patrick.net

# StuckInBA Says:
But wasn’t Evergreen going to be the next Cupertino ? Are we still on that plan or has anything changed ?

Not much has changed. Only that we are now expecting Cupertino will become the next Evergreen. :-)

FuzzyMath Says:

“A real estate crash with a side-order of credit-deflationary collapse is not the end of the world”

you keep saying that SP. Want to go into some of the reason why it’s not?

Because, as HARM put it, it is a false dichotomy.

The loan proceeds would immediately reduce the borrower’s primary mortgage, cutting interest and principal payments by 20%.

Gee. Prices will not have to rise as much for the debtor to HELOC again!

Evergreen is on the wrong side of the Bay Area.

All the cool areas have to be on the west side.

’ll let you in on a little secret: all the “truly cool” areas of Silicon Valley and the South Bay have Spanish names (Palo Alto, Los Gatos, Saratoga etc).

You forgot Los Bano.

And how would Feldstein's plan cut down on payment amounts? Making a large prepayment on a loan does not lower the payments, it shortens the term.

It looks to me as if Feldstein is also trying to address the PMI issue by taking some pressure off of them. If this is about supporting prices, well then I don't like it.

Let me just copy part of my "unpatriotic" message stuck in moderation.

I am most concerned about the crime rate of the US, because this is probably the most violent developed country I've been to.

This is not Japan, this is America. "Loser" don’t kill themselves and their immediate families out of shame, we American heroes come out with a rifle to randomly whack people out. The pattern of mass murder is very distinctive here, the murderer will take out as many people as possible before he kills himself simply because he went through a divorce or lost a job. Well, it usually doesn’t operate this way elsewhere in the world. People in Hong Kong or Japan just kill themselves, and I have no problem with absolutely no bailout in that sort of society.

Prices will not have to rise as much for the debtor to HELOC again

exactly! what there not to love :-)

In all seriousness, this seems to be the best Harvard brains can come up with. Pathetic really, but not as bad as the alternative: more "lefty" brains (Brad Delong for example), actually say that the gov. should make Fannie Mae's guarantee explicit and use it to start buying up mortgages....makes you wonder what'll happen if BO wins in November. He seems more likely to listen to Brad Delong than Feldstein.

"it is a false dichotomy"

true. But that fact doesn't predicate a certain outcome either. Just because we have other options doesn't mean they are likely to happen.

It seems to be common sense that if you take away half of everyone's money, that there will be some hardship going on. I guess I'm just not seeing your argument. Beyond pointing out logical fallacies you're not giving me a reason why it won't happen.

Harm

I view this as something of a false dichotomy

Point taken and agreed.

And how would Feldstein’s plan cut down on payment amounts?

I think that would happen because 20% of the loan would now be at a very very low interest. At least as long as short term treasuries are at 1-2%.

Plus -maybe- what DinOr said about PMI.

As far as supporting prices, I think that would have to be determined by what type of loans would be available to *new* buyers.....so I don't really see how Feldstein's plan does anything other than let the gov. take the 20% hit to the prices instead of the markets.

An analyst on CNBC pointed out today that with the $400B markdown so far we have effectively removed the equivalent of an entire year's government spending, $3.4 Trillion from the economy. Puts it in perspective.

That's a kick to the balls for sure. Uppercut and kick to the head coming.

Bay,

I still do not follow. If you had a $100k 30 year mortgage, and I gave you $20k to apply to the principle balance, your monthly payment would not change. You would just be making fewer payments over the term of the loan. The only way to lower the payments would be to pay off the loan in full and generate a new loan.

Headset

I see what you're saying. As best I can tell from his column, a reamortization/refinancing would occur. Gotta make those fees! PLus he suggest current mortgage holder collect for the government :-) aint it grand?

OO, this is why it is very important for us to protect our 2nd Amendment rights.

with the $400B markdown so far we have effectively removed the equivalent of an entire year’s government spending, $3.4 Trillion from the economy.

So what do you call it when that funny money was added to the economy in the housing runup? Did we have the equivilent of a doubling of gov spending? Of course not. All that hapened is that people were able to borrow more, and thus spent their future earnings. Now they have to pay off the debts. If I appraise your $100k house for $200k, you did not get $100k richer unless you sold it. Likewise, if I later appraise it back to $100k, you did not lose any money.

Anyone got some news links for the budget cuts in CA? It seems the schools are feeling it hard - will this cause more marked price differentials in houses due to better/worse funded school districts do you think?

What Feldstein is applying here (and I'm surprised at some of you!) is some of the basic prinicples of mortgage acceleration. By using (what is basically a 2nd here) he's automatically reducing the 1st. In doing so MORE of each subsequent payment reduces the principal owed!

True, you still owe on the 2nd but at a loan rate that is... more or less a gift. I'm sure the FHA/HUD pamphlet will describe how opting for this program will allow participants to "build equity more quickly reducing your debt" etc.

BAI,

Had "the number" been 19% or 21% we might not have caught it! (Funny how the mind works isn't it?) Since the Gov. has taken on the role of PMI that's one less @ssclown we'll have to bail out. Feldstein is a genius I tell you!

FAB,

just fyi, the police shut down a crack house in Hillsborough last year. The house went into foreclosure.

This economic downturn will hit a lot of upscale neighborhoods, armed robbery in Atherton, Los Altos Hills, bank robbery in Saratoga, all these supposedly very rare instances have been taking places in the last couple of years.

Btw, I am quite stunned at the location of Harker in San Jose. I thought Harker is some sort of prestigious private school, but it is located right next to a freeway on a very commercial strip of San Jose. Do parents feel safe picking up their kids at the $30K-after-tax-per-head school?

OO, criminals definitely took advantage of our "liberal"-minded gun laws.

I wonder if they dare rob an upscale neighborhood in Texas.

OO,

For some odd reason FBI stats show that the PNW has the highest rates of bank robberies in the country. For some time actually. More often than not our perps are; white, in their mid-30's w/ drug and or gambling problems. Downtown branches are seldom hit (too much traffic, too tricky a get-away)

So scumbags start to hit more trendy areas after they've exhausted low hanging fruit in working class neighborhoods. And it's always a shock. "We NEVER have bank robberies in_____?" So they get the surprise factor working for them too. I'll bet you a lot of your perps have NW ties. No con wants to get caught after robbing a branch successfully and then get popped on a 2nd attempt. Just superstitious I guess.

DinOR

I know it seems silly but you're right about the 20% thingy. I mean if this is such a great idea and not a bailout, why not give them a 50% low interest government loan? Why not 100%? (delong's idea).

I mean there is no internal logic to what he's saying and he is one of our greatest minds (or so I hear).

He claims, that 20% will be backed by the house as collateral so it's not a bailout. But since he also admits his plan is necessary because prices are in free-fall, then so is the collateral no?

It's silly time!

I like Summers idea better.

# FuzzyMath Says:
Beyond pointing out logical fallacies you’re not giving me a reason why it won’t happen.

My stance has been that the real-estate crash will not be a net-negative for me or other people (a) who have not been foolish and (b) whose livelihood does not depend on peddling housing/mortgages to fools.

It is not the end of the world if Bay Area housing prices crash back to 1999 levels. It was not that long ago, for chrissakes.

BAI,

I'm not ready to dismiss Feldstein yet? There's a chance it could work, AND without "principal reductions". Headset was flirting with it.

If you owed 100K and got a 2nd for 20K then turned right around and paid your 1st down to 80K your payments would naturally be smaller, right? But rather than using the new loan amount you maintain the old PITI and a larger percentage of your payment is applied to principal! For our purposes right now (the 2nd doesn't matter all that much) Besides it's at "kiss me" rates.

As the market (hopefully recovers, their theory not mine) you have some paid in equity, and... some market appreciation. Normally in a mortgage acceleration scenario you would aggressively attack the second (cars, toys, junk) and then re-apply it towards the 1st. But that's not the design here. It's simply to get homedebtors out of the red zone. Should work.

Actually there is really no point in arguing whether there *should* be bailout or not, because we know there will be. We also know regardless of the size and duration of bailout, crash will still happen. The difference is:

1) The bigger the bailout and the longer the bailout, the more likely we will have a inflationary depression (stagflation first then depression)
2) The smaller the bailout and the shorter the duration, the more likely we will have a deflationary depression (no stagflation, straight into depression).

It will be our first depression of this century, the ending of the script is already written, it's just a debate of how we get there. I believe 1) is a more likely scenario (which is gaining momentum as we speak) so I invest accordingly. It may very well turn out that BB will be kicked out of office in a few months so we head straight into 2).

"It is not the end of the world if Bay Area housing prices crash back to 1999 levels. It was not that long ago, for chrissakes."

I tend to agree. That really isn't the same scenario that northvirginiarenter is speaking of though. Just like there was irrationality on the rise of pricing, there could also be the reverse during the crash. An overcorrection seems pretty likely especially amidst the other economic problems that are going on at the same time.

I feel like we should still be in the recession we hit in 2001. The facade of housing temporarily got us out of it, but for all the wrong reasons. If we really want to face this one, it will be through returning to reality, and learning again what a hard day of work really means.

In other words, I'm beginning to see your side.

DinOR
under the plan if you owe 100K @ 8%, you will now owe 80K @ 8% and 20K at 1-2% (he says this part will be a 15 year loan). If you maintain the same payment then you can pay off the loan faster. If - as I said - it is like a refinancing, you can lower your payment so you can now afford your loan but you don't pay it down any faster. But at least you can stay in your home if you don't mind being underwater.

Either way I don't see how it can work. Your scenario presumes one's pathetic little monthly payments can build equity faster than the market takes it away.

The only way the market doesn't take it away is if new buyers can come in and get the same deals previous buyers received. Not likely.

Therefore that 20% (there's that number again) is toast. Sooner or later the gov. would have to come back and forgive it in order to convince you to not walk away (today's problem). Ergo, bailout. F**k that!

I have a better idea: let them all go under. FBs and banks and Chinese and all of them. Then anyone who can prove they were renters (or paying properly sized mortgages during the runup) gets a monthly stipend from the gov. for the duration of the resulting depression. Say 5K per month. More if you lose your job. What wrong with my plan. It's a bailout alright, but at least it bails out the innocents.

Didn’t crime go down during the Great Depression?

This is a false coincidence. Crime went down after the repeal of Prohibition (21st Amendment, 1933).

The so-called Progressive Era Amendments were the 16th (income tax), 17th (direct election of Senators), 18th (prohibition), and 19th (women voting). It is arguable that these created great mischief in the USA.

Although certain former posters went to extremes, it is arguable that a well-armed citizenry is a boon to troubled times. I'm a very level-headed sort with enough arms to equip my entire neighborhood in times of trouble, and my neighbors whom I trust know this. My neighborhood is full of policemen, firemen, retired military, and other such worthy types so we could turn out a militia of 30-40 trained men in a few minutes time should an insurrection get close.

Peter P, you should get a type 03 FFL. They are easy to get and cost $30 for 3 years. You can then buy older Mausers and Mosin-Nagants for wholesale on-line and have them delivered to your door.

I keep seeing posts and articles referring to a survivable downturn if there is an orderly decline in home prices. Again, I have to caution the intellectuals that the premise is flawed because of the psychology of a buyer. You can't have an orderly decline in prices because someone will not knowingly buy something if they know it will decline in value. With each wave of realized losses comes even more as more and more owners realize they are upside down in their houses and other properties. Once the speculative value is destroyed it is someone like me who sets the price point based on capitalization. The only way to have continuing layers of price declines is for the government and the industry to keep trying to call the bottom, but most people intuitively know what the house is worth by what a similar rent is. It is hard to sell someone a speculative investment once the trend has reversed.

On my street, if a woman yelled "rape", all the doors would fly open and from each a heavily-armed man would emerge looking for the perp. :)

@DennisN, regarding response to emergency situations in your neighborhood and others: People tend to hold back on taking action a lot of the time--diffusion of responsibility, herd mentality. Kitty Genovese's murder is the classic example. In an emergency, if you are the one to step forward, don't you find that it is necessary to explicitly tell individual people what needs to be done next? If you ask the group, no one moves. Most people don't want to step away from the herd and take action. I have seen this many times.

Would be interested in hearing your thoughts on how to get a group of people past that place of inaction.

Or, more to the point, how do you get individuals to a place where they will step away from the herd in order to do the right thing? Eg. the whistleblower at Abu Ghraib, most firefighters and medics, and a variety of foolish hero types

It's good to be able to do that. I think. And most people can't or don't.

"It's good to be able to do that, I think. And most people can't or don't."

I think that most people CAN in some fasion or another. They just won't. Sometimes, the most noble of actions carries too great a cost. You have to be selfless and willing to stand alone. Very rare in a society of sheeple.

Selfless. Interesting. Have to consider that.

I had perceived the problem as one of being so out of the self, so much a part of the herd, so expecting that someone else would handle the problem, that the self is...not online.

it is arguable that a well-armed citizenry is a boon to troubled times.

When I was in Thedford, England, I had my house ransacked when I was away unexpectedly for just one night. In fact, all my English relatives were victims of burglery, along with so many other English and Americans living in England that I knew. These were not low end areas. Most were above average suburban or country homes.

I have never had a my home burgled in America, nor know anyone in America who has. I own no guns, but I suspect that home invasions are rare because of fellows like DennisN. A crook does not know who has a gun, and will not take a chance on meeting a DennisN. In that way, a law abiding gun owner benefits all households. This does not apply in places like DC, where an armed crook knows any homeowner he meets will be unarmed.

Without going too far down the Doom and Gloom path, lets take a small swipe at why you care:

1. A well diversified portfolio does not mean much, if anything. How many Carlyles do we/ did we have? If a big part of sock buying came from higly leveredged buyers that are being forced to unwnd their positions you are talking, not about a contraction here coupled to a buldge there, you are talking about a total net loss in the market. I seem to recall a Chicago ecnomist getting a nobel prize for showing how we are all wealthier when we find a way to 'expand the pie' - which is why we moved away from the notion of econmics as a zero sum game. However, the converse is cerainly true. We ALL lose money when the pie shirnks. Care? You better. You may be able to recover, but how about the large and growing segment of the population that cannot make up its losses. Its funny to think of social upheaval from the gray-haired crowd. But believe it.

2. When the Fed not only acts as the lender of last resort, but does so now routinely with 75 banks you are not spooked? Even the Fed and the US cannot handle the losses that are quite possible (in excess of 4 trillion)

Remember, we only have to go back to the Nixon years to see our last attempt at imposing federaly mandated price. We 'may' try something like that again, who knows? Wasn;t Rumsfield on that team of figuringout what everything ought to cost?

My more probable scenario isfunding massive Federal jobs programs through massive tax increases across the upper strata of the country.

Social upheaval certainly could be in the cards. And with it, radical legislation. Don't feel like just because you understad todays rules (laws) that those cannot change. I am old enough to have parents whose families were wiped out in the Great Depresson - and they "knew" it would not affect them since they were not speculators. As small business owers the Federal governement did this: 1. Froze their access to their bank accounts. 2. Called all loans due (so those net 30 inventories killed businesses) 3. Liquidated their assets when the loans failed. 4. Effectively put they and thir employees out on the street. The govt did this to 'raise cash' to cover losses not at all incurred by this group. It was just his group that had hard assets (inventory).

Look, I have absolutely no idea how far down this road we can go. But the financials look really, really bad. Like many, I STILL have no idea how extensive the shadow banking system is. But failed margin calls, the TAF, the dollar crises, the magnitude ot the dollars already known, are giving even the sunniest of economists heart-burn. And what we have not seen yet are the massive pay-outs from the mono-line insurers we *know* are coming. Municpal bankruptcies. State lay-offs from lack of funding. Larger Federal deficits from shrinking tax revenue (and expensive rates to fund those deficits).

What can halt all of this? Dunno. All CBs following the Fed for starters. Relaxing the capital reserve requirements at banks for now. Austerity legislation? I am guessing we will see this and more in the months/years ahead. But you are right. Who knows?