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From reader Malcolm:

I get infuriated watching the news now. After all those years of our predictions having been taken right to the officials and publicly they responded, through the media, that both companies Fannie Mae and Freddie Mac were healthy. Our Senators told us there were no bailout plans. A bank bailout was masked as a homeowner bailout. All of this was to keep foreigners lending money to further fuel the corruption we know of as our federal government.

That’s exactly it. The big fear is that if Fannie and Freddie default, foreigners will perceive that the US government is likely to default too.

So what did our geniuses in DC do? The dug a hole right through the bottom of the boat, to let the water out!

Patrick

Since there are still no-downpayment loans being handed out, why don’t I get the biggest such loan that I can, never pay anything, and live free for a year until I’m finally evicted?

Seems like a great way to save a year’s rent!

And since CA is a non-recourse state, the lender could not take any of my assets, I think. Who loses? The builder, the lender, the FHA. The same people who should not be making these loans.

http://www.latimes.com/business/la-fi-realblog24-2008aug24,0,1000236.story

Patrick

Psychological insight into the housing crash from Peter C:

1. Denial: Example - “There is no bubble!”
2. Anger: Example - “The media is making all this up!”
3. Bargaining: Example - “OK there may be a bubble bursting in the East Bay but not in San Francisco or on the penninsula!”
4. Depression: Example - “I’m ruined! I’m no longer a ‘millionaire’.”
5. Acceptance: - Oh well, easy come, easy go. Hey what’s wrong with affordable housing”

Patrick:

As you know, George W. Bush signed a bill into law last year which I call the “Deadbeat Specuvestor’s Tax Relief Act of 2007.” It makes forgiven mortgage debt not count as income. So if a bank forgives some houseflipper who paid $500,000 for a house that the bank can only sell for $200,000, he doesn’t have to pay taxes on his $300,000 windfall. That’s $100,000 in taxes that you and I have to pay instead.

Anyway, even though California state passed no such law, our State Franchise Tax Board is NOT trying to collect the income tax on this very real income (even though Anna Eshoo called it “surprise income”, it’s as real as any other.) I can’t find any law or ruling excusing these deadbeats from their state tax burden.

Letters to my state reps. about it have gone unanswered, or have been replied to with form letters. (Sally Lieber, for example, must have quickly scanned and saw the word “mortgage” because the letter said something like “Sally Lieber is doing everything she can to keep your home prices high!”)

Now the State is talking about raising MY (and your) state income taxes when they’re not even trying to collect what’s owed to them. That’s outrageous. Can you raise this issue on your forum? There are billions of dollars in taxes that CA is owed by deadbead houseflippers and they’d rather tax me and you than get it from these get-rich-quickers.

Thanks.

Robert S.

From http://seekingalpha.com/article/88725-is-the-u-s-banking-system-safe

“Wells Fargo decided to extend its charge-off policy in the 2nd quarter from 120 days to 180 days, in an effort to give troubled borrowers more time to reach a loan workout. A skeptical person might think that they did not change this policy out of the goodness of their hearts.

Maybe, just maybe, they changed this policy to reduce their write-offs for the 2nd quarter, to beat analyst expectations.

There are many stories of people who are still living in houses, twelve months after making their last mortgage payment. Their banks have not started foreclosure proceedings.”

Ah, Wells Fargo’s great profits lately make a bit more sense now. They are still just pretending they are going to get paid.

Dear Patrick,

After many years of saving and prudence, I have helped my parents find
and purchase a home in the Central California town of Los Banos.
Arguably, we could have waited a bit longer. After much wrangling they
found a house at a very reasonable price and can now live in it
comfortably, having paid for it with the money they saved (not
borrowed). They paid $143,000 for a home that was last sold for about
$450,000. It was a mere coincidence that they happened to know the
couple who was foreclosed upon and thus could verify this information
firsthand. When everyone else was stark raving mad with visions of
real estate riches I begged and pleaded with my folks to wait it out
since there was no way to rationalize half million dollar homes in the
Central Valley-California’s Appalachia. I am glad there were others
out to support and substantiate my view.

Sincerely,
Efrain Rojas

From a reader:

Patrick,
Knowing that the RE market is declining, a friend of mine recently placed a bid on a condo in San Francisco that was much lower than the asking price.

Then my friend was inadvertently copied on an email that her realtor’s parter sent to her realtor. I don’t have a copy of the email, but to paraphrase, the email essentially said this:

“Tell the seller’s agent that we think our client’s offer is too low, so the seller should counter-offer. We think the buyer will get emotionally involved (with the home) and will accept the counter so we can close the deal.”

Is this unbelievable or what?! Who exactly is her agent working for anyway?

Patrick’s answer: The buyer’s own agent works for the seller and works against the buyer because no sale means no commission.

Shit hitting the fan
Splattering Fannie, Freddie
Run for cover now

What will happen? Possibilities:

1. Fannie and Freddie allowed to fail, mortgage lending stops.
2. Fannie and Freddie rescued by taxpayers, doubling tax burden on everyone.
3. Fed destroys dollar yet faster, resulting in skyrocketing inflation, then fascist takeover, as in Weimar Germany.

I think number one is the best option.

Patrick

The relationships between inflation, interest rates, foreclosures, the Fed, banks, and the general economy can be explained better in terms of hours of human labor than it can in terms of dollars.

A mortgage is a promise to work much more than it is a promise to pay money. A mortgage is technically written in terms of money, but the reality is that money represents work. The goal is for the lender to extract real work from the borrower, though perhaps in a roundabout means. The only real consideration in lending is that the borrower not be allowed to escape the promised servitude.

The housing bubble, however, consisted of promises to pay more hours of human work than could possibly exist. There are simply not enough people and not enough hours in the day to pay back such massive mortgage debt. The strawberry picker at $7/hour would have to work for about 71 years to pay back the principal on the apocryphal million dollar mortgage, and that ignores the interest, taxes, etc. It’s just not going to happen. They money is not going to be paid back.

Beyond the breaking point, when a borrower has nothing to look forward to but a life of servitude, there is no longer any motivation to pay back at all, because it cannot possibly make the situation any better. And there is a motivation to borrow yet more, because it cannot hurt. Two death sentences are no worse than one.

The Fed’s goal, when it forcibly transfers money from savers to borrowers by lowering interest rates, is to bring borrowers back to the brink of bankruptcy from well beyond that brink. When people are afraid of becoming bankrupt, they can be forced to work. When they’re already lost, there is nothing to be afraid of.

From the image above, it looks like the bundling of mortgages into mortgage-backed bonds has pretty much disappeared, and that jumbo lending has suffered about as much as other kinds of lending.

So why the long delay between this implosion in lending and price falls in more expensive neighborhoods? Is it that richer people have been able to hold out longer? Prices are down only 10% to 15% in the better parts of Menlo Park, CA, but I would expect a bigger drop based on the dearth of willing lenders. Maybe it’s just a matter of time.

Patrick