I hope you are checking out the great posts over at The Housing Chronicles Blog.
Prepare for higher taxes! Obama unveils budget blueprint.
What’s really going on with the economy?
Obama’s mortgage plan: is it fair to taxpayers?
December — George Winston
This recession is wearing on people. We are in the depth of winter in our economic cycle. It is cold out there. I hope you have a stable job and an affordable housing payment to shelter you from the storm…
I am pleased to announce that we are scheduled to have another IHB Block Party on Monday, March 9, 2009, at J.T. Schmids at the District.
I found this on another blog (not a housing blog) this morning:
“A reader writes:
“I work as a credit analyst for a big bank. I work in a call center and take calls from people who would like to lower their interest rates or increase their credit card limits. Yesterday, I talked to a man in California who for the past five years worked as a “sandwich artist” at Subway. His salary–and his only source of income? $18,000 per year. His recently foreclosed mortgage? $380,000.
“The mortgage was individual, meaning no one else was legally or, more importantly, financially responsible for it. He had no down payment for the mortgage. The down payment was an additional $70,000 mortgage loan, also foreclosed. I assume he had someone living with him, who was able to help with the interest-only payments at least for a while until they reset to include the principal. But in the end he was given a total mortgage 25 times his income with no down payment.
“Did he lie about his income and not provide documentation? Possibly. But the man was immediately frank with me about how much he made and what he did for a living. So assuming he was honest with the mortgage lender–who gave him the loan–as he was with me, their recklessness and greed become clear.”
thanks. thats hilarious. its nearly as good as the $14k/yr guy getting a $720k loan
Warren Buffet’s letter is out today. He owns Clayton Homes, one of the largest distributors of manufactured homes (trailers)…his loan portfolio is fine and here are his words of wisdom We really should nationalize Citi/BofA and put him in charge. On the other hand maybe Warren is a regular reader of IHB…
[I]n an eerie rerun of that disaster, the same mistakes were repeated with conventional homes in the 2004-07 period: Lenders happily made loans that borrowers couldn’t repay out of their incomes, and borrowers just as happily signed up to meet those payments. Both parties counted on “house-price appreciation” to make this otherwise impossible arrangement work. … The consequences of this behavior are now reverberating through every corner of our economy.
Clayton’s 198,888 borrowers, however, have continued to pay normally throughout the housing crash … This is not because these borrowers are unusually creditworthy … Why are our borrowers – characteristically people with modest incomes and far-from-great credit scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices.
Just as important is what our borrowers did not do. They did not count on making their loan payments by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their income. And they did not assume that they could always sell their home at a profit if their mortgage payments became onerous. Jimmy Stewart would have loved these folks.
…
Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.
…
The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income
should be carefully verified.
Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.
I am sorry, but if home prices were not so unrealistically high, nobody would have to stoop so low as to seek out a liar loan. I am sick of this all being laid upon the feet of people who have been finaincially ruined and left homeless to boot. The greed was that of the lenders and the builders. Certainly the taxes collected from these overpriced houses was a boon to the authorities. People could have moved to Santa Ana, this is true. And I suppose they will start doing that: you can get a house there for $130,000.
Home prices couldn’t have gotten so high without the liar loans, appraiser fraud, and other forms of irresponsible underwriting.
There are always people willing to borrow money that they are unsure of their ability to repay. It’s up to the lenders to have a reasonable certainty of repayment.
What the lender does is charge more interest to cover the increased risk. There is a certain amount of defaults that is priced into the loan. Nobody has a crystal ball. Yet the mass market survives, still depending on all of those little people spending money, as it always has done.
When you look at the big picture, this had little to do with the people making payments on the loans. For starters, the world was awash with cash. Sovereign funds, and banks buying CDOs. It goes downhill from there.
Home prices were distorted because:
(a) Unrealistic demand was created with cheap money.
(b) Unrealistic demand forced home prices upwards.
Historically, the price of homes is in balanced with demand. Ie: buyers and sellers reach a balance. The bubble distorted that.
Why?
Banks made money
Lenders made money
Builders made money
The RE industry made money
Democrats in Congress were happy about the expansion of home ownership (*)
Buyers didn’t care about the costs, only the monthly payment -and often just the teaser payment.
(*) Did you see Greenspan’s interview about this on the MSNBC show?
The story that acute observer John shared is so telling about these times.
The depth of this economic trouble we are all in has found it’s foundation in the everyday life of everday people, it is not the exclusive territory of the rich and wanna be rich although they occupy a large part of it. The stunning rise and fall in values could only be accomplished by including everyone.
And the comments that acute observer LC wrote this morning also tell us something about the nature of the “deal”.
This is not about one group or another being blamed, it is part of the total group being held accountable for the actions of wanting and taking what they thought was rightfully theirs regardless of consequences.
Christopher Thornberg in subject article states:
“In short, if we are going to spend taxpayer money, I would suggest that we use it not to help people who spent beyond their means to keep homes they don’t deserve, but to help those prudent families take advantage of falling prices by buying empty units.”
The way to help the prudent families is to NOT assist them with a home purchase, as the incentive always gets built into the price of a home – inlflating it (again) to the benefit of the seller.
To keep incentives from raising overall prices, they have to be either temporary, limited to certain people or properties, or both.
For example, if a special program applied only to vacant foreclosed homes, it would have only a modest impact on others. If low interest rate financing only lasted for 90 days, it might pull some demand forward.
There is a very substantial question about whether prudent families should be buying at all now in many parts of the country, given how much more prices will fall. If there was an incentive for them to rent vacant units, maybe that would be better.
If you’re feeling daring, and willing to put a lot of taxpayer money at risk, you might consider guaranteeing them against a market value loss of greater than X% on newly purchased homes. In areas where prices are approaching rental parity, you would get some prudent takers.
Christopher Thornberg in subject article states:
“And if we really wish to not harm those who may have made a bad choice, how about another basic change: If they allow themselves to be foreclosed on quickly and efficiently, let’s not allow any black marks on their credit records. Then they can start fresh and perhaps go buy one of those foreclosed units themselves.”
You can’t have it both ways: If the people who made bad choices are helped, then the people who made good choices are penalized.
Well, people who already own homes do have a series of choices. They can make things better or worse for themselves or others. For example, if they do a short sale and treat the property well while the process is going through, the property will be worth more. The landscaping won’t die. It is less likely to gutted or vandalized.
Quick foreclosure is not necessarily the most efficient way to get a property from an owner who can’t afford it to a new owner who hopefully can. The most efficient way minimizes damage, the time it is vacant, and the time when no one is paying even part of the mortgage.
Here is an alternate version which I think might work well. 1. A borrower contacts a lender and says “There’s no way I’ll be able to keep this house”. They are way over their heads, and the home is clearly not worth the loan value. 2. The lender continues to ask for a modest monthly payment. It might only be 1/3 of the mortgage payment, but living somewhere for free does odd things to people, especially others who are actually paying their mortgages on time. Living somewhere for free also gives incentives to the residents to be uncooperative, scare off potential buyers, etc. 3. The home is up for sale immediately, and the lender sets a reasonable price. 4. Hopefully the home sells quickly. 5. The lender and/or realtor verifies that the former owner is gone and there is no unusual damage or missing items. 5. The lender does something which gives a much more modest ding to the former owner’s credit than foreclosure. For example, they report 90 days past due payment. Even better, the credit rating agencies come up with a new category with a lower penalty than foreclosure. It would be something like “cooperative short sale” and would be moderately worse than 90 days past due, but nowhere near as bad as foreclosure.
Otherwise, you get a lot of severely trashed homes, missing pipes and appliances, dead landscaping, breakins, people living for free in a home for over a year, etc.
I know of two case without much damage to credit — restriction on buy a new property for 2 years, but still can borrow for car/truck. One was 100% purchase, live in house for 6 month and left key for bank. Other was short sale and bring some money to the table.
The credit crisis is caused by separating the retail from the wholesalers (final investors). The retailer has no vested interest in the borrowers paying back — they actually can make more if the borrowers are late or foreclosed but extra fees. Wall Street with the Demo and Repub. have really messed up with overpriced assess or in really liabilities. They profited for making the mess, sold the mess to public companies and pensions, and now are getting bailouts to profit from untangling the mess.
Retail lending is still acting in their own interest. 20% down and borrow more than 4X income. Govt. wants nothing down on loan modification (refinancing) and up to 6X income with special interest and 40 year plus loans (now a recourse loan).
Welcome to a brave new world and the new world order.
Why bother paying a mortgage when you can live there for FREE? And get Gummint Gravy to boot?
“Hey, Diddle dee dee —
The Welfare life for ME!”
NAR economists doing stand up comedy for a few extra bucks:
http://www.lvrj.com/business/40210172.html
Thanks Cosmo
Comedy is everywhere these days. I just had to look at the headline of your link and I started laughing.
We now have another crisis and that is one of confidence in our “experts/executives. We have for years relied on many to clarify and guide us as we are incapable of guiding ourselves. Well I for one am so glad we had competent people at the wheel, for had we not just think where we would be.
Yes that’s right, without joke articles to give us a good laugh.
Daniel Gross has a great excerpt from his new book in Newsweek:
Reining In Bubbles So They Won’t Pop