patrick.net

The link Sylvie provided (and Mark referenced) really cuts to the core of the issue. Since the subs originated these loans for them to step in and "float the issue" through subsidies is a clear conflict of interest.

For Wells or CFC to step in and back fill some of these loans is like a mugger having a change of heart and giving the victim "some" of the contents of her purse back to her. The mind boggles at how many securities infractions would likely occur.

This is what Ron Paul has to say about the Fed and the housing bubble; supposedly he will be up for presidency in 2008.

How about the government as a "victim"? Think of all the lost tax revenue! How we will our gov't continue to support insane spending trajectories?

A couple of examples:

California population: 36 million
California inmate population: 170,000+
Cost per inmate per year: $43,000
Cost per year per California resident: approximately $200/year per person (or $600 for a family of 3).

I thought this was staggering until you consider this:
DOD budget: $499B
Homeland security: $70B
US population: 300 million
Cost per US resident: $1,900 ($5,700 for a family of 3)

That was scary until I looked at entitlement spending and interest on the debt. I won't even get into that topic.

When the housing bubble busts, won't California and federal tax revenues decline precipitously? I know that the feds exempt $500k/house in capital gains, but there was still a ton of tax revenue related to real estate sales paid between 2001 - 2006 (singles with > $250K of gain, couples with >$500K, smart money real estate investors cashing out without doing 1031 exchanges, flippers with holding periods

We could expand on allah’s suggestion. Everyone writes on a paper what they think the tax rate should be. Uncle Sam then taxes you at that rate. Everyone writes on a paper if they agree with the Death Penalty. When they are convicted, the court looks up what they wrote on the paper and that is what they get. Everyone writes on a paper what their salary should be. Everyone writes on a paper what job they should have. Everyone writes on a paper where they want to live. This could go on and on. Wow, what a wonderful idea!?

This is idiotic and has absolutely no relevance as to what I posted.

Oops...
Should have said "flippers with holding periods of less than 2 years."

Glen,

Thanks for clearing that up, kind of left us hanging there.

All I can say is there are no easy answers. It won't just be CA with sagging revenues and the state's response to this short fall aren't clear just yet. My guess is that they (like most everyone else) are clinging to the hope that "things will return to normal".

More likely will be continued strain as floppers now begin to off-set income w/failed RE ventures. You're right though, it's awfully big to ignore and the possibility these guys will carrying forward losses for years is all too real.

Ron Paul has no charisma.

Dinor,

There will be a lot of hand-wringing, for sure. My guess is that we will see a return of xenophobic immigrant-bashing, protectionism and a continuation of aggressive military campaigns. I remember the early '90s: Japan-bashing, Pete Wilson, Pat Buchanan, Gulf war I, prop 187, three strikes law, etc.. Ugly times call for ugly politics.

The process of self-examination is psychologically difficult. FBs will not want to blame themselves. Politicians can score easy points with p-o'd voters by claiming that the source of our problems is some external threat.

Instead of admitting that they recklessly spent your tax dollars when times were flush, politicians will say that the source of our budgetary problems is immigrant healthcare or some other such nonsense.

Ron Paul has no charisma.

While I don't agree with everything Ron Paul believes in as I don't with any other nominee, anyone who is for abolishing the printing press is sure to get my vote.

Check out the new cartoon poll at CNN.

Here's a new Schiff article hot off the press.

Another small one bites the dust.

"Ugly times call for ugly politics"

Man ain't that the truth. Some time back I made an effort to de-rail the argument that subprime alone should take the blame. I was soundly thrashed (not here, at Ben's). Thus far the public and many investors seem to be satisfied /this explanation. It's neat, tidy and with a corpse and a smoking gun there's little motivation to investigate further.

How will we explain things when defaults bleed over into Alt-A etc. as we are already starting to see? For now everyone is content with this version of reality but until we address the "total package" we'll continue to fill seats at "Make Millions with Foreclosures" seminars.

DinOR, I firmly believe that the problem will bleed into PRIME mortgages. I suspect there will be some reconsiderations regarding the FICO scoring system.

Did you guys see the Ads?

Arizona CCW Courses

Wow!

DinOR, I firmly believe that the problem will bleed into PRIME mortgages. I suspect there will be some reconsiderations regarding the FICO scoring system.

It has been.

I do not understand why initial margin for stocks is set at 50% when one can buy a house with little or no downpayment.

DinOR, Peter and allah,

I agree. The Marin RE bubble blog guy uplinked a telling table:

The subprime resets and resulting defaults are only the earliest resets. The Alt-A and Prime resets take a little longer, as these are usually fixed rates for a bit longer, but reset they will. Anectodally, I (and I'm sure many of you) know people who have good credit, great jobs, who still went for an exotic loan product of some kind to stretch and afford the kind of house they wanted, ESPECIALLY in the Bay Area. Your typical professional feels he/she deserves to not have to live in a 1100 sf stucco box in the South Bay for 700k, so they stretch with an ARM to be able to "afford" a $900K or $1M+ nicer place in a nicer locale. Some/many of these folks will be hurt by the resets.

Peter P,

Do you mean they might "re-jigger" the FICO's so that a 680 somehow "mystically" becomes a 720? Since fico seems more art than science that may be entirely possible.

Do you mean they might “re-jigger” the FICO’s so that a 680 somehow “mystically” becomes a 720?

They can certainly hedonize it a bit.

I do not understand why initial margin for stocks is set at 50% when one can buy a house with little or no downpayment.

Peter P,

Which one do you have problems with? Do you disagree that you need to have "skin" in the game in order to play stocks, or that none is needed to buy a house? Wouldn't that be something if we could buy stocks using loans with "no money down" and interest-only payments! Now that sure would add stability to the stock market!

I am just saying that margin for stocks should be lower than that of homes because stocks are subjected to margin calls but homes are not.

"but reset they will"

Uh huh.

Can't say as I blame young professionals though. An 1,100 s/f home doesn't really afford all that much more utility than an 1,100 s/f apartment. How long will it be before you outgrow THAT? So "stretching" is a natural response.

So wether you default on a 700k loan or a 1.1 mil loan you're going to regret the move. This is going to cut across a lot of income groups.

skibum,

Too funny! Then when we're late making our I/O loan payment on our declining stock portfolio we can all join hands and demand our voices be heard! Kum-buy-ah My Lord :)

@SFBubbleBuyer,

Thanks for the cartoon poll link! Word of lender bailout schemes is obviously "getting around" to have something like that on CNN.

I hear ya Sylvie. I'm sick and tired of the bragging and now the whinning. I lived behind the Orange Curtain for a few years. I fear that the Bay Area is becoming infected by that same mindset. The RE bubble has certainly tainted that 'specialness' we used to have.

Any day now I'm expecting to hear the official OC greeting "Hi...what's your area code? What do you drive?"

We already have a bail out system. It's called foreclosure and bankruptcy.

Interesting article.

"We already have a bail out system. It's called foreclosure and bankruptcy."

Amen. We kid a lot about "debtor's prison" and "indentured servitude" but the truth is we did away w/that a long time ago. You want a break? There's your break.

Thanks for centering the debate Lowly!

Interesting cartoon:

http://tinyurl.com/2hda8z

Peter P,

Lower margins for stocks resulted in Black Tuesday. 10% was all the skin you needed in the game then. 50% TECHNICALLY keeps people from winding up with massive piles of debt as the brokerage sells of stocks to cover the nut as the market tanks.

20% in homes did a good job of keeping things mostly stable given the tendency of houses to stagnate rather than deflate. With 20% in, even if you foreclose, the bank can usually get back the initial investment and sometimes even costs.

10% is cutting it close to the bone, but would probably keep thinks 'sorta' stable. There's at least a little bit of 'holy crap, that's a lot of MY money' when you have to lay down 100k for your 1M McMansion.

5% through -3% is begging for trouble.

Then when we’re late making our I/O loan payment on our declining stock portfolio we can all join hands and demand our voices be heard! Kum-buy-ah My Lord

DinOR,

You know, the funny thing is that it's not THAT far off from reality. LBOs and a lot of hedge fund dealing invloves the large business equivalent of exotic loans. Wasn't the 80's heyday of LBOs and their "buy, fire and flip" strategy more or less what today's flippers do? A lot of that didn't end well, either!

Amen. We kid a lot about “debtor’s prison” and “indentured servitude” but the truth is we did away w/that a long time ago. You want a break? There’s your break.

DinOR, Robert Cote (good to hear from you!),

Maybe Amerika needs to find our own version of Australia (apologies to ajh and DS) and send the FBs there. Since everyone's moving out of Detroit, how about there?

Lower margins for stocks resulted in Black Tuesday.

Ocassional stock market corrections are healthy. They remind investors to practice prudent risk management.

Besides, why is the margin for SPY the same as some tiny four-letter stocks?

Will our version of Australia have giant lobsters and abalones? :)

We already have a bail out system. It’s called foreclosure and bankruptcy.

It will be interesting to see what happens with the new BK bill in place. My understanding is that if your income is over a certain amount under the new "means test," you do not qualify to discharge your debts in a chapter 7 BK--you need to file a chapter 13 and enter into a repayment plan. This amount is around $57K for a two person family or $62K for a three person family.

Most FBs who purchased houses over the past few years probably exceed these modest limits. Good luck to you if your "stated income" is $120K, but you list your income as $50K on your bankruptcy petition. The bankruptcy trustee may have some questions for you.

http://www.bankruptcyhelponline.org/bankruptcy-means-test/median-state-income/ca-california/

"would just need more life support" LOL!

I was thinking about setting up "Meth Colonies" where dope heads are removed from the general population but without the expense and legal hassle. Think of all the expense we go to keeping these clowns behind bars when all they really want is to get m@ther f#cking HIGH!

Why do we fight it? Simply set up a MC out in the freaking desert and WE'LL BRING THE DOPE TO YOU! No need for a car so we get them off the roads. An occaisonal Cheetos Drop should cover food and since these people refuse to spend a dime on their own health we needn't concern ourselves w/that. Then FB Ind. Serv. are put in charge at prevailing min. wage until debt is squared killing two birds w/one stone! Escape from Indio!

Those are some paultry median incomes in that BK Means Test chart. Take a look at the "Allowable Living Expenses" too. What do the column headings mean ("Under $833", "$833 to $1249", etc.) Is that income? There is no category for Automobile or gas expenses, unless that is included in "miscellaneous"?

I'm assuming the allowable living expenses would be deducted from stated income, and the remainder is used to qualify for chpt. 7 filing. Very few Californians will qualify under that test. Will the potential thirteeners take lower paying jobs or 'hide' their assets to qualify? It will be a tough row to ho for future BK filers, no doubt.

Paying off a chpt. 13 debt for obstensibly an entire life time is a very hard pill to swallow. I think we'll see a dramatic rise in fraud suits against realtwhores and loan officers before we see a rise in chpt. 13 filings. I can hear the late-night commercials now - "Are you a 'victim' of mortgage fraud? Facing bankruptcy or foreclosure? Call the law offices of Bilk and Plunder Associates".

While I dislike giving a pass to these extreme debtors, I welcome national introspection of our rampant debt addiction as well as inspection of our lending practices (particularly the credit card industry). As they say, it takes two to tango. I want the lead dancer to take some heat too.

Foreclosures are a different animal. FB's who opt for the scarlett "F" have to live with that on their credit report for 10 years. And they may have to pay taxes on the difference in the resale value, but that's not such a bad fate. It's still better than serving time (in Buffalo, Detroit, or Vegas!).

We may never see such a doomsday anyway. I suspect the FB's will refi into a better loan and/or stick it out. There is so much stigma attached to BK and foreclosure (as there should be).

I suspect the FB’s will refi into a better loan and/or stick it out.

For many a FB, this ain't gonna happen. If a FB is underwater with their loan, and no appraiser, corrupt or not, can assess their home value high enough to allow a refi at all, the refi escape hatch gets closed pretty fast. Add on top of that the significant prepayment penalties a lot of these NAALVPs have and the FB is doubly screwed.

Very few Californians will qualify under that test. Will the potential thirteeners take lower paying jobs or ‘hide’ their assets to qualify? It will be a tough row to ho for future BK filers, no doubt.

Hiding assets is near impossible. Unless the Lexus is paid off, you won't be able to "give" it to your sister. And even if it is paid off, any "gifts" or other transfers within the 4 years prior to filing can be undone by the bankruptcy trustee. Fortunately, most FBs don't have any assets, so this isn't a problem.

As for shrinking your income... Well this might work, because the BK court only looks at your income in the 6 months leading up to the filing. But how many people are willing to quit their job or ask for their employer's help in defrauding the BK court? And if you do quit your job, then how are you going to pay for gas, food, etc. I can imagine some people doing it though. If, eg, both spouses make around $60K, then one can quit working for six months, then file. But if there is a "primary breadwinner" who makes most of the money, then this won't work.

I should have qualified my statement. I don't think we'll see that kind of doomsday in the Bay Area proper. Places like SF, Cupertino, Palo Alto... I just don't see the values depreciating quickly or the prices coming down remarkably. Out in the Central Valley, for sure, there will be lots of drowning FBs. But do you really think that will happen in the some of the higher income/ higher home price areas?

While the hater in me would so enjoy seeing a dramatic fall in prices in my own neighborhood (and hearing of the FBs upside down in places like Cupertino), I also know that incomes are high here. I don't want to say "it's different" here, in that inane, irritating vane, but in some sense it is different here. The prices just don't seem to be falling dramatically. At least, not enough to support my own (sick) fantasy of seeing droves of Hummers leaving the BA, "Just Forclosed" signs on every block, etc..

Tell me I'm wrong, please!