San Diego Housing Bubble News and Analysis

I figure that they will do what I would feel to be the most unjust to responsible people.

First, they will buy all of the securities from institutions such as Washington Mutual. Then, when people say they can't afford the mortgage, instead of foreclosing, because the government could never do that, they will write down the principal owed to whatever the borrower can afford.

it's not that simple... if they just write down the principle to whatever the borrower can afford guess what would happen, it would trigger huge moral hazard, people in unprecedented numbers will start asking for handouts...why should I pay my full mortgage when my neighbor is getting for half price eh?

It would just cause complete and utter chaos..but unfortunately I think these brainless monkeys are just making a bad situation much much worse!

I fully understand the issues with doing something along those lines, I just feel that would be the most populist of plans and also the one that would make me the most upset and thus the one that they will actually enact.

Agreed, if they pass legislation to that degree every homeowner that is upside down (or even close) in their mortgage, would stop making payments and do whatever it took to prove they couldn't afford it. Solely to get their loan amount decreased. Even if it meant damaging their credit.

This would be the ultimate injustice to the American homeowner that has been responsibly servicing their loan, and to those that have been patiently waiting for prices to come back to norms.

ok, I just watched the segment on CNN Money about this plan and this guy is saying the same thing was done in the early 90s and the government actually made money because it sold off the assets for more than they bid for it. How can this be even possible? 1992 - 97 the market was declining, everyone lost money but the US government made money by AUCTIONING off properties???

CR @ CalculatedRisk had a post about it an hour ago.

kev374, based on what I understand, RTC in the 1990s took over the failed S&L. They didn't have to go out and buy the paper. So when they auction it off, they made a profit. However, this time is different. They would have to buy it from the bank and try to sell it off. The guy who ran the RTC in the 90s says that they can do what they did in the 90s now. Now, what they could do, will be more in line with what Japan did in the 90s than what the RTC did in the 90s.

Paulson just said that 5 million homeowners are in mortgage delinquency or foreclosure. The bill for this whole thing is going to get really, really big.

So from what everyone is hearing this morning, is this bailout going to effectively "save" all of the upside down borrowers by means of the government taking all the bad mortgages, then renegotiating the loans down to market values?

If this is the case, it will artificially prop-up housing prices because foreclosures may slow substantially, hence disallowing the natural market to correct itself.

Or, is this plan just going to free up the credit markets so financial institutions will start lending to each other again?

This bailout proves to me that things are far worse than we know and is a huge red flag for me to stay out of the market for now.

To think that this can all be traced back to a lack of individual responsibility and complete lack of judgement on the part of people buying homes and refinancing mortgages makes me sick.

If they buy assets at steep discounts and sell these assets then I would imagine it would accelerate the decline in prices not prop it up.

So far I have not heard anything about bailing out upside down homeowners. Paulson just stated that 5 million are in foreclosure but nothing to say he is going to write down their mortgage balances.

Those that do not have the capacity to refinance their mortgage full doc will still probably lose their homes.

You are right. So far there has been nothing about bailing out upside down homeowners. But once the government buys all of these mortgages, and the homeowner still can't afford to pay, is the government going to foreclose or are they going to try and work something out. My money is on the government trying to work something out with the borrower, no matter the cost.

It always amazes me that level headed rational folks like most of us cant comprehend that we are at the mercy of nitwits. I have worked with many very savy buyers who live their entire lives in Quicken or on a spreadsheet. They fall in love with an overpriced home, pull out the sliderule and calculate what it is "worth" and how much they will pay.

Then I have to sit them down and give them my "Nitwit Speech". It goes like this. Do not put yourself or your family on the road financial distress, so buy something well within your affordability range but forget about trying to put a 100% sane market value on a home around here. As much as you do not believe the house is worth that much (nor do I) all it takes is one Nitwit who is willing and able to pay that much. The Nit Wits set the market for sane folks. It only takes one Nit Wit to crush your dream and there are alot of Nit Wits out there. Therefore as unemotional as you are trying to be, please do not forget to include the NIt Wit factor in your calculations else you will end up a "bitter renter" for your entire life. Sad as it may seem, this is the way the world works.

I heard yesterday that, the last time the RTC was used was the S&L crisis. The govt took on something like 20 billion in bad debt and was able to sell off all but 3 billion, which the taxpayer had to swallow.

The RTC was supposed to be used for two years then dissolve, it had to be extended two times and ended up having an seven year lifespan because they could not sell the debt as fast as anticipated.

Just speculation but, I think this situation will be the same. The gov. will take on the bad debt, try to sell it, when markets won't bear the risk they will resort to work w/ homeowners, then eventually foreclose and pass losses on to the taxpayer.

I guess my next two questions are:

1. At what point does the govt decide it's prudent to lower the loan amount (or will they?), and what is the upper threshold of % write down before just foreclosing?

2. What does the govt do with a bunch of foreclosed/empty houses? Send them to REDC, HUD, or...?

Is this just a bandaid to get us through the election? Why are all the talking heads on CNBC acting as if the lord came and saved everyone, and everything is all fixed as if nothing ever happened? They all have huge smiles on their faces, it's a bit disgusting.

Is today just a fool's rally?

Count on the govt to screw up whatever they decide to do. This actually could be beneficial in that re-pricing of the market would be done on a wholesale basis. Rather than wait for the market to process all the upside down people, the govt just starts slashing the loans and thus reducing the encumberance that must be dealt with before a new transaction can be completed..i.e..reducing the outstanding loan balance. They could lock-up the homes from transactions, but that would kill the RE business. So I doubt they'd go that far.

It's pretty hard to deny the market pressure out there, but it's funny watching the massive incompetants of our politicians as they try to "solve" the problem. No matter what scenario I run through my mind, it still ends up that the prices will be forced down for the market.

Unfortunately, Senator Schumer and other Dems are strongly advocating that part of this bailout should include a plan to put a floor under falling home prices.

I just can't believe these people don't understand free markets yet...

From what I am understanding of his ideas, they want to hand out 10's of thousands of dollars to every ailing homeowner , plus decrease their loans to get the homeowner to equilibrium.

Please tell me I am hearing this incorrectly!

The last thing I read is that they really are not going to do much of anything right now because it will "take time" to work out the legislation and they were all planning on taking off at the end of Sept to campaign

LOL

LOL

roflmao

scream

CNBC acted the same way with the emergency rate cuts, opening of the discount window, Bear Stearns, etc etc etc. The rally monkey is in full force today and that is all they care about. As always the devil will be in the details. I find it somewhat sickening to see the smile on the faces when we are looking at a taxpayer bailout that is approaching $1.1 Trillion. In fact there is a bit of anger that is beginning to boil. Of course I would be just as angry if they let this go and we watched the entire western financial credit structure collapse (not hyperbole), that would more than likely take my primary income in the form of a job loss. This whole thing disgusts me to no end. The only you can do is grab a bag of popcorn and watch the show. Now the real question of the day is what the True Impact on the real economy has been?? After the market gets over its speedball high the market will be looking at how this whole thing has impacted earnings, don't be surprised if it is very significant.

I think we are all very interested in seeing the criteria set by the soon-to-be-created govt. fund with respect to not only what they will purchase but also how they will manage it and ultimately dispose of it. I anticipate that the starting criteria on all fronts will change as the buying/managing/disposing process moves along. I don't know what parameters they will begin with but they very well may end up with a sweeping and immediate mark-to-market action.

We are looking at a huge number of potential defaults in the pipeline. To the extent that the govt. fund is going to purchase souring mortgages in vast quantities, I can envision an immediate principal writedown to something actually below market value, with repayment terms modified into a very attractive 30 yr fixed rate. If the current owner (who is in default) can make the new payment, they keep the home. Essentially, I think we could very well see a situation where the govt. fund writes down principal/interest rate regardless of ability to pay more.

Of course this creates a moral hazard and will lead to more ruthless defaults from those with ability but I think the govt. has already served notice that it is willing to pick its poison. Is the overall economic impact worse if they allow ruthless defaults to run their course in the private sector or is it worse if they just buy the loans and write down the balances regardless of ability? That is the question. I certainly think it's a possibility that they will determine that the former is the case and therefore they will go the purchase/write down route and keep those people in the home.

No, the plan only saves the banks. Who cares about the upside down borrowers.

The plan will acquire all the REOs, these are homes that are already foreclosed so the question of borrower is not even relevent in this bailout. They will just dump these on the market what whatever they can get, and that is not going to be a lot, of course the loss will be borne by the taxpayer but the housing prices will go to the dumps.

Housing prices will continue and accelerated decline with this plan, the only difference is that the losses are now borne by the taxpayer.

This may be a good thing because the banks have been totally unwilling to unload these assets at a realistic price point. This plan will accelerate the unwinding.

A friend of my mother, one of the most irresponsible people I know who is also within a few months of bankruptcy because of an inability to take more money out of her house, just withdrew the last remaining amount out of her HELOC even though she doesn't need it right now because she wants it included in the amount that gets bailed out by the government. I am not making this up.

Regarding a few of the previous posts regarding the so-called TARP not being relevant to borrowers (only REO's are going to be bought, etc.), I have yet to see any fund criteria that suggests that a foreclosure is a pre-requisite for a fund purchase or that junk MBS will not be purchased (where if so, the fund becomes the owner and then it's a new ball game regarding leeway for servicer mods that may not comply with the existing p&s agreements - but where the fund may waive p&s restrictions and in fact may direct mods)

Kev374,

"why should I pay my full mortgage when my neighbor is getting for half price eh?"

Been to Temecula Lately ???

If they bail out the FBs, then we should file a class-action lawsuit (against the Fed?? -- can't file suit against the govt, right?) on behalf of renters and responsible borrowers.

If they get their bailout, I want mine too. Also, we should sue on behalf of short-sellers, since the govt intentionally and directly caused losses for them.

Then, we should bail out the candle shops, auto makers, gourmet dog-food shops, aromatherapy shops, etc...

This is beyond ridiculous!

I stand corrected. The plan is to acquire REOs as well as Mortgage Backed Securities so it looks like they will have the power to do anything pretty much!

The plan put forth by Paulson today is ambiguous. What he did say is that it will be big (hundreds of billions of dollars in funding) and they will buy illiquid assets from banks (which seems mean primarily mortgage related securities). Because these securities are not easily traced to individual home loans, and because other tranches of debt from the same basket of loans remain liquid I do not believe the RTC2 will be able to do much at the phycisal asset level. I believe Hank and Benny are lookig to save the banks and the investors in the securities, not the borrowers.

QUESTION: Would you rather your neighbor(s) get a deal that quietly and opaquely gets them to fair market value, or would you rather have a series of foreclosure auctions that drops comps for the entire neighborhood, hits property taxes and leaves empty damaged houses in the (neighbor)'hood?

Actually, if principal amounts are reduced, that should be noted in public records, and it should be mandated that future appraisals use these as comps.

After all, that was the real purchase price of the house, not the original, artificially-inflated price. The "written-down" price is the actual price the buyer could afford; therefore, it is the true sales price.

This was my belief as well. I think principal reductions would really accelerate the decline since it automatically cuts the value to whatever an actual borrower could afford. I can't imagine this not being used in appraisals.

In the end I really don't think it matters what happens with the government and all these plans. Prices will fall to levels that people can afford with fixed mortgages. Maybe it'll take 15 years, maybe 3. But it has to happen. There is no way around it.