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The irony is those that understate the foreclosure problem says it’s around 2% or fewer people defaulting. If that’s true why should the other 98% in a sense be punished for being fiscally responsible?

Here’s a seemingly delusional article from a guy who thinks the plan will work:

Bush’s mortgage bailout just might work
If insider buying is any indication, home builders and financial-services providers expect dramatic reversals of fortune in the coming months.
By Jon Markman
With his stunning decision last week to let a federal housing agency guarantee mortgages of distressed homeowners, President Bush appears to have launched a “surge” in the financial markets to match the Pentagon’s efforts in Iraq.
His plan seems straightforward: First, use winks and nods to convince his top Federal Reserve appointee, Ben Bernanke, that it would be in the best interest of both men to slash interest-rate targets by as much as a percentage point, and to do it quickly so the move has time to work its magic before the next election.
Second, use every lever available in the executive branch to provide a direct, emphatic bailout to overstretched mortgage holders at risk of foreclosure.
And third, dump as much of the financial burden for paying for the rescue of voters, aka homeowners, on the nation’s banks, rather than on taxpayers.
If the market comes to believe his plan will succeed — and the plan just might — you can expect a rally in the shares of financial-services providers and home builders that will stun even the bulls, with big-cap banks such as Wells Fargo (WFC, news, msgs) and SunTrust Banks (STI, news, msgs) rising as much as 25% over the next 12 months and some beaten-down home builders doubling in value.
Bush bailout No. 2
Bush’s surge solution for homeowners would, ironically, take a page from his father’s rescue of Latin American governments and bankers in 1989 with a set of financial instruments that came to be known as Brady bonds. In that case, U.S. banks had lent billions of dollars to Latin American companies for use in economy building without obtaining sufficient collateral.
After thousands of loans went into default, it became clear that the money had been siphoned off by kleptocrats and crooks, and there was therefore no cash flow available for repayments. When U.S. banks clamored to be made whole, Latin American governments took over their citizens’ obligations but did not have the ability to make payments, either.
Richard Bove, a banking analyst at brokerage Punk Ziegel, points out that the first Bush administration then had two choices: support U.S. banks and demand that the countries tax their people to pay back the loans, or blame the U.S. banks for making idiotic loans in the first place, force them to forgive the debts and let the crooks keep their booty.
President George H.W. Bush chose the latter in the interest of hemispheric amity and stability, and some creative geniuses in a Treasury Department headed by former Wall Street banker Nicholas Brady figured out a way for the governments of Mexico, Argentina and Brazil to convert the bad loans into dollar-denominated bonds that could be sold elsewhere. In effect, Bush 41 whisked bad credits off balance sheets south of the border with a stroke of a pen.
Now Bush 43 faces the same dilemma, only this time the bad loans are right here at home. His choices: He can thumb his nose at lenders who made stupid loans, castigate brainless homeowners who took out mortgages they could not repay, jail fraudster mortgage brokers who exploited a loosey-goosey system to generate exorbitant fees — and stand smugly by as families in Republican strongholds across the West and South lose their homes. Or he could follow his dad’s Brady bonds solution and basically forgive and forget by launching a mortgage bailout of unprecedented scope.
Ginnie and friends to the rescue
Based on Bush’s announcement last week of a new Federal Housing Administration program to help around 80,000 at-risk homeowners obtain debt relief — an effort modest in scope but stunning in its reversal of prior policy — it’s clear he will go for the latter in the interest of helping his party avoid a wipeout next November.
Bove notes that a precedent for a widespread mortgage-assistance program lies in the Emergency Home Finance Act of 1970, which established these mechanisms to help challenged households:
• Banks would originate mortgage loans with 1% interest rates.
• The Federal Housing Administration and Department of Veterans Affairs would insure the loans against loss.
• The Government National Mortgage Association, aka Ginnie Mae, would buy the mortgages at par from the banks, allowing the banks to make a small profit.
• Ginnie Mae, taking a sizable loss, would then sell these loans to Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs) at a discount so that the buyers would earn reasonable yields.
• Fannie and Freddie would fund these purchases with low-cost, government-guaranteed debt.
As a result, Bove speculates, tens of thousands of at-risk homeowners would get to keep their homes. Ginnie Mae would lose tens of billions of dollars that would be repaid by banks and taxpayers at a pace and in a manner similar to the Iraq reconstruction effort. Fannie Mae and Freddie Mac would end up with huge increases in the sizes of their portfolios. And, most importantly, the nationwide housing collapse would disappear as an election theme for Democrats.
Although this may seem a bit far-fetched, insiders in the financial services and home-building industries are buying their own companies’ shares these days at a record pace — essentially betting that something like this scenario will transpire. Home-building companies’ executives bought $15.9 million worth of their firms’ annihilated shares in August, the largest monthly purchase in the sector since Thomson Financial started keeping track in 1990.
The last time that insiders even came close to this level of buying, in September 2001, the sector rose 55% in value over the next six months while the S&P 500 Index ($INX) advanced 10%. Thomson analysts suggest raw valuation is a factor in insiders’ zeal for their stocks — as the price-to-book value of the sector hit 0.75 last month, the lowest since October 1990 — but clearly a larger motivating force is at work.
The bottom line is that Bush has ample tools at his disposal to make the foreclosure crisis vanish if he is willing to make a financial and political commitment on a par with his pledge to stabilize Iraq. With almost one in every 7.5 housing units in the United States empty due to overbuilding during the easy-money years, it would take years for enough demand to emerge under normal conditions to soak up supply. But don’t underestimate the president’s capacity and motivation to speed up the process with a surge of looser credit and check writing.
Fine Print
Wells Fargo, now trading at $36.50 a share, could easily go to $50 in a year in this scenario, as its competition from the likes of Countrywide Financial (CFC, news, msgs) and lesser mortgage bankers and brokers have been thrashed and it has its pick of the best talent fleeing those firms. SunTrust, now trading at $78, could go to $95. . . .
The three home builders with the most insider buying are Meritage Homes (MTH, news, msgs), where one insider bought $12.9 million in shares in August; Brookfield Homes (BHS, news, msgs), where three insiders bought $1.4 million; and Lennar (LEN, news, msgs), where one insider spent $845,100. Shares of these three builders are down 63%, 49% and 46%, respectively.

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Is it me or are these moves by the FED accomplishing the following:

– Throwing good money at bad
– Forcing liquidity into a tapped out market
– Further enabling people to spend money they don’t have
– Increasing inflation
– Artificially propping up home prices
– Continued devaluation of the dollar
– Allowing banks to continue to buy/sell bad mortgages
– Trying to prevent toxic MBS from becoming completely worthless
– Spending tomorrow’s money on today’s problems

I must be missing something; i.e. the benefit.

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Lost Cat, I think you have the right concept but your timing is skewed IMO. Here’s why, and I don’t mean to be contentious:

You’re comparing the turn around time of a stock bubble with an asset (housing) bubble. Stocks can be sold, go up, go down, or be purchased in a single day, sometimes multiple times. Physical assets like a house take months to do the same if not longer.

With inflation rising, i just can’t see today’s prices looking out of touch or even expensive in 5 years from now.

No doubt inflation is rising, but inflation is a measure of costs, not ability to pay for those costs. For that you have to look at incomes. Incomes have been stagnant if not down for the past 3 years where economic growth has been at all time highs. The translation there is wealth is not filtering down into the middle class. There’s an MSN article today on CEO’s making 364 times what you do.

Go to Zillow, accurate or not, and pick a house in your zip code. Go to graphs and look at the pre-2004 and post-2004 trends. Then follow the line from pre-2004 until it reaches the level of pricing today. My guess is it will take you well off the graph to about 2020. The point is prices cannot stay this high while incomes catch up.

And think about it, a house is like anything you buy. It wears out, get olds, breaks down, requires maintenance, repairs, fresh paint, the whole 9. But we know over the long term prices go up, while things like cars, that do the same thing typically go down. So why do houses go up? It’s because incomes do and nothing else. Dramatic increases and decreases are the result of other circumstances like the credit nightmare of the past 3 years, but over time housing has no choice but to track with what people can afford. The question is can prices hold out for the 10 years or more while incomes catch up. Factor in today’s credit market, declining wages and increasing layoffs, and the obvious answer is no way. Prices have a long way to come, and it will slow and painful.

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Most people who have bought in the last 2 years are probably lucky to have any equity at all, much less 50%. Another reason national averages can be misleading. A lot of people are upside down.

We’re starting to see the shift most of here have known to be coming for a few years now: the market peaked, people are out of money, and things will slow down a lot.

There’s an article in the LA times today about the cable TV shows that thrived off the housing boom now being revamped for a changing market.

Mainstream is just now catching on and saying, “yeah, we knew this was coming” when we know for a fact they were the ones calling the bottom a year ago. Or maybe now they just listen to people like Rich who saw the emotional, irrational exuberance from the get go.

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What’s alarming to me is that everything we are seeing today is just the start of the effects of the bubble. Considering what’s to come from declining home values, resetting ARMs, job layoffs, tightened spending, rising foreclsoures and inventories, it unequivocally has to get worse before we get out of this mess. The pressure on the middle class among higher costs of living, and declining wages is eventually going to necessitate revolutionary reform.

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Speak your mind guys:

[email protected]

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I thought the foreclosure problem wasn’t that big a deal? So say the now silent bubble nay-saying hypocrits.

Screw future generations to save the lifestlyes of reckless, irresponsible and just plain stupid people, all so a couple billion dollars of dirty MBS/CDO’s can line the pockets of the filthy rich. And I emphasize filthy.

What are we teaching these people? Why should they get a tax break or any break at all? They should be forced to to pay off every cent they owe, or go to jail and do community service until every cent is paid off in charitable work. So should the idiots who oversaw the granting of these loans.

We incentivize idiocy.

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Agreed Kewp.

GDP may be a good indicator of reasonable inflation rates, but here’s the percentage changes for 2004-2006 from the previous year:

2004 2005 2006
3.9% 3.2% 3.4%

Nowhere near what housing was appreciating at.

Source: http://www.bea.gov/bea/newsrelarchive/2007/gdp406a.xls

As you said, you’re thinking logically about something that was caused by reckless emotions. You can’t understand the reasoning behind those emotional decisions because there is none.

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I’ve got to agree with radelow.

We fund China’s growth. Their recent threat to unload their reserves after our urging them to revalue the RMB is a hollow threat IMO.

They unload their holdings, we stop buying, their manufacturing hits the brakes hard.

What we should really be afraid of is what they start buying their own products en masse, and in enough volume to support production capacities without exports to America. That’s when they’ll sell their US$, and their economy really takes off. Meanwhile the dollar tanks more, it becomes cheaper to manufacture here, but because anyone in the world can buy here they DO buy up our businesses, but to stop that governments control all business as our social capitalism moves to communism.

Look on the bright side though, at that point we probably have a trade surplus.

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BTW, this article is now front page.

Some interesting points:
The company forecasts prices in California to drop 16% to 20%, counting inflation.
Where are all the “experts” now, who said this can’t happen?

Already, 2.9% of subprime loans issued just last year are in default. That’s alarmingly high, Cutts says, and an unprecedented number of borrowers are not making even the first few payments.
I think we’ve all seen the Credit Suisse chart with billions of ARMs resetting over the next 5 years. More to come, I’m sure.

In San Diego and fast-growing inland cities, the economic pressure from collapsing housing prices may become exacerbated by job losses in the subprime-mortgage industry…

After the collapse of the Southern California defense industry in the early 1990s, prices took 10 years to reach previous levels.

In the 90’s 10 years of depreciation were the result of job losses. This time around the collaspe is going to cause the layoffs that will prolong the downturn. And it won’t just be subprime mortgage brokers.

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I think this more of a political feel-good stunt. FMAC is not going to underwrite loans that have any hint at going bad. They’d be foolish not to learn from the countless firms that have gone Chpt 11 on sub-prime and increasingly on Alt-A.

This may help a few refi to avoid foreclosure, but chances are if they got into a loan they couldn’t afford before standards were tightened, they won’t be able to get into one now, unless the lender takes a huge hit, and lenders aren’t in business for charity.

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No doubt whatever political nonsenscial jargon Helicopter boy says tomorrow will be analyzed ad nauseum.

As far as inflation, I’m in imports too. There’s a little thing called VAT that I am really surprised has not made more headlines. In one fell swoop it raised prices on thousands of China commodities anywhere from 2-8%, overnight! Rumor is that may happen again at another 3-5%.

Then there’s the currency, which every single day appreciates to the dollar. Today it’s 7.56:1, a year ago it was 7.92:1. Rumor there is it will go to 7.3:1 by the end of the year. Labor costs are rising as a result, and so are material costs.

Of course we only need to worry about “core” inflation, because food and energy costs haven’t gone up 20% this year either.

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I read somewhere today that the FF rate is higher than the other major rates, and the conclusion was that they are sending a message to the FED come their meeting 2 weeks from now.

I still think Helicopter boy is stuck: he lowers the rate inflation goes up, he raises or even leaves it, the bulls will flee, market dives, and housing, well housing is screwed either way.

Will he stick to his Anti-inflation shtick, or will he fold to political pressure?

These days I don’t think anyone knows.

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Enter the 200 year mortgage?

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Guys, have you noticed anything about Alex’s post yet?

He doesn’t reply to them, he just wants a reaction.

Stop replying to his outlandish posts! He’s clueless.

Alex, if you even read this, why don’t you go buy a house today for maximum I/O ARM financing and let us know how that works out for ya.

Everyone else, this guy isn’t worth the read, much less a reply.

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