San Diego Housing Bubble News and Analysis

I'm afraid you might be right, SDR. What we get, in a nutshell, is folks lying on their mortgage application on the way up by overstating their income (in order to get into a house), and lying on their re-fi application on the way down by understating their income (in order to get a deep principal reduction).

And oh, yeah, I almost forgot: you and I will pay the difference.

Daniel I couldn't agree more. Another thing that also worries me, is that even though we see much more stringent underwriting guidelines today for new loans and "non bailout" refis, I am concerned that there will be just as much pressure in the other direction to approve these workouts. Maybe I am just paranoid... I hope so.

So, what should we do? Go buy something in La Costa and wait for our letter from Santa? I'd really prefer to get into something on the coast, HELOC, buy a BMW and Porsche, then need to be bailed out.

What's the best way to position for this?

It's such a patehetic and shortsighted attempt and nothing short of socialism.

The message is go buy your dream house, default and, yes, wait for that letter to reduce your payments to 38% of your income. Apparently you can buy any value house you want, and even your income really doesn't matter.

Look for fraud to run rampant.

DJC there is not anything we can do. The post was simply meant to be informative. At the beginning of this thing I was trying to project market bottom based on a unregulated or lightly regulated fall. As federal efforts began to grow it became clear long ago that this cycle would be challenging to predict.

If there is anyone here (Rich included) who foresaw the sheer size of the intervention we are seeing and will continue to see then good for them. While a few like myself starting posting these sorts of warnings, I doubt any of us, me for sure could envision something of this magnitude.

To turn a blind eye to it and say it will not affect the cycle is naive at best. To me this is simply going to help nudge us towards a Japan style real estate market that will be quite drawn out and long.

I'm not buying it...

Let's not forget, unemployment is on the rise. Even Greenspan noted this morning in congressional hearings that it will rise substantially no matter what intervention the govt tries.

This single variable alone is going to torpedo the foreclosure "relief" activities. I may save some percent of "troubled" borrowers, but a whole new group of troubled borrowers are going to emerge. Is the govt going to save them too?

I also don't see govt wiping the slate clean on principal owed by just writing down the loan amount and giving the mortgagee a "freebee".

Lastly, on CNBC this morning it was noted that there was similar foreclosure law passed (I beleive in Oregon?) where all foreclosures have a 90 day moratorium, so during the summer months NOD's decreased substantially, but this month they spiked 460%.

I'm not convinced the new CA law is going to stem any foreclosures in the long run...

"I also don't see govt wiping the slate clean on principal owed by just writing down the loan amount and giving the mortgagee a "freebee"."
___________________________

But this is exactly what is going to happen. Whether the govt. buys the loans and writes down the balance or subsidizes privately held loan write-downs, the result is the same. And this is where we are going to end up.

Without principal write-downs there are going to be a landslide of foreclosures/walk-aways - ability to pay or not - on top of the foreclosures we already have. There are plenty of influential players who know this to be true. They are just not going to sit back and let this happen.

In fact, I don't know that I have seen a single piece of legitimate evidence that suggests that we are not moving, and quickly, toward this type of individual homeowner bailout.

So, basically what you are saying is the govt is going to do a "workout" with the maid that makes 30K a year but stated she made 130K. Through these programs, she is going to get a principal write down and stay in the house she bought...???

So, what kind of backlash do you think there is going to be when the average citizen looks down the street and sees that his neighbors, whom make 100K less than him own a house just as nice as his, and he is helping pay for it through a write down?

So, what kind of backlash do you think there is going to be when the average citizen looks down the street and sees that his neighbors, whom make 100K less than him own a house just as nice as his, and he is helping pay for it through a write down?

That's exactly the question every politician or economist for preventing foreclsoures needs to be asked.

It's a moral hazard. If it comes to this you may as well go out and buy the multi-million dollar dream mansion. And while you're at it quit your current job, go to work at Starbucks making minimum wage plus tips, get your payment reduced to 38% of that income, then go back to your other job.

The most I hear these ridiculous ideas the more I truly believe it's lip service for homeowners who don't know better want prices to stay elevated, those facing foreclsoure who need help, and banks who are trying to sell these worthless assets.

The reality is lower housing costs are good for everyone. They either refuse to accept this, or are scared to admit it.

Does anybody know what would possibly be the 'catch' or 'fine print' with those loan modification? I can think of a few... e.g. they can't sell, or if they sell, all the profits go to the bank(s), plus they have to pay back some of the money that were 'forgiven'... I can't imagine it's really and truly a freebie with no strings attached...

Regarding the maid - she will stay in the house only if she qualifies (w/docs) after the loan is written down to a BPO or appraisal value minus some additional arbitrary % down. Otherwise she is a goner.

If moral hazard isn't already out the window, it's sitting on the ledge. Certainly the powers that be can refuse write-downs to those who have ability based upon the existing loan balance. Maybe they will. But I'm expecting a more sweeping and generalized program that ignores moral hazard in favor of the ease of a template approach. In any event if the goal is to avoid foreclosures you have to throw moral hazard out to head-off ruthless defaults. I suspect you will find that much like everything else we have seen so far, it is moral hazard that is being paid lip service and lip service only. Moral hazard will not derail the bailout du jour, that much is almost certain.

I have posted many times about the inevitable mark to market of homes and a govt. subsidation is of course a mark to market or what may amount to a mark to slightly below market. We are not going to see home prices propped up. Values are going down with or without subsidation and are likely going to settle within the same historical parameters of debt/value/income regardless of subsidation. All we are talking about is a more orderly and controlled mark down that has a much less chance of driving the credit/investment industry and yes the entire economy further into the dirt.

Yes, foreclosures will go down, but at what cost?

When foreclosures go down, home prices will remain artificially high, so young people will leave San Diego. This was happening before costs started to go down. Look at the school enrollment over the last 7 years. If San Diego loses its families, because home prices are too high there will be a very negative impact down the road.

Home prices in San Diego are too high and must come down to a realistic home price to wage ratio.

/

This is not going to prop up home values or help anybody. It's only for the banks and if the people had any sense they would just dump their house and rent if it's the right business decision for them. They already either stupidly or greedily made one bad financial decision no reason to make another. This will probably help people as much as neg-ams helped people.

Another banker/government scam.

Looks promising, but from a historical perspective....when has the govt actually been successful doing anything for the common man. It's politically expedient to look like they care and are doing something. They're busy blowing their wad on making sure their buddies are ok. Wont be much left over after that.

Bush administration has recently indicated that the credit crunch has to be addressed at its source—in America’s housing market. Here are a few possible scenario:

perhaps it's the best scenario they can hope for compared to an epic bust

Counselor characterized the result best. This is simply adding order (at huge taxpayer expense) and yes (it appears to hell with moral hazard)...

From a practical perspective show me anyone in the government who is not pulling for this.

Anybody? Does anyone have any names?

This post was not meant to say that this will prop things up at all. Yet to think that this will not affect the depreciation cycle at all is a true fallacy. In my opinion it creates a huge moral hazard but haven't we already breeched that levy? I mean come on now let's be practical. I was hopeful that by now we would have already seen several lawsuits challenging these workouts and I haven't seen or heard of a single one!

Huckleberry, go to the links I posted. Go read about this FDIC chairperson. Let me tell you something my friend, if it was up to Barney Frank HELL YES the maid would get to stay in the damn home.

What sort of backlash will there be? Well let's see, we have recently seen our congress pass a bill that was rejected by a SUBSTANTIAL majority of the population. Doesn't appear to me that backlash is really on anyones mind right now. There is a short sale right near me in Scripps on Chardonay. The guy has a freeking 30 foot boat right in front of the house along with his RV. I WISH there would be a backlash and frankly I am amazed there has not been.

Regarding the recession, yes I believe, as I have said, that it will act as a major counter balance. Yet REGARDLESS of who is president, it is in no way inconceivable to me that there could be federal intervention to laid off individuals that they cannot lose thier homes.

Tell me, would this surprise you?

The only surprise to me is that there is still this belief by many people here that things like moral hazard will prevent the government from taking any steps. That the government will or will not do something in the interest of the people. That is so far from the real agenda of the government that it is almost laughable.

There is not any question whether this is right or wrong morally, or whether this will help or hurt pricing... It doesn't matter. It is what will happen. It will reduce the foreclosure inventory. It will NOT halt the cycle but it WILL change the cycle.

(and yes these people don't get write downs or rate mods for free. any profits I believe go back to the government or entity that provided the relief)

Yep, I read them and these are the statements that make me highly doubtful:

"It’s unclear if the program has yielded results thus far, although most industry insiders that spoke with HW remain skeptical; investors are also watching closely, to determine what the modification effort will mean for their investments."

“If the FDIC follows its stated plan, which is to maximize loan value or recovery value, a good chunk of these mods won’t go through anyway, despite the press given to it,” one senior banking official told HW last month, when the plan was announced. “The FDIC will find out what every other servicer already knows: for one thing, the majority of borrowers will simply ignore the offer. For another, those that do step up will give credible proof that they cannot afford their homes unless the FDIC were to undercut home value by 40 or 50 percent from current levels.”

Read here and you will clearly see more of my point:
http://mrmortgage.ml-implode.com/2008/10...

They can keep throwing money and new policies at this problem and it still will not abate...

If I'm to believe what I hear from various sources, including Mr. Mortgage, we're looking at trillions and trillions that was pumped into the economy from about 2001 to 2007.

Can the government really rescue this crisis? Are they prepared to throw trillions into this?

Another thing: This economy was booming until recently. It went from the dotcom to real estate. Please consider everything that boosted our economy, b/c it was related in one way or another to real estate.

What will make our economy flourish again? We have to make our economy grow. What will create jobs that will replace the job losses in real estate and provide money that the ATM house machines were once dispensing?

Agreed. Even if there are a plethora of govt programs to stem foreclosures and keep people in their homes, 45% of people (quote from Freddie Mac) don't even want a "workout" unless it will give them positive equity in their home. They are walking even when the GSE is trying to help them. This is the case with the banks too.

If they can't feel wealth from their home, they don't have any incentive to stay in them.

Even if the govt does enact any or all of these new programs, they won't be around for very long once they figure out that people are taking the write down and still walking away, inevitably foreclosing.

Until housing comes back to equilibrium with incomes, foreclosures are going to keep rolling, unless of course they pass new policies that force more "creative" mortgage financing, which got us into this mess in the first place.

SDR,

DaC and you are correct:

1. Most voters are homeowners, and want their loans, or their neighbors' loans, forgiven.

2. Most voters see themselves as borrowers, not savers, and are OK with programs that transfer wealth from savers to borrowers.

3. A minority of the population are very concerned about fairness. Enough lip service is being paid to moral hazard to fool the majority of this minority into believing that people in power are trying hard to avoid moral hazard.

4. The wealth transfers from savers to borrowers who own homes will cause home prices to be materially higher than they would be in a free market.

And, BTW, SDR, last year I was posting on this site that there would be massive govt efforts to keep home prices high and benefit borrowers at the expense of savers. It was obvious from day 1. I recall DaC agreeing.

That's kind of like saying a guy with a million dollars in debut was rich until recently.

I have a friend who is planning to have his wife getting paid in cash (and not reporting her income) so he could get gov't help if this homeowners bailout plan goes through. He bought a house in Temecula for $400K in 2004 with zero down and I believe he might have pulled out more cash in 2005.

Two hunches and an observation here:

1. I do think moral hazard will prevent many folks with liar loans from seeing a bailout. They're the homedebtors who have the least defensible position when they go into default, and the (initial, at least) bailout plans will require that they prove their stated income was legit. The Option ARM, subprime, and prime defaulters will get sympathy, but I'm guessing the liars get thrown under a bus. Given the number of those folks in SoCal, this may limit the effect on the market.

2. With prices dropping at 3% a month, and already at cash-flow prices in some areas, prices may drop most of the way before a more-aggressive foreclosure act takes effect. Especially with the global market crises getting increased attention, I suspect any morally egregious foreclosure relief will wait till next year, but which time we're down another 10%.

But we all did see major loan forgiveness coming, though, right? Last year, when it was obvious that 25% of California was going to end up upside-down, you knew that either through laws or loss-mitigation, someone would do something to limit foreclosures... it's just not in the loan holder's interest to foreclose on a quarter of the state. To assume that wouldn't happen is to be as shortsighted as the banks that made the loans.

Considering everyone is going to be bailed out, I have some friends that live in Vegas whom could use this situation to their advantage. I think they are upside down by about 200K now.

They bought a decent home back in 05 or so, fixed it all up then sold their failing business, so could no longer afford the mortgage so just rent it out now.

They now live in Palm Desert, both work "under the table" consulting and make good money but can show they basically have very limited income.

Since everyone and their dog is going to be bailed out, I am going to convince them to seek a principal write down.

No need to give me the moral hazard speech, everyone in the country is going to be trying to figure out how to get their piece of this bailout, even rich people. So, I'm going to start advocating my friends figure out how to get their own "bailout".

Defaults are going to go through the roof in 2009. The govt does not care about you! You dont lobby them, nor pay for their campaigns. These bailouts are for their clients. Not you. When was the last time they did anything substantial to help the populace on a level such as this? It's not part of their history at all. This is no different.