16 thoughts on “IHB News 1-2-2010”

1. IrvineRenter January 2, 2010 at 7:18 pm

   Examiner Editorial:President plans to reinflate housing bubble

   SAN FRANCISCO — Has President Barack Obama learned nothing from the collapse of Fannie Mae and Freddie Mac, the government-guaranteed mortgage giants? Has he learned nothing from the broader collapse of the housing market, caused in large part by the rotten mortgage securities that these two firms churned out and sold to investors during the past decade?

   Instead of learning from those sorry spectacles, Obama has bought into his own false narrative about some imaginary deregulatory action causing the economic collapse of 2008. Hence his baffling decision, cleverly buried in the Christmas Eve news dump from the White House communications office, to remove the $400 billion cap on federal loan guarantees for Fannie and Freddie.

   Obama’s decision is particularly disturbing for two reasons. First, taxpayers already sunk $111 billion into the Fannie-Freddie bailout in just the past few months. The removal of the $400 billion cap suggests that things are about to worsen considerably. Second, it was precisely such government guarantees that caused the housing bubble and economic collapse in the first place.

   In 1999, when Fannie Mae initially began securitizing subprime mortgages in a pilot program, AEI’s Peter Wallison predicted in the pages of The New York Times that a massive bailout would eventually be necessary. Wallison’s warning was ignored by
   President Bill Clinton and the Republican-controlled Congress, which together allowed the pilot program to expand year after year.

   The process continued under President George W. Bush, with loan standards being steadily lowered by Fannie and Freddie in their effort to give 55 percent of their mortgages to families at or below the median income level. The economic carnage of politically motivated mortgages surrounds us now.

   Today, Wallison points out that nearly two-thirds of the nation’s subprime and otherwise bad loans were created, securitized, backed by and/or required by various programs within the U.S. government, including Fannie and Freddie, the Federal Housing Administration, Ginnie Mae and the Community Reinvestment Act. Ten million of these 17 million dicey mortgages — or about 40 percent of the nation’s subprime and otherwise low-grade mortgages — were either owned or securitized by Fannie and Freddie when they collapsed last year.

   That Obama would now give these two firms a blank check is incomprehensible. Taxpayers got another thumb in the eye when Fannie and Freddie chose the same Christmas news dump to announce $42 million in bonuses for 12 top executives — obviously for their excellent work last year as they drove the ship into
   the iceberg.

   Keep that one in mind the next time you hear Obama feign outrage about Wall Street bonuses.
2. IrvineRenter January 2, 2010 at 7:32 pm

   Great article on Las Vegas:

   A look back at the naughts

   Simple logic

   This wouldn’t — couldn’t — go on forever. At some point, Americans would hit their limits and the growth of tourism would slow, and we wouldn’t need so many construction workers to build resorts, and then we wouldn’t need so many construction workers to build those houses for the first construction workers.

   Once we didn’t need those construction workers, they would be laid off and stop making mortgage payments on their homes. And the sell-off would begin. Throw in all the subprime loans that borrowers couldn’t pay to begin with and you’d get a fire sale. Welcome to 2007.

   It’s simple logic, really. Any college freshman who got suckered into a pyramid scheme could explain the illogical underpinnings of it all. It was an economic house built without a foundation on a sandy desert hillside. And there it goes, into the wash.

   Sure, we had the resorts, and the wealth they created was real, but the Strip was living on borrowed time, larded with debt, a bad recession away from near collapse and in some cases, bankruptcy.

   “A growth-addicted economy produced phony prosperity,” says Hugh Jackson, proprietor of the Las Vegas Gleaner blog and a policy consultant to the Progressive Leadership Alliance of Nevada, a liberal advocacy group.

   Phony. Like the happiness of a drug.

   This isn’t to say that the decade didn’t begin with hopeful signals — low unemployment and rising wages, and the tax revenue needed to improve schools, health care and social services. The Strip kept attracting more customers and building more hotel rooms to house them.

   But the 9/11 terrorist attacks should have provided a clear warning that a dip in tourism could pummel the city. When tourism quickly resumed, however, that warning went unheeded.

   Plus, debt was accumulating, in households here and among potential customers around the world, and on corporate balance sheets.

   It should have been a portentous time, a ripe time for Cassandras.

   “The decade began with a facade,” Jackson says of those go-go years.

   A facade. Soon it was a Potemkin village of steel and stucco, massage parlors and pawn shops.
3. OrangeRenter January 2, 2010 at 10:10 pm

   Whenever a post about Option Arms appears, I tend to post something in a attempt to explain how hideous these loans really are, and the impending doomsday.

   Inevitably, some who says they “have one of these” and my explanation of their inner workings is wrong, that “their loan doesn’t work that way”.

   Well, if you really do have an Option Arm, they work EXACTLY as described in the article above [“Four reasos to walkaway from an option arm…”].

   READ THAT ARTICLE! There is even a great chart that breaks it down exactly as it will happen to the 350,000 option arm loans in CA, and they can’t be modified.

   I’d love to hear why anyone feels this isn’t a pending disaster (AFTER you read said article). Great links, IR.
   1. newbie2008 January 3, 2010 at 8:47 am

      The chart suggest the worst is yet to come. Is there chart of loans (homes/house and commercial RE due dates)?

      If the peaks of bad debt occurs at the same time, what will the impact be on unemployment?

      Who will have priority for the bailout (banks, investors or homeowners)? Sorry the last question is stupid.

      ME, What can be done about it when people and the media are saying they want more of the same (inflated prices and easing of the money to the banks and political contributors) and to speed up the process?
   2. Chris January 3, 2010 at 11:43 am

      I *had* a 5 yr Option ARM when I bought my house in Fremont, CA (notice the word *had*). It’s a great way to save money while paying low interest (well, mine isn’t negative amor and so 1) interest rates was higher during the initial 5 years but 2) principle wasn’t going up). Furthermore, you pay off your loan and thus have a principle reduction without getting a penalty hit or refi fee (unlike a locked 15/30 traditional loan) and it’ll lower your future monthly interest only payment which allows me to save even MORE money later on (yeah, like this will catch on with **AMELICANS**…..).

      Bottom line: Option ARM is great for savers but is horrific (especially neg amor) for dumb and dumber folks who fell for the bubble (or not).

      p.s. forgive me if I offend the **AMELICANS** on the concept of savings 🙂
      1. OrangeRenter January 3, 2010 at 11:58 am

         This is what I mean… You did NOT have an option arm, you had an interest-only ARM. Therefore, you cannot defend them.

         Option Arms do not work as you describe. They are neg am loans by definition, and the article referenced explains this bettter than any other i’ve read to date.
         1. Chris January 3, 2010 at 7:45 pm

            Guess what? Interest-only ARM is one **part** of Option ARMs which contain various options that the borrower can choose to pay. I did mention neg amor in my OP. You can’t say Option ARM = neg amor completely without considering the fact that interest-only ARM is part of it as well.

            http://en.wikipedia.org/wiki/Adjustable-rate_mortgage#Option_ARMs

            Wiki is not the best but it’s close.
            1. OrangeRenter January 3, 2010 at 7:52 pm

               You said, “well, mine isn’t negative amor and so”. If your loan did not have a neg am option, then it was not an Option Arm.

               Yes, interest-only loans had there own benefits (for some) and there own problems (for most), but I’m interested in discussing Option Arm loans… They are completely different and THEY will be having a HUGE impact on the banks and the market.
4. ME January 2, 2010 at 11:43 pm

   I honestly believe our govt has been fleecing the people and it’s assets for over 30 years. Will Americans ever do somthing about it? Or should we just sit back and blog about it? There is slot of talk but the train is running out of control toward a HUGE cliff.

   Nothing will change in Washington until 99% of all Americans are homeless and starving.
   1. Chris January 3, 2010 at 11:45 am

      Well, now our govt is fleecing savers like me with ZIRP 🙁

      It’s desperate in getting me to buy a house again 🙂
5. Marc January 3, 2010 at 12:07 am

   I think a great indication of the fact that we are entering the next bubble is that I am getting direct mail again with mortgage offers from ING direct (just like during the last buble, they went silent in between). They offer teaser interest rates of ~3.6% for 5 years. What about all the fools who buy real estate now in false hope of another rally and have to refinance in 5 years at 7%? Check out ING’s website, they project a 3.6% interest rate after the fixed term in year 6 http://home.ingdirect.com/products/products.asp?s=RatesandClosingCost . So much for responsible lending!
6. BikePolo January 3, 2010 at 1:52 am

   Founds something AWSOME for this blog:
   The link is here but here is the picture: http://bensimages.com/img62557m.jpg

   LOL
   1. IrvineRenter January 3, 2010 at 9:12 am

      https://www.irvinehousingblog.com/images/uploads/201011/IHB-WTF.jpg

      I will be introducing that one this week. Thank you.
7. newbie2008 January 3, 2010 at 8:25 am

   I have not YET seen the indications of a full bubble press. My minor children have not received pre-approved for the last 3 years. But the teasers for credit card balance transfers and home loan refinancing have started again. Credit will be free flowing when my cat gets a pre-approved credit card. :}

   The puppets for the last 20 years have been doing the same song and dance of bubble creations and bail out for the banks, hedge funds and insurance companies. Best govt money can buy on both sides. Ron Paul is calling for an audit for the Federal Reserve. Fat chance of the bill passing.
8. Soapboxpolitico January 4, 2010 at 9:01 am

   Follow the money.

   I can’t recall who said it or where I heard it but it’s a great object lesson in understanding what, where and why these things are happening.

   It’s my firm belief that we will forever be engaged in an endless cycle of bubble inflations and crashes, the days of steady, reliable increases of 5-6% in investments are long gone. Why?

   Because the “money changers” and Wall St. “innovators” have figured out how to game the system regardless of regulatory environment or fundamental financial underpinnings. A couple of things lead me to this conclusion:

   Firstly, all the evidence is there to strongly suggest what has happened the last several years is, in fact, nothing new and likely is now business as usual. These guys cut their teeth in the 80’s with junk bonds and leveraged buyouts. This is where they got the taste for get rich quick scams. Then along comes the tech bubble and a “paradigm shift” in how a company or an economy can expand and make money, the so called new economy. The belief that something new and innovative could be hugely profitable took hold. This turned out to be prophetic because they had finally figured out a way to get the simpleton investor and the money sitting on the sidelines into the casino, err stock market. Suddenly every Tom, Dick and Jane was playing in the market. They also found a new way to transfer risk to huge institutional investors and eventually, the American taxpayer. Now the game was truly on. If you got enough people to believe in newfound riches, that was all it took to send an asset soaring. This may have been nothing new (boiler room pump-n-dump) but the scale was the key.

   Secondly, the creation of derivatives trading now allows for huge sums of money to flood into a given asset class with little risk. Remember that it only takes a belief to take hold and not necessarily a deep understanding of a particular asset being traded for it to have “value”. Now, the Wall St. “geniuses” could heavily leverage their cash and literally move a market in any way they see fit. The evidence of this was in 2008’s run-up in oil prices to $150/bbl, more than twice the average previous valuation and more recently, gold. Gold ran up to more than $1200/oz from a previous valuation of about $700/oz. Neither of these huge run-ups had anything to do with fundamental valuations of supply and demand, it was strictly about a belief in continually rising prices. A self serving, self generated move in the markets for oil and gold. Of course both those bubbles have either deflated or are deflating.

   My grandfather used to say, “You can’t get something for nothing unless someone, somewhere is getting nothing for something.” His folksy wisdom has stayed with me and informed my views on investing. He believed in the ideal of a fair shake, a square deal. Sadly, I feel those days are long gone. Now we have to figure out how to make our little piece of the pie and hope to stay out of the spray pattern when the proverbial poo hits the oscillation device.
9. lamf January 5, 2010 at 12:47 am

   Couldn’t you just have played Waits’ version? No one does it like him! Love reading your blog.

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