It is amazing that those who have been wrong predicting the housing collapse are now the folks guiding policy. As I discussed in the last article regarding Alt-A loans and the California Foreclosure Prevention Act, all that is being done is the state is institutionalizing option ARMs which is flat out insanity and would […]
It is amazing that those who have been wrong predicting the housing collapse are now the folks guiding policy. As I discussed in the last article regarding Alt-A loans and the California Foreclosure Prevention Act, all that is being done is the state is institutionalizing option ARMs which is flat out insanity and would make anyone feel like they took crazy pills. Why is this nuts? The so-called modifications include freezing the interest rate, negative amortization, 40-year terms, and gimmicky teaser rates. However, you can forget about lenders knocking down the principal balance since this will actually eat into their delusional profits (and would most likely make them explode like a piñata).
I love how some people to fit their own agenda (i.e., those in the real estate industry or deeply connected to it) have now taken it on their behalf to use our argument about the coming Alt-A tsunami for further government bailouts! Dear readers, as I warned you back before TARP became the utter monstrosity that it is for the crony bankers, this kind of thinking will lead to more taxpayer waste. I recently saw this argument floated but want to address it as quickly as possible:
“(LA Times) One proposal for a debt-forgiveness program was floated this month by the Milken Institute in Santa Monica. The plan, authored by institute President Michael Klowden and regional-economics director Ross DeVol, would refinance existing mortgages of underwater homeowners with new loans from the government.
Klowden and DeVol call it the “homeowner principal forgiveness vesting plan.” Here’s how it would work:
Say an owner’s mortgage is worth $400,000 but his house is valued at $300,000. The government would refinance the $400,000 loan with two new loans. Fannie Mae, the mortgage financier now under government control, would provide a first loan for the market value of the house, in this case $300,000. The Treasury would issue the second loan, in this case for $100,000.”
This is a bad idea. Since some people are misconstruing what many of us who have been warning about with the Alt-A and option ARM tsunami let me be clear about my position:
These homes should be taken back in foreclosure. Banks must eat their losses. If it is game over for them, so be it. We have a healthy rental market. People won’t be out on the streets. To take a loan from an irresponsible gambler (aka lender) and convert it to a government loan is absolute insanity. It is a scam. A swindle. I bet many of you are seething and probably have the desire to punch your monitor now that you know how this housing casino works. But guess what? This plan is much more of a crony bailout:
“They estimate that the cost to Treasury (and thus to taxpayers) of saving 1.5 million homes from foreclosure or abandonment with this plan would be between $75 billion and $100 billion. That assumes the government wouldn’t jeopardize the original lenders’ balance sheets by forcing them to share in the cost via haircuts on their loans.”
Oh really?! We wouldn’t want to jeopardize all those crony banks and Wall Street right? So let me get this straight. The purpose of this plan is to:
(1) Bailout lenders who made irresponsible loans?
(2) Give over leveraged homeowners and speculators an easy way out?
(3) Put the toxic waste onto the taxpayers’ bill?
(4) Expect lenders to walk away with no serious repercussions?
I know many of you are against the prospect of nationalization when I tossed it out many months ago. These kind of “plans” and additional workouts are actually going to cost us more than simply going in with a strong arm and gutting the system. That ship alas has sailed politically so fear not. But take a look at those banking and Wall Street stocks. Guess who won? It wasn’t the average American. However, these are the consequences of allowing the corrupt banking system to guide bailout policy. Seriously folks, here in California many people should lose their homes and become renters. Enough with the renting stigma and the notion that everyone should own a home. If you make your payment and are prudent then you have nothing to worry about. Yet if you over leveraged yourself and took a HELOC to put in a pool with faux rocks and a waterfall or bought at the peak then why should the government bail you and your lender out?
Some people are making the comparison to the S&L crisis and the Home Owners’ Loan Corporations during the Great Depression. Here are some facts about the HOLC:
-At the peak it was massive employing some 20,000 people
-HOLC received 1.9 million applications for home loans with 1 million being approved
Even with favorable terms and conditions, 20 percent of these loans failed! With that kind of rate most banks would sink. And by the way, the HOLC did file 200,000 foreclosure auctions and this experiment never revived mortgage lending which remained anemic for another decade. Why? Because the nation was in something called the Great Depression! Our housing obsession started nearly a century ago. If you have a weak economy chances are, you are going to see problems with housing. The solution isn’t to give more loans to people who can’t afford them. The solution is to focus on creating a sustainable economy with a laser focus on job creation.
By the way, as crazy as the housing market was during the Great Depression and the S&L crisis, we have never seen the amount of toxic garbage like Alt-A and subprime loans like we have in this market. So those that use those past experiences have no reference because we have never scorched the Earth with so much toxic waste that we once called “creative financing.”
The ideas being proposed are as bad as the loans that got us here in the first place. If you want an idea of how this is going to play out you should really examine what Japan went through with their double bubbles just like we did. In fact, Japan has a tsunami of their own giving us a Scrooge like glimpse into our Ghost of Christmas Yet to Come if we don’t change course:
“(UK Times) A housing loan default problem is looming and likely to begin in the next few weeks. It amounts to the detonation of a ten-year time bomb that, researchers at the Tokyo Foundation say, started ticking around 1999 in the immediate aftermath of the Asian financial meltdown. This is the result of flawed government policy, whereby the state housing loan agency offered mortgages to families that they knew were unable to pay. According to the think-tank, those loans were made on the assumption that the traditional staples of Japanese corporate life - seniority-based pay increases, constantly rising bonuses and lifetime employment - would remain as fixtures.
The impending meltdown, which the Tokyo Foundation believes could affect some hundreds of thousands of households, will be focused initially on the country’s industrial heartlands, where corporate bankruptcy rates are rising. The residential zones around Toyota’s home territory of Nagoya could become ghost towns, Kazuo Ishikawa, the think-tank’s senior research fellow, said.”
Can things get any clearer? With Americans losing some $13.87 trillion in household wealth, we have seen our own lost decade yet people keep refusing to examine the lessons of Japan. Now Japan is seeing their own horrific policies of propping up a failed banking system. No bank should be too big to fail. And foreclosures are necessary to reach a bottom quicker. The CFPA for example is merely a kicking of the can down the road policy. Don’t you find it ironic that whenever cram-down legislation is introduced into Congress the banking industry shoots it down but once the government is involved in sucking up those toxic loans, the lenders come out of the woodwork? Cram-downs don’t work when lenders need to eat the principal but when they use the taxpayers’ dime, then they are all for it. The banking industry is still operating under similar terms that caused the bubble and we keep funneling money into this sector. Are people not outraged anymore? I remember back only in September of 2008 people were calling up their representatives and mounting quixotic battles for a few billion dollars in proposals. Now, we are days away from the worthless public-private investment program and the public seems in a daze.
There is now an industry leaching on those in financial trouble:
“(LA Times) David Berenbaum, vice president of the National Community Reinvestment Coalition, called on newspapers to stop running ads by “for-profit racketeers who charge on average $2,900 to consumers for poor advice.” Examples he cited included counsel to not pay the mortgage or contact the service provider. HUD-approved counselors will help consumers for free.”
This is another problem with running programs like the CFPA or any government sponsored help. You will have these shady operators pop up to scam folks and take any money left from those who really need a call that goes something like, “unfortunately, you are insolvent. Here is what is needed to file for foreclosure.” It is that simple financially but I know emotionally, it is difficult. But don’t you think it will make it harder when you prolong the suffering with gimmicks and scams? If we kept a simple message and didn’t compound this problem further, we’d have a tough couple of years but now we are risking the fiscal sanity of our country because the banking system has our government in some form of deep capture.
Think for a few minutes. At the end of the day, someone is going to have to realize those losses on all these toxic mortgages. The only question is who is going to take the brunt of the fall? Many borrowers are losing their homes yet somehow, the big banking centers are still up and running and supposedly turned a first quarter profit thanks to the taxpayer bailout.
These bailouts have compounded the mess. In fact, it has clouded sound judgment. I think most Americans would have been even okay with say a bailout that went like, “the median home price in America is roughly $150,000. If you have a mortgage below that, we can take a look. Anything above that and sorry.” Instead, we are trying to game the system to unload the gambling happy California and mega-mortgages to the rest of the country. Need I remind you that the state has 643,000 Alt-A mortgages with an average balance of $420,000+? Sound policy involves foreclosure but you’ll never hear that from the pundits since they have their hand too deep in the bailout cookie jar.
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The Continued Crony Banking and Housing Industry Bailout: Foreclosure Scams, Japan Subprime Loans Coming Back, and Generally Bad Advice for American Consumers.
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Academics, being a privileged and rarefied lot, almost by second nature consistently look down the field. 
There are two competing positions on consumer sentiment right now. One is that it turned south last week, as people worried about their jobs - always a bad sign for spending. The other is that consumer sentiment didn’t crap out in July: it fizzled in May. So, it’s not a question of whether consumers aren’t confident in the U.S. economic machine, 
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