patrick.net

OK, let's define the too big to fail here.

Is WaMu one of them? Wells Fargo? US Bank?

Only Citi and BoA will fit the bill?

Which ones are the too-big-to-fail brokerages? Merill or Goldman? Does Goldman even handle retail customers?

Salomon Bros under Citi is a piece of crap, I used to use them before, horrible service to the extent of messing up order. Thank you very much.

Sometimes, the NIMBYists happen to be very rich and powerful…

NIMBYists typically tend to be rich and powerful. Who tends to live near dumps, oil refineries, RRs and power plants: rich or poor people? Who has lots of free time on their hands for pet "causes", can afford expensive lawyers, and have the ears of Congressmen, Senators and state legislators: rich or poor people?

Fidelity has a lot of retirement accounts. I assume their owners will be very upset (politically) if anything is to happen.

NIMBYists typically tend to be rich and powerful.

I do not see truly rich people being NIMBYists. Look at Bill Gates and Warren Buffett. Not NIMBYists.

If you want to protect your backyard just buy up the surrounding 10000 acres!

I don't know about multi-generational wealth, but gold was the ONLY thing that got my grandparents out of China before the change of regime.

Back then, only people with enough gold could get a ticket, because that was what the train tickets / liner tickets were priced in. You have plenty of real estate, stocks in factories, sorry, that didn't count. How many gold bars do you have to exchange for a ticket?

Then the fall of Saigon. Gold was the only currency that could get you out of the mess. I know of a couple of real "boat people", each paying one gold bar (12 ounces) for a chance to sail across the ocean to head for America.

I am not saying that the US will degrade to that extent, but if I were to leave this country, USD would not be my choice of currency to carry.

The SIPC has been invoked quite a bit. They have some good historical examples themselves:

http://www.sipc.org/media/release4.cfm

You should assume that your money will be illiquid for many months if SIPC is invoked. The same with FDIC, though since that's directly government controlled, they could move to expedite the process if any failures are widespread enough. For example, if every depositor in BofA suddenly found themselves collecting FDIC (which would never happen under my theory), you can bet that any politician blocking an emergency relief bill would be one wishing to end his/her term in a blaze of glory.

Gold is a currency.

So long as the next greater fool is willing to pay more for it who cares if it does not product an income! :)

RE: nuclear power, I suspect $10/gallon gas and resulting $20/gallon milk *might* change public sentiment towards nukes in a big hurry.

Hopefully, regular Patrick.net readers would fall under the "more swayed by education than slick marketing" camp. On that assumption, I am re-posting an excellent post on this subject from The Oil Drum:

advancednano on January 4, 2008 - 10:39am

rebutting some of this article:
In a comment that I have down below I list two companies (Sparton Resources of Canada and Wildhorse Energy. (5000-15000 tons of uranium per year from European flyash alone.)
http://www.wise-uranium.org/upeur.html#AJKA

Flyash is 160-180 parts per million uranium. 40 times better than granite.

Uranium mining info
http://www.wise-uranium.org/indexu.html#UMMCI

Uranium prices are substantially off of their peak
http://www.uxc.com/review/uxc_Prices.aspx

Only two thorium reactors in 2075 ? There is a project to make thorium fuel rods that can be used in most existing nuclear reactors. This seems likely to succeed in 3 years.
MIT Tecnology Review discusses the efforts to get thorium used in reactors for less waste (unburned fuel)

The Fuji Molten Salt Reactor (which could use thorium) seems to be 8-9 years from completion. The Fuji Molten salt reactor could burn 99.9% of the plutonium, uranium and thorium. So it would handle the waste issue and with profitable energy generation not some made up cost for waste handling.

The Hyperion power generation uranium hydride reactor scheduled for 2012 completion can also use thorium hydride A good hydride reactor design would burn 50% of the fuel instead of current 1-2% reducing fuel demand and leftover waste.

CANDU-type reactors - AECL is researching the thorium fuel cycle application to enhanced CANDU-6 and ACR-1000 reactors. With 5% plutonium (reactor grade) plus thorium high burn-up and low power costs are indicated. CANDU reactors can breed fuel from natural thorium, if uranium is unavailable.

The best way to get rid of the current and future waste is to build better reactors that burn all of the fuel and can generate electricity from existing waste.

The plan to use some expensive method to handle the unburned fuel is like saying if we used dollar bills for a nuclear waste incinerator it would cost a lot of money. Yes that would be expensive and an idiotic plan.

OO - people forget the essential lessons of the 1st Great Depression: Get out of debt, and Don't trust banks. Gold is indeed money, and paper money always reverts to the value of the raw material it's made of. There are lots of families who got out of a lot of places because they had gold - leaving behind others who did not.

I really want to see a nationwide movement to get out of banks, withdraw savings and put savings besides your "working cash" into silver and gold coins etc. If you are going to follow Ben Franklin's dictum to "never a borrower nor a lender be", it means by definition you can't deal with banks.

Okay - so I read a couple of articles yesterday and I got to thinking last night - and was wondering what other people think.

First - it was about the people that are buying another house (because it is cheaper and better than theirs) and then letting their old house go into foreclosure. These people are gaiming the system and letting the banks take the hit in loss of value - but am I correct in thinking this only works for people that have a non-recourse loan and no second piggyback loan?

Do you think that more and more people will do this, but realize that it is only on their first loan and not any good if they have serial refied?

Second - when all these properties are being foreclosed upon - and in some areas that hasn't happened because the judges have said "produce the documentation to prove you are the holder of the loan" (to the banks) and the banks have not been able to provide the mortgage documents - when people subsequently buy foreclosure properties - are there going to be some, where the banks are going to come along and say - hold on a minute that property belongs to us (the wrong bank/bond holder got the pay off on the old loan - or some portion of the old chopped up loans got sold to some hedge fund/credit collector as bad debt)?

FormerAptBroker Says:
I don’t understand why anyone would “invest” in something that did not give them a regular return on the investment.

"saved", not "invested". Return ON investment is an abstract concept when you are not even sure of return OF investment. Anyway, my point was gold vs. fiat. Not gold vs. a closely managed investment.

Yes Claire, only on a non recourse loan can someone just walk away from a house. Not having it recognized as debt forgiveness is a further incentive, though it might still be taxable at the state level. I should check that, it keeps coming up here. It should only work for someone with an original first trust deed otherwise the debt would just follow them to the new house so what would be the point?

No I don't think banks are going to claim title on resold homes in the future. Even if they did the title insurance would make the parties whole. That is the purpose of title insurance, to protect an owner or buyer from such claims. As you pointed out, some banks are having a hard time with the paperwork just for that reason, a claim for foreclosure has to be very clear and precise. Like an eviction, any failure to follow the process will get the person filing the action to have to start over.

As one of the people who mentioned gold:

No, I don't expect the country to collapse. If I really did, I'd be investing in residency visas, not gold. Don't be silly.

The same people who were saying that you can't eat gold were telling me the same thing when gold was at $500. How'd *your* speculative assets work out for you in the interim?

Gold is, at this time, a risky speculation. It's speculation that fiat currencies will continue to lose value vs. real assets. Unlike property, it's globally traded, so it's not limited to the local market.

Right now, important things (like oil, and soft currencies) are switching from the US Dollar to a "basket of currencies". Gold is a bet that a basket isn't any better in the long run than one.

*Something* is going to replace the dollar in international commerce. It's probably not the Euro. I think it will be gold bullion. (It won't be the Euro because the housing bubble has infected Spain, the Netherlands, and most of the Eastern block.)

BTW - in California, you don't pay sales tax on purchases greater than $1k, and amounts less than $10k are not reported. You're on your honor to report the capital gains yourself.

"Investments" have returns. "Speculations" rely on appreciation. Gold is a speculation, as is property that's twice the cost of rent. A failure to understand the difference between the two is what's got us in this mess, so I'm acutely aware of it.

I'm also speculating in short ETFs. For investment, I'm in Money Markets, whose returns stink, but who (probably) won't lose all my money.

Claire - I'm sure there are a few people buying that 2nd house then walking out on the first. But there are only a few people with balls that big. Most homedebtors are just hanging on, worried about doing the right thing, really good little slaves. And they'll work themselves nearly, or sometimes literally, to death to make the payments and follow their programming.

Which is going to make for a lot of pissed-off ex-slaves when the whole damn thing collapses anyway and life jams the red pill down their throat.

"as is property that's twice the cost of rent"

Well said. By the time the RE Boom had reached illegals arm'd w/ liar loans, debt ='d wealth and speculating ='d "investing". If you weren't ready and willing to pay 2-3 X rent, well then you just weren't getting it.

@DinOR,

If that $729K GSE conforming loan limit passes both houses and gets signed into law (and I fully expect it will --just gotta love "bipartisanship"), we might as well all be prepared for Phase II of the Real Bailoutâ„¢: dropping the FF rate to 0%, and allowing the GSEs & FHA to buy neg-am, interest-only and NINJA loans.

At that point, I suspect even stalwart bubble-warriors, Mr. & Mrs. HARM, will capitulate and buy the biggest McCrapshack we can find with the nastiest low-payment FB loan we can get. I'm thinking a cash-back "instant equity" 100-year neg-am NINJA with a maxmum LTV ceiling of about 25,000%.

What good is it being responsible when there's an endless river of government rewards for speculators and idiots?

ex-sunnyvale-renter Says:

> Justme - the Depression is hitting, and guns and
> ammo are the places to be invested.

I’m (seriously) wondering if ex-sunnyvale-renter was one of the guys out in the desert 12/31/99 waiting for all hell to break loose when the systems that run the civilized world stopped on 1/1/00…

ex-sunnyvale-renter Says:

January 28th, 2008 at 2:11 pm
Claire - I’m sure there are a few people buying that 2nd house then walking out on the first. But there are only a few people with balls that big. Most homedebtors are just hanging on, worried about doing the right thing, really good little slaves

I don't think they are though -a lot were just being greedy and into these houses because they were going to make money on them - now that house values are going down and they no longer are making profits (whether real or imagined), but losses instead, then I think they are going to bail - let's face it - I think a lot of people are much more "what am I going to get out of this" rather than "I made the commitment and I'm going to stick out no matter what" types.

Also, the thing that concerns me is that the buy a cheaper house and ditch the old one has hit the MSM so quickly and will therefore be more prominent in peoples minds when they consider the options available to them when faced with a house that is worth a lot less than what they paid for it (and the one down/across the street is up for sale for x amount less than you paid for yours).

The world *did* end on 1/1/00. Didn't you know?

After that we all became simply computer generated "toons" in a poorly produced online virtual world, coyly referred to as "the grid" by insiders who know what's really going on. The evil genius behind all this has the distinction of having created and then ruined the net's first viable streaming audio technology.

ex-sunnyvale-renter Says:
January 28th, 2008 at 2:11 pm
"Claire - I’m sure there are a few people buying that 2nd house then walking out on the first. But there are only a few people with balls that big. Most homedebtors are just hanging on, worried about doing the right thing, really good little slaves. And they’ll work themselves nearly, or sometimes literally, to death to make the payments and follow their programming. "

Just curious, how are you qualifying for the mortgage on the new house? Isn't your current house screwing up your debt to income ratios?

I think a lot of people are much more “what am I going to get out of this” rather than “I made the commitment and I’m going to stick out no matter what” types.

IMO people are neither inherently bad or good as a generality. Selfishness is part of our genes - just a basic feature of the grand design.

But leaving the philosophy out, from a pure financial point of view, there is a certain degree of smartness in this behavior. Who had the borrower's financial well-being in their mind ? Certainly not the Realtors, mortgage brokers and lenders. It was an insane game going on and I cannot fault the borrowers for looking out for themselves. Suck it up REIC, suck it up !

I posted a similar comment on Ben's blog. At a certain level, I simply love what is happening. You can ignore what Govt is trying to do. The lenders will be forced to come to their senses. The invisible hand never fails to deliver a slap in the face.

Suddenly the 25% min down payment size does not look like an impossible dream.

But leaving the philosophy out, from a pure financial point of view, there is a certain degree of smartness in this behavior.

There's a tremendous amount of smartness in that behavior.

It's a contract. If you don't live up to your end, they take the house. I fail to see the moral dimension to this.

Look at this this way - get cancer, and see how quick they put you on the street. This is a business, to them, it should be a business to you. You shouldn't feel any need to harm your family just to make them rich(er).

Indicators would seem to be seriously and disconcertingly in the red.

That 60 minutes piece is absolutely frightening to the extent it exposes and mainstreams the story to the masses, somehow losing that information exclusivity is discomforting. Inevitable of course, just wasn't quite ready for it. The brainwashed are about to come out of it, and that might just knock a leg out from the entire table while the ZIRP parachute is still too close to the ground to open.

I think maybe the key story is now the importance of propping up home prices, and if it’s not already will rapidly become the key driver of all relief, any reforms, and fiscal policy.

I had dinner with a group this past Saturday night and two separate individuals in our group were talking about their own foreclosures as if they were a badge of honor. No shame, laughing about losing properties (no, not primary residences), and freely and openly discussing details amongst a mixed group of only moderately close friends and acquaintances. Small sample, but clearly to me this is the nightmare of disappearing stigma.

As we reach a recognized 20% decline in more markets, it’s possible we could run into almost a mass revolt, a national stop paying your mortgage day or similar? The whole system comes down from there, ashes and pain. Folks are angry and desperate, and will certainly blame others or fate instead of their own lack of financial acumen. I’m sure they are modeling this scenario, and the new bankruptcy regime addresses some concerns, but is it actually possible we might see masses of folks simply stop paying all unsecured creditors and their mortgages?

On another mildly related note, a bill in the Maryland statehouse was just introduced which would prevent the credit bureaus from noting foreclosures on credit files for any consumer in Maryland who was subject to predatory lending (and no big surprise, the definition of predatory is highly inclusive). This removes the principal downside to the jinglemail samba. Does pent up demand come into the market before our politicians pandering for votes formally remove the foreclosure blemish on a national basis, putting all those folks viably back in the market? Is this in our interest?

HARM says
At that point, I suspect even stalwart bubble-warriors, Mr. & Mrs. HARM, will capitulate and buy the biggest McCrapshack we can find with the nastiest low-payment FB loan we can get. I’m thinking a cash-back “instant equity” 100-year neg-am NINJA with a maxmum LTV ceiling of about 25,000%.

I had the exact same "plan", but now I'm afraid I'll be too slow and everything - including my rental - will be sold before I can make a move and thus I'll be stuck in a tent. Do any of the rich folk here know if there's a bubble in boats? Maybe I'll just buy one of those and live on it. And I'll be in the Marina!

Earlier you asked about a decent local bank. I've had good service from First Republic - although they don't have too many branches.

Sorry to jump in so late on this but I just got home. Pennsylvania Power & Light(PPL) is officially leaving all options open as to a new reactor being built at their Susquehanna unit(Berwick). Unofficially the surveyors are already on site and the electricians union is offering the old boys in retirement 50$ an hour plus the regular 3.50$ an hour annuity to come out of retirement to show the younger guys how it's done. It should be a 10 to 15 year job. The irony is it's only 100 miles as the crow flies from three mile island although 3 mile island is operated by met ed. Wouldn't it be amusing if the first nuclear reactor to be built in the U.S. in over thirty years is that close to the unit that shut it all down?

Mr. Newsfreak

Look at this this way - get cancer, and see how quick they put you on the street. This is a business, to them, it should be a business to you. You shouldn’t feel any need to harm your family just to make them rich(er).

Exactly. Economics ought to be morally neutral.

Malcolm: Just curious, how are you qualifying for the mortgage on the new house? Isn’t your current house screwing up your debt to income ratios?

Don't know for sure, as I rent, but from the people I know it has been a fairly common practice round here (Fortress) to buy your new home before selling your old one. I guess most people would say that they will be selling their old property and therefore it is not counted on their loan application?

I had dinner with a group this past Saturday night and two separate individuals in our group were talking about their own foreclosures as if they were a badge of honor. No shame, laughing about losing properties (no, not primary residences), and freely and openly discussing details amongst a mixed group of only moderately close friends and acquaintances.

Don'tcha know --foreclosure is the New Black? (credit to txchick57, of TheHousingBubbleBlog)

All I gotta say is: jeebus, there is a lot of shit flying around all the sudden.

It's starting to smell a lot like the feeders to a slaughter house (if you've never visited such an operation, I highly recommend it) around here. The tension is in the air, like ten thousand head of livestock about to be gutted, and the doors have just swung open and the head of the line prodded in...

It never ceases to amaze me how many people rant on about the "sanctity of contract law", evil FBs "taking advantage of those poor banksters/lenders", etc.

Never mind that these crooks --in cahoots with the Fed and Congress-- cooked up this whole Ponzi scheme to begin with and established the rules of the easy-money Speculation Game. Never mind that the purchase-money mortgage contract clearly states that the borrower has the right to forfeit the house (collateral) and mail in the keys. Never mind all that, the FBs are clearly the *biggest crooks* here.

One of the guys over at Calculated Risk put it very succintly:

First to walk were the federal "regulators".
Then the mortgage broker walked (after taking his commission).
Then the lender walked (after selling the loan).
Then the mortgage securitizer walked (after selling to pension/hedge fund).
Then the ratings agencies walked.
Last to walk was the borrower.

Invest in sushi and beer.

Not investment advice

"Never mind that the purchase-money mortgage contract clearly states that the borrower has the right to forfeit the house (collateral) and mail in the keys."

Excellent! Provided they all read their contracts then this should play out pretty quickly now!

on Topic
I have all my downpayment savings in CDs (although I plan to look into Randy's recommendations on tax advantaged MM/Munis). I have all my retirement (ha!) savings in stocks - I trust Mr Market to come back eventually.

To be honest I figure that any losses we have in our 401k plan will be a lot less that the potential gain we will have when we do not have to shell out so much for a house!

@HARM

When I departed the Zillow boards, it was over being burned at the stake for "questioning the sanctity of contract law". Man. You should have heard the self-interested zealots proselytizing about the _morality_ of honoring one's contracts.

In this case it was a very earnest buyer who had signed a purchase agreement on an overpriced, bubble home, he then wanted out of before close. He was just asking if it was possible. Only LIB and I (known here as my former nemesis) offered any advice about how to try to can the deal. Everyone started acting as if once you sign on the line you have a duty before your maker to put your head in the guillotine.

Of course, upon analysis, all those people were pissed off home-sellers invading the home-buyer boards, trying to cajole people into buying their languishing albatrosses.

(Do I win any points for the most obtuse, metaphoric references in one comment?)

@Claire I know it has been a fairly common practice round here (Fortress) to buy your new home before selling your old one. I guess most people would say that they will be selling their old property and therefore it is not counted on their loan application?

I know a distant colleague of mine who did it at the "Fortress". This was last year April, when the market was still "hot". He bought a house for 975K first, and then sold his condo for around 550K later. He took an interest-only loan for the new house, and was planning on refinancing it after a year.

As much as I boast about integrity and honoring contracts, I think I would walk from a house that lost half its value. There comes a point when a situation becomes so hopeless that it is unsalvageable. There is some validity to the argument that the bank should have done a little more to protect their interest. After all they are lending on a nonrecourse loan basically co-buying the house with an FB. An appraisal isn't ordered for the buyer's interest, but it is ordered by the lender as part of their due dilligence. Putting aside for the moment, the FB liar loan frauds and all that stuff, fundamentally a bank should bear some of the blame when it turns out their assets were overvalued.

Guys, banks were pretty liberal when it came to lending on new homes because the trend was 100% that the current one would sell. Many a time I watched in disbelief as 'Buy Me' brought out dumb couple after dumb couple who were trapped in a new mortgage while they couldn't sell their current house. I could not believe that a lender would risk it but times were different. I think it would be pretty hard to pull that off now though, especially now that 60 Minutes is trying to Poo Poo our party.

(Do I win any points for the most obtuse, metaphoric references in one comment?)

Sure --you win the first-ever Patrick.net "Dennis Miller Award". ;-)