Housing Bailout Nukes Launched

Submitted by Rich Toscano on March 26, 2010 - 8:55am
Last month I discussed the idea of government-sponsored mortgage principal reductions, which I described as the "nuclear option" in the government's housing bailout arsenal.  As unjust and misguided a policy as this might be, I suspected at the time, principal reductions might well be on the way.

Well, the first volley of bailout nukes has been launched. 

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Submitted by 1stimebuy on March 26, 2010 - 9:24am.

As I was listening in the morning KPBS radio, one of the interviewee claimed that this is finally the END of the housing crash.

What do you all think? So this is how it all ends?

Submitted by Rich Toscano on March 26, 2010 - 11:19am.

Unknowable... it all depends on how much of this they do.

rich

Submitted by SD Realtor on March 26, 2010 - 11:41am.

Well Rich... I can say two things... how wrong we were initially underestimating the powers that be... and then I think about 2007 or so, how right some of us were to recant and identify the strength of the opposition. You cannot beat the house when the house makes the rules.

Silly rabbit...

Submitted by peterh on March 26, 2010 - 12:24pm.

Will this stop people from bailing? Not so sure. If I got a principal reduction that put me even, with the selling fees, etc., I'd get the heck out of dodge ASAP. The devil is also in the details, i.e., how much of a reduction, what type of loans, etc. I wouldn't call the housing bust over yet. Markets can be more powerful than governments. Uncle Sam, contrary to popular belief, cannot keep spending money infinitely. Germany in the 1920's is an example. All entities have limits in this world, governments are no exception.

Submitted by pencilneck on March 26, 2010 - 1:08pm.

"Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period."

This is an incentive to stay current on payments rather than walk.

Also, the delay of foreclosures on the unemployed for 3-6 months (in a period of nearly infinite foreclosure durations): Much ado about nothing.

Once again they are kicking the proverbial can a little further down the road. This kick seems particularly feeble in my opinion.

Submitted by sdrealtor on March 26, 2010 - 1:56pm.

SD R
Give yourself more credit. We both went on record years ago predicting massive gov't interventions were coming. Maybe you didnt believe it in your heart as much as I did but you did come out with me to predict all of this when others said the problem was too big for the govt to have any impact over.

sdr

Submitted by SD Realtor on March 26, 2010 - 5:26pm.

Yeah I was actually on line trying to find the post where I really started to whine hard about it.... I think it was in 07 sometime but what the heck. We kept getting told that 10% unemployment and 3k NODs a month were going to break the damn... I guess in retrospect we were pretty lucky to get down as far as we did right? I mean they pretty much let it slide for a good 1-2 years before the oh sh-t lights went on and they got their game on.

I gotta get me one of them govt jobs sdr...

Submitted by SD Realtor on March 26, 2010 - 5:30pm.

peter I just am not sure how relevant it is whether people walk or not. Furthermore with a certain reduction it may be cheaper to stay then to walk wouldn't it? You gotta look big picture man. This credit, that incentive, this bailout, that loan mod... the ends DEFINITELY justify the means. That is, damage done now is acceptable, is justified, and clearly will be tolerated and even encouraged if it means that more time can be bought. If the tsunami that would be done in a year or two can be relegated to a 10 year mudslide then so be it! They are gonna do WHATEVER it takes and really, REALLY the only one that can stop them are our foreign creditors. Yes the house cannot print money forever but they can keep the game up a hell of alot longer then we can.

Submitted by kev374 on March 26, 2010 - 7:41pm.

Foreclosures are only one determinant of how low housing prices fall but the other determinant is affordability - what buyers can pay and the government can't change that.

Prices will have to adjust to affordability so they will fall regardless of this program, now when prices fall it will undermine the effectiveness of all these modifications and that will lead to people just walking away anyway... this whole exercise is fruitless and is a repeat of the failed HAMP program.

The only way you can stop home prices from falling is to tackle it from the buyers end, give free money to people so they are able to buy houses at the price level that the government wants to maintain.

Submitted by ybitz on March 26, 2010 - 8:25pm.

kev374 wrote:
...
The only way you can stop home prices from falling is to tackle it from the buyers end, give free money to people so they are able to buy houses at the price level that the government wants to maintain.

Like tax credit for home buyers?
Sigh...this market is all out of whack.

Submitted by CA renter on March 26, 2010 - 11:46pm.

kev374 wrote:
Foreclosures are only one determinant of how low housing prices fall but the other determinant is affordability - what buyers can pay and the government can't change that.

Prices will have to adjust to affordability so they will fall regardless of this program, now when prices fall it will undermine the effectiveness of all these modifications and that will lead to people just walking away anyway... this whole exercise is fruitless and is a repeat of the failed HAMP program.

The only way you can stop home prices from falling is to tackle it from the buyers end, give free money to people so they are able to buy houses at the price level that the government wants to maintain.

Precisely right, kev374.

There will be tremendously negative consequences of their actions. From here on out, nobody will think of mortgages as something that has to be paid back as agreed. People will more readily overbid because they will feel confident that the govt will ride in to save them.

Submitted by CA renter on March 26, 2010 - 11:51pm.

Just in case anyone thinks I believed the govt wouldn't bail out the deadbeats:
-------------------

Comment by CA renter
2007-03-17 12:28:23

The way I see it, there are two groups who stand to lose if there is no bailout: the lenders and the FBs.

If the market is allowed to do its thing, foreclosures will flood the market, making the losses swift and certain (as they should be, IMHO).

The way to stem the tide would be to force the lenders to re-write the loans (or sell at a steep discount to GSEs or other institution which could be set up by the govt). The loans would be re-written at fixed rates (lower than current FRM rates). Negative equity would not be a factor as the new loans would cover 100% of current mortgage, irrespective of collateralization.

These loan terms would be extended to 40 or 50 years, and the borrower could make I/O payments for the entire time they live in their homes. Only upon sale would the “lender” expect principal payment, and the lender could have an agreement whereby they share risk/reward — like they could be entitled to 50% of the appreciation/depreciation.

In the meantime, the Fed would be working overtime, trying to inflate our dollars, so in 15 years, the FBs might be able to break even and finally get out from under their “homes”.
—————————-
FB wins by not losing home & not having to pay what they originally agreed to pay.

Lender wins because they will lose much less than if the market were flooded with foreclosures. Collateral prices would drop, but not as significantly.

As lenders take losses, the big banks/financial firms move in and take over the mortgage companies. They (who, in many cases represent the final lenders) would be able to buy these mortgages for pennies on the dollar. They win the biggest piece of the pie.

http://www.thehousingbubbleblog.com/?p=2...

Submitted by 34f3f3f on March 27, 2010 - 3:49am.

kev374 wrote:

The only way you can stop home prices from falling is to tackle it from the buyers end, give free money to people so they are able to buy houses at the price level that the government wants to maintain.

Or simply let home pries fall which they would do without all this intervention.

Submitted by Arraya on March 27, 2010 - 4:33am.

Oh, this is not going to do anything. There is an end to this can kicking and some point. Ponzi-schemes all end the same way. Yahoo just reported incomes went down in 2009 and shadow is up to 10 million.

Also, the FBs are really going to live up their title when their non-recourse loans turn recourse. They would run for their lives if the had any sense.

Submitted by 4plexowner on March 27, 2010 - 7:50am.

I'm with Arraya on this one - this is just more Keynesian foolishness that is delaying the inevitable and making the ultimate washout all the worse - there is still a Kondratieff Winter in our future

Submitted by jpinpb on March 27, 2010 - 8:48am.

Just a thought. Say they reduce principle. That still doesn't mean home prices are going to rise, does it? If it does, is there anyone that expects to see 2005/2006 levels any time soon?

1. This is for homeowners only. (yeah, people can lie)

2. Investors want to sell for profit.

And the other things I wonder about is what are the terms and conditions if principle is reduced? If the market does improve and homeowners are able to sell for profit, can they keep the profit or is there some obligation to bank? Would this turn into a recourse loan of sorts?

Submitted by peterb on March 27, 2010 - 11:14am.

Let's see just how effective this is when applied. HAMP didnt do squat. The details could make this just more happy talk from the govt.
Unless they can figure out how to lower long term rates and increase employment, I doubt will see too much growth in real estate prices. All these tactics are various fingers in the dike. But the water keeps rising.

Submitted by AN on March 27, 2010 - 11:38am.

jpinpb wrote:
Just a thought. Say they reduce principle. That still doesn't mean home prices are going to rise, does it? If it does, is there anyone that expects to see 2005/2006 levels any time soon?

1. This is for homeowners only. (yeah, people can lie)

2. Investors want to sell for profit.

And the other things I wonder about is what are the terms and conditions if principle is reduced? If the market does improve and homeowners are able to sell for profit, can they keep the profit or is there some obligation to bank? Would this turn into a recourse loan of sorts?


What's your definition of soon? Based on the 90s bubble (which was much smaller than this last one), it took about ~4 years to get back to peak price. Since this last bubble is at least 3-4 times bigger than the 90s bubble, wouldn't it be logical to say it'll take at least 12-16 years before we'll reach peak price again? Obviously, that strictly depend on inflation. If we experience the kind of inflation we saw in the 70s, then it would be much sooner. If we see another great recession or a depression, then it'll be much later. It's also very area specific as well.

Submitted by SD Realtor on March 27, 2010 - 1:07pm.

Exactly AN. Nobody here said or even implied that what the govt was doing was going to fix anything. There is universal agreement it will only prolong things and in the end probably make things worse. For those who are thinking the "big crash" is going to happen in the next year or two... well... you just keep thinking that way....

Submitted by sdduuuude on March 27, 2010 - 1:31pm.

Wondering if it couldn't trigger sales. Many people may need to sell but can't because they would have to bring money to the deal.

Can they get a loan reduction, then sell and pay off the smaller loan, possibly pocketing the new-found equity or at least break even?

Submitted by CA renter on March 27, 2010 - 4:56pm.

sdduuuude wrote:
Wondering if it couldn't trigger sales. Many people may need to sell but can't because they would have to bring money to the deal.

Can they get a loan reduction, then sell and pay off the smaller loan, possibly pocketing the new-found equity or at least break even?

Sounds very reasonable, sduuuude. If they want to get out of their homes, this would certainly make it easier for them to do so.

Submitted by Rich Toscano on March 27, 2010 - 7:03pm.

"Kicking the can down the road" is a vague term.

If it's used to mean, "exchanging current problems for different, possibly bigger future problem," I agree that this is what's happening.

If it's used to mean "housing will just plummet in the future" I completely disagree (or at least I disagree that this conclusion is a given).

If you "kick the can down the road" for long enough, and you devalue your currency enough as you are doing it, affordability can be achieved without a big drop in nominal prices.

So I completely disagree with the premise that principal reductions (along with the rest of the bailout dog and pony show) won't make any difference. They may cause an entirely different set of problems in the future -- but that's not the same as making no difference.

I do agree that at some point, the government will not be able to continue printing and spending money they don't have. Believe me, I am 100% on board with that forecast. But it hasn't happened yet, and it could not be more clear that until it does, they will keep pulling out all the stops to prop up housing. If the US government funding crisis takes long enough to arrive that will give them time for a whole lot of propping.

Rich

Submitted by ctr70 on March 28, 2010 - 7:18pm.

(RANT) I'm really sickened & disgusted by the principle reductions. The personal responsibility for your own finances is gone in this country.

I also know a lot of people who ran up their credit cards and are now are negotiating to settle with the credit card company for pennies on the dollar. These people I know could easily get 2nd jobs, 3rd jobs, reduce other expenses and cowboy up to pay off this debt the old fashioned way. What happened to paying back what you owe?????

It's like Americans are all now little children who can't make rational, responsible financial decisions so the parent the Government pays it off for them.

I also know a lot of people who were conservative with their money and didn't sign up for the $5,000/mo payments in 2005. They asked themselves, "can I afford this payment and still pay my bills and save money and not eat Top Ramen for the next 20 yrs?". "Could I afford this if I as without income for a while?"

What pisses me off the most is this shift in American society towards the citizens having no repsonsibility for anything. It's all blame others...blame the banks, blame the economy, it's never my own fault...the Government will bail me out and take care of me. YOU signed those loan documents.

I understand there are people so underwater they will never get out, I think there should be 2 solutions for people who can't make payments:
1. Foreclosure
2. Short sales (and this should be the banks decision w/out Gov intervention)

I mean for crying out loud, there is no friggen' inventory in California right now for those with good credit and who were not dumb enough to buy at the peak in 2005. There is NOTHING WRONG with foreclosing on these people. There is NOTHING wrong with these people renting again! There are plenty of great rentals. I don't buy this whiney crap about being kicked out of my home. JUST GO RENT THEN!!!

The Government using tax payer money and their power to force banks to do loan mods and principle reductions is some really scary anti-free market stuff.

I'm only half kidding (OK 3/4's kidding:) ) when I say we should bring back debtors prisons and putting debtors in laughing stocks in the middle of the village square. Then maybe they would learn!

(end rant)

Submitted by CA renter on March 28, 2010 - 7:28pm.

ctr70 wrote:
(RANT) I'm really sickened & disgusted by the principle reductions. The personal responsibility for your own finances is gone in this country.

I also know a lot of people who ran up their credit cards and are now are negotiating to settle with the credit card company for pennies on the dollar. These people I know could easily get 2nd jobs, 3rd jobs, reduce other expenses and cowboy up to pay off this debt the old fashioned way. What happened to paying back what you owe?????

It's like Americans are all now little children who can't make rational, responsible financial decisions so the parent the Government pays it off for them.

I also know a lot of people who were conservative with their money and didn't sign up for the $5,000/mo payments in 2005. They asked themselves, "can I afford this payment and still pay my bills and save money and not eat Top Ramen for the next 20 yrs?". "Could I afford this if I as without income for a while?"

What pisses me off the most is this shift in American society towards the citizens having no repsonsibility for anything. It's all blame others...blame the banks, blame the economy, it's never my own fault...the Government will bail me out and take care of me. YOU signed those loan documents.

I understand there are people so underwater they will never get out, I think there should be 2 solutions for people who can't make payments:
1. Foreclosure
2. Short sales (and this should be the banks decision w/out Gov intervention)

I mean for crying out loud, there is no friggen' inventory in California right now for those with good credit and who were not dumb enough to buy at the peak in 2005. There is NOTHING WRONG with foreclosing on these people. There is NOTHING wrong with these people renting again! There are plenty of great rentals. I don't buy this whiney crap about being kicked out of my home. JUST GO RENT THEN!!!

The Government using tax payer money and their power to force banks to do loan mods and principle reductions is some really scary anti-free market stuff.

I'm only half kidding (OK 3/4's kidding:) ) when I say we should bring back debtors prisons and putting debtors in laughing stocks in the middle of the village square. Then maybe they would learn!

(end rant)

Nice rant, ctr70! Agree 100% with all you've said.

Submitted by ybitz on March 28, 2010 - 7:55pm.

Yup, I second that, ctr70. Being foreclosed on sucks, I'm sure, but there's really nothing wrong with renting.

Submitted by Nozferat on March 29, 2010 - 12:12am.

SD REALTOR:

What you don't seem to get is that even if you are right and housing has bottomed and only goes up, housing has become so expensive that IT'S NOT WORTH IT anymore to stick yourself into mountains of debt and worry anymore.

I'd rather rent a nice place thanks...and keep my 20% down and the rest of my hard earned money and enjoy life instead of pay for a stupid mortgage because it's the general populous consensus that this is something that needs to be done.

Submitted by AN on March 29, 2010 - 12:24am.

Nozferat wrote:
SD REALTOR:

What you don't seem to get is that even if you are right and housing has bottomed and only goes up, housing has become so expensive that IT'S NOT WORTH IT anymore to stick yourself into mountains of debt and worry anymore.

I'd rather rent a nice place thanks...and keep my 20% down and the rest of my hard earned money and enjoy life instead of pay for a stupid mortgage because it's the general populous consensus that this is something that needs to be done.


I don't think SD R is saying we're at the bottom at all. It just sound like he's stating the current market condition right now with his experience on the street.

Do you mind clarifying your definition of expensive and not worth it? There are many place in San Diego that it's cheaper to buy than rent today. Is paying less on PITI than comparable rent still too expensive and not worth it?

Submitted by tom on March 29, 2010 - 6:29am.

Could this be the thing that finally turns "the masses" opinion on housing recovery? As a renter looking to buy, one thing I've learned is that whatever I've wanted to happen, has not happened.. however, of all the efforts.. I can't currently see a downside for my selfish interests with principle reductions. If people get back down to a break even point with their mortgages, this makes a lot of people who were "stuck" now able to sell, which to me seems good.. market will finally have the ability to have "organic"(hah) sales at the new prices which may finally free up the logjam that has been low inventory.. while also serving to firm up a bottom.

So, given for the moment I'm "ok" with it(not happy of course).. who would get pissed? That seems like other homeowners who are not underwater but have seen their "paper" value skyrocket and fall down to earth, but not yet in the red or don't qualify for whatever reason. Isn't this the majority of homeowners? All the people at my office bought late 90's, early 2000's.. who basically have ignored the whole situation because they are still fine, they are older, understand the ups and downs of california, etc... but if you start giving other people mortgage principle reductions, and it gets covered well enough in the media (doubtfull).. The other things have been easier to brush off if you're in a comfortable situation:

- Price Declines - "it's just on paper, I bought in 1999 and still have made some money"
- Tax Incentives - "well I'm already getting a big tax incentive owning my house"
- Re-working Interest Rates, Length of Term - "I already refinanced and have a good rate, and I wouldn't want to lengthen my term anyway"
- ShortSale/Foreclosure - "Glad I'm not in that situation"

Maybe the mortgage principle reductions are as easy to brush off as price declines though, but seems like it's different. So, interesting to me how this plays out in my work crowd if it ever starts to happen at a level that becomes part of the public consciousness.

Submitted by Nozferat on March 30, 2010 - 4:50pm.

AN:

I never said if PITI is less than rent it's not worth it. I said that for the most part, prices are still to high for buying a home to be worth it.

I would like to know exactly what parts of SD you consider to be nice and livable and safe and affordable at the same time? For the average person, a $500K home is not affordable...just the down payment alone is a back breaker. Doesn't that factor into the equation anymore?

Submitted by Nozferat on March 30, 2010 - 4:51pm.

tom wrote:
Could this be the thing that finally turns "the masses" opinion on housing recovery? As a renter looking to buy, one thing I've learned is that whatever I've wanted to happen, has not happened.. however, of all the efforts.. I can't currently see a downside for my selfish interests with principle reductions. If people get back down to a break even point with their mortgages, this makes a lot of people who were "stuck" now able to sell, which to me seems good.. market will finally have the ability to have "organic"(hah) sales at the new prices which may finally free up the logjam that has been low inventory.. while also serving to firm up a bottom.

So, given for the moment I'm "ok" with it(not happy of course).. who would get pissed? That seems like other homeowners who are not underwater but have seen their "paper" value skyrocket and fall down to earth, but not yet in the red or don't qualify for whatever reason. Isn't this the majority of homeowners? All the people at my office bought late 90's, early 2000's.. who basically have ignored the whole situation because they are still fine, they are older, understand the ups and downs of california, etc... but if you start giving other people mortgage principle reductions, and it gets covered well enough in the media (doubtfull).. The other things have been easier to brush off if you're in a comfortable situation:

- Price Declines - "it's just on paper, I bought in 1999 and still have made some money"
- Tax Incentives - "well I'm already getting a big tax incentive owning my house"
- Re-working Interest Rates, Length of Term - "I already refinanced and have a good rate, and I wouldn't want to lengthen my term anyway"
- ShortSale/Foreclosure - "Glad I'm not in that situation"

Maybe the mortgage principle reductions are as easy to brush off as price declines though, but seems like it's different. So, interesting to me how this plays out in my work crowd if it ever starts to happen at a level that becomes part of the public consciousness.

Principle reductions won't help you...they'll help the freeloaders and irresponsible people out there.

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