patrick.net

Iran is next, I guess.

They will kick our asses.

Well this time it's a credit union that has folded:
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/11/04/BA7FT67CK.DTL

"The weight of defaults on real estate loans has forced the Bay Area-based Cal State 9 Credit Union into federal conservatorship.

The state Department of Financial Institutions announced late Friday that it was putting the National Credit Union Administration - the federal agency that regulates and insures credit agencies - in charge of Cal State 9 operations. "

Bap33 if I understant correctly, how it works right now is you walk away from your stucco shitbox and if the debt is forgiven, you have to declare it as income and pay tax on it.

Talk about a way to hit someone who's down, kicking the wounded is after all The American Way.

I think by the time the FB has walked away from their stucco shitbox, they've likely sold the widescreen TV, the Harley, the jet-skis, etc. They've usually lost their job, health, spouse, maybe all three. The owed tax on the "income" will end up being defaulted on also. This just results in a few years' worth of paperwork and wrangling for the IRS, for no return.

I personally hope the bill passes. Yeah a few will scam the system but they will be a tiny minority in this Greatest Depression we're just entering.

ex-sunnyvale-renter

I am not sure it is going to work the way you think it will. Many loans were taken out with piggy back on top of the main mortage. These people who end up in foreclosure will still be liable for these piggy back loans even after the home is sold. The bank will graciously let you convert the Heloc loan into a line of credit at a higher interest rate. There is no escape for many people. The new bankrupcy laws will make this worst than in years past.

The main morgage will be taken care of with the sale at the sheriff's auction. If the home was bought with an 80/20 loan, the bank will get the money. Even with a 20% hair cut on the home price, the bank will break even on the main loan. This leaves the poor FBers in ruin as debt serfs.

Bap33,

I also have no love for the howmuchamonths who with thier collective use of easy credit ran up the prices of homes and cars. Yet, the Mortgage Cancellation Tax relief may have one good consequence. The law will encourage more short sales that will bring down the prices of home to levels affordable by those of us who refuse to sell ourselves into debt slavery. I would love to see an outcome where people wise up and a trend is established where folks only buy homes they can afford with a down payment and no more than a 15 year mortgage.

@ex-sunnyvale-renter

The bill is S. 1394. It has been referred to the Senate Finance Committee. As a saver and investor, let me offer my perspective.

As a reward for my diligent work, thrift and disciplined delayed gratification, I am paid back with the virtually certain passage of this bill, the creation of the SIV and its almost assured eventual bailout with taxes, and the dramatic debasement of the currency. A simple request that funds secured through cash back components of mortgage deals be treated the same as any other source of income is painted as a heartless "kick them while they're down" sentiment, and advocates of the Congressional bill like you glibly assume that somehow the missing taxes will be paid from elsewhere (and Lord knows Americans won't demand a cessation to the out of control spending so the taxes will be needed). This sentiment comes purely from the basis of I have money, and the short sale borrowers (putatively) don't.

So after saving and investing sensibly, then getting my positions in real terms eroded from the currency devaluation, I somehow don't qualify as "someone who's down". Apparently in your world I need a good shit-kicking from lots of taxes and inflation to pay for other people's mistakes. Right. Like any sensible investor is going to just stand there while he gets the crap beaten out of him by a crowd that daily resembles less and less a reasonable risk as an investment. And more like a bunch of thugs.

This bill legitimizes theft and fraud. In all other financial activity, income is never magically vaporized as if it never existed, especially if the income derived from speculation. However, because enough people participated in the speculation, the fraudulent outcome of tax-free income is given a pass. All those who got caught with underwater dotcom options triggering tax liabilities should get a pass too, by these well-nigh non-existent standards of fiscal responsibility. I'm not going to stick around for the inevitable soaking savers and investors like me should expect after this continuous trend of shameful behavior. Fool me once and all that...

The bill's assumptions on tax receipt neutrality are naively optimistic. The whole rationale behind the bill is addressing an aspect of distressed housing, yet it presumes that the tax receipts will be replaced by tinkering with a part of the tax code dependent upon a volume of housing sales that is historically aberrant. So not only will the bill reinforce moral hazard, it will increase the overall tax deficits.

We now have the likes of Mozilo heavily pressuring the GSE's for an increase to jumbo caps and other shenanigans. On top of all that you want to pour another bucket of speculative fuel by telling people with this bill that their housing is simply another investment. Not just any investment either, but one where tax liabilities from income already received and spent can be conveniently written off.

Supporting this bill means believing a system rife with fradulent mortgage and brokering activity will only produce "a few" who "will scam the system but they will be a tiny minority". What, all of the sudden a little bankruptcy will inject some sobriety into this crowd where mortgages marketed for bankruptcy cases somehow failed to leave an impression? Exactly how is letting people off the hook for highly speculative activity supposed to help them learn that housing for individuals is a consumption good and not an investment?

On the basis of my belief that Americans by and large will not own up to these financial mistakes, I moved 20% of my assets into non USD-denonimated or US economy-dependent positions a couple years ago. At the time, I thought I was perhaps unduly cynical and pessimistic. They have been ratcheting up alarmingly with the dollar weakness since Q2 of this year, and there is probably only 2-3 quarters left before real valuations (with inflation factored in) are marked to market. I now realize that I've been too Pollyannish. Tommorow on Monday, seeing that this wilful refusal to face the music has percolated to the highest policy levels, I'm taking the first steps to move these assets and enough to make up 80% of my portfolio completely offshore. First step is to head straight for dollar and US economy bear positions as a substitute for cash, then for tax planning reasons sit there until the first of the year, and expatriate the funds to offshore accounts in January 2008.

Then, even though our income can sustain a far higher monthly burn rate, my wife and I are already discussing ways to downsize to $1000 per month in food and residential shelter as a way to prepare to move offshore sooner than we had originally planned. The idea is to practice living for a year on bare essentials of material possessions (and place everything else in a shipping container), figuring out what we cannot do without for our business and personal lives. With that under our belts, we can move to almost anywhere in the world, then for the first couple of years focus upon acquiring cultural and language skills, and expand my business' geographical reach.

What does S.I.V stand for ? Suckers In Volume ?

S.I.V?
Substantial Intrusion Velocity

X,
Yeah, you're probably right on the mark.

I also like "Master Liquidity Enhancement Conduit". It's kinda' like Double Chrome Reverse Muffler Bearings. Not standard, but Double Chrome Reverse. OOOOOOOOOOOOO.AHHHHHHHHHHHHH. Can you feel the salvation. Hallelujah!!!

"Superfund is already in Silly.con Valley"

What a kick... all this was already known 10 plus years ago... the contaimination started long long ago... its the silly people who came
here since that kept saying "Every one wants to live here"
that are shocked...

Dow futures down 110 points. Citibank looking like it will write off 11 billion more on bad mortgages.
Not a pretty day.

I'll wonder aloud if this... thing can possibly have any validity? I hope no one minds?

In the traditional sense, the much dreaded short sale was an isolated instance. Death, divorce or long term job loss. Unpleasant to be sure but certainly manageable in limited cases. Now, with legions of FB's unable to make anything resembling an amoritizing payment and certainly unable to sell for what is owed, how will the system be able to handle the sheer size of this?

Dinor,
To me, its more then just the magnitude of the short sales. While large, I think the system can handle the between 1 and 2 trillion dollars the worst case could present - especially since it should not be aything like that. But what really makes this hard is that that up to 2 trillion dollars formed the basis of collateral for loans with largely no reserve requirements. Usng a multiplier of 20x on the 1 to 2 trillion means we may have a problem whose magnitude is 20 to 40 trillion. Even as hugely problematic as this is, there are a number of other countries with exactly the same problem: Australia, Engand, Spain. The kind of contraction we may see is mind boggling. If the markets lose a few hundred points here and there on the 6 to 11 billion dollar write downs from the banks so far, what will the market do once the other shoe really drops?
So far, the stop gaps of the super siv and the inflationary lower fed funds rate give the markets more time to unwind in an more orderly manner as well balance losses by the fixed income crown (inflation) and the current wage slave (asset price reduction) but it seems to me that the massive over-leveraging on a global scale will see us into a deep and long lasting global recession.

I hate to sound like chicken little, but I just can't see how we can slide past this problem. When Long Term Capital Management died with the Russian default there were enough big players to halt the loss and restore the market. I just don't see anyone, not even the US, having the financial depth to handle this crisis. Inflation will reduce the cognitive dissonance of the losses, but the financially savvy will realize the real losses in asset prices and purchasing power.

Duke,

I can't even pretend to be able to wrap my mind around this? Going forward, what investor would want any part of MBS? How would you sell it? How is the REIC going to be able to find any source of funding in the very near future?

It just feels so day to day right now and the measures we're being shown are "damage control" at best. HR. 3648? Whatever.

Right now in OR we're voting on Measure 49. Now mind you, we just passed Measure 37 a few short years ago! This new abortion is being billed as a way to keep farm land from becoming subdivisions. Well, at this point (after getting on the bandwagon for 37) I have to say NO! Sorry, but I "helped get the word out" for compensating owners for loss of use of their land and now that these guys have cashed in they want to bar further development? Talk about NIMBY!

Too bad guys, you've abused my trust for the last time. If you have land and want to make sure no one else can build next to your farm, get a lawyer. I'm so tired of people taking their personal agendas and making it everyone else's propblem. Want to fight development? You should have plenty of money left over from your M37 windfall. Fight it with that.

"propblem"? Let's try... problem.

Or consider it a new term for problematic propositions?

I foresee no investor being interested in MBS until:
1. The Fed regulates how they are carried on balance sheets
2. The Fed regulates lending standards
3. The world becomes convinced of the value of the collateral - the homes actual worth in foreclosure.
4. The rating agencies fully disclose their rating methodologies.
5. People learn how to price risk on the insurance poliies for failed MBS.

All of which means MBS disappear for a while. This means mortages should decouple from the bond market as they again become the perview of local savings and loans who mark rates to risk, business costs, and small profits. With a Fed funds rate at 4.5% I think your local bank will soon (say, 1 year from now)ask for 1-2 points (thank you for demanding borrowers get a bit more up front costs) and a rate of 7%. In the future, as was true of the past, when the fed raises rates rise, so well the 30 year mortgage.

As I try to wrap my mind around the magnitude of this problem I winder what can help? Dunno. Massive goernmeent spending on infrastrucutre? Annoucing the cure to cancer from a US company and asking the world to pay through the nose for meds/treatment? Some other technological revoltion?

@Richmond

SIV = Structured Investment Vehicle

A fancy way of saying "convenient dumping ground for investment vehicles so toxic we won't carry them on our own books".

Duke,

That's kind of what I come up with. I don't know that it's necessarily the Fed's function to regulate lending/underwriting standards but perhaps "someone" should? Until such time I can't imagine there would be much of a market, period.

Their credibility is so tarnished that even if there was some sort of new "government implied guarantee" it probably wouldn't mean much. Now they want to create some new brand of derivative to sweep a failed derivative under the carpet? It's not like anyone in a position to have made a difference can claim they weren't Patrick.net regulars. Buffet has been warning on this type of financial misbehavior for years!

Or doesn't he have any credibility either?

Oh and Dear God the "fakepaystubs.com" was DAMN funny! Right up there with "Fantasyland Mortgage"! :)

Yet, the Mortgage Cancellation Tax relief may have one good consequence. The law will encourage more short sales that will bring down the prices of home to levels affordable by those of us who refuse to sell ourselves into debt slavery.

I think this is an important point to make. Does S. 1394 basically give cash-outers a free pass on already spent equity windfall? A: yes. And I completely understand and share Bap33 & apostasy's anger (delicious, sweet anger... mmmm...)

However, I also see things from a "correction velocity" POV. The more financial penalties that exist to deter FBs & specuvestors from unloading their underwater properties, the longer this thing will drag on. I don't want to be indirectly on-the-hook for cash-out fraud and consumption I had nothing to with.

But, I also want the correction phase to pass as quickly as possible. The ultimate nightmare scenario for me (and I think many here) would be for the Fed to enact ZIRP, allow banks to keep this crap on their books forever vs. writing them off, and going into a Japan-style slow-drip housing slump, where is takes 15+ years before it makes any sense to buy again.

I don't really want to be close to retirement before I get my opportunity to buy at a reasonable price, so from that perspective, the bill doesn't look so bad. Just my 2 centavos.

Agreed. I wish it was over yesterday. Considering it will take another 15 years just for prices to get back to peak of 2005 why not hasten the correction side of things? I had heard the Senate version didn't contain the same language as the House's but that too will come. The REIC and the banks will be powerless to stop it and "any two will do" becomes a sweet and distant memory for those that weren't following it anyway.

The REIC and the banks will be powerless to stop it
I think you mean just banks. At this point the REIC needs sales volume "by any means necessary".

HARM,
Looks like I am not the only one to have read Greeenspan's book. Amazing to see how protracted Japan's problem became when face-saving took precedence over market corrections. It does seem pretty clear that the goal here in the US is to lessen the worst of the fire-sales and over-creections but to allow banks to fold and prices to go down.

Baps and Apostasy,
I would love if this board had a bankruptcy attorney. I think the new bankruptcy laws are nice in that if you have the income to work on paying off debt, you must. So the Hummer isn't free, its just cheaper and you become a slave to it. To truly game the system you also need to be out of work. Some may well do that. I think some of the 'illegal alien' anger is certainly true in that this group was able to perpetrate massive mortgage fraud and then just move; thus walking away with all proceeds. Shame on the banks and shame on them. What I have no idea about is just how large a loss that represents. I am guessing it is fairly small. So while it wrankles, it only wrankles me at the rate of senior management golden parachutes.
Another comment worth noting in Alan's book is trust. For society to function we must trust that other's share our values. Somehwere it seems to have become okay to brag about gaming the system. From seriel bankruptcy to mortgage abuses and social security manipulation, it seems that America has lost its moral compass. I can only say that everyone should voice their moral outrage at everyone that is gaming the system. Let people know its not okay to do the wrng thing just becasue they can. Peer/social presure worked for years and it can again.

EBGuy,

You're probably right. Even a short sale is better than NO sale! That's just how desperate a corner they are painted into! What they will lose though is the wink, wink nod, nod primrose path that's become the crutch of a generally weak sales crowd.

In the past I'm sure if a buyer was on the fence about "upping his offer" in a bidding war on a vacation property you could always whip out the ol' "When you go to sell it... well, you know" line.

Duke,

Great comment. Actually, it's beyond just bragging about gaming the system; it's getting to the point where you're perceived as a fool if you're not gaming. The system can only bear so many free riders, however, before it breaks down entirely.

Almost more important than the economic impact of the Great Unwinding is the lesson that wlll (not?) be taught by how we handle the many, many people who lied, cheated, and manipulated the system for their own personal gain. I, for one, have no issue with the individual who purchased a home and cannot sell it for the mortgage value getting a pass on having the debt forgiveness treated as income if: 1) 1st mortgage and 2) no refinance. No exceptions. If there is a blanket forgiveness covering everyone, then the irresponsible will be well and truly rewarded and the responsible will be well and truly treated cheated.

We need to speak the truth: gaming the system isn't gaming the system, it is lying, cheating, and stealing. Of you, me, and every other honest individual in the United States. When someone doesn't pay their fair share of taxes, it's exactly the same as stealing money out of my pocket. When an irresponsible banker knowingly makes a loan that can't be repaid and then expects the "government" to ease the pain, it's exactly the same as stealing money out of my pocket. When an irresponsible borrower borrows money and spends it, and doesn't pay it back, it's exactly the same as stealing money out of my pocket. They're not victims.

At the end of this mess, will the take-away be that only fools don't lie, cheat and steal?

Ed S,

That's a good point. As far as acid tests go, I mean if it was the guy's only home, was not leveraging his income to the max for "vacation/rental" homes and either didn't take cash out OR.... used any cash out simply for repairs and maint. of the home, I've got no problems.

But in today's crazy whacked out world, how many people does that describe? What percentage of home owners actually lessened their mort. term? How many paid down/off the loan on an accelerated schedule? How many only took out the needed cash for repairs?

In those crazy days people took out whatever the mortgage broker told the appraise-whore to say! I think that's why by mid/late '05 we saw such a rash of koi ponds and other low dollar quick-fix curb appeal projects. People began to sense the game of musical chairs was just about over and were trying to get their home to the market as quickly as possible. What would really be interesting is to do a survey among say all those sellers in SAC and find out how many of them have no designs on buying if they are actually able to sell! In the past it was just assumed that any seller would also, in fact turn around and become a buyer as well. I think we'd be surprised to see an alarming rate of folks that would love to get to the sidelines and stay there until the dust settles.

Apostasy,
Thanks for the link. Cleared up all of my questions.

DinOR

I bailed in the summer of 2004 -- I'm happy that I did. I suspect that many of the goofy add-ons (e.g. koi pond) stemmed from "Flip That House" and their ilk. I never watched that many of them, but I was always amazed on the few occasions that I did with the "Add a koi pond (or some other trivial decoration). Cost: $1500. Increase in value: $8000".

Back to the point about purchasing: too many people temporarily suspended disbelief about what they were doing in the last 5 years (2002-2007). You are a financial professional -- if you went to a client and said, "I recommend that you buy 100 shares of GE" and had a good rationale for the purchase, you'd probably get a fair hearing.

However, if you said, "Hey, instead of buying 100 shares of GE, how about if we buy 10 call option contracts on GE and sell 10 put option contracts on GE; it's the same as just buying the stock but you'll have 10x the return from just buying the stock AND I can do it with no out of pocket expense (except commissions) and GE will only go up and you're going to sell it in 2 years anyway", you'd be shown the door (by most people). But this is EXACTLY what too many people have done in the last 5 years. And they lied about their experience, income, and net worth so they could do the deal. They have bought an option and sold an option; now one is in the money and one is out (too bad it's the one that they sold that's out).

If they'd have just bought the 100 shares, they could weather the storm. But they didn't, and they can't.

The more I think about the entire situation, the angrier I get.

new thread: Bill Gross insists Fed charter includes propping up housing bubbles

I probably should have declared BK about five years ago. Instead, when I realized I was not flying right I tried to work out of it by working harder. This did not work and finally the whole thing imploded (as Ebay itself is imploding) and I was no longer *able* to keep things going.

I would actually be homeless right now if it weren't for an old friend NOT a Californian and NOT living in California who's given me a place to stay. The other plan would have been to put my stuff into a storage locker, and work out various places to sleep in the bushes at night, maybe by the time the weather got cold have shelter under some program - at least I'm not a druggie etc which is not appreciated in shelters.

As a Californian by birth who's live in CA for many years, all my CA "friends" told me to get screwed or pay 'em almost what I was paying for my apartment for a single room to rent. Nice. But here I find myself in N. Arizona being treated well, damned well.

The new BK law is not unfair. You can't do a chapter 7 unless you're below your state's or area's median income. You have to get financial counseling. It's not even much more expensive than the older version of the law. I have always felt that if a person has to do a BK, it should be where there really is no alternative. No toys - you've sold your toys or as in the case of my car, had 'em repo'd. You'd better be shopping at thrift stores and cooking at home and pretty much livin' la vida 1930s. Well, I am. Not only that, but I'm getting GOOD at living la vida 1930s - nothing like hanging around a bunch of cheap old farmers to learn that. Nope no siree, when I get out of this financial fix.....

I won't jump right back into that consumerist play pool! I get my BK done and things resolved with the IRS, you won't see this kid buying a new car! Or new clothes, or any cereal other than good old rolled oats. No more of the mindless consumerism that makes our system go, nope, it will be mindful nonconsumerism. And not only that but I like to TALK about it. With all the millions who will be financially screwed too there will be plenty of listeners, look at all the frugality-themed web sites these days and how Craigs List has a frugality forum. Nope we'll have learned our lessons and being deeply moral, won't treat a BK as a Get Out Of Jail Free Card and go on our merry way, back to partying. We will go our way with stiff necks and upright mein, and we will Spread The Word.

And this will break the economy.