The Hole Was Deeper Than We Thought
The Mercury News reports from California. “This Labor Day finds one out of eight Californians out of work and politicians everywhere promising plans for creating more jobs. Many economists say a key to quickly curing California’s malaise is to target one of its chief causes: the housing market crash. But economists acknowledge turning around the severely depressed housing market could take years. Until then, many economists say that only renewed federal spending and other policies that put money in consumers’ pockets can make a dent in the jobless rate.”
“But if that’s such a good idea, why is unemployment still 9.1 percent nationally, despite the hundreds of billions in tax cuts and federal handouts Congress passed two years ago? ‘The hole was deeper than we thought,’ replied Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto, who along with many other economists suggests another round of targeted tax cuts. ‘Who knows? It might work this time.’”
The Union. “People in western Nevada County’s real estate industry are worried that efforts to reduce the national debt could result in a change to a pillar of American home ownership: The mortgage interest deduction. ‘It will affect us all across the nation,” said Executive Director Kathleen Hinman of the Nevada County Association of Realtors. ‘Many of us buying our homes expect that interest deduction’ when it comes time to fill out income tax returns.”
“In western Nevada County, 50 residences costing more than $500,000 were sold from January through July — out of 673 total sales to date, according to figures compiled by the local realty association. Those high-end homes are few in number, but are significant for their dollar volume: $31.7 million out of a total volume of $167.1 million in sales from January through July, according to MLS. ‘This is the last thing we need right now, to take the stimulus away from our industry,’ Hinman added.”
The San Francisco Chronicle. “One of the biggest tax breaks of all is heavily skewed to wealthy residents of San Francisco, San Jose and California’s other upscale coastal cities. It’s the mortgage interest deduction. Just three metro areas - greater New York, Los Angeles and San Francisco - receive more than 75 percent of the subsidy, according to a 2004 study by economists Todd Sinai and Joseph Gyourko. Mortgaged homeowners in the San Francisco and San Jose region receive $4.6 billion a year from a tax break for what are known as McMansions, according to a study this year by John Burns Real Estate Consulting in Irvine.”
“The tax break is available to anyone who borrows up to $1 million for a mortgage - including for a vacation home - or takes as much as $100,000 in a home equity loan. The chief recipients are younger, well-off households that receive ‘a big incentive to increase the size of their mortgage or house,’ said Eric Toder, co-director of the Tax Policy Center, a joint research group of the Urban Institute and Brookings Institution. ‘In areas like San Francisco, where it’s not easy to build more housing, it drives up housing prices by a substantial amount.’”
“San Francisco real estate agent Eric Geleynse with Frank Howard Allen Realtors said in an e-mail that he understands the arguments for ending the deduction, which he concedes is ‘inherently unfair to renters.’ But with California home prices down more than half from their 2007 peak, he said that tampering with the deduction now ‘would be a very big mistake because it would be kicking the entire industry while it is down and struggling to get back up.’”
The Ventura County Star. “Janet Dorsey, president of the Ventura County Coastal Association of Realtors, said data from the county MLS showed the median selling price of residential homes and condos is trending downward. Dorsey said she expects to see more pricing pressure on homes above $600,000, as the Ventura County conforming loan limit is expected to be reduced in September to about $598,000 from its current level of $729,950.”
“‘Loans above the conforming loan limit will have higher interest rates, which affects a buyer’s ability to purchase a higher-priced home at an affordable rate,’ Dorsey said. ‘For those who can qualify and are well-positioned to purchase a home, interest rates are phenomenal and affordability for a home on the Gold Coast of California has never been better.’”
The Contra Costa Times. “An auctioneer stood behind the microphone at the dais. Two tuxedoed spotters were positioned on the bidding floor, all in preparation Friday for a trustee sale, the final leg in the California foreclosure process, which has had a real workout the past three years.”
“Properties were available in Antioch, Brentwood, Bay Point, Discovery Bay, El Sobrante, Hercules, Martinez, Oakley, Pittsburg, Richmond, San Pablo and Walnut Creek. The minimum opening bid for any property was $30,000; the highest $325,000.The bidding is conducted for each property just as it was for a three-bedroom, 2,026-square-foot single family residence in Antioch.”
“‘I have been authorized by the beneficiary to open the bidding for lot No. 517 at $145,000,’ the auctioneer said. ‘Now $150,000 … now $160,000 … now $165,000,’ he chattered until the fervor began to wane. ‘Anybody gonna bid $186,000? Does anybody else want in?’ The winning bid was $187,000. The same house had once been listed for $485,000. That was a long time ago, back when it still was somebody’s dream home.”
“Since the real estate bust, many people have complained that they couldn’t buy, sell or refinance a home because an appraiser used bank-owned or short-sold homes as comparables in the valuation process. Now I’m hearing from people upset that they can’t get their property taxes reduced because their county assessor will not use a short-sale or bank-owned property as a comp.”
“James Reece of San Francisco says that when he refinanced his condo in November, it was appraised for $660,000. But when Reece got his property tax assessment for 2011-12, his condo was assessed at $700,000 - the same as the previous year.”
“Santa Clara County Assessor Larry Stone says ‘in normal times, a foreclosure was an aberration … and we would ignore it.’ Today, ‘in areas where we don’t have a lot of foreclosures (such as Palo Alto or Los Altos Hills), we still ignore it.’ In areas with a lot of foreclosures, such as the southern and eastern parts of the county, ‘it can’t be ignored.’”
The Business Journal. “A short sale can be a practical alternative to foreclosure that allows the homeowner to avoid the chains of bankruptcy. Trankie Tiscareno, sales manager at Greatland Mortgage in Fresno, said the lender might be procrastinating because they simply don’t want to agree to a short sale. ‘They feel it’s just not in their best interests to take the loss,’ he said.”
“‘More often than not, there are multiple loans on a single property,’ said Fresno attorney Matt Dildine. Dildine said, because if the financial institutions did not agree to the terms of the sale, they could obtain a deficiency judgment for the outstanding amount, which might result in one or more lenders targeting the seller’s remaining assets. ‘Dealing with two major financial institutions is tough,’ said Joseph Hollak, a Fresno Realtor. ‘You’re asking both lenders to take a loss.’”
From 10 News. “The state is offering a program that could help residents avoid foreclosure in San Diego and other cities across the state. In 2005, Michelle Vera bought a one-bedroom condo in the College Grove area for $250,000. With an interest-only loan, she paid only on the interest for four years. This year, her monthly payments went from $1,350 to almost $1,600.”
“After she found out that she qualified, she learned that if she keeps up her payments, $50,000 will be shaved off her principal amount over the next three years. That would reduce her monthly payment from $1,600 to $1,200. The reduced payments began in June. Vera is not the only one. Since February, the state has helped almost 6,900 homeowners to the tune of $114 million.”
“Critics – including real estate economist Nathan Moeder of the London Group – do not believe enough people will be helped to make a major impact. He is also skeptical about the long-term impact. ‘The question is even if you save everyone in the same neighborhood, will they default in the future?’ asked Moeder. ‘This is a temporary solution to their situation, not a permanent solution.’”
From KPCC. “Dowell Myers, a University of Southern California professor and urban growth specialist has long chronicled home ownership among immigrants, most recently among Latinos, and what comes of it. M-A: Your research has been cited in several reports pertaining to immigrants, real estate and household wealth. But the wealth that is referred to, is it mostly real estate equity? Myers: Just over 80 percent of wealth for all groups was from home equity before the crash.”
“M-A: Some immigrant families were on their way there, having pooled savings and invested in real estate, when the housing market collapsed. With the losses that have occurred, how are these people who lost money and/or equity going to get back on their feet, if at all? Myers: They need one good decade to catch up again. But it is not likely to happen again like prior booms. In any event, immigrants who are not homeowners (recent arrivals or younger households) stand to profit by buying at lower prices. They will surely build wealth in the future.”
“M-A: So is this a good time for current have-nots who want to repeat the cycle – at least, to the best of their ability in this climate – to jump into the real estate market? Myers: Yes, now is a great time to become a first-time home buyer, given the much lower house prices and the record-low mortgage rates. Its just that the banks are going to make it much harder to qualify.”
The Adobe Press. “A notice of default is a precursor to foreclosure. It puts a homeowner on notice that if the mortgage — or, in California, the trust deed — payments are not brought current by a certain time, the lender can foreclose. The figures for how many default notices have been issued vary from source to source and depending on how the numbers are computed.”
“According to DataQuick, the number of notices issued in San Luis Obispo County fell from 359 in the second quarter of 2010 to 345 in the same quarter of 2011, a 3.9 percent drop. In Santa Barbara County, the second-quarter notices fell from 499 in 2010 to 489 in 2011, a drop of 2.4 percent. A decline in foreclosures would be good for the building industry, but developers aren’t optimistic over a one-quarter drop, said Jerry Bunin, government affairs director for the Home Builders Association of the Central Coast.”
“Developers have been unable to build because there are so many ‘distressed’ homes for sale — about 50 percent of the market. Fewer distressed homes for sale would increase the demand for new homes, although he noted even if builders have buyers, they can’t obtain land-acquisition and construction loans.”
“‘If this (decline) is a trend, or the start of a trend, that’s really good news,’ Bunin said. ‘But if this is more of a ‘blip,’ which I suspect it is, we’re really not anticipating anything normal (for the industry) until 2014.’”
short sales are a joke, IMO. By the time the bank answers an offer; usually made in the first few hours of listing; the place has suffered an unacceptable amount of neglect that makes the buyers no longer interested. No wonder so many fall thru as buyers are let off the hook repeatedly by the banks.
In the case of the short sale my mother made an offer on; the bank accepted the offer after a few months; unfortunately the homeowner let the house get trashed by changing tenants. Rather than leaving the home in the good condition that interested Mom, the owner decided to grab a few thou and rented it out again. Now he is still collecting the rent as the place gets ruined. No sale!
It seems it will take the bank a long while, while the owner collects the rent $$; seeing how they waited too long and then turned their noses up on a good offer. And nobody will want the home anymore.
“The mortgage interest deduction. ‘It will affect us all across the nation,’ said Executive Director Kathleen Hinman of the Nevada County Association of Realtors. ‘Many of us buying our homes expect that interest deduction’ when it comes time to fill out income tax returns.”
Huntsman: Absolutely No Deductions in Tax Plan
September 4, 2011 12:45 P.M.
By Katrina Trinko
Jon Huntsman touted his new jobs plan this morning in an appearance on Face the Nation, stressing how his proposal could rejuvenate the economy.
“This economy has hit the wall. It is sucking wind right now,” Huntsman remarked.
“This is a proposal that’s come right from what I have done as governor,” Huntsman said, referencing the tax reform he did while governor of Utah. “I do believe the next president of the United States in 2012 will be a former governor.”
Asked about the mortgage interest credit and the child tax credit, Huntsman confirmed his plan would be deduction-free and both those deductions would be eliminated.
…
Huntsman’s plan: Increase taxes on the poor and middle class while reducing them for the rich. We all know that our economic problems are that the poor and middle class have too much money in their pockets, and the rich have not enough… right?
Unfortunatly, he’s just a “more of the same that got us into the hole in the first place” Wall Street pawn.
‘One of the biggest tax breaks of all is heavily skewed to wealthy residents of San Francisco, San Jose and California’s other upscale coastal cities’
‘The tax break is available to anyone who borrows up to $1 million for a mortgage - including for a vacation home - or takes as much as $100,000 in a home equity loan’
I don’t know anything about Huntsman, but how is eliminating the MID reducing taxes on the rich, or increasing taxes on the poor? Wealthy, upscale, million dollar houses, vacation homes?
He wants to lower the top marginal tax rates while reducing deductions and credits.
The deductions and credits are a larger portion of the poor and middle-class’s income. Removing the deductions while not lowering the low-end rates, especailly payroll taxes, really screws the poor and middle-class to the wall.
Lowering top marginal rates while reducing deductions really helps the rich.
IF, we had consumers with tons of moeny running around snapping up every asset on the market, okay.. maybe we need to “broaden the tax base while lowering top marginal rates” (read, take more money from the poor and middle-class and less from high income individuals).
However, what we have is massive excess capacity sitting idle because the people that would buy the goods and services don’t have the money to buy stuff.
Broadening the tax base and lowering top marginal rates (read, take more taxes from the poor and middle class and less from the rich) is the exact opposite of what we need to do. Households find themselves under a crushing debt burden. We can allow the debt to collapse, mass money poofage, and depression. Or, we can attack trade imbalances so that people with debt can get the money they need to pay it back without default and poofage.
What we can’t keep doing is economic policies designed to keep debt increasing at 3x the sustainable rate forever as we’ve had for the last 30+ years. That is how we got into this mess.
All that said, it still looks like the MID is for rich people. Why is there any deduction for vacation “homes”? Why do people who can afford a $1M house need a deduction?
As for the child tax credit, in the mid-90’s I took a job doing tax returns for one of those chains to get experience. They put me in a Wal-Mart of all places. It was early in January, so I thought, nothing much to do for a long time, as who files their taxes in early January? I was flooded by people filing for the earned income tax credit for children. I realize this isn’t scientific, but almost all these early filers didn’t speak English (this was in Austin, TX). They often got thousands of dollars back with little or no income. This chain I worked for also financed the “instant refund”, and just about everyone went that route. So they were paying big interest fees to get this refund a few weeks early. It was just another part of the tax biz that I didn’t care for, and I eventually got out.
Ben,
I’m all for eliminating EIC, per-child tax credit, etc.
Unfortunatly, that can’t be the first step in the recovery plan.
The EIC was created to counter increases in payroll taxes that were sapping poor peoples’ ability to buy. So, if we want to eliminate payroll taxes, or atleast roll them back to.. say 5% from the current 15.3%, then no problem!
The per-child tax credit was also added so that poor people could keep spending. End free trade and start using tariffs to bring back jobs and increase wages, and the need for the per-child credit goes away.
If we simply eliminate these credits without attacking the underlying root casue of our economic weakness (trade imbalances), then we follow the path of Greece back into recession.
TMI regarding our foray into RE that landed us with EIC and EBT!
I admit, we accept some federal benefits, as of late. My son has two favorite sayings I taught him; “Gettin’ me some o’ that Gob’mint Cheeze, and “FORECLOSURE!” (said in elation when he spills something. Mom still makes him clean it up). He’s a riot at parties…
Life WAS easy for most of us equity fools in the 2000s. 15 years of easy living; mostly meaning that my job was fun and I could easily afford to start a family, own my own home, etc. It had just penciled for me out in 95, a home with a mother in law suite for myslef, for 270k. Soon after I had a SO and a couple kids, but I had also hurt my body in a surfing accident which totally messed up my working life as an organic farmer/vegetable salesman. but it really was the home, its shelter and appreciation, and subsequent appreciation of a couple other RE acquisitions had us living like kings, so it felt.
Now life is hard, by comparison, financially for us. We need a line on a new income stream. Injuries tossed me off our comfortabe pedestal in 2002, a bummer but historically a perfect time to begin relying on equity and landlording as income. (One HELOC to the tune of 40k without raising the payment, most of which went to mitigating mold, half the wall stripped of drywall,studs sanded)
But at the time we owned two homes; one in SB, one in Bend OR. Four units and we occupied one of them at any given time. Then later (2005-2008) it was vacation rentals of the condo while we went camping to the coast via membership camping and a rent-to-own deal with some guy with a home we had purchased in Logan, UT. That one ended poorly and ended our winning streak in RE, but at least we got out of there.
Good times, to be sure, I got my teaching license, played landlord, but my neck/back had been giving me fits thoughout, and I ended up with a 50k surgery rip-off bill. And my lovely wife and new mom largely had to run our family veggie selling biz, but finally we gave up the ghost on the biz, rented out the SB units, and bought a place in Oregon near my parents who have helped with hte kids. Two years later sold our home in Santa Barbara. We felt rich after than, more than just comfortable as we were before, till about the time of the collapse in 2008.
Now, the EIC is our the single biggest payday for my wife and I; thanks to our two kids. $7000.00. Even mo betta than the EBT Oregon Trail Food Stamps at about $300 per mo. We make about 20k plus the benefit amt., split between three jobs.
Our private health insurance premiums are $10k/yr; our largly uncovered medications around $3500/yr. Dentistry, not to mention orthodonics, is overdue for the kids. Personal medical bill for my teeth was $1400(extraction plus 3 temporary crowns, none of that implant luxury); wife got headaches last month and that was $2500. Thousand dollar deductible plus 30% of tests done. Episode subsided on its own. Insurance refused an MRI even though I did the test on myself assuming they would help with that, considering I am on pain management and have had 2 neck surgeries (2004,2005).
So yeah medical can eat up a nest egg quickly; we are hoping for some benefits soon at some job to be named later….
We are trying to keep our heads above water even though we have paid off cars and a paid off home, the frustrations of trying to pay our bills, while being underemployed, makes taking the benefits easier to swallow.ithout worrying about the stigma. The medical, gas, and groceries are kicking our asses right now, anyway.
So the EIC thing is kinda a wash for those of us that continue to carry private insurance. Don’t want to lose the house faster than absolutely necessary over a kid’s broken arm (or my wife’s partial hyterectomy, another thing thats gotta happen sometime soon. or my ankle hardware with screws backing out; good thing thats not happening in my neck!); so we continue with the ins. but it pays little at this point. And the wolves just keep coming……more later!
I disagree. i think these should be the first step.
I’m all for ending free trade and starting to using tariffs to bring back jobs and increase wages, but those shouldn’t be first steps as they would *eventually* bring back jobs.
In the short term, they would simply make the price of items that are tariffed more costly.
So the first step is end MID. 2nd step is retool free trade. 3rd step is end EIC.
The IRS just released a report titled:
INDIVIDUALS WHO ARE NOT AUTHORIZED TO WORK IN THE UNITED STATES WERE PAID $4.2 BILLION IN REFUNDABLE CREDITS
http://www.treasury.gov/tigta/auditreports/2011reports/201141061fr.html
peanuts. Sure there is fraud in the system, rooting it all out won’t fix our problems in America. Social Security, Medicare, and the tax code all need to be rewritten.
With all due respect to darrell_in_phoenix, I don’t think you spend much time around wealthy people - at least in a professional sense.
Anyone that you or I would term wealthy has never paid taxes at the marginal rate, believe me, I have seen their tax returns. You would be astounded at the myriad of tax loopholes and/or tax reduction strategies that can be found in the Internal Revenue Code.
The stated marginal income tax rates are red herrings for the masses to point to and feel good that the “rich” are paying 31% or 35% or whatever.
Believe me, they ain’t paying those rates…..never have……
“Just three metro areas - greater New York, Los Angeles and San Francisco - receive more than 75 percent of the subsidy, according to a 2004 study by economists Todd Sinai and Joseph Gyourko. Mortgaged homeowners in the San Francisco and San Jose region receive $4.6 billion a year from a tax break for what are known as McMansions, according to a study this year by John Burns Real Estate Consulting in Irvine.”
I’ve often suggested here that a disproportionate share of the MID subsidy flows to Coastal cities. It’s nice that somebody put pencil to paper and came up with some defensible estimates.
My only beef is with the phrase “McMansions” for the Bay Area. Even the small homes are expensive enough to get the benefit from the MID.
The main reason for the disproportionate MID in coastal cities is because of the standard deduction is high enough to diminish the value of the MID in states with lower home prices.
I would support what was generally proposed in the Simpson Bowles plan…reduce the max mortgage on which the benefit if calculated, and turn the MID into a tax credit. If we are to have any tax break for owning a home (an entirely different discussion), this would more evenly balance the benefit not just geographically, but also across the income spectrum. Not to mention reduce the incentive to have debt (for those who don’t do the math).
That article in the Chronicle is pretty good. It brings out the fact that the MID was mostly just an accident of history, NOT something that reflected any “congressional intent” to support house buying. That point is normally not made in the MSM.
The comments are a riot. I made my normal posting that the increased standard deduction - now up to $11.4K for couples - means that average Joes in most of the country don’t see much value from the MID.
Is California economy improving, or worse than ever?
September 5, 2011 | 1:09 am
Depending on who you ask this Labor Day, California’s economy is either on its way up or headed straight for the crapper.
A report released today by the California Budget Project finds that the state has a historically low level of employment, even as earnings are declining for most workers. By July, the report says, the state had gained back only one out of six jobs lost during the recession. The state added only 2,760 jobs a month between February and July.
Government is dragging down the economy, the report says. Over the last three years, the state has lost public sector jobs at a rate twice that of the nation as a whole, the report says. Inland areas aren’t helping either — between June 2010 and June 2011, the Inland Empire lost 10,300 jobs.
Finally, inflation-adjusted earnings in California declined 1.9% between 2006 and 2010, the report says, making a typical worker have less purchasing power in 2010 than at any point in the last 10 years.
“Coupled with the latest figures showing extremely slow growth in the national economy, these state trends make it clear that we’re a long way from a recovery that makes a real difference for California’s workers and their families,” said the report’s author, Alissa Anderson, deputy director of the California Budget Project.
…
From 10 News. “The state is offering a program that could help residents avoid foreclosure in San Diego and other cities across the state. In 2005, Michelle Vera bought a one-bedroom condo in the College Grove area for $250,000. With an interest-only loan, she paid only on the interest for four years. This year, her monthly payments went from $1,350 to almost $1,600.”
“After she found out that she qualified, she learned that if she keeps up her payments, $50,000 will be shaved off her principal amount over the next three years. That would reduce her monthly payment from $1,600 to $1,200. The reduced payments began in June. Vera is not the only one. Since February, the state has helped almost 6,900 homeowners to the tune of $114 million.”
So glad that a beyond bankrupt California could find some extra money for these 6,900 fools…
Yeah, what’s $114 M spread across the state of California? This is one of the dumbest programs, cuz it doesn’t really accomplish anything. What about all the other people who own a condo in this complex? Did they get a principle reduction? Is $50k going to keep her from being underwater forever? IMO, it’s a complete waste of money.
“…cuz it doesn’t really accomplish anything.”
It captured the attention of some dumb reporters.
I hate to say I told you so but…………
There are two choices: foreclose or reduce principle
One is the morally right thing to do and the correct choice from an economic standpoint……….and the other is the politically expedient thing to do……..
Which do you think the politicians will choose?
Is it fair to those that lived responsibly….no…..it is also irrelevant. Anyone that bought between 2000 and 2008 will get a principle reduction, probably including the refi maniacs.
Those that only bought what they could afford and/or didn’t utilize the home ATM will be left out. Everything I see and read points in that direction.
It will be stupid, unfair, and make no economic sense…..but when has that ever stopped our government in the past?
Is it fair to those that lived responsibly….no…..it is also irrelevant. Anyone that bought between 2000 and 2008 will get a principle reduction, probably including the refi maniacs.
Speaking as one of those people who bought between 2000 and 2008, I’d be happy to accept a principle reduction. And, once I got it, I’d see what I could do about refinancing into a 15-year mortgage and doing an accelerated payoff on it.
I’d also save a good chunk of the rest of the money I’d save. But, hey, that’s what extreme savers do.
In short, I won’t be reviving the debt-fueled consumer spending-based economy to the extent that the PTB would want.
As I’ve said before, if you just pay the minimum mortgage payment that the bank calculates, then you’re every bit as much of a sucker as if you paid the minimum credit card payment that the bank calculates.
If you pay ahead on a 5% 30-year mortgage you are earning, immediately, the equivalent of 5% *compounded annually for 30 years*. Try finding that return anywhere else that the Fed has stunk up.
“Which do you think the politicians will choose?”
They keep talking about principle reductions, but somehow it never actually happens nearly as much as advertised.
‘Anyone that bought between 2000 and 2008 will get a principle reduction’
I’ve been reading that here for years now. Funny how it has never happened. Cram downs, you name it, it was all just around the corner and always inevitable. Never mind all the reasoning why it couldn’t happen, it’s:
‘I hate to say I told you so but…………’
Were you saying this in 2007 like so many here? Remember judges were going to reduce balances owed? Where oh where are all the people that wrote that stuff on this blog day after day?
FAIL
“Cram downs, you name it, it was all just around the corner and always inevitable.”
Still just around the corner and inevitable — just like the housing bottom by the end of the year.
Were you saying this in 2007 like so many here?
I don’t think I made many comments, if any in 2007. I did make some comments after the 2008 crash that the money printing machine would crank up and the losses would be socialized.
I suppose there is a middle ground between foreclosures and principle reduction…….just stretch out the foreclosure process as long as possible and hope that prices recover, which is where we are now. When you have an average days from the first notice of default to actual foreclosure well over a year (and approaching 2 years in some areas) it is a “free lunch” for those not paying their mortgage.
I never said that principle reductions were imminent, only that with so many people under water, the political incentive to offer them is too tempting to the Feds.
I bet she is still underwater with a $50k principle reduction.
“principle” is only ever used as a noun, whereas “principal” can be used as either a noun or an adjective. Google it. Just sayin’ -
The hole is not deeper than we thought. We just fundamentally misunderstand the nature of the hole.
It is not a hole in the ground known as “housing market weakness” that can be filled in with a few shovel reay projects.
It is a hole in a tire known as trade imbalances. We pump in some air to reflate the tire, and the air just leaks right back out again.
Pump pump pump…. leak, leak, leak.
We need to attack and reverse the trade imbalances, or our economy will collapse under a mountain of unrepayable debt.
It is a hole in a tire known as trade imbalances. We pump in some air to reflate the tire, and the air just leaks right back out again.
Pump pump pump…. leak, leak, leak.
Reminds me of my bike shop days. We’d see people with leaky tires and they were convinced that the solution to their problem was…
…a stronger pump.
To this day, I still see these people stuck on the side of the road. They’ll ask me if I have a tire patch kit (no) and a pump (yes). The reason I don’t have a patch kit is that the glue just doesn’t last very long, especially during our summers and even more so if the rider parks the bike outside all day.
So, what I end up doing is asking the flat tire victim if he/she has a replacement tube. Because I do have a pair of levers that will get any tire off a rim. (They’re Gripfast levers — the world’s best.)
My reasoning is that, if we can get that tire off, remove the thorn(s) or glass that’s stuck in it, then replace the tube and air it up, they’ll be good to go for a long time.
You’d be surprised at the number of people who don’t carry extra tubes with them.
Trankie Tiscareno, sales manager at Greatland Mortgage in Fresno, said the lender might be procrastinating because they simply don’t want to agree to a short sale. ‘They feel it’s just not in their best interests to take the loss,’ he said.
I wonder why they feel that way?
Because if you book the loss, you are insolvant and out of a job.
When we’re talking about you personally being added to the ranks of the unemployed, you’re not in a hurry to rush things.
You would think there would be accounting standards that would force them to come clean and book the loss regardless.
There used to be, but rules were loosened in early 2009 by the FDIC and FASB.
I believe that’s correct. And why would they do such a thing?
FASB 157. Companies were required to mark to market assets on their balance sheet.
Why was it eased? To delay the depression.
0% interest rates did nothing. TARP did nothing. $trillions in Fed loans did nothing to stop the crash.
The only way they were able to stop the crash was to ease FASB 157 to allow companies to flat out lie.. Oh, I’m sorry… I mean, “Mark to model”.
Your model says 10% foreclsoure with 10% loss on each of those so 1% total loss… Hmmm… but no one will buy your bonds at 25% off because they expect 50% default and 50% loss on those? Oh, if you eat a 25% loss you are done like a pulled pork sandwhich? Oh, then just go ahead and book only a 1% loss….
Reality is fine, as long as you believe it good. As soon as reality starts to suck, it is time to ignore reality and go with fantasy.
Or, as Adam from Mythbusters says, “I reject your reality and substitute my own!”
Why was it eased? To delay the depression.
So is it possible to “delay the depression” forever using these tactics? Would we expect there to be any unintended side effects? Is a delayed depression better or worse in the long term than one that occurs on its own schedule?
Japan has been successful for 20 years…
It’s pretty clear by now, that this is the only plan they’ve got.
The names change, but the plan remains the same…
@darrell:
I don’t think the “mark to market” vs. “mark to model/myth” is that simple. “Market” implies willing buyer and willing seller. If very few want to buy an asset because of fear of world financial markets, does that mean that the asset is worth pennies on the dollar? Who would be willing to sell in such cases? Only the most desperate…this is not a “typically motivated” transaction, and hard to justify as the basis for a “market value”.
Said another way, people were not offering to buy loan pools at 75 cents on the dollar when they expected 50% default with 50% loss on each default. They were offering 25 cents, because they were taking advantage of the disruptions in the capital markets and wanted to make a 3x on their investment. The market “price” was not indicative of the likely recovery.
That said, it certainly doesn’t mean that the model should say the asset is worth 99 cents on the dollar, especially in the face of falling asset values.
In hindsight, the profit that people are earning from their panic investments (prior to “mark to model/myth”) in the troubled mortgage backed securities is evidence that the “mark to market” was too pessimistic. “Mark to model/myth”, allowed some of the fire-sales to cease, and allowed the world to catch its breath.
Either way, losses will come out…either a) as the “model/myth” used to prop up the values become harder and harder to justify based on actual default rates (how can you recover 99 cents if you have already lost 15?); or b) as the assets in question are actually sold on the open market as buyers and sellers are more rational about risk/reward and values, and the market participants want to clean up their balance sheet to move on and raise fresh capital.
Assuming that US banks will keep the garbage on their balance sheets indefinitely, in my view, is not right. While not in big pools like the RTC, we ARE seeing banks dump assets at very low prices (either loans or property)…slowly, but steadily. Slowly so that they can stay solvent during the process and earn their way out of the mess. Steadily because they will not be able to raise capital and/or keep the regulators off their backs until they have an understandable and stable balance sheet, and they want to get back to making money as opposed to simply losing less money.
As banks clean up their balance sheets, we are seeing more and more of them re-enter the market as lenders, a positive sign.
Is “Mark to Market” always right? No, but more right than “model/myth” in times with a substantially functioning pool of buyers and sellers.
Is “Mark to Model/Myth” always right? No, but more right than “market” in times when the market is not functioning.
All that said, in my view, “Mark to Market” is appropriate FAR more than “Mark to Model/Myth”. My one (major) criticism of the use of Mark to Model/Myth is that it should only be allowed in times of near complete disfunction in the markets. Today is not one of those times. Market participants are still cautious today, but there are more rational buyers and less distressed sellers, making the “Mark to Market” number a more “fair” value than in 2008/2009, when the same participants were extremely cautious, irrational, and desperate to stay liquid.
@Steve J/Carl Morris
John Mauldin calls Japan “a bug looking for a windshield”. They have been successful in putting off depression because they have not needed to go to the outside world for funding their deficits. According to Mauldin, demographics are going to finally force Japan to go to the outside world to finance their debt, which will drive up rates that they need to pay on their debt load, and either:
1. Force Japan into depression-inducing austerity measures to get their fiscal house in order; or
2. Cause the BoJ to print their way into hyperinflation to get out from under their debt burden (with significant peripheral consequences…collapse of the Yen).
It certainly didn’t help that the asset bubble Japan was trying to prop up was massive (the value of the land under the Emporer’s palace was supposedly worth more than the value of all of California).
I don’t think that the choices in the United States are “depression now” or “depression later”. I think they are:
1. Continue to run unsustainable deficits to prop up growth until the world doesn’t let you…then have a depression-inducing austerity program; or
2. Shrink deficits over time at the expense of growth until you have sustainable debt/deficits, and hope that the monetary policy employed during that time doesn’t induce inflation down the road.
The best we can hope for is #2, the “muddle through” scenario. I just hope we don’t opt for #1…then we could be Japan for a time, although we would hit the windshield sooner, since we are financing a fair bit of our deficit from the outside world already.
1. Continue to run unsustainable deficits to prop up growth until the world doesn’t let you…then have a depression-inducing austerity program;
This is by far the most likely scenario.
Everyone with any common sense looked at Japan and said, “well, we (the U.S.) shouldn’t do what they did”………….
Ben Bernanke looked at Japan and said, “jeez, I can copy them and we can probably keep it up for 40 years before we implode”……..
Except (to my understanding) “the Bernanke” advised Japan to do the opposite of what they actually did. And, we’ve already taken a different path than Japan with the dropping of rates to 0 (Japan raised rates initially), and we don’t have the ability to do what Japan did (use internal capital to fund our continuing deficit).
Other than lack of political will to NOT spend, on what basis do you think #1 is the most likely scenario?
Because of our need to raise money from outsiders, if we do go the #1 route, we will hit the wall well before Japan (not in 20-30 years, but much, much sooner). I hope the knuckleheads in DC see this. Perhaps asking politicians to be rational is too much to hope for.
I think the housing market has to turn around for the positive before the economy can truly recover. Something I will point out is that people will have to get jobs before they can buy homes. So, jobs will have to get better before the housing market does. Another thing I see is that people are complaining that appraisers are using bank owned homes and short sale properties as comparables when determining home values. Yes, a bank owned home or a short sale is comparable. You don’t exclude distressed homes because it hurts your home’s value. If a buyer can purchase a comparable home for a better value they will.
My one criticism with the appraisers is not with a bank owned home or short sale as a determinant of value, but with foreclosure sales on the courthouse steps.
Let’s say you put in a room 100 qualified buyers for a $250,000 home (have at least a 20% down payment, good credit, steady job, etc.).
Next you tell them that they can’t get a bank loan, but need to pay cash for the home, and get a loan later. How many would leave due to lack of funds? 90? 95?
There are significantly fewer qualified buyers in existence with a foreclosure process than with a traditional sales process (where a loan can be obtained). As such, apples to apples, a home sold through a foreclosure auction is generally sold at 20-30% below what the home would sell for if it was traditionally marketed.
Which is the market value? The one with the traditional marketing process? Or the courthouse steps? Both cannot be…
Good points, Rental Watch.
On a personal note, I used to rent half of a duplex from a lady who bought a two-house property at auction on the Pima County Courthouse steps. That was back in 1998. She had to have the money in Phoenix and in the hands of (I think it was) the title company within 24 hours.
She had the cash, but she had to take it from two different banks. Then she had to hippety-hop over to the post office to Express Mail it. I offered to let her use my Fedex account number so that the payment in full would absolutely, positively get there in time, but she declined.
Oh, I should also mention that she had no right of inspection before the auction. Which meant that she was buying a pig in the poke.
After she bought the property and inspected it thoroughly, she found that it needed lots and lots of work. Which took well into the previous decade to complete.
So, to those who think they’re getting a fabuloso deal on a foreclosure, I invite you to think again. The reality is that the low purchase price is the only thing will be cheap.
There is definitely more risk involved at the foreclosure auctions for that very reason. There needs to be a reward for taking that risk. If you buy 10 homes at a 20% discount to “market”, not all 10 will turn out without problems…some will have that entire discount (or more) eaten up with problems.
Again to the question of apples/apples on the value for appraisers…are they comparing a fixed home to a broken one?
“Something I will point out is that people will have to get jobs before they can buy homes.”
I don’t really see why. Just bring back stated income loans — problem solved.
This is interesting…another example of the propositions that were passed in CA actually working as intended.
My favorite quote from the article: “The absence of politics is causing problems there for politicians because an independent commission ignored current boundary lines when deciding where to put the new lines.”
http://www.bloomberg.com/news/2011-09-06/most-incumbents-in-30-years-may-lose-seats.html
I’ve now updated my scoreboard again:
People of CA: 2
Government of CA: 7,652
The first point was from the “temporary” sales tax hike of 1% actually staying temporary because of the need for there to be a 2/3 majority to raise taxes…another proposition from the last election cycle.
“If very few want to buy an asset because of fear of world financial markets, does that mean that the asset is worth pennies on the dollar? ”
Yep. That is exactly what it means.
Now, that isn’t to say we WANT to make banks insolvant when there is still a chance to save them. Too bad we’re not doing anything with out delay time to actually prevent the crash.
Jeffrey Sica, Contributor
9/05/2011 @ 10:12PM |12,382 views
Empire Of Dirt - “Let Them Fail” Why Failing Banks Should Fail
Bank of America is one of many banks sued in federal court by the Federal Housing Finance Agency on behalf of Fannie Mae and Freddie Mac.
On September 3, 2011 Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS) and 17 other banks were sued in federal court by the Federal Housing Finance Agency on behalf of Fannie Mae and Freddie Mac in an attempt to recover $196 billion dollars. At the core of this massive lawsuit is the FHFA accusing said banks of misleading Fannie Mae and Freddy Mac about the soundness of the mortgages underlying the securities. In other words, they are accusing the biggest banks in the country of lying to the United States Government.
THE CREDIBILITY OF THE FHFA
The FHFA, the regulator and conservator of Fannie Mae and Freddie Mac, lost almost all credibility when Fannie Mae and Freddie Mac imploded in 2008. They were largely responsible for causing one of the worst financial crisis’ in our nation’s history. Fannie and Freddie are still in receivership today and will be for years to come. The FHFA lost credibility because they took the word of banks who claimed that subprime mortgages were safe, supported by the fact that all the ratings agencies had given these securities the coveted AAA rating.
In another legal action against these same banks they have been accused of paying off the ratings agencies for these AAA ratings. How can a regulator who has the responsibility to protect consumers and investors be trusted when they have allowed themselves to be so misguided as to put our nation’s economic stability at such peril?
Why Has the FHFA decided to file this lawsuit years after their catastrophic mistake in 2008?
First, after giving failing financial institutions over 1 trillion dollars through programs like TARP in which the U.S. Government assumed responsibility for the bad debts and made them a liability of the tax payer, they have come to the realization that the economy hasn’t improved at all as a result. They are recognizing that “banks survived and the rest of the economy is still suffering”.
Secondly, it has become evident in recent months, due to the onset of the European debt crisis, that the interdependence of U.S. and European banks is way beyond what they initially believed. A condition has evolved in which European banks have leveraged their portfolios off of bad debt from sovereign entities and our banks in turn have leveraged our debt off of those same entities. The likely result will be a contagion which we do not have the wherewithal to contain. In other words, the FHFA and the federal government are realizing that the “too big to fail” policy may have to extend to banks all over the world due to this interdependence.
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