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July 8, 2007 at 7:02 PM in reply to: House I am renting is about to go into pre-foreclosure – what to do? #64706
patientrenter
ParticipantHe can just “walk”?
If I buy a house, and I use mostly someone else’s money to do it, and I have a contract that says I get to keep almost all the gains if prices rise, I can just “walk” if they fall?
Does this guy have a car? A house of his own? Furniture? A business? Surely he has assets that he can use to pay off the money he has borrowed?
I realize, FormerOwner, that this was not your question. And I suppose I was dimly aware that most home loans in the US are non-recourse and everyone just works (wink) with it.
Based on his getting a free ride from the lender based on nothing more than the legal hurdles the lender faces to get their money back, I’d say you should abuse the system as much as possible also, and smile to him about it just as much as he is smiling to the lender. The worst that happens is that he says he’s offended, and you say you’re sorry you brought it up if you’re desperate for that reference.
OK, that wasn’t helpful, but I needed to vent.
Patient renter in OC
July 8, 2007 at 7:02 PM in reply to: House I am renting is about to go into pre-foreclosure – what to do? #64766ParticipantHe can just “walk”?
If I buy a house, and I use mostly someone else’s money to do it, and I have a contract that says I get to keep almost all the gains if prices rise, I can just “walk” if they fall?
Does this guy have a car? A house of his own? Furniture? A business? Surely he has assets that he can use to pay off the money he has borrowed?
I realize, FormerOwner, that this was not your question. And I suppose I was dimly aware that most home loans in the US are non-recourse and everyone just works (wink) with it.
Based on his getting a free ride from the lender based on nothing more than the legal hurdles the lender faces to get their money back, I’d say you should abuse the system as much as possible also, and smile to him about it just as much as he is smiling to the lender. The worst that happens is that he says he’s offended, and you say you’re sorry you brought it up if you’re desperate for that reference.
OK, that wasn’t helpful, but I needed to vent.
Patient renter in OC
Participant“but the flipper still needs to find a greater [fool] who still has to get a regular loan.”
Spot on. So all this short-term stuff is interesting (and I want to buy a home before I’m really old), but the biggest question is what happens in the long run (including what a regular loan looks like then), and how far into the future that is.
I think it’s likely that, in the very long run, Southern California home prices will be driven by what people in the very top layer of mobile world society can afford. Everyone else will be either competing with them, if they are wealthy enough to buy a nice home in a nice area, or providing services to them. So prices in the best areas will be determined by the average wealth and income of the top slice of mobile people in the world. If the pattern of the last 20 years continues, that means the market for the best places in S Calif will go up faster than average world growth. I don’t have stats, but 5-8% a year wouldn’t surprise me. Take a look at the growth in wealth of the Forbes 400 in the last 20 years.
Will the land and buildings we “service providers” live in go up at the same rate? No. The wealthy living in the best spots will pay more to get their kids educated, and their trusts arranged, and so on, but they don’t want to fork over all their money on that. So incomes for us paeons here will go up by maybe 1-2% more than incomes elsewhere in the US.
Boil it all down, and maybe supportable home prices in the paeon areas go up by 5-7% a year over very long periods.
Are current prices the right base for this future appreciation, or prices 10 years ago, or something in between? That all depends on how much of people’s income can go to a loan payment. Clearly, if the market price was supported by people who could only afford their loans in the long run if their future salary increases averaged 10% for 30 years, then that’s not the right base. But I think there are enough people ready to fork out over 50% of their income to live in S Calif that the base should be a lot closer to 2006 prices than 1996 prices. And lenders are getting ever more ready to provide loans. Looking at the history of the last 100 years, loans are constantly being made more readily available. Maybe this last credit contraction is a step back, but there are 2 steps forward for every one back.
If underlying appreciation is 5-7% a year, how long would prices have to stay level to get us back to a situation where the 30th percentile household could afford the median home, assuming mortgage payments are 50% of income and they also increase by 5-7% a year? What are the numbers for that? I am sure someone here on Piggington knows the 30th percentile household income in S Calif. Let me just suppose it’s $100K, or say $70K after tax. Then a 30-year fixed loan at 6.5% that increases by 6% a year requires a first year payment of about 3.67% of the principal. So the 30th percentile household forking out 50% of their current and future income on the mortgage could “afford” a $950K loan. That’s actually slightly higher than today’s prices.
Do I like the idea that the ceiling for median paeon house prices might be $1 million? No, but…. it might be. It all depends on the ingenuity in the mortgage industry and the government guarantees and the investor risk aversion/desperation for yield. There’s no invisible hand that will just force it below that level, regardless of circumstances.
Patient renter in OC
Participant“but the flipper still needs to find a greater [fool] who still has to get a regular loan.”
Spot on. So all this short-term stuff is interesting (and I want to buy a home before I’m really old), but the biggest question is what happens in the long run (including what a regular loan looks like then), and how far into the future that is.
I think it’s likely that, in the very long run, Southern California home prices will be driven by what people in the very top layer of mobile world society can afford. Everyone else will be either competing with them, if they are wealthy enough to buy a nice home in a nice area, or providing services to them. So prices in the best areas will be determined by the average wealth and income of the top slice of mobile people in the world. If the pattern of the last 20 years continues, that means the market for the best places in S Calif will go up faster than average world growth. I don’t have stats, but 5-8% a year wouldn’t surprise me. Take a look at the growth in wealth of the Forbes 400 in the last 20 years.
Will the land and buildings we “service providers” live in go up at the same rate? No. The wealthy living in the best spots will pay more to get their kids educated, and their trusts arranged, and so on, but they don’t want to fork over all their money on that. So incomes for us paeons here will go up by maybe 1-2% more than incomes elsewhere in the US.
Boil it all down, and maybe supportable home prices in the paeon areas go up by 5-7% a year over very long periods.
Are current prices the right base for this future appreciation, or prices 10 years ago, or something in between? That all depends on how much of people’s income can go to a loan payment. Clearly, if the market price was supported by people who could only afford their loans in the long run if their future salary increases averaged 10% for 30 years, then that’s not the right base. But I think there are enough people ready to fork out over 50% of their income to live in S Calif that the base should be a lot closer to 2006 prices than 1996 prices. And lenders are getting ever more ready to provide loans. Looking at the history of the last 100 years, loans are constantly being made more readily available. Maybe this last credit contraction is a step back, but there are 2 steps forward for every one back.
If underlying appreciation is 5-7% a year, how long would prices have to stay level to get us back to a situation where the 30th percentile household could afford the median home, assuming mortgage payments are 50% of income and they also increase by 5-7% a year? What are the numbers for that? I am sure someone here on Piggington knows the 30th percentile household income in S Calif. Let me just suppose it’s $100K, or say $70K after tax. Then a 30-year fixed loan at 6.5% that increases by 6% a year requires a first year payment of about 3.67% of the principal. So the 30th percentile household forking out 50% of their current and future income on the mortgage could “afford” a $950K loan. That’s actually slightly higher than today’s prices.
Do I like the idea that the ceiling for median paeon house prices might be $1 million? No, but…. it might be. It all depends on the ingenuity in the mortgage industry and the government guarantees and the investor risk aversion/desperation for yield. There’s no invisible hand that will just force it below that level, regardless of circumstances.
Patient renter in OC
Participant“Second, why would anyone with an ounce of common sense assume the heloc’ed loan value for some stupid FB who got themselves in trouble? I wouldn’t fund some else’s bad consumption decisions.”
Me neither! But there are flippers out there who can’t get loans today. With this arrangement, it looks like they can get most of the potential future gain in home price without taking on most of the potential future loss, just like they could in 2006. Sweet! There may also be people not reporting income to the IRS who are having a harder time getting stated income loans for their future home.
Lenders have an incentive to go along becuase they keep getting payments with no write-down, and because it doesn’t sound as though Mike Roberts and company are informing them fully of the changes. (A big selling point of this arrangement is that it doesn’t have to go through the lender’s approval process.) Think about it. Why are lenders selling REO homes at a loss today? Because they want to? Of course not. They would much prefer to keep getting payments as long as possible. A possible loss in 5 years almost always sounds better to a loan servicer than a certain loss today.
Patient renter in OC
Participant“Second, why would anyone with an ounce of common sense assume the heloc’ed loan value for some stupid FB who got themselves in trouble? I wouldn’t fund some else’s bad consumption decisions.”
Me neither! But there are flippers out there who can’t get loans today. With this arrangement, it looks like they can get most of the potential future gain in home price without taking on most of the potential future loss, just like they could in 2006. Sweet! There may also be people not reporting income to the IRS who are having a harder time getting stated income loans for their future home.
Lenders have an incentive to go along becuase they keep getting payments with no write-down, and because it doesn’t sound as though Mike Roberts and company are informing them fully of the changes. (A big selling point of this arrangement is that it doesn’t have to go through the lender’s approval process.) Think about it. Why are lenders selling REO homes at a loss today? Because they want to? Of course not. They would much prefer to keep getting payments as long as possible. A possible loss in 5 years almost always sounds better to a loan servicer than a certain loss today.
Patient renter in OC
ParticipantScruffy, Great post!
4plex, thanks for the info. My suspicion is that the govt guarantees for home loans only modestly increased home affordability. My guess is that you think it decreased home affordability. We both know it’s more complicated than that. For people like me that save 100% of the purchase price before we buy, it has probably lowered home affordability (because I’m guessing it raised all prices). For some people who don’t save as much, it has increased affordability.
But 4plex, that wasn’t the subject of my curiosity. I just wanted to know if there was widely accepted data showing that the ratio of home prices to income had been permanently increased by the advent of the govt guarantee programs. It feels right, but is is widely accepted as true, and by how much? I’ll read the sources you gave me, but can you give me a heads-up on whether that particular part of the afforability analysis is clearly separated in the sources you referred to? And is that part widely accepted by different persuasions of the economic community? (Sorry about my obvious caution in working with the info. Economics is sad, you can get any result you want if you slice the data right.)
Allan, I think we agree that the Fed wants to administer a rap on the knuckles to excessive borrowers and risk-takers. But I don’t think they want anyone to lose a finger. I’d say a majority on this blog are hoping for very big home price drops (say 40-50%). I’d enjoy it, but I can’t see the Fed or others allowing it.
My own guess about how the price of risk in general will increase is that there will be more, quite a lot more, painful losses from mortgage loans, and that will just wake investors up to the possibility of serious losses on other asset classes. That’s if regulators and others allow the losses to go fairly big, maybe $100 billion or so. It’s nothing more than a gentle reminder, after smooth sailing for years, that a risk can become a real loss. Direct effects like consumer spending slowing because of housing slowdowns caused by tighter mortgage underwriting will be pointed to, but in reality I think it’s mostly just investment advisers realizing that if other things go wrong, they can’t throw up their hands and say “Who knew?” It won’t be earth-shaking, just a small measurable increase in the price of risk.
Patient renter in OC
ParticipantScruffy, Great post!
4plex, thanks for the info. My suspicion is that the govt guarantees for home loans only modestly increased home affordability. My guess is that you think it decreased home affordability. We both know it’s more complicated than that. For people like me that save 100% of the purchase price before we buy, it has probably lowered home affordability (because I’m guessing it raised all prices). For some people who don’t save as much, it has increased affordability.
But 4plex, that wasn’t the subject of my curiosity. I just wanted to know if there was widely accepted data showing that the ratio of home prices to income had been permanently increased by the advent of the govt guarantee programs. It feels right, but is is widely accepted as true, and by how much? I’ll read the sources you gave me, but can you give me a heads-up on whether that particular part of the afforability analysis is clearly separated in the sources you referred to? And is that part widely accepted by different persuasions of the economic community? (Sorry about my obvious caution in working with the info. Economics is sad, you can get any result you want if you slice the data right.)
Allan, I think we agree that the Fed wants to administer a rap on the knuckles to excessive borrowers and risk-takers. But I don’t think they want anyone to lose a finger. I’d say a majority on this blog are hoping for very big home price drops (say 40-50%). I’d enjoy it, but I can’t see the Fed or others allowing it.
My own guess about how the price of risk in general will increase is that there will be more, quite a lot more, painful losses from mortgage loans, and that will just wake investors up to the possibility of serious losses on other asset classes. That’s if regulators and others allow the losses to go fairly big, maybe $100 billion or so. It’s nothing more than a gentle reminder, after smooth sailing for years, that a risk can become a real loss. Direct effects like consumer spending slowing because of housing slowdowns caused by tighter mortgage underwriting will be pointed to, but in reality I think it’s mostly just investment advisers realizing that if other things go wrong, they can’t throw up their hands and say “Who knew?” It won’t be earth-shaking, just a small measurable increase in the price of risk.
Patient renter in OC
ParticipantNeetaT, I’m within a hair’s breadth of doing what you’re doing. I’ll check in a year just because I have to move then anyway, but it’s too frustrating to see miniscule movements, if any, in places I’d actually want to buy.
For other people seeing your post, though, I’d add that the market really is different and more promising for buyers than at any time for many years. The effects of the credit contraction haven’t spread yet, but they probably will. Maybe we won’t get 40 or 50% off, but you should get 5-10%.
Good luck in 2 years!
Patient renter in OC
ParticipantNeetaT, I’m within a hair’s breadth of doing what you’re doing. I’ll check in a year just because I have to move then anyway, but it’s too frustrating to see miniscule movements, if any, in places I’d actually want to buy.
For other people seeing your post, though, I’d add that the market really is different and more promising for buyers than at any time for many years. The effects of the credit contraction haven’t spread yet, but they probably will. Maybe we won’t get 40 or 50% off, but you should get 5-10%.
Good luck in 2 years!
Patient renter in OC
July 8, 2007 at 2:49 PM in reply to: OCRegister with a great article on the BoFA report regarding the ARM resets #64668ParticipantDon’t overestimate the leverage effect. If $150 billion of loan values are not paid, either through forgiveness or loan modification, then that’s exactly $150 billion of losses, not $1,500 billion. Some hedge funds or investors in derivatives or other instruments may be heavily exposed to that $150 billion of losses. But it’s still… $150 billion.
Of course, these loans found their way into many other assets, so there could be assets worth (let’s go nuts here) many trillions that are affected in some way by the loans with losses. But the only way that the $150 billion can become much bigger is a crash in liquidity that forces sales of related assets at fire-sale prices that go beyond the actual losses on the underlying loans. What’s the chance that the financial community will sit on the sidelines twiddling their thumbs and let that happen? I know we like to complain about them, but I don’t think I’d call them stupid or self-destructive.
I fully expect this episode to trigger a generally higher price for risk in the markets, but adding 20-50bp to average corporate spreads, for example, is not earth-shaking, and is long overdue. And people would look closer at their hedge funds, that’s all.
Patient renter in OC
July 8, 2007 at 2:49 PM in reply to: OCRegister with a great article on the BoFA report regarding the ARM resets #64727ParticipantDon’t overestimate the leverage effect. If $150 billion of loan values are not paid, either through forgiveness or loan modification, then that’s exactly $150 billion of losses, not $1,500 billion. Some hedge funds or investors in derivatives or other instruments may be heavily exposed to that $150 billion of losses. But it’s still… $150 billion.
Of course, these loans found their way into many other assets, so there could be assets worth (let’s go nuts here) many trillions that are affected in some way by the loans with losses. But the only way that the $150 billion can become much bigger is a crash in liquidity that forces sales of related assets at fire-sale prices that go beyond the actual losses on the underlying loans. What’s the chance that the financial community will sit on the sidelines twiddling their thumbs and let that happen? I know we like to complain about them, but I don’t think I’d call them stupid or self-destructive.
I fully expect this episode to trigger a generally higher price for risk in the markets, but adding 20-50bp to average corporate spreads, for example, is not earth-shaking, and is long overdue. And people would look closer at their hedge funds, that’s all.
Patient renter in OC
ParticipantI don’t buy into theories that say the economic world is coming to an end, or that a there’s a small cabal directing the world’s affairs. I hesitate to respond to this thread because it seems designed to attract those who have faith in some of these theories. But the point about the GSEs (Fannie etc) being a useful potential tool for our political leaders to minimize a downturn in house prices, and socialize the cost, is valid. Oh, well, here goes…
If housing prices drop enough, regular people will feel that their future plans to spend a lot but save a little are endangered. They will not accept that easily.
Most baby boomers and some in earlier generations have seen fantastic returns for 25 years now from their strategy of buying assets, even while they were still in debt. It’s become expected as part of the culture that you can buy an asset today for $1 worth of goods and services, and expect the rest of the world to supply you with $5 worth of goods and services in return for that asset when you’re older and crankier. It’s also expected that you can borrow that $1 today and repay it with much less than $5 in real value, so it’s always better to borrow over the long haul. There are even articles in respected outlets that say that the national savings rate is much higher than it appears, because the net gains from asset price inflation are not included in the savings amounts.
That’s the political pressure behind keeping home prices high. It’s probably stronger than the pressure to keep inflation low, because a lot of inflation damage is done behind the scenes and to foreigners (investing in US bonds). Inflation at 5-7% for 10-15 years wouldn’t be considered earth-shattering by voters compared to home prices dropping 50% in the next 2-5 years.
So how could house prices be supported using the GSEs? Let’s start with new loans:
1. Increase the qualifying maximum amounts of loan. Let’s throw out $850,000, for argument’s sake.
2. Permit less of a down payment, probably using complicated rules involving higher rates for less downpayment, and distinguishing between various sources of downpayment money. But let’s keep it simple: Allow 2% down, say.
3. Permit lower payments in the early years. Because of the bad smell coming from huge increases in early payments in the very early years on existing ARMs, this would probably be limited to loans with gradual annual increases, let’s say 3-7%, in the annual payments over the life of the loan, with the higher values allowed only in the earliest years.
Would this increase GSE risk? Absolutely. Would stockholders stand for it? Sure, if they got a few % extra dividends today, which would add way less than 10bp to the loan interest rate. if the market tanked, they would get wiped out, but the GSEs’ equity is tiny. Almost all the shortfall would then be picked up by future generations of taxpayers.
How about existing loans?
Offer re-fi rescue loans to homeowners in trouble. Existing lenders have to accept some haircut in their pay-off, and the borrower has to accept continued, though lower payments, and Treasury has to forgo taxes on the debt forgiveness. These loans would have options to pay low amounts today in return for higher payments later. These higher payments could be fixed, or they could be a portion of any future increase in the home equity.There are lots more ideas out there and I’m sure many more are possible.
Of course, the GSEs are only one policy tool, and many policy tools would be brought to bear at once. Obviously, lowering short-term rates would help keep home prices high, so that’ll happen if the prices drop too much for too many people. The resulting drop in the dollar will have a muted impact, because so many of our costs of production are in yuan, and it’s unlikely the $/yuan rate will be allowed to move much. I’d expect the degree of action to be calibrated to keep inflation less than 5-7% for any one year.
Patient renter in OC
ParticipantI don’t buy into theories that say the economic world is coming to an end, or that a there’s a small cabal directing the world’s affairs. I hesitate to respond to this thread because it seems designed to attract those who have faith in some of these theories. But the point about the GSEs (Fannie etc) being a useful potential tool for our political leaders to minimize a downturn in house prices, and socialize the cost, is valid. Oh, well, here goes…
If housing prices drop enough, regular people will feel that their future plans to spend a lot but save a little are endangered. They will not accept that easily.
Most baby boomers and some in earlier generations have seen fantastic returns for 25 years now from their strategy of buying assets, even while they were still in debt. It’s become expected as part of the culture that you can buy an asset today for $1 worth of goods and services, and expect the rest of the world to supply you with $5 worth of goods and services in return for that asset when you’re older and crankier. It’s also expected that you can borrow that $1 today and repay it with much less than $5 in real value, so it’s always better to borrow over the long haul. There are even articles in respected outlets that say that the national savings rate is much higher than it appears, because the net gains from asset price inflation are not included in the savings amounts.
That’s the political pressure behind keeping home prices high. It’s probably stronger than the pressure to keep inflation low, because a lot of inflation damage is done behind the scenes and to foreigners (investing in US bonds). Inflation at 5-7% for 10-15 years wouldn’t be considered earth-shattering by voters compared to home prices dropping 50% in the next 2-5 years.
So how could house prices be supported using the GSEs? Let’s start with new loans:
1. Increase the qualifying maximum amounts of loan. Let’s throw out $850,000, for argument’s sake.
2. Permit less of a down payment, probably using complicated rules involving higher rates for less downpayment, and distinguishing between various sources of downpayment money. But let’s keep it simple: Allow 2% down, say.
3. Permit lower payments in the early years. Because of the bad smell coming from huge increases in early payments in the very early years on existing ARMs, this would probably be limited to loans with gradual annual increases, let’s say 3-7%, in the annual payments over the life of the loan, with the higher values allowed only in the earliest years.
Would this increase GSE risk? Absolutely. Would stockholders stand for it? Sure, if they got a few % extra dividends today, which would add way less than 10bp to the loan interest rate. if the market tanked, they would get wiped out, but the GSEs’ equity is tiny. Almost all the shortfall would then be picked up by future generations of taxpayers.
How about existing loans?
Offer re-fi rescue loans to homeowners in trouble. Existing lenders have to accept some haircut in their pay-off, and the borrower has to accept continued, though lower payments, and Treasury has to forgo taxes on the debt forgiveness. These loans would have options to pay low amounts today in return for higher payments later. These higher payments could be fixed, or they could be a portion of any future increase in the home equity.There are lots more ideas out there and I’m sure many more are possible.
Of course, the GSEs are only one policy tool, and many policy tools would be brought to bear at once. Obviously, lowering short-term rates would help keep home prices high, so that’ll happen if the prices drop too much for too many people. The resulting drop in the dollar will have a muted impact, because so many of our costs of production are in yuan, and it’s unlikely the $/yuan rate will be allowed to move much. I’d expect the degree of action to be calibrated to keep inflation less than 5-7% for any one year.
Patient renter in OC
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