patrick.net

I hesitate to defend Greenspan for a variety of reasons, but in the interests of balance.

One clearly might pose a defendable argument that lower payment schedule over the initial several years of an adjustable rate mortgage works out to a buyer’s advantage under conditions of a short (several year) stay in a property and in appreciating, even mildly, market. So some percentage of consumers clearly did benefit from these products.

Of course, most here understand that this argument fails in respect to the larger macro effects of bubble run up caused by these very same ARM products.

How much an effect did the largely *hidden* frauds of no doc etal contribute to flawed economic analysis hitting Greenspans desk?

He did an amazing job of providing stability and confidence in his leadership on Wall Street and capital hill. Almost superhuman. What are the metrics under which one judges his performance?

This said, personally I give him a thumbs down but largely due to his role in extraneous factors including a general distaste for the casino aspects of Wall Street, the thievery of fractional banking system, and the general ineffectiveness of our democratic leadership with respect to massive regulatory failure.

I really like the helpful advice in that Bankrate story on today's news page...

Solutions to a frozen HELOC

• Appeal the lender's decision.
• Search for other lenders who may offer HELOCs.
• Amass emergency cash reserves.
• Reduce spending on luxury items.

Justme,

Ah yes. Just as I wrote. It is inevitable that people will spin these units off and chose not to engage in amrket that burned them so badly. With the new implicit backing of the governemnt, whomever buys these spun-off units will likely do pretty well. Lets see, who would that be? Ex-CountyWide execs perhaps?
In any event, your pension funds, municipalites, foreign investors, etc are all backing away from securitized debt backed by US real estate. With the recognized price inflation, and the recognized effort by the US governemnt to curtail the drop (or at the very least the pace of the drop) it will be, umm, never before we see mortgages spreads as low as we have seen in the last few years.
The government is going to have to get into the mortgage business becasue they are setting the price of housing and they have chased everyone else away from the market.
As for unfairness. Yes. In the age-old parable of the grasshoper and the ant, the government is now guaranteeing we should all be grasshopers, because they will rain mana down on everyone should times get lean.

"and taking credit for the rise in value"

The WORST aspect of smugness. Too bad we couldn't lock up their computer to where no matter what they did good old Mr. "over-valued-blogspot" popped up huh?

Yeah, the mania was so widespread that people were flipping condos that aren't even built yet, crapshacks in the desert are going up 100K a year and homes with bars on the windows are going for 599k but... YOU'RE A GENIUS!

"Location is not about the name of the city"

Is that why every once in a while you'll see a home that sticks out like a sore thumb and wonder to yourself how a nice home like that wound up in a place like this?

Been there, done that. For all your best efforts you'll NEVER be able to elevate the "neighbors" to your standards.

FuzzyMath Says:

> I’m pretty much convinced that the powers that be are
> going to find a way to take all of my generation’s money
> anyways.

I just found out that some of my former tenants in Sacramento are “victims” of the housing crash (and I’m sure that the government will find a way to “help” them with our tax money).

The “victims” were renting one of my apartments for $900 a month when they “bought” a home for about $300K with no money down and an option ARM. The low payment aka neg am payments were just about $1,000 a month.

When the home went up in value they got a HELOC and bough 24” rims for their truck and other stuff. Today they owe about $400K on a home worth about $200K and have no chance of making the payments since the “option” to make the neg am payment has gone away.

Their friends that still live in my building have been in a little apartment saving for a house the last couple years watching interest rates on savings drop while the “victims” that the government wants to bail out have been living in a big house spending thousands of HELOC cash…

The only possible victim in any economic "crime" is the taxpayer.

While the government must serve to enforce contracts, it should not seek to "protect" losers.

There are *always* winners and losers, and people became "victims" on their own free will.

We were listening to NPR yesterday and they had a debate on "torture" and interrogation.

All sensible and reasonable arguments came from those who support using stress in obtaining vital information. Yet the liberal audience would blindly oppose anything that benefits America. They would rather protect the metaphysical "rights" of a probable terrorist and the survival and well-being of innocent Americans.

When the home went up in value they got a HELOC and bough 24” rims for their truck and other stuff.

You know who tend to be the perfect customers? Poor people on credit.

I think it is the moral duty of any capitalist to empty the wallets of these people (legally, of course). They have willingly chosen financial stupidity.

Hey don’t do this to us… I used up my 5 free Property Shark reports trying to figure out which home you’re looking at.

We're looking at that one and a couple others as potentials to short, otherwise I'd give you the MLS#. Though I don't mind being non-anonymous, I'm not sure I'm prepared to tell everyone where I might end up living. Anyway, I don't want to invite competition...lol.

The problem is that the banks still aren't there yet. They're getting there, but so far they're not fully absorbing the market reality and dropping prices of their inventory (or the value of preventing foreclosures with shorts).

24" rims aside I'm starting to think that using HELOC cash for any thing other than "my roof was leaking" or "my kid was facing a death sentence for drug smuggling in Malaysia" is pretty much indefensible.

"You know who tend to be the perfect customers? Poor people on credit.

I think it is the moral duty of any capitalist to empty the wallets of these people (legally, of course). They have willingly chosen financial stupidity."

Sometimes you strike an almost poetic cord.

"24″ rims aside I’m starting to think that using HELOC cash for any thing other than “my roof was leaking” or “my kid was facing a death sentence for drug smuggling in Malaysia” is pretty much indefensible."

I'm still trying to figure out the thought process there... I have no problem taking on a debt. But once I do, it becomes my life mission to pay it off. In what world does it make sense to pay off most of a loan, then INCREASE the loan from the original all the way back up to some fragile bubble price?

I'd wager that even the really stupid people knew they couldn't get away with that forever.

What, no jokes about HELOCopter Ben? :)

I guess they really are cracking open the mines up in Silver Valley.

www.nytimes.com/2008/04/03/us/03wallace.html?adxnnl=1&adxnnlx=1207239423-JWkG0/H3Sw72T27tHzq2sg

"The problem is that the banks still aren’t there yet. They’re getting there, but so far they’re not fully absorbing the market reality and dropping prices of their inventory (or the value of preventing foreclosures with shorts)."

One fun part of this whole thing for me is watching the banks squirm. Now that their own risk models have changed, their inability to offer lower interest rates to borrowers is decreasing the value of their exploding inventory of houses.

I love circles.

Fuzzy Math,

I'm trying to figure it out too? The only case I can make for that is a senior on a reverse mortgage. Even then just b/c you've paid off the loan doesn't necessarily mean it's the right approach.

Other measures could/should have been taken.

But once I do, it becomes my life mission to pay it off.

Why? If you have a low-interest fixed-rate loan, there is really no reason not to delay paying it off.

Debt is a form of leverage. It is just a tool. There is nothing scary about it.

Stigmatizing debt is no better than worshiping debt.

24″ rims aside I’m starting to think that using HELOC cash for any thing other than “my roof was leaking” or “my kid was facing a death sentence for drug smuggling in Malaysia” is pretty much indefensible.

I wonder how much HELOC was involved in foreign real estate investment. Home prices in British Columbia are surreal.

A nice-ish condo in Victoria now costs CAD $2.5M.

"Why? If you have a low-interest fixed-rate loan, there is really no reason not to delay paying it off."

To me Peter, a low-interest loan is

Peter P,

I can kind of agree with that but I think you'll agree there's a difference between using margin on a trade, owning a leveraged ETF and owing more than you can EVER possibly re-pay?

Here's the way "I've" come to look at things:

If you're... gosh I don't know, FIFTY years old and you plan on working another 10 years and you make 100K per year that's $1 mil. right? Maybe when you're younger you don't think about so much but when that's the extent of your REMAINING earning potential you had better start looking at how that $1 mil. is going to be spent.

If you're of a mind that RE will continue to appreciate (fat chance) then by all means "borrow as much money as you can get your hands on!". However if you believe as most here do that it will be down to flat for some time to come, well then your earning potential is better adjudicated elsewhere.

In short, you've got a mil. left. (How do you want to play this, kid?)

DinOR, perhaps the homedebtors thought they could cry-baby out of this mess. :)

The scary thing is, they might be right.

Now that everybody in bubble party is getting some kind of bailout, can people watching party get some kind of bailout too? like a check for missing on the party?

!! LOL!!

My understanding is that the most recent legislation being kicked around atop the Hill is that there really isn't an FB Clause at all?

All kinds of goodies for the REIC but no relief for those actually in foreclosure. Did I hear that right?

Though I don’t mind being non-anonymous, I’m not sure I’m prepared to tell everyone where I might end up living.
Hey, I am just trying to figure out if I need to bring my swim trunks to the housewarming party. We are invited... right? ;-)

"A nice-ish condo in Victoria now costs CAD $2.5M."

Yep, freakin' insane. Let's see how long that keeps up...people on Van Isle think foreigners, etc. will keep prices propped--sound familiar?

I see lots of stupid overbuilding on the island, but mostly "vacation properties" and not rentals needed by a good 80% of those who actually work there (ie. not retirees) Even N. in Nanaimo, which is essentially a lumber industry town, prices are hugely inflated too. Not just home prices but rentals are steep. Most likely because development has focused mainly on vacation housing--not terribly responsible planning, imo. Btw--everyone in Nanaimo got excited when there were rumors that Barbara Streisand would build a condo complex there...but this is a lumber town!

The irony is that there's been so much vacation property development going on, that there's now a large surplus of those rentals, forcing those "investors" in Vancouver and Victoria to price-to-market at dare-I-say, far below their PITI. Case in point is a the 2BR townhouse I've rented right on the best beach N. of Victoria for $1200/mo. 2BR, 1300 sqft, nicely appointed with hardwood, large step-in jacuzzi, marble floors, etc. It's only a few years old, so I'd be surprised the owners are breaking even. LOL

I think the prices on the island against fundamentals are even further displaced than SFBay.

So yeah...would be cool to do a S.Bay thing in Los Gatos.

DinOR :

Long time ago when I started reading this blog, you had made a post very similar to one you made today. I loved it and remember it vividly. I would like to highlight it this one for lurkers as well.

If you’re… gosh I don’t know, FIFTY years old and you plan on working another 10 years and you make 100K per year that’s $1 mil. right? Maybe when you’re younger you don’t think about so much but when that’s the extent of your REMAINING earning potential you had better start looking at how that $1 mil. is going to be spent.

Lurkers, please read the above paragraph again and again till it sinks in and you get it.

And ask yourself this question : If you are nearing "that" age, are your investments working for you ? Or you are working for your "investments" - which includes primary residence for some people ?

I think the prices on the island against fundamentals are even further displaced than SFBay.

Absolutely. Vancouver is nice, but it is not Monte Carlo. LOL!

Let's see how the Vanhousing bubble can hold air with our "subprime" mess.

KurtS,

When we look back and see how much of our resources have been devoted to "vacation homes" it'll turn our stomachs. Especially when you consider that building material prices had reached insane highs even before Katrina.

How silly are these upscale places going to look when they're rented out to bike gangs?

StuckInBA,

Thanks, sometimes that feels like broadcasting a radio beam out into space waiting for a response? (It's always on, but is anyone listening?) The math is pretty much the same if you're younger but it just doesn't carry the same sense of urgency.

If you're 50 years old and make 50k a year you'll have 500k to work with. If your mortgage is 750k... you may want to take a step back. I think a lot of people are doing that now.

It's even worse than what DinOR says.

I was 52 and making a HAHA. But that broke down in my case to roughly $50K for taxes, $50K for living expenses, and $50K for savings. Note: most people don't save that much.

So I would have reached early 60's with maybe another $500K. Big whoop.

I had wanted to move up from my tiny Cambrian Park house to something nice in, say, Campbell. But in 2005 that would be moving from a paid-off $600K house to a $Million+ house, with a mortgage balance upwards of $400K. Had I done this, I would have reached my 60's with a house worth "maybe" $Million+ paid off but with few other savings. Those numbers just didn't add up to anything but nonsense.

So I bailed and moved someplace cheap. I now have a nice new paid-off house and the better part of $Million in cash and stocks. True, inflation and a battered dollar worry me but I'm in much better shape than had I "upgraded" in SJ.

"Note: most people don't save that much"

No they do not. Had more BA people taken that route Boise would be a much more crowded place! Then the question is... why is it so easy to say "yes" to a nice house and so hard to say "yes" to saving?

Oh a house is just like a "savings account" r-i-g-h-t..? I suppose a lot of folks in the BA (and elsewhere) are finding out that's not exactly written in stone now aren't they!?

All I'm saying is, as long as we're aware there are consequences then I'm fine with it. But please don't come cry'n to us when you're upside down in your house w/ negligible savings and limited work years left. This is basic stuff.

When we look back and see how much of our resources have been devoted to “vacation homes” it’ll turn our stomachs.

No kidding. I live in a small university town of 15000 people. When i came here like 8 years back, houses i saw were very old. Now, many of them have given way for expensive condos. Mostly as 2nd home or who knows 10th home for speculators. The median income for the town is around 28K and median price is around 280K. One of my friend started a restraunt here last year and he couldn't get a bid from any of the developers in town to get his interiors done. They were making so much money, they didn't even want to look at 150k work.

Another concept for people to wrap their heads around.

There's a big difference between being able to qualify for a mortgage, and actually being able to afford it.

Here's an interesting note from NRO on the fact that the liberals can't complain about the Fed since they are the ones who wanted one.

http://article.nationalreview.com/?q=NDNmMWFlMTZmNDdiYzRkZTk5NjY2ZTY0YWExYjNkMjY=

sa,

Good point. With all that's been wasted on homes that barely see two weeks a year of actual use I'd forgotten about all the misallocated labor? All just to feed someones' vanity.

O.K I just came up with the definition of a vacation home!

"If you can't pee off the back porch without getting complaints, it ain't a vacation home, alright?" (It's a trophy home)

Enough already!

two weeks sounds just about right. 6-8 football games.

The fact the market continues to rise on bad news just amazes me.

Here is my prediction:

In 6 weeks time (May 21) the Dow will drop below 11,500.
By years end it will drop Below 10,000.

FED has been coming comes up with something, everytime DOW is around 12K. I don't know why they are so aggressive with equity prices.

Just today:

Google laying off 300.

ATA Airlines Bankrupt and shut, more airlines to follow.

CIT Group, one of the largest private student lenders, announces it is stopping student lending as of today.

Mortgage Rates creeping up, at 5.88% 30 FRM today.

Story in Reuters about homes being worth less than their copper pipes.

Fed players indicated a Bear collapse would have led to total finanical system meltdown.

Employment report expectations dismal, anticipated increase to 5% unemployed.

And yet, the stock market is climbing. Some might argue ugly has already been priced in; as transparency and unknowns become knowns confidence flows back in. I don't think so.

I completely agree Duke, we will be well below 10,000 Dow by end calendar year. Unless of course christmas season 2008 saves us all! The next holiday should be one for the books. Figure another 20% minimum median national RE price decline, another 15% off the stock market, maybe another 10% USD currency drop thrown in.

Public is already "reeling" from the whammy of equity and housing decline to date, along with soaring prices. Imagine what folks will be feeling when we finally hit those bottom numbers. Yikes.

We are witnessing nothing less than the most drastic standing of living decline in US history.

I don’t know why they are so aggressive with equity prices.

To avoid cascading margin calls. All types of portfolios have been used as collateral. So a rapid decline in the value of the collateral can start a vicious circle pretty soon. For the same reason, Bernanke is appealing Congress to do something to stop the decline in house prices.

This is the problem with asset bubbles and their destruction.