patrick.net

PermaRenter Says:
Bernanke Urges Banks to Forgive Portion of Mortgages: Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.

I swear, sometimes I wonder if Bernanke suggests outrageously bad ideas just to make other, merely run-of-the-mill bad ideas seem like sage advice...

Or, (to paraphrase Gamal Abdel Nasser) the genius of you Fed Banksters is that you never make clear-cut stupid moves, only complicated stupid moves which make the rest of us wonder at the possibility that we might be missing something.

"make the rest of us wonder"

Oh I'm lost I assure you. This is so uncharted (it may not even be water that we're a' floatin' on?)

If we allow every FB in peril to get a "principal reduction" how does that support home values? Be it through a short sale, foreclosure or price-reduced sale it ALL drives down comps/values! Right? Will their property taxes be adjusted accordingly?

Deferring payments? Total damage control! The only "logic" I can see SP is that they're desperately trying to keep people attached to those homes rather than let them go BACK to the bank and in turn rent out to the same people or different party in near, if not identical circumstances.

so bernanke is advocating residential cram downs initiated by the bank. wow.

im pretty sure this is an awful idea. if it becomes as common as short sales, wouldnt the default rate skyrocket by FB's? I can imagine they would adopt the position of 'either cram down my principal 200k or I walkaway'.

The YouWalkAway.com people might expand into negotiating workouts/cramdowns by next year.

If I see late night ads on TV advertising negotiating your principal reduction services from attorneys it will mean the end of the world is near. The same people advertising tax settlements are probably watching this closely. It sounds like an FB's wet dream to help them stay in the big home they cant afford.

Bernanke is such an academic. Theoretically he is correct. Banks may ultimately lose less if they forgive some principal today. The Banks, however, rightly argue that if they forigve some today, they ill have to forgive some more tomorow, then more the next day . . .

I think that by ging throgh the trevails of massive Bank pain we will get the stronger lending standards and regulation (I like the new Indepenedendt appraisal Cuome netioted Fannie and Freddie to accept) we need to ensure this does not ahppen again.

PRS.com!

Principal Reduction Services

1-800-Don't-Pay!

Doesn't this break about a hundred different regulations? Who determines who and who doesn't get their loan crammed down?

When I was in England in the mid 90’s, up to $72,000 earned by an American overseas was exempt from US Taxes. No tax was due to Britain either for bank interest earned by an American.

Thanks. But you will have to live in UK too.

Could be worse.

"Cramdown" could evolve into a scheme where the amount of principle forgiven by the bank is paid out of a government "Mortgage Victim Assistance Superfund." Superfund could be financed by a tax on savings account balances.

HK,

I don't see how even a cram down would help most on a teaser rate loan? Even though there might be a substantial reduction in the amount owed/financed... the amoritizing payment on a 3,500 s/f home would STILL be more than these people can afford.

However! If this means driving down prices and the banksters take it in the shorts, well then so much the better.

Oh I’m lost I assure you. This is so uncharted (it may not even be water that we’re a’ floatin’ on?)

"may not even be water" LOL !

I am relieved that I am not the only one confused here. I am never hide in the bunker mentality but I don't know what kind of financial planning will be the best route going forward. I am sticking to "well-diversified", not because I believe in it as much as I did, but simply because I don't have any other idea. I am a bit overweight in commodities and global bonds, but that's about as much tweaking as I have done.

The additional problem (!!) is I can afford to buy a house I like now with a 20% dp and 30 yr FRM. Previously I had no choice but to wait. Now the way prices are dropping even in the "desirable" areas, it's very tempting to keep waiting. Getting into FRM debt may be the best protection from the impeding inflation. It's definitely a nice problem to have :-)

SP :

I know I have promoted MERKX many times before. But have you looked at it ? It invests in short term European bonds and has a sizable position in GLD. I have done extremely well over last 2 years using this as a means of having some cash in non-USD currency.

HK and SP,

the best way to convert money is to wire to a third country (e.g. Singapore, Hong Kong, any tax-free zone), do the conversion electronically, and wire into your destination country in the form of the currency intended for that country. I don't know about other countries, but Australia only taxes flat 10% all interest income by non-resident alien, and you can apply that amount of tax to your tax obligation to Uncle Sam. I believe most countries operate this way to avoid double taxation.

Prior to 2005, Australia doesn't tax you on your exchange rate gains, so doing the conversion in Oz was fine, things have changed obviously. Hong Kong and Singapore, for example, has no capital gains tax nor interest tax for non-residents. You just use the country as a conversion base.

In the end, you will be subject to capital gains tax when you repatriate your money back to the US, in USD. Let's be frank, if the capital gains tax is so enormous for fund repatriation back to the US, I believe emigration would be an option actively considered because that means USD has become almost worthless. But until you need to do the principal conversion back to USD, there is no worry about paying capital gains tax.

Your overseas interest income declared in the US, however, is marked to market (IRS has several options for you to choose, average, day of reporting, etc.)

Seems to me like the cram down is the most reasonable plan they've come up with yet. As long as it's not government sponsored, and not mandatory.

It allows the 2 parties who are responsible for the mess to meet halfway. I doubt this would do any good to those who kept refinancing their $300K loan until it was $800K. Nor would it do any good for those whose teaser rates are about to expire who couldn't even afford the teaser rates.

What it could do is help the people who could afford their loans, but might be in trouble during the coming economic slowdown. It could help smooth out a massive capitulation... which Randy H believes is coming in the summer.

While for those with their cash in hand waiting for a more massive crash it may not be the best thing... I still think those wishing for housing to crash more than 40% from the peak in a short period of time should beware what they wish for.

DinOR Says:
March 4th, 2008 at 9:11 am
"So it IS… possible to renegotiate the price of the home AFTER you’ve already purchased it! O.K, that’s ONE thing we wrong about!"

I have to admit, I never saw that one coming.

I think Headset is right on target.

The crammed down principal will be paid from the bailout fund (direct to the lender/investor) so the holder of the mbs is happy, the FB is happy. The only losers are the renters who save money and pay taxes as usual.

maybe i wont move to france, Austrailia is lookin good - they are RAISING interest rates to fight inflation. And perhaps an american accent is 'cool' there, anyone know?

HK,

Australia is definitely much more Americanized than people think

However, since its citizenship has been in very high demand in the last decade, immigration is becoming difficult. They raised the bar on education, job needs, money, etc. quite a few times.

What I like the most about Australia is, it has almost no illegal immigration problem. Well, if you can swim across the strait and make it through the sharks, I think you deserve a chance down under.

When I was working overseas, I believe the exemption was $82,000. However, you need to pay SS and medicare from the first dollar.

The Congress is talking about taking away such an exemption. I won't be surprised that such a "deal" will disappear in the next few years as Uncle Sam searches hi and low for extra tax income.

I won’t be surprised that such a “deal” will disappear in the next few years as Uncle Sam searches hi and low for extra tax income.

They should search hi and low for services to cut.

Well, if you can swim across the strait and make it through the sharks, I think you deserve a chance down under.

So maybe we should put sharks - or piranha - into the Rio Grande?

RE: Illegals in Australia

Aren't there stowaways and overstays?

Fuzzy Math,

Exactly, what would be the point of extending any form of aid to a borrower that couldn't even maintain the damn teaser payment?

As for Mr. 500K Heloc? Well he certainly seemed to think the home was WORTH IT when he was borrowing against it!

I'm sorry guys, I've never seen this level preferential treatment. Period. Wow! Screw "Don't 1099 me bro", with these "programs" you'll be able to... default on your home loan (and never lose (1) night's sleep) HELOC the living hell out of your home and then turn around and re-negotiate for a lesser amt. than you've already blown!

Plus of course all the blatantly lopsided tax advantages you've ALREADY enjoyed! Whadda' country.

I’m sorry guys, I’ve never seen this level preferential treatment.

US was born under a Cancer Sun. Cancer rules homes. Enough said.

Frankly I'd be quite surprised if the do away w/ tax-free income for ex-pats. Most of the "really good employment opportunities" are for civilian contractors in war zones.

Part of the big recruitment pitch is that "Sure you're dodging shrapnel but just look at the tax deal you're getting!" I'd worry more if Iraq were winding down...

Peter P,

I guess I could be a helluva lot more enthusiastic had these measures been discussed in 2005.

"Gee guys, these loans you're writing can't go on. We've been monitoring things over at Patrick.net and there's a pretty clear consensus the unwinding won't be pretty. Let's get a handle on these lending standards and make some provisions ahead of time to deal with the re-set chart and resultant wave of defaults, o.k? Any ideas?"

2008? Come on. Whatever little MEW/ATM party people were having could NOT have been worth it.

DinOr...

note my comment
"I doubt this would do any good to those who kept refinancing their $300K loan until it was $800K. Nor would it do any good for those whose teaser rates are about to expire who couldn’t even afford the teaser rates."

Nor do I think it would be in the best interest of the banks to do this for those people.

However, we appear to be on the brink of a very severe recession. In which case, even alot of the folk with reasonable loans, who could afford them 2 years ago, might find the payments increasingly harder to make in the next few years.

If housing drops another 30%, we will have close to 1/3 of all homes in the US underwater. By that point, most of the ridiculous ARM's and HELOC abusers will already be out of the picture. That 1/3 will mostly be made up of responsible owners who will be looking at their house, priced 30-50% below what they bought it for, struggling to make payments on it due to a severe economic recession.... youwalkaway will start to seem like a very smart move.

If that pool of people gives up, I'm not sure I want to even imagine the outcome. You'll be able to buy your dream house for nothing, but it will be located in a broken country.

I'm all for upholding financial responsibility. But at some point the end will begin to justify the means. Cramming down a loan makes sense as a business concept for both the banks and the debtors. And as long as the government stays out of it, which they should, it shouldn't directly affect savers.

DinOR, I think things will change for the better. However, the next few years will be "interesting."

If housing drops another 30%, we will have close to 1/3 of all homes in the US underwater.

Huh? I thought most homes are debt-free.

Fuzzy,

Oh I agree. They're forming HA (Heloc Anon) as we speak. You're right, in ways they're 'already' out of the picture (they just haven't gotten the memo yet)

I think BB message to the banks is that if they think they're going to walk away without a scratch they're crazy. Housing WILL drop another 30% and many will be under.

@ Peter P

"Huh? I thought most homes are debt-free"

http://www.fool.com/investing/value/2008/03/03/its-so-much-worse-than-you-think.aspx

about a third of the way down... seems my 1/3 was on the short side. A study by First American puts the number at 39% underwater if housing drops 30%.

So lets say you HELOC'd your way from 300k to 800k to buy H2's and Plasma's then you convince the investor (FNMA) to lop off 200k from the top out of the taxpayers ass.

How many years until you can HELOC another 200k? probably when the H4 comes out in 3 years. Talk about welfare. The FB is on it, so is the MBS investor. Sounds like the democrats will pass laws for this to happen.(*pukes*)

As much as I hate W, my god the democrats are scary with thier mortgage bailouts to keep prices 4eva high. How is that 'helping the common man' - its making him a debt slave like the serfs/indentured servants of yore.

HK,

Exactly. Btw the H4 is going to blow you away...! I realize this is a newer thread but at some point we have to discuss "WIF'M" (What's In it For ME!)

This is so in keeping with the home-debtor mentality! They've allowed themselves to become seduced by ever greater debt, and why!? Because they knew full well 'they' wouldn't be the ones paying it off! It's just that now that the Ponzi has run it's course the only GF left is the tax payer.

Whatever. As long as home prices remain sky high and someone else pays off my tab? I'm good w/ it.

As much as I hate...

W delivered a tax cut. That automatically makes him one of the better presidents, although the Iraq war is becoming increasingly saddening.

Of course, he cannot be compared to Ronald Reagan.

I fail to understand how anyone can imagine our country realizing some fluffy soft landing out of this mess.

I assume a minimum 30% housing decline from here. I also assume unemployment approaching 30% in a few short years. If this proves out, our country is going to change in completely unforeseen ways. I wonder what the contingency plans are for this environment? A Katrina response?

Duke, I also read academia in Ben's statements. My interpretation is he is saying that he now recognizes the real risks of the jinglemail cascading decline in values. And he seems to view the whole situation through a lens of managing supply and demand.

I don't recall the specific numbers, and it may have been discussed here on this board in the past. I think Ben B comes at the problem though a simplistic supply demand angle, suggesting that it is the very very small overall percentage of housing that is actively in play in the market that determines the value for the rest. As long as that percentage remains small, housing values are supported. Problem is, too many inputs and factors coming out of economic chaos that Ben B cannot predict.

Significant job loss seems inevitable from here. Ben B has no way of managing the decline.

Significant job loss seems inevitable from here. Ben B has no way of managing the decline.

Congress can certainly mitigate that with supply-side measures (such as a drastic cut in tax rates). But of course, a Democrat-controlled congress will do no such thing.

Mish has put a post analyzing Heli Ben's latest proposals.

I particularly liked this comment regarding our current discussion here.

If lenders write down principle it will invite everyone to ask for the same, over and over. It also punishes those who put up a substantial down payment for whom no writeoff would occur. Finally it would encourage those able to make payments to purposely get behind to ask for writeoffs. Loan writeoffs simply will not work on a broad brush basis.

As Buffet said in his interview yesterday, there are always unintended consequences of any bailout.

Of everything is being said, no policy maker of any sort is saying, "Let's get back to behaving responsibly". People want to gamble and expect to get bailed out. Politicians want to spend as much money as possible on all sort of things that will help them stay in (or get) power. And who is supposed to earn this money ? And why does the person who earned this money is supposed to sponsor the bail-out ? I wish Ayn Rand was around to write some blistering editorials.

It's not the talk of bail-out, but the lack of any sort of sensible suggestion from any policy maker is driving me nuts. No one is giving any counter-point. The availability counter-point was the reason I joined the bubble bloggers anonymous and still remain a proud member.

It’s not the talk of bail-out, but the lack of any sort of sensible suggestion from any policy maker is driving me nuts.

Honestly, the only sensible solution is to do just enough bailouts to ensure the integrity of the financial system and nothing more.

StuckInBA,

Good points. The reason we're not getting any counter points is b/c everyone on CH is like the deer in the headlights. This sin't your run of the mill type debacle. We have no idea as to even the scale of this thing.

Still, I don't see 30% unemployment (unless you're talking about OR)

Peter

Honestly, the only sensible solution is to do just enough bailouts to ensure the integrity of the financial system and nothing more.

Agreed 100%.

As frustrating as it is to hear the news media spin and policy maker sound bites so dominate the mainstream media flow, don't mistake these attempts to influence agendas as a lack of understanding of the issues and consequences. I think Ben B for instance has a very sound understanding of moral hazard, probably more astute than my own. It's just we will not hear him talking much about it.

Layoff announcements will begin to dominate the nightly news segments within 3 - 6 months. There is no way that American consumer consumption has not finally frozen. Housing decline story might even become old news and fade into the background by end of year.

I don't buy into export demand growth rescuing domestic employment.

# FuzzyMath Says:
While for those with their cash in hand waiting for a more massive crash it may not be the best thing… I still think those wishing for housing to crash more than 40% from the peak in a short period of time should beware what they wish for.

Oooh, 40%. Go ahead, make my day.

You see, it is bogeyman scare-tactics that make me suspect you are a closet realtwhore. Housing prices dropping 40% in the Bay Area will not do any harm to anyone except FB's, speculators, knife-catchers, and various species of RE-shills.

Heck, I _own_ my home practically F&C, and I still wouldn't mind a 50% or greater drop.

I think Ben B for instance has a very sound understanding of moral hazard, probably more astute than my own. It’s just we will not hear him talking much about it.

Unless we are willing to let people starve, moral hazards will eventually creep into our economic policies.

As I have said, the human problem is intractable. (If it is at all solvable, God would have solved it and everyone would be happy.)