patrick.net

EBGuy,

Oh I don't think it was off the mark at all. Perhaps we should be asking: "How many TIMES do you have to hit the wall...?"

I wonder if China is deciding to hold grain at home in preparation for alcohol vehicle-fuel production in the near future. Much of their foreign exchange appears to be going for petroleum. Do you think the commies are that stupid as to try the ADM "solution" to petro imports?

If banksters are having a problem making loans, won't they need more cash in order to support the lower loan-to-asset ratios of the future? Won't they push for higher interest rates to get people to put more cash into savings accounts?

Project Sentinel .... I know them well, went to them about complaints in the ghetto-fabulous Sunnyvale apartment I was in, you know, the usual, gang activity, drug deals, death threats, attempted break-ins, being followed by packs of gangers, standard stuff for Sunnyvale.

The Crime Prevention unit of the Sunnyvale PD is better to go to for the above, although the above is good for filing HUD complaints and getting the slumlord in trouble.

Funny, the place I live in now is nowhere near as hyped at Sunnyvale and no problems. Which is funny because what bought these two+ acres and buildings here wouldn't buy a damn doghouse in Slummyvale.

HARM Says:

> Outlawing stated-income, neg-am & I/O loans and requiring
> SarBox for mortgage lenders = good for consumers & taxpayers.

Why would outlawing “stated-income, neg-am & I/O” loans be “good for consumers & taxpayers”?

If outlawing stated-income, neg-am & I/O” loans be “Good” for consumers & taxpayers, would requiring only all cash sales (or maybe 50% down payments) be even “Better”?

StuckInBA Says:

> EBGuy: I have tackled that “arbitrage” question a few times.
> Especially to answer the myth about “economic fundamentals
> supporting the Fortress” argument.
> If numbers matter then why wouldn’t someone buy a better/newer/
> bigger house in Sunnyvale and send kids to private schools than
> buying a Cupertino for Monta Vista ?

The reason is that most kids (even kids from rich WASP families) can’t get in to the “good” Bay Area private schools and the kids from recent Chindian immigrants have almost no chance of ever getting in to a good Bay Area private school. If you move to Burlingame or Cupertino the public schools have to let your kid in…

FAB :

Interesting angle. Can you please elaborate why this "discrimination" ? I have never heard it before, and from your comments it doesn't seem to do with racism either. What can be more divisive than money and/or race ?

If outlawing stated-income, neg-am & I/O” loans be “Good” for consumers & taxpayers, would requiring only all cash sales (or maybe 50% down payments) be even “Better”?

In a word: yes.

Imagine a California where 50% down is the norm. Imagine working class houses that average $100-150k. Impossible you say? Nonsense.

Most of the cost of a house today is in land prices, which are absurdly high (as we all know) due to rampant speculation on margin, absurdly cheap Fed credit and the government tax subsidies that fueled it. The rest is mostly due to extortionary local government fees (as high as $100K in some NCAL counties), which could easily be eliminated if the public demanded it. The cost of labor (usually illegal) and raw materials to build the structure is practically negligible in CA --probably well under 20% of the cost of the property.

In the aftermath of the Great Depression, I/Os (and neg-ams too AFAIK) were banned and stated-income was all but unheard of, thanks to Glass-Steagal and other similar legislation. End result: affordable housing that pretty much tracked inflation and 2-3X HH wages for the next 30-40 years.

Is there any regular here who still believes that Debt = Wealth, or that allowing consumers to dig themselves an ever-deeper financial hole actually increases (not decreases) true "affordability"?

Anyone read the FOMC minutes ? The key phrase there is feeling that rates need to be reduced substantially. If anyone is still naive enough to assume that Fed is done - this might be a good time to wake up.

Note: I am not proposing actually setting a government-mandated minimum down payment of 50% or all-cash or any other figure (though at the very least the GSEs should not be buying any $0-down, stated-income mortgages).

However, banning NINJAs, I/Os and neg-ams is not only good common sense, it is also in the public's (but not Wall Street's) best interests. It was done 70 years ago, it can be done again, and it should be done.

Oh, and since we're on the subject of "regulation" vs. "subsidies", banning secret, unpublished YSPs (A.K.A. toxic-loan kick-backs for unlicensed, non-fiduciary mortgage confidence men known as "brokers") and putting up a firewall between appraisers and lenders would also not be a bad idea.

HARM, the step in the right direction for the government to do is to remove all attempts to encourage people to buy with tax breaks and whatnot, right?

If didn't have the mortgage interest deduction and the capital gains exemption and so on and so forth and got rid of all the quasi-government institutions that supposedly help homeowners, wouldn't the prices come down?

Then, let the lenders operate in a real market with no Fed cushion to bail them out. Like any other loans, the lenders will decide how much risk is appropriate.

The rates and downpayment requirements will vary based on the borrower's risk (credit rating, job etc.)

This is pretty how it was in India growing up. Most people bought houses the following way:

1. Save money while renting for years.
2. Use the saved money to buy land.
3. Using some more of the saved money (maybe after a while) and money borrowed from friends/relatives (if necessary), build the house.
4. If absolutely necessary, borrow a little bit from a bank.
5. Move in and start paying off any loans.

My father did this and many others too. And the house would be completely paid off usually a few years after moving in.

Nowadays, the US model is being adopted more and more and I feel sad about that.

I feel there is no need for banning all those dubious instruments using the strong arm of the law. If the incentives are removed and the risk stays with the lender and the Fed does not expand credit ridiculously, that will automatically happen.

sriramgopalan,

Here's the thing: there's a big difference between being pro-SUBSIDY (direct or indirect, taxpayer financial support) and pro-REGULATION.

We have NOT had any meaningful regulation in the mortgage and RE industry, especially when compared to the securities industry. What we've had are $Trillions in government subsidies, taxpayer risk underwriting and various taxpayer bailout proposals.

I would like to see this situation reversed. Real, substantive, common sense Regulation, and a whole lot less (prefereably zero) subsidies and taxpayer bailouts. I don't think we can get back to a sane lending market by eliminating the subsidies & bailouts alone.

There is a reason why there are no I/O or neg-am credit cards: it's called "Usury" --a legal concept that I would like to see come back with a vengeance and applied to the REIC.

Harm, each mortgage regulation is basically another boiler plate form that gets added to the to sign stack. People focus so much on reading that blacks can get a loan the same as whites that they neglect the note. You are right on the mark about meaninful regulation. In CA the state does a very good job regulating insurance companies so that consumers easily shop for something based on standardization of terms and coverages.

Yes redefine usury for mortgage lenders. Let rates float with the market but stop with the shell game terms.

I feel there is no need for banning all those dubious instruments using the strong arm of the law. If the incentives are removed and the risk stays with the lender and the Fed does not expand credit ridiculously, that will automatically happen.

I disagree. Banksters and companies will always try to get away with whatever they're allowed to get away with. They have a mandate to make money and serve their shareholders --period. If it's profitable and legal for them to operate factories using slave labor, they will use slaves. If it's profitable and legal for them to dump toxic waste directly into the air and public waterways, then they'll dump. If it's more profitable for them to sell "innovative" neg-am NINJA loan products (and securitize them & dump the risk onto the taxpayer) vs. "old fashioned" full-doc FRMs, then that's what they'll sell. If it's profitable and legal to hide information and coerce/intimidate competitors, then they will hide and coerce.

There's nothing wrong with capitalism, as long as some basic level of regulation is established to address its fundamental shortcomings. Namely, the tragedy of the commons, and unfettered capitalism's inherent tendency to reward unethical, coercive, fraudulent, monopolistic and other socially, environmentally & ethically unacceptable behaviors.

my dog got out the back gate, wandered around the neighborhood and came back with a mortgage in his mouth...

Maybe they will reposess his doghouse next year...

Oh, and since we’re on the subject of “regulation” vs. “subsidies”, banning secret, unpublished YSPs (A.K.A. toxic-loan kick-backs for unlicensed, non-fiduciary mortgage confidence men known as “brokers”) and putting up a firewall between appraisers and lenders would also not be a bad idea.

I suppose this is along the lines of SG's post, but I have always held the REIC will have to be destroyed if the securitization engine is to be reved up again (and there are too many reasons for it not to be). Those who "poisoned the securitization stream will be shown the door".
BTW, exotic ARMs have always been tools of the rich, so I have a hard time believing they will get banned. In fact, for our highly mobile society with shortened holding times for RE, I can see some of these types of ARMs getting more popular. Of course, this time around, someone's gonna come a knockin' to make sure the residence is truly "owner occupied" (you can bet the investors are going to want to know).

No, actually China is NOT falling for the feed-food-to-vehicle crap like we do. There was a small-scale ethanol experiment earlier last year but the central mandate right now is to shut down all ethanol projects using biograins. There is a real issue of food shortage, and keeping the 1.3B population fed is definitely one of the top priorities for the Chinese government if it wants to stay in power.

For all you no-regulation, laissez-faire "the henhouse runs better when the foxes are in charge" capitalists out there:

"If men were angels, no government would be necessary."
--James Madison, The Federalist #51 (1788)

There are two things that I disagree with Mish.

1) Gold is a better hedge for deflation. Maybe his definition is different from mine, deflation to me means USD becomes the most treasured "benchmark of wealth" in the world, everything expressed in USD terms will decrease, which should include gold. I have a big gold position but am not a gold bug, and I am particularly bothered by people who claim gold is a good hedge for both inflation and deflation, sounds too good to be true.

In what circumstances will the world collectively say, ah, these responsible Yankee bastards really care about the value of their currency, let's hoard USD, although the Fed keeps dropping rate to the floor. Does any US government official, any US government action indicate that they care about defending the USD, except for lip service?

Currency value is based on one thing, confidence. Just because USD is destroyed in massive amounts doesn't mean that worldwide investors are now suddenly confident in the US. Especially when the US consumers stop buying stuff, explain to an ex-foreigner like me why I should hoard a currency of those bankrupt consumers? What can they do for me?

2) Asset deflation across the board. That happens only once, in 1929, when USD was gold-backed, and government couldn't print out of the mess. What incentive does the US government have to make USD and all the debt denominated in USD more expensive for itself, its SS, Medicare obligations and its debt-ridden citizens?

The government's manipulation of one's currency is one-sided. You can weaken your currencies very easily, but you cannot strengthen it with the same ease. Look at Japan, they can always manipulate Yen downwards (print Yen to sell), we can just do the same, the printing ability is infinite.

Asset deflation will only happen in previously over-priced categories like housing, because government doesn't have a mechanism to sprinkle money evenly to every sector of the society. If heliBen does drop USD on a perfectly even basis to every single American, then we will have no deflation in ALL sectors. Since we don't have such a mechanism, those who can't get as much sprinkle won't be able to keep supporting the asset price that are linked to their wealth.

Mish used Japan's deflation as an example. Unfortunately he is not very familiar with the Japanese situation. One, Yen is not a world currency hoarded beyond the need for practical use, and enjoyed no premium for being the world's reserve currency, which we do, that's why we have further to fall than the Yen. Second, the extra Yen printed was largely borrowed for Yen carry-trade so they disappeared in circulation within Japan! Third, Japan's recession coincided with the emergence of China as a production base, so offshoring was a big reason accounting for the price deflation. Today, China is the already world's production base, and we've already offshored everything we can (is there still nuts and bolts left?). Therefore, it is completely naive to draw a parallel comparison between Japan and US in terms of their response to recession.

OO,

Post a comment on Mish's blog - he usually answers any comment worth answering - so most likely you will get an answer.

He has claimed that gold is NOT a good hedge against inflation and one proof is performance of gold in 15 years before 2000. According to him, it's a hedge against hyper-inflation, which is really unlikely as Randy H pointed out.

Mish argues that gold is money and hence a deflation hedge - "cash is king". It's not an asset - it's money - a form of exchange.

His definition of inflation and deflation has nothing to do with commodity prices. It's about supply of credit. He has been saying that consistently for many years - and has so far been proven right in terms of interest rates, treasury notes and gold. And we are in a housing deflation.

It took me a while to understand, but his arguments about commodity prices increasing has nothing to do with inflation - which is increase in money supply to him. Oil can increase due to peak oil and corn prices can increase due to Govt policies. That's not inflation to him and he was not ruling out increase in these commodities.

Ok, this is not all I agree with. His blog also had a great debate with Peter Schiff just last week. I would vote for Peter Schiff's stand. No matter what the technical definition for all these "flation"s are, I see prices for things we NEED going up, USD falling, houses dropping in value and eventually long term rates going up.

Sriram - I like your model on how to acquire a house. That's how it used to be most places. That's how it is for most in mexico.

It's traditionally been kind of like that here, buy the land and put a trailer on it while you build the house. Big bank loans in many cases but I also know/know of people who've done much of the work themselves, and "bit by piece" as they say.

sriramgopalan's DIY/pay-as-you-go model also used to be the standard here in the US, if anyone can believe it. Before WWII and the universal adoption of the 30-year mortgage (we can thank the government for that, naturally) and the G.I. Bill, DIY/PAYG or short-term "balloon" mortgages were the norm.

Outside of the Amish, a few earthy-crunchies and some unusually stalwart, rugged individualist types, there aren't many Americans today with a lot of enthusiasm for this model of home ownership anymore. Which is too bad, because the owner-builder really does end up "owning" the house & land within a reasonable period of time, and gains a tremendous amount of practical experience and skills in the process.

We had a discussion about this (in the context of straw-bale & alternative DIY construction), but the big drawback was, in the end you need relatively cheap land within a reasonable commute range to employment centers for it to work. As long as Wall Street (& Fed) is willing and able to lend out $Trillions in cheap credit and consumers are willing to enslave themselves to their overpriced houses for life, land prices will continue to be set by speculators and sub-prime & NINJA borrowers.

One of the biggest advantages of building houses the step by step, almost no mortgage way was the emotional investment that is made while doing so. You don't become just part of the community, you build the community doing so.

Today people ask - will this neighborhood "appreciate" as much as others ? This does not build a community. But when you are borrowing north of 80% of the cost, it is only human to think of your house as your "investment".

To be sure, this mentality was there even before the bubble. I don't think this method will ever return. Nor does it have to. The world has changed, for better or for worse. I would settle for conservative and prudent financial behavior - and I am not sure even that would ever return. I don't think this bubble bust would change much of the speculative spirit. For a few years it may seem so - but only till the next bubble.

A question about Trulia. Is there any way to obtain more information about a listing without having to go the subscription route ?

Would any of the regulars here think of buying a foreclosure ? One of the listing is quite attractively priced, but I have no idea about how buying from bank is different than buying from a person. Yes negotiations will be different, but is the process more complicated or with legal pitfalls.

Maybe I need to attend one of the Foreclosure seminars ;-)

StuckInBA Says:

> FAB: Interesting angle. Can you please elaborate why this
> “discrimination” ? I have never heard it before, and from your
> comments it doesn’t seem to do with racism either. What can
> be more divisive than money and/or race ?

All the “good” private schools in the Bay Area have way more applicants than spaces so the schools almost always take kids from families that have been generous to the schools for generations. Today the schools want to say they are “diverse”, so they do have some minorities, but the minorities are usually the kids of 49ers or black guys that became friends with some of some of the school board members while in Law School at Harvard or Business School at Stanford…

StuckInBA Says:

> Would any of the regulars here think of buying a foreclosure?

I would think about it, but I would want to get the home at a big discount. If the previous owners were still living in the house I would want a massive discount since you will have to evict them and you run the risk of them thrashing the place and will have little chance of getting any money from them…

I asked:

> If outlawing stated-income, neg-am & I/O” loans be “Good” for
> consumers & taxpayers, would requiring only all cash sales (or
> maybe 50% down payments) be even “Better”?

Then HARM Says:

> In a word: yes. Imagine a California where 50% down is the norm.
> Imagine working class houses that average $100-150k. Impossible
> you say? Nonsense.

I don’t understand why HARM (or anyone else) cares if a bank makes a bad loan and loses money… Should we pass a loan that made it illegal for parents to give loans to irresponsible kids (or me to loan a friend with a drug problem $100)?

If the government passed a law that made the minimum down payment 50% the price of homes would not drop to $100K, they would just drop a little and we would have a lot more rentals with higher rents (since a 50% down payment would make it so hard to buy landlords would be able to charge higher rents)…

> Most of the cost of a house today is in land prices, which are absurdly
> high (as we all know) due to rampant speculation on margin, absurdly
> cheap Fed credit and the government tax subsidies that fueled it.

The reason for high land prices is due to lack of desirable space and restrictions on development not speculation (if half the lots in SF were vacant and available and there were no restrictions on developing those lots the price of the lots would not be high)…

> In the aftermath of the Great Depression, I/Os (and neg-ams too
> AFAIK) were banned and stated-income was all but unheard of…

I was not around at the end of the Great Depression, but I’m pretty sure that IO loans were not banned by the government (I know that they have been legal, but unpopular for most of my life), but stopped because banks figured out that an amortizing loan would make it easier for the Borrower to actually pay off the loan (and cut bank loan losses).

> Is there any regular here who still believes that Debt = Wealth, or
> that allowing consumers to dig themselves an ever-deeper financial
> hole actually increases (not decreases) true “affordability”?

You can only dig so deep before the hole caves in and buries you. Once enough borrowers are killed by cave ins and can’t pay back the banks it will become harder to get a loan without any government action (this has already happened and I’m betting that it is now impossible to get the once popular stated income NINJA loan in California)…

From MSN Investor :

"As long as demand is greater than supply, the dollar is weak and the Fed accommodative, prices will move higher," said analyst Peter Beutel of Cameron Hanover, an oil consulting firm in Connecticut.

This is perhaps the first time I have seen MSM saying that the Fed is at least partially responsible for oil prices.

Except for professional like FAB, I don't think we should touch foreclosure. I will only buy foreclosure land.

Aside from the legal complications, the thing I am most concerned about is sabotage, which is very common. Lots of disgruntled previous owners pour concrete down the pipes, trashed the cabinets, or even intentionally pull out wires behind certain appliances to cause short circuit.

You should go on youtube to search for sabotaged foreclosed homes, classic.

I don’t understand why HARM (or anyone else) cares if a bank makes a bad loan and loses money…

Simple: if one bank makes one bad loan and loses its own money, net impact on me, Mr. Joe Homebuyer/Taxpayer = zip.

When hundreds or thousands of banks, credit unions, wall street firms, hedge funds, etc. go "all in" on the business of lending $Trillions in dodgy loans and then try to pawn off the risks on the taxpayers (bailout), net impact on me, Mr. Joe Homebuyer/Taxpayer = very significant.

Such reckless lenders, borrowers (and non-regulators) have set the market price for me and other responsible borrowers, in effect forcing us to either: (a) stay locked out of the housing market for many years, or (b) succumb and "go along with the crowd" by taking out a NINJA ourselves.

In addition, all these irresponsible, reckless actors have created monumental macroeconomic risk, which may even threaten my livelihood (recession), even though I have personally *refused* to participate in their Ponzi scheme. They also seek to socialize their losses via GSE $1million loan limits, subprime bailouts, Super-SIVs, flipper loan wokouts, etc.

Bottom line: it's not the loan brokers or bankster's asses on the line here --it's yours and mine.

FAB raised a valid issue with private schools which is very true. I know of parents in so-so neighborhood trying to get their kids on the long waiting list of the "good" private schools in the area.

Another reason why parents want to converge in "good" public school district is because these schools are relatively drug free (e.g. Monta Vista has a good reputation of being very "clean"). I know for fact that Asian parents generally freak out if they find their kids doing drugs, it is an extra premium they are willing to pay on top of the academic performance.

Harm, your regulation model for lending is a little more extreme than reality but the concept is sound IMO. That was the purpose of Fannie and Freddie. They have/had guidelines for the government to back the loans in order to make loans accessible to the masses. These standards used to be pretty tough but for some reason what you say happened. One bank somehow would lend a higher percentage and then all the others had to follow in order to not lose market share. Next thing you know the government is then relaxing their standards in order to keep the stupid programs alive and ended up putting taxpayers on the hook.

What you describe is my biggest problem with a pure free market. You will always have one firm who breaks normal decent values in order to gain an edge and then everyone has to do the same to compete.

HARM Says:
Kee-rist, people. Are we back to the old “Bay Aryans are all Googleaires and make 5X the incomes of everywhere else, thus prices cannot fall in my section of the Fortress” canard?

HARM, that is not what I said. I specifically referred to the small subset of two-income tech workers, who are potential buyers in the fortress. Whether we like it or not, these are the sheeple who might keep buying until they are either extinct (lose one or both incomes) or too scared (worried about losing one or both incomes). The median is misleading both for income and for house prices.

Since I kind or opened this can of worms, let me share my own data. I am a principal engineer (R&D) at a large tech company - there are about 30 to 40 peers at my level. My wife is a tech-manager (mid level) at a large, stable company, and there are eighteen managers at her level within her business unit - no idea how many more across the co. Together, we made a combined gross salary+bonus of about 2.5xHaHa in '07. Not including stuff like patents or stock-options or espp or other investment income.

Many of my colleagues have spouses who are at similar levels. And neither I nor my wife are near the highest paid people in our companies.

I am NOT saying everyone in the area is like this - but if a schmuck like me is looking at this kind of number, I don't know what is going on with everyone else.

I am not saying prices will fall, even in the fortress - they *have* to fall, no escaping that. The end of jumbo-ARMs itself is a punch in the gut - but I believe the real keel-over point will come when the psychology takes a hit from job losses.

(with all due respeck, and all that)

Harm

The fallout goes even further than what you mentioned. We got our loan, but only because we have impeccable credit and no credit card debt. They scrutinized the hell out of our loan (too little too late??) and I've seen tons of sales fall through out here because the banks are so scared of lending right now.

Normally I wouldn't think this was such a bad thing. But at this point those who were careful, saved money and waited out the bubble may find it really hard to get financing or have to pay higher interest rates. In the end that seems an awfully unfair price to pay for being responsible.

HARM Says:
Palo Alto Daily News:
Counseling offered to troubled borrowers ... In all of 2006, the group’s Sunnyvale office, which provides mortgage counseling to residents of Santa Clara, San Mateo, Alameda and Stanislaus counties, got one or two calls a week from people seeking advice, Eichner said.

Now it’s getting two or three calls a day.

That, my friend, is one hell of a rebuttal to my thesis. Thanks!

“Right now,” Eichner said, “we’re drowning in these calls.”

SP :

You are unintentionally highlighting what I said. People like you and in general bloggers here are not a representative sample. I will repeat. Not just being elitist, we all also have a different mindset.

Trulia says Palo Alto has 79 notices of defaults or foreclosures.

http://www.trulia.com/CA/Palo_Alto/#for_sale/Palo_Alto,CA/foreclosure_lt/

So much for it being the Fortress Core.

And Cupertino has 16. Some of these are apartments costing less than 600K.

http://www.trulia.com/for_sale/Cupertino,CA/foreclosure_lt/#for_sale/Cupertino,CA/foreclosure_lt/date;d_sort/

Sunnyvale, Santa Clara each over 90. Mountain View over 35. Anyone (eburbed ?) wants to argue that there at lest 35 GOOG employees to save Mtn View ?

Yeah, I need to sleep, but I discovered Trulia only today.