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I read an article about short sales recently (sorry, don't have a link). They said that due to the slicing and dicing of MBS's, there are a lot of new restrictions on lenders' ability to modify loan terms. And there are so many parties to any potential agreement, that individual "workouts" will be less feasible.
This market is just going to seize up and stop working, IMO.
For instance, suppose the borrower's mortgage has been securitized, then subdivided into tranches, then sold off to 12 different hedge funds, pension plans, etc... Even if the servicing department of the originating bank is able and willing to throw a rope to the borrower by offering modified terms (eg: extending the adjustment date out a couple of years), it isn't going to happen. The covenants in the securitizing instrument would prevent such an arrangement unless the bank makes the MBS holders whole by absorbing 100% of the loss. Banks won't be able to afford it.
By the same token, if the bank forecloses on tons of properties, then they will have a tougher time selling MBSs in the future, since they will get a bad reputation for originating crappy loans.
I would imagine that a bailout (really more of a global "workout") is a possibility. Similar to LTCM, only bigger. All the big financial institutions took a whack as a result of LTCM, but it was survivable. The Fed may want to orchestrate another effort to spread the pain in order to save banks and MBS investors. FBs will be on their own.
There are some very powerful arguments in favor of (I'm not making this up):
the present value of consumption.
As Glen just described, if the dollar is in a secular purchasing power decline, then consumption of certain things now is more valuable than saving, because the future value of savings will be less than the future costs of the same consumption.
Traveling to Europe is a great example.
Of course, this all depends upon believing in a long-run decline of the dollar's purchasing power. I'm not sold on that yet, though it does look possible. Let me rephrase. It's not so much that I thin the dollar is good. It is terrible. Horrible. Crap. But it's better than everything else. I'm definitely *not* sold on the Euro. That could be undermined much more immediately and with much less perturbation than the dollar at any time.
During the boom, if borrowers asked about the adjustable rates on their mortgages, they were told “oh, you can just refinance and start overâ€.
Yep. I heard arguments questioning "why would anyone these days want a fixed rate, 30 year mortgage when you have more control over your money with an Option ARM? You're just going to refi in a couple of years anyway."
I knew something was amiss when the broker I talked to was offering me interest rates before even vetting a loan app or checking my credit. Can you say "Yield Spread Premium"
GC,
Calmness will come in time. I'm still living in a country where Bush gets about 30% support.
DinOR
"My understanding was that they “would no longer publish†M-3?" Yep
Not publishing means they are definitely hiding something. I think some Investment Companies are trying to recreate the "equation" to track this data privately. Might be interesting to see the "horror".
DP,
I can easily visualize firms trying to "reverse engineer" their way through this thing. The justification for doing away with it was flimsy at best.
Patrick, nice graphic, good thread to revisit. Like I've said before it is silly to try to predict the future, and timing but with that said I sense most agree that the scenario for the bubble burst starts with a maximization of prices due to more creative ways of keeping the payment the same and then people just buying for pure speculation. After prices can't appreciate, foreclosures depress prices because they break the stalemate from reluctant sellers, and patient buyers. This scenario is now UNDISPUTABLE, and we can laugh at how simple it is but any of us who were doing this 2 years ago have first hand stories of being ridiculed for even floating an opinion of a real price correction.
I have read two of your recent links. The normal foreclosure rate is 1 per 1000 historically. In Detroit, and La Vegas that number is now 1 in 56, and 1 in 52. The cheerleaders keep trying to say we are at the bottom, and we have been saying this is just the beginning. I don't know how people can have the arrogance after being proved so conclusively wrong to then continue this denial that the obvious fundamentals suggest prices will very likely fall 50% in some hot areas, and will revert to a normal trendline in the less frothy areas.
It's official. The bubble is national. Check out this cruddy looking new construction in Little Rock AR for nearly $700K. Apparently someone in Bubba country didn't get the memo that the bubble is over.
Glen,
Thanks for the Thursday afternoon entertainment. Just what the world needs: another McAlbatross in Arkansas. What the hell is "Whispering Woods Cove" anyway? What are the woods whispering? "I see debt people.."?
Spot it.
Ohhhh... Dinor would like this one. At least with stocks there are regulations and margin calls. No such luck with a negative amortization mortgage... you can loose all your mony and then some. Nice.
Even if someone had $500K cash to plunk down to buy a house for cash, WTF kind of sales pitch is that: "it can't go to zero!" Wow. Better than Enron or pets.com! Where do I sign up?
Jeesh... and of course the obvious. A twenty percent decline in price will lose you twice your down payment if you put 10% down. Fun with leverage on the way down...
BTW, the BA Craigslist ReduceOMeter shows an all time high of 176 "reduced" listings for April 27-28.
Well that house in AR is on 5 acres. What is the cost of 5 bare acres over there?
I have to admit that I have never even been to AR, let alone shopped for RE there, so I have no idea what 5 acres in Little Rock goes for. However, I did see this ad for 40+ acres (with house) for $295K in the Ozarks. Plus they will throw in a mule!
Don't see how you could be a housing bear and expect inflation- please explain. One of the best things possible for home owners w/ fixed rates. Lever yourself up and repay in funny money. I see deflation, possibly followed by politically created inflation.
Inflation to deal with housing debts would be the preference of Barney Frank and many "populist" (translated demagogue appealing to the ignorant) politicians, the fed would likely raise rates signficantly in the face of inflation, and with little regard to the pols. Forcing a recession is preferable to letting inflation catch hold- less shorter term pain vs. greater longer term pain ending in a recession anyway. It would take a reasonably severe recession to set in for the pols to gather enough support to usurp the fed's decision making power (the markets would likely go nuts when they tried). Inflation also has the nice effect of reducing the gov'ts debt liability, though this only works if the gov't doesn't need to continue borrowing significant sums to pay off the GBF's.
That is how I could see inflation playing out.
By the way, that $295K property in the Ozards included 40+ acres, partially wooded, with rolling hills, two ponds and a large-ish house.
In LA you are lucky if you can get a cramped condo for $295K. Here's a sample:
He finally started sputtering about some property in Saratoga with “built in equity†- a.k.a. 75,000 reduction in price. That was when I walked away.
You mean "Instant Equity?"
I have been to Arkansas and you would use those 2 ponds to raise catfish as that is what everybody does , eats it , thinks about, talks about, and I thought catfish was a baitfish.
@peterp
while the catfish themselves gobble each other's droppings like canapes. The only thing worse than catfish is catfish sushi
Ozarks are breathtaking .Little Rock is a nice place if you want to be a bail bondsman. To think Walmart was born in Ark is mind-altering .
On the last thread this NA really does know about women, the college girl , the over 25 , lesbian , he is SPOT ON. He should start a consulting marriage bizz as he is genius as he takes something so complex and spits it out so simple its scary.
China to go on a buying binge in San Francisco, among other cities.
bruceb: You could raise trout in those ponds, but your neighbors would think you're uppity.
China to go on a buying binge in San Francisco,
We have plenty of Cheese for them. Lots and Lots of Cheese...
Not sure if it goes well with Chow Mein...
Peter P Says:
You mean “Instant Equity?â€
I guess both of them refer to the same nonsensical concept, but he used the phrase Built-In Equity - his point was that the house was "worth" $75K more than the current asking, so I would be buying a house with "built in" equity.
He was quite a sight too - picture a slightly pudgy, not very bright, middle-aged guy, somewhat inebriated, trying to focus his goggly eyes on you as he spouts this nonsense. I wish I had taken a picture.
SP
bruceb Says:
I have been to Arkansas and you would use those 2 ponds to raise catfish as that is what everybody does , eats it , thinks about, talks about
I recall a website whose general theme was devoted to pictures of arkansas girls wading into ponds to catch catfish with their bare hands. I wouldn't call it a pr0n site, since it didn't do much for me, :-) but maybe some guys are into that.
SP
I recall a website whose general theme was devoted to pictures of arkansas girls wading into ponds to catch catfish with their bare hands. I wouldn’t call it a pr0n site, since it didn’t do much for me, :-) but maybe some guys are into that.
Huh?
Try "instant equity" in Craig's List and see how many hits you get. It is such a retarded (mentally challenged) term. If anyone can get instant equity why wouldn't anybody just buy it and flip it right away. Oh maybe only the ones with good credit now can enjoy instant equity :)
Way, way off topic, but by jove, this could end very, very badly.
The BBC just reported that there are ads in Pakistani newspapers asking the public to notify the authorities in case they have any information on "lost" radioactive material.
I don't have a link for this yet, just heard it on the radio.
SP
I read somewhere that 40% of the mortgage workouts end up in foreclosure later anyways. But there is a problem with that estimate:
We have never had nationwide depreciating real estate before. So, if you have negative equity in a house, what motivation would you have to play along with the bank and keep struggling to make the payments, even if the bank reduces your interest rate somewhat and makes it fixed? Aside from a credit hit (and many were subprime before) and tax on the loan forgiveness, what would keep you in the game if prices keep sliding? What would you really lose by saying F this? So I would predict that past performance will be a poor predictor...l
Further, how far would the bank take this? a cut in rate from 6 to 5% is equivalent to a 10.5% loan forgiveness up front. I can see how having some loans workout this way is better than sucking in and choking on too many foreclosures all at once, but still the way homeloans are sold how many can take a 10+% hit early on and not turn out to be a losing proposition for the banks?
azrob,
If the SHTF in a big way, a bank may well consider a 10% or so hit to be way better than the alternative.
They might also be thinking that if this happened the Fed would cut short term rates right down again, in which case they would get their principal back in full (plus some prepayment penalties?) if the borrower refi-ed into an ARM again.
In fact, I am surprised none of the big lenders has yet offered workout loans with low fixed interest rates denominated in yen. It seems to me that except for the borrowers currency risk this could actually be a win-win at, say, 4% or so.
astrid Says:
I guess I would feel differently if I was optimistic enough to have children…
that's the triumph of hope over experience...
Randy H Says:
[Hyper inflation] has never occurred within a modern nation state that wields credible military power. Many examples of building-to-hyper inflation scenarios have been averted by this same mechanism, as in Russia in the 90s.
hmm, what about Germany in the Weimar Republic... or Brazil and other S. American states now?
DS,
Yes, I would like to read about Weimar Germany's stupendous military might :)
"hmm, what about Germany in the Weimar Republic"
That makes Randy's point for him. When Germany stopped making WWI reparation payments in the early 20s, the French and Belgians took over Germany's industrial Ruhr region. Germany did not have the military power at that time to stop them. Germany, after losing its prime manufactiring and mining area, resorted to making reparation payments through the printing press. In 1914, the Mark was worth about a quarter. In 1923, it took 1 million to buy a buck.
"He got so worked up with his theory (and some alcohol)"
Is this the time when everyone gives one another that "Well don't look at ME, "I" didn't invite this @ssclown" look? Ahh, "that" look!
Vince Vaughn and Luke Wilson star in:
Realtwhore Party Crashers!
How depressing. At least real party crashers 1) don't take themselves seriously 2) have nothing to sell/promote and 3) are just trying to pick up chicks you could tell how their evening was going to end ANYWAY!
Headset, astrid,
Thanks, "victors" usually don't need a wheel barrow of currency to buy a loaf of bread. Let's not let that ruin an otherwise fabulous Friday!
After reading some news articles, I am wondering if the gov may step in to play bailing bucket.
For example, someone already mentioned that MA requires banks to renegotiate loans.
In the FHA steps in, they may take over loans that banks cannot handle, forgive the underwater part, and use a zero rate for the balance. This would be restricted to owner occupied homes. Nobody would be able to buy a home this way, it would just be for those presently underwater. In the past the FHA only guaranteed loans, but the FHA has experience taking over defaults and its purpose is to support owner occupiers by allowing a lower downpayment and reduced monthly payments.
I hope nothing like that occurs, but it looks politically feasable.
While you all may be munching and mulling over the impending housing crash, a global crash on all assets (stocks, bonds, gold, and others) isn't very far away. Start planning for the rainy days. But, how?
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During the boom, if borrowers asked about the adjustable rates on their mortgages, they were told "oh, you can just refinance and start over".
But no one told them you can't refinance if your house is under water, that is, if the loan amount is more than the value of the house. Banks won't go for that, even in the continuing lax lending environment.
So their rates will adjust upward, and they won't be able to pay the mortgage, or refinance, or sell for what they paid.
Interesting times ahead.
Patrick
#housing