patrick.net

@C F,

I totally agree with you about government interference and the Law of Unintended Consequences (see above). You'll notice that most of my ideas are about reducing government involvement, (mis)-incentives and outright market manipulation.

Also, folks need to learn that ‘having stuff’ isn’t the real key to happiness and contentment.

Wow, if you can figure out how to pull THAT off, you have my vote for President!

Greed and the need for more will always create bubbles of one kind or another. Laws won’t fix that underlying fundamental.

True, but I think policies could at least be geared to limiting them when they do arise. 'Shorty' the Bubble Bear says, "Remember, only You can prevent asset bubbles!"

If there’s any ‘reform’, it’s educating the people about common sense financial management. Also, folks need to learn that ‘having stuff’ isn’t the real key to happiness and contentment.

That's the real issue. And usually this sort of reform works best as real experience, versus books and seminars while the Bulls promise "riches--just around the corner". The ensuing wallet beat-down will instill education and values--at a hefty price, but w/ 'dividends' continuing for years. I got bit during the Tech boom/bust--and hopefully got wise.

If there’s any ‘reform’, it’s educating the people about common sense financial management. Also, folks need to learn that ‘having stuff’ isn’t the real key to happiness and contentment.

Ther American dream used to be the white picket fence around a modest home to call your own. Now the dream is a nightmare of granite counter-tops, hard wood floors and an Escalade in the driveway. I don't know if the dream has gone askew or if the dreamers are just screwed.

I do think forcing the banks to hold the paper on their own loans would go a long way toward solving this problem. I mean, the banks are lending to illegals for crying out loud! How preposterous does this have to get before more people start to realize something is seriously out of whack?

Now the dream is a nightmare of granite counter-tops, hard wood floors and an Escalade in the driveway.

Dreams evolve, for better or for worse. I do think that granite is easier to clean, but it can not beat Corian.

I do think forcing the banks to hold the paper on their own loans would go a long way toward solving this problem.

I absolutely agree. Moral hazards must be removed.

Hopefully people will learn this time, I am just afraid they will bury their heads in the sand and point the finger, screaming: “It can’t me my fault! Whose to blame!”

Unfortunately, it is human nature to deny fault and assign blame. They surely did not learn from the tech bubble.

I'll never forget when they had to have an armed body-guard assigned to guy in my husband's office due to threats he'd received from a disgruntled client who'd lost a lot of money in the tech bust. It didn't matter that the broker warned against holding tech, it was still his fault. Lets not forget the day trader who lost all his $$ and went on a shooting spree in his day trading office. Never mind that no one forced him to make any of his trades, it was the industry that was to blame. You get the picture.

I really hope a RE boom/bust cycle doesn't spark these kinds of incidents, but people really don't take responcibility for their own actions. If some of these holders of the more risky NAAVLP's lose their shirts in a bust, I'm afraid it could get ugly in more ways than one.

Excuse my ignorance but what does "NAAVLP" stand for?

I really hope a RE boom/bust cycle doesn’t spark these kinds of incidents, but people really don’t take responcibility for their own actions.

I hope so too, but I can assure you that such incidents will occur in the coming years.

Excuse my ignorance but what does “NAAVLP” stand for?

Negative Amortization Anal Voodoo Loan Product

I don't agree that banks should be required to hold paper on their own loans. The secondary market is not inherently evil. The problem is when they sell the paper to someone who will, ultimately, be bailed out by the public.

Although, to be honest, I think that all pure-numbers businesses (e.g. banks, lenders, insurers, casinos, etc) are kind of evil.

HARM wrote:
‘Shorty’ the Bubble Bear says, “Remember, only You can prevent asset bubbles!”

I love the image!

I really hope a RE boom/bust cycle doesn’t spark these kinds of incidents, but people really don’t take responsibility for their own actions. If some of these holders of the more risky NAAVLP’s lose their shirts in a bust, I’m afraid it could get ugly in more ways than one.

SactoQt,
Unfortunately, I have to agree with you on this. Even worse than outright violence is what these recent buyers will try to do via litigation and governement bailouts. Basically, they will try to force you and me to pick up the tab for their irresponsibility, greed and ignorance. And if they scream in large enough numbers, it just might work :-( .

The lawsuits are gonna be crazy. I mean, we have more lawyers out there just looking for something to do. My husband learned the art of CYA very early in his career due to the tech bubble; you've never seen more meticulous notes in your life. What I think is going to be interesting to see is lawsuits against all the newbee realtors. Statistically speaking, a lot of the latest just licensed realtors only make maybe one sale a year. Say you just got your license and the only sale you make is to a buddy who's a FTB. The guy pays way too much and takes out a NAAVLP and gets screwed and has to file BK. Does anyone really think the friendship will survive? Heck no. The buyer will be suing his former buddy in no time flat. I bet we see a lot of this in the near future.

Max Says:
A simple solution - do not lower federal funds rate below inflation.

Y'know, I thought about putting that on the list, but then realized it would probably be impossible to implement or enforce. Problem is, the Fed slashed rates to negative (in real terms) in order to bailout idiots/speculators from the tech bubble --no doubt at the request of Congress & the Administration (though they will never admit it publicly).

Unfortunately, as long as the Feds have the power to manipulate the prime rate to serve selfish political ends, they will no doubt keep doing so.

Aren't there some flat fee service real estate companies banking on eliminating the traditional real estate commission model? HelpUSell, Assist2Sell, etc.? I know these companies are scorned by Realtors that work for traditional companies. THere is definitely a downward pressure on commissions because of these types of companies, plus the fact that most people can do a lot of the work themselves and the fact that prices have gotten so high that the 6% commission fee is too exorbitant at today's prices. Hell, I think 5% is way too high as well!

Perhaps the system cannot be fixed. We as participants just need to find smarter ways to exploit it. We should not feel sorry for people who overextend themselves because of foolish expectations. We should really seek to profit from them.

(Forgive me if I sound too cruel. But I afraid the system may actually demand such cold-bloodedness.)

I don’t agree that banks should be required to hold paper on their own loans. The secondary market is not inherently evil. The problem is when they sell the paper to someone who will, ultimately, be bailed out by the public.

Quesera, I don't think the banks or secondary mortgage markets are inherently "evil". In fact, if I were a mortgage lender right now, I'd probably be forced sell most of my mortgage paper as well, in order to stay competitive with everyone else. And therein lies the problem. When most lenders start doing this, you end up with a situation where NAAVLPs are being handed out like candy to anyone with (or without) a pulse.

There was a time in the not-so-distant past when banks did hold a large % of the mortgage papr they originated --like 10-15 years ago. It worked pretty well then, and I think it can work now. I believe it's time to return to this practise to restore balance to the market.

Aren’t there some flat fee service real estate companies banking on eliminating the traditional real estate commission model? HelpUSell, Assist2Sell, etc.? I know these companies are scorned by Realtors that work for traditional companies. THere is definitely a downward pressure on commissions because of these types of companies, plus the fact that most people can do a lot of the work themselves and the fact that prices have gotten so high that the 6% commission fee is too exorbitant at today’s prices. Hell, I think 5% is way too high as well!

I've heard of such services, but must admit ignorance on the details. I don't know how well they've penetrated the CA (or other) RE markets so far, but I wish them luck. Realtors are a powerful lobby and seem to regard their "mandatory" 5-6% as something sacrosanct, untouchable. Kind of a sacred cow (like Prop. 13 ;-) ).

I’ve heard of such services, but must admit ignorance on the details. I don’t know how well they’ve penetrated the CA (or other) RE markets so far, but I wish them luck.

The husband of my former co-worker actually quited his tech job and worked for Help-U-Sell. I think commission will fall to around 1-2% over time. However, I do see the involvement of real estate lawyers in the future, which will take another 1-2%. There is no way out.

I found this link to Assist2Sell's recruitment page.

http://www.assist2sell.com/joining.aspx

HARM: In answer to your question, while these companies are growing, they still have not grown enough to put much (if any) a dent into the traditional commission based model. I do know that traditional Realtors, when showing homes to buyers, avoid these listing like the plague (for obvious reasons).

‘Shorty’ the Bubble Bear says, “Remember, only You can prevent asset bubbles!”

I love the image!

Hey, now... what about a government sponsored public service ad campaign featuring 'Shorty' the Bubble Bear (in the "Just say no" style)? So far most of the proposed solutions have tried to address the problem from a supply side (build more housing) but never from a demand side.

...if there are compaines in the secondary mortgage market stupid enough to buy these MBS, they can go for it. So long as there is no taxpayer gaurantee associated with it, I think it’s great.

Scott, this is precisely the problem. If large numbers of powerful instutional MBS holders (Wall Street brokerage firms, mutual funds, etc.) get slammed, they are going to scream at Congress, and eventually the American taxpayer is going to be on the hook. Even worse, any MBSs issued by the GSEs (Fannie/Freddie/Ginnie) have the implicit guarantee of taxpayer bailout protection.

@Peter & laverty,

Thanks for the stats/links.

Even worse, any MBSs issued by the GSEs (Fannie/Freddie/Ginnie) have the implicit guarantee of taxpayer bailout protection.

Btw, this is precisely why I advocate fully privatizing them and ending government support/involvement (see "Federal Level" idea #4 from thread intro).

Btw, this is precisely why I advocate fully privatizing them and ending government support/involvement (see “Federal Level” idea #4 from thread intro).

Fully privatizing them does not change the "too big to fail" perception. LTCM was completely private yet its collapse was quickly responded to with a FED bailout package.

2. Didn’t Greenspan say that they wouldn’t be bailed out?

As far as I know Greenspan will be leaving by the beginning of next year. He can make any guarantee's he wants at this point. If there's enough political pressure brought to bear on any AG, the govt. will end up doing a bail-out. Since the banks don't hold all the paper on their loans they've just become middlemen without a stake in the loans and they're not thinking about market corrections or repurcussions down the line. The freddie/fannie type companies have become these behemoth's that have the power to do serious damage to the economy and that's scary to me.

The freddie/fannie type companies have become these behemoth’s that have the power to do serious damage to the economy and that’s scary to me.

I have a feeling that K-wave is being validated by the growing size of these important economic entities and their eventual demise.

1. Then I agree with your point to privatize them, but not your point to remove their “usefullness.”

Well, as far the GSEs "usefulness" goes, AG himself estimated the liquidity they provide has only shaved off (at best) about 1/4 of a point. Not much, especially compared to what the Fed can do at the stroke of a pen. Personally, I think they'd do fine as fully privatized companies (once they get rid of all those toxic loans).

2. Didn’t Greenspan say that they wouldn’t be bailed out?

Looks like Peter & SactoQt already beat me to the punch here. ;-)

3. The GSE’s should be pickier about which mortgages they buy, instead of blindly buying anything.

In theory they're prohibited from buying/selling sub-prime mortages. However, exactly what constitutes "sub-prime" is a very elastic concept indeed. Sort of like what constitutes "inflation".

4. I’m not sure a housing crash (at least a small one) will seriously impact their operation. Doesn’t any mortgage require 20% down, or if not, then it requires an insured loan for the downpayment? So to me, this means the base loan will be fine so long as prices don’t drop more than 20% (a big if, granted), since they’ll be able to recover their money from the foreclosure. It’s the downpayment loaners that I’d be scared of. Additionally, I thought all GSE’s can only buy small loans?

The national average down-payment for mortgages has fallen to 3%. In some markets (CA), it's closer to zero (I can find the links if you want). Most buyers also avoid PMI by doing 80/10/10, 80/20, 80/15/5, etc. "piggy-back loans". This leaves precious little safety margin for price corrections --if any.

A simple solution - do not lower federal funds rate below inflation.

Which inflation rate would you prefer to use?
CPI calculated on consumption, or calculated on assets, or some number adjusted to make the whole system work.

Maybe inflation is running at 8% (allowing for RE monthly repayments not the rental rate), add a few percent for bank margins, how would 8-9% prime lending rate sound.

Maybe inflation is running at 8% (allowing for RE monthly repayments not the rental rate), add a few percent for bank margins, how would 8-9% prime lending rate sound.

8-9% prime lending rate sounds about right. It may be politically infeasible to implement though.

Negative Amortization Anal Voodoo Loan Product

Where is surfer-X?

I love how the FED is "politically independant" but has to be influenced by the government department that calculates inflation. Still have the hands on the levers really.

8-9% prime lending rate sounds about right. It may be politically infeasible to implement though.

(sorry about typo, I did mean inflation at 6% in previous post)

The politicians can actually stand back and say that it is actually driven by inflation.

AntiTroll, you're talkin' my language here.

(from thread intro):
5. Force the BLS (Bureau of Labor Statistics, a.k.a., “BuLlShit”) to start accurately reporting the true rate of inflation in the CPI (put energy, food, healthcare & education costs back in; eliminate statistical gimmickry like “hedonics” & substitution). This should help restore the missing “risk premium” in the bond and mortgage markets, and make recent buyers feel a little less “house rich” at the same time.

Only problem is, I'm not sure how to accomplish this. The political resistance to reflecting the true rate of inflation in the CPI would be enormous.

In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing, unfortunately.

I want to add that this is a natural tendency. This tendency is not going to change in the existing system.

Do the piggy back loans have equal standing to the 80% loan? Or in the event of a foreclosure, are they only paid IF there is money left over after the 80% loan is paid off?

Scott, not being a homeowner myself, nor a Realtor/broker, I can't answer all of these questions (any experts or spouses of experts out there? --SactoQt, Zephyr?). Nonetheless, I'm reasonably sure that piggyback loans also have to be repaid in the event of foreclosure. HELOCs are considered to be a revolving line of credit backed by the home's equity, but I'm not sure how these are treated in foreclosure.

If the sale of the home does not cover all of them 100%, then I'd assume the buyer is on the hook for the difference. Of course, the buyer can always file for BK (assuming they still qualify after the new "Bankruptcy Reform" law goes into effect this October ;-) ). Then the lender or MBS-holder gets stuck with the loss. If this starts happening in large numbers and the losses get very large, then it starts to get very "interesting" politically.

I agree with Face Reality, at least insofar as real inflation is already out of control, and the middle class is taking the hit.

Jack, now you are the doomsayer.

IMO, the middle class run themselves into this current situation through extreme collective individualism. (Collectively, the entire middle class is highly individualistic with short-term and materialistic goals)

I don't know which is more gloom and doom: hyperinflation or asset deflation?

Education? Out of reach. Health care? Out of reach. House prices? Out of reach. I saw 3 dollar a gallon gasoline signs today too. Forget arguing about a basket of groceries… the inflation ship has left the shore!

Waiting for wage inflation though.

Jack, there are many exciting ways to "profit" from inflation.

Jack, I do not really feel inflation in any major way yet. Perhaps because my "kids" do not need education, health case is mostly covered by company plan, and I rent.