San Diego Housing Bubble News and Analysis

jyurasek, put yourself in the shoes of many of the participants who are in this up to their necks.

If you're head of a bank or hedge fund with a lot of exposure, you're out of a job for certain if home prices drop a lot now. This plan may get you 5 more years. That's better than 5 more months. And at the end of the 5 years, who knows, maybe your losses won't be so bad, or maybe not. At least you get 5 more years, and a second bite at the apple at the end.

Yes, total ultimate losses may be deeper by waiting 5 more years, but each individual participant facing ruin now doesn't care about that. From an individual perspective, nothing is worse than an immediate 100% loss. If a bank's losses are terrible 5 years from now, the CEO won't be worse off than if he's fired today.

If efforts to boost home prices fail, then the Fed and other govt institutions will try everything in their considerable power to inflate while keeping (at least some key) interest rates low.

Patient renter in OC

...if you qualify for the bailout in the first place that is.

Then you'd have to be able to afford your house, (maintenance/repairs, taxes, insurance, HOA, mello roos, and of course payment) AND you're keep your job through the 5 year period, when it ends, you still have to be able to pay for the payment that will inevitably rise. By this time you house may have depreciated by another, 25-50% maybe?

Of course you can't sell and cover the value of your loan during this further prolonged period of price declines, so you're now stuck, 10 years? 15 years? Until you can sell and at least break even.

That's is of course assuming your job will not be negatively affected by the hit on the economy from this correction.

But I'm sure ol' Helicopter Boy will keep flushing the toilet on the dollar to get through this.

The people making the plan don't care. They will be long gone in 5 years. In the mean time it makes a select few suckers debt slaves to a bad investment just long enough for the investors to minimize their liabilities in the short term and get out of town.

I do think that the existing CDO holders want to make the liabilities of the CDO/MBS packages look minimal. To that extent, this interest rate freeze may do that. The problem is that the corner of the rock has been picked up.. looked under.. and man is it ugly. I don't think this can be so easily painted over. As an investor, I wouldn't want to be locked into a 7% yielding investment with a 50% chance of losing 20% of my principle on a 5 year span. I would rather take the 20% right now, and find a better place to put the money.

On the other side of the coin, the freeze will tend to hold people within a rapidly devaluing piece of property. If they are not already underwater, they will be in 5 years (unless the Bernanke flush inflates everything else).

What is really important are rules changes for mortgage brokers and real estate agents, establishing their true fiduciary responsibility and with true repercussions on violations.. rules that are much along the lines of Series 3, and Series 7 licenses for stock brokers. A mortgage broker is not required to find you the best mortgage, so they serve themselves and the mortgage companies. They will present the most expensive mortgage they thing you can afford and that you would go for. Same story with the buyers broker and the 'hidden bid' trick.

Interest rate 'freeze' - the real story is fraud

Bankers pay lip service to families while scurrying to avert suits, prison

Sean Olender

New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.

Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.

But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process..............

http://www.sfgate.com/cgi-bin/article.cg...

Here is Mish's take on that article..

A number of people have all emailed me with a sensational but preposterous "Mortgage Meltdown" article by Sean Olender about the interest rate freeze.

Yes there is "fraud everywhere" as the article suggests, and yes the freeze "has nothing to do with keeping people in their homes", and yes, "The problem isn't just subprime loans", and yes a "mortgage meltdown" is in process.

But the rest of the article is complete nonsense.
Here are a few snips:

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing.
The goal of the freeze is not to "stop bond investors from suing". The goal of the freeze is to Peddle a Sucker Trap Disguised as Hope.

However, so few people will qualify for the program (see Little Hope For Hope Now Alliance) that no one can possibly claim it will stop much of anything, including lawsuits or foreclosures.
The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.
This main part of the program is a freeze, not refinancing. If someone is qualified for refinancing, they are expected to do so at whatever rate they can get.

The freeze plan only gives breaks to a small minority and those breaks are in the form of a freeze not refinancing. Most of those involved in seriously overstated income or other loan fraud are probably already foreclosed on, seriously delinquent, or otherwise not likely to qualify for refinancing.
The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?
What bond investors are going to be "tricked"? Where? By what mechanism? The claims get sillier and sillier.
We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers.
It was Hillary Clinton, other Congressional fools, and President Bush who want to sacrifice the constitution via safe harbor acts. See Hillary Clinton and George Bush: Two of a Kind for more on this topic. I will be among those screaming if Hillary brings that bill forward, but the freeze plan itself does nothing to prevent lawsuits.

There are so many legitimate fraud issues to discuss and so many real housing issues that deserve attention, there is no reason to bring out the conspiracy theorists with these kinds of convoluted ideas.
http://globaleconomicanalysis.blogspot.com/