patrick.net

...unless the federal government tries to “fix” the situation once again.

Which they are half-way to accomplishing. If this bill's income tax provisions passes, everyone who cashed out refi'd then walked away via a foreclosure is laughing all the way to the bank, while taxpayers are left to pick up the tab with increased taxes and inflation to fund bailouts for the banks.

In fact, if you can find a compliant mortgage broker and appraiser, this is a great way to draw income tax-free. Put houses on your paper for the smallest up front cash possible, regardless of how toxic the loans are. Make sure you get enough so that X months down the line, you and your accomplices have enough to live on for 7 years from cash out refi's on all the properties, then let foreclosure take the properties.

If this bill has to pass because of realpolitik, then at least tighten up the income tax provision to only apply to short sold paper that was not part of any cash out. Give the investors holding that paper lots of reasons to help the IRS identify paper written with a cash out. If a mortgagee short sales on paper that delivered a cash out, the income tax assessed is split 50-50, half to the investors holding the paper, half to the Federal Government. Have the IRS publish an electronic directory that holds the legal description, address, and amount of the short sale for all properties claimed under the provision. The investors have an incentive to check this directory every day against their databases, and register any claims that the liens on the property cannot be extinquished in a short sale unless their cash out refi loan is partially repaid through the income tax.

The Congress and IRS will know that any relief provided will only be to short sales of properties where no income from capital gains was realized. As a investor/saver/citizen, I'll be satisfied that there was no bailout involving taxpayer funds. Keep the second home changes to fund the budget shortfall, though I suspect grandfathering in properties purchased before 2008 is a bad idea, because it sets up CA Prop. 13 dynamics all over again, just on a national scale. I would rather see a rapid phase out of grandfathered properties, such that all properties fall under the new rules within 4 years.

So is this the DinOr evil plan?:

FB lives in 1800 sqft home in average area, owing a $600k mortgage

FB is still making payments (no reset yet), so he qualifies to buy a 2500 sqft home in upscale area, post bubble price from builder only $500k

FB moves to upscale house, lets other house go into default

@apostasy,
the Refi and walk crowd is VERY LARGE at least in CA.

I saw one home the guy took out 1 m heloc (he paid 2m for it) and they it went to foreclosure. The 'Dont 1099 me, Bro' law is gonna be HUGE for him, possibly 300k savings. Probably he fled the country with his winnings anyway and would never pay the taxes.

The government forgiving debt is huge because they are the ONLY entity that can reliably collect on debt at least if you are living and in the US. The IRS will put you in jail, take your crap and sell it, garnish wages, anything they want to do they can.

In college i was a bill collector part time on credit cards and phone bills. crummy job. We used to be in awe at what the IRS would do to these people, swoop in with agents and snatch em up and sell their luxury cars at auction. The people with guns (gov) always win.

@Headset,

Well it is evil and a "plan" of sorts but I can't take credit. There were several articles from FL, VA etc. where couples were (on one hand) cryin' da' blues yet at the same time VERY excited about their new digs.

Before credit shut down, lenders were still living in a cloud so they let people that from all appearances seemed "creditworthy" go ahead and buy that bigger, cheaper home (without selling their 1st ) and didn't realize they were being set up for some very heavy bag holding!

The interviews were hilarious! "Our new home is bigger and we needed the 3,800 sq. ft. with a child on the way! We didn't want to be cramped into our 2,950 s/f place now that we're having a family. The agent said there were no offers on our old home that we'd bought in 2003 and HELOC'd the living hell out of but I know we can't afford to make TWO mortgage payments so....

Skibum and I started calling them the SSOTW (Sob Story of the Week) they were just that common.

aposty,

I agree. Letting people walk away with 500k once in a lifetime is plenty generous where I'm concerned but again with my "Right on Red" driving analogy people have grown accustomed to this sense of entitlement.

I wouldn't lose any sleep over who and who ain't "grandfathered". The point is that whomever buys your "vacation home" WON'T be grandfathered and less likely to want to be part of your "momentum play". What's really great (again assuming it passes) is that a lot of people with raw land won't be able to finish a structure this late in the year to have an actual residence to claim prior to 1 January 2008! Ha!

SP,

Lower prices do not necessarily hurt Realtors (tm). as they rely on transaction volume as much if not more than % of the sales price. If volume remains high, they would be more than willing to accept significantly lower prices. I know you are sorta saying the same thing, but the difference is that we are at an inflexion point in prices right now (in the Bay Area), so volume is low due to several reasons, including "sidelined" knife-catchers, er, buyers. If prices were continuing to head down predictably and the we got to the point where volume increases again, that would be a different story.

The other subgroup hurt by lowering prices are obviously RECENT buyers. Their margin from "profit" to cutting a check to bring to the closing table is razor thin, especially with high LTV. They perhaps are the truly screwed by lower prices.

I saw a house for sale in my neighbourhood.

4821 Deep Creek Rd Fremont CA 94555
4 beds, 3.0 baths, 1,750 sq ft
lot 4,692 sq ft

Sale History
09/29/2006: $800,000
06/27/2005: $720,000
11/02/1993: $250,000

I can see signs of another short sale.

This guy bought this house a year ago, now wants to sell it. I bet this guy does not remember the .com bust in 2001, nice timing to buy. The guy before had this for a year 2005-06. See Greenspan's free money in play...

I thought the average time to be in a house was 7 years? Has this changed? :=) Who said buying/selling house is not like trading stocks??

:-)

If the tax liability on forgiveness debt is taken away, that is one less reason for people to even try to stay in their houses. Back in the early 90's, it was not at all uncommon for people to just walk away from their homes if being upside down was brought into the equation. We had negative valuation then as we do now. Different causes, but it was an ugly time none the less. I wonder if people will just walk away, take the hit and get on with their lives. If that happens, the correction will accelerate.

skibum Says:
If volume remains high, they would be more than willing to accept significantly lower prices.

But volume WILL remain low during a period of visibly falling prices. This is because the ONLY person bringing money (the buyer) has no incentive to complete the transaction quickly. Whether prices are low or high, it is in their interest to minimize the duration for which prices are falling.

In the short term, the realtwhore strategy is to try and cover up falling prices through tactics ranging from statistical spin (median) to outright denial (it will never go down) to plain old lying (bottom-calling).

When falling prices can no longer be covered up, their strategy will shift to making prices fall as fas as possible.

The combination of these two tactical moves will achieve the strategic goal of minimizing the duration of low-volume drift.

SP

Oh, by the way, when I said:
"Whether prices are low or high, it is in their interest to minimize the duration for which prices are falling",
I meant:
"it is in the realtors' interest"

If I had to choose between making $100.00 once and making $50.00 twenty five times, I know which one I would take.

"See Greenspan's free money in play..." LOL!

Given the way you've dissected that little gem it really is like one of those glass sided ant farms or clear plastic V-8 engine models! Great for minutes of entertainment!

Yeah, the "7 Year Hold" is now nothing more than an urban myth. What in God's creation would be the purpose of "owning" a house for what, 15 months? 15 months! (My wife and I have had grudge matches that lasted longer)

Any more when you buy a house it should have a "rip cord" installed that automatically pops up a spring loaded "For Sale" sign in the front yard (complete with color flyers) and complimentary "Buy it NOW before I list with an agent" Craigslist posting!

"In the event of of Negative Equity Break Glass and Pull Down Hard"

When falling prices can no longer be covered up, their strategy will shift to making prices fall as fas as possible.

Like inducing labor instead of waiting for nature to deliver?
If you can't accurately call the bottom, you can act to cause it.

SP,

I think we are saying the same thing.

I do think I am seeing more and more "Realtor (tm) capitulation", admitting prices have fallen and taking the strategy of trying to convince sellers to lower prices while trying to convince buyers that it's a good time to buy now that prices have dropped. Even in the "Fortress."

"When falling prices can no longer be covered up, their strategy will shift"

It certainly will! The protracted downturn in the tech wreck (that didn't want to end) is why so many people left the business, and haven't so much as entertained the notion of coming back!

Had the correction been largely over in 2 or 3 qtrs. most would have stayed. Given it was more like 39 months I don't know how many people can weather that duration of a down market?

Steveoh,

Exactly like induced labor! In this case not so much for the health of mother and child but because dad has court-side seats.

Makes sense, but its still hard to imagine a Realtor(R) uttering what amounts to "its the price stupid" to a seller.

Makes sense, but its still hard to imagine a Realtor(R) uttering what amounts to “its the price stupid” to a seller.

Desperate times call for desperate measures...

"it's the price stupid" will come in time (depending on that particular market). I've been hearing realtors saying things like:

"If you're really serious about selling you have to trust me on setting the price. I've seen a lot of homes that "show" really well and never get a call back, let alone an offer when the sellers priced too high. So I'm going to ask you again, are you serious about selling?"

It's hard for them to quantify the seller's motivations at this point. In the past what made seller's tick was pretty much by the book. Job, Divorce, Retirement, Death. Life events. Well what's motivating seller's NOW!? Realtors aren't very used to dealing with frantic sellers yet frantic sellers that don't want to lower the price a dime? It's a tough situation for NAR and that might be why the offered HR 3648 to get people off the fence?

@Richmond
I wonder if people will just walk away, take the hit and get on with their lives.

...and if this happens, I wonder how so many newly damaged credit histories will affect lender decisions. Can we assume that the pool of potential buyers will suddenly shrink if lenders keep tight lending practices from here on out? Or will the number of consumers with new lower Fico scores, be small enough to have little effect?

Also, "getting on with their lives" may mean using cash only for a while. Surely, something they have not done for some time.

@Steveoh,
Sorry it took so long to respond, had lunch.
Good point. I think that there may be a large pool of people that could qualify for home loans under traditional lending standards if prices moderated enough. Although, that would mean a price slaughter not a price reduction. Is it possible? I don't know. We can break out the calculators and do the math, but human nature always seems to add that unexpected twist.

"The U.S. subprime housing crisis will not peak until 2009, rating agency Standard and Poor’s said on Tuesday, adding it had underestimated the extent of fraud in the industry.”
Ahhh, the Fourth Horseman of the Housing Apocalypse has been unleashed. I have been getting tired of the MSMs SSOTW. Now that S&P has put the bottom off at least a year and a half and officially recognized "fraud" as a problem (really do ya think?), we may finally get some reporters digging around and coming up with some doozies. Straw buyers and first payment defaults will start getting more coverage than the poor sap who just wanted a slice of the American Dream (as opposed to the whole pie). I imagine this may dampen the bailout enthusiasm a bit. At any rate, hats off to blogging sites that specialized in this type of material before it was in the public eye. I imagine they will be a starting point for intrepid reporters trying to get a handle on the situation.

Capitalism without failures is socialism.

Oooohhh...it's socialism. Aren't you a little late for the Cold War?

Duh, of course it wont peak til 2009.

Such a no brainer. Resets spike April 2008.
Foreclosure takes 11-12 months (in CA)+ 1 to 3 months to sit idle before actually showing up in MLS.

So in summer 2009 there are 30 million homes for sale and no body will lower their price. (thats the crisis)

If sellers won't lower price and buyers are rare, realtors will stop taking new listings after they have enough to show. Like our friend George from Florida who used to post awhile back.

In an era of 30 million houses hitting the market, we may see home sellers having to pay a realtor to take a listing.

The most basic, fundamental reason why lower housing prices are good is that lower prices reflect lower scarcity (assuming the market is functioning, of course). Lower scarcity means more people can grab onto that good old American Dream.

This is assuming you think the American Dream is worth !@#$ :)

HeadSet Says:
DS, I could not get your link to work.

hmm. do you have a profile on the phpbb forum at all? i'm 'user (uid) 7' by the looks, being an early subscriber... anyhow, if you go to the phpbb forum, you can look up my profile and send a note...

The software vehicle routing package is called “Trapeze.”

Is this commercially available? I've got an article somewhere summarising 1/2 a dozen of the routing packages out there, done by Oxford U...

We used it to route our MiniBus operation for several years. However, in 2004 we lost our MiniBus contract to a large national firm who underbid us, and tried to make up their money on the backs of the drivers. The drivers thus unionized.

something very similar happened to my outsourcing service company in a tender we lost for a huge govt logistics contract -- the storemen then got it in the neck by the underbidding co and walked away from the job -- better money just down the road... oops, massive contract change proposals, sorry about that, we underestimated the costs...

Drop me a line, we’ll do lunch

Be careful what you offer, as the company I work for is the sole US client of the OZ firm Sigtec, which provides us with Taxi Dispatch software. I have been offered a trip to their Seaford headquarters (I declined, I’d love a trip to OZ, but not the 24 hrs in a tube), and may get that offer again. If so, I’ll take you up on that lunch offer.

hmm, I'm about 1,000 km from Seaford, but, eerily, my folks live a spit from there at Frankston, and I'll probably be there in December this year at least, as well as Ballarat. So if you can organise a trip before Xmas... ; )

I was looking at developing a system which is somewhat akin to what Sigtec is offering, in fact, with a particular application in mind... so intended to be a startup without reinventing the wheel...

Is it 24 hours in a tube from CA? more like 10-12? east coast is a different story...

or actually a lot more like 'Trapeze', but not as general...

DS,

Trapeze is commercially available:

http://www.trapezesoftware.com/

i’m ‘user (uid) 7′

I went to the forum (hopefully the right one), and it showed you as user 6. Apparently a login is required for me to send you an email, and my Patrick's blog login is not it.

Is it 24 hours in a tube from CA? more like 10-12? east coast is a different story…

As nice as OZ is, I will probrably fly back home. Thus, I saw it as 24 hrs.

EBGuy,

the Fourth Horseman of the Housing Apocalypse has been unleashed

OK, if Fraud's the Fourth Horseman, what are the first three?

(Maybe that should be a thread topic. :) I'll start the ball rolling with "Neg-Am, Zero-Down and CDO's".)

HeadSet Says:
DS, Trapeze is commercially available

yeah, why google trapeze+routing+software when i can wait for the answer here? altho i did google it in fact, and the stuff they are offering is very much like what i was brainstorming... wireless, GPS, in-trip entertainment, etc

I went to the forum (hopefully the right one), and it showed you as user 6.

does it? i'm 6th in list order, but uid 7, patrick is first but uid 2, etc.

Apparently a login is required for me to send you an email, and my Patrick’s blog login is not it.

yes, you'd have to create a phpbb profile also, which could be a good thing, as it's more comprehensive than wp, lets you message people, says something about you, etc

As nice as OZ is, I will probably fly back home. Thus, I saw it as 24 hrs.

hmm, i suppose it is, plus some jet lag. i've done a few continuous trips to UK, which IS 24 hours at a time. lots of loverly airline food; i try to oversleep to beat the jet lag. but if you're a Type A i guess you would want to try to get something productive done on the flight... (not ralph fiennes style...)

EBGuy,

Way funny Bubble Tracking link! A study in denial. I mean, what is the purpose of having a listing "active" for 1,134 days!? Great "color comments" as usual.

Well, it's official - it's back to times of insanity in Silly Valley (Wall Street Journal). I like how all the "entrepreneurs" see no bubble, while the VC folks interviewed all do:
_____________________

As Tech Heats Up, Sages Dust Off Bubble Indicators

Goofy-Names Index Rises, Perks Gauge Glows Red; A 5th-Grader as Founder

By REBECCA BUCKMAN and KEVIN J. DELANEY
October 9, 2007; Page A1

SAN FRANCISCO -- The Federal Reserve monitors things like inventory levels and housing starts to gauge the economy's direction. In Silicon Valley, old-timers have some leading indicators of their own.

The goofy-names index, for example, is back near its previous high. Consider Orgoo Inc., which helps people organize all their Web communications. Or Zipidee Inc., a purveyor of "digital goods" such as cellphone ring tones. "Are these names of dogs or are they names of companies?" asks Kate Mitchell, a venture capitalist in Foster City, Calif.

The rate of odd-looking start-ups, too, is on the rise. One called Startup Schwag exists solely to deliver a monthly package of T-shirts and other goodies bearing logos of other tech start-ups. Rapper MC Hammer, known for 1990s hits like "U Can't Touch This" and a 1996 bankruptcy filing, is chief strategy officer of an online-video start-up called DanceJam. PlaySpan Inc., a Web-gaming outfit that raised $6.5 million, boasted on its Web site that it had been founded by a fifth-grader.

Then there's this familiar froth indicator: Some office landlords in Silicon Valley are again accepting stock in still-private start-ups in lieu of rent.

"It is absolutely déjà vu," says David Chao, a venture capitalist in Menlo Park, Calif., who reports seeing lots of bad business ideas, from ever-younger entrepreneurs. "There's just as much junk now as there was in 1999," he says.

That year, of course, was when dot-com excess was nearing its glorious peak -- a profusion of product-free businesses, strange company names and profligate spending on things like in-office massages. Start-up stock effectively became legal tender for bills to landlords, lawyers and workers. The bubble started leaking fast in 2000 and soon left quite a mess.

...

Zipidee's name comes from the upbeat "Zip-a-Dee-Doo-Dah" tune in the 1946 Disney film "Song of the South." Founder Henry Wong thought the name sounded "memorable, carefree and open-feeling," just like the company's "open, digi-good marketplace," says spokeswoman Jessie Wong, who is also Mr. Wong's wife. Mr. Wong, who is a venture capitalist as well as an entrepreneur, says, "I don't see the froth that a lot of people see."

People like Howard Hartenbaum. "It seems like we're in a bubble," says Mr. Hartenbaum, a venture capitalist, and he's betting on it: His firm, Draper Richards LP in San Francisco, has pulled back its new investing in Internet companies over the past three or four months.

Mr. Hartenbaum's indicators: He is being pitched by too many inexperienced management teams who haven't worked together before and seem to think they're entitled to start-up riches. And he finds entrepreneurs recycling ideas that flopped in the last tech boom, such as Web sites that offer group discounts for consumer purchases or pay people to surf the Internet so they will look at ads.

Free food is a bubble indicator that John V. Bautista watches. A longtime Silicon Valley lawyer, Mr. Bautista cites the revival of work-force perks like free eats and gym memberships.

He points to one of his own clients, RockYou Inc., which invites its 20 full-time employees to order any food they want from Costco during the week. Goodies like beef jerky and candy are continually arriving at the San Mateo office of RockYou, which makes software "widgets," programs that let people add things like slide shows to Web pages. RockYou's chief executive, Lance Tokuda, doesn't see any bubble but admits the food policy "kind of reminds me of 1999." Mr. Bautista sees "a bunch of little bubbles," and says that "some of them are popping, others are growing."

The froth indicator that tech veterans cite most often is the befuddling business plan. BillMonk, a company launched last year, offers Web tools to let friends keep track of debts to each other. "You think about that and say, 'Give me a break,' " says Peter Falvey, a co-founder of tech investment bank Revolution Partners in Boston.

Mr. Falvey concedes the service might appeal to kids. BillMonk was bought earlier this year for an undisclosed sum by a mobile-payments company, Obopay Inc., whose moniker might qualify for the goofy-name index. (It derives from "obol," an ancient Greek coin, and the "obo" part also echoes the phrase "or best offer.")

Other prognosticators cite the burgeoning Internet-conference scene. The TechCrunch Web site expected 400 attendees at a Web conference in San Francisco last month; it stopped selling $2,500 invitations when sign-ups reached about 900.
...

At one point in the conference, women in lab coats began working the crowd, handing out test tubes filled with "power shots" of vodka and cranberry juice. They were touting Powerlabs, an online "community" from a start-up called Powerset Inc. that is creating a new Web-search engine. Powerset says the women worked for a public-relations firm.

Theatrical ploys like "spokesmodels" are another troubling indicator, says David Hornik, a venture capitalist. "Second- and third-time entrepreneurs and venture investors who lived the late '90s get nervous when they see these telltale signs of a bubble," he says.

As a lender I can say that I prefer lower prices because there is less potential downside in the risk equation. There's no shortage of people who need to borrow.

People would think real estate agents hate lower prices but the difference in actual commission paid is pretty minimal during a normal shift. Also the market corrects for over or underpaying real estate agents. The negotiated commission percentage is normally lower on a million dollar house verses the percentage on a $100K condo. When I was buying years ago realtors easily got the full 6% because the compensation, though a little generous, was not horribly out of line. When prices tripled and people went to sell during the recent boom, it was pretty easy to get an agent for 1-3%. It was only a matter of time before IpayOne type firms disrupted the model.

@skibum,

I don't know how much of a "perk" I would consider "free food from Costco" but your point is well taken. (Shouldn't that cardboard pizza be free anyway?)

RockYou, MC Hammer and... OboPay? In fairness, altough a lot of these "ideas" had been tried the last go 'round it may have been too early? Since then there are a lot more people on-line and using the internet for a growing variety of uses. It's a bigger part of more people's lives.

Still and all, silly is well... silly and this second wave may not have markedly better success than the first. Now where's my "power shot" damn it!

Speaking of web 2.0 startups: ForeclosureRadar.com is awsome.

I was looking at Manteca,CA and Elk Grove,Ca on it and the NOD/REO/NOT are astounding in numbers. And those are not even for sale yet.

Unfortunately the bulk of foreclosure are where no one wants to live. BFE nowhereville.

But in 2 years Foreclosure will be the new black, renting will be the way to 'maximize your freedom' and we will be closer to bottom. Already sliding fast down that curve and it feels great to have the economy normalizing to affordability.

The people bemoaning and denying the bubble/crash are the most selfish humans the earth has ever seen. They would price thier own children out of having a life so they can gloat about phantom equity.

"The people bemoaning...."

You know, sometimes HK can be downright profound!

Who was it that said "When realtors are imploring you to buy b/c it's cheaper than renting, THAT will signal the time to buy!"

Oh btw, I think I'm going to finally get an office. Seems the fellow that restored one of the historic buildings here in town has another nearing completion in the next few months. It's on the 2nd floor with about 400 s/f of covered deck facing the river and lots of common areas (foyer, reception area etc.) so my unit will be less than 150 s/f and about $1.00 to $1.10 per. Since I'm the only financial guy in town *without an office I figured it's high time I got one. Unless of course you think "I" should buy the building off the guy at today's prices?

OK, if Fraud’s the Fourth Horseman, what are the first three?

And I saw when the Lamb opened one of the seals, and I heard, as it were the noise of thunder, David Lereah saying, Come and see.
And I saw, and behold a white horse: and he that sat on him had The Exemption; and two hundred fifty thousand dollars was given unto him: and he went forth conquering, and to conquer.
And when he had opened the second seal, I heard Lew Ranieri say, Come and see.
And there went out another horse that was red: and power was given to him to securitize mortgages, and that they should leverage CDOs: and there was given unto him a great sword called the rate reset.
And when he had opened the third seal, I heard Robert Shiller say, Come and see. And I beheld, and saw a black horse; and he that sat on him had the Fed funds rate in his hand.
And I heard Alan Greenspan in the midst of the National Association of Realtors say, a measure of abundant liquidity for a penny, and three measures of low risk premiums for a penny; and see thou hurt not the oil and the gold.
And when he had opened the fourth seal, I heard the voice of Chris Thornberg say, Come and see.
And I looked, and behold a pale horse: and his name that sat on him was Fraud, and Casey Serin followed with him. And power was given unto them over multiple primary residences, to inflate with false appraisals, and with negative amortization, and with no money down, and with low initial rates.