Here Comes the Big Bailout, Funded by You and Me

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Posted by The Tim on July 25th, 2008 at 10:21 AM · 116 Comments

The US taxpayer is about to be saddled with hundreds of billions of dollars in bailouts to pay for the idiotic decisions of those that gleefully inflated the housing bubble.

At 11:00 AM Eastern TOMORROW (Saturday), the Senate votes on the “housing rescue” bill, which includes:

…an unlimited line of credit to Fannie and Freddie, allows the government to insure up to $300 billion in refinanced mortgages and extends a tax break of as much as $7,500 to first-time home buyers.

While it is probably inevitable by now, the Senate hasn’t voted yet, so there is still time to contact our Senators and try to explain what a horrible idea this is.

Maria Cantwell:

Phone: (202) 224-3441
Fax: (202) 228-0514
Email Form

Patty Murray:

Phone: (202) 224-2621
Fax: (202) 224-0238
Email Form

Categories: News
Tags: bailout, government_meddling

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116 responses so far ↓

1 old timer // Jul 25, 2008 at 10:28 am

E-mail to both of them two days ago, no response.
They’re going to do what their keepers tell them to do, voters notwithstanding.
Long live Goldman Sachs!
The rest of you - EAT CAKE!
2 Alan // Jul 25, 2008 at 10:46 am

If this bill passes, the lending spigots will open wide and real estate prices will rise rapidly.

Gold should to well too with all of the new money sloshing around.
3 Scotsman // Jul 25, 2008 at 10:48 am

I’ve been calling and emailing.

Despite Paulson’s claim that they may not have to use this new authority, we all know they will. CNBC just finished up a discussion that put the real cost at $1.3 TRILLION.

Good bye bond rates, good bye mortgage rates, hello higher taxes! To the universe, and beyond!!
4 WestSideBilly // Jul 25, 2008 at 10:50 am

Le sigh.

Not taking a suicide loan last summer is starting to look like a bad decision.
5 unearthly // Jul 25, 2008 at 10:52 am

Unfortunately our two Senators are bit dim and certainly short-sighted; the money will go straight into the pockets of Wall Street. Of course $3.9 billion dollars is squat when there are tens of thousands of people $100k or more underwater in California alone. The re-default rate for loan reductions is 40% and will only rise. When a fixed mortgage is twice the cost of an Option ARM and you’re barely scraping by then the odds are high you will default again. Both parties just like sucking on the teet.
6 DavidB // Jul 25, 2008 at 10:59 am

It’s an election year so of course the politicians are going to do something to make it look like they’re helping. Unfortunately, this package does little to help the average American. The incentives that are being offered like $7,500 credit toward the purchase of a home (1st time buyer) are limited to annual income of $75K for a single tax payer or $150K if you’re married. The credit also has to be repaid (interest free) over 15 years!

The real reason this was legislation was passed was to prop up Fannie and Freddie but it’s being presented by the media as a savior for the average American to keep their home.

This is a complete waste of tax payer money!
7 Sorin // Jul 25, 2008 at 11:06 am

Not many politicians are going to vote against it because it’s an election year, and they want to look like they are doing something to help irresponsible people stay in homes they can’t afford.

It’s hard being financially prudent in a system that rewards idiocy.
8 Buceri // Jul 25, 2008 at 11:14 am

I posted this before; but here it goes again. Jim Jubak’s take on why this bailout has to happen.

http://articles.moneycentral.msn.com/Investing/JubaksJournal/TheHugeThreatToTheUSEconomy.aspx
9 matthew // Jul 25, 2008 at 11:29 am

I agree that F&F cannot be allowed to fail, but the method that they are utilizing to prop them up is absolute B.S.

I wrote and called both senators, I have also signed every market ticker petition, hopefully someone will phillabuster this thing tomorrow.
10 patient // Jul 25, 2008 at 11:39 am

If you commit $$$ to something that is not performing you want to see a robust improvement plan. As a taxpayer I’m ok to commit tax money to preserve Fanny and Fannie but only if the plan is to flush out all bad debt and only take on good debt. Something like force lenders to have a very speedy foreclosure process where homes are sold within a month of the notice of default. ( If this is possible ). Stop the “keep people in homes they can’t afford” efforts and get on with it. Only secure loans that are solid and rebuild stability and profit. I could be ok with having tax money covering the survival of the GSEs during these premises.
11 Scotsman // Jul 25, 2008 at 11:44 am

Too big to fail, too big to save. Trying to save these guys will cause the cost of .gov debt to rise significantly, pushing the whole bond market over the edge, pushing interest rates up significantly. Housing will still crash, just for a different reason.

They should let them fail. There is no legal requirement for the .gov to guarantee the debt, and we cant afford to save a $24 trillion market with a $3 trillion dollar government already carrying $9 trillion in debt and another $60 trillion in forward commitments. This will tank the lending market for a decade or more.
12 EconE // Jul 25, 2008 at 11:50 am

Call your senator?

HAHAHAHAHAHAHA.

Like they are going to listen.

I can hear it now on the floor of the senate….

“I was originally in support of this bill until some really well spoken young man called and told me what a bad idea it was so now I’m voting no.”

Do you *really* think your politicians care about the little person? Seriously?

It still won’t “prop” up the housing prices as we all know…those are about incomes and sane financing. Any homeowner with a 2006/2007 option ARM is screwed already. It’ll help peoples 401k and other retirement plans more than it helps homeowners….however…I don’t see how even 800 Billion is going to float all the derivatives that were created out of the debt.
13 Mark // Jul 25, 2008 at 11:51 am

“What’s happening at Fannie Mae and Freddie Mac wouldn’t matter so much, of course, if the U.S. didn’t owe so much to the rest of the world. But it does. The sooner we realize that the two most important jobs a debtor has are successfully managing creditors and getting out of debt, the better off the U.S. will be.”

Jim Jubak

Not going to happen! We don’t pay anybody back. Well maybe we pay someone back, but only by borrowing the money from someone else. We just keep running the debt up.

So what if the run up another $300 Billion in debt. It’s not much on top of the $9.5 trillion already owed. We just borrowed $160 billion for the stimulus package. There is even talk of borrowing more for another round of stimulus. It’s not uncommon to have 1/2 trillion dollar deficits in a year.

Lets face it, we’re a nation that can’t survive without foreign aid. We suck up a large portion of the worlds excess capital to finance our life styles - and we ain’t going to pay it back.
14 The Tim // Jul 25, 2008 at 11:52 am

EconE, the idea isn’t that a single person will change a Senator’s mind, but that if enough people contact them all on one side of an issue, they might listen (but probably not).
15 mukoh // Jul 25, 2008 at 11:54 am

Calling makes no difference 90% of the people who are dept ridden will support it anyway. Bubbleheads will of course call. :)
16 mukoh // Jul 25, 2008 at 11:55 am

This thing is passing by Saturday, even our “have a beer with” president is not going to veto it.
17 mukoh // Jul 25, 2008 at 11:59 am

EconE

Quote
It still won’t “prop” up the housing prices as we all know…those are about incomes and sane financing. Any homeowner with a 2006/2007 option ARM is screwed already. It’ll help peoples 401k and other retirement plans more than it helps homeowners….however…I don’t see how even 800 Billion is going to float all the derivatives that were created out of the debt.
End Quote

If you read the bill that homeowners who are under water or getting there option arms especially will be reappraised and moved at 90% LTV of that to FHA/FNMA. With lender taking only a 3% upfront hit on that transfer of paper.
I call that book cleaning for the lenders who are holding those right now and modifying them to accomodate the guidelines.
18 EconE // Jul 25, 2008 at 12:12 pm

Tim.

Time to be realistic. People have been calling, writing and emailing their senators for over a year now. Look where that got us. Not to mention….I wonder how many “Laura Richardson type” politicians are out there.

Mukoh…good luck on getting those $600k for $1667/mo loans re-written into a sane loan. Remember…it has already been stated that there will still be many many foreclosures and not everyone can be saved.

I’m betting very few will be saved.
19 Alan // Jul 25, 2008 at 12:12 pm

You can read the bill. Go to http://thomas.loc.gov/ and search for HR3221. Select “Housing and Economic Recovery Act of 2008 (Engrossed Amendment as Agreed to by House)[H.R.3221.EAH2]“.

So far I don’t see anything I disagree with. I haven’t found the part that says unlimited money to back bad mortgages.
20 SeattleMoose // Jul 25, 2008 at 12:18 pm

Ah yes, let’s save the flippers and infestors.

What about me? I lost several hundred in Vegas?

Where is MY gambling bailout????
21 [troll] // Jul 25, 2008 at 12:19 pm

f ths bll psss, th lndng spgts wll pn wd nd rl stt prcs wll rs rpdly.
………………………..

Ys Sr!

Hrd Hr Hr!!!!

Rntrs r lsrs
22 B&W Nikes // Jul 25, 2008 at 12:19 pm

Unlimited credit? Throwing good money after bad. How is this any different than sending the town drunk on a free shopping spree at the liquor store?
23 mukoh // Jul 25, 2008 at 12:22 pm

EconE some loans are getting rewritten. This will not save a guy with $70k income and a $3k a month mortgage PERIOD.

However the banks that have big portfolios of loans which are doable, they can rewrite and take a 5%-10% loss and transfer them to government backed loans, instead of taking a 25% hit on taking the house back and marketing it or selling to investors.
It will free up their reserves on deposit backing up the current loans, and clear a path to do regular 3% FNMA/FHA loans.
24 Alan // Jul 25, 2008 at 12:23 pm

I’ve skimmed over the entire bill. Maybe someone else can point out where it “authorizes an unlimited line of credit to Fannie and Freddie”. It looks like fairly sensible regulation to me.
25 jon // Jul 25, 2008 at 12:24 pm

There is a quite a lot of good things in this bill. And once a mortgage is refinanced, 50% of any appreciation goes back to the government.

Under “TITLE IV–HOPE FOR HOMEOWNERS”

(2) APPRECIATION IN VALUE- For each eligible mortgage insured under this section, the Secretary and the mortgagor of such mortgage shall, upon any sale or disposition of the property to which such mortgage relates, each be entitled to 50 percent of any appreciation in value of the appraised value of such property that has occurred since the date that such mortgage was insured under this section.

`(m) Limitation on Aggregate Insurance Authority- The aggregate original principal obligation of all mortgages insured under this section may not exceed $300,000,000,000.
26 mukoh // Jul 25, 2008 at 12:25 pm

B&W.
This is pretty ridiculous to tell the homeowner who is on the tip of the knife blade because of their irresponsibility is that “Hey you bought the home for $500k, now it is worth $400k, we will give your loan as a $360k to FNMA and lose another 3% hit on it, keep living it up, just because you can’t pay or have no income to continue on the current mortgage”.

That is pretty wild.
27 SaversAreLosers // Jul 25, 2008 at 12:26 pm

It looks like the government is going to inflate its way out of this mess. If you save money (like in a 401k) then you are a sucker and you are going to lose it all. Better spend it all now on tangible goods and take out some huge loans before you join the ranks of the LOSERS. Hardee har har!!!

Hack… hack…
28 RAL=Choad // Jul 25, 2008 at 12:32 pm

Joke of the day:

What do you call RAL with a wooden leg?

S**t on a stick.
29 [troll] // Jul 25, 2008 at 12:34 pm

Fck y t.

Rntrs r lsrs
30 jon // Jul 25, 2008 at 12:38 pm

mukoh - The bill puts a limit on debt to income ratio of 31% and required verification of 2 years income from the IRS.

There really are a large number of very sensible provisions in the bill. People should really take a closer look at it before they get upset about it. If there are real problems with specific provisions, I’m sure the Senators would like to hear about it, but they will not be interested in hearing from ranting blog readers.
31 Lefty // Jul 25, 2008 at 12:39 pm

Choad,

Can we please the keep the conversation on the same track?
32 Please Buy My House, Idiot Renters! // Jul 25, 2008 at 12:43 pm

RAL,

You be sure to tell us when you actually sell your house. (here’s a hint - the bailout is not being done for your benefit…)

LOL!
33 MrRational // Jul 25, 2008 at 12:47 pm

Jon,

You are acting way too sensibly for this blog. Remember, most people here are giddy as little schoolgirls in anticipation of the next Great Depression that will finally teach those SOB speculators a thing or two.
34 [troll] // Jul 25, 2008 at 12:49 pm

thy wll nt b ntrstd n hrng frm rntng blg rdrs
……………

Tht’s fr sr. ll th Bbblhds r ntrstd n s th cllps f mrc.

Dw 8,000 H!
R fllng nthr 80% H H!!!
h Gd strk! Nsty!
WM gng ndr!

Y lsrs r prclss!

prt frm th fct tht Wshngtn (nt ths W) wn’t lt ths hppn y mrns dn’t thnk wht ffct t wld hv n Y. Chncs r &qt;glly&qt; gd tht f th bv hppnd y Bbblhds wll b lvng n tnt cty ndr -5 jblss!

f crs, wll b fn, thnks……..
35 [troll] // Jul 25, 2008 at 12:50 pm

ff th mrkt dt rntr, y r nt pyng ttntn r myb y r jst s thy sy “thck”
36 Buceri // Jul 25, 2008 at 12:53 pm

Since we are in a money saving mood, while you are on the phone with your senators, make sure you ask them to stop the tax breaks for the most profitable companies on the planet when it comes to a vote again next year.
37 RAL=Choad // Jul 25, 2008 at 12:55 pm

Nice how you come troll when there’s “good” news, but you are nowhere to be found on bad news days. Case in point, yesterday when the Dow dropped 200 and WM dropped another 10%.

You’re such a wanker. Go and apply for another HELOC. Your wife needs a new dress when I take her out tonight.
38 Michael // Jul 25, 2008 at 12:56 pm

Freddie and Fannie have 5.6 Trillion in mortgages. This is a band aid that everyone in the Fed except the press seems to realize. We have 60 TRILLION dollars of debt both public and private (credit cards, mortgage, student loans.) and our GDP (after profound manipulation) is only 13.4 Billion.

Good luck.

This is an election year band aid that fails to grasp or understand the real problem. In fact this is bound to make the situation worse.
39 goin' for it // Jul 25, 2008 at 12:57 pm

As Jon pointed out this bill does very little to actually help people who are underwater or in trouble. The number of hoops and requirements for getting assistance are massive and difficult to overcome.

This bill’s function is to allow the Treasury to give Fan/Fred our money so they can buy all the toxic loans from the investment banks. Then the banks can recapitalize, keep their profits and move on with business as usual.

Meanwhile, when Fan/Fred blow up, we get stuck with the bill.
40 RAL=Choad // Jul 25, 2008 at 12:58 pm
41 RAL=Choad // Jul 25, 2008 at 1:01 pm

http://www.marketwatch.com/news/story/washington-mutual-shares-fall-further/story.aspx?guid={97492703-E5BE-48D1-9FDF-01B1F4E675FC}&siteid=yhoof
42 [troll] // Jul 25, 2008 at 1:02 pm

Hy Chd,

s tht th bst y cn d, nslt my wf?

Y r nt nly lsr y r rlly pthtc.

fl srry fr y ‘ll mn.
43 RAL=Choad // Jul 25, 2008 at 1:02 pm

http://tinyurl.com/6hoh73
44 softwarengineer // Jul 25, 2008 at 1:02 pm

ALAN [2], YOU HAVE IT WRONG

Interest rates will go through the roof if the federal government borrows $1 trillion [I don't believe they can anyway, who'd lend it to 'em?]. If they theoretically printed the money and drastically devalued the dollar; the price of oil would like go to $300/bbl.

Food will go up too. We will enter a massive stagflation [worse than a depression, because commodities sky rocket while the economy worsens].

I don’t see it happenning to a massive degree [perhaps a 20-30 billion chunk at worse]; we’re broke and can’t afford it. Letting our currency devalue is exactly like defaulting on the debt [we give China and Arab countries payments that don't buy anything]. they’d likely pull all their money out of out treasuries; then watch interest rates go through the roof.

RE won’t go up, it will become worthless with like 15% interest rates. Your average Seattle home will be worth like $150K. In other words, trying to bail out part of it will hopelessly destroy thing.

Paulson isn’t that stupid or is he? Maybe this is the beginning of a new world government? LOL
45 RAL=Choad // Jul 25, 2008 at 1:04 pm

My comment was meant to be insulting you, moron. Learn to read.
46 [troll] // Jul 25, 2008 at 1:06 pm

ctlly, sggstng tht my wf wld g t wth y s nsltng HR.

Chd=Mrn
47 RAL=Choad // Jul 25, 2008 at 1:09 pm

I’m curious to actually find out your financial keys to success. What are your recommendations?

Seriously.
48 softwarengineer // Jul 25, 2008 at 1:11 pm

HERE’S PROOF THAT THIS BAIL OUT BILL IS MOSTLY HOTAIR AND LOONY

Who’s going to fund the bail out of the world banking system this subprime mess is all entangled in?

See the proof:

http://www.rgemonitor.com/roubini-monitor/253111/who_is_going_to_rescue_the_hundreds_of_busted_us_banks_dont_count_on_suckering_again_the_foreign_governments_the_sovereign_wealth_funds_and_the_biggest_fire_sale_in_the_history_of_humanity
49 RAL=Choad // Jul 25, 2008 at 1:12 pm

http://tinyurl.com/55o5kf
50 B&W Nikes // Jul 25, 2008 at 1:14 pm

Mukoh@26 - not advocating throwing purchasers in distress into the volcano by any means. Just seems beyond absurd to me that after the now widely understood implications of the dismantling of Glass-Steagall (which released this roller coaster), that the solution is further credit extension without any protection from the same thing occurring again. It’s a band-aid on the open jugular.
51 mukoh // Jul 25, 2008 at 1:19 pm

The biggest issue IMHO is that not just looking at the bubble or inflation, deflation, however at how educated consumers are. 90% of the people think that loans are a great thing, investments are a waste of time, knowing the economy and where things are headed is for politicians. I thin a patch on this is nothing going 10 - 20 years out, system needs to educated people on debt, investments.
52 [troll] // Jul 25, 2008 at 1:21 pm

’m crs t ctlly fnd t yr fnncl kys t sccss. Wht r yr rcmmndtns?

Srsly.
…………………….

Chd,

Srsly, y dn’t hv th rght tttd nr th brns t b sccssfl.

Srry
53 flipofftherenters // Jul 25, 2008 at 1:21 pm

Ahh, the bailout. It’s the doomers worst nightmare. As soon as we see funding, Foreclosure will be halt to minimum, Homeowners with ARM loans will get modified to fix mortgages. Lastly, PRICES WILL START CLIMBING FAST HERE IN SEATTLE. Strap yourself bubblebrains you are going up for a bumpy ride!
54 softwarengineer // Jul 25, 2008 at 1:22 pm

SEATTLE HOME PRICE COLLAPSE WITH BAIL OUT DEBT

Here’s more proof home prices will collapse if our government borrows a $1 trillion to back the bad loans:

States in part from comments section of Dr. Roubini’s article (see URL above):

Nouriel,

Is it time to revise your estimates downward concerning housing price declines?

“Fitch Ratings said Thursday that it had enhanced its U.S. residential mortgage loss mode … Fitch’s revisions suggest … a very bearish take on housing prices over the next five years: Fitch said in its report that it is expecting home prices to decline by an average of 25 percent in real terms [inflation adjusted] at the national level over the next five years, starting from the second quarter of 2008.

And that’s the base case scenario.”

http://calculatedrisk.blogspot.com/2008/07/fitch-projects-additional-25-percent.html

Written by Gloomy on 2008-07-25 15:07:40
55 Scotsman // Jul 25, 2008 at 1:40 pm

“And that’s the base case scenario.”

That’s the punchline, right? ;-)
56 Scotsman // Jul 25, 2008 at 1:47 pm

http://biz.yahoo.com/cnbc/080725/25851253.html

RAL, RAL=Choad, if you’re going to have a pissing match, you should each donate $50 to Tim for the privilege of using his “yard.”
57 Bits_of_Real_Panther // Jul 25, 2008 at 1:50 pm

“Fitch said in its report that it is expecting home prices to decline by an average of 25 percent in real terms [inflation adjusted] at the national level over the next five years, starting from the second quarter of 2008.”

That could mean 4-5 years of flat prices or a drop then gradual recovery. Homeowners should be happy with either of those outcomes, and prepared for worse
58 matthew // Jul 25, 2008 at 1:52 pm

Normally I’m a staunch supporter of the 1st amendment, but RAL is seriously making me rethink my stance.
59 Thomas B. // Jul 25, 2008 at 2:13 pm

I’m torn on this one… I respect and understand your argument, but the people most in danger aren’t the homeowners. It’s the banks that have the loans. The $300 billion is for them, from what I understand. I think this bill would stabilize the credit market and put banks on the road to recovery. Home prices will still go down, because banks will be more cautious in lending, hence fewer mortgages granted, or, in the alternative, banks will require higher standards for mortgages eliminating a number of people from the housing market. So in essence, this bill is about banks and not homeowners.
60 vboring // Jul 25, 2008 at 2:18 pm

Choad, you’re single-handedly bringing the quality of discourse down here. can you please go find somewhere else to troll. RAL doesn’t need to be egged on.

RAL, i don’t know why you comment here, if you have so much disdain for the other regulars.

Jon, if the bill is reasonable, it will be ineffective. if the goal is to bail out the people in crazy situations, only a crazy bill could work. so, we’re either talking about an ineffective bill or a crazy-moral-hazard-subsidize-the-bastards bill.

honestly, it seem the best case scenario is that the price collapse process could slow. so people in houses they can’t afford will stay there and slowly lose money over decades instead of ditching and giving the losses to the banks.

but, no matter what, nationwide (worldwide, if we’re honest), prices will eventually revert to sustainable affordability levels. it is just a question of who takes the loss, when, and how disruptive the process will be.
61 Sarge // Jul 25, 2008 at 2:33 pm

PRICES WILL START CLIMBING FAST HERE IN SEATTLE.
—————————

Who can afford the current prices much less higher prices? Even if credit loosens they will be traditional loans, the suicide loans that bloated housing values are gone forever (good riddance!). Prices will continue to drop until they become affordable with traditional loans. At best prices will stabilize, the days of fast climbing home values are gone for a very long time.
62 darth_z // Jul 25, 2008 at 2:35 pm

Actually, there are potential 2 outcomes for this so called “Bail out”:

1 - Best case scenario: the rate of deflation will slow down a little bit and will be prolonged over many years - not crashing - until long term inflation and income will catch up with home price - The great mean reversion that is proven to be always true. I suspect this is exactly what the government has in mind.

2- Worst case scenario: The bail out fails, Fany and Fredy will be nationalized (most people still believe that this is the case - look how much the stocks of these 2 has come down since the bail out was announced) and eventually, the Fed will have to nationalize the housing market. In this case, you will sell homes to and buy homes from the government. This is the end of housing as the an investment tool. The great american dream (or nightmare lately) will be history. Housing will become very boring (as it was in the past) and people will look at other assets for investment.
63 TJ_98370 // Jul 25, 2008 at 2:43 pm

.
What Should Uncle Sam Do?
.
NEWSWEEK’s Business Roundtable takes stock of the real damage—and offer solutions to the economic crisis.
.
- Robert Reich , secretary of Labor under Bill Clinton
.
Of course Fannie and Freddie are getting bailed out. They’re Bear Stearns to the 10th degree—way too big to fail, especially with the rest of the Street in turmoil. And of course tax payers get stuck with the tab.
.
What worries me is the complete lack of accountability by Fannie’s and Freddie’s executives, as well as Wall Street investment bankers also now being insured by taxpayers. We’ve created the worst form of socialized capitalism—private gains combined with public losses……
.
- Larry Lindsey, former governor of the Federal Reserve
.
The recent troubles at Fannie Mae, Freddie Mac and IndyMac show just how messy things can get when the relationship between the government and the market gets too cozy. Fannie and Freddie are private for-profit concerns that operate for the benefit of the shareholders, but with government intervention both in their mission and as a source of bailout money when things go badly. This leads to both the privatization of profits with the socialization of losses and political interference in the processes of profit making and loss mitigation.
.
The plan advanced by Secretary [Henry] Paulson provides an open-ended source of funding for the government to buy the stock of the companies and to lend them unlimited amounts of money. While it may be a necessary last-ditch effort to save them, the plan leaves existing management and directors in place and asks for no explicit accountability for existing shareholders and other investors……..
.
- John Snow , former Treasury secretary under George W. Bush,
.
The current turmoil results from excessive risk-taking and imprudent lending based on the assumption that housing prices would rise indefinitely. We now have a long-overdue correction. Government’s proper role is to provide for an orderly adjustment while allowing the underlying market forces to work. Although it is painful and disruptive, the sooner it is resolved, the less injurious the spillover to the rest of the economy will be………..
.
64 jon // Jul 25, 2008 at 2:46 pm

The $300B will allow many homeowners an alternative to what they are doing now with an upside down mortgage, which is dumping their house on the market. Providing a way to keep the house will reduce inventory and avoid the need for everyone to keeping lowering their prices below everyone else. That will help banks stabilize the value of their collateral and stop the bleeding for writedowns. Some areas, seems to me in the midwest mostly, have overshot and are selling below cost. Cutting inventory there could stop the deflationary cycle. Areas that are still overpriced will not be helped. I would have to read the bill more carefully to see what specific safeguards there are to prevent extending US credit in areas that still need to fall more, but the overall tone of the bill looked good to me.
65 Michael // Jul 25, 2008 at 2:49 pm

The United States holds 60 Trillion in debt (both private and public). A majority of this debt is private (mortgage, credit card, and student loans). If the United States GDP is only 13.5 Trillion then how do your purpose that our debt will be paid down? I feel that this debt has been built through naive consumers and bad government. Consumers spent 102% of their income last year. How do your purpose that real estate could increase in value?

The Fed can either print more money or slap band aids on the problem. It is beyond our capacity to actually fix the problem and 300 billion will give them six months (at best).

I would suggest buying short soon after the fed implements its fix.
66 david losh // Jul 25, 2008 at 2:49 pm

To me it’s dollars in, dollars out. The housing market has generated billions of tax dollars these past few years. Infusing those tax dollars back into the housing market system makes sense to me. Housing has bolstered our entire economy by creating durable goods orders, wages, investment income, and infrastructure.
In the world of corporate welfare it seems these dollars are staying here rather than our tax dollars going to Iraq, China, Columbia, or the Middle East.
67 Jay // Jul 25, 2008 at 3:14 pm

Ratings agency can apparently do no wrong. Hey, they are the ones dutifully stamped the seal of AAA on those MBS/CDO/CLO with a whole lotta of subprime garbage and now they are busy covering their mistakes.. but people still believe them and their analysis. I guess faulty analysis is preferable to no analysis.

Now, regarding Fannie and Freddie, yes, they’re like an overgrown tumor, but cutting them off now could effectively kill its host, namely the United States of America, and possibly the international economy. Some said the government debt cost will rise siginifcantly because of this so called rescue, but I think the reality is the exact opposite. Fannie and Freddie’s debt always carried that implicit government guarantee aura, and they were able to grow this large precisely because of that implicit guarantee. If the U.S. government decides to abandon Fannie and Freddie now, that could be seen as equivalent to defaulting on government debt by many creditors, and in the worst case scenario, all U.S. debt may start to carry the default-risk premium and the U.S. government’s funding cost will then skyrocket and eventually it won’t be able to borrow anymore. The collapse of capital markets and worldwide banking systems will follow (along with much of our savings), international trades will halt, and the resulting depression will ravage all of us for many years.

Besides, even if Fannie/Freddie default does not lead to U.S. defaulting on her debt, such event will certainly freeze the mortgage market and housing prices will plummet. Now, that probably will sound good to many readers of this blog, but because of already overleveraged balance sheets of many TBTF institutions, such scenario may very well result in failure of the U.S. banking system with dire consequences.
68 Eleua // Jul 25, 2008 at 3:20 pm

This will help PNW real estate?

$1.3T is a lot of money, by any standard. We either tax it directly (my share is $21311), or borrow it ($80/mo in interest + the 21311 over several years). In the former, all money that could be put toward houses is sucked into Wall Street hands. In the latter, that $80+ will go against money I could use to upgrade to my “Bainbridge Island Dream Home,” but I will be paying higher interest rates to afford that place.

That assumes this isn’t a giant air-ball.

We still have not addressed where all the Level III assets will get dumped at 10c on the dollar and how the banks will recapitalize. If WaMu or WB goes TU, the FDIC is tapped-out. What then? Another $1.3T to recapitalize the FDIC and quell the panic?

Declining home prices (except RAL’s dump) are the symptom, not the disease. Too much bad debt is the disease and this bill does not address any of that. At the end of the day, the banks are still holding lots of crappy loans that they will have to eat. Getting some people out of SP loans, while trillions of people are laboring to make their non-SP loan is not going to help. Also, if the lender of that SP loan has to eat it or have the contract rewritten, how many will be generated in the future?

Yeah, I thought so.

This is an attempt to kick the can past November at a cost of $21K per family.
69 patient // Jul 25, 2008 at 3:21 pm

Consider for a while if homes were bought without financial corporations involvement, i.e with cash and no loans. Then there was a temporary shortage of supply that created a price bubble. Builders then caught up with demand and the bubble bursted. Anyone think Uncle Sam would be there to hand out money to cover for peoples losses? Of course not. This has nothing to do with helping the american poeple and everything to do with bailing out corporations. Some people will be helped but that’s a side effect that happens to score good political points and therefore becomes the official reason. Most people will be “helped” to remain slaves to their overinflated mortgages forever, nice indeed.
70 [troll] // Jul 25, 2008 at 3:23 pm

RL, dn’t knw why y cmmnt hr, f y hv s mch dsdn fr th thr rglrs.
……………

dn’t hv s mch dsdn fr ll th rglrs.
Mny d hv vld pnts. thrs r lvng n l l lnd nd sm hv rl nsty tttd ctlly njyng wtchng ppl n fnncl trbl nd chr n th ctl nd ptntl flrs f r fnncl nstttns wtht rlzng th cnsqncs n LL f s.

lv mrc nd hv cnfdnc tht r chsn ldrs wll ltmtly str th crrct crs, wth bmps n th rd, t rsm r cnmc grwth nd mntn r hgh stndrd f lvng..

Thr s wy t mch nwrrntd pssmsm frm Bbblhds.

Lf s gd.
71 NoMoreWork // Jul 25, 2008 at 3:35 pm

RAL,
Life is great. And, as your homeowner buddies have informed me over the past 5 years: “life has been AMAZING!!!!!” due to their houses “SKYROCKETING IN VALUE!!!!”

Excuse me if it finally takes a turn and I don’t feel too bad for you. I’ve had the bull sh!t about home equity held over my head for too long. So yes, I think some homeowners should take it in the chin. If people could afford their houses and are still comfortable making the monthly payments then I think that’s great. Hell, it’s where I hope to be one day.

To rest who bought their “AWESOME SKI BOAT!!!” with “non-lake property in northgate” home equity, well I think we can cheer on their demise a little bit. So I say… na na na na na NA!!

I’ll just sit here and short WaMu, but make no mistake, it’s about making money, not about “loving America”.

I love America
72 Dave // Jul 25, 2008 at 3:46 pm

Hey RAL-

You just gave McCain’s talking points. Why doesn’t that surprise me?

Dave
73 david losh // Jul 25, 2008 at 4:20 pm

OK you lost me with confidence in our chosen leaders.George Bush is an idiot. George was elected because Al Gore was in favor of the assualt weapons ban and in turn against our Constitutional Right to bear arms. We forget what a hot topic that was, but many people who recognized George as the lackey he is had to vote for him.
Kerry was never in the running and a clown like that even making a showing was proof that George was a lesser of two evils choice.
What is very true is that this is a logical step of support for the United States economy. It’s what we pay taxes for. The implied gaurantee aspect is on every one’s minds, or should be. Our economy has moved ahead with concepts of the FDIC, Fannie and Freddie Macs ability to remain solvent.
What’s being over looked here is the number of housing units created. They won’t sit empty. money will change hands in one way or another. Let’s also remember builders ended up with a ton of money. These units were sold and the money is in the system some place.
Lenders may be writing down loans but those real dollars are still circulating. How does that work out?
74 b // Jul 25, 2008 at 4:25 pm

RAL -

Your undying trust in our government to fix every problem with magic is truly frightening. In a free market economy plenty of people should be cheering on bad companies with bad business plans going into the toilet, because it helps keep the market operating properly. You talk about how these companies going under effects everyone badly, but the problem is you ignore the effects their ruinous business plans have had on everyone already and what continuing that streak would do to the economy overall. Here is a hint, "chocolatey" companies like WaMu going under does everyone a bigger favor than propping them up.
75 b // Jul 25, 2008 at 4:26 pm

Haha, nice filter replace Tim :)
76 Dave // Jul 25, 2008 at 4:50 pm

darth_z (#61) — This is the end of housing as the an investment tool. The great american dream (or nightmare lately) will be history. Housing will become very boring (as it was in the past) and people will look at other assets for investment.

This is probably one of the best outcomes from this whole sorry affair. When everyone stops looking at the roof over their heads as some “sure fire” investment that will put them on the road to riches, then maybe housing will go back to being boring and affordable. There should be a premium for buying a home versus renting one, but it shouldn’t be so large as to cause all the economic distortions that this episode has brought on.
77 John // Jul 25, 2008 at 5:04 pm

Some people thought the rescue of Bear Stearns would mark the bottom of the stock market too. A few months later, it is hitting new lows.

This time, the market might have already priced in this news with the rally in the last week and it has started going down again.

Does this bill mean people can put little or no money down on homes? Are subprime and no-doc loans back in vogue? If not, then how are home prices going up? A large segment of buyers is still shut out of the market.
78 Jason H. // Jul 25, 2008 at 5:10 pm

Anyone that calls is an idiot.

Call if you want them to vote it down and end up in a recession worse than the great depression.

Yes, call if you want to be taken over by China… if our economy fails, watch the vultures come down and start a war with us… no doubt.

So yes, you bubbleheads… start WWIII… and don’t bail out the economy.

Freddie and Fannie are as much of the government as GWB.
79 John // Jul 25, 2008 at 5:33 pm

“Yes, call if you want to be taken over by China… if our economy fails, watch the vultures come down and start a war with us… no doubt. So yes, you bubbleheads… start WWIII… and don’t bail out the economy.”

China already owns this country. Their foreign reserves are a trillion dollar in the black, thanks to us, and we are in deep red.

When does the love for America turn into bailing out people who spend beyond their means and companies that lend to them just as recklessly? That’s not capitalism, that’s socialism. The flag waving, commie haters should chew on that.
80 [troll] // Jul 25, 2008 at 5:46 pm

NmrWrk
Lf s grt. nd, s yr hmwnr bdds hv nfrmd m vr th pst 5 yrs: “lf hs bn MZNG!!!!!” d t thr hss “SKYRCKTNG N VL!!!!”
………………
t nvr md dffrnc t m. nvr brrwd gnst my hm. 1st mrgg nly tht’s nly nw bt 20% f th ctl hms vl.
ls dn’t rb n th qty thng, n my crcl thy r ll rspnsbl hmwnrs.

Dvd Lsh
K y lst m wth cnfdnc n r chsn ldrs.Grg Bsh
…………….

wsn’t rfrrng t th crrnt dmnstrtn r pltcns fr tht mttr, ths “mss” s gng t g n fr t lst nthr yr r s.
81 Everett_Tom // Jul 25, 2008 at 6:02 pm

Here’s a interesting article. An IMF (International Monetary Fund) report which suggest housing in the USA is overvalues by 8%- 20% in Q1 of this year.
82 Garth // Jul 25, 2008 at 6:35 pm

In california and vegas the foreclosures have been happening before the resets, i guess meaning the people were not able to pay even the teaser rate or it is outright straw buyer fraud.
83 geon // Jul 25, 2008 at 8:01 pm

I called and emailed the senators a couple days ago–so call me an idiot.

The real idiots are the ones who think this bailout will actually help. It pains me to see folks with a 7 percent mortgage rate begging to get a 3.3 fixed so they can make it work.. give me a break. Seven percent! Get out of the banks house if you can’t afford it.

I’m pretty sure that’s what our last mortgage rate was fixed at and I thought it was darn good.

A nation of whiners, we are.
84 mikal // Jul 25, 2008 at 8:40 pm

No kidding, read this blog.
85 jon // Jul 25, 2008 at 8:40 pm

The requirement for IRS income verification of 31% debt to income is not going to help the deadbeats or idiots who loaned them money. It will help the people who are trying to make an honest living but made a big mistake and paid too much. Time will tell how many of those there are.
86 Captain Kirkland // Jul 25, 2008 at 9:01 pm

Won’t matter if this passes or not. Real Estate is still screwed.
87 [troll] // Jul 25, 2008 at 9:40 pm

Tm - thnk f y cntct thm, gvn th pplrty f yr wbst, Mr nd Ptty wll dfntly lstn.
88 TJ_98370 // Jul 25, 2008 at 10:29 pm

See post # 63.

This is a complex situation. It is encouraging that some very influential people have the same perspective that have been long expressed by “bubbleheads” .
89 matthew // Jul 25, 2008 at 10:34 pm

Jason H.,

You are an idiot. F&F are PRIVATE entities. They are leveraged at somewhere between 60-1 to 300-1. That is far more leverage than any hedge fund around. Throwing money at the problem will only prolong the agony. Instead of a quick and hard recession, we are going to get a decade long deflationary spiral. We are repeating exactly what the Japanese did during their housing bust and it won’t work now just like it didn’t work then.

Only difference is that they were a nation of savers, not spenders.
90 Everett_Tom // Jul 25, 2008 at 11:13 pm

A little off topic, but

Fed takes over and then sells two more banks, who were going under.

http://www.reuters.com/article/newsOne/idUSN2528445020080726

(First National Bank of Nevada and First Heritage Bank NA of California)
91 takenroad // Jul 25, 2008 at 11:36 pm

For what it’s worth, I posted a paper letter to Maria Cantwell and Patty Murray in late May or early June, asking each not to vote for a “mortgage bailout” bill of any sort. I actually got an emailed response from Maria Cantwell on June 19th.

Here it is:

Dear Mr. (redacted),

Thank you for contacting me regarding the housing crisis. I appreciate hearing from you on this important issue.

The Mortgage Bankers Association reported that of the 44 million active mortgages, 343,000 entered the foreclosure process by the third quarter of 2007. This is the highest foreclosure rate in 35 years. While subprime loans only make up an estimated quarter of loans taken out today, almost two-thirds of foreclosures are made on homes purchased with subprime loans. Each foreclosure can impose damages up to $80,000 to the surrounding community, including the loss of property taxes, the damage done to the prices of neighboring properties, and the cost of foreclosure related services performed by the government.

While I understand your frustrations with what appears to be a “bailout,” I believe that we must closely evaluate every proposal and consider the best path forward that will stabilize our nation’s faltering economy. The housing market is an integral component of our economy’s health. Without action, over three million homes are likely to be foreclosed upon in the coming years, and approximately two million families affected. With such grave financial consequences, the coming foreclosure emergency must be addressed head-on, and Congress must take appropriate action.

One factor that must be considered in deciding what action to take is the prevalence of predatory lending practices, which have contributed greatly to the popularity of subprime loans. Almost 90 percent of subprime loans were taken out by those refinancing their homes-not by first-time homebuyers. Furthermore, 61 percent of those who received subprime loans were eligible for more secure prime loans. In most cases, those who were eligible for prime loans were led to believe that the riskier subprime option was the only choice for which they were eligible. This deception must be considered as we try to strike an appropriate balance between helping people who are at risk due to events beyond their reasonable control, and allowing others to assume responsibility for the consequences of their financial decisions.

It may interest you to know that Washington state has some of the strongest regulations in the nation related to mortgage lending. Six percent of Washington state mortgages were subprime loans, compared to 6.6 percent nationally, but of those loans, only 2.9 percent of Washington loans entered foreclosure proceedings in the fourth quarter of 2007, compared to 5.29 percent nationwide. The national fourth quarter homeowner delinquency rate was at 5.82 percent, but only 3.23 percent of Washington state mortgages were overdue.

Our nation faces numerous economic challenges today, including record debt and a falling dollar. On April 10, 2008, the Senate passed the Foreclosure Prevention Act (H.R.3221) by a vote of 84 to 12. I supported this bill as an important first step in pushing our economy and housing market in a new direction, but there is still much work to do. I will continue to use my seat in the Senate Finance Committee to pursue policies that promote growth in the economy and increased standards of living for American families in a fair and responsible manner.

As the House and Senate continue to work on solutions to this crisis, please be assured that I will continue to keep your views in mind and will work to craft legislation that is good for the nation and for Washington state.

Thank you again for contacting me to share your thoughts on this matter. Finally, you may be interested in signing up for my weekly update for Washington state residents. Every Monday, I provide a brief outline about my work in the Senate and issues of importance to Washington State. If you are interested in subscribing to this update, please visit my website at http://cantwell.senate.gov. Please do not hesitate to contact me in the future if I can be of further assistance.

Sincerely,
Maria Cantwell
United States Senator

For future correspondence with my office, please visit my website at
http://cantwell.senate.gov/contact/index.html
92 shawn // Jul 25, 2008 at 11:37 pm

Does this thing have a kill filter? That’s one thing I loved about Usenet, plonk, the trolls disappear. I suggest everyone here take an oath DNFTT! Lets all agree, we can talk about them, but do not address them. Gosh, at least if these folks are going to flame they should at least do a good job of it, go learn from Guy Macon.

http://www.html-faq.com/etiquette/?flame
93 mikal // Jul 26, 2008 at 3:37 am

Right Shawn. Keep pointing out that Seattle Bubble has to do with being in your bubble and less to do about real estate. That is smart.
94 david losh // Jul 26, 2008 at 8:47 am

Something has been bothering me for a couple of days. I’ve asked before and I’m asking again. How does money get lost? How do dollars get lost? Where do they go? Expecially now that no one wants dollars, where are they?
I understand we send dollars to Iraq, Afganistan, China, Columbia, and the Middle East, but don’t those dollars come back to us as the largest consuming country on earth? Aren’t the goods, services, and products coming back at inflated prices that Americans simply pay?
How was it, or is it, some one would, or could pay $500K for a property that was only worth $350K? Why would they? How could they? Isn’t it the circulating dollars that makes that all possible?
I’ve had debt before and I’ll have debt again, but I’ll ramp up my business and pay it off, like I have before. Isn’t that the difference here in the United States? There’s always more money. I don’t know why, but there is always more money. How do you explain that?
Are you claiming they are printing money to pay debt? That doesn’t seem true. How did we pay down debt in the Clinton administration? Did they print money? I’m just not getting it. The FDIC closes two banks one day and Mutual of Omaha buys them the next day. Mutual of Omaha? Aren’t they a very conservative group of investors?
Please help me out here.
95 patient // Jul 26, 2008 at 9:25 am

David, money isn’t lost but value is. The stock market is probably the easiest way to visulaize it. You $70 for a share of WM. The next day some news exposes that the value is really $50. What happened to the $20? The seller you bought your share from will put it into another asset or multiple assets at some stage to their current value. So the money is still their it just moves around as values of assets changes.
96 patient // Jul 26, 2008 at 9:32 am

And in a very large scale the dollar and the US economy are assets as well and if the rest of the world puts less value on them our dept will accelerate if we have a negative trade balance.
97 patient // Jul 26, 2008 at 9:35 am

Regarding growth of money supply it mostly from surplus from trade balance or borrowing from other countries or our own credit institutions.
98 Yaoyao // Jul 26, 2008 at 9:57 am

losh,
i’m not sure if your questions are rhetoric or not, you seems to subscribe to the idea that real estate bubbles can do no wrong. will try my best to explain even though i think many people have already explained and i’m surprised that you as a regular still don’t understand it.

Real estate bubbles, like the internet bubbles are created by too much money sloshing around the system and these extra money chases the latest hot fad pushed by wall street bankers. late 90s the fad was stocks for i-named money pits and dumb money pushed stock prices to ridiculous heights until even semi-smart money get in t