foreclosure is your best option. You eat the 37,500, you get a black mark on your credit, and you move on.

    And the bank, far from being a winner, is now out 62,500. Assuming they can even sell the house for 650K...which, in a foreclosure auction is highly unlikely.

    Foreclosure is not something that enriches a bank. Everybody loses in a foreclosure. And renegotiating a loan is not the answer either, because now the bank wants you to have the full 20% down instead of that measly 5%.

  • ||

    "Apparently the banks think foreclosing is a better deal than renegotiating."

    Sort of an unrelated observation: a lot of people who got into banking over the last 10 years made money regardless of whether they were intelligent or not. This is the first major culling of the banking heard.

    Countrywide owns a certain house in Orlando that has a cracked foundation, condemned balcony, cracked plumbing, no central AC, a $5,000/yr. tax bill, and an out of code electrical system. The house is worth only what the land is worth (maybe less, because the house has to be torn down). Yet Countrywide lent somebody $305,000 to buy this junker in 2004.....And we're supposed to impute intelligent, rational decision making to these idiots?

    By the way, the kicker about that house is that some stooge put new floors and appliances in it! Gotta love the "flip this turd of a house" crowd.

  • ||

    kinnath said:

    Can you say "tobacco settlement 2.0"



    Tobacco companies mint money. Failing mortgage lenders do not.

  • ||

    Let us not also forget that there are entire sections of the country that did not benefit from the housing boom, but under congress's pen, will suffer losses. In my area we saw very little growth in housing prices over the period where they trippled in the DC area, but we are somehow supposed to pay for people to keep appreciated gains during a bubble that we didn't benefit from?
    Seriously, people like joe think they're moral because of this?

  • Invisible Finger||

    What am I missing?
    (I am sure I am missing something)


    What you're missing is that the stupid lender then sold that mortgage to a stupid investor (aka hedge fund, pension fund, foreign bank, etc.) and is only servicing the loan for the investor; it isn't the original lender's loan to renegotiate anymore. You'll have to track down the actual current investor of the actual loan in each individual case and get their willingess to work with the individual borrower. That'll take so much time that 30-year fixed mortgage rates are sure to rise to historically sane levels (or higher) - and you'll find most of these borrowers can't afford even that slightly lower principal at the historically-sane rates. Even then, when these investors see the amount of work involved going over each borrower's financial ability to repay (the typical underwriting process rather than the fog-a-mirror test of the last few years) these investors will likely just say "fuck it" and foreclose because it's a lot faster and cheaper overhead-wise.

    Bottom line - unless the borrower's principal is around 2.6x-to-3x his annual income, these bailout schemes amount to nothing but face time for politicans. The typical underwater borrower has principal 6x his annual income; that's going to require tax credits of close to 200K - even Democrats know better than to suggest that.

  • Neu Mejican||

    MP,

    Like I said, I am far from expert in this field.

    So this puzzles me...

    because now the bank wants you to have the full 20% down instead of that measly 5%.

    and this

    Foreclosure is not something that enriches a bank. Everybody loses in a foreclosure.

    Seem at odds. If the bank loses in a foreclosure, but requiring you to pony up 20% in the renegotiation means that you will foreclose, what is their incentive to require that 20%.

    As for the 750k now being 650k, why would I as a home owner or a bank assume that this house wouldn't be worth more than 750k by the time the 30 years is up? Why are these decisions about long-term value being made based on current/short term trends in prices?

  • ||

    (aka hedge fund, pension fund, foreign bank, etc.) "


    I thought them damnable speculators had to have something to do with this.

  • Neu Mejican||

    You'll have to track down the actual current investor of the actual loan in each individual case and get their willingess to work with the individual borrower.

    Okay, I seemed to have understood this vaguely already...this seems like the incentive for a broad policy fix...an even playing field that says "this is how you go about doing this." In the end maybe everyone loses some, but if foreclosures are lose-lose-lose, but only a win because of the hassles/overhead involved in renegotiation then the policy fix remains procedural and should be aimed at reducing that overhead to avoid the lose-lose-lose...

    No?

  • Russ 2000||

    The Great Depression was part of a long term positive.

    robc, you really can't believe that, can you?

    All the Great Depression did was put more power in the hands of the central bank - the party that CAUSED the problem.

    That's a long-term negative in my book.

  • ||

    Lenders lose big time (usually) when they have to foreclose. The costs of foreclosure, the condition of houses being foreclosed upon (often trashed, similar to the case with defaulting tenants), and the legal limits placed on foreclosing lenders (to protect borrowers) all make it hard to even break even. Especially when the market is frozen like it is now. Of course, part of that is due to the practice of requiring lower and lower downpayments. For a while, loans were being made with loan-to-value ratios of greater than 100%. Craziness.

    There's also the fact that a higher foreclosure rate means that the anticipated income for the bank from its mortgages may be much lower. This is complicated by the fact that loans are often securitized and sold in the secondary market, but it remains a bad thing.

    Ultimately, foreclosure is considered better than nothing. It certainly beats writing off the loan, but that's the whole point of securing loans in the first place. Banks will generally try to work out something rather than jump to foreclosure, though, in this market, they may decide that's a waste of time in some cases.

  • ||

    Neu Mejican said:

    Seem at odds. If the bank loses in a foreclosure, but requiring you to pony up 20% in the renegotiation means that you will foreclose, what is their incentive to require that 20%.



    The amount of equity that a borrower has in a property is directly related to how bound that borrower is to the property. In the example I gave, the borrower with 5% down was willing to walk. With 20% down, they're much more likely to find a way to make things work. Thus, down payment sizes are directly related to risk management, and banks right now have every incentive to be diligent about their risk.

    As for the 750k now being 650k, why would I as a home owner or a bank assume that this house wouldn't be worth more than 750k by the time the 30 years is up?



    Future value isn't relevant when you can't make payments today. And in any refinance, the bank is going to appraise the house at today's market value. So that 100K difference is relevant today, because in the refi, the bank isn't going to give you 750K for a house that's only now worth 650K.

    Anyhow, as you point out, there's a lot of incentives pro and against. So obviously my simplistic case should be considered representative of every situation.

  • ||

    Let us not forget that there is still an oversupply of housing, even at the lower rates. It's not like we have the optimal number of housing units for the population, and we simply can't afford them. It's that there are too many units for people to be able to afford to buy them at reasonable prices and lending rates, and houses were built (ahem, speculators) assuming the lower lending rates, lower down payments, and lower income to home-value ratios. Trying to prop up house values is exactly the opposite of trying to keep people in their homes.

  • ||

    Do the massive bailouts have anything to do with this being an election year?

  • Rhywun||

    Where have you folks been? The American Dream is non-negotiable. That means getting every American into their own house, even if they can't afford it. We're not gonna trump up those home-ownership rates by letting Americans stay in rentals.

  • Invisible Finger||

    Why are these decisions about long-term value being made based on current/short term trends in prices?

    Because a short-term amount of money (5% or less) is being put down.

    It's a 2-way street. If you are putting 5% down, you are statistically a short-term buyer hoping on quick appreciation; if you put 20% down you are statistically a long-termer. If you say you are a long-termer, you need to put your money where your mouth is.

  • ||

    "Ultimately, foreclosure is considered better than nothing."

    What seems so funny to me is that banks will not work with somebody who can't afford the payment, but has a job, and can make something close to the payment. Instead, they'll foreclose, then pay taxes and insurance on the house while it rots on the market at 75% of what the person who couldn't meet the current payments was on the hook for. It's almost like they are saying, "you couldn't afford to pay us the extra 2% in interest, so we're going to lose $80,000 on this $300,000 house. That'll show 'em."

    Then the banks have foreclosure "auctions" where they show up and up the bidding. A few months back people griped and complained, but now people just skip these silly charades. Why would I spend $1,000 to inspect a house when the bank is going to jack up the price to near bubble levels?

    I'm looking for a house right now just begging to give my money to somebody...and they just don't seem to want it. There has to be some systemic reason why their actions are so idiotic. I just can't believe that everybody in banking is a reject from law or engineering.

  • ||

    down payment sizes are directly related to risk management

    Once upon a time (like, during the S&L crisis, from which we apparently learned, err, nothing), I read a study which found the single best indicator of the likelihood that a loan will be repaid is- tah daaah!- the down payment as a percentage of the loan amount>

    Holy crap! Who'd a thunk that?

  • Russ 2000||

    The American Dream is non-negotiable.

    Yes, but the American Dream is 100% equity in your titled property, not merely having a giant mortgage for it.

  • Neu Mejican||

    Thanks for clarifications guys.

    Lamar's post gets at what I am thining...

    So this makes me ask this...

    If you are already in a contract and renegotiating the loan...this is fundamentally different than making a new loan. You already screwed up, but are trying to minimize loss...given the lose-lose-lose nature of foreclosure...why does the renegotiation need to be about anything other than the monthly payment? You are renegotiation payments on the same loan, not making a new one. That is what I am talking about.

    Again giving buyers this option as a policy fix seems to involve no taxpayer funded buy-out. If it involves procedural changes that reduce overhead/costs for the lender then it could, conceivably have the desired effect with no federal cash involved.

    No?

  • Nigel Watt||

    So since home prices in Houston didn't participate in the bubble since we don't have zoning, can Houstonians be exempted from paying for this?

  • Invisible Finger||

    It's almost like they are saying, "you couldn't afford to pay us the extra 2% in interest, so we're going to lose $80,000 on this $300,000 house. That'll show 'em."


    If you actually do the math, it makes perfect sense.

    Over the life of the 300K loan, that extra 2% is $180,000. Would you rather lose $80,000 or $180,000?

  • TallDave||

    In the 1990s it was:

    Problem: Lots of people have a poor record of repaying their loans, and so cannot get mortgages to buy homes.

    Solution: Make it easier to give loans to people who are poor risks to repay their mortgages.

    What could possibly go wrong?

  • Neu Mejican||

    Over the life of the 300K loan, that extra 2% is $180,000. Would you rather lose $80,000 or $180,000?

    I think this is framed incorrectly.

    Isn't that extra $100k not a loss, but a potential profit not realized? Seems fundamentally different than a loss.

    Again, what am I missing?

  • ||

    Again giving buyers this option as a policy fix seems to involve no taxpayer funded buy-out. If it involves procedural changes that reduce overhead/costs for the lender then it could, conceivably have the desired effect with no federal cash involved.

    No?


    The desired effect is that the irresponsible buyer looses their house and the irresponsible loaner takes a lose....we want this effect to discourage bad behavior.

    Ever heard the words "Moral Hazard"?

  • ||

    In the subprime world, historically, workouts were common. Lenders might allow a deferred payment or some other mechanism for helping a borrower avoid default. And, of course, the most common option was to refinance. One problem today is that the refinance option is no longer widely available.

    I suspect that lenders are going to have limited tolerance for sustaining losses over time, given their generally shaky financial status as an industry. So, they may just jump to the foreclosure decision in the belief that certain borrowers will go bad sooner or later.

    One thing that would be nice about not bailing out borrowers or lenders is that the kind of madness we saw in the last ten years would be much less likely in the future. Losing your house and tens of thousands of dollars is bad, and something you'll want to avoid doing again. Watching your business tank is similarly disincentivizing.

  • ||

    Neu Mejican said:

    why does the renegotiation need to be about anything other than the monthly payment? You are renegotiation payments on the same loan, not making a new one.



    I don't believe that's an option. That's outside of my realm of expertise though. But AFAIK, there's nothing in the mortgage contract that allows either side to renegotiate. A renegotiation clause would introduce large variables in the predictability of the mortgage revenue stream. One can argue that those additional variables could act as a safety valve in situations like what we're currently experiencing, but I'm sure there would be numerous other (potentially highly undesirable) consequences. Thus, you have to write up a whole new contract.

  • Neu Mejican||

    Joshua Corning

    The desired effect, even by your own formula, is that the irresponsible buyers and lenders learn a lesson and pays for their mistakes. This doesn't have to involve losing their house...in the scenario I am talking about both parties take a hit...why does that hit need to be so dramatic in your mind?

  • robc||

    robc, you really can't believe that, can you?

    Sure I can. Compared to the long term economic growth in the history of mankind, the great depression is merely a blip.

  • Neu Mejican||

    MP,

    I don't believe that's an option.

    Probably not, or it seems people would be taking it. I am suggesting the fix may be to open that option up and see what happens.

    but I'm sure there would be numerous other (potentially highly undesirable) consequences.

    Of course if you believe that no smart policy can be crafted then you wouldn't want to do anything...but if the policy can anticipate these and minimize them, then it may be worth trying. As problems arise, it can always be fine-tuned.

  • ||

    I'd say, up to a certain point. I doubt you'd argue that a crash as severe as the Great Depression was a net positive in the long term.

    It would have been if FDR had not prolonged it for an extra 10 years.

  • Invisible Finger||

    Isn't that extra $100k not a loss, but a potential profit not realized? Seems fundamentally different than a loss.

    If you were forced to take a cut in salary, but you had a choice of taking either an $80K cut or a $180K cut, which would you take?

  • ||

    why does that hit need to be so dramatic in your mind?

    You're still assuming that this hit is dramatic. Can you expand on what the negative consequences of just letting it take its own course is?

  • robc||

    down payment sizes are directly related to risk management


    I was reading recently that during the 1800s, 50% down was the absolute minimum if you wanted a loan to buy property.

  • ||

    Neu Mejican,

    One thing to keep in mind is that litigation is an option for borrowers. I'd venture a guess that 80-90% of the loans in question are on the up-and-up (overall--some lenders would have a higher number of questionable loans). However, for the ones that aren't, federal and state consumer protection laws provide any number of bases for going after the lender. I'm not sure all of this is amenable to class action, but I'll be surprised if plaintiffs' attorneys don't jump into this, either way. Certain consumer protection laws and fraud can get you noncontract damages, too (anything from treble damages to punitive damages), which should make some attorneys happy to help.

  • ||

    It's truly awe-inspiring to watch people who haven't yet wondered whether millions of foreclosures could have consequences beyond those experienced by the borrower and bank chortle about how everybody else is clueless about economics.

    Hey joe while you are on the subject of Krugman...where is that recession he has been predicting for like 7 years?

  • Russ 2000||

    Compared to the long term economic growth in the history of mankind, the great depression is merely a blip.

    Good for you. Pesonally, I don't a fuck about what the economics of people in the year 3535 are going to be. Call me a heartless bastard.

  • robc||

    NM,

    Some banks are doing what you discussed. Its just, in most cases, a bigger loss than the foreclose now option is.

    Think of it this way: You owe me 500k on a 400k home, you cant afford the payments at 10% (subprime plus adjustment). I can foreclose and take a 100k loss. Or, I can follow the Neu plan, refinance it to a 6.5% loan, collect payments for a year or so and then foreclose because you cant make that payment either. Is that a positive or a negative? Tough to say.

    Banks seem willing to work with anyone who can possibly sorta convince them that they can catch up soon. If they are financially strong, they can refinance. The problem is the people who cant make the payments, cant make the lower payments either, in many cases.

    The key is the banks didnt make the loans thinking that the people would make the payments, they made them knowing that they would gain so much equity from the increase in home values that whether they made the payments or not, they would be able to pay off the loan by selling a few years down the road.

  • robc||

    Russ 2000,

    The Great Depression ended ~30 years years before I was born. It has the same relevance to me as the economy in 3535. They are both just hypotheticals.

  • robc||

    As an aside, defining a "block" as a chunk of land surrounded by roads on 4 sides with no roads inside it, there is new construction going on on my block (just not on my street).

    Despite the fact that Louisville has already bottomed out (due to being a bubblet at most), I find this amazingly stupid.

  • miche||

    Nigel,
    I'm selling my house in Plano and I can tell you that we didn't participate in the bubble crap. We are getting an offer today and if it works out, we'll be making or losing nothing. And, we bought the house right: 20% down, very low fixed rate, paid extra to the loan, and beat the builder to shit on the original price. We are lucky that we are in a good place with the house but my husband wants to just get rid of it because we are already in our new home which we also bought right. Everybody seems to think that it's fire sale season, low balling offers and there are builders down the road who can offer brand new at same pricing area. I think it's the perfect property to rent but my husband makes the money, pays the bills and doesn't want the headache of having tenants.

    It's like we rented for 8 years.

  • ||

    Reinmoose,
    Let me take a stab at it. If I recall, when this started to take shape, the battle cry was that the mortgage lending meltdown would affect all lennding practices. Lenders would only lend to the lowest risk borrowers. Many businesses would be unable to borrow operating capitol and would fail. It would be a devastating domino effect on the entire economy of the whole world.

    disclaimer: I have had one semester of high school econ with a teacher that had a habit of investing in things at their peak and taking a beating.

  • ||

    It's an analogy of limited usefulness, but- a Suburban (for example) which was bought new from a dealer two years ago is now worth less than half its sticker price. However, the buyer continues to make the payments, because of its utility value.

    There are unquestionably people who cannot make their current monthly house payments, but there are also a lot of people who can afford their payments, but are crying because the price appreciation they expected, or were told to expect, has not occurred. Should they abandon their homes? Should they be "bailed out" by Congressional attempts to put a floor under house prices?

    What about people who had equity, but cashed it out with "home equity lines of credit" in order to buy plasma televisions? Do we bail them out?

  • ||

    The key is the banks didnt make the loans thinking that the people would make the payments, they made them knowing that they would gain so much equity from the increase in home values that whether they made the payments or not, they would be able to pay off the loan by selling a few years down the road.

    One thing you should note in this is that the increase in home values was a regional phenomena found only in areas with stringent land use and zoning regulations...essentially "smart growth" discouraged the creation of new supply to meet growing demand and as a result home prices rose.

    This bail out is a massive wealth transfer from regions with good land use regulations, where the prices remained affordable in too areas with draconian "smart growth" land use regulations.

  • ||

    "essentially "smart growth" discouraged the creation of new supply to meet growing demand and as a result home prices rose."

    Then why did the bubble hit places with open development (i.e., Florida) so much harder than it hit the "smart growth" places like Portland?

  • Invisible Finger||

    I was reading recently that during the 1800s, 50% down was the absolute minimum if you wanted a loan to buy property.

    That was common in the early 1900's unless you went the Building & Loan route, which was sort of a mutual society. Building & Loans amortized mortgages (and required other purchases in a mutual company) whereas other residential mortgages were typically interest-only & variable-rate with lump payments of principal at the end of the term. (I'm amused when the modern press calls these "new" products.)

    Also, by "property" you must mean "residential" (aka non-income producing, aka "dead", hence "mort"gage). For farming and industrial property and probably for apartment buildings the down payment wasn't typically that high because of the expected income to be derived from the property. (And technically those loans are "live" gages rather than "mort" gages.)

    Don't forget that most borrowers were fucked in the Great Depression by the fact that the Fed allowed the banks to close without paying off their depositors. When you are saving up for your lump sum payment by opening a deposit account and the bank then closes and your principal payment vanishes, you are fucked. Before one thinks that the FDIC prevents that problem, think of the typical mortgage principal ($400K) and think of the FDIC maximum insured amount ($100K). The insured deposit is still small - if you had a 400K lump sum payment at the end of your interest-only loan, and the bank ran off with all of your deposit except for 100K, you're still fucked. 30-year amortization helps spread the risk and lower the payments but at that length you accumulate almost no equity (because you pay down hardly any principal) for the first 10 years or so.

  • ||

    "Over the life of the 300K loan, that extra 2% is $180,000. Would you rather lose $80,000 or $180,000?"

    What are you talking about? If I invest $80,000 today, I'll have over a million dollars in 30 years. So, let me think about this...[mulling it over]...I'll take the $1.2 million over the $180,000.

  • ||

    A couple of things:

    1. You're not likely to be able to find an apartment anywhere decent unless you can pass a credit check.

    2. With very few exceptions, the people buying McMansions in the exurbs that they couldn't afford to buy (and now can't afford to heat) were determined to protect their snowflakes from the trauma of coming within 20 miles of a brown person before age 18--at any cost.

    And they vote. And they believe they have a God-given right to live as far away from the ghetto and the barrio as humanly possible.

    Those are the consequences politicians are afraid of. Governments have been subsidizing white flight from the cities since the Forties. One of the biggest welfare scams ever. God help any politician who opposed it now.

  • ||

    "If you were forced to take a cut in salary, but you had a choice of taking either an $80K cut or a $180K cut, which would you take?"

    Same as above. I would much, much, much prefer to take the $180,000 cut spread out over 30 years ($6,000 per year) than an immediate $80,000 cut. The extra $74,000 would be nice, but not as nice as a humble foreign policy.

  • ||

    Then why did the bubble hit places with open development (i.e., Florida) so much harder than it hit the "smart growth" places like Portland?

    Care to quantify that in anyway?

    Or is "harder hit" based on the number of news articles you have counted?

    And where did you get the idea that Florida had "Open development"?

    http://miamidade.gov/wps/portal/overview

  • Neu Mejican||

    Then why did the bubble hit places with open development (i.e., Florida) so much harder than it hit the "smart growth" places like Portland?

    Maybe because those smart growth policies have helped maintain value/prices?

    Maybe the homes in those smart growth cities are actually worth more as a result of being in smart growth cities?

    I could be convinced otherwise, of course. Just speculating here, but it seems people include quality of life as a result of location as part of home value. The nice neighborhood with a good quality of life provides a nice cushion when the bricks and mortar become worth less than they were before...

    No?

  • Neu Mejican||

    Seattle's home prices have slowed in their rate of increase.

    Is this due to the increased development apparent everywhere in the city, or is it due to the national market?

    Those smart growth policies in place in Seattle seem to be allowing for a huge surge in the supply of housing in Seattle despite the national downturn.

    What am I missing?

  • ||

    "Care to quantify that in anyway?"

    Not really. I don't think it is any secret that prices in FL rose higher and fell farther than prices in Oregon. I'm not aware of any angle that shows Oregon as harder hit than Florida, or Portland harder hit than, say Punta Gorda. The study was done by Moody's, a respected analyst.

    And I say that Florida has "open" development because (1) it is my business and I know, (2) I've yet to see a request for a major development (or a small one) denied (but maybe I'm just that awesome of a lawyer). In fact, Florida lefties talk tough, but developers run this state. Only two governors since 1970 have been something other than a developer.

  • ||

    Seattle's home prices have slowed in their rate of increase.

    Can we say foreclosures?

    The increase in supply is not an increase in the number of houses but a drop in quantity demanded.

    But yeah everything you said agrees with what I said. Regional hikes in prices are due to "smart growth" policies of those regions.

    In fact, Florida lefties talk tough, but developers run this state. Only two governors since 1970 have been something other than a developer.

    So your comparison is Smart growth light with a larger population then smart growth capital city was a more severe in Smart growth capital city?

    How is Kansas doing? Or Ohio? You know areas with actually no smart growth. Where densities are determined by markets rather then government mandate.

    but maybe I'm just that awesome of a lawyer

    I have my doubts...any land use lawyer who says government mandates that prohibit sprawl is "Smart Growth" while government mandates that require sprawl is "open development" is a fucking idiot who I would never hire.

    It does not matter if the total amount of housing is locked up in huge lots required by law or in open space required by law the end result is a lack of supply of housing stock.

  • robc||

    From what I understand, Houston had very little bubble and I think they qualify as the definition of "open" development.

    I doubt South Dakota has anything resembling smart growth but they didnt even know a bubble existed. Their prices are going up while everyone else's are going down.

  • Neu Mejican||

    Joshua C,

    The increase in supply is not an increase in the number of houses but a drop in quantity demanded.

    You need to get over the mountains more often.

    Seattle is seeing a rapid increase in the number of actual homes available. Most are in the form of multi-use condo/coop style developments. This is partly due to the fact that some smart growth polices involved removing restrictions on these types of development.

  • ||

    "So your comparison is Smart growth light with a larger population then smart growth capital city was a more severe in Smart growth capital city?"

    I really don't understand what this sentence means. I'm not being a dick, but could you restate it?

    "any land use lawyer who says government mandates that prohibit sprawl is "Smart Growth" while government mandates that require sprawl is 'open development' is a fucking idiot who I would never hire."

    LOL! I send the "land use" work to specialists. I don't dirty my hands with the grunt work.

    But again, I don't understand your statement. Smart growth, in general, is urban planning (and adherence thereto) that concentrates population nearer to city centers. I used the term "open development," to mean "without serious regulatory impediments." Perhaps you were confused because I made up that term, borrowing it from the techies. I was hoping it would be more user friendly than that.

    And I'm not aware of any government regulations that "require" sprawl, but perhaps you have something in mind?

    I'll admit, I don't know much about Kansas or Ohio. But for whatever reason, both Kansas and Ohio rank low in population growth, whereas FL and OR are much higher.

  • Invisible Finger||

    Same as above. I would much, much, much prefer to take the $180,000 cut spread out over 30 years ($6,000 per year) than an immediate $80,000 cut.

    If you take an 80,000 cut now, you have a (smaller) pile of cash you can reinvest - "If I invest $80,000 today, I'll have over a million dollars in 30 years" - otherwise you lock yourself into a smaller profit than what you originally agreed to.

    The lender had 300K. After loaning it, he has 0K (zero K). He expects that loan to give him 540K at the end of 30 years (6% interest). If he works out a 2% interest cut with the borrower, he'll have 360K in 30 years. A 180K cut spread out over 30 years.

    If instead he forecloses now with an immediate 80K cut, he'll receive 220K which he can reinvest in your apparently nine-percent risk-free, "If I invest $80,000 today, I'll have over a million dollars in 30 years" scheme; which in 30 years will earn give him 3000K. Heck, he may as well pocket 140K and invest only 80K in your scheme and in 30 years he'll have 1140K. That's still more than DOUBLE the 540K in the original deal. IOW, the lender would be an idiot NOT to foreclose ASAP.

    If the agreed to the 2% interst reduction workout, the lender would receive monthly payments and put that money into the 9% investment of yours. But in 30 years he'd receive around 1800K, 40% less than the 3000K he could get if he foreclosed.

  • Russ 2000||

    Maybe because those smart growth policies have helped maintain value/prices?

    Or helped maintain unaffordability, depending on your point of view.

  • Neu Mejican||

    Russ2000,

    A difference without a distinction, I think.

  • Neu Mejican||

    And I'm not aware of any government regulations that "require" sprawl, but perhaps you have something in mind?

    They usually involve requiring a certain amount land around a building, a certain number of parking spaces per square-foot of building, a restriction on residential use in commercial developments, a limit to how sub-divided a particular piece of land can be...things like that.

  • ||

    Lamar can speak to this more authoritatively than I can, but Florida being run by developers (esp. at the local level) is an example of how what looks like a free market isn't entirely. Developers get major subsidies and regulatory exceptions, often in exchange for things that look suspiciously like bribes. Even when the latter doesn't occur, the developers are rarely denied their sweetheart deals.

    Don't misunderstand me--I'm upset about the government's role in this more than I am with the developers themselves, though they are part of the problem, too, of course.

  • ||

    It's truly awe-inspiring to watch people who haven't yet wondered whether millions of foreclosures could have consequences beyond those experienced by the borrower and bank chortle about how everybody else is clueless about economics.

    No, there's also the consequence that letting housing prices fall, because their appreciation is no longer being fueled by easy credit, will make houses more affordable to people who want to buy them on prudent terms (such as 20% down payment, fixed interest rate, 30 year term) and who have been paying rent waiting for the bubble to burst. What's truly awe-inspiring is how joe is comfortable with fucking those people for the benefit of people (borrowers and lenders) who gambled on 5-year ARMs and the expectation that prices would go up indefinitely.

  • Russ 2000||

    And I'm not aware of any government regulations that "require" sprawl, but perhaps you have something in mind?

    If you're talking exurbs, you're typically talking about communities without sewer systems. So for waste you need septic systems (and a large enough yard to house one) and open space in lieu of storm sewers. Space is also required for wells.

  • ||

    "If instead he forecloses now with an immediate 80K cut, he'll receive 220K..."

    From who? The magical liquidation fairy? What I find hilarious is that you spout off like an expert, but you never once questioned by figures (2%, $80,000 loss), which were just sarcastic made up exaggerations.

    If mortgages are such bad investments for banks, such that they'd always be better off and prefer to foreclose, why do they make the loans in the first place????

  • ||

    This bad market aside, the amount of money a bank makes from a loan that performs versus one they have to foreclose on is huge. It's a big deal when a bank has to write down or write off a loan of that size in good times. Banks are heavily leveraged, too, which means that money that just sits around can get them into trouble.

  • Tim Cavanaugh||

    "The plan would allow distressed borrowers and their lenders to stem losses by allowing qualified owners to refinance into more affordable, 30-year fixed-rate loans with a federal guarantee."

    Since all of this describes what a qualified "owner" can do already, is the only difference the federal guarantee? If so, does that guarantee refer to a conforming-loan guarantee (also available now), or an actual contract in which some federal entity will be on the hook if the borrower defaults?

  • ||

    I used the term "open development," to mean "without serious regulatory impediments." Perhaps you were confused because I made up that term, borrowing it from the techies. I was hoping it would be more user friendly than that.

    Then perhaps you can explain how I get 4 homes per acre in this type of zoning?

    http://www.miamidade.gov/planzone/Library/brochures/EU-1C.pdf

    And how does a mandated 15% max lot coverage on 2.5 acre lots increase the housing supply?

    To say that these are "Open Development" standards is a fucking joke.

  • Michael Ejercito||

    I was just thinking how awesome it would be if Congress could find a way to artificially raise the value of a house.


    Something bugs me.

    Why is it that lower home prices are seen as a bad thing, while higher gas prices are seen as a bad thing. Is this not a contradiction?

  • ||

    And I'm not aware of any government regulations that "require" sprawl, but perhaps you have something in mind?

    Here you go:

    http://www.miamidade.gov/planzone/Library/brochures/EU-1C.pdf

    Seriously do you have any idea what the fuck you are talking about?

  • ||

    "How do we deal with the 8000 dumbasses a day that could become homeless without robbing the smart to bail out the stupid? How do we, as a nation, require real personal responsibility, without going through a complete societal and economic breakdown?"

    Just make everyone take drug tests, then we will all be OK. Because testing people for drugs makes them better employees drones, then by extension they will pay on time. It's a win win, drug tests are one of the few things made in America and everyone's on dope anyway, so they won't mind.

  • Kolohe||

    Also, by "property" you must mean "residential" (aka non-income producing, aka "dead", hence "mort"gage).

    This explanation of the etymology is too good to check.

  • ||

    "To say that these are "Open Development" standards is a fucking joke."

    Having "relatively few impediments" to development is not the same as not having any. More importantly, zoning laws are changed all the time. Comprehensive plans, zoning laws and construction permitting rules are all fluid.

    "Seriously do you have any idea what the fuck you are talking about?"

    LOL! Apparently not! Did you see that brochure you linked to! That was some heavy stuff! I've never seen a developer able to get land re-zoned! I've never seen a developer get denied at the local level then take his case to the state-level under a Development of Regional Impact theory! I've never seen counties try to use the availability of water and wastewater utilities as a way to limit growth! I've never seen zoning boards rezone entire areas in exchange for environmental protections! I've never seen county commissioners reverse positions when a developer contributes to their campaign! I've never seen new elections change the entitlement opportunities for a parcel of land! I really have no experience in any of this!!

    What I DO know, is that if there is a f*cking brochure that says your house must be on an acre, you better believe that everything within that jurisdiction will be on an acre lot whether it is built today or 5,000 years in the future.

    In fact, since the law is so clear, and so fixed, and so impossible to alter in any way, there's really no need for lawyers anymore. Heck, I'm not even sure why I show up to work everyday, what with all the nothing I don't know about anything.

    Thanks for educating me, Dondero. I really am glad you know the first thing about development. Especially in your area of expertise, i.e., the political atmosphere and adherence to development planning in Portland vs. the atmosphere in Florida cities.

  • ||

    "And I'm not aware of any government regulations that "require" sprawl, but perhaps you have something in mind?

    Seriously do you have any idea what the fuck you are talking about?"


    I have to inquire: since I asked politely for a clarification, what made you take the douche-bag angle in responding? You never answered my original question. Did you get all vinegary to hide the fact that I mentioned the city of Punta Gorda as the hardest hit, yet you responded with zoning laws in Miami? Or was it to obscure the fact that virtually all cities have zoning? Or possibly to hide the fact that completely government-free development rarely exists?

    I'm just wondering if I was rude in any way prior to your turning into a total asshole for no apparent reason.

  • Invisible Finger||

    From who? The magical liquidation fairy? What I find hilarious is that you spout off like an expert, but you never once questioned by figures (2%, $80,000 loss), which were just sarcastic made up exaggerations.

    REO auctions happen often, hardly a liquidation fairy.

    Perhaps you meant those figures to be exaggerations, but they are in fact typical of the market. A 26% loss (80K off of 300K) is attainable in a REO sale. The lender would be more likely to work out terms with the borrower if the drop in value was closer to 60% since the funds recovered in a REO auction might not be enough in comparison to how close (and how willing) the borrower is to making the payment on a modification. Then again, if the property is dropping in value that much, the borrower would benefit from a foreclosure more than the lender would.

    I don't see the 2% interest figure as an exaggeration, it's typical. Did you think it was too high or too low?

    I mocked your invest-80K-get-1.2-million-in-30-years - I don't know what's guaranteeing a 9% return for 30 consecutive years these days. On that front I will not claim to be an expert. Then again, a 9% fixed rate mortgage was about the norm in early '95.

    Nice chatting with you.

  • ||

    Three-hundred-billion dollars is a lot of money. Whether right or wrong; the bailout scheme makes me ask a few questions:

    1) Will the bill become law?
    2) Who benifits?
    3) How can I get my dirty dick-skinners on some of that filthy lucre?

  • ||

    "Nice chatting with you."

    Wait, I still want to know why banks do mortgages at all if they can make better money elsewhere.

  • ||

    4) Why does Wall Street love this plan?
    5) Why do congress critters love this plan (sse #4)?
    6) Why do freedom loveing tue patriots hate this plan (see #4).

  • Rakune||

    #4 shoud say (see#2) Stupid keybord & etc.

  • Invisible Finger||

    Wait, I still want to know why banks do mortgages at all if they can make better money elsewhere.

    Do you put all your egss into one basket?

  • ||

    "Do you put all your eggs into one basket?"

    So aren't we back where we started? If they have a certain amount of money in basket A, the mortgage business basket, our discussions about the future value of $80,000 doesn't mean much I guess. It wouldn't go into basket B anyway.

    If the bank puts that $220,000 into a different loan at 6%, they would be around $25,000 ahead over 30 years than if they would have reduced the first guy's loan by 2% (assuming he paid at 6% for, say, two years). Clearly we are oversimplifying interest and risk assessment, but isn't this about right?

  • ||

    The solution to everything is to cut interest rates, create special liquidity facilities, and backstop bad loans with fiscal policy. It's worked every time it's been tried!

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