Obama “Can’t Wait” to Screw with the Market Even More

Okay, as long as we’re talking politics this week, let’s just dive in head first. I’d like to discuss the latest federal “relief” plan that made news this week. Here’s an AP story from Monday: Obama Offers Mortgage Relief on Western Trip

LAS VEGAS — President Barack Obama offered mortgage relief on Monday to hundreds of thousands of Americans, his latest attempt to ease the economic and political fallout of a housing crisis that has bedeviled him as he seeks a second term.

His jobs bill struggling in Congress, Obama tried a new catchphrase — “We can’t wait” — to highlight his administrative initiatives and to shift blame to congressional Republicans for lack of action to boost employment and stimulate an economic recovery.

While Obama has proposed prodding the economy with payroll tax cuts and increased spending on public works and aid to states, he has yet to offer a wholesale overhaul of the nation’s housing programs. Economists point to the burst housing bubble as the main culprit behind the 2008 financial crisis.

Wait, what? No, the main culprit behind the crisis was all the insane financing, derivatives, bogus ratings, leveraging, and all of the other nonsense that went on during the housing bubble run-up. The bust and financial crisis were just the inevitable consequences of the near-universal death of responsibility at both the personal and the corporate level.

Moving on…

Under Obama’s proposal, homeowners who are still current on their mortgages would be able to refinance no matter how much their home value has dropped below what they still owe.

Because there are so many people whose homes are worth half what they owe who just want to refinance to a lower interest rate. Or something.

“Now, over the past two years, we’ve already taken some steps to help folks refinance their mortgages,” Obama said, listing a series of measures. “But we can do more.”

At the same time, Obama acknowledged that his latest proposal will not do all that’s not needed to get the housing market back on its feet. “Given the magnitude of the housing bubble, and the huge inventory of unsold homes in places like Nevada, it will take time to solve these challenges,” he said.

Please, don’t “do more.” Hasn’t the government already done enough? Killing financial oversight, over-promoting “ownership,” over-expanding Fannie & Freddie, bailing out irresponsible banks…

Presidential spokesman Jay Carney criticized Republican presidential candidate Mitt Romney for proposing last week while in Las Vegas that the government not interfere with foreclosures. “Don’t try to stop the foreclosure process,” Romney told the Las Vegas Review-Journal. “Let it run its course and hit the bottom.”

“That is not a solution,” Carney told reporters on Air Force One. He said Romney would tell homeowners, “‘You’re on your own, tough luck.'”

I’m certainly no Romney fan (he’s probably my least favorite potential 2012 challenger), but he’s right on this one, and Mr. Carney has got it backward. Foreclosures are not the problem. The problem is over-inflated values that got completely detached from all sound economic fundamentals. Foreclosures are the solution, not some sort of government-forced refinance plan that helps people to continue throwing good money after bad for decades to come.

[Update]

It seems I was a little unclear on why exactly I think this is a bad plan. The main reason I’m not a fan of this “help people refinance their underwater mortgage” program is what I said just above: It only “helps people to continue throwing good money after bad for decades to come.”

Let me try to explain via an example. Let’s say you bought a 3-bed, 1.75-bath Seattle-area home in 2007 for $419,000. You put down 20% and got a 6.6% rate on a 30-year fixed-rate mortgage. That puts your total monthly PITI payments at about $2,600.

Today your house is worth about $280,000. You still owe about $314,000, so despite putting 20% down, you’re 10% underwater (more if you count the costs of selling). If you refinance into a new 30-year mortgage at today’s rate of 4.2%, you can drop your payments from $2,600 to about $1,900.

Pretty good, right? $700 a month savings!

But what if instead you were able to do a short sale (or default, if the bank won’t play ball), rent for a few years, then buy a home at today’s lower prices?

Going rent for a home like yours in your neighborhood is around $1,400 a month—$500 a month cheaper than what you’d be paying if you refinanced your underwater mortgage. Five years of renting at that price (even allowing for some increases in rent) will cost about $25,000 less than five years of paying the $1,900 a month refinanced mortgage, and $67,000 less than paying your original mortgage.

If you take the $67,000 you save by renting for five years and put it into a $280,000 home comparable to what you used to own, your monthly payment (if rates go back up to 6%) will be just $1,600—$300 less than if you take the government’s deal and refinance today. The numbers work out even worse for you to take the deal if you originally put no money down or have a home that is even further underwater.

Here it is in table form:

Scenario Payment Today Payment 0-5 yrs Payment 6+ yrs
do nothing $2,600 $2,600 $2,600
HARP refinance $2,600 $1,900 $1,900
rent, then buy $2,600 $1,400 $1,600

That’s what I’m talking about when I say that continuing to pay an underwater mortgage is “throwing good money after bad.” It’s short-sighted and in my opinion a larger drain on the economy than encouraging people to get face the consequences of their poor purchase decisions, get out of these houses and move on with their lives.

  

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.

157 comments:

  1. 1
    S-Crow says:

    The Tim said: “Because there are so many people whose homes are worth half what they owe who just want to refinance to a lower interest rate. Or something.”

    Yes, there are thousands who would like to stay in their home and are current and do owe more than today’s market values. I expect many of these people will benefit from lower interest rates (a good thing) and will use the new FHFA (HARP, Freddie Mac Relief-Refi Plus program) guidelines that was announced this week for implementation in the coming weeks.

    One of the larger impediments to people qualifying under HARP or similar programs under existing guidelines was the 2nd mortgage lienholder (PNC/National City, B of A, Wells Fargo, and others) approving subordinations under certain conditions that made it more difficult (cash to close) or were declined. The new guidelines appear to require 2nd liendholders to approve their subordinate position more liberally.

    If anyone would like more information on this program or referrals to lenders whom we work with to discuss your options, let me know at: tim at legacyescrow dot net.

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  2. 2
    No Name Guy says:

    Tim

    There you go speaking the TRUTH. “Foreclosures ARE the solution”.

    Don’t you know, people can’t handle, or don’t want to hear the cold, hard truth of the matter, period. Oh, and as was commented over on Zero Hedge (or CHS) the other day – this plan will cement a LOT of people as debt serfs – locked into an underwater house.

    I expect this to be a flame filled comment thread…..

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  3. 3

    RE: S-Crow @ 1 – I was going to pick up on the exact same quote. I don’t understand where Tim was coming from on that one. Lots of people want to refinance to lower rates but cannot due to equity issues. Contrary to popular belief here, not many people want to be foreclosed out of their home.

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  4. 4

    Tim totally ignores the main point of the story. President Obama proposes something that never had a snowball’s chance, and then uses that not passing Congress as an excuse to do something else. The partisan democrats will drink that up, but I think most independents will realize what he’s doing (and partisan republicans will hate whatever is proposed).

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  5. 5
    Matt the Engineer says:

    You sound heartless, Tim. These aren’t one more aspect of a screwed up real estate system – they’re people. People that are being kicked out of their homes. If that’s necessary because they can’t pay, fine. But this is a subset of these people that could pay if only they could refinance.

    Each family that we kick to the curb to make room for empty unused housing is potentially another homeless family sucking resources from our social programs. Each family given another chance at their homes is potentially adding productivity to our system, and monthly payments to the banks.

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  6. 6
    Bink Wilson says:

    Agree w the Tim. Cannot keep legislating the tide tables. But doing the right thing would be easier to sell if a bunch of the high-end crooks in this mess lost all their assets along with the little people. The sense of partiality and injustice is toxic to our pseudodemocracy.

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  7. 7
    bobthemagicman says:

    RE: Matt the Engineer @ 5 – They’re people who made bad decisions and should be held responsible for those bad decisions. And if we don’t give people the natural consequences of their actions they will not learn from their mistakes. It’s not heartless it’s life.

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  8. 8

    Good Article Tim

    You and SWE are on the same wavelegth today.

    Similarly, that recent bipartisan Senate joke bill to allow foreigners to “buy their citizenship with a $500K home’ blew up in their face….the Wall Street Crooks aren’t fooling the lion’s share of us Dem/Reps anymore….and getting us embroiled in pointless party fights to keep our eye off the “overpopulation depression ball” isn’t working anymore for most of us.

    Article from FAIRUS.ORG Stein Report:

    “…”Looks like they are reaching absolute desperation to keep this market afloat. They will do anything possible to keep home prices inflated before they allow Americans to pay what they can afford- which is all anything is really worth- what people will pay you for it.

    The outcry became more serious when former Labor Secretary Robert Reich attacked the bill on his Web site. Yesterday both the Christian Science Monitor and the Huffington Post (AOL) published the piece, titled ‘Why We Shouldn’t Be Selling the Right to Live in America .”

    “America is having a fire sale. Why not sell wealthy foreigners the right to live here, too? But what about American home buyers – many of them young, just entering the market – who would prefer low home prices that aren’t bid upward by rich foreigners? It’s not altogether obvious why we should favor American homeowners over American home buyers,” wrote Reich….”

    http://www.upi.com/Business_News/Real-Estate/2011/10/26/Foreign-Buyer-Visa-Bill-Backfires/9581319652819/

    SWE’s blog on the Stein Report:

    Exactly

    None of us complains when flat screen TVs and laptops decrease in price to $200.

    Why should we complain about housing going down in price?

    I own a house and admit it.

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  9. 9
    Matt the Engineer says:

    RE: bobthemagicman @ 7 – That “made bad decisions” argument rings false in our economy, especially after all of the billions we spent on those at the top that made bad decisions. What’s a good decision in your mind – only buying a house when you have 4 years of payments saved up? There are quite a few that made very rational decisions to buy a home when they had a good job, that are now in a very different set of circumstances.

    Let’s forget about the emotional argument of homeless families. Keeping people in homes is good for our economy. Killing our economy in the name of teaching future potential home-buyers (and specifically those buying during a bubble) a lesson seems insane to me.

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  10. 10

    So if foreclosures are a good thing( a natural consequence) and lower home prices are a good thing, then letting people refinance their homes based on equity they used to have?
    …Shouldn’t that lead to more foreclosures?

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  11. 11
    Grant says:

    I’m far from an Obama supporter, but how exactly would allowing underwater refinancing negatively impact the market?

    Even if someone’s had some late payments or doesn’t have great credit, much better to allow them to refinance and possibly avoid foreclosure–better for the homeowner, better for other homeowners and better for the mortage holders.

    Again, how is this a negative?

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  12. 12

    RE: Matt the Engineer @ 9

    Call Me Heartless

    You likely signed the contract at a high price, the rest of America didn’t.

    Let’s not throw the Social Security baby out with the home affordability water.

    Many disabled and poor don’t want to be on the streets to prop your Wall Street Crook home price Ponzi Scheme up.

    We can’t afford both. Face it.

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  13. 13
    S-Crow says:

    RE: Ira Sacharoff @ 10RE: Kary L. Krismer @ 3 – Agree. There are a substantial number of people who are productive, employed and would like to refinance to take advantage of lower rates but due to the equity position being negative cannot do that under conventional lending guidelines. Many of these people have no intention of walking away just because their home value has dropped.

    Ira ~ they are not refinancing people based upon equity they used to have. They are allowing people to refinance regardless of the value of the home subject to some guidelines (if I understand you correctly). However, if the homeowner needs to move for whatever reason then there is a problem unless they bring cash to close—which is happening.

    Foreclosure/Short Sales are due to non payment (whether intended or due to some other circumstance).

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  14. 14
    joe dirt says:

    Nobody is being kicked out of their house, they are being kicked out of the house the bank owns because they welched.

    Now Obama is doing to student loans what the government did for home mortgages.

    We’ll end up like the Greeks – rioting over who gets to stay on the dole.

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  15. 15
    Grant says:

    RE: softwarengineer @ 12

    How would allowing underwater refinancing be on the backs of the poor and disabled?

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  16. 16

    By Grant @ 11:

    I’m far from an Obama supporter, but how exactly would allowing underwater refinancing negatively impact the market?

    I think what President Obama is really after is kick starting consumer spending. Reduce someone’s home payment by $200 and they’ll likely spend $200 more every month.

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  17. 17

    RE: Grant @ 11

    Its Easy Grant

    The longer we let unqualified homeowners live in our neighborhood on the verge or going into foreclosure, the more run down our neighborhhod gets, quickly too….which leads to even more price degradation.

    The family that was evicted next to me left a HUGE MESS [and most of it was likely sabatage IMO]. My daughter saw the hoses draining the water out from the living room floor, not under it, over it. President Johnson had a Great Society plan of building houses for all the poor, it was a HUGE FAILURE. The poor TOTALLY ramshacked the government subsidized homes for the bull dozers. Read your history book if you don’t believe me.

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  18. 18
    Matt the Engineer says:

    RE: joe dirt @ 14 – Semantics. The end result is more families on the street. That’s an undeniably bad thing for our economy. You must see that having them homeless outside of an empty “bank owned” home makes no sense.

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  19. 19

    RE: Grant @ 15

    Social Security cuts are already happenning, we’re broke.

    Medicaid recipients are lucky to find any doctor today that takes just Social Security, Medicare too…ask ‘em.

    I suppose letting the Medicaid recpients go toothless and the elderly have no physicians is a minor inconvenience? But that’s exactly what’s happenning right now.

    And you want a bailout?

    We’ve got bigger fish to fry in this country than catering to the top 10% of American households with housing bailouts. You know it too I imagine.

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  20. 20

    By softwarengineer @ 17:

    RE: Grant @ 11

    Its Easy Grant

    The longer we let unqualified homeowners live in our neighborhood on the verge or going into foreclosure, the more run down our neighborhhod gets, quickly too….which leads to even more price degradation..

    What makes you think they are unqualified? They are current on their mortgages. The only reason they cannot refinance is lack of equity.

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  21. 21
    Grant says:

    RE: softwarengineer @ 17

    But if someone isn’t behind on payments (or hasn’t been late on many), has decent credit and qualifies financially for the refinanced mortage, why not let them refinance? From a risk perspective, the bank and the market already has greater risk the homeowners will default or stop taking care of their come, so seems like nothing but positives to me (and I am a free market, personal responsiblity guy!)

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  22. 22
    doug says:

    RE: Kary L. Krismer @ 4

    Kary, I agree on most of your points, but disagree on your conclusion. You seem to think this is a pretty reasonable bill. You also think it doesn’t have any chance of passing (of course it doesn’t). If a reasonable bill can’t get passed, that’s OBAMA’s fault? Yeah, it probably won’t pass. But as long as congress operates on ‘complete obstruction at all times’ why shouldn’t they be hammered for it?

    As to others’ points, I actually think this is a fairly decent idea. I thought the new home purchase rebate was an awful idea. But that was enticing new buyers to purchase at inflated prices, robbing from future demand. This bill would help struggling families who have still kept current on their mortgage. I think these are people operating in good faith. It will be good for them, and probably good for the banks in the long-run, by preventing some defaults.

    I can’t think of many liar-loan owners and flippers who this would prevent from strategic-defaulting or just plain defaulting. I think a lot of them are out of the market already. I also can’t see this pumping up home prices much. If someone’s way underwater and refinances to a lower interest rate, I’m not going to buy his or her underwater home at full price… This bill will just make it easier for him or her to make his payments.

    Lastly, let’s remember that it’s not just speculators and flippers and people who use their house as ATM’s that fell behind on their mortgages. A lot of people lost their jobs, and picked up crummier jobs due to the fallout. EVERYONE with a mortgage buys that mortgage assuming they will be employed for the forseeable future. I did. Tim did. Unless you bought your house for cash you could end up like the people this bill is meant to help.

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  23. 23
    Grant says:

    RE: Kary L. Krismer @ 16

    And for those who hate the Wall St. fatcat, crooks etc, you should be happy the banks would be getting less interest!

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  24. 24
    Anon says:

    Tim, there may be an issue with the site – Grant’s name and e-mail are appearing in the reply form in my browser (and I’m not Grant).

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  25. 25

    RE: Kary L. Krismer @ 20

    We Were Talking About Foreclosure Relief Kary

    But yes, if you don’t need foreclosure relief, ya don’t need a bailout….you’re likely the lucky top 10% of American household incomes.

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  26. 26
    Matt the Engineer says:

    RE: softwarengineer @ 17 – I don’t think you’ve really thought through your scenario. You’re assuming there’s always someone with more money (enough to fix up the house) that wants to buy that home. Decreasing the number of homeowners in the US without decreasing the supply of homes means there will an increase in empty, derelict homes. This is exactly the opposite of the effect you desire.

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  27. 27
    The Tim says:

    RE: Anon @ 24 – It’s something to do with the caching configuration at your employer, since you and Grant are on the same corporate network.

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  28. 28
    Grant says:

    RE: softwarengineer @ 19

    How is allowing underwater mortgage refinancing a bailout? How does it cost taxpayers anything?

    To address our deficit and debt issues, the economy needs to recover. And allowing homeowners who only hurdle to refinance is lack of equity to refinance minimizes risk of foreclosure and increases disposable income, both of which are good for the economy. And it only costs the mortgage holders, but it’s in their best interest too……..

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  29. 29

    By Grant @ 28:

    RE: softwarengineer @ 19 – How is allowing underwater mortgage refinancing a bailout? How does it cost taxpayers anything?

    Someone is eating the cost of the reduced interest. I haven’t looked into this closely, but I assume this would only be on loans owned by Fannie or Freddie, so to the extent they earn less interest we’d have to pay more to bail them out. But you’d have to offset the cost of any foreclosures which don’t occur because of this. It might actually make money.

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  30. 30

    By softwarengineer @ 25:

    RE: Kary L. Krismer @ 20 – We Were Talking About Foreclosure Relief Kary.

    Where does that phrase appear?

    We might be talking foreclosure prevention, but these are not owners currently anywhere near foreclosure.

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  31. 31
    scotsman says:

    F@’k ‘em. We are broke, borrowing almost half of every dollar we spend and you are talking about yet another give away to people who made bad choices. This is why this economy will eventually collapse.

    Cap fed spending at 18% of gdp.

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  32. 32

    RE: S-Crow @ 13
    I don’t get it. Say Martha and Tony bought a house in 2007 for 500,000 with 3.5% down. The house is now worth 300,000, but they owe 450,000. They can’t refinance now because they have negative equity, even though they have jobs and good credit. Under this proposal, they’d be able to refinance what they owe, so wouldn’t that be based on the equity they used to have?
    They wouldn’t be able to tap into extra cash, and their payments would go down?
    In essence it’s not a bailout, because these people are not defaulting on their loans. And it would certainly stimulate the economy. but what are the risks?

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  33. 34
    Voight-kampff says:

    Ahem…
    A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.
    Great nations rise and fall. The people go from bondage to spiritual truth, to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependence, from dependence back again to bondage.

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  34. 36

    RE: ChrisM @ 35

    I Agree ChrisM

    We’re broke.

    Refinancing underwater loans is like letting a used car owner drive a car 3 years and then giving them a new car trade in anyway…..good for who? The deficit? Someone has to pick up the depreciating asset cost and it ain’t the tooth fairy. Perhaps they’ll hide more toxic loans in our retirement investments?

    But we’re all like dogs barking at the same squirrel in the tree….we all know this bill is toast, we’re broke.

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  35. 37
    tony clifton says:

    RE: Matt the Engineer @ 26
    The houses won’t be empty. The former loanowner can rent them from a new owner. The rent will be cheaper than their mortgage payment.

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  36. 38
    Voight-kampff says:

    RE: Voight-kampff @ 34

    Yes I’m replying to myself,
    I believe the next election will be decided by people who will vote to continue living off the treasury… Things like this mortgage balderdash.

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  37. 40
    doug says:

    RE: The Desponder @ 33

    Well, I take it back. That sounds like crap. Another massive bailout for the banks.

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  38. 41
    The Tim says:

    RE: Matt the Engineer @ 5 – False dichotomy. Families that lose “their” homes to foreclosure don’t end up on the street, they just go find a rental. It’s no fun, but it’s hardly the end of the world.

    I’ve also updated the post with more thoughts on why this is a bad plan and why I think it would be counter-productive for an underwater borrower to participate.

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  39. 42
    Jon says:

    Wow… this is what I hated about the bubbleheads back in the day of buy now or be priced out forever. Anyone saying the people that overpaid, that are STILL making their payments, AND want to take advantage of today’s lower interest rates are idiots, are well, idiots. Your attitude that they made a mistake and they should pay for it because they weren’t a bubblehead like you, spitting in their face, stoming on their bad decision. I say to you… you lack class. You lack sensitivity. You lack the fundamental value that every American should have… decency.

    This helps far less people than I would like to see it help, but I know hundreds of people that bought in the last 7 years that would love to refinance, but can’t. They are paying 7% on that ARM, or they are paying 6.5% on the 30 year fixed…

    They WANT to stay in their home
    They NEED to stay in their home
    They NEED more cash flow
    They ARE CURRENT on their payments.

    Horrible post… makes me not want to read your biased slant ever again, Tim.

    BTW, Romney, Cain and Perry are idiots when it comes to the housing market. Period.

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  40. 43
    Ray Pepper says:

    “That’s what I’m talking about when I say that continuing to pay an underwater mortgage is “throwing good money after bad.”

    Why did it take you so long to realize this Tim? Its almost November 2011!!!!!!!!

    I think its time for this again for the upteenth time: http://www.youtube.com/watch?v=CJiR0lu99_I

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  41. 44
    The Tim says:

    RE: Jon @ 42 – Did you read the update I added to the post? The numbers don’t work out in favor of the borrower that takes advantage of this program. It makes more sense to get out of the house and move on with their life.

    How is it indecent or classless to suggest that people not take a bad deal and instead choose an option that is better for their family financially?

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  42. 45
    masaba says:

    Trying to boost your page hits, are you, Tim?

    Honestly, other than the monthly MLS median, and the Case Schiller data, their really isn’t much of interest left on this blog. I guess that’s why you are starting these kind of articles.

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  43. 46
    Jon says:

    My problem with your analysis, Tim, is that you can’t rent that home in that prime neighborhood for $1400. You can rent that home in, say, Bothell… but if you want to be in Phinney Ridge, or Capitol Hill, or Admiral; you’re going to have to pay a lot more.

    Your analysis is scewed to the lower end buyer. What about those people who bought a median priced home in Seattle, say a good neighborhood.. they paid $400-700k… they can’t find that rental for anything less than $3k a month… and their mortgage payment would be less than that!

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  44. 47
    The Tim says:

    RE: masaba @ 45 – While I haven’t posted on a strictly political topic for quite a while, I used to pull out articles like this fairly frequently. I try to post a decent mix of stats, anecdotes, opinion, advice, and humor. It’s never going to be the exact mix that pleases every reader, but I feel like I’ve got a decent brew going these days.

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  45. 48
    wreckingbull says:

    Another gift to the banks. Astonishing that more people don’t get this. Just another phase of the The Greatest Heist.

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  46. 49
    tony clifton says:

    By Jon @ 46:

    My problem with your analysis, Tim, is that you can’t rent that home in that prime neighborhood for $1400. You can rent that home in, say, Bothell… but if you want to be in Phinney Ridge, or Capitol Hill, or Admiral; you’re going to have to pay a lot more.

    I want a house in Medina Jon, what say you buy me one? Never mind the fact that I can’t afford a house in Medina, I want one and someone owes me!

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  47. 50
    The Tim says:

    By Jon @ 46:

    My problem with your analysis, Tim, is that you can’t rent that home in that prime neighborhood for $1400. You can rent that home in, say, Bothell… but if you want to be in Phinney Ridge, or Capitol Hill, or Admiral; you’re going to have to pay a lot more.

    The neighborhood I used in my example is actually just over the county line in Snohomish, and I used real-world numbers from a friend that really bought a house for that price in 2007.

    You wouldn’t have been able to buy a home in a prime neighborhood for “just” $419k in 2007, either. I’d like to see the full numbers for a specific example taken from one of your friends in one of the neighborhoods you mentioned.

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  48. 51

    RE: wreckingbull @ 48

    Times Magazine Reported Last Week

    54% of Americans agree with the Wall Street demonstrators. FOX news alleged the Wall Street demonstrators were far left.

    Sounds like the majority of people do get it now, wreckingbull, and they aren’t buying that FOX news wild allegation either.

    We’ve woke up.

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  49. 52
    SummitSeeker says:

    RE: ChrisM @ 35

    Wow Tim, you’re slipping. This post contains very incorrect statements and you highlight it as a “great comment”. In fact there are very good reasons to treat student debt differently than other kinds of debt and have it not be dischargeable in bankruptcy. Namely, lenders can’t “repossess” knowledge/skills that you gained with your student loans. If student loans were dischargeable every student would declare bankruptcy upon graduation when almost all have a negative net worth.

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  50. 53
    Jon says:

    By The Tim @ 44:

    RE:
    How is it indecent or classless to suggest that people not take a bad deal and instead choose an option that is better for their family financially?

    I was talking about the comments that came afterwords, moreso than your original post.

    Here’s why it’s a bad deal:

    1. Stress: There is stress in moving.
    2. They uproot their family (kids, grandparents, wife)
    3. Shame: They succomb to the idea that have to tell their friends they are short selling their home.
    4. They lose consistancy in their life.
    5. They are now at the beckon of a landlord, who may or may not be a slum lord.
    6. Cost: It costs a ton of money to move
    7. Stability. They lack it renting… especially after the first year. Further, what happens when the foreclosure notice is slapped on their front door, when they have NOTHING to say about it?
    8. Paying Customers: IF they allow it to go to a short sale, the bank MAY or MAY NOT accept less than what they owe. These are people that are MAKING THEIR F&*^ing payments!
    9. Mortgage Fraud: IF they short sale, lie about their income (obviously, they have to considering that’s the only way they are going to get a short sale), then they are committing fraud. Nice!
    10. Credit: You screw their credit up for 3 years, at minimum (and then they can get a loan from who? The governement… not the private sector!) Actually, you screw their credit up for 10 years!

    Stupid. That’s my humble opinion. Yes, it’s humble.

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  51. 54
    Jon says:

    By tony clifton @ 49:

    By
    I want a house in Medina Jon, what say you buy me one? Never mind the fact that I can’t afford a house in Medina, I want one and someone owes me!

    Did you buy one in the hayday? Have you been making your payments? Oh, you didn’t, well this doesn’t apply to you. Go fly a kite.

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  52. 55

    RE: The Tim @ 41
    Do you have any stats that show what percentage of foreclosed homeowners ” just find a rental?”
    I don’t know the answer to that one, but I bet the percentage is higher than zero of foreclosed homeowners who end up actually homeless. Don’t most landlords run credit checks? Aren’t foreclosed homeowners dinged on their credit quite a bit when they get foreclosed? Does that prevent them from renting? Again, I don’t know the answer.

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  53. 56

    RE: tony clifton @ 49

    The Y Generation Was Priced Out

    There was a glimmer of hope with the way the cards were falling, but now they want to stop the poker game and deal from the bottom of the deck to aid the more uppper class underwater buyers and hamper the poorer Y Generation.

    Its that simple.

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  54. 57
    Jon says:

    By The Tim @ 50:

    By Jon @ 46:

    You wouldn’t have been able to buy a home in a prime neighborhood for “just” $419k in 2007, either. I’d like to see the full numbers for a specific example taken from one of your friends in one of the neighborhoods you mentioned.

    Real life example:
    2004: Purchased with multiple offers at $392k, Phinney Ridge
    2010: Rent in that neighorhood for same home: $2700
    2004 Mortgage: $1900 (20% down) $2300 with all fees of taxes, insurance
    2011 Mortgage: $1682, all inclusive.

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  55. 58

    RE: SummitSeeker @ 52

    The Unemployment rate for Engineers is Right Around 6%

    Twice normal levels, of course they don’t count like salespeople at Radio Shack with engineering degrees as unemployed. So the 6% is a joke too.

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  56. 59

    RE: Jon @ 53

    Ya Do What Ya Haveta Do

    Like Tim said, renting isn’t that bad after a foreclosure.

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  57. 60

    RE: Jon @ 57

    $2700 Rent????

    And ya got a bridge ya sell SWE?

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  58. 61
    Matt the Engineer says:

    Your analysis uses a bunch of tricks, including the old used car salesman trick: just looking at payments. In the refinance scenario, they have paid 5 years off their mortgage and had 5 years worth of mortgage deductions on their taxes.

    Tell me, if it’s such a great deal to rent, who in the world would buy that home and rent it to them? They’d have to make a profit somehow, right?

    I do get that they’d be letting the banks absorb the loss in value rather than themselves. And that is a benefit. But even using your math they end up worse off. And in the real world some of them end up homeless. (“but they can rent!” sounds great when looking at the middle class – go to the low end of the financial spectrum and you’ll quickly find examples where rent is more than their mortgage)

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  59. 62

    RE: Ira Sacharoff @ 55

    The Family That Was Evicted Next to Me

    Quickly got an apartment in Auburn. Seamless.

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  60. 63
    Ray Pepper says:

    RE: Kary L. Krismer @ 3

    “Contrary to popular belief here, not many people want to be foreclosed out of their home. ”

    True but when these upside down home loans , over the next decade, run into the 1st sign of trouble with marriage, job, illness, family, virtually anything they are the first bill to not get paid. Then the cycle begins. At 90 days its irreversible.

    What the general public is NOT getting is the education from real estate “professionals” who would rather see more loans, title, escrow, etc business brought to the table through these bogust refi’s. Lets extend your debt over 40 years and drop your interest to 2%…Yippee!!

    The financial independence upside down homeowners can have by saving their $$$ while their homes return to the banks to get “re-priced” , at their current market value, should always be recognized.

    Ira, if you have the CASH and a JOB then YOU as a tenant is GOLDEN!

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  61. 64
    scotsman says:

    RE: Jon @ 53

    I agree. Now let’s talk about who gets stuck with the bill. Somehow I don’t think that’s you.

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  62. 65
    Ray Pepper says:

    RE: Ray Pepper @ 63

    Seattle Bubble is supposed to be cutting edge intellect in Real Estate? Is it not? I sure have met the most educated people from this site.

    Where are the charts and graphs showing what a prudent homeowner could SAVE v Continue to PAY on their upside down loan over the course of a few years +. I would like to see Tims Graph on a 4000 Mtg payment that stops getting paid and instead the money gets placed aside until the day of Trustee Sale. Then I would LOVE to see teh financial results of time lines that get expanded using honest attempts at Loan Modification, Attorney Assistance, AG of Washington, Mediation, and of course the many GRASS ROOTS MOVEMENTS that accompany your day at Trustee Sale.. BTW Do NOT forget to include the BONUS BUCKS you will get offered for leaving the home in “broom-clean condition” which is averaging at LEAST 3000 but can easily be negotiated with additional TIME and $$$ to faciliate your move.

    Educated Upside down homeowners ALWAYS and I MEAN ALWAYS walk away far more financially secure then anyone left in their upside down situation flagellating through the Loan Modification abyss. Furthermore, when educated properly, they will THANK the LORD for BUYING into the Bubble of 2005ish because they now know the ball is in their court and THEY dictate the actions of the Bank.

    Initiate the GRAPHS and lets give the Bubble Heads a NEW HONEST PERSPECTIVE!

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  63. 66
    Jon says:

    RE: scotsman @ 64

    Well, it’s owned by Fannie or Freddie… so they own it. Sure, we subsidized them, but they own it. So we let them refinance, thereby allowing them to lower their monthly payment and increase their chance that they will pay it not next month, but years thereafter. I see this as a win/win.

    It doesn’t add debt to us… it just helps the homeowner who is already paying.

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  64. 67
    ARDELL says:

    Let’s keep it simple:

    1) Owner buys home in 2009 for $560,000 with 20% down at 5.5%
    2) Current interest rate at 4% – owner wants to refinance to save 1.5% on rate
    3) Current appraised value of same house $480,000, because 2 neighbors went into foreclosure, while he made his payments on time.

    WHY do you NOT want this owner to be able to refi from 5.5% to 4% rate? Is there some reason you want to put that homeowner “in the penalty box” and say “Lose your home golly you! We want more foreclosures…not lower payments!”?

    What does wanting to drop your rate from 5.5% to 4% have to do with “foreclosures”?

    Seriously…just pretty darned MEAN…no? Or are you just wanting to find fault with Obama for the umpteenth time?

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  65. 68
    Jon says:

    RE: Ray Pepper @ 65

    Ray – silly Ray.

    An Educated Upside Homeowner always walks away more financially secure? Are you on CRACK?

    So now their insurance goes up because their credit rating is in the tank. They can’t apply for a loan anywhere because NO ONE will give them a loan. They have a hard time securing a rental as they have now been foreclosed upon. They can’t get short term loans, they can’t get long term loans.. and for what? Because they wanted to take advantage of lower interest rates that will not only help them spend more money in this economy (ohhh, good for everyone), BUT keep their house AND insure they are going to be able to make payments for YEARS to come, securing that debt.

    I don’t think I have EVER so vehemently disagreed with your analysis.

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  66. 69

    RE: ARDELL @ 67 – Now you’ve done it Tim! You’ve made me agree with Ardell! ;-)

    Even worse. Banks love it when people are locked into high interest rate loans. Why are you siding with the banks? ;-)

    Seriously though, I continue to believe this is less about the housing market and more about overall consumer spending. President Obama needs that to increase and increase quickly. The only way for that to likely happen is for house payments to go down.

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  67. 70

    RE: Jon @ 68 – FWIW, I don’t think insurance companies can use credit ratings to the same extent they used to, if at all.

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  68. 71

    By ARDELL @ 67:

    Let’s keep it simple:

    1) Owner buys home in 2009 for $560,000 with 20% down at 5.5%
    2) Current interest rate at 4% – owner wants to refinance to save 1.5% on rate
    3) Current appraised value of same house $480,000, because 2 neighbors went into foreclosure, while he made his payments on time.

    WHY do you NOT want this owner to be able to refi from 5.5% to 4% rate?

    BTW, the monthly savings on that scenario would be over $400, without even considering a reduced principal amount. That’s a lot of extra potential spending.

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  69. 72
    tony clifton says:

    By ARDELL @ 67:

    Let’s keep it simple:

    1) Owner buys home in 2009 for $560,000 with 20% down at 5.5%
    2) Current interest rate at 4% – owner wants to refinance to save 1.5% on rate
    3) Current appraised value of same house $480,000, because 2 neighbors went into foreclosure, while he made his payments on time.

    And why can’t this home owner refifnance now on his own? He still has equity!

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  70. 73
    Ray Pepper says:

    RE: Jon @ 68

    wrong wrong wrong….Now you get this: http://www.youtube.com/watch?v=yytbDZrw1jc&NR=1

    Ahh feel better now I was finally able to use that clip!

    When you have CASH you will be able to rent most anything you desire as it is an “explainable situation” and you now have the ability to pay in advance? a large damage deposit? or whatever you seem comfortable with because YOU have the CASH! You can INDEED get many many loans because there are MANY MANY ways to BUY a home. Anyone CAN apply for a LOAN..BTW…

    With the CASH they saved and hopefully paid OFF or paid current all their other debt they will most assuredly be able to do everything INCLUDING Buying a home!

    Don’t believe me? Its time to educate yourself.

    When you have the CASH then YOU call the shots! When you don’t the banks do!

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  71. 74
    David Losh says:

    RE: ARDELL @ 67

    Good point, Tim, you are talking about maybe 2% of the market. Why would you care? It generates jobs, provides a modest amount of disposable spending, and helps the banks you love so much.

    Foreclosure has proved to be a disaster. You just don’t see it yet because of stories like Ray’s where yes indeed rents have skyrocketed. Banks will end up in asset management and we will have massive ghettos of poverty.

    You are hyping the Real Estate sell, sell, sell, theme again that some how things will return to “normal.” They won’t.

    Obama, or your government, has nothing to do with the crisis we have. They are charged with protecting the public, but are limited in what they can do. Obama as President with a hostile Congress is extremely limited.

    We should all attack the culprits who are the banks. We should make the banks pay. This is a financial market mess that they have turned around, with help from people like you, who are blaming the consumer.

    You want the consumer to pay for massive bank, and corporate profits.

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  72. 75
    The Desponder says:

    RE: Jon @ 68 – A couple weeks ago I did a craigslist search for travel trailers. In the listings were a couple wanted ads begging for someone to give them (or very cheap $$$) a travel trailer to live in because they had been foreclosed and lost their house. Maybe it was a scam, I don’t know. If a couple is unemployed, and loses their house they can’t always get an apartment. There are plenty of people who will not see it coming until the sheriff shows up at their door. Some are not educated to the process enough to prepare, others might not be capable. I am sure the percentage of people who end up homeless after a foreclosure is greater than 0. The number of people who end up moving into someone’s basement or a crappy travel trailer, I bet, would be even larger.

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  73. 76
    Grant says:

    By Kary L. Krismer @ 29:

    By Grant @ 28:
    RE: softwarengineer @ 19 – How is allowing underwater mortgage refinancing a bailout? How does it cost taxpayers anything?

    Someone is eating the cost of the reduced interest. I haven’t looked into this closely, but I assume this would only be on loans owned by Fannie or Freddie, so to the extent they earn less interest we’d have to pay more to bail them out. But you’d have to offset the cost of any foreclosures which don’t occur because of this. It might actually make money.

    Well, assuming these are loans owned by Fannie/Freddie, one could argue the taxpayer is funding the reduced interest payments IF it caused Fannie/Freddie to need another bailout , but many of the same taxpayers are under and unemployed and could benefit from the increased disposable income and minimization of additional foreclosures, which would benefit the economy, lower unemployment and help stabilize the housing market–again, I’m no Obama supporter, but this is necessary–we’re stupid to let arbitrary rules about equity requirements for a refinancing artificially increase the cost of housing…

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  74. 77
    Grant says:

    By David Losh @ 74:

    RE: ARDELL @ 67

    Obama, or your government, has nothing to do with the crisis we have. They are charged with protecting the public, but are limited in what they can do. Obama as President with a hostile Congress is extremely limited.

    We should all attack the culprits who are the banks. We should make the banks pay. This is a financial market mess that they have turned around, with help from people like you, who are blaming the consumer.

    You want the consumer to pay for massive bank, and corporate profits.

    All players are to be blame with the most belonging to the government–low rates pushed by the Fed, Fannie and Freddie buying what they knew was crap with abandon and requiring banks to lower standards.

    Banks to a degree since they knew they were underwriting crap, but Fannie and Freddie were buying, so no risk to them–again, that’s primarily the government’s fault.

    Homebuyers since we knew it wouldn’t last and wanted the most we could get.

    But saying we should “attack the banks” is ridiculous.

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  75. 78
    Xizor says:

    Usually I find the Tim very level-headed. But most his analysis here strikes me as irrational. The choice is default on the 6.6 per cent underwater mortgage or refinance and responsibly meet your contractual obligation. The Obama program makes plenty of sense to me as an alternative to nuking our banks.

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  76. 79
    tony clifton says:

    By Ray Pepper @ 73:

    RE: Jon @ 68

    When you have the CASH then YOU call the shots! When you don’t the banks do!

    Couldn’t agree more Ray. Wall Street has made America a bunch of debt slaves!

    They control housing, health care, and education(student loans).

    They’ve got their fingers in everything. Lard the debt up on the American public and keep them paying, forever. Wall Street gets a cut of everything, and the American public has swolled those turds hook, line, and sinker!

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  77. 80
    David Losh says:

    RE: Grant @ 77

    That’s an absurd position to take. It begins, and ends with the financial markets who bought loans, any loans, to bundle. The operative word is bundle, because the game is still going on today with them there “premium” mortgage Notes. Them there people who put down the 20% that they know they are going to lose, but hey, they can afford it because they all have JOBS.

    To heck with the poor dumb schmuck that wasn’t smart like the new crop of debtors.

    Think for two minutes what a foreclosure set of land lords looks like while people lose homes, or just walk away. What will those housing units look like for the amount of rent paid? You know this isn’t like Europe of New York brown stones that are passed down from family to family. We aren’t talking charm here. We’re talking bank owned or bought by bottom feeders. Where do you think the term comes from?

    We’re in for some extremely hard times, especially for the people who don’t prepare today. The best way to prepare is to give the banks nothing.

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  78. 81
    mukoh says:

    RE: David Losh @ 80 – Only the banks are to blame! Nobody else! Thats the stance! Keep your head up Losh and walk into that bank with your head up to clean it.

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  79. 82
    mukoh says:

    Its election season heating up.
    Obama is buying votes left and right as most democratic presidents have done, firstly boosting federal employement by thousands in every state, and especially the key states, and federal employees block WILL vote for their new savior.

    This HARP buys him into more of the crowd of OWS who feel left out since they got no money to pay their mortgages and woops the house value didn’t exactly shoot up to take some more draws against seconds to pull their next hawaii getaway. :)

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  80. 83
    Lisa says:

    By Xizor @ 78:

    Usually I find the Tim very level-headed. But most his analysis here strikes me as irrational. The choice is default on the 6.6 per cent underwater mortgage or refinance and responsibly meet your contractual obligation. The Obama program makes plenty of sense to me as an alternative to nuking our banks.

    Agreed. There is a value for keeping their credit score and house, and for people with jobs, that value is rather high. This plan is much better than the previous principle modification plans that “helped” people who were better off defaulting.

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  81. 84

    The supposition in the Tim’s logic is that rents will stay the same for the next five years. I just see no reason that will happen, especially if more people are foreclosed and forced into the rental market.
    As Kary mentioned, the main gist of this proposal is not so much to rescue the housing market but to get people to spend money and stimulate the economy. People who are not behind on their mortgage would not qualify for this proposal., Without it, the middle class folks who would qualify for this mostly will slog along and make the payments. Tim might think they’re better off as renters and maybe they would be, but without being foreclosed, very few will choose to go to a rental. Middle class people with an extra 700 dollars or so per month are going to spend that money.
    Whether this is the best way to stimulate the economy, I don’t know. But that’s the obvious intent. Rescuing the poor would not be politically popular. Poor people don’t vote, and it’s in vogue to hate the poor. Middle class people vote.

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  82. 85
    CCG says:

    By The Tim @ 27:

    RE: Anon @ 24 – It’s something to do with the caching configuration at your employer, since you and Grant are on the same corporate network.

    Ah, thank you. That’ll teach me to read SB when I’m supposed to be working. :-)

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  83. 86
    David Losh says:

    RE: mukoh @ 81

    You can’t read?

    The financial markets are global. If it were just here, or if it was just foreclosures, then there would be chance for a correction.

    What’s going on here is nothing compared to Europe. We have friends, and relatives in Spain where the market crash is in the millions of dollars for many investors. One person owned 24 condo units that he bought, and rented. He sold as many as he could when he saw the change in the market place.

    There is foreclosure in Spain, but you still owe the money. I don’t see any type of correction there. In Barcelona there are miles of development at an inflated price point. All of those people are wiped out.

    The financial markets haven’t yet taken a hit. That’s how you can be so sure of yourself. There have been no losses by banks. Banks are making huge profits.

    What I’m saying is you would have to be brain dead to trust a bank, or buy property in today’s market place.

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  84. 87
    David Losh says:

    RE: mukoh @ 81

    Oh yeah, I almost forgot that we can’t all be in the medical supply business.

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  85. 88
    Macro Investor says:

    I guess some people think capitalism is “mean”. Personally, I believe no able bodied adult should be handed a living. Society should provide only for the truly disabled. It’s wrong to force hard working people to pay for their neighbors mistakes or laziness. We work hard enough supporting ourselves. Charity should be voluntary, not at the point of a gun — which is what taxes are.

    So Obama wants taxpayers to take under water loans off the books of banks, and put in on taxpayers. On the surface that does help some people, but by forcing everyone to pay a share it is morally wrong.

    Others have pointed out that this is a stealth bail out of the banks. Yes it is. Let’s not forget the banks are desperate to refinance notes that were robosigned or not recorded correctly. This is a huge win for them… The 1% win again, and the rest of us get to pay — we the 99% (aka the suckers who always get screwed). I’d say it’s time to get mad and do something about it.

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  86. 89
    NESeattleSeller says:

    Kary and Ardell seem to have a great argument. This quote from software engineer is exactly the wrong analogy: “Refinancing underwater loans is like letting a used car owner drive a car 3 years and then giving them a new car trade in anyway”. Refinancing an underwater loan on a home is like refinancing a car loan, not like giving them a new car. The owner still owes the same principal. Only the interest rate and payment schedule change. People do this all the time. The only issue is whether or not the principal owed is larger than the latest guess at the market price. If not, then the loan gets approved. If so, the new plan is to approve it anyway and take the risk that the house will go to foreclosure. But if the homeowner qualified (in reality, not in some liar loan fashion) and has been making payments, continues to be employed, etc. then this is a good bet to take.

    If you were offered the bet for this so-far-responsible homeowner, which way would you go: A, keep the payment high and bet on no foreclosure or B. lower the payment and bet on no foreclosure? The price of money has declined just like the value of real estate. Why not let people take advantage of that, increase their monthly net and keep them in homes that someday (maybe just a few years from now) will be worth more than the principal owed?

    On a $400,000 loan let’s assume the homeowner still owes all $400K but the house is only worth $300k. If they can get a 4% rate, they can pay back to even money in just 33 months. Then the loan is worth the same as the house ‘s market price now. This does assume that the house doesn’t decline in value further, but I am fairly confident that though it might, there is an equally good chance that in 3 years it will have risen again to today’s price, maybe even higher. Families with good jobs and kids in school will be very happy to cut their payments, stay in their home, and probably be back to level in about 3 years. Why, Tim, do you think it better for them to screw the bank, create another house on the market, and break their promise to pay? (I know – businesses default all the time – doesn’t make it right or fair.)

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  87. 90
    mukoh says:

    RE: NESeattleSeller @ 89 – How can they make up $100k equity loss in 33 months? That is if they pay $3k a month extra principal? Where is the number magically coming from?

    What Tim is saying IMO strictly is that if someone over paid for a home why make them a debt serf for the rest of their life? Let them out of their debt now, have them become fiscally, economically responsible and come back to the market later.

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  88. 91
    NESeattleSeller says:

    RE: Macro Investor @ 88
    Not exactly. Taking performing loans away from banks and making them even less risky is not much of a bailout. The only way the taxpayer loses is if these refinances net less than long term treasuries are paying. That is to say, these loans would be paying the owner (Freddie or Fannie) 4%. Let’s assume servicing costs are about 1% (way high – probably more like 0.01%) so real return is more like 3%.

    Long term treasuries are far less than 1%. (Long Term Real Rate Average: The Long-Term Real Rate Average is the unweighted average of bid real yields on all outstanding TIPS with remaing maturities of more than 10 years and is intended as a proxy for long-term real rates. – These are at 0.81 today and have only been above 2% a couple of days in all of 2011). It would take a significant percentage of foreclosures with significant losses to make these a liability to taxpayers.

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  89. 92
    TK says:

    Does refinance turn a non-recourse loan into a recourse loan in WA? If so, the proposal will be a win for the lenders.

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  90. 93
    tony clifton says:

    By Macro Investor @ 88:

    It’s wrong to force hard working people to pay for their neighbors mistakes or laziness. We work hard enough supporting ourselves. Charity should be voluntary, not at the point of a gun — which is what taxes are.

    Testify Brother!

    I wrote checks out yesterday for my second half property taxes. Amounted to a little over $4800, a little over $9600 per year. I know a bunch of wingnuts out there that think that is just great, I’m paying for their kids to go to school, cops, firefighters, etc. The wingnuts that I’m talking about are conservatives with a bunch of kids, they’ll never pay their fair share, you know. To them it’s a buffet, $5 and all they can eat.

    I’ve got a friend at work that subscribes to your philosophy. He put three kids through school. The state pays an average of around $7200 per year per student. Multiply that out by three kids for twelve years each and you come up with a sum that is greater than $250K. His property taxes are around $2500 per year. He’ll never pay for what he gets from the state, ever.

    And like you, he thinks he’s over taxed. His sales taxes will never make up the difference, ever, either. He’s in the same boat on the Federal level, not paying anywhere near his fair share. He thinks that since he pays something that is good enough.

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  91. 94
    Jonness says:

    By Matt the Engineer @ 5:

    You sound heartless, Tim. These aren’t one more aspect of a screwed up real estate system – they’re people. People that are being kicked out of their homes. If that’s necessary because they can’t pay, fine. But this is a subset of these people that could pay if only they could refinance.

    Life’s tough, and then you die. And your solution simply makes life tougher for everybody; thus, it’s unethical and immoral. Your solution extends this mess out another decade, two, or three instead of simply letting houses fall to levels that are affordable to people’s incomes so that they can afford to make payments on their homes. Your solution artificially inflates prices so that new families who buy homes also have to pay more than they can comfortably afford to pay. It inflates prices to levels where families who are currently overextended and can’t afford their payments can’t simply walk away, rent, save money, and buy an even better house for a much cheaper price a few years from now. And the type of harm your solution does to the U.S.A. as a country is even greater.

    Grown adult people signed contracts promising to pay a certain amount of money for homes and willingly knew if they did not pay for the homes or could not afford to, they would lose the homes. Things didn’t work out, and now those contracts need to be exercised. Hopefully, people learn from their mistakes, learn some legitimate business survival skills, and don’t repeat these mistakes in the future. Otherwise, they are going to suffer all over again.

    Yes, some completely innocent people will be harmed by allowing the economy to work normally and house prices to reset to where people can afford to buy them with the money they take home from working. But WAY more innocent people will be harmed by your artificial manipulation into the marketplace.

    Look, I’ve been down lower than 99.9% of people can ever dream of getting. I won’t go into specifics, but I learned the hard way that there is only one way up off the bottom, and that is to do it yourself.

    Life is not a fairy tale. We are not on this earth to fulfill our childhood fantasies of finding Santa Clause, and all ends well thereafter. Life is a tough brutal son-of-a-gun. And the truth is, we are on our own. We don’t need parents, we don’t need government as our parents, we don’t need handouts. What we need is an honest work ethic and the determination to improve our life situation.

    There is only one way out of this mess, and it’s to grow a real economy. It’s the only thing that is going to work. All of these government gimmicks aimed at getting crooked politicians elected are not the answer. They are a bandaid covering an open festering wound that refuses to heal. The politicians and their followers want to get a better bandaid to hide the unsightly wounds their ridiculous policies created. But the wound cannot heal while it’s covered up. We need to rip off the bandaid, admit the problem, and start working to solve the it with real solutions.

    Each family that we kick to the curb to make room for empty unused housing is potentially another homeless family sucking resources from our social programs. Each family given another chance at their homes is potentially adding productivity to our system, and monthly payments to the banks.

    BS! Each family we kick out for having pulled all the “free” equity out of their homes at the bubble peak and not stopping to think about the cost of paying these loans back is another cheaper home on the market that someone who didn’t go wild during the bubble and instead saved their pennies can now afford to buy.

    The more foreclosures the better. Why should I spend the next 30 years slaving to pay off a house that costs double its historical relationship to incomes when the only “benefit” is that someone who pulled their equity and went on a massive coke binge and ended up with a hole in their nose and an empty wallet gets to have yet another government freebie? And what happens when this new supply of cocaine runs out? Do you want me to pay for yet another free round of drinks? Hey, I’m getting tapped out here and growing weary of funding your coke binge. I think the better solution is for you to go down tomorrow morning and check yourself into debt rehab and learn how to act responsibly and live within your means.

    Manipulation into the market of the very sort you are proposing is what caused this problem in the first place. How on earth can you possibly believe that more of the same is going to fix it? The only thing more of the same is going to do is keep the economy from ever being able to grow again at a sustainable healthy level.

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  92. 95
    JimN says:

    What I don’t like about these types of programs is that “the devil is in the details.” For some, especially with high equity, refinancing may make sense. For people underwater, with no other assets, it likely does not.

    Anybody know if refinancing changes the terms of the recourse? ie. If I have a mortgage in a non-recourse state, can refinancing now make the note “recourse.” This would be a very important issue.

    As Ray says, always educate yourself before such decisions.

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  93. 96
    Pollyanna says:

    FWIW, we bought in ’05 and used HARP to refi at the beginning of this year. Sure, it would probably make the most financial sense to sell, rent & save money, then buy again in a few years, but home ownership is more than just numbers. We like our house, neighbors and location. This is the only house our kids have known. We plan to live here for the next 30+ years.

    We were able to go from a 5.5% 30 year to a 3.5% 15 year loan. We aren’t hurting for money…in fact, we’re in better financial shape now than we were when we bought and we actually have the cash to pay the house off if we choose to.

    I’m failing to see how we are deadbeats/losers, or how our refinancing was bad for the economy. We have other friends who are in the same position (minus the ability to pay the house off right now…), but exceeded the 125% LTV ratio for HARP. They would love to take advantage of the program.

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  94. 97
    Andy says:

    I’m sorrry but stupid ought to hurt. The sad truth is there are winners and losers in this life. That is the essence of evolution and the essence of capitalism. People made mistakes, now they need to suffer the consequences, not force those of us who acted rationally and intelligently to share the consequences.

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  95. 98
    Hugh Dominic says:

    FYI calculated risk blog totally called this. I passed that advice on to someone Tim tried to help on this site who was trying to talk his bank into an underwater refi. “just wait till Fall and Obama will buy you the refi for free” I said. Here it is.

    From CR’s analysis, many of you are correct that this is a bank bailout:
    * it clears these high risk loans from their books and moves them to the taxpayer
    * it turns non-recourse loans into recourse loans in e.g. CA and AZ

    Politicians love it because:
    * they like to look like they are doing something, and this is something

    The Fed loves it because:
    * they are going to use this as an opportunity to put a bunch more toxic loans on their balance sheet, which lets them do a QE3 without having to call it a QE3

    The public loves it because:
    * some are idiots and don’t read this blog or run the numbers themselves
    * some do know the numbers, want to stay anyway, and save money

    Private fund investors (i.e. not you) love it because:
    * this will raise the volume of foreclosures owned by the public (taxpayers are already the #1 owners of foreclosed homes through FNMA)
    * when the public sells off its foreclosed homes, these guys get exclusive rights to buy them in bulk for pennies on the dollar as the taxpayers take the loss

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  96. 99

    By NESeattleSeller @ 91:

    RE: Macro Investor @ 88
    Not exactly. Taking performing loans away from banks and making them even less risky is not much of a bailout. The only way the taxpayer loses is if these refinances net less than long term treasuries are paying. That is to say, these loans would be paying the owner (Freddie or Fannie) 4%. Let’s assume servicing costs are about 1% (way high – probably more like 0.01%) so real return is more like 3%.

    I think you’re dealing with the wrong calculations, since this is already an existing transaction. Whether the government wins or loses will depend on how many people don’t default on their loans because of the lower rates, balanced against the loss of interest income. That could either be because they don’t default because it’s more affordable (lower monthly payment) or a better perceived value (basically a net present value calculation).

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  97. 100

    By TK @ 92:

    Does refinance turn a non-recourse loan into a recourse loan in WA? If so, the proposal will be a win for the lenders.

    As far as I know, California is the only state with such a rule. And that might not even apply to this type of transaction, depending on how the structure/document it.

    Edit: A post above indicates Arizona might have a similar rule.

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  98. 101
    doug says:

    RE: David Losh @ 80

    You know, calling people who waited out the bubble ‘bottom-feeders’ is pretty arrogant. That’s just about everyone in my generation (born in the 80’s) and younger.

    The term bottom feeder’s doesn’t originate from people that buy at the right time in a market. It’s for things that eat animal waste.

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  99. 102

    RE: doug @ 100 – I think you’re misunderstanding what he’s saying. The term bottom feeder isn’t used in the context of when they buy, but what they buy and how they buy.

    So for example, someone who buys in the 2011 Street of Dreams neighborhood wouldn’t be a bottom feeder.

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  100. 103
    David Losh says:

    RE: doug @ 101

    Bottom Feeder is a Real Estate term, like slum lord. There is no top, or bottom to the Real Estate market. There are good deals, and bad.

    The Real Estate community no longer likes the term “deal.” That term doesn’t go along with the new Real Estate agent professionalism.

    What I’m saying, and what people should pay attention to is that foreclosure isn’t an answer any more. We are well past any rate of absorbtion for foreclosures.

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  101. 104

    I don’t think you can talk knowledgeably about foreclosure properties without being familiar with them. They are largely different from other properties. Many/most of these properties are extremely neglected prior to foreclosure, and many of them remain that way when sold to their ultimate new owner (e.g. not a flipper). Depending on the type of loan the buyer uses, some extreme conditions might be corrected (e.g. FHA) or nothing might be corrected (e.g. Homepath). What’s most disturbing is the new owner may not have any better talents or abilities to repair and maintain the house than the old owner, but admittedly these properties can be great opportunities for those who enjoy working on their own homes and have the ability to do so.

    What I’m saying is it would be nice if all these foreclosures ended up in better condition at the end of the process, but that doesn’t always happen. And when they are fixed up, much of what is done is just cosmetic, and sometimes even that is done poorly (e.g. exterior painting done without proper preparation).

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  102. 105

    RE: NESeattleSeller @ 89

    When Social Security Goes Broke [it already has, i.e., Medicaid/Medicare working right]

    America will cease to function. Its that simple.

    When upper middle class in Seattle don’t get an extra few $100 in their pay check to consume is a complete joke compared to wiping out entltlements’ i.e., $1000 per month contributed to the health of the economy, let alone preventing America’s imminent bankruptcy.

    Savvy investors predict with FUTURE rationale and many get rich that way, so throw the same old same bubble trap philosophy history charts in the dumpster where it ALL belongs….it triggerred the current depression and we all know it too.

    Automatic butcher axing will do it to us all anyway and this bill doesn’t have a “blue moon” chance of passing….most Dem/Reps know it too.

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  103. 106

    By David Losh @ 103:

    RE: doug @ 101

    Bottom Feeder is a Real Estate term, like slum lord. There is no top, or bottom to the Real Estate market. There are good deals, and bad.

    The Real Estate community no longer likes the term “deal.” That term doesn’t go along with the new Real Estate agent professionalism.

    What I’m saying, and what people should pay attention to is that foreclosure isn’t an answer any more. We are well past any rate of absorbtion for foreclosures.

    Very True David. We’re no longer “agents”, we’re brokers. There are no more “deals”, after all, we’re professional, so maybe we’re “opportunity brokers?”, and speaking of bottom feeding, the latest MLS memo now forbids brokers showing a house from displaying their fangs during the showing.

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  104. 107
    David Losh says:

    RE: Ira Sacharoff @ 106

    Brokers, I meant to say Brokers.

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  105. 108
    Dirty Renter says:

    RE: The Desponder @ 33
    Blah blah blah…you can twist every proposal to say it’s ‘for the bankers’.
    The Fed lowers interest rates in an effort to stimulate the economy….it’s for the bankers.
    The President proposes programs to keep people in their houses…it’s for the bankers.
    Barney Frank passes gas…it’s for the bankers.

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  106. 109

    RE: David Losh @ 107 – I still use the agent/broker distinction because the new terminology would require you to use a longer term (broker and designated broker). Too cumbersome.

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  107. 110
    David Losh says:

    RE: Kary L. Krismer @ 4

    Until 2008 we worked on bank owned properties, or pre foreclosure. The last one we did was for Bank of America on a trash out call back. They wanted us to bid it even though there was a big ass lock on the garage door. It was a new lock so I bid it way up. They also wanted the place winterized.

    Sure enough the garage was full of the garbage that was taken out of the house. The house itself wasn’t bad but we winterized, cleaned, and painted a couple of walls.

    We submitted our bill to a third party provider who contracted with us. It was Omega Property something or other in South Carolina. They didn’t pay. The property went up for sale and got an offer for $100K less than what had been loaned. I submitted our bill to escrow.

    Omega Property something or other had packed up during the night with funds from a half dozen banks and declared bankruptcy. Bank of America payed us directly to get our bill out of escrow.

    Thousands of contractors have lost money since 2008 in a variety of bank owned property scams. From what I’ve been told it’s an absolute circus.

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  108. 111

    RE: David Losh @ 110 – I’m not talking about the cleanup, but instead the general condition.

    For example, were the gutter drains plugged up for so many seasons in a row that the siding has been damaged to the point of needing replacement? Is the floor around the toilet rotted out? Do rodents have continuing access to the attic and crawl space? Is the gas furnace or water heater well over 20 years old?

    I mentioned this before but I saw one REO that had both recalled LP siding and Pabco roofing. It also had all of its carpeting removed. I suspect the plumbing, electrical and insulation were okay, but other than that it needed a complete rehab.

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  109. 112
    tomtom says:

    By David Lush @ 110:

    It was a new lock so I bid it way up.

    I submitted our bill to escrow.

    Bank of America payed us directly to get our bill out of escrow.

    Thousands of contractors have lost money since 2008 in a variety of bank owned property scams. From what I’ve been told it’s an absolute circus.

    There definitely was a scam here.

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  110. 113
    No Name Guy says:

    I suggest everyone mosey on over to CHS at Of Two Minds and read his latest:

    http://www.oftwominds.com/blogoct11/healthy-housing-market10-11.html

    Oh, and this refi proposal IS in fact a bail out of the banks. Everyone does realize that BoA, JP Morgan, et al are in fact insolvent. If they marked their mtg portfolios to market it would wipe out their capital (and so would marking their Greek, Italian, Spanish, French, etc bond holding, but that’s a different issue).

    This refi plan is no different that what Japan did – keep the zombies “alive”. Look what’s it gotten them. Nothing. Sheese people……grow the heck up. You’re all somewhere in the denial, anger and bargaining stage.

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  111. 114
    No Name Guy says:

    By Dirty Renter @ 108:

    RE: The Desponder @ 33
    Blah blah blah…you can twist every proposal to say it’s ‘for the bankers’.
    The Fed lowers interest rates in an effort to stimulate the economy….it’s for the bankers.
    The President proposes programs to keep people in their houses…it’s for the bankers.
    Barney Frank passes gas…it’s for the bankers.

    And yest there Dirty – the lowered rates ARE a bail out of the banks. Get free money (~0.1% or less on savings) from depositors and put the “excess reserves” on deposit at the Fed for a higher rate. A stealth tax on savers.

    Get the Fed Government to take toxic mortgages off the banks balance sheets (via this refi where Fannie or Freddie are the bag holders) – a stealth bail out of the banks. If they were forced to mark them to market, JPM, BoA and the rest are insolvent.

    As far as that fool Frank – well, I’m sure if he farted again the Bankers would get a laugh out of it, so yes, that would be for the bankers. Now, where’s my extra can of re fried beans I can send him. :-)

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  112. 115

    I read Tim’s update above. If this site had been around in the early 1980s and I’d read and followed Tim’s advice I would have let my condo go into foreclosure. Values had gone down. Interest rates had gone down but I couldn’t refinance. Condo developers were going into bankruptcy and units were being auctioned.

    But if I’d reacted to the then current conditions, even today when financing a house I’d have to answer that I had let a house go into foreclosure. But beyond that, I would have missed out on over a 100% return when I sold. Money I still have in the bank today.

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  113. 116

    Here is a thought – that may not be well thought out yet.

    One of the principal problems with the housing market is the number of people trapped in unsustainable mortgages in overencumbered houses they cannot afford. The solutions proposed thus far are (1) various modification schemes, and (2) foreclosures.

    The problems with foreclosures is the stigma associated with the foreclosure and the uncertainty about renting with a foreclosure on the record. Instead of encouraging principal write downs that will never happen, an alternate policy might be to forbid reporting the tender of a house as a negative on the credit report and providing a voucher for $6000 towards first and last months rent.

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  114. 117
    Dirty Renter says:

    RE: No Name Guy @ 14
    No Name…You missed my post about mark to market a year or two ago. Of course, it is just my opinion. Mark to market accounting for banks was implemented in November of 2007. It was ceased in March of 2009 by FASB, due to pressure of the Congress. So what, a new 14 month rule is put into abeyance. BFD.
    First of all, M2M is a horribly pro-cyclical accounting method, much like the FASB, FDIC & SEC rules to minimize loan-loss reserves. Total BS. I think we all know now that it is smart for banks for to incease loan losses in good times, no?
    Secondly, M2M is a short-term non-cash accounting entry, which is used as a collateral measure, not a cash flow. Banking safety is all about cash flow, not collateral, a secondary method of repayment.
    Thirdly, banks HAVE been using M2M accounting for decades….for assets which they plan on selling within 12 months. Fair enough, I think.

    M@M accounting for banks is like appraising your house every April 15th, which you do not plan to sell, marking it to market, and then using then putting the gains or losses on your income taxes. Silly, no?
    That said, every nation’s banking system is under water, during every recession, and if one wants to destroy it with M2M accounting, so be it….even though it is cash-flow profitable.

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  115. 118
    Dirty Renter says:

    RE: No Name Guy @ 13
    Sorry No Name…but the Feds begged BAC, JPM, WFC to take on the toxic waste of CFC, WAMU. WB respectively…..and so you now think they’ll reinstate M2M and bankrupt them.
    Honestly, do you think that’s right?
    BAC stopped making subprime mortgages in 2001…but were silly enough to buy CFC.
    You want to decimate JPMorgan and Wells for being conservative banks who were strong enough to swallow the toxic assets of WAMU & Wachovia(Golden West(pik a pay thieves) & World Savings), at the request of the FEDS?
    I’ve been wondering for years….what exactly are the qualifications of Smith, Denninger, Shedlock and the rest of the mob? I know Mish is a civil engineer…and boy, was he ever wrong on his loud calls that commercial lending was going to bankrupt the system. C&I has been the savior of the lending business. He kept talking about his banker friend from California giving him the inside scoop. I have a friend who says he has a candy-cr*pping unicorn, that counts to 10.

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  116. 119
    S-Crow says:

    RE: Kary L. Krismer @ 115 – Superb comment Kary. If my folks sold their Capitol Hill property (22nd & 23rd & Prospect/Highland Drive) during the difficult times of late 70’s & early 80’s when out of work for a long period….they would not have enjoyed the gain realized. The funny thing is that their lifestyle is still almost sickeningly frugal and currently own property outright.

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  117. 120
    Jon says:

    RE: The Desponder @ 75

    These are people paying their mortgage payment… not sure it applies.

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  118. 121
    Blurtman says:

    Obama reads text that has been written by others. Does anone really think he has somehow been transformed, with no training or experience, into an expert on real estate or financial matters?

    Here is Tim Geitner, speaking through Obama, about the EU bail out deal:

    “There’s no doubt that it’s progress. And so the key now is to make sure that there’s strong follow up, strong execution of the plans that have been put forward.”

    “But I was very pleased to see that the leaders of Europe recognise that it is both in Europe’s interests and the world’s interest that this situation is stabilised. And I think they made significant progress over the last week. And the key now is just to make sure that it drives forward in an effective way.”

    “The message that they are going to deal with this in a serious way has calmed markets all around the world.”

    Welcome to the new Soviet Union, comrades.

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  119. 122
    patient says:

    I’m a democrat and voted for Obama but I think Romney just got my 2012 vote. I can’t stand this insane meddling in the housing market and banks. Stop it already.

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  120. 123

    By Blurtman @ 121:

    Obama reads text that has been written by others. Does anone really think he has somehow been transformed, with no training or experience, into an expert on real estate or financial matters?.

    I’ve often said it matters more who is around the President. Both GWB and BO made bad choices initially (e.g. Rumsfeld and Emanuel).

    I wonder which has had more turnover the past two years? The White House or the Seahawks?

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  121. 124
    David Losh says:

    RE: Kary L. Krismer @ 111RE: tomtom @ 112

    We also did rot work, and mildew. At one time banks would go through an entire process that is no longer cost effective. One of the big issues was lawn care in developments. Banks used to try to keep places looking presentable. As Ray points out there are now entire developments that just sit, and rot.

    How many foreclosures are there? How many banks have asset management departments up, and running to handle the work load?

    As an example we worked on three town homes yesterday, all bank repos, by a local bank, and all three, even though owned by the same person, were in different stages of disrepair.

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  122. 125
    Jon says:

    By patient @ 22:

    I’m a democrat and voted for Obama but I think Romney just got my 2012 vote. I can’t stand this insane meddling in the housing market and banks. Stop it already.

    Romney can’t beat Cain!

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  123. 126
    patient says:

    “Romney can’t beat Cain”

    When people start to realize that 9-9-9 is an upside down progressive tax he’ll be dead in the water. Lower income people spend close to 100% of their income, making their tax burden close to 18%. The more you earn, the more you save and re-invest gradually lowering your tax. The ultra high earners will be closer to a 9% tax. This can’t possibly fly with the majority.

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  124. 127

    RE: Kary L. Krismer @ 123
    The Seahawks got a new quarterback. It remains to be seen whether the White House will.

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  125. 128
  126. 129
    No Name Guy says:

    RE: Dirty Renter @ 118

    So you make my point, in regards that the Feds were begging various entities to take over insolvent ones, and drag themselves down into the dung pile. The point is the FEDS INTERFERED and spread the garbage onto a whole lot more entities. Instead of only the insolvent and their owners and bond holders being wiped out, now the rot has been spread far wider.

    Now, they want to do it all over again, only shifting the cost onto the taxpayers (even more so). Talk about moral hazard on ‘roids. Let the equity and bond holders of these insolvent banks (and so called owners of their underwater homes) get wiped out by foreclosure and bankruptcy. Wipe the stinking pile of bad debt off the books (on both sides) and start with a clean slate.

    It has to end somewhere there DR. Now is as good as a time as any, although not getting here would have been far better. Cut the losses. The money wasted is a sunk cost. The only evaluation is looking forward: What needs to be spent from today on to get what gain? If Cost going forward > Gain the result is let it go regardless of what has been spent or done in the past.

    Enough with the fat, idiotic fingers of federal officials who know jack getting in the way. This is yet another ill thought out interference (like the ones you pointed out DR, like GM and Chrysler, like Solarianda,, etc ad nauseum – want to get international? Ireland bailing out their banks, Germany bailing out their banks via Greece – all of it to enrich the few at the expense of the many). Let it alone for crying out loud – enough cronyism.

    Let it fall down then salvage the pieces. Will it be pretty? Heck no. Then again, when has a disaster been pretty?

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  127. 130
    No Name Guy says:

    Kary and S Crow @ 115 and 119:

    Fine and dandy that in a couple of instances things worked out (I’m serious on this – I’d rather see success than failure).

    It sounds like the particulars of those situations and the individual circumstances were favorable for a wait it out strategy. Great that you / they took a chance with YOUR / THEIR OWN MONEY to do so.

    The (few) exceptions don’t invalidate the figures the Tim presents that for many it’s a fools errand to throw good money after bad, nor the argument that doing so with the Taxpayer money is idiotic public policy.

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  128. 131
    S-Crow says:

    RE: No Name Guy @ 130 – I understand you point, but also don’t forget that there is a huge subset of people (about 1/3 of property) that own their property free and clear and another huge subset that are gainfully employed, enjoy their home and community in which they reside and also are upside down and would like to refinance. People can argue that because their home is underwater they should just stop paying and others argue that they should stick it out and hope for values to return to where they have positive equity in LTV (which is also created by paying down debt load). I would add that it was pretty golly tough to stick it out when a parent of mine was unemployed for a very long time and home values were going no-where in that time period. The problem is that many people can afford their home, they just can’t afford the home plus the excessive debt load in addition to that (vacations, expensive depreciating cars etcc.). Trust me, I see it every day.

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  129. 132
    Jonness says:

    By Pollyanna @ 96:

    FWIW, we bought in ’05 and used HARP to refi at the beginning of this year. Sure, it would probably make the most financial sense to sell, rent & save money, then buy again in a few years, but home ownership is more than just numbers. We like our house, neighbors and location. This is the only house our kids have known. We plan to live here for the next 30+ years.

    We were able to go from a 5.5% 30 year to a 3.5% 15 year loan. We aren’t hurting for money…in fact, we’re in better financial shape now than we were when we bought and we actually have the cash to pay the house off if we choose to.

    I’m failing to see how we are deadbeats/losers, or how our refinancing was bad for the economy. We have other friends who are in the same position (minus the ability to pay the house off right now…), but exceeded the 125% LTV ratio for HARP. They would love to take advantage of the program.

    Of course your friends want to “take advantage” of a free government handout at other people’s expense. Who doesn’t? That’s the entire point in this country. Everybody wants a free government handout, but nobody wants to pay for it. If it weren’t true, the U.S. wouldn’t have an unsustainable debt problem and no realistic way to pay for impending entitlement programs.

    So let’s see how your friends like this plan. They get bailed out, but to pay for their bailout, they get their taxes raised, and I get mine lowered. Hmmm…something tells me they no longer want to “take advantage” of the handout because it’s no longer free, and I’m going to get a better deal than them. Go figure…

    Your friends signed a contract promising to pay a certain amount per month at a certain percent interest rate or they lose the house. What part about that are they forgetting?

    If only I had a giant “undo” button, and I could just hit it every time I don’t feel like taking to effort to make good decisions. Every time I get drunk or mentally lazy and screw up, I’ll hit the button, and your friends have to pay for it. Hmmm…now I know why your friends are so enticed by having me bail them out. It’s almost too good to be true.

    Could someone remind me of which crooked politician I need to vote for in order to get my free undo button? I really want the button, and I’ll vote for anybody in order to get it.

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  130. 133
    Jonness says:

    By Kary L. Krismer @ 15:

    I read Tim’s update above. If this site had been around in the early 1980s and I’d read and followed Tim’s advice I would have let my condo go into foreclosure. Values had gone down. Interest rates had gone down but I couldn’t refinance. Condo developers were going into bankruptcy and units were being auctioned.

    But if I’d reacted to the then current conditions, even today when financing a house I’d have to answer that I had let a house go into foreclosure. But beyond that, I would have missed out on over a 100% return when I sold. Money I still have in the bank today.

    Tim’s advice is to sell now, live frugally and buy in a few years when you can actually afford to make the payments. Thus, I have a really difficult time figuring out how you would have lost out on the entire 100% return if you had followed his advice. Furthermore, comparing the early 1980’s to now is apples and oranges. The 1980’s were highly inflationary. In the current environment, the rates are at record lows.

    So let’s test out Tim’s advice using using a different timespan. Let’s say in 2007, when you bought your house, you put 0% down. In 2008, it was clear you were horribly underwater. So you stopped making payments, saved 100% of your house payment, taxes, and insurance, lived frugally, and saved up $50K per year for 3 years. Oops, the bank foreclosed, so you saved for another 4 years and then bought a way more affordable home well within your means for cash or nearly for all cash. Now we wait out the 25 years or so you are giving in your 80’s example. IMO, following Tim’s advice pays WAY more than yours.

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  131. 134
    2kt says:

    RE: scotsman @ 31

    The banking system simply can not take another 15% down leg in housing prices. It’s that simple. What Obama is trying to do is to slow down the process and allow the banks to write down the losses against current income. It may fail after all, but what is your solution?

    Bank of America will go under with another 15% down. Who will pay out the account holders, FDIC? It has only about $50 to $60 billion on hand. US Treasury? With what, Chinese loans?

    It really does not matter how you pay for it, upfront or on the backend. Let banks go and pay through FDIC/Feds/Chinese loans or try to slow the process and pay through various refi schemes.

    What he does has a chance, however small, what you and your like-minded kind offer is a guaranteed disaster in the next 2 years.

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  132. 135

    By Jonness @ 33:

    By Kary L. Krismer @ 15:
    I read Tim’s update above. If this site had been around in the early 1980s and I’d read and followed Tim’s advice I would have let my condo go into foreclosure. Values had gone down. Interest rates had gone down but I couldn’t refinance. Condo developers were going into bankruptcy and units were being auctioned.

    But if I’d reacted to the then current conditions, even today when financing a house I’d have to answer that I had let a house go into foreclosure. But beyond that, I would have missed out on over a 100% return when I sold. Money I still have in the bank today.

    Tim’s advice is to sell now, live frugally and buy in a few years when you can actually afford to make the payments. Thus, I have a really difficult time figuring out how you would have lost out on the entire 100% return if you had followed his advice. Furthermore, comparing the early 1980’s to now is apples and oranges. The 1980’s were highly inflationary. In the current environment, the rates are at record lows.

    So let’s test out Tim’s advice using using a different timespan. Let’s say in 2007, when you bought your house, you put 0% down. In 2008, it was clear you were horribly underwater. So you stopped making payments, saved 100% of your house payment, taxes, and insurance, lived frugally, and saved up $50K per year for 3 years.

    As to the first example if I’d gone into foreclosure I wouldn’t have been able to buy again, and thus I would have lost out on the possible gain.

    As to the second example, there would be no way to save 100% of your house payment and taxes, unless you’re living on the street. Let’s deal with some real life examples.

    Also, as I recall, Tim put some significant money down. If his advise is so great, why did he put money down when he purchased his house? He should have just gone with a 3.5% FHA loan, and if the value goes down he would walk away. Why would he risk the money put down over 3.5%? It sounds like a few months ago he didn’t even believe his advice.

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  133. 136
    Scott Weitz says:

    Great post, Tim.

    You are absolutely right.

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  134. 137

    One more point about this not being so much about the housing market.

    With the first time buyer credit the plan directly impacted demand for houses. Higher demand, higher house prices (than what it would have been without the plan).

    Here at best all they are doing is reducing supply, specifically the supply of REOs, and even that is questionable. Even after these refinances, these people would still need to do a short sale if they wanted to sell, so that is not changing. Since this plan is only available to those who are current on their loans, foreclosure is at best a long way off. Any impact on pricing would be more than 9 months down the road in Washington state. President Obama doesn’t have that long for something to take effect.

    So again, I really think this is more about increasing consumer spending. That impact could be only a month or two away for each family that takes advantage of this program.

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  135. 138
    David Losh says:

    What happens if you apply that $700 to the principal balance? What if you start to pay off your under water home? What are the savings if you just feed the principal in the over all amortization schedule?

    Foreclosures aren’t a solution for any one, not even the “investors” who are snapping up these great bargains. When the twitter feed post for today gets corrected I’ll make the comparisons between residential, and commercial.

    We are after all talking about building a Real Estate.

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  136. 139
    Jonness says:

    By Kary L. Krismer @ 135:

    As to the first example if I’d gone into foreclosure I wouldn’t have been able to buy again, and thus I would have lost out on the possible gain.

    That’s not true. You could have bought a home right away where the owner carried the contract. This would have limited your options, but you still could have gotten back in as soon as prices stabilized. Otherwise, you could have waited the necessary time it took to get qualified for a conventional loan again and gotten in at that point. Either way, there is no way you would have missed out on the full 100% gain.

    As far as I know, current waiting periods for going conventional are:

    * Buying After a Foreclosure: Minimum 5 years
    * Buying After a Foreclosure With Extenuating Circumstances: Minimum 3 years
    * Buying After After a Deed-in-Lieu of Foreclosure: Minimum 4 years
    * Buying After a Deed-in-Lieu of Foreclosure With Extenuating Circumstances: Minimum 2 years
    *Buying after short sale: 2 years

    As to the second example, there would be no way to save 100% of your house payment and taxes, unless you’re living on the street. Let’s deal with some real life examples.

    That’s not true. My neighbors have been living in their home for over 3 years without having paid a single penny on the mortgage, taxes, or insurance. They are saving 100% of their house payment after having learned the hard lesson of having spent the $300K they pulled in equity on their 0-down loan. When the bank finally takes the home, they will simply move in with their parents until they feel the housing market has stabilized and their credit score is improved, at which point, they will buy another house using a government-backed loan with a good mortgage rate.

    I think the biggest problem with Tim’s advice is the-live frugal and save as much money as possible-part (OK, maybe that’s my advice and not his). If people won’t live frugally, then they should forget about it. Bad behavior is only fully rewarded in our current environment if you learn your lesson and start living frugally.

    Also, as I recall, Tim put some significant money down. If his advise is so great, why did he put money down when he purchased his house? He should have just gone with a 3.5% FHA loan, and if the value goes down he would walk away. Why would he risk the money put down over 3.5%? It sounds like a few months ago he didn’t even believe his advice.

    He didn’t want to pay for mortgage insurance (built-in to FHA), so he put 20% down. But more-so he difference with Tim is, he is living WAY beneath his means and can rent the house as cash flow positive if he decides to move.

    But you do bring up a good point, there are different situations that require different choices. It’s not a one-size fits all. I think the bottom line is, if you don’t live frugally, you can’t save money. If you went wild during the bubble and withdrew all the equity in your house, you are better off stopping payments and learning how to live frugally so that you never repeat the same stupid mistakes again (my neighbors are a good example). OTOH, if you are not an impulsive spender, are only slightly underwater, and you tend to live within your means, sticking it out might be the better decision as long as you don’t mind being underwater for the next 5 years or so.

    It really matters how far underwater people are. If they are 25% underwater, it could take 15 years just to get even. If they are 50% underwater, it could take several decades to break even. If they are only 5% underwater, then they probably need to get a life and stop worrying about it for a while.

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  137. 140
    Jonness says:

    It’s important to understand what kind of economy we are in. We are not in a normal business cycle induced recession. In a high inflation environment like the 1980’s, it makes sense to tie up money in assets. In a debt-bubble induced financial recession that leads to asset price deflation, it does not make sense to continue to pump money into the depreciating asset class that caused the recession, unless you can truly afford to take the hit.

    Comparing the 1980’s recession to the current recession is worse than comparing apples to oranges. Kary believes it’s impossible to predict future prices because past performance is no guarantee of future results. Yet, he is attempting to use his past performance in one environment to extrapolate future results in a completely different environment. Despite this method being highly suspect, he does bring up a good point. You can get a sense of the most probable outcome if you actually compare apples to apples, such as the U.S. housing bubble vs the Japanese housing bubble. Despite differences in the two economies, the similarities in the housing sector have so far proven to have been a good guide to investors. OTOH, stocks have been a different story.

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  138. 141

    RE: Jonness @ 139
    Interesting comments, Jonness. What if you’re employed,and easily making the mortgage payment, but the value of your house has fallen 40 or 50%? Should you walk just because the value of the house has gone down? What if rents for similar houses weren’t less expensive?

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  139. 142
    Ray Pepper says:

    RE: Ira Sacharoff @ 141

    40-50%? I’m “done” quicker then lutefisk on a plate in front of you. But, I must emphasize the worst and I mean WORST thing a homeowner could do in this situation is walk-away. Never- EVER leave your home unless you want to or are FORCED to via Sheriff.

    If the Sheriff has arrived you made errors in your EXIT STATEGY. DD is crucial with Trustee Sale dates. The banks are giving pretty darn good “deals” now for homes POST Trustee sale but the fact remains you need to be around (or relatives/tenants) inhabiting the house to see them. I would also emphasize that as of Late 2011 if you lose your home via Trustee Sale, and your desire was to stay, you again made errors with your DD and exit strategy,

    Furthermore, people fail to realize how much they are actually upside down. In this state you might as well tack another 10% onto the assumed amount due to the HIGH cost to sell with RE fees, excise, title, escrow, repair orders, etc..

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  140. 143
    MichaelB says:

    Tim, This is a good plan as well as a bad plan – in other words, it depends! In some cases it is a bad option for the homeowner. In other cases it will be a good option for the homeowner.
    So, it will be good for homeowners in a percentage of cases. Thus, it will have a positive impact. Obama cannot get support for congress, so he is doing what he can….

    By the way, the way you have presented that youtube video on your website smacks of racism – “Obama is going to pay for my gas and mortgage!!!” No wonder you moved to Everett – what a redneck!

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  141. 144
    David Losh says:

    RE: MichaelB @ 143

    I didn’t click that video before; good catch.

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  142. 145
    Jo-Pete says:

    RE: MichaelB @ 143 – Why is it racist to show an ignorant, selfish person cheering because Obama is giving her a handout? Are we not allowed to point out greed and selfishness in “minority” populations?

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  143. 146
    Mee says:

    At this point Obama will screw anything to get re-elected…..

    Remember he is the One but more like a skinny Zero to me.

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  144. 147
    whatsmyname says:

    By Jo-Pete @ 145:

    RE: MichaelB @ 143 – Why is it racist to show an ignorant, selfish person cheering because Obama is giving her a handout? Are we not allowed to point out greed and selfishness in “minority” populations?

    The thing is that she doesn’t say that Obama is going to pay her gas/mortgage – or that he will give her a handout. To interpret what she says as expecting a handout reflects a conscious or unconscious filter which neatly lines up with a common and easily recognizable prejudice. Nice hood, by the way.

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  145. 148
    MichaelB says:

    RE: Jo-Pete @ 145

    It’s totally unnecessary. The selection of this particular clip shows very poor judgement. Making a negative point about our president using a racist association. It’s tea party, birther racism.

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  146. 149
    David Losh says:

    RE: MichaelB @ 148

    You should see the rest of the clips on the page.

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  147. 150
    TeaKake says:

    I haven’t read all 100+ comments so I apologize if someone brought this up before.

    The big issue I have with this critique of Obama’s refinance plan is that the argument against paying for underwater homes (at lower interest rates) only works in states like Washington that have consumer protection laws. In many other states, if a person defaults or does a short sale (even if approved by the bank), that person is left responsible for the balance. Simply put, in many states you cannot walk away from your home. The remaining balance of your mortgage will follow you the rest of your life — they can put liens on any future property and, in some cases, garnish your wages.

    I agree with Tim that to refinance an underwater home in WASHINGTON might not make sense and so Obama’s plan wouldn’t be god for someone here but I think it’s short sighted to critique the national importance of this law.

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  148. 151

    By Jonness @ 39:

    By Kary L. Krismer @ 135:

    As to the first example if I’d gone into foreclosure I wouldn’t have been able to buy again, and thus I would have lost out on the possible gain.

    That’s not true. You could have bought a home right away where the owner carried the contract.

    The Garn Act was passed in 1982 and basically ended almost all owner contract situations. That’s why today even with sellers that have a lot of equity, you don’t see a lot of owner financing. Given the low bank rates today you’d see a ton of that if it were safely available.

    As to some of your other points, I’m not sure what the buy after foreclosure rules were back then, but I doubt they were as generous as even today. Foreclosures weren’t taking three years back then, but I could have probably gotten 6-8 months of free rent, so I’ll give you that. I don’t buy the argument that avoiding PMI justifies putting 20% down if you think walking away is just a good option for everyone, but thank you for acknowledging that it’s a different situation for everyone. I’ve never said walking away isn’t a good option for some.

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  149. 152

    By Jonness @ 40:

    Comparing the 1980’s recession to the current recession is worse than comparing apples to oranges. Kary believes it’s impossible to predict future prices because past performance is no guarantee of future results. Yet, he is attempting to use his past performance in one environment to extrapolate future results in a completely different environment.

    If you’re basing that on my comments regarding Tim’s suggestion to walk away, you’re reading too much into that. I’m not trying to predict that we’ll see the same type of inflation as in the past. I’ve never changed my position that we could either see significant inflation or deflation, and that it’s best to be balanced for either.

    All I’m saying is things seemed just as dire back then in the early 80s, so don’t just go making extreme decisions based on the fact that things seem bad now. This isn’t some new event that mankind has never gone through before. And despite some of the press hype, it’s not even all that bad.

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  150. 153

    By MichaelB @ 43:

    Obama cannot get support for congress, so he is doing what he can..

    President Obama has not tried to get support from Congress. He proposes things he knows will not fly and then complains that they don’t get passed. Pure politics.

    I haven’t heard a lot of Republican complaints about this plan, but that might change in the next couple of hours when I watch the Sunday morning shows.

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  151. 154

    RE: TeaKake @ 50 – You can be responsible for the remaining balance on your mortgage debt in Washington, especially in short sale situations and where you have more than one deed of trust.

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  152. 155
    David Losh says:

    RE: TeaKake @ 150

    Good point.

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  153. 156

    By Kary L. Krismer @ 53:

    I haven’t heard a lot of Republican complaints about this plan, but that might change in the next couple of hours when I watch the Sunday morning shows.

    Well, it didn’t change. The only place this was even mentioned, that I saw, was in the first few minutes of Meet the Press, when it was grouped with 3 other things President Obama did by executive order. I don’t think it was even mentioned by name (as opposed to something general to help housing), and the only person talking about it was someone working on President Obama’s election.

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  154. 157

    […] 156 comments, 10/27: Obama "Can’t Wait" to Screw with the Market Even More […]

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