Bailout (foreclosed, credit, mortgage companies, rate)

[Mathguy]

Originally Posted by TimtheGuy

Why would you want to do a SINGLE thing for the fippers?? Screw 'em! That took a gamble and lost. There should be NOTHING done for investment properties!

Please re-read, your emotion is causing havoc with your reading comprehension.

The intended benefit, was to smooth the impact to the economy so as to not impact the non-flippers caught in the problem not of their creating.

Please take your time to make a reasoned response. I'm not suggesting we bail them or the lenders out but rather let them spread the pain out so that it doesn't screw up the whole market and hurt a lot of other people.

[olecapt]

Same old bull from the same old sources. Las Vegas, which is always singled out as one the classical examples has about 60% of its shorts owner occupied. This of course demonstrates the oft repeated and completely unsubstainted charge that the big sufferers are speculators. Speculators don't live in the homes they buy.

It is also clear that 90% of the shorts are Vegas owned.

So in at least one place you guys have no idea what you are talking about.

[AnthonyB]

Originally Posted by Mathguy

As for bailing out "flippers?" as long as it's minor like resetting terms etc. (which is what the free market is leaning towards anyway) then fine if it cushions the blow slightly (the fed does this all the time with interest rates).
If the bulk of the pain is ultimately felt by the speculators but cushioned so it doesn't disrupt the overall economy then fine.

It's a multi layered mess that requires a delicate touch and some realism.
Most solid economists (I would give high points to those who warned about this early, such as Schiller or Roubini) seem to think that the mortgage market and borrowers need to sort this out mostly on their own. By forcing the banks and Wall Street to deal with their mess, swallow what they can and try to sort out the savable deals, it makes this scenario less likely to be repeated. Banks take a loss and borrowers are still responsible for their finances. The resulting tightening of credit should prevent excessive risk taking in the future. Government involvement could be limited to regulation which was lax anyway.

A government bailout (which suggests dumping money on the problem) is a whole other issue and it seems that many have trouble looking beyond panic to seeing the big picture and coming up with a realizable goal.

I would suggest that number 1 the government focusses on preventing another bubble from expanding and 2. focusses on the economy.
One problem of course is that the economy of the last 5 years was built on easy credit and consumerism, we are manufacturing less than ever, credit card debt is at an all time high, we all know about the helocs and the savings rate is negative. Without reopening the spigots and allowing the money to flow for ever, there will have to be some pain and probably a recession. Delaying it will only make it worse. A step by step tightening of belts is probably the best we can hope for.
Lots of people also talk about rate cuts. Trouble is rate cuts don't just affect the housing market (and don't always affect mortgage rates which also have risk factors added), it affects the dollar abroad which is already weak which affects oil and of course imports, which we are addicted to. Too far and costs rise leading to inflation. Wages increases are already running below inflation, so that will only cause more pain (ha) and make it more difficult for people who are stretched to pay their bills. "Saving" mortgages will weaken other areas of the economy. The only bright spot is that inflation would make the market catch up with house prices, but it would be painful.

As for dumping money - fraught with problems.
Getting more people into FHA sounds great on paper but I worry though about why they weren't eligible initially. Probably because they were a bad credit risk and/or did not have the appropriate income in the first place. Nothing about that changes, just that the government (ie, us)would bear the brunt of the risk, there is still plenty of room there for foreclosures and loan failures.
And of course there are all the people HELOC'd up to their eyeballs. Either they bought lots of stuff they couldn't afford, or they were borrowing more to pay previous mortages in a never ending cycle of debt. Not much saving there and cutting them off slows the economy considerably.

Housing market goals? To "maintain" prices? Without unlimited credit, values have to return to balanced affordability (relative to incomes) in order to get first timers back in. Tough choice. Either maintain a credit bubble indefinitely or watch values drop. No-one is offering credit now, so the latter has to happen. Unless the taxpayers pay for their own credit in some kind of sick cycle because the rest of the world has pulled the plug.
Prevent foreclosures? How? Forgive people their loans i.e. give them a free house? Limited in its ability to help the market itself and of course there are societal issues of rewarding irresponsible behaviour, penalizing the responsible and the add-on repercussions of people expecting to be bailed out of all financial mistakes (IRA drop in value -ask the govt.)

I don't think anyone is unsympathetic to the family charged 12% who would have been eligible for an FHA fixed rate loan - it might not be fraud but it borders on it.
But how many are really in that position? How many Heloc'd up to the eyeballs? How many borrowed more and more to delay the inevitable? How many flipped? How many bought a primary residence they couldn't afford speculating that they would be saved by rising prices? Second homes? Investment properties with negative cash flow?
In other words, helping the 'deserving" might be a noble goal but how can the deserving be defined? Where do you draw the line? And if you help everyone, will it really make a difference in the long run?

I wouldn't want to be Bernanke. I think he is stuck between a rock and a hard place. The bubble disguised the fundemental weakness in the economy. The economy itself needs to be fixed, not the bubble.

[olecapt]

FHA simply went out of style during the runup. There were simply too many other solutions that appeared better than FHA to all concerned. May have been wrong...but that is how it appeared.

I think in the period FHA basically went to zero. So there were lots of borrowers who could have gone that way.

So there are likely a significant number of folk who can convert to an FHA if offered the opportunity.

I will continue to stress that, in Las Vegas and elsewhere, the speculators mostly bailed with large profits. Who is left is Joe Sixpack holding the bag.

[Mathguy]

100% agreement Anthony B.

It's hard to communicate fully here, I guess I'm not talking bailout after all in the true sense of the word....I'm talking about general actions (by people like Bernanke) to help smooth the descent a bit...but descend it shall.

I guess at what point does the government have a duty to save people from themselves? Speculation and greed have been around forever and the credit\debt problem started 20 years ago. Politicians don't like belt tightening on thier watch...see Bush getting blamed for the internet bubble popping right after his election. Maybe he will tighten things up as a lame duck and leave his successor with the recession.

[Mathguy]

Originally Posted by olecapt

I will continue to stress that, in Las Vegas and elsewhere, the speculators mostly bailed with large profits. Who is left is Joe Sixpack holding the bag.

Could you post or refer me to any sort of information supporting this?

[AnthonyB]

Originally Posted by Mathguy

Speculation and greed have been around forever and the credit\debt problem started 20 years ago. Politicians don't like belt tightening on thier watch...see Bush getting blamed for the internet bubble popping right after his election. Maybe he will tighten things up as a lame duck and leave his successor with the recession.

A lot of economist have pointed out that the last time credit was so rampant was just before the Great Depression.

You are right about polititians and belt tightening. We went to war with no belt tightening. The current bubble was caused by the government trying to mitigate a soft landing to the internet bubble. Definitely not healthy.
Most government fixes appear to just delay what has to happen, kind of like using pain killers to deal with a tumor rather than cutting it out all the while letting it get bigger and bigger.

It will take someone with real b@lls to handle it properly.

[olecapt]

Originally Posted by Mathguy

Could you post or refer me to any sort of information supporting this?

I know of no official source either way. What I did was to simply look at the short sales in Vegas about a month ago. I then checked to see the tax address versus the property address. I know of almost no circumstances where an investor tax bills to the property address. I repeated the technique this weekend for the City of Henderson which was an area active in the runup period. Out of 328 short sales (but not foreclosed) I found 234(61%) billing to the property address. A little over 90% billed to a Vegas address. I removed the short and foreclosed because they have a high percentage of bank owned even though repo has not been indicated. One can go back into the history and find out if they were owner occupied but it is a significant amout of clerical effort.

To provide a publishable piece I would have to write a mildly complex script as it involves entries in two different data bases. That is more work than I am willing to do. It is however reasonably easy to sample with MLS access. Given little reason to expect this to be an ongoing discussion I am unlikely to spend the effort.

[AnthonyB]

I think many people have different interpretations of the term "speculator".
To some speculators are purely investment buyers who purchase in another location with the intention of flipping.

To me a speculator is anyone who makes financial decision X based on solely on assumption Y which is outside of their direct control - in other words they speculate the outcome.
That would apply to anyone buying a property, even owner occupied, where the purchase decision was based solely on the ability to resell at a profit in a short space of time -for instance taking out an interest only loan of $300k and hoping/guessing/assuming/speculating that in a couple of years someone else will come along, pay $400k and the "owner" would walk away with a profit.
Or that they could consistently refinance into another interest only and hope that their income would catch up.

The assumption of profit and a never ending supply of greater fools/ buyers allowed people to overbid with abandon.

Remarkably similar to a Ponzi scheme or Pyramid. Except with Herbalife the dollar amounts were somewhat smaller and it didn't affect non participants.
And you couldn't live in a jar of vitamins.

[goodbyehollywood]

Markets are generally efficient. For every seller, there is a buyer-- at some price. If the seller has equity, they can sell at whatever the market will bear. It isn't the taxpayers' or the lender's responsibility to protect a seller's equity. They gambled, and their takeaway is what it is.

If the seller is upside-down, then they're just renting. The lienholder owns the house, and they are probably a company. When companies make enough poor decisions, they go out of business or are acquired for whatever price someone is willing to pay. The people who lose-- the home "owners," the lender, the stockholders-- all took a risk. They made an investment that they expected to pay off, but knew might not.

So everybody who willingly took a stake in the real estate game took a risk. Maybe it was calculated, maybe it was foolish, but they chose to put their money and their financial reputation on the line. Taxpayers didn't choose anything. They had no stake in the upside; why should they participate in the downside?

I know we live in a global economy, but a bailout by any name isn't the answer. Investing in real estate-- to live in, rent out or flip-- has always been a risk, and in any game of risk, not everyone's a winner. But the losers should be people who chose to play.