patrick.net

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

Note the phrase "tax payer". Sure, the plan does not directly dip into tax dollars, and so the fed monkeys can stand up and say this does not affect tax payers.

Rah rah, yippee.

What I care about is American consumers, and the overall economy. If government measures prop up housing prices, it affects our whole economy, at least it does in California where a larger proportion of these welfare recipients reside. What happens on the Hill disproportionately affects areas of the country where so-called subprimers have the qualifications needed for the free money. Which may raise, sustain, or stall the natural lowering of prices (could anyone disagree that this meddling will certainly NOT bring down prices??).

Maybe only 100,000 homes will be propped up in price by this move, and maybe it is only for a short period of time. Regardless, it does harm the market and more importantly, opens the door for more fiddling by Uncle Sam.

It stinks. Even if we cannot sue for damages, it still stinks. Worse, it makes no dent in the overall problem, but in my estimation, causes more problems for a larger class of Americans, namely, those who do not qualify for the free money and those who do not yet have a mortgage. Future potential buyers will experience unprecedented difficulty in the years to come in getting a mortgage. That fact was true prior to the US Treasury's involvement, however, now it is exacerbated as lenders build in higher rates and fees to cushion from any similar measures that the government may dream up.

The lenders are following this closely. This is their bread and butter afterall. If it could happen once, it could happen again, and they will be sure to build in safe-guards (read: higher rates) to ensure the return they thought was guaranteed by the free market (should the government hold that gun to their head again).

I hope all the drama is unneccessary and prices come down as they should, as they were meant to anyway. And all of this will seem like a big joke. For now though, we don't know how the industries and the market will react. Because it has never happened before.

I should clarify that by "it" in my post, I mean the freezing of rates for a select class of FB's.

@Mhrist

I just do not see that anyone has agreed to purchase the loans that match the criteria for the "plan". It seems to me that the lowest risk options are being offered a way out via a tranche upgrade, but this is a very small percentage. The 30/30/30 solution that you are talking about seems way out of whack. Ownership of the MBS's will stay as they are, the only change will mostly be the percentage of return in the short term.

Again, I invite criticism or comment, because I know far less than the collective on this forum...

"bottom-groping"

Take it any way you like! :)

@Mick,
Using the same logic, isn't it unconstitutional for a law that takes my hard earned money away from me and gives it to someone lazy in the form of an earned income credit? (Punishing those that work harder? You had to see my comments coming...)

Amen Brother.

BTW,
You forgot to end that with:
*Not Tax Advice*

Sweeeeeet. A *tricorn* tinfoil hat! :o

Mick, I would humbly submit that the People can still appoint their legislators. If the People were uniformly disgruntled about the taxes levied upon them, they would elect legislators who would abolish taxes.

I would further suggest that the People submit to taxes because they realize it is the most feasible way of funding public works for the benefit of all. We all need roads, hospitals, ports, a legal system and a military to defend us. There might be a few who claim that they don't need such infrastructure, but this is a Republic and the People have spoken. We the People (or the vast majority of us) decided that we will all chip in for the general good. Nobody likes taxes, but we like taxes a lot more than being an unindustrialized backwater at the mercy of foreign powers.

J Galt,
now I think it is more of a 20/20/20/20 split for all performing loans. Gov, Banks, Low Risk Inv, High Risk Inv. As for the part of the governemnt there are a few factors that can increase their participation such as:
1)The speed of implementation - the faster it is implemented the more loans will be purchased
2)The appraisal mechanisam - depending on how this is done it can drastically increase the participation as well.Making 600k real appraisals in a month or two, even with a 90 day foreclosure stop doesn't sound possible. So maybe it will be lax enough to let a lot of people in.
3)This might work for many prime borrowers that have purchased subprime loans because of the better rates and equity and moved off from Fannie. This is a way of the gov of getting the lost sheep back in the flock in a way. After all even in the worst hit areas right now the foreclosure rate is 1 in 100 or more. The other 99 most probably did syphoened the equity or refinanced to this new crap loans and they are needed back.
4)What are the banks willing to do to move you to an FHA loan - maybe they loaned 500k, the house is now worth 450k. They can drop the mortgage with 50k and sell it to the gov just as they are sometimes doing when you want to currently sell, and as I am sure it is and will be done to get you into Fannie.

Another point of this whole fiasco is that it sounds like an effective way to separate the people that have bought properties. You will know quite fast things like:
A)Real owners living in houses they like and want to stay in
B)Ones that cannot afford but want to keep their house
C)Speculators
D)Equity liars

This will be good for when we are unwinding this fiasco.

Finally, a point to consider: by setting this system up, the government will shortly have the infrastructure to handle transferation of troubled loans. Once they do have it, they can pluck back on TV and say they will bail out even more loans, and since the problem is bigger than anticipated this time it will cost money. Why hitting congress and the tax payer for money twice, when you can do it once when you have everything set up.

Marty

Brand,
altough the people can, they are so dependant that anyone even proposing abolition of taxes will be branded as a looney. If you do infact have such a person, he will need to abolish government spending with all the welfare, freeways, national parks, overloaded police and jail systems, wars, government contractors and government employment. And lest not forget that the governement is the biggest employer and spender around thest parts.
When our Founding Fathers came up with the no-tax crap, they lived in a very different world. Tarrifs ment something other than protecting industries inside the country thus hurting the average joe and we were exporting a lot to england and the world. Not the case today. We didn't have 30-40% of the population in some type of a government asistance with another 20% working for the said government.
I believe taxes are wrong, but I am also a realist. It will not be possible to get the political power with people that are dedicated, after all the ones hurt by taxes a LOT are very few compared to the majority that lives on government assistance. The only way is a major change in everyday life, like oil getting to 10$/gallon, or the dollar collapsing, or the banks and credit collapsing. Looking at it as such, you are in luck. We're just in the middle of such a predicament and I am pretty sure you will get your utopia sooner than you think without voting.
A horse ride to Washington takes 3-4 months after all from Cali. Maybe less while there are roads but still, it will take a while. And the Winter can screw it pretty bad too :)

Marty

The Founding Fathers lived in a pre-industrial society, where the basic unit of society was the "yeoman farmer" the independent farmer who educated himself in his spare time, took part in local government, sold farm products locally, bought things locally, etc.

It was before the time of the railroads and railroad trusts or people getting "railroaded", before the Civil War, before Marx.

Taken all the way, Peak Oil will return us to the days of the Yeoman Farmer, but the transition back is going to be pretty painful to most people.

Americans are actually pretty resilient in difficult times. Most people seem soft and whiney now, but if a real crunch hit I believe that we would tighten our belts. People's attitudes tend to change once they realize that other people aren't going to save them from disaster.

Of course, New Orleans might have proved me wrong. For all the money spent, the city is still a shambles with tens of thousands of residents still displaced.

Overall I believe that technology will prevent a major social decline based on "Peak Oil". Americans will learn to consume less energy, just like Europeans. Even as we cut back consumption, our wealthy society of 300M people will push along developments in solar, geothermal and plant-based fuels. I hope oil goes to $200/barrel and stays there for a decade. Americans will get smarter as a result. Despite being the world's most voracious consumers, we also seem to be a very unhappy society. People need to spend more time with their family, take long walks in the park and tend a garden.

I wouldn't shed too many tears for the uber-wealthy getting victimized by the government-dependent masses. They have legions of accountants and lawyers, so they are not particularly defenseless. If anything, the constant drain of taxes prevents them from becoming complacent, and that is an even greater benefit to society.

By the way, Calculated Risk has some excellent commentary on why this is not a bailout.

In short: the purpose of this PR campaign is to encourage delinquent and threatened borrowers to contact their lenders immediately to get on the fast track to a modified loan. As Tanta points out, most of these "teasers" are in the 6-8% range (these are subprime loans, after all). And most importantly, this is a voluntary industry action (meaning no new laws) costing zero taxpayer dollars, executed within the existing framework of the MBS/CDO/SIV legalese.

In other words, it's mostly a bunch of PR fluff, with the potential upside of getting a nice chunk of troubled borrowers into a slightly better situation.

@ex-renter,
I don't think that Peak Oil will be the cause of the change. More like Peak Globalization... But yea, the Founding Fathers did live in a very different enviroment. This is why, in the constitution it says that if times change, so should the constitution. Our society is very different, we are just slow to change the constitution.

There are many people that don't want the constitution to change, in a way shooting themself in the foot. Society does change, we have a bunch of laws and regulations that are not constitutional all over. Bot for a politician it is easier to curcumvent the constitution than to change it.

Imagine, Bush, wants to torture. He either tries to change the constitution which will be impossible. But he just creates a policy that allows it. Worst case scenario? In 2 years or so, the Supreme Court will rule against the policy. In turn Bush rewords the policy and he has a card blanche for another 2 years. He won't get into any trouble except with the voters who don't really care and have no real choice, especially if they are republicans. And even then, he just didn't know it unconstituional beforehand so he is not really a bad guy.

Marty

I don't see a need to make changes to the Constitution. It is such a well written document that it stands the test of time. I think the debate of the role of government is a healthy and ongoing discussion, and the Constitution will always have at least two interpretations regarding the federal role over states' rights.

mickrussom says: If you only knew the fiscal ship I run, you would probably be more apt to respect my position on my earnings being stolen from me, not for roads, but for massive waste. I know what to do with my money better than the masses.

Mick, I find myself skeptical that you're one of the top 1% earners in the U.S.A. That being the case, you're benefitting the same from U.S. infrastructure more or less the same as everybody else. You're also paying taxes on the same order of magnitude as most people.

I never said the system was efficient. I simply said it has a useful function. The bureaucracy performs its job with considerable monetary loss. But even that "loss" still goes back into the economy by some means. It gets paid out in government payrolls or spent on various goods and services. It's all just a big washing machine tumbling around our money, except that occasionally a certain chunk gets tapped out and put to the public good. So who cares how big the machine needs to be, so long as it functions?

Pity the poor rich people who are having to pay taxes as much as 50% on their marginal income. Back before JFK, the top marginal rates were as high at 70%. Those were the days when the American economy was the envy of the world. This is from a guy who is paying AMT.

Taxes aren't too high in America, if anything they are too low.

Taxes aren’t too high in America, if anything they are too low.

Taxes are of course too high in America. Just because crazy Europeans have higher taxes does not make our any lower.

In just years, Europe will be falling apart because of the path they chose. Hopefully Sarko can turn that around. Europe MUST immediately outlaw unions, lower taxes, and drop most welfare programs.

We should push for a constitutional amendment to cap the maximum tax rate at 15%.

Who is going to pay for all the roads and bridges that need maintenance? How about that massive budget deficit? What do you plan to eliminate to finance that? Or is spending more than you take in a long term sustainable policy?

Spend some time overseas, and appreciate the working transit systems. Ride the bullet trains. Why don't we have anything like that here?

Who is going to pay for all the roads and bridges that need maintenance? How about that massive budget deficit? What do you plan to eliminate to finance that? Or is spending more than you take in a long term sustainable policy?

Toll roads. The market will run the transportation system.

We can have massive budget deficit with 100% tax. The idea is to spend less. Privatize as much as possible.

Spend some time overseas, and appreciate the working transit systems. Ride the bullet trains. Why don’t we have anything like that here?

Done that. Not impressed.

Transit works if and only if it is profitable by itself. That does not need much taxpayer money beyond right-of-way, loan guarantees, and a simple nod of approval.

We don't have bullet trains because it is silly. US has the best aviation infrastructure in the world.

Peter P Says:
Taxes aren’t too high in America, if anything they are too low.

We should push for a constitutional amendment to cap the maximum tax rate at 15%.

Don't be silly.

15% across the board would be A-OK with me, as a working stiff at $5 an hour I was paying close to 30%.

Ask your sandwitch preparer, barista, the guy who cuts proscuitto for you at the market, what their paycheck shows as "gross" and what they get, working stiffs are still paying 25-30%.

15% would be regressive, but not nearly as regressive as people* are paying now.

*As always, here, "People" means Americans.

Questions about the Hope Now program.

Once some modified paper is taken in by FHA, the investors are paid off by the under the terms of the new FHA paper as far as I can tell, and thus the risk of holding the paper is now transferred to the FHA. While the FHA "operates entirely from self-generated income and costs the taxpayers nothing", anyone like Brand who believes Hope Now places no taxpayer funds at risk please explain the following to me.

The Hope Now program acts as a platform to pressure Congress into passing pending bills to relax mortgage lending standards. If one or more of these pass, the taxpayer will certainly be on the hook for the bill of the privatized profits, and losses pawned off onto the FHA. If the terms of the program were such a great deal for the investors, would you agree that they wouldn't be so eager to unload the assets and leave money on the table?

Question: what reasonable explanation would posit that if the FHA is in danger of insolvency that it would be allowed to fail without access to taxpayer funds, when its historical origins and founding documents clearly indicate that the American taxpayer is the de facto if not the de jure insurance guarantor and even the reinsurer. The taxpayer provided the funds for the initial establishment, and the Act gave the administration wide latitude via the initial funding conduit of the Reconstruction Finance Corporation. While it is true that the ongoing operations of the FHA, including managing existing levels of default out of operational funds, do not depend upon the taxpayer, I have yet to find anywhere documentation that denies that ultimately the taxpayer is indeed the ultimate guarantor of the insurance.

Question: what sound finance rules do you follow that state for a given borrower who has already demonstrated excessively poor financial decision-making ability by choosing a loan product that requires a workout to prevent default should be provided access to prime loan products with even lower risk insurance premiums? I assert that such borrowers have a recent history of poorly thought out financial decisions, and extending them such loans with even lower risk premiums flies in the face of sound lending practices.

Question: if you accept that the taxpayer is the reinsurer of the FHA, then by what sound lending practices would you expect that relaxing lending criteria will increase the stability of the FHA portfolio?

The history of the FHA provides a fascinating illustration into the perils of government interference. The housing market was clearly overpriced in 1934 when the agency was established. The market was on its way to a complete flush out and reset to more sustainable price levels when the FHA stepped in and artificially stimulated the market. And here we find ourselves today, about to commit the same acts and enter an even graver state of financial sin.

Not all of the Hope Now program is bad. The private-sector call center to reach out to the borrowers, and the promise of stronger lending regulations to aid in bringing greater transparency to the market are both measures I applaud. However, we are playing with a very dangerous fire with the other parts of the program, and I have yet to find answers to some troubling questions about these dangerously reckless parts of the program. This is not to speak of other aspects I find troubling, like a claim (I have yet to substantiate) made by a poster on Calculated Risk that pooled paper run through the Hope Now program will let the securitization pool start marking to model instead of a periodic (monthly or quarterly) mark to market.

I used to be a working stiff myself and I never remember paying taxes like that. If you actually made $10k/yr (the minimum wage in CA is $7.50, in SF $9.36), you might see 25% taken out of your paycheck, but you would get most of it back if you filed your taxes, since the personal exemption is $8750 and you would get an Earned Income Credit more than equal to the rest.

You would still be on the hook for Social Security tax and CA disability, but combined those are only about 8%.

Why do you have to be 25 to qualify for the Earned Income Credit? That seems bizarre to me, is the government penalizing you for not being in school or something?

Jimbo says: Spend some time overseas, and appreciate the working transit systems. Ride the bullet trains. Why don’t we have anything like that here?

I think this point has been thoroughly discussed on prior threads. First, the U.S. is much more spread out than Europe. Light rail cannot effectively service all the outlying areas, or even a feasible percentage of them. We have commuter trains in big cities like New York, Boston and Philadelphia because the population density is sufficient to support them (and parking bad enough to encourage usage).

Second, and perhaps more importantly, Europeans are compelled to use the light rail because riding the train is inexpensive compared to their total cost of car operation---insurance, licensing, car taxes, and especially gasoline prices. I rode the train every day in Germany, but it was way more expensive than driving my car in the U.S. We could raise the cost of gas to $5-6/gallon, but that would hammer rural areas and lower income commuters the worst.