patrick.net

I don’t agree that banks should be required to hold paper on their own loans. The secondary market is not inherently evil. The problem is when they sell the paper to someone who will, ultimately, be bailed out by the public.

Quesera, I don't think the banks or secondary mortgage markets are inherently "evil". In fact, if I were a mortgage lender right now, I'd probably be forced sell most of my mortgage paper as well, in order to stay competitive with everyone else. And therein lies the problem. When most lenders start doing this, you end up with a situation where NAAVLPs are being handed out like candy to anyone with (or without) a pulse.

There was a time in the not-so-distant past when banks did hold a large % of the mortgage papr they originated --like 10-15 years ago. It worked pretty well then, and I think it can work now. I believe it's time to return to this practise to restore balance to the market.

Aren’t there some flat fee service real estate companies banking on eliminating the traditional real estate commission model? HelpUSell, Assist2Sell, etc.? I know these companies are scorned by Realtors that work for traditional companies. THere is definitely a downward pressure on commissions because of these types of companies, plus the fact that most people can do a lot of the work themselves and the fact that prices have gotten so high that the 6% commission fee is too exorbitant at today’s prices. Hell, I think 5% is way too high as well!

I've heard of such services, but must admit ignorance on the details. I don't know how well they've penetrated the CA (or other) RE markets so far, but I wish them luck. Realtors are a powerful lobby and seem to regard their "mandatory" 5-6% as something sacrosanct, untouchable. Kind of a sacred cow (like Prop. 13 ;-) ).

I’ve heard of such services, but must admit ignorance on the details. I don’t know how well they’ve penetrated the CA (or other) RE markets so far, but I wish them luck.

The husband of my former co-worker actually quited his tech job and worked for Help-U-Sell. I think commission will fall to around 1-2% over time. However, I do see the involvement of real estate lawyers in the future, which will take another 1-2%. There is no way out.

I found this link to Assist2Sell's recruitment page.

http://www.assist2sell.com/joining.aspx

HARM: In answer to your question, while these companies are growing, they still have not grown enough to put much (if any) a dent into the traditional commission based model. I do know that traditional Realtors, when showing homes to buyers, avoid these listing like the plague (for obvious reasons).

‘Shorty’ the Bubble Bear says, “Remember, only You can prevent asset bubbles!”

I love the image!

Hey, now... what about a government sponsored public service ad campaign featuring 'Shorty' the Bubble Bear (in the "Just say no" style)? So far most of the proposed solutions have tried to address the problem from a supply side (build more housing) but never from a demand side.

...if there are compaines in the secondary mortgage market stupid enough to buy these MBS, they can go for it. So long as there is no taxpayer gaurantee associated with it, I think it’s great.

Scott, this is precisely the problem. If large numbers of powerful instutional MBS holders (Wall Street brokerage firms, mutual funds, etc.) get slammed, they are going to scream at Congress, and eventually the American taxpayer is going to be on the hook. Even worse, any MBSs issued by the GSEs (Fannie/Freddie/Ginnie) have the implicit guarantee of taxpayer bailout protection.

@Peter & laverty,

Thanks for the stats/links.

Even worse, any MBSs issued by the GSEs (Fannie/Freddie/Ginnie) have the implicit guarantee of taxpayer bailout protection.

Btw, this is precisely why I advocate fully privatizing them and ending government support/involvement (see "Federal Level" idea #4 from thread intro).

Btw, this is precisely why I advocate fully privatizing them and ending government support/involvement (see “Federal Level” idea #4 from thread intro).

Fully privatizing them does not change the "too big to fail" perception. LTCM was completely private yet its collapse was quickly responded to with a FED bailout package.

2. Didn’t Greenspan say that they wouldn’t be bailed out?

As far as I know Greenspan will be leaving by the beginning of next year. He can make any guarantee's he wants at this point. If there's enough political pressure brought to bear on any AG, the govt. will end up doing a bail-out. Since the banks don't hold all the paper on their loans they've just become middlemen without a stake in the loans and they're not thinking about market corrections or repurcussions down the line. The freddie/fannie type companies have become these behemoth's that have the power to do serious damage to the economy and that's scary to me.

The freddie/fannie type companies have become these behemoth’s that have the power to do serious damage to the economy and that’s scary to me.

I have a feeling that K-wave is being validated by the growing size of these important economic entities and their eventual demise.

1. Then I agree with your point to privatize them, but not your point to remove their “usefullness.”

Well, as far the GSEs "usefulness" goes, AG himself estimated the liquidity they provide has only shaved off (at best) about 1/4 of a point. Not much, especially compared to what the Fed can do at the stroke of a pen. Personally, I think they'd do fine as fully privatized companies (once they get rid of all those toxic loans).

2. Didn’t Greenspan say that they wouldn’t be bailed out?

Looks like Peter & SactoQt already beat me to the punch here. ;-)

3. The GSE’s should be pickier about which mortgages they buy, instead of blindly buying anything.

In theory they're prohibited from buying/selling sub-prime mortages. However, exactly what constitutes "sub-prime" is a very elastic concept indeed. Sort of like what constitutes "inflation".

4. I’m not sure a housing crash (at least a small one) will seriously impact their operation. Doesn’t any mortgage require 20% down, or if not, then it requires an insured loan for the downpayment? So to me, this means the base loan will be fine so long as prices don’t drop more than 20% (a big if, granted), since they’ll be able to recover their money from the foreclosure. It’s the downpayment loaners that I’d be scared of. Additionally, I thought all GSE’s can only buy small loans?

The national average down-payment for mortgages has fallen to 3%. In some markets (CA), it's closer to zero (I can find the links if you want). Most buyers also avoid PMI by doing 80/10/10, 80/20, 80/15/5, etc. "piggy-back loans". This leaves precious little safety margin for price corrections --if any.

A simple solution - do not lower federal funds rate below inflation.

Which inflation rate would you prefer to use?
CPI calculated on consumption, or calculated on assets, or some number adjusted to make the whole system work.

Maybe inflation is running at 8% (allowing for RE monthly repayments not the rental rate), add a few percent for bank margins, how would 8-9% prime lending rate sound.

Maybe inflation is running at 8% (allowing for RE monthly repayments not the rental rate), add a few percent for bank margins, how would 8-9% prime lending rate sound.

8-9% prime lending rate sounds about right. It may be politically infeasible to implement though.

Negative Amortization Anal Voodoo Loan Product

Where is surfer-X?

I love how the FED is "politically independant" but has to be influenced by the government department that calculates inflation. Still have the hands on the levers really.

8-9% prime lending rate sounds about right. It may be politically infeasible to implement though.

(sorry about typo, I did mean inflation at 6% in previous post)

The politicians can actually stand back and say that it is actually driven by inflation.

AntiTroll, you're talkin' my language here.

(from thread intro):
5. Force the BLS (Bureau of Labor Statistics, a.k.a., “BuLlShit”) to start accurately reporting the true rate of inflation in the CPI (put energy, food, healthcare & education costs back in; eliminate statistical gimmickry like “hedonics” & substitution). This should help restore the missing “risk premium” in the bond and mortgage markets, and make recent buyers feel a little less “house rich” at the same time.

Only problem is, I'm not sure how to accomplish this. The political resistance to reflecting the true rate of inflation in the CPI would be enormous.

In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing, unfortunately.

I want to add that this is a natural tendency. This tendency is not going to change in the existing system.

Do the piggy back loans have equal standing to the 80% loan? Or in the event of a foreclosure, are they only paid IF there is money left over after the 80% loan is paid off?

Scott, not being a homeowner myself, nor a Realtor/broker, I can't answer all of these questions (any experts or spouses of experts out there? --SactoQt, Zephyr?). Nonetheless, I'm reasonably sure that piggyback loans also have to be repaid in the event of foreclosure. HELOCs are considered to be a revolving line of credit backed by the home's equity, but I'm not sure how these are treated in foreclosure.

If the sale of the home does not cover all of them 100%, then I'd assume the buyer is on the hook for the difference. Of course, the buyer can always file for BK (assuming they still qualify after the new "Bankruptcy Reform" law goes into effect this October ;-) ). Then the lender or MBS-holder gets stuck with the loss. If this starts happening in large numbers and the losses get very large, then it starts to get very "interesting" politically.

I agree with Face Reality, at least insofar as real inflation is already out of control, and the middle class is taking the hit.

Jack, now you are the doomsayer.

IMO, the middle class run themselves into this current situation through extreme collective individualism. (Collectively, the entire middle class is highly individualistic with short-term and materialistic goals)

I don't know which is more gloom and doom: hyperinflation or asset deflation?

Education? Out of reach. Health care? Out of reach. House prices? Out of reach. I saw 3 dollar a gallon gasoline signs today too. Forget arguing about a basket of groceries… the inflation ship has left the shore!

Waiting for wage inflation though.

Jack, there are many exciting ways to "profit" from inflation.

Jack, I do not really feel inflation in any major way yet. Perhaps because my "kids" do not need education, health case is mostly covered by company plan, and I rent.

Jack-
Maybe there will be a generational change in the middle class, and a new middle class will emerge.
I'm guessing it will professionals, no children , possibly imigrants, that have a different set of values to current middle class.

They will probably work hard, not speculate, build there own wealth through their own business's, not waste money on toys, or devaluing assets (SUV's etc).

I often wonder how middle class people can afford to have kids these days.

I wonder about the same thing. But the answer for much of the middle class is "unburied" debt.

I don’t know if calling it inflation is really the right thing. It doesn’t seem to be causing the vicious circle of increasing incomes and increasing prices. It’s just increasing costs without increasing incomes.

Actually, wage inflation is alive a kicking.
Factory wages have increased a fair bit in China.

Again, under globlaization we will see real wage inflation in the developing world and real wage deflation in the developed world.

One thing that’s clear is that housing has become less affordable in many places, in particular on the coasts. Other things have become less affordable as well, such as higher education and health care. In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing, unfortunately. Jobs and entire careers are becoming much more short-lived, pensions are eliminated, health insurance is scaled back, housing, education and health care costs are rising disproportionately to incomes, two incomes are becoming more and more of a necessity, etc. etc. I wouldn’t bet on any of these things going back to what they used to be as much as I would like to see things getting easier for people rather than more difficult.

The fact is people can only afford what they can pay for. This whole mess is a result of a credit bubble that is going to burst or slowly deflate as interest rates go up. You might be able to use the in-home ATM for awhile but at some point all this stuff is going to have to be paid for. Health care and education are really necessities and people are going to have to find a way to pay for them. Escalades and second homes are not necessities (to rational folk anyway) and can be sold off. I guess my point is the middle class is not going to be able to keep fueling this buying frenzy especially if jobs are harder to come by and costs are rising. There has to be a break even or just plain breaking point, and it seems to be getting closer and closer. My husband tells me that it takes the economy a year or so to show the effects of an interest hike. But the fed only waits a month or so to see what's happening and if there aren't drastic enough results they continue to raise rates. Since the fed has been on a year-long tightening schedule, we should only now or in the near future begin to see the effects. Since the fed has raised rates so many times, the effect may be way more drastic than folks are prepared for. Should be interesting at any rate.

It may make sense to discuss “bubble reform” if there’s some serious collapse, but that hasn’t happened, and all these predictions about massive price drops and foreclosures are just speculation at this point. There’s a tendency here to think that this already happened, is happening, or will inevitably happen....

One thing that’s clear is that housing has become less affordable in many places, in particular on the coasts. Other things have become less affordable as well, such as higher education and health care. In general, I would say that life is becoming harder for the middle class in this country, and I don’t see that changing...

Face,

We are agreed that life is getting much harder for the middle class, and that other costs besides housing are rising faster than incomes. No doubt about that, regardless of how you fudge the CPI numbers.

Nonetheless, housing is rising even faster than healthcare & education, and has been for 5 years or more. We've seen nominal price gains of 200-300% in many areas on both coasts, feuled overwhelmingly by those I/Os, neg-ams & no-docs.

I just don't see how this trend can go on forever. In my mind, a correction/crash is inevitable, in order to bring housing back in line with equivalent rents and supporting incomes (the fundamentals). No, I don't think this will play out in 1 or even 2 years. I don't think nominal prices will fall to 1996 lows, either. But 2002 or 2001 levels is a distinct possibility.

IMO this can be considered a foregone conclusion. As always, you are free to disagree :-) .

Re: Inflation

Isn't the whole idea of the fed raising interest rates to prevent inflation? How much control does the fed realistically have?

Do u guys think high inflation helps or hurts housing prices?

Let’s say inflation goes from 2.5% to 7% for example.

Convential inflation (in which inflation bleeds into wage) will help housing prices. "Inflation" without wage increases wil have deflationary effects on housing because "real" wage is lower.

MP, again, I am talking about middle class housing. Prime markets have their own set of behaviors.

How about a 1% NAAVLP?

Don't they already have those??

If inflation is to rise, I would bet on commodity prices if corporations have no pricing power and stocks otherwise.

How about a 1% NAAVLP?

Don’t they already have those??

I saw a 0.95% Option ARM the other day.

Yes. I was just recognizing your (unintentional?) pun!

Ah, very clever. It was unintentional, but when I wrote in the word 'rate' I had a feeling someone would comment...

0.95% option ARM's. Too scary for me.

What?? Goats don't need to be educated??