Real Estate Crash thread

[Benny Profane]

Quote from above article


Took Japan 15 yrs to stabilize its realestate market and that was with long periods of interest rates at 0%.

Funny, I was thinking about this today.

Our 15 years will coincide with the boomers going into old age, which officially started with the first boomer applying for SS a few months ago, an important event only CNBC felt important enough to call a milestone for 15 minutes. Of all the clatter and chatter I read and hear about this subject ("subprime"), all the supposedly "smaht" people never mention this macro event. Think of it - the biggest bulge of the population, the people who have been living for today for the last 50 years, going into the end game, out of shape, meager savings, if at all, in debt with both credit cards and probably paying a pretty sizable mortgage on their biggest asset, because they drained that equity for last years big screen, Range Rover, and Vail/Aruba experience. They're doomed to work hard for the rest of their lives, just to pay for this crap, but they won't be able to, because they'll be job eliminated, or just too damn old, fat and tired to work hard. And now this. Their personal little piggy banks are shuttung down, and the stock market is reacting as it should. Tough times ahead.

I like international funds, and yeah, it would be awesome to have an affordable ocean view condo in Florida for cheap. Bring it on.

[woodstocksez]

I don't quite understand the anger. People just want to live in nice places and provide for their families. I just can't get too angry about that.

I can't either, but so what? I can get angry about people believing it's their right to have what they want to have with little or no regard for whether they can afford it or not. There were plenty of those people fueling the housing boom and I don't want one penny to go to helping them out if they're in trouble now.

Yes, some made mistakes along the way. Borrowed too much, didn't anticipate the costs of home ownership, got divorced, lost their job, had a medical problem, or did something stupid.

Not all mistakes are created equal. Some are worthy of compassion; others are not. Your list includes both types (some - such as medical problems - may not really even be mistakes).

You didn't. Congratulations. But that doesn't mean you are some kind of genius. It is easy to sit on the sidelines and never take a risk and then fault others for doing so. But don't expect a pat on the back.

It is an important point that it didn't take a genius to understand that quite a few people were almost certainly making big mistakes. Many of the people that made those mistakes were either too ignorant of what they were doing to be doing it, or were too self-absorbed to much care whether what they were doing was responsible or not. I don't shed a tear for those people. Choosing to stay on the sidelines wasn't about being too scared to take a risk. It was about being responsible enough to not take an obviously stupid risk. In a proper world, that doesn't deserve a pat on the back because it would be of little note. However, in the real estate universe of the first half of this decade, that kind of behavior was far too rare and, at the least, those who engaged in it have every right to expect that their prudence won't be obviated by a bailout of those who thumbed their nose at the scaredy-cats afraid to live a little.

To me this is an exciting time. Properties are becoming available that were out of reach 3 years ago. I am looking at 10-20 properties a week. There is this really cool 100 year old mission revival home in my neighborhood that, with a lot of TLC, would be a gorgeous home. And I looked at this warehouse this weekend that should be converted to a bunch of artists studios. Call me greedy or stupid but if I had the money (or could borrow it, which I am trying to do) I would buy them both. I might go broke. I might make a fortune (unlikely), or maybe only a meager sum for my time and effort. But it would be fun to try.

Well, if you're completely willing to bear the consequences of trying, then by all means go for it. You may be one of the few who really is willing to accept the downside of a high risk/high reward tradeoff (assuming that's the situation). My experience, though, is that most are not: lots of people talk big, but when it gets down to it, they either want someone to guarantee that things will work out or prop them up if they don't.

[Core Shot]

The dubious transactions all fit a pattern that Theobald said should trigger "bells and whistles" for law enforcement anywhere -- time and time again properties that failed to sell for months when listed at around $450,000 were pulled from the market and then suddenly sold for more than $800,000.

^^^^^^^someone needs to go to jail for that.

I have a fraudulent sale to a straw man right next door to me.
Still doing ok as a rental, but I expect any day he will stop paying the mortgage, and collect as much rent as he can before foreclusure and returning to his home country.


So, my neighborhood in a nutshell:
1) fraudulant mortgage next door (worth $350, "bought" for $490)
2) bank foreclosure across the street hasn't had any showings in 8 months(bought for $490 bank trying to sell for $370)
3) fix and flop 2 doors away, been on market for 18months, price now at $450 and owner hemmoraghing badly but refusing to lower price to market.

[Spats]

Bailing out stupid homeowners seems insane and I don't buy any argument to do so, but it seems to fit the same overall market/currency stability justification for the savings and loan bailout.
[...]
Either way it seems to call for more market oversight/preventative constraints in the first place, which is far from a repub platform.

What it calls for is a non-inflationary monetary policy that doesn't create massive, unsustainable asset bubbles. "Market oversight" with an inflationary money policy is like trying to mash on your brakes with the accelerator floored. All the money will get spent somewhere.

The only Presidential candidate who will address this is Ron Paul. All the other candidates, Democrats and Republicans, are completely bought and paid for by Wall Street. Check out the lists: you'll be shocked, because it's the same firms financing both sides...except Dr. Paul.

http://rabbit-hole-journey.blogspot....-anointed.html

[Tourette Dude]

Funny, I was thinking about this today.

Our 15 years will coincide with the boomers going into old age, which officially started with the first boomer applying for SS a few months ago, an important event only CNBC felt important enough to call a milestone for 15 minutes. Of all the clatter and chatter I read and hear about this subject ("subprime"), all the supposedly "smaht" people never mention this macro event. Think of it - the biggest bulge of the population, the people who have been living for today for the last 50 years, going into the end game, out of shape, meager savings, if at all, in debt with both credit cards and probably paying a pretty sizable mortgage on their biggest asset, because they drained that equity for last years big screen, Range Rover, and Vail/Aruba experience. They're doomed to work hard for the rest of their lives, just to pay for this crap, but they won't be able to, because they'll be job eliminated, or just too damn old, fat and tired to work hard. And now this. Their personal little piggy banks are shuttung down, and the stock market is reacting as it should. Tough times ahead.

I like international funds, and yeah, it would be awesome to have an affordable ocean view condo in Florida for cheap. Bring it on.

You bring up an interesting point. Boomers retiring and add to that a stagnant birth rate ...hmmm....who is going to pay for all those entitlements??.. Immigration. Thats why I think the corporate backed DNC and RNC has ignored the illegal immigration for so long. We allow illegal immigration to depress wages through both supply and the fact that they are being paid under the table. Then once the "problem" becomes too big to manage you allow for amnesty and bring people on to the tax rolls.Wages have been reset at a lower point but the sheer number of new workers brought onto the tax rolls balances out the tax receipts. Immigration is needed and as far as I'm concerned, as long as there are no security issues, immigration should be essentially unlimited. It just needs to be legal. The problem is that wages have already been depressed.

Your right that the refinance piggybank is tapped and the credit market is contracting just as forclosures and inventories are rising. You've been correct the whole time regarding the bubble issue. The current game is an attempt to inflate our way out of it. It's the classic "pushing on a string". They pump money into the system but have no control over where it goes. Its been flooding into commodities for quite a while and banks attempting to increase there reserve balances The ponzi scheme is unraveling as witnessed in the credit markets. The issue is WAY beyond the subprime market now.

As you know, just be patient and deals will be all over the place. Its still too early though, the correction has a long way to go.

[Tourette Dude]

What it calls for is a non-inflationary monetary policy that doesn't create massive, unsustainable asset bubbles. "Market oversight" with an inflationary money policy is like trying to mash on your brakes with the accelerator floored. All the money will get spent somewhere.

The Austrian school view is interesting from a purely economic standpoint. How could the current fiat system transition over to a metal backed/limited supply system? Since the breaking with Bretton Woods and the development of the BlackScholes option pricing model we've had 30+ years of building a "risk" management based derivative financial infrastructure. The growth of money supply is only partly controlled by central banks across the world. Money supply is also "created" through leverage within the OTC derivatives system. During this theoretical transition from fiat to metallic based currency system what would happen to all those derivatives contracts?? The financial system would collapse. In theory from an economic standpoint Minsky had it right. But the current global financial infrastructure is too complex and powerful to revert back to a fixed money supply regime. I'm not defending the current system that is essentially built upon the foundation of moral hazard, I'm just being realistic.

The Austrian school also has a misguided view that the free market will arbitrage inefficiencies out of a system without regulation. You really need to look at the concept of externalities. Greed drives profit, not what is good for society. What's easier, dumping your used motor oil down the drain or driving somewhere to properly dispose of it. Individuals may tend to make the decision to properly dispose of it based on the social good. What happens when the main driver is reducing costs and increasing profit---it gets dumped down the drain! I have yet to see corps scrambling to voluntarily clean up polluted sites, reduce air pollution,reduce dumping waste into water supplies, call for higher CAFÉ standards, allow only safe and effective medications to released and on and on and on.... The list is endless. Externalities are only reduced by forcing the corps to absorb theses cost through regulation

[Spats]

Here's the key to understanding Austrian economists:

They have amazing insights about money and finance that are almost always a) correct and b) much simpler than the crazy crap you have to assume as a Keynesian.

Where they run into trouble is by describing these amazing insights and then jumping to the conclusion "...and therefore an unfettered free market solves all problems." The really cranky ones add to this "...and everyone who disagrees with me is stupid."

In other words, their diagnosis is almost always correct, but their prescriptions do not necessarily follow from their diagnosis. You can have sound money, environmental regulation, and social programs -- you just have to pay for them with taxes instead of by printing money. However, you do have to be very, very careful about what incentives you are offering, and what the effects will actually be versus what you want them to be. (Cue the classic essay "On The Folly Of Rewarding A While Hoping For B."

"Economics for Real People" (Callahan) is a great read, and very easily understandable, especially for people who never made any sense of Econ 101 in school or thought it was useless voodoo (which much of it is). Just keep what I said about Austrians in mind.

As far as "how do we transition out of fiat money", Dr. Paul's position is that we don't abolish the Fed, but simply legalize the use of gold and silver as legal tender (essentially by abolishing "income" taxes on changes in their value relative to the dollar.) This means that you can choose to accept either hard money, Federal Reserve Notes, or both, and we let the market decide who's right.

[Tourette Dude]

In other words, their diagnosis is almost always correct, but their prescriptions do not necessarily follow from their diagnosis. You can have sound money, environmental regulation, and social programs -- you just have to pay for them with taxes instead of by printing money. However, you do have to be very, very careful about what incentives you are offering, and what the effects will actually be versus what you want them to be. (Cue the classic essay "On The Folly Of Rewarding A While Hoping For B."

Does Ron Paul actually believe in a strong regulatory enviroment and social programs or is he actually a libertarian and social conservative?

I'm assuming that the essay "On The Folly Of Rewarding A While Hoping For B. is about about "the law of unintended consequences". Recent ethanol subsidies immediately came to mind. Who needs corn for food anyway. Farmers are also shifting land that was once used to grow soybeans and wheat to corn production leading to further food shortages. Not necessarily in this case, but I wonder how often the "unintended" consequences are actually intended.

As far as "how do we transition out of fiat money", Dr. Paul's position is that we don't abolish the Fed, but simply legalize the use of gold and silver as legal tender (essentially by abolishing "income" taxes on changes in their value relative to the dollar.) This means that you can choose to accept either hard money, Federal Reserve Notes, or both, and we let the market decide who's right.

How would you deal with the paper market in metals. I'm sure your aware of GATA.org and their law suit.

[Spats]

Does Ron Paul actually believe in a strong regulatory enviroment and social programs or is he actually a libertarian and social conservative?

He's a solid and consistent libertarian...for instance, unlike neo-cons, he supports legalization of drugs at the federal level, even though as a devout Christian (and the only mainstream Republican to still be married to his first and only wife) he likely abhors their use.

What would effectively happen under a Ron Paul presidency is that the states would take a much stronger role in regulating their residents and providing social programs as they see fit. (Remember, this country is the "United States", and the Constitution was written with this model in mind.)

California would look a lot different than Arkansas, and I don't think this is a bad thing, seeing as how the blue states (which have all the economic growth) are massively subsidizing the red states at the federal level. Wyoming wants the gubbermint off its back? Great! It's California's money anyway! See how all those Republican farmers and ranchers like it when they've got to pay market rates for their irrigation water and grazing leases...

This wouldn't be entirely laissez-faire, either. For instance, California, New York, and several other states have been trying to raise air quality and CAFE (auto mileage) standards for years now, and since they have so much of the US population, the car manufacturers would essentially have to comply nationally. Why hasn't it happened yet? The Bush EPA has told them they can't pre-empt the looser federal pollution standards!

I'm assuming that the essay "On The Folly Of Rewarding A While Hoping For B. is about about "the law of unintended consequences". Recent ethanol subsidies immediately came to mind. Who needs corn for food anyway.

Yes. It is the law of unintended consequences applied to corporate management.

Under Ron Paul, industrial hemp production would be legal, and hemp produces about 4x the ethanol per acre as corn. Corn ethanol is a creature of Archer Daniels Midland and other big agribusinesses, and their ownership of both the farming supply chain and many Senators. As you rightly point out, it's pork masquerading as clean energy.

How would you deal with the paper market in metals. I'm sure your aware of GATA.org and their law suit.

My thoughts: If people are free to choose their currency, and their currency isn't constantly being devalued by inflation, they can choose whether the risk of allowing their capital to be lent out is worth it or not. Metals as currency would also distribute their ownership dramatically, making it much more difficult to build up huge short positions and derivatives than when everything is in a few bank vaults.

The problem right now is that with a constantly devaluing currency, you need to give your money to Wall Street in order to not lose it to inflation. Then they play with your money, build and sell towers of derivative instruments, take a big cut for themselves, buy their Senators and Congressmen, and perpetuate inflationary policies. It's not a coincidence that real wages in the USA peaked in 1973, just after Nixon took us off the gold standard, and all the economic growth since then has basically accrued to the top 20% of Americans.

[4matic]

I've been curious why mortgage rates haven't been following the market. Hopefully an institution or two steps up soon.. Banks should step up and lwer the Prime too. It's way out of whack at 7.5%:



There has been remarkably little movement in the 30-year fixed over the last month, especially when you compare it to what's been happening to U.S. Treasuries. In the last month, the 30-year fixed has risen as high as 6.34 percent in Bankrate's weekly survey and has fallen to a low of 6.29 percent twice, including this week.

Meanwhile, the yield on the 10-year Treasury note has been falling as investors seize the safe securities so they can sleep soundly. On Oct. 31, the 10-year Treasury yielded 4.4 percent. Three weeks later, it yielded 4.01 percent. That's a decline of 39 basis points. Meanwhile, the 30-year fixed-rate mortgage averaged 6.29 percent on both dates.

A lot of observers think of 10-year Treasuries as a proxy for fixed-rate mortgages: When Treasury yields fall, so do mortgage rates. But that's just a rule of thumb, and it doesn't always work. There is no direct connection between Treasury yields and fixed mortgage rates, and the events of the last month demonstrate that.

Mortgage rates aren't joining Treasuries on their plunge because of the perception of risk. Treasury notes are safe because they are backed by the U.S. government. When you own a Treasury note, you can't lose your principal, even if the government has to print money to pay you back.

But there is risk to owning securities backed by residential mortgages. As lenders and investment banks write down billions of losses related to subprime and jumbo mortgages, investors have become leery of anything having to do with home loans. Investors are taking refuge in the safety of Treasury notes, but they don't see any refuge when they look at mortgage-backed securities. They demand the same yields on mortgage-backed securities that they wanted a month ago, even as Treasury yields have declined. That's why mortgage rates haven't followed.


Bankrate.com Posted: Nov. 21, 2007

[Benny Profane]

Check out Chuck "Tony Soprano" Rizzo in this one. Obviously, proof that markets are local, but, still.....

http://www.nytimes.com/2007/11/25/re...te/25nati.html

"Home prices in the greater Detroit area have fallen by 20 percent, and in many instances more than that, in just a year. Homes that sold for $450,000 in 2006 have typically sold for $360,000 or less in 2007, real estate agents say."

[4matic]

Ten year note hit 3.85% today. With the momentum of thius decline I can see fresh lows below 3%. Fixed mortgage rates are going to fall dramatically.

http://www.marketwatch.com/tools/quo...&freq=1&time=9

[Platinum Pete]

Fixed mortgage rates are going to fall dramatically.

when? I need to make a move.

[4matic]

when? I need to make a move.

It's time to shop around now. Different institutions are adding different risk premium. Market rates are full 1/2 point lower than what would typically be a 15 or 30 year mortgage rate. Even my credit union has added some risk premium.

[comish]

My own experience while shopping for jumbo IO in the last 2 weeks, see recent thread, is that the difference in pricing right now is MASSIVE. For a 10 yr, 0 pt, IO I was seeing anywhere from 6.25% to nearly 8% depending on who you talked to so definitely shop around. Now that obviously is greatly effected by the IO and the Jumbo portion of my situation. If you are looking conforming then I think the difference is a lot less. Its readily apparent many institutions aren't interested in doing Jumbo's or IO's or both thereby effecting their risk premiums and resulting interest rate.

[Spats]

I've been curious why mortgage rates haven't been following the market.

Known as "The Return of Risk Premiums". Also, who wants to write a mortgage in a time of falling home values?

During the last few years, junk yields were, what, 50 bps above prime or something insane like that? Everyone had so much money and was chasing yield so hard that it knocked the risk premium down to nothing. As long as the money supply inflated fast enough to keep asset prices increasing, no one got in trouble...but finally, having exhausted the entire population of the USA, including illegal immigrants and the unemployed, we've absolutely run out of borrowers to keep increasing the money supply, causing asset values to top out and start falling. Now the entire house of cards is collapsing.

[fez]

here's an interesting article http://www.bloomberg.com/apps/news?p...qHw&refer=home

basically it puts part of the blame on the mortgage defaults on the banks themselves. the credit card divisions got bankruptcy reform legislation pushed through a couple years ago that makes it hard to walk away from CC debt in bankruptcy. so instead people are walking away from their mortgages.

Bankruptcy Law Backfires as Foreclosures Offset Gains


Washington Mutual Inc. got what it wanted in 2005: A revised bankruptcy code that no longer lets people walk away from credit card bills.
The largest U.S. savings and loan didn't count on a housing recession. The new bankruptcy laws are helping drive foreclosures to a record as homeowners default on mortgages and struggle to pay credit card debts that might have been wiped out under the old code, said Jay Westbrook, a professor of business law at the University of Texas Law School in Austin and a former adviser to the International Monetary Fund and the World Bank.
``Be careful what you wish for,'' Westbrook said. ``They wanted to make sure that people kept paying their credit cards, and what they're getting is more foreclosures.''
Washington Mutual, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. spent $25 million in 2004 and 2005 lobbying for a legislative agenda that included changes in bankruptcy laws to protect credit card profits, according to the Center for Responsive Politics, a non-partisan Washington group that tracks political donations.
The banks are still paying for that decision. The surge in foreclosures has cut the value of securities backed by mortgages and led to more than $40 billion of writedowns for U.S. financial institutions. It also reached to the top echelons of the financial services industry.
Prince Exits
Citigroup Chief Executive Officer Charles O. ``Chuck'' Prince III stepped down this week after the country's biggest bank by assets said it may have $11 billion of writedowns on top of more than $6 billion in the third quarter. Stan O'Neal was ousted as CEO of Merrill Lynch & Co., the world's largest brokerage, after an $8.4 billion writedown. Both firms are based in New York.
Morgan Stanley, the second-biggest securities firm, said in a statement today that subprime losses will cut fourth-quarter earnings by $2.5 billion. The New York-based bank said it lost $3.7 billion in the two months through Oct. 31 as prices for securities linked with home loans to risky borrowers sank further than traders expected.
Even as losses have mounted, banks have seen their credit card businesses improve. The amount of money owed on U.S. credit cards with payments more than 30 days late fell to $7.04 billion in the second quarter from $8.37 billion two years earlier, according to data compiled by Federal Deposit Insurance Corp.
In the same period, the dollar volume of repossessed homes owned by insured banks doubled to $4.2 billion, the federal agency said. New foreclosures rose to a record in the second quarter, led by defaults in subprime adjustable-rate mortgages, according to the Mortgage Bankers Association in Washington.
`Let the House Go'
People are putting their credit card payments ahead of their mortgages, said Richard Fairbank, chief executive officer of Capital One Financial Corp., the largest independent U.S. credit card issuer. Of customers who are at least three months late on their mortgage payments, 70 percent are current on their credit cards, he said.
``What we conclude is that people are saying, `Honey, let the house go,''' but keep the cards, Fairbank said Nov. 5 at a conference in New York sponsored by Lehman Brothers Holdings Inc.
The new bankruptcy code makes it harder for debtors to qualify for Chapter 7, the section that erases non-mortgage debt. It shifted people who get paychecks higher than the median income for their area to Chapter 13, giving them up to five years to pay off non-housing creditors.
No Help Left
The court-ordered payment plans fail to account for subprime loans with adjustable rates that can reset as often as every six months, said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. Two-thirds of debtors won't be able to complete their payback plans, according to the Center for Responsible Lending.
``We have people walking away from homes because they can't afford them even post bankruptcy,'' said Sommer, a Philadelphia- based bankruptcy attorney. ``Their mortgage rates are resetting at levels that are completely unaffordable, and there's nothing the bankruptcy process can do for them as it now stands.''
Four million subprime borrowers with limited or tainted credit histories will see their mortgage bills increase by an average 40 percent in the next 18 months, according to the National Association of Consumer Advocates in Washington. About 1.45 million of those will end up in foreclosure by the end of 2008, said Mark Zandi, chief economist at Moody's Economy.com, a research firm and unit of Moody's Corp. in New York.
Lenders began the process of seizing properties on 0.65 percent of U.S. mortgages in the second quarter, a record in a quarterly Mortgage Bankers study that goes back 35 years. The percentage of subprime borrowers making late payments increased to 14.82, a five-year high, from 13.77.
Bankruptcies Increase
Personal bankruptcies rose 48 percent to 391,105 in the first half of 2007 from a year earlier and Chapter 13 filings accounted for more than one-third of those, according to the American Bankruptcy Institute. In the first half of 2005, they were just 24 percent of the total.
Bad mortgages slashed Washington Mutual's profit by 72 percent in the third quarter from a year earlier, the Seattle-based thrift said Oct. 17. Income from credit card interest rose 8.8 percent to $689 million in the period, helping to offset a loss the bank warned on Oct. 5 would be 75 percent.
Washington Mutual shares tumbled the most in 20 years yesterday after New York Attorney General Andrew Cuomo said the thrift had pressured real estate appraisers to assign inflated values to properties. Its dividend yield fell to 11 percent and the company traded at 0.74 price-to-book value.
Citigroup's third-quarter earnings fell 57 percent on mortgage losses. Bank of America stopped so-called warehouse lending to mortgage brokers after its profit declined 32 percent in the same period.
`Unintended Consequence'
JPMorgan reported profit growth of 2.3 percent in the quarter, the smallest in more than two years, after reducing the value of leveraged loans and collateralized debt obligations, investment packages of mortgages, by $1.64 billion.
Washington Mutual spokeswoman Libby Hutchinson in Seattle, JPMorgan spokesman Thomas Kelly in New York and Bank of America spokesman Terry Francisco in Charlotte, North Carolina, declined to comment on the bankruptcy law.
``The law had an unintended consequence of taking away a relief valve that mortgage borrowers used to have,'' said Rod Dubitsky, head of asset-backed research for Credit Suisse Holdings USA Inc. in New York. ``It's bad for the mortgage borrowers and bad for subprime investors because it means more losses.''
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was the biggest overhaul to the code in more than a quarter of a century. The old law, the Bankruptcy Reform Act of 1978 that was signed by President Jimmy Carter, had loosened requirements for debt forgiveness.
Lobbying Effort
Financial companies began a coordinated lobbying campaign for bankruptcy reform in 1998 when the American Financial Services Association, a trade group representing credit card companies, joined the American Bankers Association to form the National Consumer Bankruptcy Coalition.
Campaign contributions from the coalition and its members totaled more than $8.2 million during the 2004 election that gave Bush his second term in office. Two-thirds of the donations were given to Republicans who supported the bankruptcy changes, according to the Center for Responsive Politics.
The group, later renamed the Coalition for Responsible Bankruptcy Laws, has since disbanded. Its members included Washington Mutual, JPMorgan, Bank of America, Citigroup, MasterCard Inc., and Morgan Stanley.
Ford Motor Co., General Motors and DaimlerChrysler also were members. They won provisions in the new code that changed the way car loans are treated in bankruptcy.
Reform the Reform
Congress may soon take action to ``reform the bankruptcy reform,'' Zandi said. The House Judiciary Committee is working on legislation to let bankruptcy judges restructure home loans by lowering interest rates and reducing mortgage balances to reflect current market value.
Banks including Washington Mutual, Citigroup and Wells Fargo & Co. sent a letter to the committee opposing the change, saying such restructurings should be done privately.
Countrywide Financial Corp., the largest U.S. lender, said last month that it will modify $16 billion worth of adjustable-rate mortgages. Washington Mutual said in April that it will spend $2 billion giving discounted rates to help customers with subprime loans refinance at better terms.
So far, most lenders have been reluctant to change loan agreements. About 1 percent of mortgages that reset in January, April and July were modified, according to a Sept. 21 Moody's Investors Service report that surveyed 16 subprime lenders that account for 80 percent of the market.
Congress probably will approve at least a limited measure to permit loan modifications, said Westbrook, the University of Texas law professor.
``They are going to have to figure out some way to address the problem,'' Westbrook said. ``I don't think our economy or our consciences can handle the number of foreclosures we'll see if they do nothing.''

[4matic]

http://article.nationalreview.com/?q...BkMzA4OGI1ZGM=


Ben Stein said it well this past Saturday on Fox’s Cavuto on Business: The sub-prime mortgage problem is grossly overstated; the sector is just too small.

Smart guy, Ben. Ferris Bueller never should have skipped school that day — he would have learned economics from a master. (Stein, for those who might have missed it, played Bueller’s (Matthew Broderick’s) high-school teacher in the pop hit, Ferris Bueller’s Day Off.)

But let’s switch movie metaphors for a moment. In Rain Man, autistic savant Raymond Babbitt (Dustin Hoffman) is asked two economics questions by Charlie, his money-loving younger brother (Tom Cruise).

Charlie: Raymond, how much does a candy bar cost?

Raymond: About a hundred dollars.

Charlie: Raymond, how much does an automobile cost?

Raymond: About a hundred dollars.

The questions are designed to reveal a systematic flaw in the way Raymond looks at the world. For all his skill at counting the minutia in life (like toothpicks), he just doesn’t understand the issue of scale. He doesn’t have an inherent sense of how big things are.

I’ve thought a lot about Rain Man over the past few months as I’ve been following the press coverage of the sub-prime mortgage crisis. The story’s been on the front page of the Wall Street Journal nearly every day. Pretty much every show on CNBC — except Kudlow & Co. and one or two others — has been obsessed with the topic. Yet no one seems to be asking the Rain Man question: “How big is the sub-prime mortgage market?”

And the answer, as Ben Stein makes clear, is not very big at all.

Currently there are about 44 million mortgages in the U.S., and less than 14 percent of them are sub-prime. And only about 13 percent of those are late on payments, with the majority of late payers working through their problems with the banks.

So, all in all, when you work through the details and get down to the number that really matters, only about 0.6 percent of U.S. mortgages are currently in foreclosure. That’s up a hair from roughly 0.5 percent last year. That’s it.

Actually, that’s not it. Things are actually better than the numbers suggest, since sub-prime-mortgage homes are less expensive than prime-mortgage homes. This makes sense. Wealthier people, generally, can afford costlier homes than less-wealthy people. The recent sub-prime surge brought large numbers of moderate-income families into the home-ownership market, and their houses are less expensive than most. Therefore, the dollar impact of the sub-prime default is smaller than if it were a prime default.

With approximately 254,000 mortgages in foreclosure at the moment — up from roughly 219,000 last year — the sub-prime meltdown has given us an increase of 35,000 mortgage foreclosures over the last quarter. Since the average sub-prime mortgage clocks in at almost exactly $200,000, we’re looking at an approximate $7 billion increase in foreclosed value in the first quarter of this year.

Raymond, how big is household net worth in the U.S.? About a hundred dollars?

Actually, it’s a lot bigger than that — about $53 trillion. In other words, the recent increase in sub-prime foreclosures amounts to 0.01 percent of net U.S. household wealth.

That’s toothpicks, Raymond.

[rideit]

However, that ~7 billion doesn't exist in a vacuum...there is a HUGE ripple effect that runs both up and down the economy when you have a fast default rate like that.
I don't think anyone disputes that.

The butterfly effect, writ in economics.

Hell, this subprime nonsense is bankrupting the savings of small towns in Norway, whose mutual fund managers banked on sub-prime short speculations. (as an example) one town recently lost 64 million.

Odd world, anymore...

[skier666]

I agree, the media has attributed to the panic, which created a waveform throughout the world financial markets. Granted, the AAA rating was pretty ridiculous considering the mortgage securities included too many mortgages to people who really could not afford their home. But, at the end of the day, if I worked for the banks that owned these mortgages, I'd try, god forbid, to reorganize their loan, and have them keep making interest payments (all profit). Although, the banks won't make as much money, its better than foreclosing on a house that may be incredibly difficult to sell, and the long process of foreclosing the property. This would help everyone out, keeps the property taxes being paid, and allows people to buy xmas presents. Granted, its not really fair to the 30 year fixed person (myself) but it'd be better for the economy in the long run. In any case, the apartment rental market has been extremely strong since this CATASTROPHE has taken place.

[Benny Profane]

I think Prof. Stein was just trying to limit his comments to the housing market itself, not the disaster that the banks and credit markets are experiencing by playing musical chairs with these bad loans worldwide. Even Florida schoolteachers are going to have an iffy Xmas because of the scare :
http://www.nytimes.com/2007/12/05/bu.../05invest.html

"Florida’s governments in recent weeks have withdrawn billions of dollars from the fund because of concern over investments linked to subprime mortgages. It is unclear what losses the fund may sustain."

And, I think Paulson and the banks are trying to head off at the pass the whole home equity loan problem that will be with us longer, now that millions more Americans, those "wealthy" ones you speak of, have borrowed on assets that are no longer worth what they were 6-12 months ago, and nobody really knows how low that market will drop. That's a mortgage, too, and, really, why pay a 250,000 second mortgage when the value of your MacMansion has gone down 30%. Walk away, gives the keys to the bank (or whomever is holding the loan - that may take some real detective work to figure out) but keep on paying the credit cards. The new bankruptcy law makes you do that, but homes are suddenly dispensable junk.

More Stein from this Sunday's Times:http://www.nytimes.com/2007/12/02/bu...e7f690&ei=5070

Here he takes it much more seriously, and spins quite a little conspiracy theory. Personally, I think this is old news for the real insiders. Those greedy fuckers are off driving the price of oil near $100 a barrel while we sleep.

[rideit]

Here he takes it much more seriously, and spins quite a little conspiracy theory. Personally, I think this is old news for the real insiders. Those greedy fuckers are off driving the price of oil near $100 a barrel while we sleep.

However, it was announced today that China is sinking 5 billion in 'exploration' projects in Kuwait..(exploration as to how feasably they might usurp US oil contracts, perhaps?)
In other words, all the doom and gloom china/India projections ARE coming to light...and face it:
Increased demand=higher price, period.
Regardless o what the 'insiders' might like to think that they can control.

[Stu Gotz]

I think Prof. Stein was just trying to limit his comments to the housing market itself, not the disaster that the banks and credit markets are experiencing by playing musical chairs with these bad loans worldwide.

That's like saying I wouldn't be an alcoholic if I hadn't had that last six pack. Sub-prime foreclosures are just one part of the story of the trainwreck. Stein is is arguing his point like he is still an economics student in 1960, when local banks held the paper.



The National Reviews in-house economists are Larry Kudlow and Don Luskin, who are economists like Adam Sandler is a singer.

[Toadman]

http://article.nationalreview.com/?q...BkMzA4OGI1ZGM=



Currently there are about 44 million mortgages in the U.S., and less than 14 percent of them are sub-prime. And only about 13 percent of those are late on payments, with the majority of late payers working through their problems with the banks.

Actually the majority of late payors are having a massive problem working through there mortgage deafault problems. In fact less than 1% of mortgages in default have been "worked through" with lenders. There's over $1.2 trillion worth of sub-prime ARM's set to reset over the next 3 years. However, this proposal should help out those folks that were irresponsible...
http://www.cnbc.com/id/22113159/for/cnbc

[woodstocksez]

... but it'd be better for the economy in the long run.

Really? Conditioning people to expect that irresponsible risky behavior won't bear consequences is better in the long run? No, it's "better" in the short run and that's why it will happen.