patrick.net

SP :

If you take that away, all they have is a house they don’t really want, bought for far more than it is really worth, paid for with money they don’t really have, and a loan that will pretty much consume the lion’s share of their income.

Well said. That's why I insist, it's mostly psychology and the fundamentals don't justify the absurd prices in the Fortress. Because very few people paid (or could have paid) a lot of down payment in percentage terms. Yes, people can stretch to max and somehow service the loan as long as there is a job.

But a 1M loan to a 150K income techie is not too far from subprime.

FormerAptBroker Says:
[re: Paulson's Snake Oil Plan]
He does not want to “solve” the problem, he just wants to delay it (until after the election)…

In addition to delaying it past the election (and handing the Democrats a bigger Bag o' Krap to deal with in 2009), there seems to be another angle to this.

If you look at the qualifying criteria for the FB's who actually might get their rates frozen, you will notice that is very carefully carved. It identifies the subset of FB's who can be kept on life-support for a while.

In other words, the ones who can afford the reset get no help. The ones who can swing a refi also get no help. Not a problem for the bank since they keep making payments.

The completely hopeless cases get foreclosed on right away. This becomes an immediate problem for the banks.

The ones who cannot afford a reset will get to keep paying 'frozen' rates for a while. This bunch of underwater fools keep making payments, so the bank doesn't need to foreclose immediately. Eventually, though, when the freeze is lifted, most of these will probably go belly up anyway. But that is not for a few more years...

The net result is that _IF_ this crazy, desperate scheme actually works as intended, the banks can spread out the foreclosures instead of having to take it all right now.

The fact that it also is a election year only makes it easier for the plan to get approved in a hurry.

>the banks can spread out the foreclosures instead of having to take it all right now.

Exactly. Whatever be the scheme, it will not end up helping the FBs. They were screwed the minute they signed the paper to buy something that couldn't really afford.

The whole scheme is to help out the banker buddies of those in power.

I do not see the Paulson plan as any type of help to the borrowers. It's primary target is to help lenders - because they cannot handle the flood of foreclosures. At the current rate of foreclosure generation and current ability of the system to process it, there would be buffer overflows all over.

So this plan adjusts the speed of foreclosures. It will indirectly help some borrowers and will be directly marketed as such to gain political mileage. So many of us are justifiably pissed off. If it actually succeeds in putting some order in this chaos, it may not be as bad as we think. Yes, all of us want this to get over this ASAP and move on, but that was never likely. We have been discussing bailouts for a long time now.

WOW. There were 3 of us, posting almost exactly the same thing almost together.

By the way, the real elephant in Paulson's room is this -

They are willing to overwrite contract law on securitized mortgages that have already been sold to investors. They are pretty much monkeying with the underpinning of trust beneath the financial and derivative markets. That is one doozy of a precedent to set.

They are willing to risk the credibility of the financial system by forcing a practically unilateral change in debt-obligations. "Finance this debt for me and I will pay you some interest"

They are bending over backwards to delay and/or obfuscate the market revaluation of securities - thereby promoting an opacity that DIRECTLY impacts trading in these securities.

So, Mr. Paulson, if _this_ is the cure, EXACTLY HOW BAD IS THE REAL PROBLEM THAT YOU ARE TRYING TO RUN AWAY FROM?

We are f*cked.

Sp,

Of course we are f*cked. I disagree with trying to drag the problem out. I want the process over ASAP. It is a $hit sandwhich that everyone has to take a bite of. I would rather it happen under our terms rather than wait for foreign capital to dry up. The end result will be the same, but more painful if we are cut off by our creditors.

Duke Says:
I am still thinking about the fortress here in the BA.

Well, stop. :-)

For what it's worth, Zillow seems to have marked down many Cupertino houses by 3 to 5% in the past month. Even though I don't trust the absolute value of their Zestimate, this is still an unusual trend to see in their numbers.

The assumption that the government can, at its discretion, override contracts drawn between two private parties is a dangerous precedent.

In the future, people will enter and draw up crazier and crazier contracts because they are not inviolable anyway.

If things go south, the gummint will interfere and fix everything.

SP,

I'm glad you mentioned the precedent of meddling in the mortgage mess. Since when, in the good old capitalist US of A, has the government been able to annul contracts legally made by consenting adults because they weren't a good idea? Ostensibly the people who made these mortgages to the lesser able to pay did so fully expecting the contractually agreed upon higher rates of interest. They were expecting to be rewarded for risk. As were the secondary markets. If fraud was committed, and I'm sure brokers committed a lot, go after it, but a crappy deal? Caveat emptor.

As to the SUV write off- I'm waiting for the private jet write off (OK, because it's the only way I could afford one...). Think about all the jobs it would bring- pilots, maintenance people, personal stewardesses, refueling people, ground people, prepared gourmet meal box lunch people. Think of how much more productive a society we could be without that mandatory two hour arrival before departure. Yes, private jet write offs, good for America, good for us all!

They are willing to overwrite contract law on securitized mortgages that have already been sold to investors.

My understanding was that most servicers have some leeway in changing the interest rate if problems should occur.

And that this move was to encourage more servicers to take advantage of that clause.

So it's not a government breach of contract per se.

But that's just my understanding...

SFWoman,

LOL.

Private Jet write-offs will definitely help the common good.

If only we could tie it somehow to "national interest", we will be all set.

The whole scheme is to help out the banker buddies of those in power.

Unfortunately, it will also put a little brake action on the slide of home prices. I wonder if it is possible that if housing costs (rents and mortgages) fall to the point where they are a much smaller bite of the take home income, the economy would benefit by people having more money to spend on items other than housing. Down payment requirements and loan rules may prevent future homebuyers from getting a loan that commits too much of the monthly take home. Thus, more money left over for other wants, such as SFWoman's private jet.

The faster home prices fall, the better for us all.

SP :

So, Mr. Paulson, if _this_ is the cure, EXACTLY HOW BAD IS THE REAL PROBLEM THAT YOU ARE TRYING TO RUN AWAY FROM?

We are f*cked.

I think that's what Fed and Treasury officials are seeing in future and makes them scared. This time RE was not local, and trouble won't be local. If ZIRP get's us out of this, then so be it.

Damn italics again.

Bapp33,

I think you and sriramgopalan agree that force should not be used in the marketplace

"most of them take very little interest in the neighborhood"

They certainly don't. Oh and that's hardly confined to the BA btw. What makes this additionally insulting is that they were somehow able to convey the highest levels of smugness at the same time.

Then again, that was the promise the boom held. If ONE guy on your block made less than you or wasn't holding up his end insofar as dedicating every free moment to installing koi ponds (you need only tolerate it for 2 years) before moving up the property ladder.

Hello Kitty,

I must have been one of those guys in the 80's! I love a "boat". Especially as the rear suspension begins to sag, that really gives it that "cutting a wake" look. HARD to PORT!

You're absolutely right. The Hummer will become the next, "Aw hell, he's a good kid, just let him drive the old one" car. It has all the ear markings.

DinOR,

Funny. My thought has been that Hummers and SUVs will soon become the drive-by-shooting-vehicle-of-choice. It has taken longer than expected, though.

justme,

Wasn't that what Tupac was driving when he was gunned down? I always think it's classy when you're in Vegas and a block long Hummer Limo filled w/ frat boys screaming out of the windows rolls by!

BTW, why are all these posts categorized under "Uncategorized"? There is a "housing crash" category.

Not sure how this relates to the current discussion, but someone told me that we should really be paying around $5 a gallon for gas right now, but big oil is keeping prices down in order to crush ethanol. I haven’t heard this theory anywhere else. Think it's true?

First, I don't know where this magic $5 per gallon comes from. I don't know if there is some body of literature that I don't know about that says $5 is the socially optimum price for a gallon of gas, but everytime I have had a debate with big government type of a strong liberal viewpoint this magic number is raised. It also has to be from government taxes because the idea of an oil company making that much money gets the corporate haters in an uproar.

To give my opinion to moonmac's question, I don't believe there is some conspiracy to keep ethanol down. In my opinion they would have kept prices at $1.50 if that were the case since it is now pretty much a push on a cost comparison. Ethanol has its own challenges which is why it has yet to really catch on, and in my opinion lithium ion battery technology will make an all electric car feasible in the next few years. The middle of the road technology will be the plug in Prius which will be out in 2009.
Also visionary oil companies like BP are rethinking their businesses and are morphing from being oil companies to energy companies. At least that is how they are trying to market themselves.

I don't think big oil has to do anything to crush ethanol. It will be crushed under its own weight. Ethanol, even with all the tax-payer subsidies, will not pan out.

Malcom,

True, but that cuts both ways. I don't know how many times I've had conservatives tell me... "If Bill Clinton had his way we'd be paying 5$ for a gallon of gas!" (Toasts and hardy yucks) It's just THAT "magic" a number.

Touché DinOR :)

As Randy H was fond of saying, at some point it becomes "group think" or some kind of echo chamber.

I'm currently reading NGEO and they have an article about corn-based eth. being DOA but they do hold out hope for sugar-based eth. Anyone finish that already?

If ethanol was a viable fuel, the market would be using it already, at least in those countries where gasoline is expensive.

Ethanol from corn would have so many layers of subsidies that it would be hard to figure if it is proving to be viable or not.

Forget getting ethanol from sugarcane. Could we first get sugar from sugarcane? I am tired for this high fructose corn syrup tax-payer subsidized abomination in everything.

www.theoildrum.com has probably the best write-ups on the unfeasability of ethanol .....

I believe it takes a lot of energy to make ethanol - so where do you get the energy from? Oil & Gas? Or maybe they could go nuclear?

sriramgopalan,

Brazil is doing quite ok providing a large fraction of their automotive fuel with ethanol from sugarcane. It can be done. The problem in the US is that `any green program quickly gets hi-jacked and turned into corporate welfare, which is even less efficient than the human welfare programs.

Brazil does have a significant problem that they are scorching jungle to grow sugarcane on the land. This leads to less CO2 absorption and a loss of rain forest. But their program is clearly price-effective and net-energy positive by a significant margin. Check out Wikipedia for more details.

Nuclear is a very good choice for base load energy needs as well as making transportation fuels. I work as an operator at such a plant and have always been impressed on how cost effective it is. I also think we also need coal. I do not want to use coal however for making electricity. Instead I want to use nuclear power to convert coal in to oil using the Fischer-Tropes method. This method would make use of heat that is thrown away through the top of a cooling tower. Why not make use of this waste heat and turn it into a useful commodity?

Nuclear power is a renewable source of power. We have built many breeder reactors in the past and proven its viability. I would however like to see the reactors made under a join ownership program of private industry and government like South Texas Project. About half of STP is owned by the City of San Antonio, the city where I am from, and they have the lowest electric rates in the state. Deregulation is not a good thing for the consumer. I now live in Ohio and am now seeing it too deregulate itself. There is talk of huge increases in our electric rates.

Bap33,

A good humorous post. I love it when you parody yourself :-).

But: Don't discount ideas just because they are advocated by someone you perceive to be a lefty.

By the way, I'm not morally opposed to whale farms. But what are you going to feed them? Corn-fed krill or plankton is one idea, you can see where that leads. I'm sure you could make good biodiesel from whale oil, although not very efficiently. Plant-based fuel will beat animal-based fuel just about any day.

At $90/barrel, oil is abundant. We have tar sands in Canada. We just need time and resources to develop new oil fields.

Ethanol is just silly. What is next? Flintstone-mobiles?

Let the market solve our energy problems.

If we find a way to burn whale blubber in a car, and get nothing but water in the exhaust, and get 180mpg per pound (about 7 gallons), will the lefty’s allow whale farms?

Whale meat tastes like rubber.

I believe it takes a lot of energy to make ethanol - so where do you get the energy from? Oil & Gas?
Claire,
A lot of people erroneously believe that a lot of the energy expended to make ethanol comes from petroleum. Actually, ethanol production is a way to supplement our existing gasoline infrastructure with natural gas, coal, and a small amount of renewable (solar) energy. Here is a recent summary from the Energy and Resources Group at UC Berkeley. They have cool spreadsheet model that reconciles several recent studies about the EROEI for ethanol.

Brazil does well for its drivers that's for sure. What people don't realize is Brazil's drivers are the top 20% of the population who rule the rest with an iron fist - the average person there has no hope of owning a car, and large numbers of peasants are enduring lives of slavery in the sugarcane plantations so the rich can keep driving.

Sort of upsets the soccer moms if their betting skills in the RE casino were not what they thought they were, and they and their kids end up hacking 'cane for the rest of their lives.....

Peter P Says:
December 4th, 2007 at 3:23 pm
"Let the market solve our energy problems."

It's a larger challenge than just saying the market will take care of it. Markets have been slow to react for numerous reasons. The first being that profits actually increase as scarcity increases. Even though I don't believe it is a crisis it is a basic tendency, like rhino horns, to not consider the future social costs to a transaction today.
There is also the catch 22 horse and cart dilema. It will take government infusion in the areas of infrastructure and standards. Say you invent a new fuel; that's great but it won't automatically become a standard or even compatible in the mass market until fuel operators and manufacturers accept it as the new standard. That is why I like the Prius plug in hybrid concept. If that technology catches on, not only will it be environmentally sound, ethanol or other biodeiesels could be its fuel for the 20% of the driving that would be outside of the battery range. Like I said earlier, new Li Ion batteries are coming soon and already the Tesla company is making a $100,000 sports car with a 200 mile range. It is not a huge leap of the imagination to realize this will soon be available in a $20,000 economy car with even greater range.

Peter P Says:
December 4th, 2007 at 3:24 pm
"If we find a way to burn whale blubber in a car, and get nothing but water in the exhaust, and get 180mpg per pound (about 7 gallons), will the lefty’s allow whale farms?
Whale meat tastes like rubber."

I believe the larger goal is energy independence and environmental balance. I think it would speak poorly of our society if we actually chose a solution like that if presented with the dilema. Maybe we could make a car engine which runs off of dead African children, then we would never have a shortage of fuel although it would still be foreign energy.

Malcolm,

>Maybe we could make a car engine which runs off of dead African children, then we >would never have a shortage of fuel although it would still be foreign energy.

With tongue firmly planted in cheek: "uh, let the market decide".