patrick.net

From J Galt

"First, the idea that this is a Government “Bailout” plan, is utterly false. There are no taxpayer funds going towards this action."

As some have pointed out, the taxpayers will be holding the bag. It's only a matter of time.

"In truth, there were a number of families that were duped into Sub-prime because the Mortgage Brokers were payed a premium for signing people up under this class of mortgage."

Duped? if by duped, you mean they failed to do due diligence, then yes these people were duped. No one forced these people to gamble with risky loans, and as far as I know they had the capacity to contract.

This looks a school project, and it looks like you're arguing for the plan. I'm not sure my comments will be helpful, but good luck with your report.

"Potential buyers face higher prices for a house than they would if the market were just allowed to work. This is a direct harm to millions of people, especially young families with limited income.

Is it illegal for the government to manipulate markets to benefit one class over another?"

Case and Controvery (standing)

At least in federal courts, and possibly state courts, there must be a case and controversy, (for fed courts, see Art. III). Meaning that the plaintiff has suffered an injury in fact, caused by the government, that is capable of judicial resolution. Further, the case must be RIPE, (the plaintiff has been harmed or there is an immediate impact of harm). This is part of the limitations for going forward with a case in federal court, and most likely limitation for state courts as well.

Since the Buyer is only a POTENTIAL buyer, there really hasn't been any direct harm, and the case is not ripe for review. In other words, the plaintiff only has a potential interest, not an existing interest in which the court can render a judicial resolution (remedy).

I haven't looked at Constitutional law in a while, but I think this would be the first hurdle to overcome when looking at the facts above.

I am being far too lazy to actually read the text of the bailout plan. But I have heard it summarized as merely a set of guidelines which entitites can voluntarily follow to freeze interest rates. It is stated as being in their interest as it will prevent dumping too many properties on the market which has the effect of excaerbating the problem.
As long as this is only voluntary I suspect we will have to see MBS owners having to send paper to their owners explaining why it is a good idea and then getting their permission.
As long as its voluntary there is no way anyone can sue.
In fact, as long as its voluntary there is no way the Supreme Court can step in and rule on its constitionality.

If these guidelines are law, look for Judge Roberts to slap this down.

J Galt you make many good points except that this is absolutely a government bailout. Bush's plan will become a tax burden on the US. It might appear through Fannie and Freddie or in a huge increase in the deficit or a larger trade imbalance. My thinking is that it will appear as an additional tax on my savings by the federal reserve in the form of inflation. I give the example of Japan in the 80's. There was a real estate bubble that was not allowed to burst. Now the Japanese government is carrying a huge government debt from the indirect bailout of the Japanese banks.

For the record, I am neither for, nor against the plan, as I am not a homeowner, nor do I think that this will contribute to "Stickiness" in any appreciable manner. It applies to far too few people to have any sort of bearing on the housing market as a whole. My sole purpose is to get people to understand exactly what is going on, so that we can "get over it" and remain vigilant that they do not pass some new "plan" that would include FHA/Fannie/Freddie bailout money coming out of my pocket. In other words, my opinion of this plan ranges from window dressing by the administration to show that they are taking action to a diversionary motion used to hide a sleight of hand trick, (like picking my pocket).

@SP
I am far more bearish than to think that the housing situation, (especially here in CA), will return to '05/'06 highs in only 5 years. I am just pointing out that 5 years seems to be the strategy cycle used by the authors of the plan.

Duke,

As long as its voluntary there is no way anyone can sue.

What about the guy that signs the paper a day earlier that is not eligible for the plan or the "homeowner" that has the same mortgage that is deemed to be able to affor the higher rate.

Good information J Galt and true to your name. I appreciate your insight. This is window dressing for the Bush administration and will have little effect long term housing market.

In a statist setup, that is precisely what the government does. I think it is immoral but few others agree so it is not illegal.

In any non-free system, there are two kinds of people: Those who put in more into the system than they get out of it and vice versa.

So, after a while, most people just spend most of their time and energy in trying to move from the first group to the second.

The simplest scenarios is taxes. I know a lot of people who think taxes are a wonderful idea and yet, I haven't met anyone who goes to H&R block in March and tries to increase their taxes. Even though none of us will come out and say it, those who support higher taxes would prefer that the taxes come from the mythical "rich".

Whoever makes $30K a year thinks "rich" is $60K a year. Someone who makes $150K a year thinks rich is whoever makes $300K or more a year.

How the system handles the housing bubble will be a valuable lesson for me, considering I missed out on the stock bubble. It will help me decide, the next time a bubble comes around, should I be prudent or should I just dive in and speculate? Since both the democrats and the republicans want to bail out irresponsibility, I suspect it will be the latter.

House prices seen falling 30 pct By Julie Haviv
Thu Dec 6, 6:41 AM ET

NEW YORK (Reuters) - Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over, a report from Moody's Economy.com said on Thursday.

On a national level, the housing market recession will continue through early 2009, said the report, co-authored by Mark Zandi, chief economist, and Celia Chen, director of housing economics.

The report paints a worsening picture of the hard-hit housing sector, which is in the midst of its worst downturn since World War II.

While activity will stabilize in 2009, it will not be until 2010 before a measurable improvement in sales, construction and pricing will emerge, the report said.

House prices are forecast to fall 13 percent from their peak through early 2009. After accounting for incentives home sellers are offering buyers, effective declines peak-to-trough will total well over 15 percent, the report said.

Punta Gorda, Florida, and Stockton, California, are the hardest hit markets in the U.S., with price declines from peak-to-trough forecast at 35.3 percent and 31.6 percent, respectively.

"This is the most severe housing recession since the post-World War II period," Zandi told Reuters.

These markets have been hard hit due to several reasons, namely the exiting of investors from the areas, a fair amount of subprime mortgage loans causing an increase in foreclosures and overbuilding by home builders, Zandi told Reuters.

Home sales, however, should hit a bottom in early 2008, which will mark a 40 percent drop from peak-to-trough.

"The housing market's most fundamental problem is it is awash in unsold inventory," the report said.

In addition, the housing downturn will take a large toll on the rest of the economy. During the height of the boom in 2004-05, housing contributed nearly a percentage point to annual real gross domestic product, or GDP, growth.

In the current downturn, housing will subtract more than one percentage point from U.S. economic growth this year, and a percentage point and a half in 2008, with the effect on growth seen most pronounced next spring and early summer.

"The intensifying housing recession is expected to weigh on the broader economy, but not break it," the report said.

The Moody's Economy.com's report, titled "Aftershock: Housing in the Wake of the Mortgage Meltdown," said that when house prices hit their nadir, some 80 of the nation's 381 metropolitan areas will experience a double-digit peak-to-trough price decline.

Price declines, however, will vary in degree throughout the nation, with more than a 15 percent peak-to-trough expected around Washington and Detroit.

Significant declines are also expected throughout most of Arizona, California, Florida and Nevada. During the housing market's heyday, speculative activity was rampant in these areas, causing prices to surge much higher than other regions.

The Northeast corridor, and markets such as Boise, Idaho, along with Denver and Salt Lake City, will experience between 5 percent and 15 percent declines. In the rest of the industrial Midwest and parts of the Mountain and Pacific Northwest, prices will fall more modestly.

While some point to rising default rates in the subprime mortgage market, which caters to borrowers with poor credit histories, as the root cause of the problems plaguing the housing market, Moody's Economy.com said an unwieldy supply of unsold homes is the prime factor.

The U.S. Census Bureau said that, as of the third quarter of 2007, there were close to 2.1 million vacant unsold homes for sale, equal to 2.6 percent of the stock of owner-occupied homes.

A well-functioning housing market has a substantial amount of inventory, but in the quarter century between the early 1980s and mid-2000s, the vacancy rate stayed near 1.7 percent.

The difference between the two vacancy rates provides a good estimate of the amount of excess inventory in the market, which currently totals nearly 750,000 homes and is by far the highest level of excess inventory in the post-World War II period, Moody's Economy.com said.

Moody's Economy.com, which is based in West Chester, Pennsylvania, is an independent subsidiary of Moody's Corp and provides economic research and consulting services to businesses, governments and other institutions

If you think that there is no tax money involved, then you should read this Chronicle article.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/06/MN0RTONT8.DTL

"Treasury Secretary Henry Paulson also has urged Congress to pass a law that would let cities and states sell tax-exempt bonds to refinance mortgages for borrowers who otherwise might lose their homes."

I totally agree with the writer. 'If this is not a bail out, then what it is.' How are they going to pay back to bond holders? Unless the government is going to hold lien on these homes so tax money is going to be used surely. Why do I pay for their irresponsibility.

The people who get this redemption will pay lower tax then I do as a renter because their monthly payment hardly include principle while they afford their home. These people will benefit on both sides.

During the boom time, I endured the look down by other people because I don't own home. I was waiting for the price to be corrected while saving diligently. We didn't buy a new car. We didn't go to fancy restaurants. We didn't go for cruise. There are so many things that we didn't because we thought that that is extravagant. The affordability right now is just ridiculous. Where is justice department? I need to bring justice here. I cannot tolerate this irresponsible people.

Why do I have to subsidize their outsize life? This is unbelievable.

Also, Bush said that it is not going to help investors. If housing stopped bleeding and they hold onto it, then it will help them. Isn't it?

Nothing helps me. It just teaches me that I am all alone.

Any State or Local Government that passes Bonds to refinance mortgages is ultimately robbing from the many to feed the few. Any such measures need to be put down immediately. Really it would be no different than an FHA bailout, only at a local level.

As long as this is voluntary I suspect we will have to see MBS owners having to send paper to their owners explaining why it is a good idea and then getting their permission.

Duke, that permission is either (a) explicit in the MBS documents and signed off by the owners at inception, or (b) disallowed in the MBS documents and signed off by owners at inception.

In the first case, no new permission is required. In the second case, no workout is permitted and the borrower gets no five year freeze.

I think some confusion has arisen from a failure to recognize we're dealing with three discrete contracts or agreements here:

The mortgage agreement between lender and borrower is subject to renegotiation provided both parties involved reach an agreement.

The contract between the lender and the securitizing entity details allowances and restrictions necessary for issuing MBS, and it may impose limits upon the terms of workouts between lender and borrower. If the borrower proposes terms not permitted under the securitization agreements, the lender cannot agree to them, and no new terms are established.

The agreements and disclaimers produced by the MBS for an investor's signature at the time of purchase contain these details. By signing off on these terms and conditions, the investor agrees to these underlying contracts in their entirety.

Only in a case where lender workouts violate securitization agreements would a lawsuit follow, and it would be the MBS issuer who would sue, and not the investors. Investors may indeed decide to file suit as individuals or as a class, although competent counsel would almost certainly advise against it, and the most likely outcome would be failure in the courts and, of course, impressive legal fees to be paid.

Our Beloved Leader getting some ink in the SF Chronicle:
Patrick Killelea, a Silicon Valley computer programmer, runs a popular real estate blog at www.patrick.net that for years has blasted what he sees as the ever-expanding real estate bubble.

"We're talking about helping people who made bad decisions and asking the government to intervene on their behalf only to let them make more bad decisions later," Killelea said. "What if there was a Vegas bailout? I blew all my money in Vegas, but I should be bailed out?"

Bruce,
Nah. No confusion. Any contract can be modified as long as both parties are willing. In this case, the governement on behalf of the ARM crowd, is asking the investment crowd to renogiate their discrete contracts since (in theory) it would be in both parties interest. The trick is reaching the investment crowd for their approval since the act of securitzation massively diffused the ownership interest in any given property. I had written more details past this but its pretty boring, suffice it to say that the legal brains are making a run a proving this is in everyone's interest and everyone should agree.

What I find much more interesting in the legal realm are the judges refusing to allow Deutche Bank to forclose on properties. The judges feel the ownership interest is not conclusively proven. Woa! That should give massive pause to any who think Wall Street will continue to provide our historic low interest rates through securitzation. If your recourse to a non-performing loan is to have Vinnie the judge say, "Tough", there will be absolutely no-one left to buy these products. Makes it easy to mark to market - they are all worth zero.

I haven't waded throught Bush's "New Hope" proposal myself, but a lot of much smarter people who work in the mortgage industry have, such as Tanta from Calculated Risk. Her opinion reinforces J. Galt's opinion --basically, it won't apply at all to 0-3% "teaser" rates, and the majority of Jumbo-prime, prime Alt-A & option-ARMs won't be affected.

EBGuy,

Thanks for the link. You know, I could be a WHOLE lot more cooperative here if Paulson (among others) would simply come out and say...

"This was a major debacle and horrifying lack of anything resembling lending standards. We've lost prestige in front of our creditors and realize we are at your mercy to allow us to at least attempt to correct this. We're not even sure it CAN be "corrected"! We'll need to make amends to all of the responsible borrowers and taxpayers out there"

Yeah, then I could get on board!? However, as things stand all I'm hearing is "What has manifested itself is the result of... perhaps a little exuberance and we're going to do what we need to do to make it right. You may not care much for our tactics, but we're the ones calling the shots".

In which case all I can say is, best of luck.

Duke,

I would never want to imply that you were confusing the issue. Shooting past you, as it were, as I've seen some posts fearful that contract law is under attack. I was concerned myself at first, which led me to look at the business in detail.

As HARM so nicely points out, it's a token program in any event. Recessionary forces continue apace.

What I find much more interesting in the legal realm are the judges refusing to allow Deutche Bank to forclose on properties.
Cleveland is proving to be the proverbial canary in the coal mine for ferreting out all these "issues" surrounding the housing bust and securitization. Other gems include: how does a city figure out who to bill when combating blight as the mortgage has been securitized (see article I posted here over a year ago). Banks throw up hands and says, "Hey man, we are only the trustee." This can lead to the city taking much more aggressive measures as Wells Fargo recently found out. One of their foreclosed properties in Cleveland recently got razed as they did not properly communicate with the city that work was being done (after getting some nasty messages from the city manager). Also, Slavic Village is pioneering "forced urban scrap recycling" (aluminum siding and copper pipes) by desperate criminal elements -- coming soon to a mothballed Lenmar development near you. And block watches aren't that effective, if, ya know, no one lives there...

PS -- Tanta at CR is starting to remind me of the old EF Hutton commercials (not complaining here, as I "listen" too....)

Hi guys,

The government does not specify that they need any agreement from the investors. This is because if a loan is approved for this program it is taken private by the bank, and sold to FHA who would probably be paying a full price. Now, technically this is not a loss. It's the FHA buying a bunch of securities and putting them on their books.

Step-by-step case, someone calls the 1800 number and explains, 'I have such and such loan.' If the loan confronts to the criteria set, then the 1800 help person alerts the FHA or a new and coming GSE. It tells them, this and this loan from this and this bank is eligible. The FHA entity goes out and purchase the specific loan from the bank, hence taking it private. They then control the loan and can do whatever they want, such as freeze the rate. Since full price was paid and the loan was sold, investors don't really have anything to do. They just get money back.

And none are questioning which value of the property is considered when applying. If the last appraisal value is, there will be quite a few eligible loans around. Besides, just as the banks has been letting people sell for less instead of foreclosing, maybe they plan to do the same so the loan conforms to the government requirements just as they do many times for Fannie and Freddie loans. If they do it fast they can probably lose only as much as prices have currently fallen.

Marty

As far as people taking the government to court, they are currently not doing anything that is not a norm. They just approve loans based on specific criteria, just as Fannie doesn't want to give loans that are over 417k, and there are loans that are not given if the price is under 500k, such as many sub prime ones.
If the FHA says, we will only purchase loans originated between 2005 and 2007, and you loan did originate then, and you conform to all other criteria, and they refuse you, then you might have grounds for a trial.
Otherwise, it will be like going and suing Best Buy since you didn't get on "200$ Off Every HDTV" last week.

Sorry to burst your bubble. No pun intended :)

Marty

Thanks Marty, that answers a few questions that have been lingering in my mind.

Here is a good summary of the Plan.

Eligibility Requirements for a Teaser Freezer
A job
An income
Equity--borrowers must owe less on a home than it is worth
An inability to refinance
An inability to afford payments after a reset
A good payment history--delinquent borrowers do not qualify
A loan with a reset scheduled between 2008 and mid-2010
A loan issued between January 2007 and July 31, 2007

By taking to loan private the FHA will have to perform an appraisal. So recent mortgages with the equity to cover the losses the appraisal revelas makes sense - less the goverment be sued for favoring one class of borrower.

Frankly, I would be shocked if they even get the claimed 240,000 people (of the up to 2.8 million in trouble) as a number of homes are already heavily underwater. In fact, by dollar volume (which massively biases the problem to place like Palm Beach and Stockton) there is even less releif then the small amount of relief this 'fix' will heal.

So as a conclusion to this thread - there is no freeze. No one can sue. These are not the droids you are looking for. Move along.

Just in case anyone needs a link, since some people doubt this,

Story
Specifically:
"Under the plan, negotiated by the Treasury and White House with representatives from the private sector, borrowers will be able to refinance an existing loan into a new private mortgage or be moved into a loan from the Federal Housing Administration."

After watching Paulson talking about the plan last night on pbs, I think that this stories author took the statement out of context. I do not think that under the plan, the subprime homeowners will automatically receive a loan from the FHA.

I am more worried about the effects this bail out will have on foreign investment.

Currently we must import massive amounts of capital to keep our system going. The trade defecit, government debt, and our export of inflation will catch up to us. I wonder what will happen if the foreign investors decide to stop buying our bonds, t bills, and stop taking dollars for oil.

I believe this bailout will only lead to massive inflation here at home and an even worst set of consequences for the country than if we had not tried to step in. The Saudis will probably switch to a new currency before long such as the Euro. If this happens, god help us! You think $5/gallon is bad?

The foreigners will probably stop accepting US T-bills as well. All those wonderful programs that the government has will only survive with higher taxes on the tax payer. No matter what, tax payers will pay for this bail out with inflation and higher taxes for the government. China will stop buying our T bills as well. They will simply refuse to import our inflation and instead sell to Europe.

That is not all folks! Anyone paying for Social Security will be surprised to learn that the government really has no money in the trust fund. The government took the excess money and spent it! You will find plenty of T bills that are just promises from the government to pay for it later. I can see the government mailing these IOU in instead of a check. Can you trade IOUs for food/water/ or housing?

The US collectivly is nothing more than a crack whore trying to get the next fix no matter the cost. We will sell our own children's futures to slavery just to get that next hit. Soon our foreign creditors( drug dealers) will refuse to do buisness with us.

JGalt,

I also saw Hank w/ Erin Burnett of CNBC and after she... kind of grilled him briefly he was clearly relieved to be moving on to the next topic (China). I'm not saying there isn't merit to your point, there is. I'm just at a point to where I don't want to hear about ANYBODY being bailed out! Period.

It was kind of neat though to see the Wash. Post basically "surrender" the article to Keith over at Housing Panic! They even showed posts w/ a lot of angry and pointed graphics.

nutty,

At some point dealers HAVE to cut off a "waste case". Whatever it was they used to be known for (strong arm robbery, I.D theft or turning tricks) they reach a point where the addicts are no longer reliable to commit the crimes that once funded their habit.

Galt,
you are right. I got confused on the whole going private OR move into FHA. I am assuming that going private means the bank buys the loan back and holds to it. Basically, it can be seen as a 30 gov/30 banks/30 investors split on loses and risk for all subprime loans.

So to recap:
-Gov buys all performing loans with a very high risk of default and freezes them taking a hit.
-The banks buys the rest of the performing loans and freeze them taking a hit.
-Money from those transactions goes to high tranches investors(gov and institutional investors) right now so they can keep on driving the economy and recoup their loses.
-Lower tranches are left holding the defaults and the few good loans left so they can calculate their losses pretty fast.

It's a sweet plan. I actually could not think of a better and painless way to handle this dire situation.

As for the process outlined in the federal program it doesn't change much. In the end it will either be a FHA entity that controls your loan or the banks. The outcome is still the same.

@Dinor,

I doubt the world will allow us to commit another armed robery (Iraq's oil).

For entertainment purposes, I recently visited the CME site to check on Case/Shiller Home Index Futures.

For the ten city composite (peaked May 06 at 226.29) , there is actually some open interest in Nov 2010 contracts. Last trade was at 182.00 so this is predicting a 20% haircut from peak. We are currently sitting at 212.65 for the 10 city Composite Index.

San Francisco futures are not trading that far out (no open interest), but there is a bid of 132.6 for Nov. 2012s (anyone want to write that contract?). I realize it is probably fishing expedition, but that bid price would represent a 40% discount from the May 06 peak of 218.37. SF Bay Area Index is currently at 206.46 .

Quiting from http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/

>>

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

Sorry for the typo!

Mhirst, it is my understanding that the rate freeze is imposed on the bondholders' yields. Can you show me where this is not the case? FHA refinances are a part of the plan but rate freezes are not automatically moved to a federal loan program.

Malcolm, I have a link and a paste from the story a few comments back

Marty

I read it, and it does not say all of the loans which are frozen are purchased which is my and many others' sticking point.

In a study this July Countrywide found that only a small percentage of loans went into defaut due to ARM readjustment; Now, that study happened across loan spectrum, and before credit had tightened much, or price drops had accelerated. I seriously don't expect this to slowdown the foreclosure tsunami by more then maybe 2%...

The question was: Would buyers face higher prices from the "bailout" than if the market were allowed to work.

Well does anyone believe that a "bailout" that the idiot-child Bush announces with the wrong phone number is going to work?

Just asking.

# eburbed Says:
I haven’t heard as much negativity around [dismal shopping season] as I had expected. Could the shopping season actually be faring well??

Hard to tell from the cheerleading American MSM, but there seems to be some rumblings in the news today.

J Galt says:
I am just pointing out that 5 years seems to be the strategy cycle used by the authors of the plan.

Thanks for the clarification - this wasn't clear in your original post.

Home sales, however, should hit a bottom in early 2008

Oh bullshit. Here we go with the bottom-groping again.

Malcolm,
the loans are either purchased by FHA or the bank. The investor is not involved. The gov and banks agreed they will purchase all the sub-prime freeze loans. The gov and institutional investors get $$$ now. The lower tranches keep in the prime loans. And all defaults get devided by the players.

Just the messenger, Excuse me!

Marty