[jtfanclub]

helene_t, on Dec 20 2007, 05:57 PM, said:

That is something I have difficulty understanding - why so many governments subsidize house owners relative to renters, whether through tax deductions of interests or otherwise.

Because building new houses stimulates the economy, a lot more than building the same number of rental units.

Renters don't mind, because they want to own houses, and they believe that these subsidies make it easier for them to buy a house.

[Mbodell]

kenberg, on Dec 20 2007, 07:45 AM, said:

About giving up your house because the balance on the mortgage exceeds its value: I'm not so sure.

Suppose a guy buys a house for $500,000 and there is  a 10% drop in value These figures are pretty realistic these days. In a sense, he can save $50,000 by telling the bank to take this house and shove it. But he has to live somewhere. Even at the height (or depth maybe) of mortgage nonsense I don't think people with foreclosures on their records were finding it easy to get a new mortgage. So if he walks away from the house it seems to me that he will be renting. And maybe having trouble getting in to a decent rental place.  Further, the bank may have further claims against him if in the future he gets back in the game.

Mbodell, above, gives a very interesting summary of the situation but I, with no figures at all to back my opinion, am still a little skeptical that a large number of people who could pay their mortgages are just walking away because  their house has dropped in value. No doubt the amounts are an issue. If the mortgage exceeds the value by, say, $200,000 I can imagine that walking away is tempting. For 50K, it doesn't seem so rational. So a question: Is it possible to really tell who walks away because they cannot pay the mortgage and who walks away that could pay it but decides the house is not worth the payments?

joshs gave a good summary. It does depend on your location too. For instance, I'm in California. Here the majority of homes bought in the ending two years of the bubble were not owner occupied. That is they were people speculating and investing in homes. Indeed, a large chunk of the people who have been foreclosed on are speculators in California.

But as joshs said it is rare that these people just decide rationally that it is better to walk away, more often it is an external factor, like they can't afford the carrying cost of the property because they were supposed to flip it for $100K profit in 3 months and had not planned on having to pay the interest and property tax and what not for 15+ months (on this home and the 15 other similar ones they bought).

For the owner occupier the same thing will happen. Some of these people will not be able to pay the carrying costs for a variety of reasons (illness, divorce, forced relocation, job loss, interest rate adjustment, death, etc.) and will then be in the position where if they had a decent chunk of equity in their house they would sell the house and keep the equity (which may still be a loss for them since maybe they put $100K down but now only have $50K of equity, or maybe they put $100K down and now have $150K in equity but after they account for the property taxes, maintenance, insurance, realtor's 6% commission and opportunity cost they may still lose money) but since they have no equity they will go to foreclosure instead.

The truth is many people who will narrowly avoid foreclosure likely will have been worse off from avoiding foreclosure and would have been better off to walk away and rent. But really the only people who will be largely fine from their housing are those who entirely or nearly own their home outright (and even those folks would have been better off to have sold 18 months ago - good move phil!) and those who rent. Even if you put a responsible 20% down at the peak you're likely to end up underwater on the house. And even those people who own outright or rent and miss getting hit directly with the foreclosure mess are going to be hit from the economic fall out.

I also agree with the assessment that this mess will be bad for a long time. It will be bad in the US until at least 2009, and I suspect we'll have a false bump in 2009 and will actually be very bad until 2011 or 2012 (anyone who has seen the pictures of wave of loans and schedule's of adjustments will likely share these suspicions). The worst part of the build up took 8 years from 1997 through 2005 to build up and 8 years from 2005 through 2013 to unwind isn't unreasonable.

It will interesting to see if the Democrat who wins the white house in 2008 manages to avoid getting pinned with blame for the mess and destroyed in the ballot box in 2012 or not.

[mike777]

On a more forward looking note, how do posters expect the subprime mess to be resolved?

I am betting governments will not be able to stand the political pressure and inflate.
I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

For me that means I am looking at even more broad based commodity index investing.

[Echognome]

mike777, on Dec 20 2007, 06:14 PM, said:

I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

As opposed to inflating through what other policy?

Your second sentence seems to imply that you think it will only be through monetary policy.

[mike777]

Echognome, on Dec 20 2007, 09:21 PM, said:

mike777, on Dec 20 2007, 06:14 PM, said:

I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

As opposed to inflating through what other policy?

Your second sentence seems to imply that you think it will only be through monetary policy.

no, I am betting fiscal policy also. In other words even more government spending deficit programs, alot more. I only mention both for clarity sake, some may not know both methods. Not everyone has a PHD as you do in economics.

I expect this to be long term trend.

[Winstonm]

mike777, on Dec 20 2007, 09:14 PM, said:

On a more forward looking note,  how do posters expect the subprime mess to be resolved?

I am betting governments will not be able to stand the political pressure and inflate.
I am betting they will inflate through fiscal and monetary policy. In other words flood the world with dollars and possible with euros.

For me that means I am looking at even more broad based commodity index investing.

Mike,

I'm not so sure the government can do anything short of nationalizing the mortgage industry - even inflating won't help that much.

Ben Bernanke talked about this conundrum in his Jackson Hole speech - there is not a lot that the Fed can do to impact the capital markets, and as securitization has taken root as the primary mortgage lending mechanism, lowering federal funds rates do not have much impact.

I don't think most are aware of how serious a problem there is - way more than simply subprime loans - there is systemic risk.

I think you are right in that the attempt will be both monetary and fiscal policy, but we are in the throes of the unwind of a credit bubble - not a housing bubble - and the credit bubble extended into all asset classes.

[Mbodell]

The gov't gave control of the money supply and inflation to the Federal Reserve. The Federal Reserve gave control of the money supply and inflation to the equity markets and banks and Wall Street. The expression from the Japanese crunch is that the gov't can't push on a string. That is in order to have inflation you need more people lending money and borrowing money (which is why normally lower interest rates lead to inflation). But if no one is willing to borrow/lend money even with low interest rates (see the current banks not lending even to each other and hording cash in spite of the low interest rates) then attempts at inflation will fail.

Really, my worry is we'll have the worst of all worlds. Inflation in the price of commodities, food, energy, health care, education while wages say stagnant and home prices suffer deflation.

[kenberg]

People bought homes at prices that they won't be able to sell them for. That problem is probably not solvable. Maybe wise action will keep prices from falling through the floor.

But what is wise action? Governments always promise more than they can deliver. Democrats like me can supply plenty of examples involving our current president, but in the interest of harmony let me recall (I think correctly) that it was Bill who promised that by 2000 American children would be number one in the world in science and mathematics. Most of us have a portion of our brain that keeps us from standing in front of large groups of people to say things that are patently false. Successful politicians have overcome that disability.

I like simplicity. Start with No more zero rate credit cards, no more ARMS, no more interest only mortgages and so on. The arrange it so that if a borrower defaults you can draw a pretty short line from the person who approved the loan to the person who lost the money. Song from West Side Story: Everything free in America / For a small fee in America. This line seems to describe at least part of the problem.

[Al_U_Card]

There is tons of info on alternatives throughout the internet.

The point is that who gains from this financial carnage? The rich and the banks. They know in advance where the ship is headed. They can get out of the way and secure their resources in time to avoid losing everything. The little guy always pays the price. The few benefit from the loss of the many. Always has been but doesn't always have to be. Look to your own history and how financial manipulation has affected and molded your country.

Right from the revolution, thru the civil war and the world wars......see? It is all about wars and financial manipulation. Iraq war? Bullshit! Financial conflict? Right on!

[sceptic]

Quote

People bought homes at prices that they won't be able to sell them for. That problem is probably not solvable. Maybe wise action will keep prices from falling through the floor.

This is not strictly true at the point of purchase, at the point of purchase people brought something they could not afford if there was a fluctuation in the market place. greedy bastards never fully explained this to them (nor did they care as long as they were getting their commisions) the sales people were quite possibly unscrupulous as are the lending institutions

I think they deserve to suffer not the poor mug they tricked into a loan, they knew they could not afford if things went a bit skew wiff

Greed is at fault and the solution sadly is left to the politicians who get their advice from economists that just manipulate figures to do what ever they please, I think it is quite feasable that you can pay an economist to produce figures supporting any view point you like

No one has the BALLS to sort the market out because if they did, there would not be so much credit available and that is possibly the reason that no one bothered to sort it out prior to this very foreseeable event

This is just my humble opinion for whats it is worth

[helene_t]

I suppose most home owners see their income go up and their mortgages being eroded by the inflation. Those who must sell their house with a loss will often bye a new house at a similar (lower) price. So the only ones who get into troubles are those whose income goes down and/or for some reason must move to a rented house.

[ArcLight]

>>The point is that who gains from this financial carnage? The rich and the banks. They know in advance where the ship is headed. They can get out of the way and secure their resources in time to avoid losing everything.

Merrill Lynch
Bear Stearns
Citicorp
Morgan Stanley
UBS
the various monoline insurers (FGIC, ACA, etc)
various large banks in Germany and the UK
CIBC (Canada)
Countrywide

They all made out like bandits :-)

Not!

[Gerben42]

Quote

People bought homes at prices that they won't be able to sell them for. That problem is probably not solvable.

That is not the problem. If you buy a house to live in it so you don't have to pay rent when it has been paid off, who cares what it's worth?

[joshs]

kenberg, on Dec 21 2007, 10:11 AM, said:

People bought homes at prices that they won't be able to sell them for. That problem is probably not solvable. Maybe wise action will keep prices from falling through the floor.

But what is wise action? Governments always promise more than they can deliver. Democrats like me can supply plenty of examples involving our current president, but in the interest of harmony let me recall (I think correctly) that it was Bill who promised that by 2000 American children would be number one in the world in science and mathematics. Most of us have a portion of our brain that keeps us from standing in front of large groups of people to say things that are patently false. Successful politicians have overcome that disability.

I like simplicity. Start with No more zero rate credit cards, no more ARMS, no more interest only mortgages and so on. The arrange it so that if a borrower defaults you can draw a pretty short line from the person who approved the loan to the person who lost the money. Song from West Side Story: Everything free in America / For a small fee in America. This line seems to describe at least part of the problem.

Ken,

I am not sure about your notion of simplicity.
For instance, if price's go up 2% and you earn 6%, you are really making only 4% in constant dollars, while if prices go up 8% and you make 6% you are losing money. All calculations should really be made in constant dollars (accounting for inflation).

In constant dollars, an ARM has the same interest rate every year (and thus is not risky) and a fixed loan is in fact quite risky.

What eliminates the risk for the fixed loan for the borrower (and adds significant risks for the lender) is a quirky asymmetry in the mortgage contract:

If the mortgage contract was I give you this amount of money and you give me this many payments of X amount, we would have a symmetric contract. In fact, the lender has prepayment risk:

Lets say I lend at 5% and 2 years later the rates are at 6%. Well then the lender is losing 1% on its money (in constant dollars) relative to the original contract.

On the flip side if I lend at 5% and 2 years later the rates are at 4% then it may appear that I am gaining 1% (hence symmetry) but in fact a lot of your customers refinance, so you only gain the 1% on a fraction of your loans.

Therefore, when borrowers have a right to prepay, a fixed rate mortgage will result in a loss if you charge the customer the prevailing market rate for capital. So what happens is that you have to charge more for a fixed loan OR eliminate the borrowers right to prepay. Hence there is necessarily a cost to eliminating the risk.

Most of the changes to mortgages in the last 25 years:
a. made them more appealing to investors (who did not want huge interest rate risk, and wanted to know when approximently they were getting there money back)
b. thus making more money available for people to buy homes
c. thus made mortgages cheapers and enabled a lot more people to own homes

Further, home ownership has always been one of the primary vehicles of capitalism:
Hernando de Soto, for instance, found that 75% of all companies were started with money borrowed against that person's home.

P.S. I highly recomend Hernando de Soto's book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

Having said all that, the industry certainly went too far and allowed too many people to own homes. So the situation has changed from:
Old: That evil bank didn't lend me any money because they said I couldn't afford it
(I have seen this scene in 100's of movies over the years )
New: That evil bank lent the guy money despite the fact that they couldn't afford to pay it back

I think both descriptions are silly. I personally like the modern attitude which is "lets set up a good risk management scheme to help allow us to make more loans." Its just a question of keeping everything in balance...

[jtfanclub]

Al_U_Card, on Dec 21 2007, 10:30 AM, said:

There is tons of info on alternatives throughout the internet.

The point is that who gains from this financial carnage? The rich and the banks.

Actually, in the usual funny way, it's the banks that are getting killed. They made massive profits when the prices were going up, and now that they're taking a massive beating they expect to be 'rescued'.

Change the capital gains taxes so that loans being forgiven aren't considered a profit except under certain dastardly circumstances. Other than that, let it ride. Bankrupcy is designed to keep banks from being overly stupid. If banks let their clients go into bankrupcy, they'll lose money hand over fist. So, what should happen is that these deals get renegotiated so the banks get something and the clients keep the house. Unfortunately, since the mortgages got sold, and it's often unclear who even owns them any more, I think we'll just see a whole lot of bankrupcies instead.

For now, if necessary, I don't have a big problem with the government offering low interest loans to banks to keep them alive, with some pretty heavy conditionals to make sure they pay it back. Outside of that, they should leave it alone. One of the major issues is going to be that our banks are going to end up being owned by foreign companies, so far mostly Saudis and Chinese. Oh well.

[kenberg]

joshs, on Dec 24 2007, 12:03 PM, said:

 
Most of the changes to mortgages in the last 25 years:
a. made them more appealing to investors (who did not want huge interest rate risk, and wanted to know when approximently they were getting there money back)
b. thus making more money available for people to buy homes
c. thus made mortgages cheaper and enabled a lot more people to own homes

I confess that this makes some sense to me. But, in practice, is this working as advertised?

Lenders and borrowers have their self-interests, I have mine, different from theirs but common, I think, to many. Namely, I don't want to see a collapse of the system. My mortgage is paid off, my kids have fixed rate mortgages that will be paid off in the not so distant future. So my personal stake here is let's not sink the ship.

Home ownership is good for the owners and good for the country. I favor it. Debt beyond what a person can handle is good for no one. I bought a townhouse in 1970. It cost around 28K but of course we have to scale this for inflation. What is important, or seems to me to be important, is that after I put up my 20% or so down payment I was left with a mortgage that was in the neighborhood of twice my annual salary. Banks expected something like that. As I built up equity and moved into a house I think the mortgage was maybe three times my annual salary. But banks didn't go much beyond that. Now it appears to me folks are, or were, getting mortgages with little or no down payment and in amounts that may be seven or eight or more times their salary and then they run up credit card debt that astounds me. Out with the old, in with the new, but I find it hard to believe that this is sustainable and, from what I am reading, we are about to find out that it isn't.

In a phrase, this risk that they are so fond of spreading around seems to be spreading to me and to all of us. I don't wish anyone ill but I also do not wish to be dragged down by their wild speculations.


I imagine the fact that people ran up debt they could not handle and banks made loans they should not have made is going to cost me some money. It's the breaks, I guess, but I don't like it.

[joshs]

kenberg, on Dec 26 2007, 09:24 AM, said:

joshs, on Dec 24 2007, 12:03 PM, said:

 
Most of the changes to mortgages in the last 25 years:
a. made them more appealing to investors (who did not want huge interest rate risk, and wanted to know when approximently they were getting there money back)
b. thus making more money available for people to buy homes
c. thus made mortgages cheaper and enabled a lot more people to own homes

I confess that this makes some sense to me. But, in practice, is this working as advertised?

Lenders and borrowers have their self-interests, I have mine, different from theirs but common, I think, to many. Namely, I don't want to see a collapse of the system. My mortgage is paid off, my kids have fixed rate mortgages that will be paid off in the not so distant future. So my personal stake here is let's not sink the ship.

Home ownership is good for the owners and good for the country. I favor it. Debt beyond what a person can handle is good for no one. I bought a townhouse in 1970. It cost around 28K but of course we have to scale this for inflation. What is important, or seems to me to be important, is that after I put up my 20% or so down payment I was left with a mortgage that was in the neighborhood of twice my annual salary. Banks expected something like that. As I built up equity and moved into a house I think the mortgage was maybe three times my annual salary. But banks didn't go much beyond that. Now it appears to me folks are, or were, getting mortgages with little or no down payment and in amounts that may be seven or eight or more times their salary and then they run up credit card debt that astounds me. Out with the old, in with the new, but I find it hard to believe that this is sustainable and, from what I am reading, we are about to find out that it isn't.

In a phrase, this risk that they are so fond of spreading around seems to be spreading to me and to all of us. I don't wish anyone ill but I also do not wish to be dragged down by their wild speculations.


I imagine the fact that people ran up debt they could not handle and banks made loans they should not have made is going to cost me some money. It's the breaks, I guess, but I don't like it.

I doubt that anyone disagrees with you. But what has been going on recently is three things:

a. housing prices have skyrocketed in recent years (particularly on the coasts). The ratio of home price to rent rose around 40% this decade to its peak 2 years ago. This is of course unsustainable (this ratio should be in equilibrium long term) but created a bubble effect:
a1. some people saw prices going up and "speculated" hoping to make a profit
a2. others saw prices going up, were afraid that they were going to be priced out of the market if it kept going up, so they bought even though they really could not afford the homes (its just they felt they really really could not affod it in a year or two)

these behaviors kept price demand from reaching a natural equilibrium and let prices way overshoot there intrinsic value.

b. While home ownership is clearly a good thing, too many people got lent money who couldn't really afford it. There is lots of blame to be spread around. Lets suffice it to say when there are many people involved in any enterprise, there interests will not be completely aligned, so borrowers, brokers, appraisers, loan originators, investors, mortgage servicers etc all have different interests... as does the president of any company and the folks who work for it, so the worker bees may want to sell mortgages that are not really in the company's best interest to sell.

c. after the housing market began to soften, and mortgage defaults began to rise, there was an over-reaction in the investment community, which pulled a lot of money out of the mortgage market and made conditions even worse (its for isntance much harder to get a jumbo loan now, and the rates have gone up even for people with perfect credit).

[joshs]

joshs, on Dec 20 2007, 03:44 PM, said:

pclayton, on Dec 20 2007, 03:16 PM, said:

P_Marlowe, on Dec 20 2007, 08:30 AM, said:

Fluffy, on Dec 20 2007, 06:26 AM, said:

I that's true isn't it wort it to lose your house and buy it on the auction?

Gerben mentioned the mayor reason.

And depending on the laws, the bank will
get the house and sell it, but this does not
mean (!), that you got rid of your complete
loan, at least in Germany you still owe the
bank the missing money, ...
unless you declare your self bancrupt, which
requires that you make your finnacial situation
public, and you are under surveilance for a
couple of years.

With kind regards
Marlowe

PS: And of course you may not get your house
back at a cheap price.
Afterall an auction is open to all.

It doesn't work this way in the US.

There are two types of foreclosures: Judicial and Non-Judicial.

A Non-Judicial foreclosure is used in 99% of the cases. The property is put on the auction block and the bank can bid up to the value of its loan + costs. It is a relatively quick process - 4-5 months, but the bank can't go back after the borrower for any shortage. The property is the only security for the loan, the bank can't go back and get a 'default judgment'. If after the property sells and the bank still hasn't collected its loan, its SOL.

Rarely, the bank will have a huge shortfall, and the borrower will have a significant financial statement where it pays to go back and get a judgment for the balance. This assumes the loan documents allow it, and the borrower has something to go after. It is also a much slower process, since the 'judicial' foreclosure doesn't get any priority on the court calendar, so it can take 18 months or so.

Actually there are two distinctions:
Judicial vs Non-Judicial Forclosures is one
The other is Recourse vs Non-Recourse loans
You sort have combined the two into one idea

The standard mortgage contract is a recourse contract. That is you have borrowed $X and have agreed to pay this money back. If you do not, the bank lays claim (holding a lien) to your property and sells it. Giving them your property does not eliminate there claim for $X. If you borrow 200K, and they foreclose, and sell the property for 150K you can still sue for a definciency settlement for the other 50K.

Now having said that, this doesn't happen much for two reasons:
1. Most of the western states (including CA) passed laws back in the depression against definciency claims on home mortgages. These laws effectively convert to mortgage contract from a Recourse to a Non-Recourse loans. Note though that these laws really are mostly in the western US.
2. Most people who default don't have any money, so its a waste of time and money (legal costs) to go after them....


For Judicial vs Non-Judicial see:
http://www.all-forec...om/judicial.htm

Its really mostly about the forclosure process (and property auction process) and disposition of the property and not about the debt.

BTW, if you look at:
http://www.all-forec.../procedures.htm

It will tell you in which states its possible to get deficiency judgements.

[helene_t]

kenberg, on Dec 26 2007, 04:24 PM, said:

Home ownership is good for the owners and good for the country.

Why? I can see that home ownership gives owners motivation to invest money and effort in the local community, to avoid damaging the local natural environment etc. in order to support their investment. That's a good thing.

But home ownership also makes risk-averse people invest the bulk of their savings in a single property, and it open up for do-it-yourself work which cannot be taxed effectively. Even if capital invested in a home was taxed at the same level as capital invested in bonds or shares, renters would still pay more taxes than owners because the maintenance of a rented house is done by VAT and tax paying contractors rather than by the residents.

[Winstonm]

Quote

Out with the old, in with the new, but I find it hard to believe that this is sustainable and, from what I am reading, we are about to find out that it isn't.

Ken, you are way, way, w-a-y behind the curve on this news - about 1 1/2 years.
We've already discovered it's not sustainable - now the only question left is how much damage will be done.