San Diego Housing Bubble News and Analysis

This is the right thing to do.

People shouldn't have bought more house than they could afford.

Screw the speculators.

HLS,

No, you are right. However, it is the right thing to do by the investors.

The investors will be losing enough. There is no reason to increase their losses by trying to save some idiot who overpaid for a house.

If modifying a loan results in a greater loss to the investors than a foreclosure, why in the world should they not foreclose?

It was never about "keeping people in their homes." It was always about saving the banking system.

Just think about it...there were far more people who were "worthy" of a bail-out during the pre-bubble days. You know, the family that bought a house well within their level of affordability, but then mom or dad got cancer, and lost a job. THAT is someone I'd much rather save than the idiot FBs who never intended to pay back their loans unless the housing market paid it for them, via appreciation.

A non-recourse loan/foreclosure is a GIFT to these borrowers, as they really could have the lenders chase them for life, or until bankruptcy. They got to live in a house for free, in many cases, and then walk away after stealing hundreds of thousands of dollars from the lender/bank. Why should we feel sorry for them?

But I heard them say,

They wanted to help homeowners..

I know I did, I know I did....

HLS has a point. They message is deceptive and manipulative.It causes confusion.

However, how many borrowers call the mortgage holder and say..."I am going to lose this house. How can we do this in a way that is best for the investor, the tax payer, the country, etc?" I know there are some, but probably just a few.

Of course, more BS from the financial industry to fleece the populace. I'm sure, just as buying, these loan modifications are not in the borrowers best interest.

I would like to have seen a similar provision in the bailout. Something to the effect of "Bailout must result in positive outcome for the country" unfortunately we did not and it protected the same people that these loan modifications are.

All hail your banker masters!

BUSH-whack has now added the word "preventable" before foreclosures...

SO, a "preventable foreclosure" is one where the borrower is foolish/cluless enough to accept a modification that is not in their best interest, so they can remain a "homeowner" owing somwhere between 20%-100% more that the house is worth.

In the FDIC thesis, they expect a re-default rate of one third. The net result is that two thirds of the original defaults end up in foreclosure eventually, BUT they "saved" one third through "successful" mods.. Isn't that special ??

Cannot imagine the actual dollar cost to the taxpayer. Trillion has become a meaningless word.
HLS

Everyone will win with this and everyone will lose.

The buyers will be stuck with mortgage balances greater than the house is worth (they lose!), but their mortgage will be much lower than it was before (they win!). The investors will take a hit on their loans (they lose!), but they'll take less of a hit than if the houses were foreclosed on (they win!). The taxpayers will end up funding a big chunk of this (they lose!), but such funding (the "socializing of loss" concept) will help keep us out of a depression (they win!).

Everyone will be unhappy. Yup, sounds like the essence of a perfect compromise to me.

Dave,
I know that you know your stuff..

Do you really believe that we are going to actually avoid a depression ??

It's just being delayed for those that aren't ready to attend yet, like a meeting that is running a few minutes late, waiting for more to show up.

I'm thinking that the future comparisons will be to the "Greatest Depression" which will be the one of 2007-2016, not the "Great" 1929-1941.

In your example, only their payment will be lower, not their balance.

.....happily ever after. THE END. HLS

Following this win/lose idea. What would be the win/lose factors specific to loan originators and house sales people?

Yes, I believe we are going to avoid a depression, as defined by a peak-to-trough decline in GDP of 10% or more. If you look at the capacity for the govt. to borrow and stimulate (go back to WW II and you'll see federal debt to GDP at 122% - right now we're at about 70%) we've got many trillions of dollars of capacity. At very low rates. It gets paid off slowly - with lower corresponding GDP going forward - over the next 10-20 years. Painful, yes. But not the end of the world.

No, in my example, there is a blend of lower rates AND substantial principal reduction. That's one way in which the lenders are going to lose. They just won't lose as much as if all of these houses go into foreclosure.

Look, we're in a serious bind here. Which is not surprising to me or anyone else here. But one thing we have going for us is the experience of Japan and the Great Depression to look back on for lessons of what not to do. Current policy prescriptions are far from perfect, but I will say this: they get marginally better each week. At least the Officialdom is "learning" from each little mistake and taking some marginal corrective action. I believe that we're going to see a massive globally-coordinated stimulus plan in 2009. The US, Asia, Europe - the whole freakin' globe. Will it prevent a steep, long recession? Nope. That's baked into the cake no matter what happens. But if policy actions are handled properly, we should avoid a depression. The tools and capacity are there.

The only way is by government spending then, correct ?
Are there any other options ??

Let's do a poll on where the national debt will be in 12 months. My guess is 20 trillion.

Will they be able to sell trillions more in T-Bills at <3% ??

Govt will subsidize cars and plasma TV's in every house in the nation.

Forget about healthcare or anything preventative, just spend, spend, spend.

Many people's lives are already in a D.
Forget about the clinical definition.
It's not going go get any better for millions for a very long time.

We may have 20% of population on welfare/food stamps soon. . HLS

If you look at the capacity for the govt. to borrow and stimulate (go back to WW II and you'll see federal debt to GDP at 122% - right now we're at about 70%)

Attempts to reframe the argument in terms of only federal debt are red herrings. First because how we measure "GDP" has changed so dramatically over the years that it's not really possible to accurately compare federal debt over the decades. Second because federal debt is only 20% of the debt pie.

Ultimately whether the debt is held by a town, a state, a corporation or the federal government it is the labor of individual people that pays it off.

http://www.atimes.com/atimes/China_Busin...

After committing over $7 trillion into the finance sector, the market continued to fail and the economy heading downward. If just $2 trillion of the $7 trillion the government has so far committed for the financial sector were to be channeled directly to the unemployed, each worker would receive $200,000 (the equivalent of four years at average wages) to tie them over their jobless phase to kick-start the economy.

The same amount would support for one whole year 40 million middle-income families with an annual income of $50,000. If government funds were directed towards people rather than institutions, consumer demand will revive immediately and companies will sell again to make profits. The recession will end within 18 months.

But alas, the measures taken by the US government thus far were all designed to save the financial system and its institutions from the penalty of excessive risk rather than to help the economy and its people from the pains of recession. The net result of this top-down approach will be to punish the economy with a lost decade while feeding the cancer of a dysfunction financial system held together by unsustainable debt.

Still, the market-oriented US leader felt the need to adhere ideologically only to a top-down solution. The priority must be to save the dysfunctional financial system and its wayward institutions, while the public must wait for the presumed trickling down benefits, if any. A decade-long depression will be the result.

The leaders of the G20 have a collective responsibility to face the reality of the crisis to save the world economy from total collapse instead of meekly following misguided US rescue measures of adding more liquidity to a crisis created by excess liquidity.

arraya,

That was one of the best articles I've seen regarding our current situation, and how the government is on the wrong track...that their efforts will actually worsen the depression rather than protect us from one.

It's not about GDP or making more credit available. The problem is that people at the bottom of the food chain have been starved. In a debt-based system, the movement of money is always from the bottom-up. At some point, the bottom not only has nothing left, but a major deficit which they cannot possibly pay off. At that point, the entire system freezes, and the only way out is for the money to be redistributed from the top-down, so the cycle can start over again.

We can either redistribute from the top-down, or we can print money and give it to the bottom half by creating jobs (govt infrastructure, energy and healthcare innovations, etc.). Either way, the money needs to go to the bottom, not the top.

I framed in terms of federal debt because the govt. has the authority to tax in future years to bring that debt down.

Total non-financial debt-to-GDP is around 340%, which is almost an all-time high (only because it's fallen a little in the last few months). That will be worked down to around 250% over the next 10 years by a combination of debt being written off and paid down, and GDP growing very modestly (probably averaging half the rate of the last decade). 250% is high, but sustainable.

Look, I'm quite bearish. But data suggests that avoiding a depression is easily achievable with the right policy response. We'll see if the Officialdom is capable of maneuvering properly.

davelj wrote:

Look, I'm quite bearish. But data suggests that avoiding a depression is easily achievable with the right policy response.
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What would you propose?

There's one little problem with this analysis. The $7 trillion committed to the financial sector thus far is BACKED BY ASSETS. We can debate the quality and value of the assets, but at least there are assets there. When you give $2 trillion to a group of folks - with no assets in exchange - you've just got a $2 trillion hole in your balance sheet. The first stimulus package ($300 billion) went directly to the consumer. This second proposed stimulus package ($500 billion?) will go less directly to the consumer, but will get there in a roundabout way.

Now, if the government decides to write checks directly to folks, then so be it. (And, in fact, if mortgage balances are reduced by fiat then this is doing just that. And the numbers will likely be a couple of trillion dollars.) But don't be confused - that's a lot different than putting up money backed by assets.

Finally, if there's no financial sector, there's no economy for all intents and purposes.

Again, we can debate what the right mix is between sending money directly to taxpayers and taking on debt backed by financial sector assets. But let's at least distinguish between the two. Otherwise we can't have a coherent discussion about the options.

As a thought experiment, I propose the following. There's a family earning$75K/year. Family has a $250K mortgage. Freddie lowers principal due to $175K and lowers the interest rate. Govt. backs Freddie, so this is a direct hit to govt. (and taxpayer). What's the difference between sending this family $75K straight from Washington, and reducing their mortgage balance by $75K through a principal reduction plan? There isn't any. Trust me, a whole lot of middle class (and other) yahoos are going to get the equivalent of a huge stimulus payment courtesy of Uncle Sam (and the taxpayers) once these mortgages start getting re-underwritten. Therefore, I question the wisdom of just sending everyone a check.

If everyone gets money from the gov, that would homeowners and renters. If just the homeowners get bailed, the renters get screwed again, doubly, b/c their tax dollars will/is helping the bailout.

Depends on how you look at it. Renters presumably have jobs. Many of those jobs would disappear in a depression. So avoiding a depression would be in renters' best interests.

Also, the average - note I said AVERAGE - renter probably earns around the median income or below. These folks don't pay much in the way of income tax anyway. So they won't be paying for a big piece of the various bailouts either.

Finally, prices are going to continue heading down regardless, so renters who want to buy are still going to come out ahead. And for folks that want to keep renting just because they like renting... how are they getting screwed? I'm not seeing it.

I'm going to get to this - I promise - but I don't have time at the moment. I've been juggling various strategies in my head but need to put pen to paper.

But I'll say this for the moment - the problem isn't financial capacity; it's politics. It would be more beneficial to have a marginal, modestly effective strategy enacted immediately than to have the "perfect" strategy enacted over 2 years. Because 2 years is too long to wait. The danger here is the politics of the thing. There's a lot of dawdling on about whose ox is getting gored and whose isn't.

Can you show your math? I get $20K, not $200K

For all the talk of "saving homeowners".....

What homeowmers?

I don't see no homeowners asking for a bail out, I see people that aren't paying their bills on something they never could afford whining they want to kept what isn't rightfully theirs anymore.

If they want it, they can pay their bills. If they don't want to pay the bill, get the f--- out. Then someone that can pay the bill and is willing to pay the bill, will pay the bill at a price that makes sense.

If you think I sound pissed, I am. For one good reason, I've been living in rentals watching this BS since 2004 when I sold my place and subsequently got out bid on other properties. I've now watch those properties resell, refinance or in general just F-up and now get foreclosed.

You haven't seen anger until you take my money and give it to the dumbshits that bought the places I wanted because they're poor little homedebtors that are too stupid to have known what they were doing.

1) The gooberment calls them homeowners.
They are in denial just like the house occupants.

2) You represent the majority that may need to revolt/riot

3) I'm on your side

HLS

They are getting screwed because even in a depression not all of them are losing their jobs. We had 25% unemployment in the depths of the depression. For most of the late 30's it was "only" in the high Teens. Since then, we have never come close to 25% and even now are still under 7%. Add in all the diseffected U6 groups and it rises to about 13% or so. Considering that 'full' employment is about 5% (there will always be some that are unemployable or transitioning careers) we would only really be benifiting less than 8% of the population if we are using the "well they get to keep their jobs" phylosophy. Considering that about 65% of Americans are "owners"; renters who get to keep their job would make up no more than 3-4% (rounding up) of the population. While nothing to sneeze at, that tiny minority of the population could most likely be served far better with other programs. So doing something that hurts the majority of renters to save a minority of them who most likely could benifit far more from some other, non-trickel down, plan is screwing them as a whole.

Plus I have a feeling that the "average" (your average) renter would love to buy a house, but cant afford one. Reducing principle for those who already own will have a huge opertunity cost for the majority of renters who will keep their job no matter what and would like to buy a house they could afford.

On a seperate note, I believe the majority of renters are young. Renting is very common in your teens and twenties, but not so much in your 30's 40, and 50's. So this is the population that will have to pay a markedly higher cost of living (if it isnt "markedly higher" why are we doing it???) paying for overpriced houses and higher tax rates. This will force them into lower standards of living in the future, reducing our overall standard of living for atleast a generation or two. That isnt screwing them either?