Foreclosure Rescue Plan Open Thread

Here’s a good summary of Obama’s proposed foreclosure rescue plan from our friends over at Calculated Risk.

This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.

Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure – prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

Personally, I feel that foreclosures are part of the solution, not part of the problem.

Here is The Tim’s 4-point foreclosure plan:

  1. Require banks to inspect the loan documents from all home loans issued between 2003 and 2008.
  2. Any mortgages found to be based on falsified information are immediately nullified.
  3. The home “owner” must either qualify for a full-doc loan based on current standards, or forfeit the house.
  4. Ta-da! Foreclosure “crisis” solved.
  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

121 comments:

  1. 1
    matt says:

    I don’t see how this would be a good plan.

    If a ton of homes foreclose there would be a big influx of homes on the market. Prices would drop further, affecting people who can make their mortgage payments, and banks would be forced to take even greater losses. Meanwhile, new home builders would also face some serious fallout as they’d have to compete with homes quite possibly being sold at a loss. Not to mention the incredible cost of reviewing documents for the millions and millions of homes that closed over the prior 5 years.

    I don’t see how your plan is a win for anyone.

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  2. 2
    Cris says:

    http://www.oftwominds.com/blogfeb09/capital-trapRE02-09.html

    An interesting article for some who thinks bottom is close..

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  3. 3

    A certain amount of home sales where buyers got loans based on falsified information was at the behest of mortgage brokers or those working for them…I know, I know, if you’re getting a loan you should review all the documents carefully. But that wasn’t the case then, and it’s still not the case. Some of these folks were truly duped by the whole gaggle of crooks ranging from real estate agents to loan salesmen to lenders to appraisers. Yes, the buyer has some responsibility, and yes, propping things up doesn’t really solve the problem, but what happens to these large institutions that made these loans and fraudulently packaged them to investors? Should they just get bailed out by the Feds and let the borrower just hang and pay for all these others misdeeds?

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  4. 4
    The Tim says:

    By matt @ 1:

    If a ton of homes foreclose there would be a big influx of homes on the market.

    Sounds great for potential buyers.

    Prices would drop further…

    …also great for buyers.

    …affecting people who can make their mortgage payments…

    Wait, how does lower home prices stop someone from continuing to make affordable mortgage payments on their house?

    …and banks would be forced to take even greater losses.

    Many of the banks are already technically insolvent if they were forced to mark their assets to market. Besides, they’re the ones that let all this lies-based lending happen in the first place. I say let the insolvent banks fail and those that remain can pick up the pieces.

    Meanwhile, new home builders would also face some serious fallout as they’d have to compete with homes quite possibly being sold at a loss.

    I missed the part of the Constitution that specifies the right of businesses to perpetually succeed regardless of the long-term viability of their business model.

    Not to mention the incredible cost of reviewing documents for the millions and millions of homes that closed over the prior 5 years.

    Sounds like it would put a lot of people to work. So I guess my plan doubles as a job-creating stimulus. Sweet.

    I don’t see how your plan is a win for anyone.

    Winners in my plan: home buyers, responsible banks, conservative home builders, and everyone that stands for a return to economic sanity.

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  5. 5
    john says:

    I’m all for cheaper homes (I’m waiting for the bottom to buy), but also think that softening the thump at bottom is probably good idea. So much of our economy is tied up in the housing debacle that allowing a free-fall probably isn’t good in the short and medium run. The more people think they may lose their homes, the weaker consumer confidence gets, the more layoffs, rinse, repeat, etc.

    If housing prices operated in a vacuum, then Tim’s post #4 would hold more water, but, for example, if housing prices fall, people stop spending, people get laid off, then that keeps people from making their mortgage payments.

    Clearly we have to get out of this somehow, but a race to the bottom is not always a good idea.

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  6. 6
    TJ_98370 says:

    As Kyle Bass puts it, a Darwinian flush is needed.

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  7. 7
    matt says:

    @ the_tim

    You’re kind of being smug, aren’t you?

    Bottom line, rampant foreclosure doesn’t create jobs, doesn’t help existing responsible home owners, doesn’t do the homebuilding or construction industry any good, and wont do anything to reverse or halt the housing slump.

    If we keep people in their homes and get them to keep making their monthly payments at least we have some money moving hands. It may not be a silver bullet, but I think it would be even tougher to stomach the alternative.

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  8. 8
    The Tim says:

    RE: matt @ 7 – Is it “smug” to suggest that we shouldn’t be privatizing (largely ill-gotten) gains and then socializing the subsequent inevitable losses?

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  9. 9
    mukoh says:

    Tims solution is so brilliant. I think we should call Obama right now. :)

    LOL. Seriously, do you really assume it will even get that close? Nobody wants this to be wide open, and there are far bigger forces at hand here then Tim might comprehend.

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  10. 10
    The Tim says:

    RE: mukoh @ 9 – Oh don’t get me wrong, I realize full well that anything even remotely resembling my plan wouldn’t have a [insert your favorite “not a chance” cliché here] chance of ever even being brought up for discussion in DC.

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  11. 11
    Ben says:

    American politicians never want to anger their constituents, even when the constituents don’t like the plan because they don’t understand what is going on.

    This is why they do what they do. Focusing on the politicians is the wrong thing to do – the people must be educated as to why it is a folly to allow this moral hazard.

    BTW – I don’t understand what is so bad about foreclosing somebody’s house. They can now go rent, probably for half what their mortgage was. Most people who have been foreclosed are probably more careful about taking on debt. I am sure that it sucks emotionally, but why reward bad decisions and punish good ones?

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  12. 12
    David McManus says:

    Wait, how does lower home prices stop someone from continuing to make affordable mortgage payments on their house?

    I’ve been saying that for months now. What your house is worth should not prevent you from making a payment. I suspect some people are just not going to pay as some sort of protest. “Well, my home is only worth 300K but I owe 400K, so F it. I shouldn’t have to pay”

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  13. 13
    Magnolia44 says:

    Should be some fun posts over the next few days.

    I said in the past govt intervention was coming, I would have liked to see something better in terms of lower rate refinance for responsible borrowers throwing out the ltv ratios of 80%.

    I did see something for fha and fnma refinancing related to that but it kicks off march 4th. I say still more intervention to come, good luck to us all cause its ugly out there owner and renter alike

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  14. 14
    yeslerhill says:

    I agree with The Tim as far as banks being allowed to fail, (or nationalized!), but I think there were plenty of people who were scammed by lenders or RE gangsters. I think that if the federal gov took over all residential home mortgages, and reset the rates at 1%, and they are all held as public debt, and then home owners would be paying back the federal gov at whatever rate they can be made to/afford to pay.

    I am opposed to any bailouts of any financial institution, and no one who was buying a vacation home or a f;ipper, or a rental should receive any help.

    I think a severe drop in home values will do great things to reign in the vulgar consumerism that was a big part of this economic depression.

    The notion that we can, or should, bail out this failed neo-liberal economic model is a terrible idea. It will lead just to another bubble and another collapse.

    I wish we had a leader who could say; The system we’ve had over the last 30, 60 years has brought us to this collapse, and it is time to break with the past and take a more sustainable, mutual prosperity. Rather than just hyping “growth” as the answer to everything.

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  15. 15
    me says:

    By David McManus @ 12:

    Wait, how does lower home prices stop someone from continuing to make affordable mortgage payments on their house?

    I’ve been saying that for months now. What your house is worth should not prevent you from making a payment. I suspect some people are just not going to pay as some sort of protest. “Well, my home is only worth 300K but I owe 400K, so F it. I shouldn’t have to pay”

    Actually, it often makes perfect financial sense to abandon your house if you are badly upside down on your mortgage.

    Say you are owe $400,000 on a house which you now realize is only worth $200,000. You can afford the mortgage payment. However, you realize that you are going to have to move one day and sell your house. You won’t be living in it the rest of your life, odds are you’ll want to sell in 5+ years, and the house obviously won’t be doubling in price again in that time.

    So you are now trapped in your house, you can’t sell it but you know you’ll need to. Meanwhile, you’re paying twice on your mortgage what new buyers would be paying, you’re paying twice what renters are paying, and you know that one day you will have your house foreclosed on because you won’t be living there forever.

    So you might as well get the foreclosure over with now, take the hit to your credit score, and then you’ll be able to start rebuilding your credit and start saving money (as your mortgage/rent payment is cut in half) towards eventually buying another house.

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  16. 16
    mukoh says:

    RE: The Tim @ 10 – Agreed. I think you very well know. :)

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  17. 17
    The Tim says:

    RE: mukoh @ 16 – It’s because of posts like this that I would never stand a chance of being elected to any sort of political office. :^)

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  18. 18
    Scotsman says:

    How many more crap sandwiches are we expected to eat?

    Greed, on many peoples part- home buyers, banks, brokers, loan officers, builders, and yes, even the government (in an effort to try and be everybody’s best friend) led to an unsustainable situation. Now that situation is collapsing and everyone is busy trying to pass the ticking bomb off to someone else before it blows. It would be funny if we weren’t in the same room with these clowns.

    Grow up. When my kids were little and got hurt out on the playground, etc. my wife and I would tell them “it’s a good thing you’re tough, because sometimes when you play hard, you’re going to get hurt. Brush it off and get back in the game.” To this day, they don’t complain, more adult than most “adults.”

    If you HELOC’d out all your equity, bought more house than you could afford, made a bet on a future that didn’t materialize, or didn’t pay attention in school so you couldn’t understand the loan documents, TOO BAD. Now you get to deal with the results of your decisions. But the government shouldn’t pass off on the taxpayers costs that the government forced others to take on, and those who profited shouldn’t try to pass off the losses they’re looking at now. The whole thing just pisses me off.

    I have two signs over my desk:

    “:What you do speaks so loudly I can’t hear what you say”

    And my favorite:

    “Everybody, sooner or later, sits down to a banquet of consequences.”
    (Robert Louis Stevenson)

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  19. 19
    TheHulk says:

    I would like to add that this “great plan” should exclude everyone across the board who ever took out a HELOC on their house. Your house should never be an ATM. Not gonna happen I know.

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  20. 20
    98115_Renter says:

    Anecdote regarding banks pushing HELOCs and Loans.

    In 2002 I was a bank teller at JPM Chase bank in Houston, TX. When someone came in for a transaction (deposit, whatever) we often got little marketing flags on our computer screens telling us to ask if the customer was interested in a HELOC, etc. I’m not sure what the flag was based on (existing mortgage, average balance) but it was obvious the bank(s) were out to make mucho dinero on these things.

    One of those customers was a wise old man and told me that there are gonna be lots of people losing their homes over this stuff.

    My opinion: Claw back the bonuses on all of those who made money on these products and use it to restructure the payments (refi, not principle reduction) for those who are currently unable to refi. Also, the stockholders should lose their shirts (they already have for the most part).

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  21. 21
    David McManus says:

    By me @ 15:

    By David McManus @ 12:
    Wait, how does lower home prices stop someone from continuing to make affordable mortgage payments on their house?

    I’ve been saying that for months now. What your house is worth should not prevent you from making a payment. I suspect some people are just not going to pay as some sort of protest. “Well, my home is only worth 300K but I owe 400K, so F it. I shouldn’t have to pay”

    Actually, it often makes perfect financial sense to abandon your house if you are badly upside down on your mortgage.

    Say you are owe $400,000 on a house which you now realize is only worth $200,000. You can afford the mortgage payment. However, you realize that you are going to have to move one day and sell your house. You won’t be living in it the rest of your life, odds are you’ll want to sell in 5+ years, and the house obviously won’t be doubling in price again in that time.

    So you are now trapped in your house, you can’t sell it but you know you’ll need to. Meanwhile, you’re paying twice on your mortgage what new buyers would be paying, you’re paying twice what renters are paying, and you know that one day you will have your house foreclosed on because you won’t be living there forever.

    So you might as well get the foreclosure over with now, take the hit to your credit score, and then you’ll be able to start rebuilding your credit and start saving money (as your mortgage/rent payment is cut in half) towards eventually buying another house.

    Fine, if you want to stop paying and deal with the consequences then that’s fine, but I’ve got a big problem with people who want to stay in their house and not pay just because their house is worth less that what they owe.

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  22. 22
    patient says:

    What the gov. forget is that it doesn’t matter what they do with foreclosures it will not stop the slide in prices. Prices on homes are set by what the buyer want and can pay not what the sellers ( banks or individuals ) price them to. All this will achieve is to make a 3 year correction a 10 year correction and make many people slaves to crushing, consumption hampering debt forever. I sincerly hope that these $50b will be enough to pay for the removal of senators Dodd and Franks when this money goes up in smoke and nothing is achieved other than angering the 30%+ people who are not homeowners and all parents who will see their children carrying the cost of this moronic waste of money.

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  23. 23
    98115_Renter says:

    RE: patient @ 22

    Don’t forget that the parents of the children who will paying for this are the ones who are underwater.

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  24. 24
    microsofties says:

    How about giving a tax incentive to renters that do NOT contribute to this financial anarchy or need to be propped up?

    Give some added incentives for people to dump houses and move into the rental market, and those on the fence with foreclosure might leave.

    Would be interesting to see if there was a benefit for NOT owning property in this country.

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  25. 25
    DavidB says:

    My understanding is that this plan only covers conforming Fannie & Freddie loans. It doesn’t help any homeowners with Jumbo loans and those loans are more frequently defaulting these days.

    Maybe it will help if the homeowner files for bankruptcy and the judge modifies the debt obligation.

    I don’t think this plan will help much in cities like Seattle were the median home price is so high and it’s not likely that Fannie or Freddie were used for the home loan.

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  26. 26
    98115_Renter says:

    RE: DavidB @ 25

    I believe the median home price in Seattle qualifies as a conforming (non-Jumbo) loan.

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  27. 27
    b says:

    I have a much better plan. Congress enacts a law that any foreclosure happening from 2007-2010 can only ding your credit rating for two years. If you cannot afford your house, I am so sorry you will have to rent like me, its terrible I know. Maybe in two years time you can take your special free pass and go buy a new house, since you will have saved about 6-12 months housing cost by getting foreclosed (oh, how terrible to get free money, I know!).

    Instead we get another barf sandwich, where those in the most precarious loans that never should have been made and those who HELOC’ed or “invested” their way to foreclosure get rewarded with cram downs, 0% interest loans and $1000/year to pay their licking bills.

    Its sickening, and I am beginning to think this mess is going to end with guillotines and not a severe recession.

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  28. 28
    Peckhammer says:

    By The Tim @ 10:

    RE: mukoh @ 9 – Oh don’t get me wrong, I realize full well that anything even remotely resembling my plan wouldn’t have a [insert your favorite “not a chance” cliché here] chance of ever even being brought up for discussion in DC.

    I dunno, Henry Paulson certainly shared your view when he let Lehman Brothers and Bear Stearns fail, and then he did an about face when the entired financial system almost failed.

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  29. 29
    AmyM says:

    I’d like to draw out a few points on the new tax credit. I am a CPA, just to give some background. I had a young lady ask me about it at a client site yesterday. She was very excited about the possibility of buying a home and getting the new credit until I told her that her AGI (adjusted gross income) must fall below $75,000 for singles and $150k mfj (married filing jointly).

    She was disappointed because like me, she had done the math . In King County where the average home is still almost $400,000, without substantial income and a hefty down payment, that isn’t very helpful. Now that the standards have changed, you must prove you can pay the mortgage. By the time you figure in taxes and insurance, that’s a difficult proposition.

    So, she has the great job, for the moment, but thought that extra credit could really help push her over the edge. Oh, guess what, she makes too much. Except that she hasn’t been able to comfortably afford a house up until this point in time.

    It may make a difference in the condo market, but doesn’t do much for the SFH situation here in King County.

    What about the folks on the sidelines? Traditionally a first time home buyer is someone who hasn’t owned a house in the last 2 years. With the new credit it is now three years. So, even those who sold at the top and are patiently waiting won’t be rewarded.

    In California, the situation is worse because in LA, SF area the prices are still too high. CA is one of the hardest hit states. AZ and FL may benefit but who is willing to move cross country in this economic environment? Strike 3: The credit can only be used for a primary residence. Anyone want to move?

    It may help the Mid-West, where incomes are far more in line with home prices. Oh wait, those prices never got out of control and are more stable( i.e, St Louis, Kansas City, Indianapolis, etc.) Detroit is in free-fall. No one can help that.

    So the responsible, hard-working, and savvy investors are out. Oh yeah, they are the only ones with any money right now: some kind of stimulus.

    The bottom line is still the same. Home prices have to be affordable or the numbers won’t work. The market can and will find a bottom despite the government intervention.

    That’s my $.02; $.07 if you adjust for the inflation that will probably result from all the money being printed.

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  30. 30
    jon says:

    “3. The home “owner” must either qualify for a full-doc loan based on current standards, or forfeit the house.”

    Does the The Tim plan include the Fed monetizing the FDIC, or will all bank deposits also be wiped out?

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  31. 31
    Joel says:

    By The Tim @ 4:

    Winners in my plan: home buyers, responsible banks, conservative home builders, and everyone that stands for a return to economic sanity.

    Boooooring. Any real plan would involve at least a reality T.V. show, a dozen washed-up celebrities, and giving lots and lots of money to people that are experiencing the consequences of their actions.

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  32. 32
    Randal J says:

    Tim, the statement you relayed from Calculated Risk:

    “This plan rewards those homebuyers who speculated with excessive leverage.”

    is incorrect. What Obaba said today was:

    “It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell. And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.”

    As for your foreclosure remedy, I think it would be solution only if every foreclosure was due to either an unscrupulous borrower or excessive speculation on the part of the borrower. But I don’t beleive that to be the case.

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  33. 33
    Robert says:

    If this does not help prop up the prices – Obama will move in and fight the tide with even bigger debt and even more money to get the prices to rise. People who always say the govt cannot cause inflation are wrong. Govt has at its disposal infinite amount of money and can do as they please.

    Right now they do not even have to worry about the USD tanking. The rest of the world is in chaos. The Chinese need Americans to spend. So it will be a nice ride.

    So very soon we might find out that home prices are really rising like crazy. Since there will be so much money on the market – there will be even more speculation (people have to park monye somewhere). It will be crazy!

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  34. 34
    buystocks says:

    Robert,
    jeez, i better buy a home fast before i’m inflated out (sarcasm)

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  35. 35
    matt says:

    By The Tim @ 8:

    RE: matt @ 7 – Is it “smug” to suggest that we shouldn’t be privatizing (largely ill-gotten) gains and then socializing the subsequent inevitable losses?

    Why would you think your opinions on privatization have anything to do with your smugness?

    You were sarcastic in your responses, put words in my mouth (I never said declining home values impair an individuals ability to make mortgage payment), and have a clear penchant for putting ironic quotation marks around as many words as possible.

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  36. 36
    Flotown says:

    Robert-

    When the printing presses really get moving – as appears likely a future case from Bernanke’s speech today, the Fed will start buying treasuries and the dollar will decline versus SOME other currencies, namely the yuan, driving up the costs of imports. But, since most americans are paid in dollars and assets are priced in dollars, this printing mechanism will do little to cause the inflation of asset prices. Rather, the best way to reinflate asset prices is to loosen lending standards, and banks seem remiss to do this moving forward.

    The other way to drive housing prices higher, all things being equal, is to lower interest rates. However, we’ve seen that, lacking qualifies buyers at current prices, even low interest rates have not been that helpful. Looking forward, given the size of the deficit, interest rates are almost sure to rise, even in light of the prospect of the fed buying treasuries – the dollars are just too large for the Fed to contain without entirely trashing the dollar. Our creditors don’t like it when we do that and will threaten to not buy our notes any more if we do so.

    At any rate, none of these things seems to call for spiking housing prices anytime soon.

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  37. 37
    The Tim says:

    By matt @ 35:

    (I never said declining home values impair an individuals ability to make mortgage payment)…

    I wonder then if you could explain exactly what you meant by:

    Prices would drop further, affecting people who can make their mortgage payments…

    How is it affecting them? Why should they care?

    …and have a clear penchant for putting ironic quotation marks around as many words as possible.

    My usage of quotation marks is quite intentional and not intended to be sarcastic in the slightest. I just take issue with people misusing the English language.

    Is it a “crisis” when a person goes to a casino and loses $100 on bad bets? To call the foreclosure situation a crisis is to use loaded and leading language that presupposes the action that should be taken.

    Furthermore, I put “owner” in quotes because people that took out 100% (or larger) loans with payments they could not possibly have afforded long-term do not own a home, what they own is a very large debt.

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  38. 38
    Kary L. Krismer says:

    By TheHulk @ 19:

    I would like to add that this “great plan” should exclude everyone across the board who ever took out a HELOC on their house. Your house should never be an ATM. Not gonna happen I know.

    I used a HELOC instead of a bridge loan because the rate and cost to set up was cheaper.

    It was paid off out of escrow, but overpaid, and then while it was over-paid, they froze it! (But they did send the overpayment–I think it was just mail crossing.)

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  39. 39
    Kary L. Krismer says:

    By DavidB @ 25:

    My understanding is that this plan only covers conforming Fannie & Freddie loans. It doesn’t help any homeowners with Jumbo loans and those loans are more frequently defaulting these days. .

    I’m looking at bankruptcies, and not foreclosures, but for bankruptcies it’s clearly loans at the conventional amount level that are filing. Stated differently, I’m not sure there’s a higher default rate for jumbos.

    Also, you don’t need a jumbo to buy a median price home in Seattle.

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  40. 40
    Kary L. Krismer says:

    RE: AmyM @ 29 – There aren’t that many first time home buyers looking for $400,000 houses.

    But you’re right regarding the income limitations. I think the credit will mainly help the condo market.

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  41. 41
    The Tim says:

    RE: matt @ 35 – Also, what I meant by my comment regarding homebuilders @ 4 was that nobody has an inherent right for a business plan to always be successful regardless of their situation (see: horse-drawn carriage manufacturers).

    Not that it doesn’t suck for those businesses and their employees that have failed, are failing, and will fail. It definitely bites. But times change, some businesses fail, others succeed and evolve. It’s the way business is supposed to work.

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  42. 42
    Kary L. Krismer says:

    As to the refinancing portion of the plan (increasing the LTV from 80 to 105), that sort of fits with what I’ve been saying about the lowering of interest rates. They’re trying to determine how many bad loans are bad by making refinancing attractive, but unfortunately with declining values, not everyone can refinance. This helps correct that.

    With this pretty soon they’ll be able to assume almost all the old F&F loans are at risk because: (1) The person has poor credit; or (2) The person is underwater more than 5%.

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  43. 43
    Kary L. Krismer says:

    Tim, I don’t think your four point plan would be legal. About all you could do is look for those people and then criminally prosecute them (likely bank fraud), or pursue their discharge if they file bankruptcy (and you don’t non-judicially foreclose.)

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  44. 44
    The Tim says:

    RE: Kary L. Krismer @ 43 – I figured it might not be. It was posted more as a starting point for a discussion than as a serious political proposal. As I said above @ 10, I’m fully aware that a plan like this would be a 100% non-starter for a host of reasons.

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  45. 45
    DaveyDave says:

    Just like with TARP not being enough to get the economy going again and we had to enact a second stimuls bill of just under $800 billion, we of course will need a second Housing Affordability and Stability Plan (HASP 2.0). This will include the following 5 measures as I see it:

    1. Pass the 28th Constitutional Amendment that makes it a right to refinance.
    2. Any mortgage written after 2010 will be denominated in Yuan to save in government printing costs.
    3. Predatory lending institutions receive $1000 for every person they can convince to take an unaffordable loan as well as 1 free bag of breathmints.
    4. If you mention the name, ‘George Bailey’ when signing a mortgage, the lending institution must knock 25 basis points off the rate.
    5. If a citizen is outed as a saver, then they are forcibly deported to Japan and only welcomed back with a credit score lower than 550.

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  46. 46
    Sniglet says:

    The main flaw with this new plan is that it is targeted at keeping people in homes they can’t afford with the intent of propping up housing prices.

    Unfortunately, the result we need to see is that everyone who cannot truly afford the homes they live in move elsewhere, allowing losses to incurred and prices to fall quickly to new (affordable) levels. There is nothing cruel or sad about this. The people who lose their homes to the lenders will simply find rentals, for MUCH better deals anyway, allowing them to start rebuilding their finances. This latest bail-out simply drags out the pain these over-indebted souls are experiencing, setting them up for defaulting yet again a year or so down the road.

    In fact, I don’t really understand why we need a home-owner bail-out to begin with. It’s certainly NOT to help struggling home-owners (who would absolutely be better off just moving to a rental and shedding the mortgage obligations altogether). This sounds like yet another bank bail-out (by stealth), subsidizing the bad mortgages, allowing banks to go further delay taking write-downs on bad loans.

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  47. 47
    jasonwarren says:

    I’ve been trolling here for a while, waiting for the right time to comment.

    My family has been waiting on the sidelines here in Seattle for six years, renting a place well, well below our budget, and I’ve been blogging on the lunacy of Seattle area home valuations. I just went in and got prequalified for a loan, and have started looking in earnest. Curiously, even with all the ‘revised’ qualification and loan/income ratios, I was still approved for a loan probably 20% higher than I’d be comfortable assuming. Silly banks.

    I posted a link and some commentary on Facebook today about the iniquity of Obama’s foreclosure bailout, the moral hazard, the need for further drops in valuations (in some locales), and that anyone who bought a home in an overpriced market was irresponsible and bears some responsibility for the current dilemma. This post generated more follow up commentary and more venom than anything else I’ve ever posted on FB (abortion, gay marriage, Palin, IP rights, …).

    It seems no one wants to admit, or even seriously ponder, whether their personal actions were in any sense irresponsible and contributed to the market movements. Folks, if you bought a 1500 sq ft tri level townhouse on Cap Hill at any point in the last couple of years for $50k more than it sold for one year prior, you contributed to the problem. If you bought a home in Bellevue, fixed it up, and flipped it in 1-2 years for 30% more than you bought it for, you contributed to the problem. If you moved to the area to come work at MSFT in 2004, rented for a year, then jumped in to the ‘get it NOW!’ market in 2005 and paid $575k for a home on the plateau that previously sold for $425k in 2003, you contributed to the problem. The marginal unit sets the valuation for the market. All it takes is one yahoo to buy an already overpriced home in a bidding war without an inspection or other constraint, on the premise that ‘the market can’t go up forever, but I’ll be able to sell this place long before things go south’, and they reset the valuation for the entire market and contribute to the problem.

    In the market over the last 7-ish years in Seattle, those who didn’t buy helped act as a brake on what could have been an even worse spike and crash. Now it’s my turn to contribute to the solution. I’m going to take my savings, good credit, purchasing power, and flexibility afforded because I’ve been renting month to month, and I’m going to shop until I find a nice place that accepts an offer 10%-15% below their already reduced asking price. If it takes six months and dozens of visits and offers, that’s fine. I’ve got time. The market isn’t going anywhere I don’t want it to head.

    I did the math, and for every one recipient of the average $7800 ‘foreclosure package’, 14 of us are ponying up $550 to front the bailout. I’m in a double income family, so we’re fronting $1100 ‘in the national interest of helping at-risk homeowners’. Very annoying. But I’ll swallow $1100 if I can grind multiples of that out of a bank on a foreclosure special and help drive down ASPs.

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  48. 48
    BelRenter says:

    I think the government might as well spend the $75 billion buying and bulldozing homes if they want to tackle this problem supply-side! The problem is that the supply of homes greatly exceeds demand at the current prices. The demand side (affordability) problem is too large: prices ARE going to fall. Houses are just too expensive for the average home-buyer, particularly in a period of economic distress.

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  49. 49
    Kary L. Krismer says:

    Sniglet, the refinance portion doesn’t assume they can’t pay or afford to stay. In fact, if that’s the case, they probably couldn’t refinance under this plan. What it does is simply allows them to refinance even if they can’t meet the 80% LTV number.

    It is sort of odd in that typically if you had a pool of mortgages, you wouldn’t want to reduce the rates on those that could afford the payments but were otherwise locked into the program. That’s why I think it’s either political, or designed to separate the bad loans from the good ones, the way I described in #42 above.

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  50. 50
    Kary L. Krismer says:

    By BelRenter @ 47:

    I think the government might as well spend the $75 billion buying and bulldozing homes if they want to tackle this problem supply-side! The problem is that the supply of homes greatly exceeds demand at the current prices. The demand side (affordability) problem is too large: prices ARE going to fall. Houses are just too expensive for the average home-buyer, particularly in a period of economic distress.

    I heard on the news that there are about 60,000 empty houses in Phoenix. In King County it’s probably under 10,000 (5,000 listed and 5,000 other, the latter of which is a guess).

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  51. 51
    Sniglet says:

    What it does is simply allows them to refinance even if they can’t meet the 80% LTV number.

    This is precisely my point. People who are having problems making ends meet with their current payments are unlikely to all of a sudden be made miraculously whole after refinancing (not without some SERIOUS principal reduction).

    In any event, these people will almost CERTAINLY be better off just letting the home go into foreclosure. Why keep people saddled with an over-all debt load (even if re-financed) that is atrocious?

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  52. 52
  53. 53
    DrShort says:

    RE: The Tim @ 37

    Tim,

    I’m surprised by your inference that foreclosures and short sales are not creating a crisis situation. If the impacts were limited to the homeowners who would just have to go back to renting, then I might agree. Even if the effects were limited to housing, I might agree. But it’s not that simple. At all.

    When that $400K mortgage gets foreclosed and only $150K can be recovered, $250K in losses is passed down the food chain. Someone ultimately pays off that difference. And it’s regular people and businesses who’ve acted completely responsibly that end up paying the $250K off with job losses, stock losses, worthless bonds, etc.. There’s simply no way to allocate the financial pain to those who made the bad decisions. In fact, those with no money who bought expensive homes with nothing down are probably the least affected by this mess. They had and have nothing to lose. They just go back to renting at a much cheaper monthly expense.

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  54. 54
    DrShort says:

    RE: me @ 15

    “Actually, it often makes perfect financial sense to abandon your house if you are badly upside down on your mortgage.

    Say you are owe $400,000 on a house which you now realize is only worth $200,000. You can afford the mortgage payment. However, you realize that you are going to have to move one day and sell your house. You won’t be living in it the rest of your life, odds are you’ll want to sell in 5+ years, and the house obviously won’t be doubling in price again in that time.”

    Because of the reasons I discussed in #53, I think anyone who walks away from a mortgage when they can still make the payments should suffer consequences. They should be subjected to a much higher federal tax rate, fines, and/or criminal charges, I know it’s not illegal, but it should be. All they are doing is passing on their losses directly to others.

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  55. 55
    DaveyDave says:

    By DrShort @ 53:

    RE: The Tim @ 37

    Someone ultimately pays off that difference. And it’s regular people and businesses who’ve acted completely responsibly that end up paying the $250K off with job losses, stock losses, worthless bonds, etc.

    DrShort,
    I’ve seen your contributions to this blog, so I well, know that you’re a lot smarter than me. But the market does allocate risk to those that elect to take it. If I’ve got stocks or bonds, then I’ve chosen to take on risk for a hoped for return. It’s exactly the stock and bond holders that should pay for losses in the institutions they’ve invested in. And as far as job losses go, I haven’t heard of a guaranteed job yet. We’re all in the same boat there.
    The stock and bond holders, during good times don’t come up to me and say, ‘DaveyDave, I know you didn’t put any money in this with me, but please take some of my profit. It’s the fair thing to do here.’
    I know we all need to get through this together, but giving people tax money to stay in a home they couldn’t afford to begin with isn’t a solution. And giving lending institutions more money just to serve the loans they make is even more ludicrous in my mind.

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  56. 56
    EconE says:

    I already made fun of the bill in the previous thread.

    By EconE @ 14:

    RE: DaveyDave @ 8

    Let’s have some fun with the PDF DaveyDave provided…

    “â�¢ Neighborhoods are struggling, as each foreclosed home reduces nearby property values by as much as 9 percent.

    Each home? 9%? I should be able to get a house for 99c in Sacramento then.

    � No Aid for Speculators: This initiative will go solely to helping homeowners who commit to make payments to stay in their home � it will not aid speculators or house flippers.

    Hmmmmm.

    What was that Kary revealed in some recent thread? Something about half the houses on the MLS being empty? Aren’t there like 9 million empty homes out there? These aren’t “homeowner” homes. These are speculators homes.

    Yup…no help for those folks.

    And don’t forget about the fact that the banks have only listed 25% of the foreclosures so far. 75% still to come. Add those to the empties that Kary mentions. And don’t forget all the unlisted builder inventory of condo’s, townhomes, custom high end homes galore, and every flipper that has bought a foreclosure in 2008 to “gussy up & flip” but is now holding the bag yet the house isn’t on the MLS yet as the flipper is still furiously installing granite and cheap 3-strip engineered hardwood floors before it can be listed.

    ok…back to the PDF

    “The average homeowner could see his or her home value stabilized against declines in price by as much as $6,000″

    You hear that sellers. What that means is that when it hits bottom those $1,200,000 2 BR condos will only fall to $606,000 instead of $600,000.

    Whoo Hoo! I guess every cloud has a silver lining.

    Don’t fret however. I haven’t seen a condo that sold for $1,200,000+ have a comp go for $606,000 yet. One (very) near carbon copy did however close for $765,000 a little over a week ago.

    So…don’t go cutting your listings in half yet sellers.

    30% to start should do.

    Let’s move on…

    “The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month* to sustainable levels.”

    (*emphasis mine just this one time)

    Read between the lines. Looooong time indentured servitude…ooops…I mean debt service. No principal reductions. Can’t do that…it would kill the derivatives market. You still want to retire don’t you? Don’t believe me? Read the PDF yourself.

    Sorry ’bout that. Don’t really like having to be the bearer of reality.

    Better lower those prices Mr & Mrs existing long time homeowners (and builders too for that matter) as you’ll be competing with the banks soon.

    And guess what!

    The banks won’t care what they get for all the foreclosures as the government already has their backs and will cut them a check for the difference. And it’ll happen in the best of neighborhoods also. Don’t believe me? You’ll see.

    Keep on keepin’ on! And as much as Sniglet preaches 80% off…and will be all over your A$$ for only offering 50% of asking…still…

    Don’t offer more than 50% IMHO. If you do, only after you have your “bidding war” buddy bid 60% off. (is that legal?)

    Option-ARMs more than double (falsely) the purchasing power of a buyer. Add in a little bump for the stated income and boom….houses are 60%-80% overpriced.

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  57. 57
    EconE says:

    By DrShort @ 53:

    RE: The Tim @ 37

    Tim,

    I’m surprised by your inference that foreclosures and short sales are not creating a crisis situation. If the impacts were limited to the homeowners who would just have to go back to renting, then I might agree. Even if the effects were limited to housing, I might agree. But it’s not that simple. At all.

    When that $400K mortgage gets foreclosed and only $150K can be recovered, $250K in losses is passed down the food chain. Someone ultimately pays off that difference. And it’s regular people and businesses who’ve acted completely responsibly that end up paying the $250K off with job losses, stock losses, worthless bonds, etc.. There’s simply no way to allocate the financial pain to those who made the bad decisions. In fact, those with no money who bought expensive homes with nothing down are probably the least affected by this mess. They had and have nothing to lose. They just go back to renting at a much cheaper monthly expense.

    So…don’t foreclose eh?

    What if the person in the $400k house can only afford a $150k mortgage (necessitating a principal reduction) yet someone else who can’t afford to “buy out the toxic loanowner” at 400k is able buy the house for $200k?

    Sounds like foreclosure is the cheaper option in that scenario.

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  58. 58
    DrShort says:

    By EconE @ 57:

    By DrShort @ 53:
    RE: The Tim @ 37

    So…don’t foreclose eh?

    What if the person in the $400k house can only afford a $150k mortgage (necessitating a principal reduction) yet someone else who can’t afford to “buy out the toxic loanowner” at 400k is able buy the house for $200k?

    Sounds like foreclosure is the cheaper option in that scenario.

    I’m not against foreclosures. In fact, I think the quicker, the better so we can get on with a recovery. But it is a crisis that impacts the entire economy and, ultimately, it will be the one’s who acted responsibly who will pay a big part of the bill.

    And I think any principle reductions should come with some heavy strings attached. For instance, if the house goes back up in value and the owner sells, they have to pay back the original amount.

    The last thing we want to do is encourage people who can pay their mortgage to stop paying.

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  59. 59
    Kary L. Krismer says:

    By Sniglet @ 51:

    What it does is simply allows them to refinance even if they can�t meet the 80% LTV number.

    This is precisely my point. People who are having problems making ends meet with their current payments are unlikely to all of a sudden be made miraculously whole after refinancing (not without some SERIOUS principal reduction).

    You’re assuming these people are in some sort of financial distress. If they were they probably wouldn’t qualify for the refinancing portion of this program.

    I was upside down in my first condo for several years, but never in financial distress. The two do not necessarily go together, and in fact I’d guess most people who are upsidedown nationwide are not in financial distress.

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  60. 60
    Kary L. Krismer says:

    By DrShort @ 54:

    RE: me @ 15

    “Actually, it often makes perfect financial sense to abandon your house if you are badly upside down on your mortgage.

    Say you are owe $400,000 on a house which you now realize is only worth $200,000. You can afford the mortgage payment. However, you realize that you are going to have to move one day and sell your house. You wonâ��t be living in it the rest of your life, odds are youâ��ll want to sell in 5+ years, and the house obviously wonâ��t be doubling in price again in that time.”

    Because of the reasons I discussed in #53, I think anyone who walks away from a mortgage when they can still make the payments should suffer consequences. They should be subjected to a much higher federal tax rate, fines, and/or criminal charges, I know it’s not illegal, but it should be. All they are doing is passing on their losses directly to others.

    At a minimum, getting a home mortgage in the future will most likely be more difficult, or at a higher rate. The foreclosure only shows up on your credit report for so many years, but the question I believe on the loan app is “Have you EVER had a house foreclosed?”

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  61. 61
    Kary L. Krismer says:

    As mentioned above, approximately half the houses are vacant, but you can’t assume the owners were speculators. Some bought a house before selling their old house, which suddenly became much more risky after former Treasury Secretary Paulson spoke in September. Some people got moved by their employers. Some people died (estate sales).

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  62. 62
    DrShort says:

    By DaveyDave @ 55:

    By DrShort @ 53:
    RE: The Tim @ 37

    Someone ultimately pays off that difference. And it’s regular people and businesses who’ve acted completely responsibly that end up paying the $250K off with job losses, stock losses, worthless bonds, etc.

    DrShort,
    I’ve seen your contributions to this blog, so I well, know that you’re a lot smarter than me. But the market does allocate risk to those that elect to take it. If I’ve got stocks or bonds, then I’ve chosen to take on risk for a hoped for return. It’s exactly the stock and bond holders that should pay for losses in the institutions they’ve invested in. And as far as job losses go, I haven’t heard of a guaranteed job yet. We’re all in the same boat there.
    The stock and bond holders, during good times don’t come up to me and say, ‘DaveyDave, I know you didn’t put any money in this with me, but please take some of my profit. It’s the fair thing to do here.’
    I know we all need to get through this together, but giving people tax money to stay in a home they couldn’t afford to begin with isn’t a solution. And giving lending institutions more money just to serve the loans they make is even more ludicrous in my mind.

    I don’t disagree with anything you’ve said. I just think the impacts of this housing mess will be felt by FAR beyond those who made irresponsible decisions. There’s still a ton of foreclosures left to come and I wonder how many other institutions will be brought down by it.

    On the one hand, banks made some extremely stupid loans, but you have to have a well functioning banking system if an economy is going to function.

    There’s no good solution to this mess.

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  63. 63
    DaveyDave says:

    RE: DrShort @ 62
    I hear you and agree. I suppose I’m just venting out of extraordinary frustration and nausea…

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  64. 64
    DrShort says:

    By Kary L. Krismer @ 60:

    At a minimum, getting a home mortgage in the future will most likely be more difficult, or at a higher rate. The foreclosure only shows up on your credit report for so many years, but the question I believe on the loan app is “Have you EVER had a house foreclosed?”

    That’s not enough. If a person walked away from a loan they could have paid, they should be subject to severe tax penalties at a minimum. Tax the forgiven debt as income. Eliminate any future capital gains on a principle residence. Make them ineligible for any conforming loan mortgage programs.

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  65. 65
    David Losh says:

    RE: DrShort @ 52

    Absolutely! Banks wanted the foreclosure process so they could quickly turn a non performing loan into an asset they could sell. There are no buyers today. There are suckers who are buying those “affordable” homes only to find themselves holding worthless junk a year or two later.

    The more foreclosures the more worthless this junk is. Real Estate is an industry that is shedding jobs. Banks, lenders, investors, and stock traders are also losing those jobs that feed off of real estate. That’s just one market sector.

    Manufacturing needs to sell goods. Agriculture is based on perishable goods. Technology needs people to be able to afford to pay. The list goes on.

    Let me take one example of a company that “speculated” in a Real Estate venture by adding office space they needed and could share with like minded ventures. The have had 20% growth over the last ten years and last year lost 10% of thier income. New orders are at a stand still. All of that growth is in jeapordy and the new “debt” of the new office space is now a drain.

    Sure they will adapt, in time. Right now they will be losing a debt, but also an asset. The foreclosure of the office space will be for what “new” venture? Who’s going to take a risk in a declining market? What will happen with the property they “leveraged” to build the other space?

    More to the point, what will happen to the hundreds of employees they have and the hundreds of companies that depend on thier technology?

    When you create foreclosures you lose jobs. All the busy little bees that “prop up” those home owners, or land owners, lose jobs as those properties become useless.

    Was it 16 million empty houses in the US so far?

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  66. 66
    DrShort says:

    Just one last point…

    Here’s a list of the largest 15 US companies by assets from a couple of years ago.

    Citigroup
    Fannie Mae
    JP Morgan Chase & Co
    Freddie Mac
    Bank of America
    General Electric
    American International Group
    Morgan Stanley
    Merrill Lynch
    General Motors
    Goldman Sachs Group
    Wells Fargo
    Wachovia
    Prudential Financial
    Ford Motor

    All are in serious pain or no longer exist.

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  67. 67
    David Losh says:

    RE: DrShort @ 66

    More foreclosures add to assets, but is that what they want?

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  68. 68
    Ray Pepper says:

    Darn Realtors are to blame for all this! They should all be put on a boat for Gilligans Island.

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  69. 69
    matt says:

    @ the tim

    What I meant by affecting homeowners is the drop in home values due to foreclosures. It’s certainly affecting them; I guess it’s a caveat emptor situation, but it’s still really unfortunate.

    And I officially call shenanigans on your use of quotations as legitimate.

    Exactly how bad would it need to get for you to take the “”s off of “crisis”? It’s certainly a subjective term,
    And your “owner” explanation is just patently false. If someone is fully leveraged they still own their house, they just have negative net worth. They still have title to their home, they own it.

    As far as business failures go, if you’re not just being smug your certainly be callous and naive. As some other people have mentioned, the fallout would affect a lot of people in responsible companies that didnt do anything irresponsible. I dont think people indirectly affected by foreclosures would sum it up by simply saying it bites.

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  70. 70
    The Tim says:

    RE: matt @ 69 – You’re right, there is no easy way out of this mess. No solution will be able to insulate people that were 100% responsible in their actions. However, I still prefer a solution that avoids the moral hazards inherent in most foreclosure rescue plans that are currently being floated.

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  71. 71

    […] The Tim at SB reminds us to consider that when speculation occurs, foreclosures are a natural part of the solution and may not always be a negative, especially when a homeowner is far better off renting a similar home for far less than the (even modified!) mortgage payment. Home values fall and people who can afford to purchase do so. This begs the question: Do modified mortgage payments really help homeowners? The answer is, it depends on the homeowner. […]

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  72. 72
    EconE says:

    By matt @ 69:

    What I meant by affecting homeowners is the drop in home values due to foreclosures. It’s certainly affecting them; I guess it’s a caveat emptor situation, but it’s still really unfortunate.

    The drop in home values is not due to foreclosures…it’s due to the fact that the bubble popped. Period.

    Let’s take a hypothetical example.

    If a person making 200k/year “responsibly” (30 year fixed 20% down) bought a 600k house in Watts during the peak of the bubble…and that house is now (doubtfully) worth (even) 150k…how should we “feel”? What should we “do”?

    Did all the foreclosures there bring the value down?

    No….to the contrary…it was the loan products offered that falsely inflated the “value” of houses in the first place.

    It’s Watts after all. Houses there never should have been $600k. If you’re smart enough to be in the $200k income category, you should be smart enough to know when prices are completely out of line with both incomes and rents.

    Whoever is paying that person $200k a year should realize that they are employing a mathematical illiterate…and probably overpaying them at that. ;^)

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  73. 73
    Civil Servant says:

    Scotsman @ 18, I enjoyed this righteous comment.

    One keeps hearing that the goal of the new program is to keep people in their houses. Does anyone know if changing the term of existing mortgages, say to 40 years from 30, was at any point considered? If it’s true that a couple hundred bucks a months makes the difference to these families, why not let them get it that way?

    If you want something that badly, it should be worth something to you, especially if your getting it implies a cost to someone else. I must be missing something here, but I don’t know what it is.

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  74. 74
    Jon S says:

    EconE @ 72, If you’d go back to matt’s original comment, he’s not saying why there are foreclosures. No one doubts there was a real-estate / credit / everything bubble and poor lending practices which have led to significant foreclosures.

    Matt is saying that many people, both responsible homeowners, irresponsible homeowners, and renters will be adversely affected if there were a catastrophic wave of foreclosures like Tim’s four step plan suggests.

    Foreclosures adversely affect home values, vacant homes will drive down prices of adjacent homes, the increased supply coupled with lack of demand will drive down values and from there you start to cascade out to nearly every other sector of the economy.

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  75. 75
    The Tim says:

    By Jon S @ 74:

    …and from there you start to cascade out to nearly every other sector of the economy.

    Which gets back to the comments I made in this post.

    Basically it is pretty messed up that the whole friggin economy would be based on artificially inflated home prices. Now that the air is coming out of that bubble, instead of the appropriate response of “doh, what were we thinking” we’ve got politicians doing everything they can to prop up the phony economy, which in the end will only serve to prolong and delay the pain.

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  76. 76
    harbord says:

    There’s never been a better time to bye

    Why is nobody being held accountable ? What’s another $5 billion tacked on for some new club fed prisons?

    We are in a free fall, the begining stages of the Darwinian Flush, *TJ @ 6

    Is Acorn getting $5 billion?

    Here comes the social engineering

    Maybe Octomom won’t need a reality show to get a 15 bedroom house

    Seriously, we are just around the corner from Uncle Sam placing people in empty houses, nationalzing the banking system, and having everyones medical records. Here’s your hope and change, comrade.

    Great posts on this thread. I learn a lot reading. Thanks Tim for sharing your creation.

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  77. 77
    Jon S says:

    @The_Tim 75, Agreed, the financial system we have now with insane amounts of leverage, off-sheet balances, credit default swaps and any of the other financial products I can only start to comprehend appears to be a giant shell game with the housing bubble fueling the consumer arm of the economic monster.

    It is what it is…and at this point it’s mostly unfortunate.

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  78. 78
    jon says:

    There was some overbuilding during the boom, just like there is an oversupply of inventory at the peak of every business cycle. That doesn’t mean that prices should be driven steadily down until the surplus is cleared. What should happen is that some sellers need to sell now, while others can hold out for the year or two until population catches up with supply. With new construction at 50 years lows that shouldn’t take too long. The problem is more complex because the demand for houses is affected by the ability of people to double up or simply forego second homes until the deflation phase is over.

    Having prices go below the cost of replacement is not fair to taxpayers who have to make up the values of the failed mortgages. If the government can expend a lesser amount of money to preserve prices at the replacement cost level until the surplus clears, then defaults will be fewer and taxpayers will be better off, although renters who want to find a bargain will be disappointed.

    The replacement cost of housing is complicated by a couple of things. One would be deflation in construction costs, but with trillions in stimulus spending, that is not likely to be more than 10 or 20 percent. The other is the cost of land. Long term that is determined by the dollar value of time spent in traffic and transportation cost, plus premiums for things like view. That is much harder to figure, but basically depends on salary levels, which is also subject to deflation. Most housing I think is mostly construction costs and not the land. The high end areas where land is expensive are actually the areas that have not dropped that much so far.

    So it makes sense for the government to minimize the cost of bailouts by supporting house prices at replacement costs, if the prices that will hold at the time of the recovery can be estimated reasonably. Once price stability is seen, buyers will stop doubling up and will resume purchases of second homes.

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  79. 79
    Sniglet says:

    Just who is the latest bailout, designed to subsidize re-financing for struggling home-owners, supposed to help? It certainly doesn’t help the people are already saddled with debt loads they can’t afford.

    As Tim points out, declining home prices and foreclosures aren’t necessarily “bad” things.

    http://msurkan.podbean.com

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  80. 80
    Magnolia44 says:

    Umm guys… The whole economy is fu&@”&. Take it for what it is, can u really imagine 50% off and everything be ok business as usual? I called govt intervention before and it will happen again. Will it work? Who knows, life goes on hopefully i can refi to a lower rate, then i am ok having the govt spend the30k+ we paid in taxes last year.
    If i cant life goes on whats whining going to do, we are collapsing as a country and people here want another 20% off home prices, wow.

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  81. 81
    David Losh says:

    RE: The Tim @ 70

    Responsibility, there’s a word. Being a renter hoarding cash, playing it safe, being so smart that you are talking about the housing sector.

    What about stocks, bonds, government backed securities? I know let’s talk about the currency market and what the dollar is doing against the Euro, or Yuan.

    There is a reason why banks own 16 million empty houses, it’s a safe bet. The best part is they were all free for the taking. Let’s get the mukoh guy back to explain about buying pre foreclosure notes for thirty cents on the dollar and why that makes sense.

    It’s all funny money, in real dollars, hoarded by business concerns who know exactly what they are doing. More foreclosures? Do you really want your next rental controlled by a multinational corporation? Will you need a job so bad that a transfer to Guam will look like a promotion?

    For all the super fancy mathmatical equations concerning the financially engineered global markets no one here sees that the only thing you can count on is the little piece of the earth you own free and clear.

    You have one choice and that’s the money you make, in cash flow. It’s your business because your job is in jeapordy.

    I lthink you’re a straight up kind of guy. What you’re doing is is a great and beautiful thing. Please keep it up.

    You are a guy who did something positive and built something out of that. In all of this other talk maybe some of the smart guys have a solution.

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  82. 82
    DrShort says:

    By Sniglet @ 79:

    As Tim points out, declining home prices and foreclosures aren’t necessarily “bad” things.

    I think Tim is incredibly smart and done a great service with this site, but he’s off base on this one. I don’t know what the right solution is, but wanting/ hoping/wishing for massive foreclosures to bring about a new economic model makes about as much sense to me as the extreme right wing Christians hoping for the apocalypse — things will be better, but everyone has to die first.

    Housing should and will eventually adjust to its natural level. And the sooner the better. I just don’t want the entire economy to be taken down by the “reset.”

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  83. 83
    David Losh says:

    RE: Sniglet @ 79

    You need to make more money. Get rid of debt and make more money. Pay off your house and make more money.

    Obama’s plan is to create jobs. the quickest and easies way to create jobs is by throwing money at the housing sector.

    The bail outs are for the over extended credit markets. They are doomed. You can talk all you want about a bunch of stuff, but it had to do with the labor saving device of the computer. Technology, Microsoft especially created a whole new industry only imagined and greatly anticipated.

    A computer is every home is what Clinton and Gore promised and that’s what we got. It’s tons of money. Money that needed to be upgraded every year since. Billions and trillions of dollars that allowed other companies to make billions and trillions of dollars.

    It’s over. The same as the Industrial Revolution ended in the space of time between the first and second world war.

    The money that governments are throwing around has nothing to do with the housing sector. It’s equalizing a global concern of what to do next. What will be the next focal point for the new economies?

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  84. 84
    Scotsman says:

    Tim’s solution is the only one that’s reality based. You may not like it, but there is only one way out, and that is to return to wage or income based valuations for everything in the economy, from housing to food to taxes. Good old-fashioned supply and demand formulations based on sustainable and reliably confirmable prices. We can get to that point in one year or ten, but there is no doubt where this economy is going to end up. The government can exhaust itself and the taxpayer’s resources trying to work some voodoo magic behind the curtain, but it won’t win in the end.

    Some people like to work the band-aid off slowly, some are rippers- but the band-aid comes off. I can’t stand the whining, and want to get back to play, so I’m in the ripper camp. But some can’t deal with the “pain” and draw it out as long as possible. That’s fine-… but it’s coming off. In the same way, all the false values and economic distortions are heading for the null position.

    And David- sorry to disillusion you , but one never “owns” anything in this world. The government has the ultimate claim on all your personal property. If you doubt that, try letting your taxes lapse and see how long you remain in control of even the water you drink, let alone that piece of dirt.

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  85. 85
    EconE says:

    RE: Scotsman @ 84

    ‘Tyler Durden’ said it best.

    “The things you own end up owning you.”

    http://www.youtube.com/watch?v=4siTwwGvHLQ

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  86. 86
    Kary L. Krismer says:

    By The Tim @ 70:

    RE: matt @ 69 – You’re right, there is no easy way out of this mess. No solution will be able to insulate people that were 100% responsible in their actions. However, I still prefer a solution that avoids the moral hazards inherent in most foreclosure rescue plans that are currently being floated.

    How do you feel about the bankruptcy “cramdown” idea? I’ve been touting that since before there was a housing crisis, because I didn’t think there was any reason home lenders should be given special treatment in Chapter 13.

    But more to the point of this, being required to stay in bankruptcy for three to five years, living on a court approved budget, that isn’t hardly a painless way to deal with a problem. And some people can actually benefit from learning how to live on a budget.

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  87. 87
    Kary L. Krismer says:

    By Jon S @ 74:

    Foreclosures adversely affect home values, vacant homes will drive down prices of adjacent homes, the increased supply coupled with lack of demand will drive down values and from there you start to cascade out to nearly every other sector of the economy.

    I think you have to look at more than just values. Vacant houses have an adverse effect on neighborhoods in other ways. How would anyone here like living in a neighborhood where three houses on the block were vacant and not being maintained?

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  88. 88
    Kary L. Krismer says:

    By DrShort @ 82:

    By Sniglet @ 79:

    As Tim points out, declining home prices and foreclosures aren’t necessarily “bad” things.

    I think Tim is incredibly smart and done a great service with this site, but he’s off base on this one. I don’t know what the right solution is, but wanting/ hoping/wishing for massive foreclosures to bring about a new economic model makes about as much sense to me as the extreme right wing Christians hoping for the apocalypse — things will be better, but everyone has to die first.

    Housing should and will eventually adjust to its natural level. And the sooner the better. I just don’t want the entire economy to be taken down by the “reset.”

    On the upside it would be like rooting for the prices to overshoot more.

    No market is perfect. They all overshoot and undershoot all the time. With stocks that can take only days (although it can go on for months or years too). With real estate the process is much slower.

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  89. 89
    TheHulk says:

    I wonder how different things would be, if we had been a recourse state. If I take a loan, I should be responsible for paying it off. If I cannot pay it off, the lender can come after me and possibly garnish my wages to recover the money they loaned me.
    Maybe it is time to apply this simple principle nation wide. Then we will see a return to realistic home prices AND hopefully not see any housing bubbles in our lifetime.

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  90. 90
    Tim says:

    “Housing should and will eventually adjust to its natural level. And the sooner the better. I just don’t want the entire economy to be taken down by the “reset.” ”

    Unfortunately the economy is going to be taken down by the reset because now it is real money being lost. The dot com crash just eliminated a lot of paper wealth and a lot of early retirement dreams but for the most part what was lost was potential profit. Unfortunately this time is different as the banks actually lent the money and people actually spent it.

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  91. 91

    RE: Kary L. Krismer @ 86

    Completely agree, Kary. Other debt holders are somewhat at the mercy of bankruptcy judges, but these same judges don’t have the legal authority to adjust home loans. Why not?

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  92. 92
    Kary L. Krismer says:

    RE: TheHulk @ 89 – We are a recourse state. The banks can foreclose judicially and come after you. They just typically choose to go non-judicially because it’s faster.

    I believe California is non-recourse on purchase money loans, but that their refinance loans work the same as ours.

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  93. 93
    98115_Renter says:

    It’s so funny to me that there is so much outrage at $75 Billion rescue plan for low to middle income homeowners. Where’s the outrage at $1-2 trillion bailout the banks are getting?
    I’m not saying either is right or wrong, and I think we probably won’t know the answer for years or even decades. But it is always amazing to me that corporate bailouts are “needed” while bailouts for individuals are “wasted”.

    Show some compassion, freaks.

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  94. 94
    vermillionsky says:

    RE: 98115_Renter @ 93

    Please tell me what makes you think the people criticizing the foreclosure bailout are happy with the bank bailout.

    I think they are equally outraged at both.

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  95. 95
    Kary L. Krismer says:

    I think both are aimed at helping the banks.

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  96. 96
    98115_Renter says:

    RE: vermillionsky @ 94

    Your outrage should be proportionate to the dollar amount then. Since TARP I-II is about 95%, and HomeRescue II about 5%, 95% of the indiginance (is that a word?) should be directed at TARP and 5% at the ‘irresponsible’ home buyers.

    I think that some perspective should be introduced.

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  97. 97
    Scotsman says:

    By Kary L. Krismer @ 95:

    I think both are aimed at helping the banks.

    We have a winner!! It’s really all about the banks, the $275B for mortgages, the $700B Tarp 1, the stimulus, the coming TARP2, the coming Stimulus2, all of it. Except that which is aimed at attempting to socialize the country. Opps, guess that’s all of it…

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  98. 98
    98115_Renter says:

    RE: Scotsman @ 97

    It’s not socialism, it’s corporate welfare.

    Real socialism would involve bringing the guillotine out to Wall St. and freezing the assets of those earning >$500k/year, then redistributing that to the other 99% of the country so that they can go see the doctor without risk of bankruptcy.

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  99. 99
    vermillionsky says:

    RE: 98115_Renter @ 96

    You’re right… “equally” is not really the right word because TARP does give away a lot more taxpayer dollars. But you implied that people here on this board complaining about the foreclosure bailout are OK with bank bailouts.. that we think they are “needed”. You had no basis to make that assertion. Most people who oppose the foreclosure bailout also think TARP is a colossal rip-off of taxpayer dollars. I haven’t seen one post saying “this foreclosure bailout really sucks, but I sure am glad we gave the banks trillions of dollars without requiring accountability!!!” This article is about the foreclosure bailout, so most of the discussion is about the foreclosure bailout, not TARP.

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  100. 100
    The Tim says:

    RE: 98115_Renter @ 93 – If you’re looking for outrage about the bank bailouts, may I recommend you check the discussions following these posts:

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  101. 101
    98115_Renter says:

    RE: The Tim @ 100

    I know those discussions exist, I’m just injecting perspective that this is worth about 5% (or less) of TARP, and an even smaller % (maybe 2-3%) if you include the Stimulus.
    Considering housing is really the root of the entire problem, this is a very small % to throw at tthe problem. Maybe we should all be glad that they are not directing $3 Trillion at housing. $75 Billion is a relative pebble on the beach.

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  102. 102

    I still maintain that a fair number of the underwater homeowners were duped. Maybe they should have been more aware of what was going on, but to some extent some of them were victims, and maybe there’s some rationale to help them out a little bit, by perhaps allowing bankruptcy judges to allow modification of their monthly payment, but how were the banks “victimized”?

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  103. 103
    Ouch! says:

    98115_Renter has a point, but I think outrage over the foreclosure package is still warranted. Statistically homeowners tend to only stay in their homes for 7-9 years before moving on. Why is it so important to keep them in their homes now? Is it bad if they move into something more affordable now rather than later? If you follow the money, the foreclosure plan, like TARP, is just another way to prop up the banks.

    But the foreclosure plans sends the wrong message to taxpayers. If you make a poor investment in housing, the government will do everything in it’s power to rescue you. Why isn’t the government helping me (or you) with losses to retirement stock investments? Why are they focusing on 9 million over-extended homeowners?

    If you invest in stocks, bonds, mutual funds – no money for you! Chin up and take your losses. If you gambled by over-purchasing personal real estate – you made the right choice. The people who complain about it are sore losers.

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  104. 104
    EconE says:

    RE: Ira Sacharoff @ 91

    From what I understand, judges do have the legal authority to modify loans.

    However, that would take down a HUGE chunk of the derivatives market.

    Investors can also legally sue that judge.

    And how were the banks victimized? Simple, people lied about their incomes…but then again…the banks allowed them to.

    Stupid Stupid Banks.

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  105. 105
    Herman says:

    What this country needs is for private individuals with cash to start investing or spending it. These are the people who made smart decisions in the past and can make the smartest decisions about where the invest the money now.

    These people don’t need a “bailout” or a “package” or any other gimmick. What they need is…. low prices! And that’s as easy and cheap as doing nothing.

    The markets need to crash down for 1-2 years to create great valuations. Then the government can intervene to create stability. The combination of great value and stability will bring in the private money.

    The impatience is killing us. Spending tax dollars to try to sustain inflated asset values is counterproductive.

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  106. 106
    Lake Hills Renter says:

    I’m no fan of CNBC, but I saw something there today (forgive me, home sick) that I haven’t seen on any other network so far, not that I’ve been looking — the host asked several panelists, when talking about the housing bailout, why homeowners who didn’t get in over their heads, and people who don’t even own homes, should have pay for those that did get in trouble. First time I’ve heard that question raised on air.

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  107. 107
    98115_Renter says:

    RE: Lake Hills Renter @ 106

    Well the answer for those who own homes is simple: prevent foreclosures on their block and therefore prevent their home value from falling further.

    It’s a bit less clear for those of us who rent.

    One note: Nobody is paying for any of this anyway. We are all getting tax cuts year after year, remember? It’s all deficit spending. Eventually someone will pay, but it is not clear who or when.

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  108. 108
    Kary L. Krismer says:

    By Lake Hills Renter @ 106:

    I’m no fan of CNBC, but I saw something there today (forgive me, home sick) that I haven’t seen on any other network so far, not that I’ve been looking — the host asked several panelists, when talking about the housing bailout, why homeowners who didn’t get in over their heads, and people who don’t even own homes, should have pay for those that did get in trouble. First time I’ve heard that question raised on air.

    It’s not terribly surprising. How often do you hear on the news the real reason for the compensation for 9/11 victim’s families?

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  109. 109

    “How often do you hear on the news the real reason for the compensation for 9/11 victim’s families? ”

    Fill me in, Kary. I have heard absolutely nothing from the media or anyone else. What is the real reason for compensation for 9/11 families compensation?

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  110. 110
    Kary L. Krismer says:

    Well the fact that it was passed by Congress within about 10 days of 9/11, and the fact that to receive the compensation they had to give up any rights to sue, tells you it wasn’t compassion or to compensate the families for their losses. It was to protect the insurance and airline industries, mainly the former.

    So like foreclosure relief, everyone gave up something for the greater good, not to protect or compensate those in trouble.

    BTW, I’m not entirely positive, but I think the name of the act that created the fund was the Air Transportation Safety and System Stabilization Act .

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  111. 111
    Kary L. Krismer says:

    Now I am sure: http://www.ustreas.gov/offices/domestic-finance/atsb/hr2926.pdf

    (See Title IV)

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  112. 112

    Thanks, Kary. It’s like so many things. We pay for them, but it’s to protect industries with a whole lot more resources than we have.

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  113. 113
    David Losh says:

    Thank you Kary for bringing 9/11 into the discussion. I personally think all of the economic expansion was a response to having the World Trade Center attacked by foriegn interests. The exuberence of the American way of life lead us to the fulfillment of the American Dream for so many people.

    I also look at the foreclosure assistence as a way to divert people from legal action against lenders. In my honest opinion I think lenders were allowed to use some very deception business models to get money out of consumers.

    I also think patriotism was used in many respects to promote the idea that consumer spending was good for America. When the President of the United States encourages home ownership, and Congress enacts legislation to give the scheme easy credit options, it does give the impression of being a good thing for America.

    I think our government did the most to create this mess.

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  114. 114
    Kary L. Krismer says:

    Think of the 9/11 legislation as being similar to the bailout of AIG. I’m not sure which companies would have been most on the hook, but this legislation was designed to keep them in business.

    What the Fed was doing immediately after 9/11 is interesting too. If I recall correctly, they started acting almost immediately.

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  115. 115
    Mark says:

    What people seem to forget is that for every house sold at an inflated price, a bunch of people made a bunch of profit. With the exception of institutions now holding the paper mortgage, it is a zero sum game. Why is there no effort to recover ill-gotten gains over time?

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  116. 116
    David Losh says:

    That is true that the profits have been made and are now “out there” to be used for other ventures. If that money now gets taken away to some place else, like to the government, there is a good chance it will end up in another misdirected effort to fix things.

    The key in all of this is government intervention. If after 9/11 the government would have persued the evil doers and stayed focused on justice things would be different. They instead interferred with the rebuilding of the site, handed out money like candy, and ran interference for the insurance industry.

    Good intentions that we now see were a misdirection.

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  117. 117
    Kary L. Krismer says:

    By Mark @ 115:

    What people seem to forget is that for every house sold at an inflated price, a bunch of people made a bunch of profit. With the exception of institutions now holding the paper mortgage, it is a zero sum game. Why is there no effort to recover ill-gotten gains over time?

    What ill gotten gains? Are you going to sue someone because they sold their house here in August, 2007? They either had great timing or were lucky, but neither is grounds for a lawsuit.

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  118. 118
    98115_Renter says:

    Anybody who watched Santelli’s “outrage” on CNBC yesterday, and who felt a little disgusted by his faux “traders’ populism” might be interested in the NYT piece up today:

    http://opinionator.blogs.nytimes.com/2009/02/20/rick-santelli-tea-party-time/

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  119. 119
    JimN says:

    There seem to be two camps emerging: Both believe the banks/financial system needs to be fixed.

    1. Big banks/finance. These blame falling home prices as the root cause of our current situation. Supporting home prices will support the banks/finance system. Let’s loosen credit, subsidize housing some more, and try to keep going for a little more. This is a huge and influential industry and has the ears of lots of politicians. Of course, it is not only the fortunes of the companies they run, but also likely their personal fortunes at stake. Although they’ve already lost a huge percentage of their net worth, the hope is that things will rebound/stabilize at least a bit.

    2. Economists and those who believe the credit bubble is the root cause, ie. ridiculous credit/fraud. This resulted in the real estate boom and fed on itself. Home prices need to correct (and are still overall too high), and the banks are insolvent. Rather than throw good money after bad, take over the banks, wipe out shareholders and sell back to private industry. At that point, regulate and maintain rational lending standards and don’t allow for a repeat. (Yes, bank will be boring slow growth entities again.) This will result in L shaped markets for both the finacial sector and housing.

    #1 seems to be similar to the Japanese experience of the “zombie banks.” #2 seems to be the route to “reset” the system and getting back to a diversified, sound economy. I think if it weren’t for the huge power and influence wielded by the financial industry, we wouldn’t even be talking about #1 as the way to fix the banks. The tech bubble collapsed, and then began resumed more rational growth thereafter.

    This week, it looks like #2 has a leg up for now. Yes, unfortunately #2 may result in lots of people’s houses and retirement accounts not rebounding for many years, but at some point we need to choose what’s best for our country.

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  120. 120
    Kary L. Krismer says:

    By 98115_Renter @ 118:

    Anybody who watched Santelli’s “outrage” on CNBC yesterday, and who felt a little disgusted by his faux “traders’ populism” might be interested in the NYT piece up today:

    http://opinionator.blogs.nytimes.com/2009/02/20/rick-santelli-tea-party-time/

    I finally saw this on the news today. It actually lowered my impression of CNBC, which I didn’t think was possible. Loved the White House response, calling it ignorant. But IMHO that goes without saying when you’re dealing with CNBC.

    I’ll agree there is a morality hazard to part of the plan, but the concern is saving the entities that CNBC worships.

    If I’m sick of anything, it’s that morons on CNBC make so much money spouting so much nonsense.

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  121. 121
    Lake Hills Renter says:

    Put me in the #2 camp. If I hear one more person say the government should keep housing prices from falling, I’m going to f-ing LOSE it!

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