Bits Bucket And Craigslist Finds For August 2, 2007
Please post off-topic ideas, links and Craigslist finds here.
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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More server problems this morning folks, sorry.
And I thought there was a conspiracy to block the truth…. Just kidding.
Out of curiosity, what kind of problems are you having? Have you noticed an increase in traffic over the past couple of weeks now that the bubble is more main stream?
Still looking into it; the same thing happened two mornings in a row. This isn’t traffic related, IMO.
The REIC up to it’s old tricks?
Is it Database Problems Ben? MySQL?
From what I hear, it’s hardware.
Bugs: “eh, Daffy…Ben’s HBB is having a hardware problems”
Daffy: “Hey Bugsy, Wiley E. Coyote has just the thing for old Ben…a refurbished Gov’t “CIA” 100 GHz computer, it’s still in the original ACME computer box with all the cables.”
Bugs: “eh, sounds good Daffy, does Wiley E. accept PayPal?
Daffy: “Just give me the cash Bugsy…I’ll send Road Runner up to Flagstaff… ASAP”
Bugs: “Sorry Daffy, my rabbit hole HELOC has been reduced…I’ll have to pay using my ACME AMEX,… “eh, Don’t leave Toonville without it”
This Donation ad has been sponsored by:
“Neil’s Buttered Derivative Popcorn”
“The slippery Popcorn that takes its time… for a quality POP!”
Whew! Thought that my computer was revolting against me.
Question for the board.
Say you “own” a house and have a $300k mortgage on it and the house is worth less than the mortgage balance. Let’s say the house only sells now for $200k. Now let’s assume the “owner” has money in the bank and could still afford the mortgage or come up with the difference but no longer wants the house and just wants to get out of it. Is it a good idea to simply go into foreclosure on the home, get hit with the tax implication and the negative credit ramifications than to pay off the $100k that would be owed on the home assuming the “owner” couldn’t short sell the home with the mortgage company.
The way I see it the “owner” could keep his $100k instead of taking the full loss on the home and would simply only owe the $100k tax implication to the feds but would still have his cash. Granted there are credit score issues but that seems worth it if one is cash rich and just wants to unload the home and rent for several years instead.
I’m not so sure if you are cash rich that a bank will allow a short sale.You have to be in a financial hardship situation as far as I know.
You have asked the million dollar question really:
Do you walk away and lose your credit or continue makeing payments assumeing the market will come back some day.Some are lucky to be able to make the payments but others are relying on instant equity to make the payments.I think it is all up to the individual.
Pesonally my credit is very important to me.I would never put myself in the situation you have presented but many others have.
I think a lot of people will poor credit really have nothing to lose by walking away and we are seeing that happen right now.That is why banks did not loan to deadbeats in the past.Then all of a sudden we are in a new era where real estate only goes up.
One thing I have observed with unsucsessful people is that most of them have bad credit.If you screw your credit up it will haunt you for the rest of your life.My dad ruined his credit and no one will loan him a dime.
“If you screw your credit up it will haunt you for the rest of your life”
“bad credit = ruined life”
The tyranny of threatening to ruin your credit, and therefore your life.
That’s the Big Bugaboo and Scare Tactic created by the Corporate American Debt Machine…. and I’m tired of it.
I have excellent credit, am of modest means, and have zero debt.
If borrowers and lenders would behave financially responsible “ruined credit” and the threats that come with it, would all but disappear.
There are only a couple good reasons to take on debt (under strict conditions)…. everything else YOU CAN’T AFFORD.
Debt is the direct opposite of freedom.
Actually, my best friend from college went BK in the late 90s and two years later he was getting credit card offers in the mail, bought a new car with a loan, etc. Later, after living on credit cards in law school school and passage of the 2005 bankruptcy “reform”, I felt like a dope for not taking advantage of the bankruptcy law. The “bad credit” scare, at least for him, turned out to be just that, a scare tactic.
The bad credit only matters if you happen to need to be looking for a job and said job pays over $30,000 or so a year (which is just about all jobs in the real world). Also, on most applications for licensing, you must disclose a past BK. But in most other situations, you can probably get by without credit. The thing smart BK attorneys will have you do (if you pay them enough money) is to reaffirm the debts you want to keep. So if you have AMEX and maybe a good car loan (BMW, Mercedes, Wells Fargo, Ford, GM) you would keep those and screw everybody else. It is much quicker to rebuild when you keep some active.
As AZdude mentioned, if you have money in bank, the lender will want whatever will cover the short sale. ChrisBirmingham, you also need to check you state in terms of what recourse the lender(s) has. I would consult with a good BK/r.e. attorney.
Recourse: another reason no doubt why banks loved refinance business.
If your non-recourse original purchase loan became a recourse refi, then I would imagine that the bank could “recourse” after the other assets of the hypothetical cash rich FB above.
That’ll change, Jim. Your friend took advantage of an era of easy credit that’s now coming to an end.
Agreed TJ, and I guess that’s a good thing in the long run, though it’ll be painful for a while, and some of us who didn’t take advantage will kick ourselves for not gathering our roses while we might’ve, so to speak…
Kramer says sell it if it’s lost 20%!.
Personally, I could not walk away from a debt if I had the means to repay it. I consider my word gold. If there was true fraud (and not imagined fraud to deny self-accountability) I would hire a lawyer. But if not, I’d be stuck in the home and either take the loss or wait (and wait and wait and wait) for prices to come back as they will someday. If I could not make the payments I would still struggle until I had no choice but to give up. However, baring illness or a new great depression (or a stupid relationship where my assets got stolen either a b/f or Vanguard going under) I can’t see a situation where a cheapskate like me would buy more than I could repay even in a downturn.
Unfortunately, I think we are about to see the “it’s all about me” mentality in it’s purest form - lots of ethically challenged individuals walking away from homes, even ones they can afford, while a few honest people destroy their lives trying to do the right thing.
AS far as a bank “allowing a short sale” if you have money in the bank. If they feel thier alternative is go through the FCL process and reselling as an REO, most would gladly work with a cooperative borrower.
You can’t walk away from it if you have money in the bank to cover the difference. The “howmuchamonth” people who got the 110% interest-only mortgages with teaser rates were people with nothing to lose. (Of course they caused tremendous harm to responsible citizens who want to save up 20% or more down and get a fixed mortgage, but nobody gives a crap about those people. There’s a “War on Saving” going on in the US. Responsible people are routinely screwed.)
Depends on if the loan is recourse or non-recourse, which might also depend on the state you are in. On a recourse loan, the lender can indeed come after your other assets, though that would take a court judgement. For $100k, I expect the lender would go for it.
IMO it depends on why you bought the house in the first place. If you bought the house because you wanted a nice place to live and can afford the payments then the price of the house shouldn’t matter.
If you bought the house for investment purposes then a formula involving money would be the deciding factor as to whether you should keep it or not.
Again, IMO.
I would get a judgement against you for the deficiency balance of $100,000 and then start garnishing your wages and bank accounts till I was paid in full. Oh, plus court costs and attorney fees.
That’s it’s important whether it’s a recourse or non-recourse loan. If the latter, then the court will not give the lender a judgement against the borrower; all the lender will get is the property back.
Should say: “That’s why it’s important…”
Is a bad debt garnishment allowed in all states? I seem to remember Texas only allowing child support & IRS garnishments from paychecks?
Is there a tax implication when you are foreclosed on? I thought that was just when you do a short sale.
I have a similar question. I think I know the answer but I would love input. I looked at a house owned by my now-deceased landlady this week. She purchased at peak, financed the full amount. Balance actually grew by a couple thousand dollars over 2 years. (Nice.) Landlady’s estate is in bankruptcy–she owned about ten peak-price homes. Estate is trying to liquidate at remaining mortgage balance on the houses, but balance is larger than current market value on several. If they can’t sell, they will let them go into foreclosure. I really like this one house, and am having an extremely difficult time finding a decent rental in S. Tampa for less than $2K (I paid $1350 for a 3/2). I would stay in the house 5+ years. I want to offer 25% less than the mortgage amount and see if the lender would consider a short sale. I won’t buy for anything more than that, but that would be approx. 2002 pricing. I think the appraisal would come in significantly higher, but it would take a significant amount of time to foreclose, and by that time, I expect that property values would be significantly lower. I don’t think that the estate would oppose my price, because it is so in the red there will never be any money. The only recourse the lender would have would be against the estate, correct?
Research the sale/assessment history of the home.
Pay nothing more than what the place was assessed or transferred for in 1998.
The value shake-out has about another 9 years to go.
Don’t catch a falling knife.
The only problem is, I have been displaced from the last 2 places I’ve rented, over a span of 2 years. I can’t keep moving once a year. I will go insane. Plus, what I would pay for this house is less than half of what I could actually afford using traditional financing, so it’s not like it would be a stretch. I don’t need the biggest house I can afford, I just don’t want to have to keep moving.
I can’t keep moving once a year. I will go insane.
Paying movers to move you locally = $2K?
Loss of home value = n x $100,000K
Leaves quite a bit leftover for therapy.
The best solution is to research the rental to make sure the owners are well above water.
whoops:
Loss of home value = n x $100K
I know you all are correct, and I have been a devoted HBB follower for 2 years. Thanks for talking some sense into me. I wish these moron sellers would just rip the band-aid off nice and fast, instead of this slow process of bleeding to death.
BTW - any Tampa people know how to find a decent house to rent to S. Tampa? North of El Prado, east of Dale Mabry, and (of course) south of Kennedy? All the listings online are for idiots who bought last year and are trying to cover their carrying costs. Even Craigslist.
Thanks,
Soon to be homeless, Tampaesq
All the listings online are for idiots who bought last year and are trying to cover their carrying costs
Have you tried a Property Management Co.?
Believe it or not, I used a real estate agent to get my current place in Vegas. He specializes in corporate relocation. This house has been a rental for years, one owner since it was built.
The estate might not oppose your price, but the bank might. If the amount you are offering is less than the mortgaged amount, then someone (read: the estate) will have to come up with the rest; otherwise, that’s when the bank needs to approve a short sale.
As for the estate funding the shortfall so that the sale goes through to you, that might not be possible. The executor and estate attorney there would be better able to tell you if they’d be even allowed to do that using the other estate assets, but the point might be moot anyway unless the estate actually has he cash to do it.
Like I said, the estate is completely insolvent–to the tune of at least high 5 figures. It’s either take the current market value, which is somewhere near my price, or foreclose.
Interesting. Seems pretty clear to me that the bank’s best interest would be served by taking a short sale.
If it were a living, breathing, *earning* human owner, there would be a chance of getting some payments from them, if not now then in future. But for an estate that is completely insolvent, there is no chance.
So the bank should at least entertain the offer. I can certainly imagine them (through bureaucratic bullheadedness) choosing the foreclosure route instead. The only advantages foreclosure could have for them are (1) maybe they think they can sell it for more — ha!, or (2) by holding it as REO, they won’t have to (de)value it on their books yet, whereas a short sale would be marked to market now.
Approach them. See what they do with a low offer on a short sale. Maybe they are not fools.
Good points NoVa.
Was it suicide?
yes.
Isn’t it interesting that no one raises the obvious question? If you agreed to pay the mortgage aren’t you morally obligated to do what you said you would do? What is your word worth?
Good point, Dawnal. I think the very fact that people are asking about turning the keys in indicates that they have decided to throw moral obligations to the wind, though, and now they only want to know legal obligations. Another case of Legal != Moral.
Walking away form a debt to a business is not immoral. Businesses go bakrupt all the time, is that immoral? business and morality are two seperate things.
“business and morality are two seperate things.”
The New Paradigm in a nutshell.
My contracts professor would say that anyone who enters into a contract to lend money to another person takes into account the fact that the person may not fulfill that obligation (to the extent the law allows him or her not to fulfill it) at the time the contract is signed. That is why bad credit risks pay more interest.
You might say that the people lending the money didn’t take into account the fact that property values were going to fall. The fact that they underestimated this risk is pretty much their problem.
So, there is an argument that when you are dealing with commercial lenders (either bannks or the people who bought the mortages from them), the risk of people not fulfilling their obligations was fully priced into the deal. You may agree or disagree as you choose, but that is why we have laws to define the lenders rights in the event that the borrower stops paying.
I would say you are in a very different situation with a loan from a non-commercial lender, like a friend or relative. I think the law disagrees with me on this point and assumes that all lenders have the same ability to price risk as commecial lenders.
You should have seem me argue with that professor that a person buying a house who discovers it is nothing but a wooden sponge filled with termites should get his money back. He wanted me to agree that if the house had a 10% risk of termite infestation the buyer would just have discounted the price 10% and that would make it all OK. I thought the fact that you were talking about purchaser making a single purchase for a place to live and not an investor made a difference in the analysis. I think we had assumed away the right to pre-purchase home inspection.
Polly, if you make that argument, then shoplifting is OK as well. You see, the evil corporations that own the big stores have all that shrinkage priced into their goods, so… why not, eh?
Ah, the moral decline…
I think there is a difference between a patently illegal act (even if the store expects it and chooses not to up security enough to bring it down to close to zero) and an act that is entirely OK within the legal system but far down on the “have you no shame” scale.
And I still think that the general discusion on this blog discounts the emotional attachment many people have to their houses. And over estimates the ability of most people to figure out how much they still owe on their house - if a person can’t figure out that a change from 4% to 6% on an interest only loan will take a $1400 a month payment to $2100 a month (not a $1428 per month payment), there is little that person can be assumed to know about her outstanding mortgage ballance.
Is there an imbalance here?
When the lender suckers you into a bad loan with terms you don’t understand, that’s business.
When you escape through a loophole, there’s a “moral obligation”.
Seriously… and when those same businesses change the terms of their agreements with you after the fact, as happens all the time with credit cards? Are you still “morally obligated”? And when they violate their own agreements with you or commit fraud against you? When are you no longer morally obligated?
For the majority of my life I felt morally obligated to pay a bank in the same way as I would a friend. That feeling has eroded greatly, though I have not actually acted on the impulse not to pay. (Not yet, anyway.) That’s because in the last 10 years, I’ve found that almost every large institution I have done business with, even ones I trusted for a long time, has defrauded me at one point or another when I was not looking.
This is getting OT, but always check your bank statements, they’ll assess extra fees they’re not entitled to if you’re not actively checking. (I caught BofA double-assessing monthly fees weeks apart under different names over a months long period, giving the appearance of forethought, and then doing it again even after I called them on it, and had to threaten to sue, under the auspices of a big class action firm where I was working at the time, to get them to stop and give back my money - I’m certain they stole MILLIONS from their customers in that episode, and very few people ever got a dime back. I also caught them years later issuing a credit card in my name that I did not apply for, and then had to fight to get them to admit the application was falsified by an employee who got a commission for doing so - they did the same exact thing to at least two friends of mine. Think it’s accidental?) Likewise, if you ever use a low-interest balance transfer check with a credit card, watch the interest rate as time goes by - even if it’s supposed to stay fixed, they may increase it on you and force you to catch and call them on it. Keep the paper copies of the terms of the balance transfer check, because they may try to force you to produce them to give you back what you are morally and legally entitled to.
I was ranting on a tangent there for a second, but back toward the topic, I believe that the collective experience of getting screwed by the government and by faceless corporations has greatly eroded our society’s sense of morality - a lot of folks just don’t feel obligated anymore, in part because we’ve grown more selfish culturally, but also in part because the people we do business with have screwed us around so much that we now feel, collectively, like everyone is screwing us all the time, so there’s little moral wrong in screwing them back. An unintended consequence of the transition from mom-and-pop local businesses to big faceless companies, methinks, where no one knows each other and taking your profits by screwing people you’ve never met doesn’t have quite the sting…
JimAtLaw: I totally agree with your rant. I think the big banks have management conferences where they sit around and invent new ways of assessing fees. I will never give Bank of America any business. I hope one of the fallouts from the housing bust is a new set of consumer protection laws, and regulations of banks.
Well said, and very, very true !! There is no more personal stake or accountability anymore, so business tries to get away with extracting every last penny possible. Including, of course, the real estate industry.
The days of the golden rule have long passed us by, and as much as some of us pine for a simpler, moral time, the U.S. has been transformed & influenced by 2nd/3rd world values.
Other countries have a dog-eat-dog, kill or be killed system, which has slowly penetrated to America.
Here in Sacramento, you can easily see it in the sneering Russians, who consider Americans naive’ & ripe for the picking …… Mexicans ,who are used to immense graft & corruption as a way of life … Asians, materialistic & always think the price is negotiable & no one can out deal them .. etc etc.
Of course immigrants also bring many positive changes, but on the whole America has changed / but at what price ?
It’s definately less Caucasion European, but for the flamers who will respond, I ask this: why is 80% of the world trying to emmigrate to the 20% northern european-style countries?
I dont notice a desperate rush to Zimbabwe. Pakistan.
Hey, remember that big 60’s ” back to africa ” movement by the militant blacks? Yeah, that went well for about what, a month?, until a few actually arrived & saw all the beautiful natural resources ruined by the corrupt govts.
Western style democracy;not perfect systems, but they seem to work the best overall because … hmmm .. perhaps the citizens cared more about the country than personal greed & realized without a decent system of fair laws, there is NO FUTURE !!
rant off. for now …
An unintended consequence of the transition from mom-and-pop local businesses to big faceless companies, methinks, where no one knows each other and taking your profits by screwing people you’ve never met doesn’t have quite the sting…
Kinda how the drive-by shooter might feel. We usually get the society we deserve.
My wife seems to think I have some emotional attachment to my pre-marriage bank account at BofA. Ha. They sucked up two of the last few banks I’ve dealt with so I didn’t even open it with them anyway.
We keep just the minimum balances that avoid fees there because we still have some automatic payments coming from those accounts. If she wants to do the work of shifting those payments to the bank that pays 10 times as much interest, I’m all for it. (About + $150 / year impact, yippee.)
I’ll keep their bad credit card because of %-of-credit-used and average-age-of-credit metrics for our credit rating and because we just paid their $18 yearly fee so no impact for another year. But AFAIK, another savings and checking account more or less has no affect on credit rating.
If you agreed to pay the mortgage aren’t you morally obligated to do what you said you would do?
Do you think the bank would hesitate to screw the mortgage holder in the worst way possible if the tables were turned?
My guess is that they’d tell you, “It’s not personal, it’s business.”
What the bank might do doesn’t seem relevant to me. If you agree to do something, it seems to me you must do it. If you sign a mortgage and didn’t read the fine print or speak to an attorney about its meaning, that is your fault, not the banks.
If you agree to do something, it seems to me you must do it.
You never agreed not to default. In fact, such a clause in a contract is unenforceable, IIRC. (Which is why there is a body of law around default.)
There is simply no concept of ‘moral obligation’ among bankers and mobsters. It’s not personal, just business.
Dawnal,
The voice of integrity speaks in your posts. I agree with Jim At Law as well, many large financial institutions have become bottom feeders in their business models, but the onus is on the customer to reward honest outfits with their business. I limit my business to Vanguard and USAA–and I used to work for Morgan Stanley and Lehman.
If it was a non-recourse loan, you are doing exactly what you said you would do. You are either paying back the money or giving back the property. That is what you said you would do. Those are the terms of the contract. The banks do not hesitate enforcing the terms of the contract when they stand to gain why should you. The operative word here is if it is a non recourse loan, which in CA (I think) means it was your first loan (no-refi) and you put full 20% down. If after that you are upside down and you return the property to the bank, ah tough luck for the bank.
Actually I think you agreed to pay the amount you borrowed. I don’t think it is either pay or give the property back.
Spike,
Love USAA. Great people to deal with. And to everyone else - you don’t have to qualify for the insurance (military, former military or related to same) to have a bank account.
I would think that if he had 100k in the bank and not in retirement funds why leave the house to begin with? If it is a job transfer well that’s different. I would try to sell the house fast and use the money in the bank to payoff the difference. Matter of fact that’s just what I did on April 30. The difference was not 100k, but it was 10k. And I still have my over 830 fica score, in fact it is probably higher since I am less in debt now than 6 months ago. I would never do something that would damage my credit rating. Insurance companies use that as well.
Banks don’t need another non-performing asset on their books.
You will have to prove you are destitute before they let you walk away. Short sales are very hard to close.
I like they way you think Chris. It’s not an emotional decision, its not an american dream, its about money and your future. You will have to become somewhat of an expert on the lending rules that apply to your state and particular loan. If you haven’t established much in the way of credit you don’t have much to lose by letting it foreclose. As another poster mention, this is why they didn’t lend lots of money to people like that in the past.
Stay in it as long as you can to save up the cash you will need to live on with reduced credit in the future. The rules on the longevity of a foreclouse in your redit report are defined, but I don’t happen to know what they are. If its something like 7 years you’ll be ready to buy again after things have settled out. You can skirt some of the rules if you later get married and your wife happens upon a large down payment and buys a house for 2 of you. Not having good credit doesn’t mean much unless you are trying to get a mortgage. Most people use their credit not to invest, but to pull future consumption (e.g. fancy cars) into the present at a discounted rate (the interest they have to pay). They don’t get more, they just get it now, at the expense of later. This appeals to people who aren’t planners and like to say things like “Life is short, I might get hit by a bus tomorrow.” But usually they don’t, and they just become broke a$$ old people.
” . .. and they just become broke a$$ old people”.
Heh heh …. so fuggin true. And yet they still find the money for vices like smoking, drinking, illegal drugs, etc, which they usually abuse, then joe RESPONSIBLE taxpayer pays for their self-inflicted abuse to keep em alive longer than deserved over our sense of let-no-one-die-at-at-all-costs.
Of course no human can play God & decide who really deserves med care or not but I wish there was some feasible way to tax the irresponsible amongst us who foist their problems upon others to fix.
I’ve commented on this before, so no need to flog a dead horse … exceptions abound for responsible smokers, etc …
“Life is short, I might get hit by a bus tomorrow.” But usually they don’t, and they just become broke a$$ old people.”
Stop you guys are killing me. Lucky no cherry icee in mouth…
I don’t think there are any tax implications to a foreclosure. That’s only if the bank allows a short sale. Then you have to pay income tax on the amount that you have been forgiven. In this case, that would mean that you would pay $33,000 in extra taxes (assuming you’re in the 33% tax bracket) if the bank AGREED to let you sell the house for $200,000.
However, if the bank does NOT agree to the short sale, then you will be on the hook for $100,000. In that case, you would probably file for bankruptcy.
That would stay on your record for 10 years, during which time you would rent. Assume your rent started at $900/month and appreciated at 3%/year over 10 years. Then you would end up paying $126,892.36 in rent over that period.
So it would cheaper by $26,892.36 to pay the extra $100,000 than to go bankrupt.
Of course, you would have carrying costs if you kept the house over that period too, but if you were planning on buying something at the end of that 10-year period, then you would still have carrrying costs on that house, so the costs are simply deferred, not avoided.
At some point it’s integrity. You took the money willingly and sometimes things go against you, but does that suspend your ethics? Are you dumping your problem onto the rest of the population because you CAN’T or WON’T pay the mortgage?
He took the money willingly, and the bond holders lent it to him willingly. If there had been a guarantee the interest rate would have been cheaper for him, less people would have borrowed so much, and we wouldn’t have had a housing bubble in the first place. Ethics has nothing to do with it, it was just business. If he borrowed money from his friends and family I would feel different
“Ethics has nothing to do with it, it was just business.”
Which is why I choose carefully with whom I do business. As Warren Buffett has observed numerous times, waste your time doing business with unethical folks, you’ll get eaten alive every time. And, there is no such thing as someone who is moral, but unethical in business. Either you’re honest, or you’re not.
It is unethical and dishonest to exercise contract terms and laws that the other party feels are detrimental to them in off-nominal situations?
I thought it was just a violation of the Golden Rule.
Looking at a chart of Beazer homes stock - climax bottom ?
Maybe, unless they really do go bankrupt. All of this “stuff” is do for a bounce, nothing goes straight down. Some shorts have really great profits to cover.
The Trend is Your Friend….greatest investment advice I ever received from a Seasoned Veteran of 20 years who had a SEAT on Wall Street.
From a technical point of view, a high-volume spike to the upside or downside usually gets tested. In other words, expect price of BZH to test out that 8.10 low at some point.
Another tax question, more opinion-oriented: As the housing bubble unwinds, it’s already creating deficits in state and county budgets that are severely crunching the ability of those governments to maintain their level of services. Shortly, the federal government will be losing money as well. How do you see this playing out? Recent polls show defense spending as the most populer cut, but still under 50% and a nearly universal (80%) rejection of the idea of a tax hike.
The feds were already going BK by 2020, will this speed it up, or will the reality of hyperinflation or stagflation eliminate that worry?
I think that falling tax revenue, combined with the social security surplus turning into a deficit in 2009 or sooner, will lead to a rapidly growing national debt.
This growing national debt will provide resistance to the shrinking money supply caused by the housing bust.
The government will need some excuse to print money in order to prevent deflation. If anything I think we should expect an increase in government spending over the next several years (unless we elect Ron Paul!)
Maybe, however as of now Feds are taking in record amounts in tax receipts. The key is to cut spending. Tax increase talk is just election year class warfare nonsense.
Yeah, but there’s only so much that “discretionary” spending can be cut. It’s like a homeowner trimming his 1 foot hedges in the front while the backyard is overgrown with kudzu 12 feet high.
I so agree with the comment of cutting spending, but who goes first?
Every single govt dept, worker, agency et al will voraciously defend their turf/job as necessary. Does it REALLY take 20 social service agencies in San Fran to do homeless work?? They are still there.
Same ol Same ol. I refuse to visit SF - havent been in years.
So, what gets cut first???! Just about impossible to do. And living here in CA I can testify that once a govt program gets started, they lobby to keep it going no matter what. Ex: massive prison overcrowding but the prison guard union pressured for no state exchange of prisoners.
And won. Gotta protect yer job, and whats even more humerous is the outright bragging from prison guards about the huge on-call salary bonus they get just for being available by a phone.
Of course the guards will reply that without them society would be at the mercy of bad criminals. To that I say: ” as opposed to NOW ” ?!
ok ok lest I ferget - rant off
I just had a thought, with all of the new *income* from debt forgiveness, what are the chances that the government will earn even more revenue. The FED shouldn’t see a decline until unemployment rises and wages fall.
Then again, income tax is only a small percentage of all the taxes collected by the federal government and many people may not be able to pay the 30K tax on 100K debt forgiveness.
If someone buys a house with a 400K loan and then has to sell it for 300K they get hit with 100K of *income* from debt forgiveness, but at the same time don’t they get to take a 100K loss? To what extent do these cancel out?
How many of those getting forgiveness aren’t in a taxable class that the IRS can find (e.g. illegal immigrants)? Also, though short sales are more common, they’re still uncommon enough that I think the reciepts this will bring in will be offset by other factors. Particularly since the IRS will likely end up ‘forgiving’ a portion of those forgiveness taxes anyway, since it’s not likely J6P will be able to come up with the $25,000 to give to the IRS because he made a bad decision. If he could come up with $25,000 in the first place, he wouldn’t have been in that spot.
Go Hokies (2004)
If you buy a house as your personal residence, you cannot take a tax loss on the sale. So no $100k deduction.
So many double standards… you cannot get a credit for the loss, but you get taxed on the gains! (in certain situations, like moving twice in 2 years with gains both times).
True, you *can* get taxed on the gains in some circumstances. But in most primary residence deals, as long as the owner isn’t flipping and moving every year, he’s not paying taxes.
Own and live in it over 2 years, 250k (or 500k/couple) tax-free. Hold it less but have an “unforeseen circumstance” and you can pay no tax on a pro-rata portion of those numbers. Not a bad tax deal at all on the way up, which is why the downside is “balanced”.
I know several people who made very nice tax-free profits that way, and are now complaining about not having a deduction if they sell on the way down! Well, what happened to the profits? “Oh, that? We spent that a long time ago…” Doesn’t matter — none of them can afford to sell now because they can’t bring a check that big to closing. Doh!!
“If someone buys a house with a 400K loan and then has to sell it for 300K they get hit with 100K of *income* from debt forgiveness, but at the same time don’t they get to take a 100K loss? To what extent do these cancel out?”
Yeah but a lot of people have a $200k gain on the house, but are still $100k underwater. As an example they bought the house for $100K in the 90s, in 2005 they house was worth $400k and they HELOCed out $300k. Now the house is worth $300k with a loan balance of 400k.
They got to spend $300k cash and never pay any tax on it because it was a loan not income.
I always laugh (to myself) whenever someone says after seeing their tax return “but why am I paying taxes, there was no gain. My loan balance was the same as the sale price”.
“Shortly, the federal government will be losing money as well…”
Actually, except for part of the Clinton term, the federal government has been “losing money” for quite a long time. They just have a good credit rating which allows them to cover their shortfall (for now at least) by selling bonds. But just like a mortgage, that money will have to be paid back sooner or later.
The Feds are already bankrupt, but no will admit it, and no one wants to try and fix it, except Ron Paul maybe. The balance sheet looks terrible, liabilities far outweigh assets. Cash flow sucks too, cash in lags cash out by a trillion or so, if you include the little “off-balance” items like Iraq, and how they rip off SSI and Medicare to pay for the general fund.
The only way out is inflation, which they are doing like crazy, and to raise taxes.
Check out some of David Walkers comments and speeches, very illuminating.
http://www.gao.gov/index.html
Who is David Walker and why should I listen to him?
David M. Walker, the Comptroller General of the United States and head of the U.S. Government Accountability Office
I’m convinced Mr. Walker (and Ron Paul) is just about the only senior person in the Federal Govt who has his head screwed on straight. He tells it like it is, for example he flat out states SSI and Medicare are/will be bankrupt unless taxes are raised and benefits cut. Try getting that out of a Washington politician.
60 Minutes: U.S. Headed For Fiscal Crisis?
David Walker, comptroller general of the U.S., totaled up our government’s income, liabilities and future obligations.
He concluded the numbers don’t add up.
http://www.cbsnews.com/sections/i_video/main500251.shtml?id=2534935n
Caution: viewing may make your head hurt and/or explode!
So which is greater, inflation by the fed gov. or deflation by the housing bust/credit crunch?
It seems like the government will have no choice but to FORCE inflation or declare bankruptcy. The only other option would be for the Government to absorb the federal reserve and cancel out the respective liabilities / assets. This would leave only foreign debt and bonds held by the public.
With the election just over a year away, how do you all think this housing crash will affect voters? Will it help or hurt Ron Paul?
Not only is there going to be a problem with reduced tax rolls, but there is going to be severe problems with repayment of tax payer loans to local agencies that expanded the utilities to accomodate all those new housing tracts.
The problem is that when development happens in undeveloped rual areas, the local agencies have to establish all the infrastructure. If developers converted 20% of the land to housing in this bubble, the public utility usually assumes that the rest will also get developed in the future. So they build out the system to service the 20% but have the capacity for future 100% land use.
What happens when these areas full of no doc sub-primes go under. Fees go unpaid, melo-roos go unpaid and new developement haults.
This leaves the public utilities in a pickle. They borrowed massive amounts of debt from the Fed, the state and muni bonds. They planned for an increasing amount of users based on the bubble growth of the past few years to pay back these loans. They planned for staffing and maintenance to increase at the same inflated pace.
What are they to do? They just built gigantic water and sewer treatment plants and they are going to be underutilized for at least 10 years, if we’re lucky.
They have to raise fees on the homeowners that stay. And they have to charge more on any new developement that comes in the future.
Both of these effects will damage demand and make things worse. Or they could go crying to the state and the feds to bail them out of the debt. Whatever happens the tax payer will have to cover for the expenses that the utilities assumed would be borne by developers.
Hold Out in LA
Damned interesting / thanks for that summation.
At 15:49 EDT yesterday the Dow was up 56 points, at 1600 EDT he Dow was up 150 point. The head trader for Rydex funds said “he has never heard of or seen such a thing”.
Kind of like the current RE market? Not normal?
That is what happens when you put a child with limited experience as head trader of a fund.
It was not and is not an unusual event.
Thank you for the correction.
Not an unusual event? Some of the traders that frequent indexcalls.com thought it was:
First a comment from Europe:
“Above you can see the 5minute chart of the S&P. At 9.25pm it stood at 1441 (-0.9%). The index had just dipped under its previous low of the day and appeared ready to continue its decline. From 9.25pm onwards it appeared as if an invisible hand pushed all indices upward.
In the remaining 35 minutes to the close, the S&P gained 1.7% which translated to a 0.7% gain for the day.
When I look at the charts of the major US indices which all made similar moves simultaneously, I really have to ask myself the question, “In what sort of ‘ïnvesting world’ are we now involved”.
The simultaneous movement of all the indices in the absence of any kind of news or explanation, smacks of price manipulation and this troubles me deeply.”
Then this comment:
“Methinks “THEY” couldn’t say, “We decided to intervene in our free and fair markets when it looked like meltdown was about to occur. Buying a few thousand S&P futures at once is our time-proven method of achieving such a stick-save. We always have tons of money in the petty cash to do this and we will do it time and time again until you realise that confidence in our capital markets is a matter of nashnul security.”
Even The NY Times noted that “A last minute rally saves the day,if not the week” and referring to stocks “They bobbed and weaved. Then, seemingly out of nowhere, they surged”.
The grand old man, Richard Russell who has been writing the Dow Theory Letter for over 50 years, eludes to the strange closing yesterday…”I had the distinct feeling that near the close of today’s session somebody or some group decided to “save the day.” Who could that be? Who would have the power to buy, say, a few thousand S&P futures? ”
To those who care to look, it was a blatant demonstration of the power of the Plunge Protection Team. In your face, suckers!
Dawnal, In the last hour of the market, I can remember lot bigger percentage moves than yesterdays move and I am sure Mr. Russell can remember the same moves.
Yesterdays move could have been caused by one buyer buying the S&P futures contract - closing out a short position and forcing traders to scramble for underlying stocks.
If you would like to see some last hour market moves look at the NASDAQ in 2000.
If I were to guess on the last hour buyer, my guess would be KISC.
I can find no better proof than the fact that homebuilders are trading up today?
Anyone here think, for a second, that some broker made a buy offer because they are a good deal?
If you do not know the buyers total position, then you do not know whether they are covering shorts, unwinding a hedge or opening a new position. Many investors take the month of August for vacation, not many wish to leave “open positions” while leaving. Some very good firms were short homebuilders and related companies. I do not expect to see big changes in open interest on the “short side” there are a lot of new shorts.
At this time with 50 minute to go to market close, it appears to me that traders are loading up on stocks to have bullets if what happens yesterday tries to repeat.
Stocks Surge in Late Trading (Yahoo News headline)
Traders get nervous having bought bullets to sell into the close, but where is the buyer from yesterday? 15 minutes to close
“At this time with 50 minute to go to market close, it appears to me that traders are loading up on stocks to have bullets if what happens yesterday tries to repeat.”
Pavlov’s bulls…
Yep, getting set up for the kill. LOL
If you look at the charts, the stocks bounced off the 200-day moving average - a well watched line by the funds.
From the San Diego Union-Tribune, Housing hammers economic outlook:
http://tinyurl.com/27jzl3
“San Diego County’s economic outlook has taken a downward plunge, dragged down by a sharp decline in home building, according to a report released yesterday by the University of San Diego.”
“The slumping housing market is negatively impacting employment and income, hurting consumption, and leading to a surge in the number of foreclosures, according to the report.”
“Five of the six components that Gin uses to gauge the health of the economy were negative in June: building permits, unemployment insurance, consumer confidence, help wanted advertising and the national economic outlook.”
“The only positive note came from local stock prices, which participated in the upward surge of the market that briefly took the Dow Jones industrial average above the 14,000 mark last month.”
Has the definition of “contained” changed?
These are the same experts that a few months ago completely rejected the idea that the housing sector would affect the general economy…..
As long as stock prices keep going up, the economy will do just fine.
I have to add that despite the gloom conveyed by Gin’s leading indicators, the evidence that I see on the ground is that the tourism industry is humming this summer. The airport has very heavy traffic, and the beaches are crowded. Perhaps foreign visitors taking advantage of the weak dollar will save San Diego’s economy from a bad real-estate-led recession?
“It’s a liquidity event, not a default event and it’s a secured US corporate debt exposure not a US subprime mortgage exposure.”
Credit Suisse banking analyst James Ellis
Aug 2, 2007
Glad James has straightened that out for everyone. Is he more-or-less saying, “Subprime is contained, but other stuff ain’t contained”?
LOL
No. Mr. James is saying don’t worry about subprime defaulting, worry about US Corporate debt starting to default.
3 weeks before the defaults start being reported.
Last quarter’s crisis: subprime
Next quarter’s crisis: covenant lite
Serious revenue shortfalls at the state level in Florida. Next economic impact from housing may be lower government spending.
Revenue shortfall ‘inevitable’
Planners shave $1.1 billion off new budget
http://www.floridacapitalnews.com/apps/pbcs.dll/article?AID=/20070802/CAPITOLNEWS/708020364&theme=
House budget chief Ray Sansom, R-Destin, said the state has to tighten its belt until the economy resumes its growth, projected for early 2009.
Oh I feel so much better now - see my crystal ball has been very cloudy of late. I guess his is crystal clear. However don’t they have something like 46 months of inventory right now? With more to come as more condos get completed and the October resets take place. Oh, wait my crystal ball is suddenly clear, oh no Floridians you may not want to hear this but my crystal ball is showing scenes of 1927.
Better get a case of popcorn!
This helps explain the subprime mortgage mess and hedge fund blowups. It predicts the Fed and others will try and lower interest rates also.
http://www.marketoracle.co.uk/Article1694.html
Commercial lending tightening up.
I spoke to my conduit lender yesterday to price a commercial deal. He said yields are now 200 bps across the board for all commercial property types. To put this in perspective typical yields for this conduit lender is anywhere from 100 to 145 bps.
He said many of the secondary players they sell commercial traunches to are “stuck” with commercial loans they can not sell off themselves. Many of these commercial loans were underwritten “liberally” and now the guidelines have tightened up. Therefore, these guys (all the big wall st. co’s) can not buy new traunches because they can not get rid of the ones they have now. Deal flow has been frozen.
He said yields are now 200 bps across the board for all commercial property types. To put this in perspective typical yields for this conduit lender is anywhere from 100 to 145 bps.
When you say this, do you mean that there is now a 200 bps spread between the yield of these commercial loans and some other financial instrument? Would that be some sort of Treasury note? If so, which one?
A person can learn so much on this blog!
Spread is typically added to 10 yr US treasury rate. Commercial CMBS loan origination is pretty much dead in the water for the time being. Life Company’s have widened spreads for new loans in response and purchased AAA tranches at 140 BP’s. For good quality commercial assets at 75% LTV +/- spreads have moved 30-40 BP’s thanks to subprime mess.
I was not sure about this, so I asked Citigroup (current borrower) for a new commercial loan and this is the rates they sent me.’
3 Year Fixed 6.33% 0.00 Pts
5 Year Fixed 6.40% 0.00 Pts
7 Year Fixed 6.46% 0.00 Pts
10 Year Fixed 6.56% 0.00 Pts
15 Year Fully-Amortizing 6.56% 0.00 Pts
Loan to Value: 80% Purchase 80% Refinance
Loan Size:Multifamily up to $35,000,000; Commercial up to $25,000,000
Amortization: Up to 30 Years
Recourse:
Non-Recourse available over $1,000,000 with standard carve-outs
Rate Lock: At time of application – 60/90 Days
I am a small borrower so it may be that the lending size for others will be either higher or lower, but these rates do not appear to have changed in the last year.
Just to confirm, my BIL’s firm has a good sized commercial RE practice in Dallas. That group has gone from busier than a Bangkok hooker during fleet week to twiddling their thumbs in 8 weeks.
That’s a great analogy and one that could be used to descibe a possibly related change in leasing activity for industrial space in Phoenix and Las Vegas. Its slow. By the end of September we will know if this is a summer slowdown or the beginning of a cyclical downturn. My bet is on the latter.
Hey Clogged, keep us informed on the leasing market. That is definitely a good pre-indicator of micro-markets.
BTW, what do you do on the commercial RE side of things?
I’ve started reading the Broker Outpost forums lately. Seems everyone is concerned about competing with FHA. My favorite was “FHA is the new subprime”. While funny, that comparision seems to be based on low Fico and low down. But you are capped at 29% gross PITI and have to go full doc.
If full doc and 29% are the now required, I’m all for it.
29% PITI — ha ha! So much for FHA ever being relevant in bubble markets, even if they do raise their house price limits…
“If full doc and 29% are the now required, I’m all for it.”
Ditto that. They aren’t going to succeed in much of a rescue of bubble pricing on those terms.
But there’s been talk of forcing FHA to reduce its standards to get closer to those of the now BK subprime lenders. Sort of a way of taking the problems out of private hands and putting them on the public (you and I).
What do they mean that they’re stuck with these loans. They can make money servicing them, right? Pure gold.
Oh, wait you mean they’re really crap loans that will lose money?!?!? Ah dang , don’t you hate it when you end up as the bag holder?
Exactly, when you finance stuff at 4 and 5% cap rates, that’s what happens, no cushion for debt maintenance. I knew there was a commerical bubble here in Phoenix when people starting telling me (as recently as earlier this year) that commercial was taking off…
LEND is down 32% at this time!
It said this a.m. that it has questions whether it can continue as a going concern.
http://money.cnn.com/2007/08/02/news/companies/bc.accreditedhome.reut/index.htm?source=yahoo_quote
Yesterday there were questions raised about whether BZH could continue as a going concern, and today there are similar concerns about LEND. It seems as though fixtures of the housing bubble are starting to fail at an increasing rate…
Lone Star to the rescue?
The other side of the trade is up 42%.
Make it 48% now.
oops, my bad up 153% now.
I am not the only commentator to note the peculiarity of yesterday’s spontaneous bull stampede in the last hour of trading…
Out of Nowhere, Dow Jumps 150.38
Trading Is Furious;
Second 5-Billion Day
For NYSE-Listed Shares
By PETER A. MCKAY
August 2, 2007; Page C1
The stock market surged in the last half-hour of trading after sputtering throughout the day, amid continued concerns over a possible credit crunch spreading throughout the economy.
Wall Street traders and analysts couldn’t cite a specific catalyst for the quick rally, although a wave of preplaced electronic orders to buy and an earlier pullback in crude-oil prices seemed to help. The Dow Jones Industrial Average was hovering in the red and near its intraday low around 3:30 p.m. EDT, but then rallied more than 217 points.
http://online.wsj.com/article/SB118601271260585464.html?mod=todays_us_nonsub_money_and_investing
If the U.S. stock market were a mental health patient, I would almost suspect that someone tried to apply electroshock therapy in the last hour of yesterday’s trading.
More of the same this morning? I would guess that after too many such treatments, the patient might end up severely injured…
http://www.marketwatch.com/tools/marketsummary/
Gs, My friend
Read Chapter 12
Order Imbalances and Stock Price Movements on October 19th and 20th, 1987
http://tinyurl.com/2zttk4
(caution 26 pg pdf)
October 19th most people know, however on October 20th the NYSE market was done 20% and rallied to unchanged on the day in the last hour.
What risk is there if you know the U.S. gov’t and the FED is going to bail you out?
Should say …Rallied to unchanged on the day in the first hour.
“What risk is there if you know the U.S. gov’t and the FED is going to bail you out?”
The risk is that of the levee effect.* Translation to financial markets: If everyone knows the Fed / U.S. govt is offering free bailout insurance (esp. hedge fund managers), then everyone also knows they can engage in high risk activity with no downside risk. Pretty soon, systemic risk ramps up to a level that threatens to swamp the system.
*levee effect refers to the tendency of flood plain development to increase due to the perceived protection offered by levee construction. During the next flood which breaches the levee, the development which occurred is severely flooded.
I’m a nursing student, and I got to see people get electroshock therapy. Once they wake up, they’re very tired, with a bad headache.
Oh crap! Wall Street smells a possible bailout again. Keep in mind that this guy is not with one of the regional FRBs. He’s a member of the Politburo.
“The Federal Reserve has a key part in ensuring the U.S. financial system weathers financial turbulence, Fed Governor Randall Kroszner said at a nomination hearing on Thursday.
“The Federal Reserve … has an important role to play in responding to and mitigating the impact of financial crises and shocks,” he said in testimony to the Senate Banking Committee.”
http://www.reuters.com/article/marketsNews/idUKN0221574820070802?rpc=44
“The Federal Reserve … has an important role to play in responding to and mitigating the impact of financial crises and shocks,” he said in testimony to the Senate Banking Committee.”
Does that mean we should expect lots of helicopter drops in the near future?
Good catch Deron, It upsets me to have some mope say something that stupid. “The Federal Reserve has a key part in ensuring the U.S. financial system weathers financial turbulence.” Where was he when the Bonds, Stocks, Real Estate soared to the current stratospheric heights? The Fed has the ability to tighten the moneys supply and if they wanted to stop “financial turbulence” then the Fed could have stopped the formation of bubble markets. The Federal Reserve aided and abetted the inflation of all assets and now after, the largest theft of wealth in the history of the world, the ponzi scheme is unraveling.
It really frost me to see this kind of stuff, especially right after Poole’s pro-free market statements. But unlike the blindly bullish, we need to stay alert. The slow unlucky bears have already been weeded out by natural selection in a harsh and unforgiving environment.
I think the Fed may try something (possible helicopter drop) in the Fall if the stock market refuses to follow their plan. They have several major obstacles: The most important one is that the quasi-bank credit machinery that they have protected from regulation and nurtured is collapsing. Hedge fund are blowing up with many more to come, private equity is frozen by normalization of risk spreads and finance companies hunkering down against spiraling losses. Under the circumstances, the Fed might have trouble convincing the less-damaged commercial banks to stick their reproductive equipment into the light socket.
“We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.”
Mr. Alan Greenspan to Senator Jack Reed
February, 2005
Get the H-E-double-hockey-sticks out of the DOLLAR!!!!!!!!
“We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.”
That statement about SS hung with me over all other statements. It’s is the obvious insight into their intent. If you can’t bankrupt SS from the outside, chip away at it gradually from the inside.
“Poole’s pro-free market statements” = plausible deniability for Fed intervention in the form of plunge protection measures
Have certain hedge funds & private equity playas (Citadel, Cerburus, Blackstone, etc) been tasked with providing preemptive bailouts? (E.g., rather than wait for LTCM-style failures with post-collapse mop-up operations, why not acclerate the mop-up operations by getting hedgies with bank to snap up firms on the brink?)
If my conjecture proves correct, what is in it for those sufficiently confident to try and catch falling knifes in flight? One possible explanation: The Buffet Effect (whenever Buffet announces he is buying, the stock price of whatever he buys goes up).
—————————————————————————
Beazer shares rally after decline
Citadel raising stake in home builder eases fears after ‘unfounded’ rumors
By John Spence, MarketWatch
Last Update: 2:28 PM ET Aug 2, 2007
BOSTON (MarketWatch) — One day after bankruptcy rumors surfaced and pushed shares of Beazer Homes USA Inc. lower, the stock bounced back Thursday after a regulatory filing disclosed that a hedge fund has increased its stake in the home builder.
Beazer’s (BZH :Last: 12.69+1.21+10.54% 2:55pm 08/02/2007) shares were up more than 11% in afternoon trading after a filing Thursday said Citadel Investment Group LLC, a large hedge fund firm run by Kenneth Griffin, has raised its stake in the residential builder to 5.7%.
http://www.marketwatch.com/news/story/after-pullback-beazer-shares-rally/story.aspx?guid=%7B34B65A2B%2D9EED%2D4122%2D9346%2D482E02084680%7D
GS
I wonder how many of the sheeple bothered to actually check the 13G filing. Those are always done with a bit of a delay and big financial buyers wait as long as they can to disclose their moves. Apparently Citidel crossed the 5% ownership threshold for BZH on July 24.
The BEST prices that day were a little under $17. It’s likely that they had been accumulating stock for some time prior to that since they got to 2.23 mil shares by COB on 7/24. I would be shocked if Citadel’s average cost was anwhere close to $17. With the price falling steadily for weeks, I’d bet they averaged in north of $20/share.
Looks to me like they’ve managed to piss away $15-20 mil thus far. So much for them being smart buyers in this case. It’s certainly nothing to get excited about now.
Another conjecture: Hedgies and private equity firms either are anticipating a bailout or know one is in the bag, which would tend to make snapping up failing REIC firms look smart through the rear-view mirror.
What puzzles me is how these firms are raising money for fire-sale purchases despite the obvious obstacle of a burgeoning credit crunch?
Hedge funds prepare to buy amid credit woes
Marathon, Silver Point raising money; Citadel already snapping up positions
By Alistair Barr, MarketWatch
Last Update: 3:00 PM ET Aug 2, 2007
SAN FRANCISCO (MarketWatch) — Rising subprime mortgage delinquencies and pulled leveraged loan deals are roiling global credit markets, but some big hedge funds are preparing to buy and others have already begun stepping in to scoop up distressed assets.
http://www.marketwatch.com/news/story/credit-market-wobbles-some-hedge/story.aspx?guid=%7B82E6055C%2DACB5%2D4C70%2DB53E%2D867030A3685E%7D
Bravo! Encore!!!
U.S. stocks rallying, Dow up 133 points in last half hour
By Nick Godt
Last Update: 3:37 PM ET Aug 2, 2007
NEW YORK (MarketWatch) — U.S. stocks again rallied in the final half-hour of trading Thursday, with the Dow Jones Industrial Average gaining over 120 points, as bargain-hunters seized on recent market volatility to pounce. The Dow industrials were up 118 points at 13,481, with 27 of its 30 components higher. The S&P 500 index gained 7.8 points to 1,473, while the Nasdaq Composite gained 22 points to 2,576. The market behaved in a similar fashion on Wednesday and rebounding from early pressure due to ongoing concerns about credit woes at global financial institutions.
Greetings from NYC, where yesterday’s market rally show that Alt-A is contained!
Mayor Bloomberg predicts market retrenchment will have serious consequences for the city’s budget:
http://www.nysun.com/article/59643
But what does he know. He’s a politician.
Meanwhile, the Daily News is still worried about subprime foreclosures.
http://www.nydailynews.com/opinions/2007/08/02/2007-08-02_foreclosure_fiasco.html
They’ll be more to worry about later.
Hey WT, I know you’re being sarcastic. The thing about Bloomberg is he tells it straight–NYC is not immune, and yes, as it unravels, tax receipts will fall…not good news, but boy, I respect the man.
More anecdotal evidence. I listen to Dr. Wayne Dyer’s show on HayHouseradio.com and on his July 30 show, a woman working in the mortgage business called. She said, “I’m a straight commission person. I’ve been in the mortgage business 15 years. Right now, the whole mortgage business is collapsing.” She wanted guidance in finding a new career.
I bet she didn’t save any money for a rainy day.
If she had 2 years of living expenses in T-bills she would not be worried. In my line of work, I have to have lots of conservative investments because I can easily become unemployed several months. This has happened to some colleagues of mine in the consulting business, so it can happen to me. I invest like a 68 year old outside my tax-deferred investing, but I invest like a 25 year old in my retirement plan - all aggressive growth stocks - because I don’t need that money for another 20 years.
It would be cool to be unemployed for 5 months while living in Hawaii in a rental, casually waiting for jobs to come back - when that time comes. I knew of one consultant who parked himself in Thailand while waiting for a better economy. He had no care in the world while there, obviously!
That’s only ok if you are the kind of person that does not go nuts when they have nothing to do.
You mean go nuts when you don’t have somebody else inventing things for you to do???
It would be cool to be unemployed for 5 months while living in Hawaii in a rental, casually waiting for jobs to come back - when that time comes.
Trust me, you will find plenty of things (you enjoy) to do to keep from going nuts. It’s a blast, but the tough part is getting motivated to go back to the real world when the time comes.
http://www.iht.com/articles/2007/08/01/bloomberg/sub.php
“Investment banks that bundle and sell home mortgages often commissioned reports showing growing risks in subprime loans to less creditworthy borrowers but did not pass on much of the information to credit rating agencies or investors, according to some of those who prepared the reports.”
The I-banks knew there was a big problem. They hid the evidence and sold the stuff to unwitting buyers. Now they’re getting sued and rightfully so.
These investors who bought it and are now claiming they did not know should be shot for not doing due diligence. Stop pointing the finger people!
Tom, Moody’s filed a report last week that said they got phony numbers…you can’t do “due diligence” anymore because Enron accounting is norm for the financial industry, and Crammer is their delievery system.
Smoke and mirrors everywhere
i posted this lastnight a bit late. its from my LL. i moved into a carlsbad condo and tried to weasle out of the lease, now he writes me this last night.
Ann-
We have a solution for all of us. We have decided to liquidate the condo and when sold let u out of the lease of course by action of the sale. We will be selling it well below current asking prices and it will be sold.
We will give you proper notification and certainly time, if needed , to find another place. We will also need to have the realtor possbily show the property and will give you notice.
If we can get it sold, we will all be happy and free and clear. Our intent is to not mess around and just drop pricing until it sells immediatly.
Thanks for your understanding and cooperation with the realtor, Ron Hetu. We know how unhappy you are and think instead of watiing until the end of your lease to sell it, 6 more months, we will sell it now and get you out also. Please feel fre to contact me anytime.
Rob
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Pinpoint customers who are looking for what you sell.
Hi. I’m in SD County, too. Have they told you what the price they plan to list it for? If so, does it sound reasonable? Would you consider buying it yourself if the price is right? I’m assuming not, since you are obviously not happy there. What were the problems with the place?
Thanks for sharing, agitated. I do enjoy keeping up with what’s happening on the rental side as we proceed to later innings in this game.
Naturally, if you signed the lease but want to be out of it, you help yourself most by working with the agent and keeping the property neat and ready to show. Sure, a lot of tenant-rights people would tell you that the landlord needs to give lots of notice to show, etc. etc., but do you really want to decline a potential buyer access to the place? Every month it sits unsold is a month that you are legally on the hook for paying.
The problem comes with the timeframe of 6-months. Unless that landlord puts a really good price on the condo, it will not be selling in a month. Even if he finds a buyer this month, it will likely be well into September before closing. If he’s slow in dropping the price to meet the (sagging) market, that can drag even longer.
Now if you want to buy the place, you could follow the example of one of my dirtball acquaintances. I wouldn’t advise it, morally, but he knew that his landlord was running negative cash flow, and he also knew that he didn’t want to move. But to buy the place? Price was a bit high. So he kept the place in miserable, dirty condition and made the poor landlord toe the line every single time a showing was to be done. So when the buyers did get in, he was ready to present them with water under the bathroom sink, dirt everywhere, smells, underwear drying on the kitchen faucet… ugh. Buyers ran sreaming! In the end, he battered the landlord down a bit more than 10% and bought the place. I feel sorry for his landlord.
As the housing bust continues, expect to see more sites like this:
http://www.mymccrearyhomesucks.com/
Unless your LL has given you a 120 days written notice of his intent to sell he has to mail or deliver to you in person a 24 hour notice to show the place. And yes that is 120 days.
And even if he has given you that 120 days notice he has to give you a 24 hours notice to enter and the date and time. The realtor has to leave their card. All showings have to be scheduled during normal business hours 9-5, no weekends or holidays.
http://www.dca.ca.gov/
> Quick Hits
> Landlord-Tenant
What was your story by the way? I missed it.
Oops, this was a reply for agitated in sd.
Aug. 2 (Bloomberg) — Taiwan’s insurance stocks fell after Taiwan Life Insurance Co. announced a loss on securities backed by subprime mortgages, amid concern that the effects of souring U.S. home loans may be spreading in Asia….
“Concern about the subprime problem has finally hit home for Taiwan investors,” said Michael On, who manages $100 million at Beyond Asset Management Co in Taipei.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJZRm9gAdLMY
Local economic tragedy hits San Diego’s KPBS, as they cut two outstanding locally-produced shows. Gloria Penner’s Full Focus featured some very provocative discussions of the deteriorating San Diego housing market.
The GM was on the 9am KPBS broadcast today. His attitude towards listener opinion was something to the effect of “Screw the listeners; I’m the decider.”
More Metro news
KPBS cuts two local shows, 12 employees
By John Wilkens
UNION-TRIBUNE STAFF WRITER
August 2, 2007
SAN DIEGO – Citing a need to “spend our financial resources wisely,” KPBS yesterday canceled two local programs – the radio show “A Way With Words” and the TV show “Full Focus” – and laid off 12 employees.
Doug Myrland, general manager of the public broadcasting station, said both programs “had elements of success in the past, (but) trends indicate their future potential for audience and revenue growth is minimal.”
http://www.signonsandiego.com/news/metro/20070802-9999-1m2kpbs.html
That’s sad
I found the GM’s attitude highly offensive, given that they are a public radio station. It is fine if a private for-profit organisation ignores their contituency’s viewpoint, but given public funding, there is a public obligation.
First we saw “sub-prime” lenders fall. That was easy to predict, even though everyone acted like it was a surprise.
Then we see “alt-A” lenders seizing up. That was harder to predict, except if you know what type of loan programs “alt-A” encompasses (high loan-to-value, stated income, etc.)
Now you are seeing troubles in “prime” lending, with Countrywide saying that 2nd liens (HELOCs, etc.) of prime borrowers are experiencing more defaults than they had planned for.
A question: Will “prime” get worse? My thoughts are that “prime”, during the last two years, and especially in California and other bubble areas, has consisted of a large portion of I/O arms and Negative Amortization ARMs (including the heavily advertised “Option-ARM”). During a flat or downward housing market (like we have in those areas), I’d consider even “prime” first liens to be ticking time bombs…especially on the Neg-Am/Option ARMs. Any thoughts? Does anyone know what percentage of “prime” is Option ARMs and I/O ARMs?
Smart young folks I talk to all seem to prefer renting to buying right now. This poses a looming political issue for govt and quasi-govt entities which are supposedly riding to the rescue of the collapsed subprime sector. Given that smart young households are also rich young households, efforts to goose housing demand through below-market interest rates and govt guarantees runs the risk of attracting a disproportionate number of falling knife catchers from the low income / low education segment of the U.S. population. Don’t be surprised when there is a massive public backlash against govt programs which led to record high foreclosure rates in low income communities.
“goose housing demand through below-market interest rates”
Side topic, but without “no money down/low money down” and “stated income”, Cali and other high-priced bubble areas are toast…no matter what the rates.
Agreed, especially if well-informed young households with bank are bubble sitters…
I work with several people that are fanatical followers of Harry Dent. While his demographic analysis has merit, it fails to account for the effects debt. His life-cycle consumption analysis suggests that both spending and income for the boomers will continue upward to a peak in 2010.
They don’t like it when I point out to them that the drawdown of savings and dramatic increase in household debt might have some serious effects on that scenario. Both trends take future consumption and accelerate it into the present, with the future loss of buying power equal to current consumption plus interest. So while Dent’s underlying L-T demographics may be correct, much of his ballyhooed ’spending wave’ is already behind us - pulled forward by all the debt we’ve accumulated.
If these young folks are really smart, they will wait out the current housing and credit bubble, then the subsequent wave of selling by Boomers looking to cash out and downsize. Given the underlying demographics, that could take over a decade. Gonna be a good time to rent.
“Both trends take future consumption and accelerate it into the present,…”
A great deal of housing demand and consumption demand have been accelerated into the present in recent years. Unfortunately, there is a future bill to pay for such acceleration…
So while Dent’s underlying L-T demographics may be correct, much of his ballyhooed ’spending wave’ is already behind us - pulled forward by all the debt we’ve accumulated.
Exactly!
One more point to ponder: Goosing rates will definitely bring in some buyers on the margin. My questions are twofold:
(1) Will this be enough to reflate the bubble? (I concur w/ arroyogrande that the answer is “no.”)
(2) What will be the demographics of the marginal buyer pool?
This is where I believe the Loan Rangers of Subprime (Fannie, Freddie and FHA) face a serious political risk of attracting low education / low income buyers into catching falling knives that lead them down the path to future foreclosures, as well-educated high-income young households have enough sense to take shelter from falling knives in the rental market.
Demographics…
Question: What kind of demographics did Mitsubishi get a few years ago when they offered 0-down, 0-payments for a year to goose sales?
Answer: The demographic that make other arrangements around the time the first payment comes due and default on the purchase they were enticed into but couldn’t really afford.
Been reading BO. You can still get SIVA or SISA but are you gonna pay for it! I was seeing 8.875 to 9% - ouch
What I want to know is what FIVA, 95% LTV, 720 fico, DTI 32%, O/O SFR in CA will fetch for a rate?
“FIVA”
Gwynster, what is the “FI” in FIVA? I know VI (verified income), SI (stated income), and NI (no income number needed/no doc), but what is “FI”? (Might be good instead of “stated income for w-2 earners”, call it “Fraudulent Income”)
Full Income verified assets. I’m just learning the lingo-
Basically I’m trying to figure out if I have to stay under 29 DTI with FHA or can I find something better with 32%. Right now our DTI is 3% as we finish paying off one last student loan.
gwynster, you posted -
“Been reading BO. You can still get SIVA or SISA but are you gonna pay for it! I was seeing 8.875 to 9% - ouch
What I want to know is what FIVA, 95% LTV, 720 fico, DTI 32%, O/O SFR in CA will fetch for a rate? ”
…. what the HELL !?! I know you work in a Davis College/Univ so was that an attempt to get us to buy a course outline to decipher that jargonistic post? Can I just CLEP the course ?!
Now is a GREAT TIME TO RENT
LOLOLOL
Doesn’t that look nuts? I tried post earlier but the blog keeps eating posts
FIVA Full income verified assests. It looks different because who has been doing these lately? I think these went out of style about the time Pong was popular.
95% LTV loan to value, basically 5% down
720 fico
DTI 32% 32% debt to income - basically spending less then a thirt of gross on PITI
O/O owner occupied
SFR
Just trying to see what the spreads look like compared to traditional FHA as the credit markets contract. Not to mention it’s nice to be able to write down all that in shorthand to pass to broker down the road so you can get to the chase faster.
Getting a GFE doesn’t mean you have to use it. I consider it a license to torture listing agents >; )
Aquis,
SIVA - Stated Income, Verified Assets
SISA - Stated Income, Stated Assets (aka Liar Loan?)
FIVA - ???
95% LTV - Loan To Value, loan is no more than 95% of apprasied value.
DTI 32% - Debt To Income, no more than 32% of your monthly income goes to debt service
O/O - Owner Occupied
SFR - Single Family Residence
CA - Bubble Central
You forgot NINJA loans - No income, no job, no assets
LMAO that anybody would do those.
“NINJA loans”
Those lasted, what, a year before sub-prime collapsed? With NINJAs, it was best to close on 10 properties simultaneously, with cash back at closing, then take the next freight train outa town. NINJA loans were the sign of the coming of the apocalypse.
Ok many thanks to all for the breakdown on those abbreviations.
(I was out in the back parking lot while you go-getters were paying attn in class. ‘Scuse me - gotta couple o’ burgers to flip now & a fry basket to shake. )
CAR IN DRIVE-THRU ! CAR IN DRIVE-THRU !!.
Question for those ‘in the know’ here.
Do lenders sell off prime mortgages that are in default at a heavy discount only to buy them back (refinanced) at a higher price? I’ve been hearing about some companies that help people avoid foreclosure but was wondering how they make their money.
OT, but thoughts going out to those in the Twin Cities where the bridge collapse happened…our thoughts are with you.
What a terrible tragedy. No Californian can watch that story unfold without recalling the horror when a section of the I-80 Oakland East Bay Bridge collapsed into the SF Bay during the 1989 Loma Prieta temblor.
Anybody heard from Clouseau?
I know it’s too late for anyone to read this post, but I’ve been wondering about HIC too. Ever since he got bit by that bat, he’s like this character to me. What would I do if he stopped posting forever? I think I’ll look for him again tomorrow AM.
How long does it take for rabies to show up? (Just kidding - I seem to recall he got the shots?)
And yes, for all affected by the tragedy our thoughts are with you. And hopefully this will be a wake up call to Americans to start thinking about our failing infrastructure. (Not that we can afford to.)
Investors were relieved that profits at companies such as Nokia Corp. came in better than expected, and after the Labor Department said jobless claims rose last week by a slightly smaller number than economists predicted. The report — which comes before Friday’s highly anticipated July employment report — was a promising sign that the job market is holding up.
Does anyone see a problem with this? Independent contractors, which is 90% of the real estate and building industry do not claim unemployment compensation. So all those people are not counted in the numbers.
“Investors were relieved that profits at companies such as Nokia Corp. came in better than expected.”
This is the most depressing thing I have seen all day. It would be great if Nokia were an American Company or even made a few phones here, but it is Finnish. (Aladin Sane - no Finished jokes - por favor -just kidding!) A few share holders made a few bucks, in the meantime Motorola is trading near its 52 week low. In May, Motorola announced it would slash 4000 jobs. The cuts came on top of 3500 previously announced layoffs.
“The fickle forces of fashion have hurt the American bootmaker Timberland, which is facing a $100m (£49m) shortfall in sales as its chunky footwear loses out in a trend towards slimline shoes and trainers.
Timberland today revealed a second-quarter loss of $16.6m and said its global revenue was down 1.1% to $224m, with an 8.5% fall in American sales….”
http://tinyurl.com/32ra8k
I still love my Timberlands, I’ll have to go out and buy a pair or 2 before the company goes under or gets sold.
Bankers try and digest effects of subprime disorder
By Martin Arnold, Andrew Edgecliffe-Johnson and Philip Stafford in London
Published: August 2 2007 22:08 | Last updated: August 2 2007 22:08
City bankers are beginning to sound like doctors treating gastric disorders. “It is a serious case of indigestion. There will be a lot of pain. But it will pass. Come back and see me in September, when things should have cleared up,” a senior investment banker said this week.
The indigestion he was referring to is the nervousness spreading through debt markets, triggered by the US subprime mortgage crisis, pulling the rug out from some planned buy-outs and leaving banks facing losses upon financing for others.
http://www.ft.com/cms/s/1bc37e34-412c-11dc-8f37-0000779fd2ac.html
Banks strive to abandon buy-out deals
By Francesco Guerrera, James Politi and David Wighton in New York
Published: August 2 2007 22:08 | Last updated: August 2 2007 22:08
Private equity groups believe they can force Wall Street banks to fund billions of dollars of pending takeovers in spite of the credit market turmoil by exploiting legal concessions extracted from the banks during the recent takeover boom.
Investment bankers and lawyers say some Wall Street firms are lobbying buy-out funds to cancel recently announced takeovers in the hope of avoiding big losses on the sale of the high-yield debt used to fund leveraged buy-outs.
Some banks are even considering picking up the break-up fees paid by private equity groups to companies when a takeover collapses.
http://www.ft.com/cms/s/85e8cef6-4120-11dc-8f37-0000779fd2ac.html
Subprime blues sound familiar
By Desmond Lachman
Published: August 2 2007 19:34 | Last updated: August 2 2007 19:34
T he rapid unravelling of the US subprime mortgage market reminds us of the adage that history repeats itself: many of the sad excesses of today’s subprime market are but an echo of the costly savings and loan crisis of the early 1980s. Perhaps history will have taught the American taxpayer to resist vigorously picking up the bill, which this time around could prove even more costly than the earlier S&L meltdown.
At the heart of today’s subprime crisis is the unfortunate interaction of financial innovation gone awry, inept market regulation and a failure of the rating agencies to exercise their fiduciary responsibility to protect the average investor.
http://www.ft.com/cms/s/bcd23682-4120-11dc-8f37-0000779fd2ac.html
The Short View: Fed’s priority
By John Authers, Investment Editor
Published: August 2 2007 18:25 | Last updated: August 2 2007 18:25
Markets are generating enough uncertainty of their own, but they now face external events that could stoke up volatility. Friday brings US non-farm payrolls, which almost always provoke a market overreaction. On Tuesday, the Federal Open Market Committee meets for the first time since world credit markets started to tumble. The FOMC’s statement also regularly provokes a wild overreaction.
Nobody expects the Fed to change the Funds rate next week. It will stay at 5.25 per cent. But the market does now believe the Fed will cut rates by the end of the year. Fed Funds futures put the chance of a cut to 5 per cent by January at almost 100 per cent.
http://www.ft.com/cms/s/e20bf088-411a-11dc-8f37-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2Fe20bf088-411a-11dc-8f37-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fus
P.S. Not sure what the rest of the article says (I only copied the part available to non-subscribers like moi) but my personal take is that the economy will have to show some serious signs of weakness by year-end to justify the Fed’s rate cut. Given 100% probability of a rate cut implied by Fed Funds futures, it appears that many market presumably well-informed participants in the futures market think a slowdown is in the bag. Which brings us to the subject of the ever-resilient DJIA in the face of bad news; doesn’t the stock market normally tank in anticipation of an economic slowdown?
GS
I’ve written several times about the myth of an omnipotent Fed. It’s because of a number of studies conducted over many years showing that the Fed doesn’t so much set rates as follow the lead of the bond markets. The current 10-year Treasury trading at roughly a 50 bp discount to Fed Funds is basically signaling that they will cut rates. Notice that the rate cut predictions disappeared when Treasury yields exploded upward in June. The Fed will just do what its master the bond market gives it permission to.
GetStucco, if you’re still out there this late in the day - your theory about you can sell a house in a few days if you price it right was tested and found to be 100% accurate. Closed on the house today, will post more in the morn. Thank you Ben, GS and everyone on this blog.
I’m a little miffed that all the lawsuits against the subprime mortgage lenders are from “investors” who backed the mortgages and people who signed up for mortgages they knew they couldn’t afford.
There’s a large class of people who have been victimized by the Subprime Mess. Trouble is, many of them are too foolish to know they’re victims. I’m talking about folks whose assessed property values have gone up, along with property taxes based on assessed value, because of the value was set from sales into the neighborhood to subprime borrowers.
A responsible person would never take an interest-only 110% mortgage with a teaser rate (with the exception of people who have the cash in the bank to pay off the mortgage in one lump if necessary). Only people with no savings and nothing to lose would: just declare bankruptcy if things don’t work out.
But because of this influx of funny money, and no shortage of people who only cared about “howmuchamonth”. house prices shot up….along with property taxes.
Sensible, responsible savers got screwed. (It seems like there’s a War on Saving in this country.) We know that one’s primary residence isn’t an “investment.” I don’t care one bit what the house I’m living in is “worth”, as long as it roughly tracked inflation by the time I’m ready to sell, if ever.
Nobody would feel good if some Billionaire decided to pay $2 Million apiece for 5 homes on your block, when the existing homes were selling for $400K, and all of a sudden your property taxes doubled because you now live in a $2 Million home instead of a $400K home. But when nearly the same thing happens over a period of a few years, with free money being handed to people with no means of paying back the loan, nobody bats an eye. Just replace “some Billionaire” with “investors who bought hedge funds”.
I’m hoping some smart attorney will figure out a way to identify those people whose assessed values were based on neighboring sales to people who filled out fraudulent “no credit check” applications, or got very speculative loans, and sue the subprime lenders for the extra payments caused by assessed comparable values based on nonsense loans. Especially the case where the comparable sale used to set value ended up in default!
The reason I said “many of them are too foolish to know they’re victims” is that people seem to like crazy home valuations. It makes them feel “rich.”
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