The Practicalities Of A Bailout
Readers suggested a topic on bail-out details. “Perhaps we can talk a bit about the practicalities of a bailout. I work for a big company involved in the MBS business. How can current subprime loans be ‘restructured’ in any way when they are owned by MBS investors who purchased these securities assuming the loans will perform as originated?”
“In other words, they paid for loans with certain payment characteristics, any restructuring will certainly make them less valuable as the interest rates will be less than planned.”
“Almost all mortgage loans are part of an MBS transaction. The originator certainly has no right to restructure them (I’m thinking of WaMu’s recently announced $2BN plan).”
“If there is some kind of forced restructuring the MBS market will totally collapse. I work closely with most of the MBS underwriters on Wall Street, there are a lot of very unhappy people here right now. We can enjoy their discomfort (and frankly, I often do) but the MBS holders will be the losers in the end, and that is all of us one way or another.”
A reply, “I’m not sure this could work at all, but it could work like this. All the investors in all the tranches with their varying interests (good luck) would have to agree to swap some of the their bonds (matching the non-performing part of the portfolio) for new ones in one of two pools, the workout pool and the foreclosure pool.”
“To be eligible for a workout, a FB would have to be a legitimate purchaser who could have afforded their home at pre-bubble prices, but overpaid due to the frenzy, or someone who bought earlier but fell behind to due temporary hardship. They would get a 30 year fixed self-amortizing loan at current interest rates, but with the principal written down so the payment would be more than is traditional but not oppressive (say 38% not 30%).”
“And they would have to agree not to take on any more debts. Those investors who choose the workout option would take the loss on the write down up front.”
“Those investors who choose the foreclosure option would get the results of foreclosure proceeds.”
“Here is the problem. Once you have a workout options, what about the family eating Ramen noodles every night and paying 50% of their income to meet the higher payment? Once a workout at 38% is available, and if they were underwater, they would have every reason to default unless they had extensive other assets.”
“And it is possible that if not every investor chooses the ‘workout’ option the borrowers in each issue who would be eligible for a workout could be limited. In that case, it would be first come first serve, and everyone would have reason to rush into default before the only option left is foreclosure.”
“So the only think I can think of that works only works if a minority (the sharpest operators and most selfish people, most likely) figure out what to do.”
One saw immediate problems, “Any bail out will kill credibility for decades. If the governing ‘elite’ wants to try this option, they will have to take that as a consequence.”
One said, “Interesting, but substituting loans in the existing MBS pools would not work, it would fundamentally change the cashflow structure of the transaction.”
“Your idea does make me think though that it might work for CDO’s that have MBS in them since they are not designed to be static pools. Still, even in that case the MBS themselves would need to be reconstituted so you are back to square one. I can’t think of a single incidence in the past 15 years (as long as I’ve been in this business) where investors have got together to agree an MBS pool restructuring, just too cumbersome of an exercise.”
“I’m really interested to see how this bailout idea can possibly work given the existence of the MBS business. However, one thing I am sure about, it’s going to be a great time to be a securities lawyer!!”
Another saw irony, “It would be an amazing validation of the Law of Unintended Consequences if the MBS business by its very structure prevented bailout ideas from working.”
Another points to a bagholder, “The i-banks and anyone who originated these will have to come up with any shortfall from their pockets.”
A reply, “Like New Century? I don’t think they have the capital or the profits once this gets rolling. And the only way it doesn’t roll all the way down the hill is having a large share of Americans live in near poverty to keep paying their debts, which any workout would work against. They’d run like lemmings into default just as they ran like lemmings into debt peonage, if that’s what the people down the street are doing and what shows up on Oprah.”
The original poster said, “No, the originators or IB’s have no contractual obligation to make up any shortfall to MBS holders so why would they. These entities are taken out by the MBS trust, they no longer own the loans - a true sale to the trust has taken place.”
And one saw a governmental role, “I am guessing the subprime bailout will come in the form of some kind of taxpayer-provided insurance. This is a good way to get taxpayers to assume the costs, as few taxpayers understand that loading up the balance sheet of explicitly-guaranteed government agencies like the FHA or implicitly-guaranteed (too-big-to-fail) government sponsored enterprises like Fannie Mae or Freddie Mac with toxic mortgage debt is a form of taxation.”
“However, one would have to pay premiums to a private insurer to assume the risk. In lieue of premiums, the cost assumes the form of a time bomb that will go off at some indeterminate point in the future when one of these debt-burdened agencies blows up and taxpayers are billed for the cleanup costs.”
The San Francisco Chronicle. “Dumb: Buying a house you can’t afford with no down payment and a loan whose monthly payments will explode in a few years. Dumber: Lending money to people who can’t afford a traditional mortgage, especially when they have lousy credit ratings and don’t substantiate their income.”
“Dumbest: Bailing out dumb and dumber, especially with taxpayer money.”
“Keeping people in homes they had no business buying is wrong in many ways. For starters, there’s no easy way to bail out homeowners without bailing out the lenders and investors who were largely responsible for the subprime mess.”
“Many experts say we are in the early innings of the foreclosure cycle. If we bail out people today, will we be willing and able to help people who fail later in the game?”
“Propping up borrowers who took a gamble on a house and lost reinforces gambling. ‘If people think they can take out a bad mortgage and they get bailed out, that’s called moral hazard in social insurance and it’s a very bad thing,’ says Thomas Davidoff, an assistant professor in the Haas Real Estate Group at UC Berkeley.”
“For California, ‘we have proposed a $1 billion loss mitigation fund,’ says Bob Gnaizda, general counsel for an advocacy group. And who should finance this fund? ‘It’s up to a combination of the investment bankers and the banking industry and the state government if necessary to provide the funding or the guarantees of the funding,’ Gnaizda says.”
“‘We’ve asked (state Treasurer) Bill Lockyer to use his persuasive power to convince the six to eight largest investment banks, all of (which) do business with the state, that they have a stake in California’s growth and economy. Since they helped finance the subprime fiasco,’ he says, they ought to help solve it.”
“What governments can do is prevent another subprime disaster by enforcing good underwriting guidelines and requiring clear, plain-English disclosures of the risks of exotic mortgages. What’s more, society could stop demonizing renters.”
“With or without bailouts, the subprime crisis is going to hurt many people. But it could have a silver lining. If it brings down home prices, more families could afford homes with realistic mortgages. And if it reminds everyone that buying a home is a risky proposition, so much the better.”
For individuals, the best governmental actions would be to end taxation of short sales as income and make sure that the bankruptcy laws allow people to walk away from the adjustable rate loans and all of their variations without recourse by the lenders.
As to the lenders, hedge funds, and everybody else who bought the tranches of packaged loans, they took a risk, and there’s no reason for any government agency to bail them out.
There will be a lot of pain, both individual and institutional, but the end result will be a much more affordable housing market with prices 25 to 50% lower than the peak, depending on the individual market.
“Propping up borrowers who took a gamble on a house and lost reinforces gambling. ‘If people think they can take out a bad mortgage and they get bailed out, that’s called moral hazard in social insurance and it’s a very bad thing,’ says Thomas Davidoff, an assistant professor in the Haas Real Estate Group at UC Berkeley.”
Uhhh, that is why we are in this situation. (S&L, Mexico bailouts)
The market has to correct on it’s own, it’s the only way to address the affordability problem. As far as letting the buyer walk away, no dice. Most knew or should have known what they were getting into.
I agree matt .In part the MBS holders took the risk knowing what the foreclosure laws were . How can the government apply retroactive a program that changes the law that changes recourse for the lenders ? The lawmakers can only change the law for the future I believe .
Also ,if the MBS investments can’t be restructured than the only recourse for a bailout would be another lender refinancing the failing loan notes ,(and that would come in the form of a tax bailout if that happened ). So, no bailouts .
All the lenders that engaged in subprime lending can create a new company that will refinance loan notes that qualify for a restructering rather than the gov. doing it .They can call the new company “The Lenders Group “.
This is one of the things that drive rational investors insane. The fact that the rules can be changed any time and retroactively with nothing more than:
“Alll those in favor?”
“Aye!”
“Bill passes.”
Retroactive changes in the law are subject to a constitutional challenge, and I believe the challenger usually wins. Some lawyer who reads this blog should comment. (?)
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Contrary to a popular belief, most politicians are not dumb, and they understand what’s in their interest.
A politician who expects to get votes for a bail-out will advocate a bail-out.
A politician whose constituents send a message that he will lose votes if he goes for a bail-out, will go against a bail-out.
Morale: make sure that your elected representatives know where you stand.
All this means is that if 10% of the voters are rational, practical, prudent and 90% of the voters are f***tards then the rules will be changed so that the f***tards win in the end.
Thus, there is very little risk in taking systemic risk. The government will print money to bail out everyone. The government will not protect you if it is only a small group. Thus, no bail out for margin traders in 2000 but a savings and loan bailout.
Is the mortgage industry too big to fail? Probably. But what is really at risk here? For the life of me I cannot figure out what everyone is so worried about? A lot of paper profits will go up in smoke. Some people will lose their jobs. Some people will lose their homes and move to other homes that they will rent. Growth will be negative in nominal terms. I think growth has been pretty non-existant or pretty low in real terms for a while.
But eventually people will work out their loans, sell their homes, or go through a foreclosure. The bad paper will be heavily discounted. Consolidation will occur in the home builder industry. Some Mexicans may go home. And everything will be fine.
The only way to really screw things up in government intervention. A bailout, to work, has to be subsidy to the borrowers. Either cash or tax benefits. That would make more people stop paying their notes and a vicious spending cycle that could only be financed by inflation would occur.
I hope that doesn’t happen. I don’t think it will. The only way I can see it happening is because Florida is a state that can swing the Presidential race. CA and Florida are ground zero for this whole debacle. But i would think we’d see political promises as opposed to an act of Congress. After the election, a lot of talk, new regulations, but no money for anyone. There just isnt’ any money there.
ex post facto clause is fundamental to the constitution but only about making things illegal.
So, the government can/will change trading requirements, funding or reserve requiremtns.
No problemo constitutionally. Always a BIG risk if you screw over classes of investors.
I worry about how it effects poor/older Americans first as most vunerable to these kind of mistakes. Old people on fixed income and/or childer that might be wards of the state. inflationary policies are fatal to them.
Also have to be careful in treatment of workers over age of 55 because they have little recourse to change retirement plans.
So any bailout or monkeying with currency and future debt adversly effects a large percentage of this slice of population.
Not to sound too bitter, but most everyone lives on a “fixed” income; I get tired of people saying seniors need special treatment–they already get discounts at restaurants, Prop 13, etc. Why do they need even more at others’ expense?
Besides, any old person who saved and invested over time will likely be rich…the stock market returned far above historical averages during the 1950s-1990s. Plus, a ridiculous housing bubble to profit from. It is doubtful the younger generations will have it so easy to make a decent return from their investments…plus will likely get screwed on Social Security.
Prop 13 benefits EVERYONE, even the morons who buy today, as their tax increases will be capped in the future. If people CHOOSE to buy when the market is at a high, they have no right to complain about the long-time residents.
People need to start thinking more rationally. If a great majority of buyers refused to buy at ridiculous prices, we would be far better off — both in terms of actual housing prices AND with respect to property taxes.
One of the groups not often mentioned, but who stand to lose as much from a bailout as current renters are the long-time residents in areas where prop taxes are not capped. Many of these people will be forced out of their homes because they can’t afford them — all due to no fault of their own.
In part the MBS holders took the risk knowing what the foreclosure laws were …. Also, if the MBS investments can’t be restructured than the only recourse for a bailout would be another lender refinancing the failing loan notes, (and that would come in the form of a tax bailout if that happened)
Here’s an interesting aspect I hadn’t thought of before regarding the $20B FM-fronted bailout. This sounds a lot like how rising pension fund funding requirements forced out the solvent pensions, leaving only the doomed ones paying insurance. This is from this morning’s NYT:
“And last week, investors were heartened by Freddie Mac’s announcement that this summer it would begin offering $20B in loans to borrowers trying to refinance their mortgages…
‘That’s great for borrowers, but not for investors in existing mortgage pools,’ said Thomas A. Lawler, founder of Lawler Economic and Housing Consulting. He noted last week that these initiatives would attract the better borrowers, those who could meet more stringent lending requirements, such as being able to muster a 20 percent down payment and document appropriate income levels.
But as these people pay off their existing loans, two problems arise for investors. The prepayment of the loan means expected income from it disappears, and it also leaves mortgage pool investors with a greater proportion of troubled borrowers.
To the extent that the availability of these programs makes it possible for better subprime borrowers to refinance away from current lenders and into a better mortgage product,’ Mr. Lawler said, “it’s hard to see how that will be beneficial to the existing holders of subordinated subprime loans.’ ”
Someone should write a book about the Law of Unintended Consequences as it recurs throughout history. For those of us who enjoy suckling at the drippings from irony’s tit.
“That’s great for borrowers, but not for investors in existing mortgage pools,’ said Thomas A. Lawler, founder of Lawler Economic and Housing Consulting. He noted last week that these initiatives would attract the better borrowers, those who could meet more stringent lending requirements, such as being able to muster a 20 percent down payment and document appropriate income levels.”
Wow. The theoretical basis for CDO (MBS) appreciation must have taken a 180 degree turn, or else this guy does not know anything about pricing AAA level asset (mortgage) backed securities.
First, the $20 billion IS NOT A BAILOUT! Unknot your panties, everybody. Freddie is a federally chartered corporation. It is not a branch of the government. It is owned by stockholders. Like many other private lenders they are going to try to keep from going under by helping keep borrowers out of foreclosure. It is just a possibly (they have to do the math) savvy business move to get borrowers on a lower fixed mortgage that they will pay instead of an ARM they will default on. Now I don’t think it will work, as most borrowers won’t qualify because they will be WAY underwater, but nontheless this is just a boring old private business move, attempting to make lemons into less nasty lemons. If anything, it is an ANTI-bailout, because (if it works…) it will make Freddie more solvent and fewer borrowers bankrupt, relieveing pressure on the feds.
Now, back to the MBS holders. In the ‘orthodox’ theory of AAA rated CDOs (I am slightly confounding MBS and CDOs here, oh well) the source of risk is either unexpected levels of prepayment, combined with interest rate changes. If interest rates are rising, MBS investors hope that prepayment occurs, so that money is released for investment in better paying securities. The expected prepayment rate is priced into the cost of the MBS, so if interest rates rise and prepayment rates rise, they win big time. This is even more the case for stripped (if Freddie does this, I’m to lazy to check) securities. In a stripped security, the mortgage pool is processed into two derivatives, one which gets all principal payments, the other that gets all interest payments. In this case, early payment hurts the latter and helps the former almost no matter what interest rates do. So, if Freddie does refinance lots of mortgages, the result will be unexpected prepayment of mortgages, into a rising interest rate. So this should help (unless I am missing something) all MBS investors except holders of stripped interest securities. Now, ‘orthodox’ MBS theory holds prepayment risk to be the only appreciable risk (outside interest rate changes), but if sufficient foreclosure occur that the damage leaks into the MBS (this is a much bigger worry for holders of BBB tranche of non-agency MBS, IMHO), the security holders really will suffer. Again, having their mortgages refinanced by Freddie will protect them against any default risk, too. So I think the (non) bailout should only help most of the MBS holders.
Finally, IMO that piddly amount of money (relatively speaking) will do little to stop the fall in prices. And Freddie would try very hard to not lend to frauds- I would expect the borrowers to be carefully scrutinized before they were offered a refinance. And Freddie ain’t Freemont.
Create new company… great! More new lenders fees and commissions. Just what the lenders want.
Why is everyone looking to assist the buyers that committed documentable fraud over the last couple of years? The ONLY ONLY ONLY “bailout” that should occur is cash incentives for new home buyers! New home buyers are the ones getting screwed in all of this not the existing speculators!
No bailout for existing home speculators!
“The ONLY ONLY ONLY “bailout” that should occur is cash incentives for new home buyers! ”
The ONLY ONLY ONLY bailout that should occur is “None”.
I agree shadash and your right that many of these loan packages are outright fraud . I’m just saying if the lenders/bagholders want to rewrite a loan ,let them do it on their dime .
If lenders were smart they would give a outstanding interest rate /terms to anyone who puts 20% or more down on a loan who also has a good credit score .Reward people who are savers not the sub-prime gamblers .
Yea the system is screwed up. If you were to actually charge interest rates related to risk. Those putting the least down would be charged the most mount of interest while those putting the most down would be charged the least amount of interest
Also providing incentives to new home buyers is the cheapest form of a “bailout” that might occur. This is because like you said you’re encouraging savers to invest in housing. Currently the only people being encouraged to buy are the stupid and the scammers.
There are already incentives to invest in housing, like the tax deduction for mortgage interest. What they tend to do is prop up prices, benefitting the sellers, not the buyers. The buyers traditionally bought as much as the lenders would let them, and that turned out too much in recent years.
What did you mean with “cash incentives”? Borrowing more than 100% of the value and keeping the cash? That seems exactly the wrong direction - instead, downpayments should be encouraged: by saving first, buyers learn which mortgage they realistically can pay, lenders get assurance that the buyers is earnest by spending earnest money.
shadash, My first answer belonged to your first post. I liked your second post:
> Those putting the least down would be charged the most mount of interest while those putting the most down would be charged the least amount of interest
That would be a step in the right direction, to higher downpayments. The change in interest rate between 5 and 20% down should be large - between 30 and 50% down, however, (e.g. from the proceeds from a previous house) I wouldn’t expect a large difference in rates though. Maybe our lender experts like az_lender could say more about that, how they see their risk as a function of downpayment size.
“…make sure that the bankruptcy laws allow people to walk away from the adjustable rate loans and all of their variations without recourse…”
Sweet! That would jack up lending rates to the moon, thereby crushing home values. You got my vote.
2007 is going to suck.
-Rent
I don’t think it would jack up rates to the moon. The problem was/is/will be not the rates the lenders charge but the fact that people can’t pay the money back. The solution is to require a substantial down payment as was needed in the past. 20% down will protect the lenders just fine after the prices fall back to the long term trend line.
Sweet! That would crush home values. You got my vote.
Yep and crushed home values are just what is needed and it’s goin to happen. The only question is how fast we can get it over with and how can we minimize the damage to the economy as a whole. It’s not really a ‘bailout’ it’s just recognizing what will happen anyway and helping the process along.
Maybe people will start companies that actually produce a product again. Instead of just pushing around paper.
I agree with both of you.
Making all mortgages non-recourse would make downpayments more popular with lenders who now have seen actual price declines first hand. This in turn will do many good things to the market like driving home prices back to realistic values - the buyers know what they had to do to save so much, and they get a much better feeling for the large dollar numbers involved. They would know what they risk with that buying decision.
“For individuals, the best governmental actions would be to end taxation of short sales as income…”
Right. And I suddenly see a rash of ritzy sleazy CEOs getting ginormous “loans” from their own companies which are then “forgiven” for tax-free income when they sell back the property to an interested party.
Think of the Duke Cunningham scandal in reverse (Cunningham had a government contractor buy his house for an outrageous above market sum).
The reason why loan-forgiveness has been taxable is because otherwise it’s a huge loophole inviting tax fraud, as crooks can structure taxable income via forgiven loans.
Given the recent history of the REIC’s ethics, do you have any doubt that any change to this will be massively abused?
I would not like to make debt-forgivness non-taxable in any case, but only in those where the money was used purely to purchase a home (no cash-out e.g.). The burden of proof would be on the person whose debt was forgiven, to show that it was e.g. due to market forces that pushed him underwater.
the best governmental actions would be to end taxation of short sales as income
Um, has it occurred to you that this would open up a new era in tax-free executive compensation? Any time you give a tax break to one party in a transaction without a matching tax liability to the other party you’ve opened up the financial floodgates.
In regard to SF Chron. article: Yes, but it’s not just Subprime Lending. That would be wishfull thinking.
I can’t believe my ears… did they replace the entire editorial staff at that paper? Did somebody throw a brick and one of their heads and rouse them from their stupor?
I’m pretty sure their will be federal and state “bailouts” that maybe address one percent of the problem, maybe, but lets politicians say they voted to help the struggling “homeowner.” It amazes me how early policians are jumping all over this but essentially turned a blind eye to the energy crisis sham a fews years ago.
No, she’s their token conservative columnist.
Hardly. Neither of you reads the SF economics page much, do you?
“In other words, they paid for loans with certain payment characteristics, any restructuring will certainly make them less valuable as the interest rates will be less than planned.”
This is obviously where the good Senators who take campaign contributions from the REIC will ask taxpayers to do their part. Without an injection of taxpayer funds, it is rather unclear how a bailout could be structured to help the borrower side of the market without penalizing the lending side of the market.
Why should taxpayers bail these morons out? I can be certain of one thing.If there is a bailout of the rejects then I’m positive a lot of folks are going to somehow figure out how to pay less in taxes.They will not have their money going to people who gamble it away.I have made a lot of sacraifices in my life to be able to get ahead.I worked my ass of as a kid and learned the value of money.That work included getting my hands dirty and breaking a sweat.The talk of any bailout just gets me all fired up and disgusted.
Those of us with good credit, and some economic sense NEED to get organized on this.
I am talking about contacting reporters, TV stations, news outlets, protests if it comes to that, we need our voices to be heard, not just supposed “victims” voices.
The $hit being proposed as far as bailouts is so outrageous to me that I second ArizonaDude, it “gets me all fired up and disgusted.”
I expect we’ll see plenty of bailout urgings from advocacy groups and task forces while they dance and rant in front of politicians who in turn make pronouncements about relief and the “fabric of our neighborhoods”. I’m not smart enough in this area to truly know whether or not a bailout of any size is viable or even possible but I swear on St Joseph if one comes along that involves taxpayers and/or prolongs high housing prices, I’m gonna throw the biggest adult tantrum you’ve ever seen.
Rainman,
I can save you the blood pressure. If uncle sam passes some spending bill, it will only add to the debt, since we are in the red already. So to protect yourself from the mountain of US debt, buy some foriegn currency CDs.
Ben, any link thru your websites to same?
In the sidebar.
The $hit being proposed as far as bailouts is so outrageous to me that I second ArizonaDude, it “gets me all fired up and disgusted.”
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Ditto. It’s why I suggested a class-action lawsuit the other day. There are a couple of ways to do this, IMHO.
One class-action lawsuit which claims these bailout are discriminatory — is the govt going to “bailout” renters and keep our housing costs (rent increases) from going up and pricing us out of our homes? [victim group: poor, minority, single-parents, etc. who rent]
Another lawsuit claims discrimination because by keeping housing prices artificially inflated, the govt is keeping property taxes artificially high. Is the govt going to bail-out long-term residents (who never refinanced and bought affordable housing for themselves) by making up the difference between what prop taxes **should** be and what they currently are? [victim group: seniors/disabled/fixed-income residents]
How about the other speculators like stock/options “investors”, Vegas gamblers, commodities & currency traders, etc. Is the govt going to cover all their losses as well? [victim group: poor, addicted gamblers]
Seriously, with all the talk of bailouts, I’m prepared to file these lawsuits, NOT because I want to “win” any money, but because it might wake up the PTB to what the repercussions could be if they move forward with any bailouts.
There probably will be some type of “bailout”, but I doubt it will affect prices. The government alone did not start this bubble, and it does not have the power to keep it from busting.
Consider the technology bubble. If government passed laws to subsidize investors in technology stocks, stocks would not immediately take off like they did in the late 90s.
A particular type of bubble comes once in a lifetime. Even if the gov’t devoted all its energy to propping up inflated real estate prices, it could not do it.
‘The talk of any bailout just gets me all fired up and disgusted.’
IMO, this is why a frank discussion of the details is valuable, as it reveals how unlikely it is. Remember, about 40% of homeowners own outright. 30% rent. What is the subprime percentage of the population? And don’t you think it has dawned on lawmakers that this thing could be alt-A and prime in 6 months?
These posters have made valid points; how could these proposals not destroy the MBS industry? IMO, our government has enough on its plate as it is.
I can’t wait to see Principal Skinner and Superintendent Chalmers get up in front of all the parents and tell them they’ve cancelled the music program, sports programs and drama club because the local government bailed out irresponsible borrowers. That should be precious.
School systems are a huge reason that people buy. Just wait until the school systems get hurt by this. Another leg in that chair will be cut away. Oh, these idiots are so idiotic. The government is just a collection of termites that will eat through this entire thing before it’s done. Bailouts for everyone!
We had the S&L bailout in the 1980’s. Then the LCTM hudge fund bailout in the 1990’s. We have welfare for people who haven’t worked a day in their life. We have welfare for oil corporations when their profits are at record highs. All this does is reward irresponsible behavior - then we wonder why our country is in such deep debt.
Just wait until the school systems get hurt by this.
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Problem is the school districts will be harmed even more if a bailout is NOT enacted. Most schools receive the bulk of their funding via property taxes.
I know a few city officials in the San Diego area. I’ve tried (anonymously, via e-mail) to warn them and suggest that they curtail their spending in the event of a RE downturn. Basically, they replied that they have looked into it, and are aware of the dangers…yet, I know they are moving ahead with very costly (and unnecessary) projects, even now.
We can only do what we can do…at least many of us are trying to warn people & write politicians, newspaper editors, etc. We just have to keep hammering on it.
I was talking with a co-worker who is owns a home and is not in trouble. He was arguing that a bail out of sorts might help because he is worried about all the potential foreclosures and his house losing value as prices fall.
.
But if your coworker’s house is overpriced, its value should fall.
If foreclosures drive prices down to affordable levels, somebody will buy those houses.
Is your coworker willing to have his taxes rise (or mortgage deduction eliminated) so that the book value of his house will continue making him feel good?
Yep, most people who own are praying that housing values don’t fall…even those that haven’t leveraged themselves to the hilt.
In large part, current housing values don’t reflect any sense of value for the structure and underlying property…housing values are the value of those things, plus the price of past vacations to Europe, butt-ugly F350 pick up trucks, jet-skis, little Brittany’s college education, $80,000 of home improvements that really only add $10,000 of value, et al.
Since almost everyone is in this mentality, the longer home prices stick the more people will think that these grossly inflated values represent normalcy. This bubble needs to deflate sooner rather than later.
Yep. I know a few people whose houses are fully paid off. Trust me…they do not want their “values” to fall, even if that means their own children can’t reasonably afford to buy.
The only group that would be 100% against a bailout are renters. Any other group stands to gain something.
No they don’t. A bailout cannot support inflated prices long term. Market fundamentals will prevail and prices will fall, bailout or no bailout. People should wake up and not be snookered into thinking that they can prop up the value of their own assets with their own taxes. It’s impossible.
A bailout would just put more money in the pockets of the RE shysters as the expense of everyone else.
A destruction of the MBS industry also means the end of all “fog a mirror” loans as well as 100%, 90%, and even 85% loans. Traditional (pre-structured finance) underwriting standards were always 80% LTV maximum; no stated income, no i/o, no neg-am. etc. So you’re right Ben, it would be virtually impossible to attempt any kind of a bailout without severe and negative unintended consequences. In other words, the end of the market-based MBS industry also means a dramatic downward plunge in home prices as the pool of truly qualified buyers becomes microscopic. This may happen anyway, but any type of bailout will guarantee it.
I’ve been amazed that any investor would buy this garbage to begin with, but what investor would ever pile money into these instruments after watching the government re-organize the contracts after the fact, knowing that anything bought today, in the future may or may not be anything like what was agreed upon? Way too much uncertainty and too much risk of loss.
The problem with the bailout is basically one of scale. The housing market is just way too big for any kind of a Greenscam put. So all proposals thus far may total $40B, truly a small drop in the bucket compared to the size of the market. Subprime alone was $450B+ in just 2006! This is only one year and not the vastly larger and equally toxic Alt-A or somewhat toxic and even larger prime. The government would have to start talking in the tens of trillions if they really wanted to prop up this mess. Numbers of that magnitude could only be accomplished with a complete hyperinflationary trashing of the dollar. Will they go there? No way to tell, but it seems like a heck of a risk. Certain destruction to stave off likely destruction? We can tell that the Fed has the pedal to the credit-creation metal by looking at M3 equivalents and the way the stock market has responded to all of this leverage. But this may be as much as the Fed is willing to do: they can provide liquidity and lots of it, but they cannot provide capital. Providing capital translates to immediate hyperinflation.
So that’s why it seems like any talk of a bailout really won’t accomplish anything other than to line the pockets of some well connected Wall St. cronies in the form of a taxpayer slush-fund for loss mitigation. JSP will get screwed again and will still lose the house, and then have to pay more in general taxes and inflation due to these silly slush funds.
Darth, I think Tanta’s right in that the non-GSE MBS market cannot survive “normal” conditions anyway. Your take?
p.s.: The bulls are runnin’ wild at CR today.
> I’ve been amazed that any investor would buy this (MBS) garbage
I have tried to find out the composition of my 401k choices, but, being the non-expert I am, could not be sure that among the offered bonds was no MBS. The only thing easy to do was to avoid Fanny, and they are not even in the deepest shit. What are the alternatives? My 401k has US stocks, US bonds, US cash, and foreign stocks but no foreign cash or bonds
“…how could these proposals not destroy the MBS industry?”
Could Fannie and Freddie be asked to fill in for MBS industry players getting cases of cold feet?
Fannie, Freddie & FHA/HUD/VA (trully govt entities).
I see no reason why bailout proponents would not try to funnel everything through these entities. While investors in the MBS markets would not earn the hoped-for interest, they might be able to recover the great majority of their principal if the FBs refi’d through a GSE or govt entity. Their losses would be far, far greater if the market were allowed to correct things on its own.
I think a bailout is “in the bag”. We need to fight this with everythings we’ve got. See above suggestion for a class-action lawsuit against the govt/housing authorities, etc.
“I’m positive a lot of folks are going to somehow figure out how to pay less in taxes.”
For this reason and others (including Republican demonization of taxes since Ronald Reagan’s reign in power), I am sure the taxation is coming in the form of inflation.
The hammer’s got to fall somewhere. All government can do is choose who its gonna fall on. The problem in trying to make the key actors in the bubble foot the bill is that the whistled-up-out-of-nowhere money has already been extracted and spent. Are we going to ask the mortgage clerks to hand in their pay from the last five years? That money is spent and gone. Are we going to ask the longterm homeowner who sold at the top to turn their profits back in? Are we going to ask the bling producing companies to hand their profits back to the HELOCed homeowners so that they can hand it back to the banks? This is an egg that can’t get unscrambled.
Now that we’re on the downside of the bubble someone is going to have to come up with the trillions of dollars that were monetized and spent during the upside of the bubble. That someone is going to be a combination of homeowners, banks, investors, taxpayers, dollar denominated asset holders. Who exactly depends on how government chooses to respond to the situation and unfortunately only the last three have actual assets that can be siezed to fix the situation.
“Dumbest: Bailing out dumb and dumber, especially with taxpayer money.”
Dumb, dumber and dumbest. LOL!
‘NACA, a Boston-based nonprofit group, has $1 billion to help homeowners with subprime loans refinance their mortgages at more affordable rates. Subprime mortgages have higher interest rates to compensate for the increased risk of lending money to people with weak credit scores.’
‘For those who don’t qualify for the financing, NACA will help renegotiate their subprime loans with existing lenders, said Angela Morris, director of NACA’s Tampa office. ‘Whoever these lenders are, NACA is getting in their face,’ Morris said.’
This is just another attempt to delay a much needed correction in price. Suppose there is a panic in the bond market and long rates jump, then what?
Then my portfolio doubles! sweet >; )
“Suppose there is a panic in the bond market and long rates jump, then what?”
I am guessing the risk of a panic that leads to a jump in long-term bond yields has been preemptively and indefinitely ‘contained’ by financial levy building. The concern about this scenario dates back at least to the dawning of the Greenspan era, when Ravi Batra wrote about it in The Great Depression of 1990.
http://www.amazon.com/Great-Depression-1990-Ravi-Batra/dp/0440201683
I think we’ll be hearing alot from NACA. Granted, they are socialists but you can get a great loan through them.
Thanks for the link. Unlike most people here, I don’t have a huge income but I do agressively save and invest in my retirement. 5.375% is a nice rate and I’ll take it if I can get it.
Getting in the lender’s face? WOW! What a joke. When Enron defaulted on their loans did they hire advocates to get into the bondholder’s face? This time is different……Really different. It will not be as easy to push around bondholders like community bank lenders. Have fun getting in the face of the Bank of China, The Saudi Royal Family, SAC and Pension Funds. Good luck
You might be right, but perhaps NACA is up to the challenge. According to the Website:
“On May 5, 1999 from the Senate floor, Senator Phil Gramm (R-TX), head of the Senate Banking Committee, attempted to portray banks as victims of Bruce Marks (the CEO of NACA). Gramm described Marks as ‘… someone who graduates from college, goes to graduate school, and goes to work for the Federal Reserve in acquisitions and mergers, quits and goes into business, spends four years harassing banks and bank presidents, and finally the bank (Fleet Bank) caves and gives them $1.4 million, gives them $200,000 to set up their organization; they now have twenty offices, lending $3.5 billion…’ Senator Gramm continued, ‘There is a CRA protester who calls himself an “urban terrorist” who used those charges against a bank, harassed them for four years, went to a speech of the president of the bank (Fleet Bank CEO Terrence Murray) at Harvard University, disrupted the speech, made this man’s life miserable for four long years.’”
The amounts of money being mentioned to support bailouts is very low. It would probably take hundreds of billions. What would a billion dollars accomplish in CA? And what do you do with these people after you bail them out? Lock them into the house for years or decades? Many will want to move to new jobs over the years, so what do you do then with their properties that will probably still be upside-down? Bail them out again? Restructuring their loans so they can afford them won’t let them sell their homes, so many will just walk away in the future. They either walk away now, or walk away later. Any significant funds to drop on these fools and criminals will probably be created out of thin air, crashing the US dollar even futher towards bankruptcy.
“And they would have to agree not to take on any more debts. Those investors who choose the workout option would take the loss on the write down up front.”
What are they going to do, cut up their credit cards?
That and putting an earmark on their SS# that says that they can not estabilsh more credit would be a nice start.
LOL…So true matt . The second you would bail these sub-prime gamblers out they would run out and run up their credit cards again .How can the lenders control a borrower from taking out other loans and credit cards? That is why loans need to be have good underwriting to begin with to determine the spending patterns of a potential borrower .If a borrower is high risk they need to put more money down ,simple as that .
Stucco,
This is my greatest fear. It would be a slap in the face of an fiscally prudent individual.
Right,
State Official: “Ok Mr and Mrs too-much-home-buyer. Even though your house is worth 80% of the loan you owe and plummeting even more as we speak, we want to help you stay in your house”.
Mr-Too-Much-Home-Buyer (whispers to wife): “Damn, I wish they’d just kick us out instead of prolonging the torture.”
Sometimes you have to be cruel to be kind.
“What would a billion dollars accomplish in CA?”
For some perspective, it would cost upwards of $1.5b to purchase all the SFRs currently twisting in the slumping market’s headwinds in a six zipcode area of San Diego I sporadically track (inland N. County) — and this is only for the homes currently listed on ziprealty.com, which is an understatement of the actual inventory, which includes lots of newly built, never occupied homes in the $1m+ price range.
He adds, “I’m not one to say everyone should be a homeowner. The fact is, the people are in the homes, they had their assets stolen from them, the loans were set up to fail.”
What “assets” is he talking about?! These “homeowners (wannabe)” put down nothing (or 3% at most)–they NEVER owened the house; they were merely renting from the bank!! All they had was LIABILITY, not assets!!!
The Man gave me too much money. My civil rights have been violated.
“It would be an amazing validation of the Law of Unintended Consequences if the MBS business by its very structure prevented bailout ideas from working.”
Ah, yes, the Law of Unintended Consequences. We all know that the goal of all this bailout talk is to keep the real estate market artificially pumped. We also know that government institutions never achieve their stated goal. Do you remember that welfare was meant to strengthen families?
I have another Law of UC example to bring up here. Who has tried to hire somebody lately, especially somebody in the I.T. field? One of the first things you have to do is determine if the person is eligible for overtime or not. The guidance is mind-numbing since it is all gub’ment lingo and completely incomprehensible. In short, it is nearly impossible to make the person a salaried employee without having them have direct reports or be a computer programmer. It is just awful. You can pay the person $500,000 per year and they still might be eligible for overtime. God bless the paternalism of our government officials.
The goal of this awful rule, other than to make lawyers even more wealthy, was to prevent help-desk staff from working a ton of hours with no overtime. Those poor help-deskers can’t make their own decisions. What was the real consequence? Bye bye help-desk jobs. We’ll see you in India. Hey, at least those help-desk people don’t have to work more than 40 hours without being paid overtime? They most likely get overtime at the Quicky Mart.
Intended consequence: Maintain inflated real estate prices (for a whole variety of reasons including propping up Wall St.)
Predicted consequence: Kaboom!
The MBS risk takers were expecting a over-all higher yield for taking the risk on these sub-prime loans . In some cases the interest rates were twice the amount or more of the going prime rate loans and these investors expected a pre-pay also in the yield .That MBS Market expected a high turnover rate on these loans and they were basing the risk on real estate going up . So, no reason to bail out investors that were going for the higher yield risks .No reason to bail out borrowers that were taking a risk that they could get a better loan down the road . The only party that should be restructering loans are the gambling bagholders with their gambling borrowers .
I’m no great expert in this field, but I truly fail to see how a bailout accomplishes anything here. To the extent that there is a crisis, it boils down to one simple fact. Namely, that there is an enormous number of people in this country who owe more on their properties than they are currently worth. Take away that one simple fact and the ‘crisis’ vanishes.
There are simple actions the government can take to help prevent future such problems. For example, a truth in lending law that forces all lenders to produce a summary sheet that follows some sort of established easy to read and understand format in which all the terms of the loan are laid out in plain language, especially things like future payment increases under an ARM.
Second, prepayment penalties should be abolished. There is no legitimate reason to have a prepayment penalty on a mortgage.
As for the rest of it? I simply don’t see much else than can or should be done except let the market work itself out.
If you give a loan out with an ARM teaser rate the investors make no money for the first couple of years. So, if you give away a free refinance then you’d end up eating a loss. Hence the prepayment penalty. If you forbid those terms then you can’t write the teaser rate loans (a good idea).
Cuts out the flipper part of the equasion to a substantial degree.
I’d guess a lot of banks are going to consider eating the smaller loss of waiving the prepayment penalty and letting people refinance. It will probably make sense as a lower loss than default proposition.
James — I like that reasoning and predicted result.
” Have fun getting in the face of the Bank of China, The Saudi Royal Family, SAC and Pension Funds. Good luck.”
LOL! A bailout simply makes no sense. And what about all the so called “prime” borrowers that are going to see their mortgages adjust to sphinckter-tightening levels? Don’t you think they’ll then feel entitled to some relief? As someone said earlier, the cost to fund a bailout is just too staggering. This government and our economy simply can’t afford it.
I’ve done the math. It seem pretty simple to me.
Guns + Butter = 1968
Screw those guys. If they don’t keep the price of oil down, our deal is off and they can take their useless Mortgage Backed Securities and shove’ em.
The part that I love the best is this: the US already has a national debt of almost $9 TRILLION dollars. Over 40% of that debt is already owned by the Federal Reserve, see http://www.brillig.com/debt_clock/faq.html
The interest on this debt is staggering. In FY 2006, over $406 BILLION was spent to maintain the debt. By way of comparison, that sum is roughly equivalent to all of the spending on the following departments combined (see http://www.federalbudget.com/) :
Agriculture
Homeland Security
Education
Transportation
Interior
Environmental Protection
NASA
Now there is a proposal to spend even more public funds? From whence shall such funds appear? Will this be more debt taken on by the nation? Or do we actually intend to be financially rational and cut some spending somewhere? Higher taxes? All in favor?
Seriously, a federal bail-out program of the size and scope necessary to be effective would severely strain our resources and move the federal government that much closer to actual insolvency. Even those who rely upon the debt-to-GDP measure to insist we’re on solid footing must note that we have only once been at a higher debt-to-GDP ratio, and that was a spike at the end of WWII. For those non-history minded folks, the Second World War required a mobilization of the entire economy to the point where rationing of gas, rubber, oil, sugar, and other commodities was implemented. Is that what people want? No?
Then stop talking about a bail-out. The nanny state cannot help. Big government has failed and will continue to fail. The only stability - the only one - which has ever succeeded is a truly free market based upon an educated and rational populace. When people become irrational, they fail. When they abandon financial sanity, they fail. Discipline and prudence will reassert themselves in time, and lessons will be learned. Interference with the learning process is not only impossibly imprudent under current financial burdens, but would be counter-productive.
I have a question:
Why does the US govt have to pay interest on money when it can print its own? Think about it (hint: Federal Reserve controls our Govt, and it’s a private corp.)
If the government were to stop paying interest to the 60% of debt held by other people, it would be called a “debt default.” Since that default would be on about $5.4 trillion dollars, it would be the largest the world has ever seen. The markets would be traumatized beyond belief. This principle holds just as true for the 40% owned by the Fed and its member banks.
The “why not just print the money” trick is already in play, and has devalued the dollar by an enormous amount. Since 2002, the dollar has lost another third of its value compared to most major currencies. Nobody wants to have money that is just printed into existence. It’s effectively counterfeiting or watering down of the currency.
Some “experts” state that the Dow should be up to 20,000 to make up for the decline in the dollar, and that its range at near 13,000 is actually a serious loss for its’ investors. Run a search on “debasing currency” for stories on what happened to Roman Empire, the British Empire and more.
The FDIC guarantees the banks but refused to regulate them. Then you had GSE’s buying up 30-40 percent of subprime loans from 2004-2006. The CSI’s will find the government’s prints all over this crime scene.
As for the private markets, let them eat dirt. They foolishly took the gamble and now must suffer the losses. Millions of private citizens were wiped out by the dotcom bubble burst with no bailout from the government. Why should MBS and real estate investors or banks receive a bailout?
“From whence shall such funds appear?”
Supplied by printing presses and distributed by helicopters.
This entire sub-thread can be summarized, analyzed, and resolved by two words:
BUY GOLD.
paul
A bailout only postpones the inevitable, throwing good money after bad. How is keeping a FB in his overpriced home going to help? If the loan terms are adjusted in his favor, he still has almost 30 years of onerous payments, he should just be allowed to walk without the credit hit and buy later at much lower prices, if ever. The best bailout is for the FB to stop making the payments ASAP and start renting.
“How is keeping a FB in his overpriced home going to help?”
There is something else that we never discuss on this blog. How many of the FBs are actually people that you wouldn’t want living in your neighborhood in the first place? It doesn’t take much to destroy a neighborhood. A little white trash strategically placed can have one awful impact on an otherwise decent location. In many ways it was a blessing that these people couldn’t buy. But when they were flush with lender cash, and driving the price of neighbor’s houses through the roof, they were acceptable. They will be pariahs once again.
Yup. During the bubble we started getting gang graffiti.
Nice.
But, for a little while they were able to pretend they were living just like the pretend people on television. You know, the ones they send get-well cards to, where the characters get “sick,” or gifts to when the characters get “married.”
And when they’re arrested or sued for falsifying their loan documents, they will probably blame it all on their evil twins.
No one is going to get arrested. The “Barbara Boxers” of congress don’t believe in personal responsibility.
“The Man gave these people too much money. Their civil rights got violated.”
> they send get-well cards to, where the characters (on TV) get “sick,” or gifts to when the characters get “married.”
That’s funny. Do you have link where I can laugh about it?
Hear! Hear!
I visited my mother in Pensacola, Florida about a week ago and noted a couple examples of the this phenomena. Mom has lived in a solid middle class neighborhood in a great location (close to major stores and downtown with access to the major transport arteries) for greater than 20 years. Houses are about 1,800 to 2,200 sq. feet on 0.3 acres. The neighborhood was built out in the early 70’s.
Due to the magic of subprime and loose lending standards a couple of new families have moved into the neighborhood…
Family number one is white and possesses three huge pimped out Ford trucks, one of which they park on the front lawn of the house i.e. between the street gutter and the front door parallel to the street. The monster truck is parked on the lawn because the area on the street in front of the house is taken up with a one of the Ford trucks and some type of medium size commercial vehicle. The third truck sits in the driveway.
Family number two is black and must have made that Jefferson move up from the hood because a couple of members insist on sitting all day at the entrance of the garage in the front of the house in a couple of lawn chairs. Although the “hood watch” is annoying, the people that live there are pretty nice.
Oh yeah, according to a hand made sign barely visible between all the vehicles, the house with all the trucks is on the market for $300,000. Good luck with that. The most recent sale in the past six months was for $170,000. Furthermore, the house next to the self appointed neighborhood watch director has been on the market for greater than a year. The sales price was initially $245,000 before sliding into foreclosure. Presently the house is on the market at $158,000 which puts it at around $87/sq. foot. I am not sure if the “hood watch” program is reflected in the asking price!
Can’t you report the truck on the lawn? It must be illegal.
It’s only illegal if local code prevents it. This could well be an unincorporated area — in those, in rural or exurban Florida,it is quite common that there are no restrictions that would prevent parking the truck or even a boat in the front yard. As in, “”Hey, it’s MY yard.” From time to time on the board, different posters rail against homeowners associations and rules telling them what to do or not do with their home. Can’t have it both ways. If you want total freedom, you have to accept your neighbor’s.
There is a world of difference between having a functional municipal government, which can and should take action against things like trucks parked in front yards, and having a Cuba-style neighborhood association running your life.
Beverly Hills doesn’t have HOA’s, nor do many other upscale municipalities. They don’t need them.
Sounds like what is happening in our neighborhoods in Sacramento except everything is 250 per sqft or more.
Nasty, butt-ugly, pimped out trucks are everywhere in coastal northern California. When did America become the land of dumb-a$$ rednecks? Make that financially-illiterate, scapegoating dumb-a$$ rednecks?
You left out the Raiders stickers. It’s like a continuous ugly competition.
hey man
why the hate towards white trash?
we are people!
As we enter the foreclosure boom, the best FB bailout is walking. As another poster once said, “You can’t un-ring a bell.” The solution is really simple. If you are a FB and want to lessen the pain, walk.
Walk and start anew. You need to take the bull by the horns. Start planning your exit. Waiting and borrowing from savings, friends, and family simply prolongs the painful consequences of poor decision making.
Don’t wait for government intervention. It will be short and late. Certainly don’t wait for benevolent banker workouts. Enjoy the walk FB. Enjoy the walk. Here is your song:
http://www.youtube.com/watch?v=iAdHgwsocRM
LOL, here is another one. Do they need a hug?
http://www.youtube.com/watch?v=Vwv1rrVyuSM
Jingle keys was very popular in Austin and Houston in the late 80’s! Whole families just disapeared into the night never to be heard from again. Those people didn’t wait around for any bailout—they got out!
How would a bailout affect the mortgage brokers, lenders, appraisers, RE agents, etc. who have enjoyed record high salaries during the bubble? It seems like a bailout allows those people to keep and enjoy their ill-gotten gains.
If even the SF Chronicle says a bailout is dumb, I would guess it has no chance of happening.
Heh, I had that thought too.
When they took away insurance for any loan made over a 20% down loan is when the system went haywire . The PMI insurance company would not allow bad loans when the borrower only had a small stake in the down-payment /home . In recent years you had lenders making 100% stated income loans without any insurance . What did these greedy jerk Lenders think would happen with that kind of lending .The RE market inflated beyond reason and now we have tracts of vacant homes and thousands of foreclosures coming . Now ,I would not even think of buying in a market with this sort of lending going on until I know that the buyers/borrowers /lenders aren’t going to destroy the neighborhood with faulty lending .
You are not kidding. Those second mortgages that have been issued of late (second lien) with no insurance and no downpayment are toxic squared. They would not have been accepted into mortgage pools for MBSs. They are so trashy, who in the heck backed them up? I have heard of some getting bought as ‘mezzanine debt’, A/B loans, or subordiant debt, but this all makes junk bonds look like Google stock. I wonder who is holding these mortgages and how they are doing now?
Gee, the way I see it, the people who are mostly going to get hurt are the stupid, and the rich. It’s perfect. It’s the perfect form of taxation.
Penalize the two groups who are the most detrimental to society overall. Stupid people and the indigent rich who try to make money without providing valuable goods or services (rich investors who bought into mortgage securities).
This whole thing is a blessing in disguise.
You see, what we need is a few million homeless people to serve as examples. You know why India and China are kicking our asses? A short anecdote will serve here. I worked with a guy from India. I asked him what made him want to be a software engineer. He said, “When I was young my father took me out onto the street and showed me the homeless and the destitute and asked me if I wanted to end up like that.”
Or as I like to put it…
Little Tike: “Mr? Why are you making the sheriff put our furniture out on the street?”
Me (who bought the foreclosure): “Because Mommy and Daddy paid way too much for this house and couldn’t afford it. By borrowing way beyond their means and jacking up the housing prices they hurt everyone else. Not only selfish, but stupid. I can forgive each by itself, but not together. So Mommy and Daddy mortgaged your future and I’m just putting a stop to it before it gets worse.”
Tike: “Can I watch Sponge Bob?”
Tike: “Can I watch Sponge Bob?”
No, the flat panel was part of the deal.
Unfortunately, some of these “rich people” who bought the MBS and CDO were pension funds and bond funds in the 401K’s. As for the stupid foreigners and hedge funds, they can go to hell.
Hi Jerry,
Thanks for the suggestion for those trying to shield themselves from attack in the War on Savers by purchasing FXA, FXB and FXE. Could you offer any specifics on the best way to do this?
Thx, GS
I was in FXE and rolled out into an inverse S&P. (Euro looked kind of toppy, imo.) Long the Aussie cash wise, though.
A Yen ETF started trading this past February. Marketwatch on FXY:
http://tinyurl.com/ytonkb
FXA, FXE, FXB are exchange traded funds managed by Rydex. You can buy them the same way you would buy shares in IBM, through your brokerage account.
Anybody check out the Merk Hard Currency Fund??
Yeah, “collateral damage”.
Oh well. You can’t make an omelette without breaking a few eggs.
By the way, the lenders better hurry up and foreclose. Every month they wait they’ll be losing several percent from the value of the collateral. Oh, by the way, it’s pretty obvious that the lenders were as stupid as the borrowers so I wouldn’t expect any outcome from this but a nuclear wasteland.
I wonder how Goldman Sachs sidestepped their ownership of over 2 milion shares of New Century as of December 2006?
Can’t touch dis. Bubble Time.
“Every month they wait they’ll be losing several percent from the value of the collateral.”
I guess you don’t have any faith in the Fed’s & Treasury’s ability and willingness to respike the punchbowl in order to make today’s mortgage mess tomorrow’s mortgage disaster? Perhaps the Day After Tomorrow has already arrived?
Maybe, but hopefully the people that matter notice the turd that surfaced in that punchbowl and won’t drink.
That’s nasty!!
It’s only a Baby Ruth!
A sure fire way to “kill” any proposed legislation is to form a “committee” to “study the issue”…it will then die slowly or be pushed off for years…eventually evolving into something much more watered down.
Having been a city councilman I quickly learned that this a sure fire way to “kill” something.
I can’t wait to get one or two Bubble McMansion foreclosures for pennies on the dollar.
With apologies to Dickens:
Bubble Crash is a very busy time for us, Mr. Cratchit. People preparing feasts, giving parties, spending the mortgage money on frivolities. One might say that 2008 is the foreclosure season. Harvest time for the bubble waiters.
“For California, ‘we have proposed a $1 billion loss mitigation fund,’ says Bob Gnaizda, general counsel for an advocacy group. And who should finance this fund? ‘It’s up to a combination of the investment bankers and the banking industry and the state government if necessary to provide the funding or the guarantees of the funding,’ Gnaizda says.”
I agree, up to the point where he suggests ‘the state government if necessary.’ Let the investment bankers shoulder the cleanup costs for the toxic waste dump of bad mortgage debt they have created across the state of California.
GFs and FBs are more than stupid; they are true believers. Their behaviors and attitudes reflect a certain degree of conviction in an alternative market reality. At some point in the past, their goals, dreams, and beliefs usurped reality.
Q: How can you tell that the American economy is not working anymore?
A: The rich are getting poorer, and the poor are getting richer.
The bailout is already happening, it’s called: allowing inflation to run rampant. This is done by keeping short-term interest rates low, which encourages spending, encourages borrowing, and encourages flight from the US dollar. If you can find a way to keep up with it (stocks? foreign currency? metals?), you will be taxed on the nominal profits, but that’s better than sitting on a depreciating asset (US-denominated cash accts).
Yep. Greenspan handed Bernanke a real turd and now Congress wants him to make it float.
Good Luck.
Absolutely correct AZ…..if real inflation is close to 10% then everything in 5 years is going to cost about 60% more…..this may provide a cushion for the housing market, but the real question is can domestic USA wages keep up?
Ahhh, there’s the rub. How long before Big B turns into a Volcker?
“…
allowingencouraging inflation to run rampant.”Telling the world that fixing a problem then not following through with action results in making the problem worse than it would have been with pledge to fix things.
“…with no pledge…”
Sorry AZ, but commodity inflation without wage inflation does nothing to help out FBs. In fact, it makes their situation worse as their other expenses rise.
if there is so much inflation, why aren’t wages rising?
answer: because it is debt financed inflation
payback of the debt will cause deflation
The idea that commodity inflation and wage inflation must march in lockstep is only valid for a closed economy and is based on the idea that commodities can only go up if people have the money to pay for them. We are now in an open economy and the surge in demand for commodities is coming from the chindians. Short answer, chindian wages are rising faster than commodity inflation while american wages are stagnant. Chindian workers are getting richer and american workers are getting poorer. This will continue until globalization reaches its end state in which a worker in des moines will have exactly the same standard of living as a worker in bangalore or shanghai.
And as an aside, shutting the border wouldn’t stop the process. We don’t have the natural resources within our borders to maintain our standard of living. We have to bid for them on the world market and so will always be in ever increasing competion with others for them.
I should add,
Unless, of course, we invade a country that has the natural resources we need to support our standard of living and make it a defacto part of our country. Hmmm, I wonder if there are any coutries in the world that have lot’s of oil?
diemos, that’s what scares me.
The U.S. could end up feeling like a wounded, cornered animal with the sharpest teeth ever. Once our coddled citizenry turns frightened, who knows what the politicians will do?
“Chindian workers are getting richer and american workers are getting poorer.”
Good! Exactly what lazy, debt-ridden, fat a$$ Americans deserve for shopping at Walmart and buying products produced by Chindians.
““ I work closely with most of the MBS underwriters on Wall Street, there are a lot of very unhappy people here right now.”
Well that’s hilarious. And embarassing for the securities “professionals”. Because there’s nothing new about debt, debt-securities, or exotic loans. The nature of risk-asessment hasn’t changed in a long time. There have been Class A bonds, Class B bonds and Class C bonds for over a century now.
The lower the quality of the security, the higher its payout. Period.
What happene here was that Wall Street collectively decided, in its vast herd mentality, to pursue a financial strategy of lower-quality paper in exchange for higher yields. Wall Street decided to cozy up a little closer to the risk-side of the equation.
This wasn’t done blindly, or without an understanding of the nature of risk. (Wall Street is in the *business* of risk/reward asessment. Its *all* they do). So for Wall Street to be “unhappy” is nothing short of bizarre. Its like saying “I’m extraordinarily unhappy that I bet the farm on this coin flip and it came up heads”. The odds could not have been more researched. The risks more clear. Thousands of spreadsheets generated by armies of analysts and “quant jocks” summarize the risk profiles of these deals every day.
Wall Street is Unhappy? No. Wall Street is not unhappy. Wall Street is greedy. And so is everyone.
Greedy lenders should burn. Greedy borrowers should too. They’re two sides of the same equation. The only difference is that the lenders could have seen this coming from miles away. So they’re the one’s who have no right to be “unhappy”.
““ I work closely with most of the MBS underwriters on Wall Street, there are a lot of very unhappy people here right now.”
@#$% them!
““ I work closely with most of the MBS underwriters on Wall Street, there are a lot of very unhappy people here right now.”
Well that’s hilarious. And embarassing for the securities “professionals”. Because there’s nothing new about debt, debt-securities, or exotic loans. The nature of risk-asessment hasn’t changed in a long time. There have been Class A bonds, Class B bonds and Class C bonds for over a century now.
The lower the quality of the security, the higher its payout. Period.
What happened here was that Wall Street collectively decided, in its vast herd mentality, to pursue a financial strategy of lower-quality paper in exchange for higher yields. Wall Street decided to cozy up a little closer to the risk-side of the equation.
This wasn’t done blindly, or without an understanding of the nature of risk. (Wall Street is in the *business* of risk/reward asessment. Its *all* they do). So for Wall Street to be “unhappy” is nothing short of bizarre. Its like saying “I’m extraordinarily unhappy that I bet the farm on this coin flip and it came up heads”. The odds could not have been more researched. The risks more clear. Thousands of spreadsheets generated by armies of analysts and “quant jocks” summarize the risk profiles of these deals every day.
Wall Street is Unhappy? No. Wall Street is not unhappy. Wall Street is greedy. And so is everyone.
Greedy lenders should burn. Greedy borrowers should too. They’re two sides of the same equation. The only difference is that the lenders could have seen this coming from miles away. So they’re the one’s who have no right to be “unhappy”.
“This wasn’t done blindly, or without an understanding of the nature of risk.”
I would go so far as to suggest that this was done with an understanding of the prospect for a taxpayer-funded bailout that would mitigate the downside of the risk.
We’re talking underwriters here, Stucco. They’re not so much concerned with the risk as the loss of the gravy train.
They are unhappy because they are on the lose side. Time for the pig to get slaughtered.
After we rub its lipstick off.
My understanding is that to get into court you have to have what is known as standing. Being a dumb asshat hardly qualifies. Nothing to see here, move along.
I love the balls on this Alan Greenspan. He almost single handedly created this mess then he goes around giving speeches as an impartial observer and tangling up the current Fed Chairman to boot.
Well, I guess you have to be a real piece of work to rise to the top in this country.
“How can current subprime loans be ‘restructured’ in any way when they are owned by MBS investors who purchased these securities assuming the loans will perform as originated?”
That is a great question, and unfortunately there is no easy answer. A bailout for MBS holders would be structured quite differently than a bailout for real estate speculators. First time homebuyers in over there heads are another story altogether. Yes, a case by case basis will truly provide security for securities attorneys. Alternatively, devaluing the dollar might become attractive for some, but holders of fixed income investments (annuities) are going to get pinched in any scenario.
But I choose not to be an idiot. Like driving through a red light. They should take their medicine.
There is no way to restructure a loan inside an MBS other than prepayment or prepayment short, inducing a capital loss.
The only logical way that doesn’t gum up the system totally is to refinance the questionable loans and pull them out of the trust: MBS holders take an immediate cash hit, and move on.
The AAA tranche owners (first to be paid from the pool) don’t want the uncertainty and confusion—they want the B and below holders to take the bullet, and to get the roach out of the house. That’s why they paid extra to be in the AAA pool in the first place.
The low-ratings holders want to try to hold on to hope and wishing and will try anything to dodge the bullet.
“What governments can do is prevent another subprime disaster by enforcing good underwriting guidelines and requiring clear, plain-English disclosures of the risks of exotic mortgages.”
It has been reported in the national press that 40% of subprime buyers (nationally, not just in CA) were hispanic, and I am guessing that a sizable fraction thereof are not fluent in ‘plain-English.’
“Some 40 percent of mortgages granted to Hispanic buyers are subprime and 52 percent in the case of African Americans, an incidence that drops to 19 percent for non-Hispanic whites.”
http://www.hispanicbusiness.com/news/newsbyid.asp?id=60896&cat=Headlines&more=/news/more-news.asp
Yep, it’s just like I was saying. Pretty soon you’ll be seeing this, a lot:
“The Man gave me too much money. My civil rights got violated”.
We need a new law…
“Anything you see on TV has to be free. You don’t have to pay for it”.
Now that’s MY solution to the current American economy.
We tried to answer this question here:
http://www.irvinehousingblog.com/2007/04/16/how-homedebtors-could-avoid-foreclosure/
We didn’t come up with a viable answer either…
I still saw that, at the MOST, a “victim” of “predatory mortgage practices” should get is his or her life back (back to renting, maybe get their FICO score back to where it was before they bought); they should NOT get to keep a house that they can’t afford.
Why should anyone get MORE than they had before the (alleged) victimization? What rationale is there in righting a wrong by giving the victim MORE than they started out with…especially if taxpayer sponsered bail-outs are being considered?
Also, why should anyone be willing to “bail out” a predatory mortgage “victim” and allow them to stay in more house than they could afford, especially when this means bailing out the banking and mortgage industry that is supposedly responsible for the “victimizing” in the first place?
I guess what I am saying is that even if you are an ultra compassionate “government should do something” type of person, you should be against any sort of “you get to keep your home” bailout for predatory lending “victims”.
The silly romance and wasteful Mystic with
“THE Great American HOME” aka the HOUSE or McMansion..is just ONE of MANY American idiotic “SACRED COWS” that is long overdue to be Slaughtered.
Drop in another Barrel of shark chum, while I lighten up the mood with a little JAWS MUSIC.
I really think all of the talk of a bailout is only political posturing and won’t happen because:
1/3 of people are renters = no mortgage
1/3 of home owners do not have a mortgage
let’s say 50% (worst case) of all mortgages go bad, that leaves 78% of Americans who will NOT benefit from a bailout. As a politician, I’m not sure what kind of public support I would receive if nearly 80% of my constituents are theoretically opposed.
I have yet to hear one person who is not a FB (or politician) support a bailout.
Just my .02.
http://centralcoasthousingbubble.blogspot.com/
Oh, I almost forgot - our government is bankrupt. Just one more reason why this will never happen.
“I have yet to hear one person who is not a FB (or politician) support a bailout.”
I have yet to hear one red state politician propose a bailout. Perhaps the blue state politicians are figuring foreclosure bailout proposals into their strategy for losing the 2008 presidential election.
That’s because you just dont want to look for it.
The right has been directing this country since 1980….and people are shocked at where we have arrived? And now they want to throw mud on the people who told them they were delusional.
http://tinyurl.com/2gego4
Hey if the American people fall for the blaming of Democrats for the Repulican economy they deserver the 3rd world existence that is waiting for them.
Of course Republicans have a whole host of PR people and think tanks whose job it is to convince the frog that the water isn’t boiling…working pretty good so far.
Spencer Bachus, Mr Frank’s Republican counterpart, has backed an “assignee liability” system which would mean investment banks that repackage mortgages into bonds would be liable to pay compensation to borrowers if loans turned out to have been mis-sold. unless they can show they conducted extensive due diligence.
I was at a conference the other day and one of the servicers said 40% of all modifications or renegotiations fail anyway. Also, the servicer has wide latitude in restructuring loans to minimize losses. Sometimes a restructured loan will lose less than a foreclosure. It all depends on the MBS doucments as to how much leedway if any the servicer has.
I don’t believe artificially propping up an industry is a good long term solution. People who were truly defrauded are the only ones the govt should be helping, by criminally prosecuting those who did these bad loans by deception, forgery, etc. Siezing the assets of crooks should go toward paying the restitution to real victims. I hate to say it but people who were complicit, by lying about their income or ignoring common sense, do not deserve any help. Helping them, or God forbid the lenders or investors, would be condoning this and keeping the problem alive. I volunteer for a consumer org and the builder complaints that used to mostly be about shoddy construction now increasingly have elements of predatory lending and mortgage fraud. I’m seeing intelligent and careful people have had documents forged or switched, things like that. In every case i can think of the homeowner used the builder’s in-house lender. We don’t deal with the issue of mortgage fraud in itself but are seeing it now as part of the homebuilder problem.
//”It was their fault. They just wanted to sell. They should not have approved us,” Ibarra said. “We just jumped at the opportunity because we thought it was going to be easy, as easy as getting the loan.”//
This is a good summary of the problem. It was someone else’s fault. ‘They should not have approved us.’ Forget the fact that ‘we should not have borrowed the money.’ Skip that ‘we should not have borrowed the money if we could not afford the payments.’ Or what about the fact that people who make around $80K a year combined, and who don’t put like 50% down, cannot afford a $600K house. I find it really hard to feel sorry for people for just being stupid. There is nothing about this that makes sense on any level.
There is only 1 word to explain all these “GREED”. All I can say is “It is a gamble and you lose; pay up now” LOL.
“With or without bailouts, the subprime crisis is going to hurt many people. But it could have a silver lining. If it brings down home prices, more families could afford homes with realistic mortgages. And if it reminds everyone that buying a home is a risky proposition, so much the better.”
We should not forget to thank Alan Greenspan for his role in dropping interest rates to negative real levels just in time to drive home price inflation into overdrive around 2003. Consequently, the home purchase component of the U.S. household formation process was transformed from a routine savings mechanism for building household wealth into a high risk gambling proposition which will leave behind many broke households and broken homes as a legacy.
“To be eligible for a workout, a FB would have to be a legitimate purchaser who could have afforded their home at pre-bubble prices, but overpaid due to the frenzy,….”
Overpaid? To whom? Wall Street? A Mortgage Company?
It appears that taxpayers, Wall Street, mortgage companies, appraisers, etc., etc., all “benefited” from the frenzy. And now all are being blamed. What about the SELLERS who walked off with all of this cash that’s been “lost”. Maybe we should have them refund the “overpayment” that they collected at closing? Comments……
If the sellers were honest and didn’t hide defects of the house from the buyers, I don’t see how you could ask them for money back. The sellers put their houses on the market, and others came and gave them money for it, money they had gotten from lenders with the wrong risk-pricing algorithm. The sellers did get a gift from the government in the form of reduced capital gains taxes, but that was a mistake by the governement, not by the sellers. Even I would take a tax saving that I politically disagree with, wouldn’t you? No, the sellers should keep their gains. (Disclosure: I was no a seller, and none of my relatives was either.)