A new bill circulating in Congress would encourage accelerated default on a grand scale and crush California's housing market.
Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618
Resale Home Price …… $217,900
I haven't ever really found a place that I call home
I never stick around quite long enough to make it
It's just a thought, only a thought
But if my life is for rent and I don't learn to buy
Well I deserve nothing more than I get
Cos nothing I have is truly mine
Dido — Life For Rent
Dean Baker of the Center for Economic and Policy Research was one of the early public voices who called the housing bubble. He accurately noted the disparity between rent and payments and concluded housing prices were not sustainable. Like me, he was a renter looking to buy as prices were ramping up, and like me, he noted that since it didn't make sense for him personally to buy, it didn't make sense for anyone else either. Being an economist at an influential think tank, he was in a position to research and write about the issue and be heard.
I really like Mr. Baker's proposal, but I have been afraid to write about it because I don't think lawmakers fully understand what passing his legislation would do to the housing market. I would very much like to see it become law, but if it does, every inflated housing market in the country would crash very hard as loan owners accelerate their defaults. If lawmakers are educated to this fact by me or the banking lobby, they will not pass this good legislation. But I am only a blogger, so perhaps they will ignore me. Let's hope so.
Right to Rent could change the nation's foreclosure crisis: CEPR
by CHRISTINE RICCIARDI — Wednesday, September 22nd, 2010
In the wake of reform enacted to promote homeownership, analysts at the Center for Economic and Policy Research are saying that ownership may not be the smartest option. In a report released today, The Gains from Right to Rent in 2010, the CEPR suggests that giving homeowners the right to rent their house at a fair market price could be a game changer in the nation's foreclosure crisis.
The report dissects the benefits of a drafted bill, H.R. 5028, also known as The Right to Rent. Under the legislation, homeowners entering the foreclosure process would be able to occupy their homes for up to five years, while paying rent to a lender. Rent would be based on fair market price as determined by an independent appraiser and adjusted annually.
Think about the effect of this law from the perspective of an underwater homeowner making a payment that exceeds a comparable rental. Why would anyone in that position keep paying their mortgage if they knew they could default and stay in their home for five years? Further, wouldn't these owners also believe that they would be given a chance to repurchase the house after 5 years when their credit is improved? If this law is passed, every market inflated above rental parity would crash to that price level because of a rush of accelerated default.
"This would give homeowners an important degree of security, since they could not simply be thrown out on the streets," wrote Dean Baker and Hye Jin Rho, co-director of and research assistant at CEPR. "This policy should also benefit neighborhoods in the most hard-hit areas, since they would not have large numbers of vacant homes following foreclosures."
This policy probably would benefit the hardest hit areas because there would be less turnover of the housing stock. Riverside County would benefit greatly while Orange County would be crushed.
The CEPR report, which compares the costs of owning a home and renting in 16 major metropolitan statistical areas around the U.S., found that homeowners would see substantial reductions in costs by becoming renters if they rented in a bubble-inflated market. Savings are much less, however, if the market was not affected by the housing bubble.
For example, in the Los Angeles MSA, homeowners would save $1,586 per month by becoming a tenant. The median home price in 2006 and 2007 was $608,600. Based on that number, CEPR found the monthly cost of ownership as $3,128 versus $1,420 to rent.
New York/New Jersey, Sacramento, San Diego and San Francisco savings are all over $1,000.
The tremendous savings being touted here are real, and they represent a loan owner's incentive to accelerate their default. Most loan owners believe house prices will go back up and they will get appreciation and HELOC riches: they are making a strategic repayment. Once the incentives change, fewer will make the oversized payments. Instead of continuing to make a strategic repayment, most will opt to strategically default. It's only the false belief that their investment will yield results that keeps most of these people paying now.
In Detroit, however, the marginal saving is only $89 between owning and renting home. MSAs including Baltimore, Chicago, Cleveland, Minneapolis, Philadelphia, Phoenix, and Tucson had a difference of less than $500.
“With roughly one-in four mortgages underwater, the loan modification plans put forth so far have done little to help homeowners facing foreclosure,” said Baker. “Right to Rent, on the other hand, would benefit millions, provide families with real housing security, and could go into effect immediately.”
And it would lower house prices to rental parity.
And it could fill adequate demand. According to a survey done recently by Apartments.com, 60% of respondents said they prefer renting to buying a home. Almost 30% said they had never rented before but are currently looking for an apartment.
The CEPR report includes an appendix with cost analysis for 100 MSAs around the country. Amounts for houses are based on costs for a house that sells at 75% of the median house price. The basis for rental costs is the Department of Housing and Urban Development's Fair Market Rent for a two-bedroom apartment. The calculations used assume the homeowner faces a marginal tax rate of 15%. View the full report here.
Permanent Rental Parity
Despite the problems created with implementation of a right-to-rent law, the impact would be long lasting and very positive because most first mortgages would be limited to rental parity. Right now, the excess mortgage payment going to the bank represents money not being spent in the local economy. When a loan owner in California is paying a 50% DTI, very little is left over to stimulate the economy — and have a life. Without appreciation and HELOC abuse, high DTIs are detrimental to California, and a HELOC based economy is an unsustainable Ponzi Scheme.
Since the incentive to default exists for mortgage payments above rental parity, lenders will stop underwriting those loans. If you were a lender, and if you knew the borrower could default at any time and stay in the property for 5 years and only have to pay you rent, wouldn't you keep the payment at or below rental parity? A right to rent law would stabilize the housing market in a way no other government program has succeeded in doing. Unfortunately for lenders, the implementation of this law will take the remaining air out of the housing bubble.
I strongly support the idea of keeping house prices at rental parity because it discourages Ponzi living and puts the economy on a sustainable footing. I proposed a similar idea in The Great Housing Bubble:
There is one potential market-based solution that would require no government regulation or intervention that would prevent future bubbles from being created with borrowed capital: change the method of appraisal for residential real estate from valuations based exclusively on the comparative-sales approach to a valuation derived from the lesser of the income approach and the comparative-sales approach. Both approaches are already part of a standard appraisal, so little additional work is necessary–other than appraisers will have to focus on doing the income approach properly. In the current lending system, the income approach is widely ignored. … When the fallout from the Great Housing Bubble is evaluated, it is clear that the comparative-sales approach simply enables irrational exuberance because the past foolish behavior of buyers becomes the basis for future valuations allowing other buyers to continue bidding up prices with lender and investor money. Prices collapsed in the Great Housing Bubble because prices became greatly detached from their fundamental valuation of income and rent. This occurred because the comparative-sales approach enables prices to rise based on the irrational exuberance of buyers. If lenders would have limited their lending based on the income approach, and if they would not have loaned money beyond what the rental cashflow from the property could have produced, any price bubble would have to have been built with buyer equity, and lender and investor funds would not have been put at risk. There is no way to prevent future bubbles, and the commensurate imperilment of our financial system, as long as the comparative-sales approach is the exclusive basis of appraisals for residential real estate.
My approach was to change the appraisal system to limit loans to rental parity, but Dean Baker's idea of right to rent would have the same effect. If loans are limited to rental parity, so will house prices — unless we suddenly become a nation of savers and manage to inflate a bubble with equity…. not going to happen.
Sold to Countrywide at the peak
This wasn't really sold to Countrywide, but borrowing the full value had the same effect. The owners extracted every penny of equity, and Countrywide (B of A) will end up with another REO. In effect, they bought the property in mid 2007 but didn't know it. 
- This property was purchased on 10/23/1998 for $88,000. The owners used a $66,000 first mortgage, and a $22,000 down payment.
- On 3/5/2003 they refinanced with a $150,000 first mortgage.
- On 7/30/2007 they refinanced with a $296,000 first mortgage. These owners were not regular HELOC abusers, but they did manage to double their mortgage on two occasions.
- Total mortgage equity withdrawal is $230,000. That is great for a 1 bedroom condo.
Foreclosure Record
Recording Date: 07/19/2010
Document Type: Notice of Default
Some might disagree with my giving them a "D" for mortgage management. With only two refinances, I think these people really believed they were living within their means and only spending part of their appreciation. It doesn't appear thoughtless or reckless — stupid, but not reckless.
Irvine Home Address … 247 ORANGE BLOSSOM Irvine, CA 92618 
Resale Home Price … $217,900
Home Purchase Price … $88,000
Home Purchase Date …. 10/23/1998
Net Gain (Loss) ………. $116,826
Percent Change ………. 132.8%
Annual Appreciation … 7.8%
Cost of Ownership
————————————————-
$217,900 ………. Asking Price
$7,627 ………. 3.5% Down FHA Financing
4.31% …………… Mortgage Interest Rate
$210,274 ………. 30-Year Mortgage
$41,642 ………. Income Requirement
$1,042 ………. Monthly Mortgage Payment
$189 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$18 ………. Homeowners Insurance
$230 ………. Homeowners Association Fees
============================================
$1,479 ………. Monthly Cash Outlays
-$94 ………. Tax Savings (% of Interest and Property Tax)
-$287 ………. Equity Hidden in Payment
$12 ………. Lost Income to Down Payment (net of taxes)
$27 ………. Maintenance and Replacement Reserves
============================================
$1,137 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$2,179 ………. Furnishing and Move In @1%
$2,179 ………. Closing Costs @1%
$2,103 ………… Interest Points @1% of Loan
$7,627 ………. Down Payment
============================================
$14,087 ………. Total Cash Costs
$17,400 ………… Emergency Cash Reserves
============================================
$31,487 ………. Total Savings Needed
Property Details for 247 ORANGE BLOSSOM Irvine, CA 92618
——————————————————————————
Beds: 1
Baths: 1 bath
Home size: 814 sq ft
($268 / sq ft)
Lot Size: n/a
Year Built: 1976
Days on Market: 62
Listing Updated: 40419
MLS Number: I10079989
Property Type: Condominium, Residential
Community: Orangetree
Tract: Cpwas
———————————————————
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Located in a desirable community. Just down the road from Irvine Spectrum, to UC Irvine and walking distance to Irvine Valley College. It is a one bedroom/one bath downstairs and a big loft upstairs. Kitchen have new granite countertop and tile floors. Bathroom have new tile floors as well. And have wood floors in other rooms. Amenities such as tennis courts, basketball court, swimming pool, childrens playground.
The realtor needs to work on subject-verb agreement and basic grammar.
Where the local renters are
I can’t help but think the graphic has some errors. From its legend, its entire range is from 0% renters to 1% renters. Could it be that the numbers are actually percentages represented as their numerical values (0.0-1.0) and not normalized as percentages?
The programs have failed and the unemployment is rampant and it appears that the fecal matter is definitely impacting the air circulation unit, but will the banks really be forced to capitulate with reality? I’m getting worn out by all this. I have 100% faith in our elected and unelected officials’ ability to figure out a new way to make our financial markets 100% filled with lies. Or make that 1.0% faith and 10000% lies; I’m not sure.
Wouldn’t such a law be wrong? It would throw contract law out the window and give people a message that this is a country based on mob rule and not laws to protect. And so much for private property rights. I may not like the bankers, but taking away their private property rights is wrong and totalitarian. Yes, it is wrong to bailout the banks, and adding another wrong to a wrong will not help.
This so called ‘right to rent’ legislation is evil.
The law does have a lot of problems. I can see a lot of ugly cases. Owner removes and sells fixtures during foreclosure, rents back house from bank and refuses to send rent payments until the bank makes the property habitable. There are just way to many ways for a rental arrangement to go wrong; especially if the renter is already very upset with the bank that is obliged to rent to them for five years.
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
A procedural right, not a substantive one guaranteeing you to stay in your house if you don’t pay for it! Jeez Louise, James Madison is rolling over in his grave.
I think awgee was talking about the gov seizing property from banks.
I agree with the viewpoint that the new bill would encourage default on a grand scale and crush California’s housing market. At time, when the passion for real estate investors is very dim, introducing such a bill will not go in favor of bankers. This might do more harm than good!!
Living here in AZ, it’s interesting to hear and see what’s going on in other states. Obviously we were hit pretty hard here. It’s not good anywhere, but what you have going on in LA is fascinating.
How you would reduce the incentive to enter right-to-rent? Tie it to bankruptcy. Write a new chapter of the bankruptcy code, and have a judge look at assets/debts, income & expenses.
We already have strategic defaulters not paying anything, so wouldn’t it be better for them to be paying something? You could also tie an option to the after 5 yr purchase so that the original note holder could get most, if not all, of the appreciation.
What you’d have to start with is the occupant signing the deed over immediately. At that point, the bank can evict much quicker than if they have to foreclose first. This ensures payment. If someone had not been paying for a while, they’d have to make back ‘rent’ payments to get ‘current’. Because of this accelerated deed-signover, I think banks will fight this even harder because of the immediate losses they’d have to realize than the strategic defaults it might cause. The game is pretend-and-extend, and anything speeding things along goes against the rules of that game.
Where’s John Nash when you need him? The situation is one where both parties going after their own best interest results in a suboptimal overall solution. There needs to be some cooperative solution that yields a far increased overall benefit AND increased benefits for both parties.
There is a simple solution. Just require all new mortgages to have a right to rent clause in them. This will have the same effect…all future demand will have a price ceiling at the ~ rental parity price. It doesn’t bail out the victims (speculators) or desecrate all the existing housing contracts.
Simple, as im simple-minded. Who would loan thousands under those terms, let alone want to invest thousands in an asset the government was going to prevent from appreciating. I know I wouldn’t. Idiocy.
GOVERNMENT OUT OF MARKETS.
@awgee —
Can you explain how the Fourth Amendment is relevant to this discussion? I think I know where you’re trying to go, but I don’t know.
It is the basis for private property rights in the USA. The government can not just take your property. The money owed to the lenders is their property through contract. How can Congress just make a law to take something that is not theirs to take? It is unconstitutional to take that which is not yours. We are supposed to be a nation of law, not mob rule.
Everybody seems to look at the solution to problems without asking whether those solutions are right or wrong. People are just looking at whether or not a new law would be effective in accomplishing their desire. Do you want to live in a society where the government can just take your property because the majority vote it so?
Just because stupid people come up with stupid new laws and stupid underwater homeowners vote for the laws to pass, does not make it right.
At this point in the debacle, it should be blatantly obvious the scope of govt should be strictly limited. The govt needs to be completely out of the mortgage market. They should not lend, they should not guarantee, they should not prop up, nor should they distort the foreclosure process. A socialized mortgage market is a recipe for disaster.
This has to be the singularly worst idea I have seen anyone float on IHB.
The 4th amendment reference is due to the Govt seizure of assets from the lender, transferring them to the buyer, and subsequent restriction of the use of the assets of the lender.
Lets suppose someone buys a property for $500,000, and puts 10% down for a mortgage of $450k, and a rate of 5%. But they could rent a similar property for the equivalent of 5% of $400k.
With this scheme, the govt steps in and decrees that the contract is void, and instead of the bank owning a loan of $450k, they instead are forced to trade that loan for a physical asset that is now worth only $400k.
Now, on top of that, the bank is not free to dispose of that asset as they wish, they are forced to rent it to the person who just took them for $50k.
Sure it would reduce home prices… but that is just because it would make it absurdly difficult to get a loan.
You could also just declare that the govt. would no longer enforce any loan contracts, that would also eliminate the existence of mortgages and subsequently reduce home prices.
We could also do the opposite of this plan… declare that any renter has the option of buying the home they are renting at any time and all they have to do is pay the govt mandated buyout price. So all those positive cash flow rental units can get claimed by the tenants.
So now we have no one willing to loan money to buy a home, and no one willing to rent a home to someone. That would make for a fun experiment. Prices would drop because no one would be willing to loan money at a reasonable rate, rents would rise because the supply of rental houses would decrease, and because the owners who were willing to rent a house out would have to charge more to compensate for the risk of asset seizure.
The people who would make out like bandits would be the foreign cash buyers. Everyone else would end up living in shanty towns.
I can imagine a self published Tea Party fan fiction novel that uses this as a plot line. The USA plunges into chaos, only to be saved by the heroic Tea Party. Hmm… Maybe this is actually the plot of the up coming remake of Red Dawn. 🙂
The 4th Amendment is irrelevant to this discussion since it exclusively talks about the State’s police powers. The relevant constitutional right is the 5th Amendment:
“No person shall be held to answer for any capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
Here there are two clauses that would contradict this law:
* “nor be deprived of life, liberty, or property, without due process of law”
* “nor shall private property be taken for public use, without just compensation.”
The only question we have regarding whether the second clause is relevant, is whether this would constitute a public use.
Stan,
You are correct. I was too overcome with the ridiculousness of the suggestion to cite the proper legal framework.
Instead of ‘right to rent’, the correct name for this legislation is ‘Legalizing theft’.
There is nothing to prevent lenders from currently foreclosing and then renting to the current occupants. In fact, they did so widely in The Great Depression.
This should be left to the banks discretion, as ir is currently.
Why should those with little to no downpaymeny get this sweet loophole while those who put 20% down pass to avoid the pain of losing their downpayment forever? The incentives are messed up.
Currently nearly all mortgage lending is backed by the gov’t, so claiming that some action would cause lending to stop doesn’t mean much (w/o gov’t support lending would be crawling right now).
If the property really belongs to the lender right now, why can’t the lender evict immediately? There are already limitations on what lenders can do.
A huge number of REOs are already gov’t owned – either through the GSEs or FDIC, so the gov’t could start this on their own.
If you’re going to challenge the constitutionality, you’ll have to make a case that due process was not followed, nor just compensation. It’d be hard for a bank to argue it wasn’t getting ‘just compensation’ when they’re happy to let people live in homes not making payments and not moving forward with foreclosures.
And this still may not flatten sale prices in premium areas where the loan balance is below rental parity.
Looking at Scott Gunther’s 2009 data of an average of 40% down in Irvine, many of the homes being bought either have a low or zero loan payment. This “right-to-rent” will only affect the low end as I’m sure there will be a cap as to what type of products can be covered under it. What good rental comps can you pull for a $5mil Shady home?
It’s the same reason why prices haven’t been decimated in premium areas because many of the homeowner are not underwater due to the high down transactions. For every 0 down or HELOC abuse IR profiles here… I can probably find ALL CASH buys that are just as hard to believe.
OK, so who’s going to come and fix & pay for the leaky roof or the broken air conditioner or water heater? Who’s going to do the maintenance on this rental?
This is the problem. It’s a similar thing to the “Suddenly Landlord” problem some owners were having when they didn’t really want to be a landlord. We’ve seen the banks not pay the HOAs. Does anyone really expect them to maintain the property? Fix the dishwasher or the roof? A bank would make an awful landlord.
Bank cashflow on a property would be negative. Multiply by 10s of thousands of properties. Repairs happen. Shit happens. Banks would eventually mail the keys to the govt.
Govt could then be the landlord. Can you say “projects”?
Remember kids, every time you argue the govt can spend money to “invest” in our future, there are both good and bad investments in life. The private sector tries in earnest to pass on money losing ventures. The govt, and voters, use twisted statistics and logic (job creation being my favorite=)), to spend money on projects (failed business ventures the private sector wouldn’t touch). The suckers keep voting for further and further ineffeciency a la govt.
Everytime you see a crappy jobs report, blame yourself for voting to drag the private sector to the ground.
Agreed 100% Matt, so I’m assuming you include yourself in creating the problem because you vote defacrat or repugnantcan correct?
This is a terrible idea. It abrogates the property rights of the lenders and rewards squatters. If lenders cannot rely on their contracts, then future interest rates will be higher to compensate for such government-created risk. That means, once again, the responsible will pay for the irresponsible.
It is, after all, ridiculous to even consider the underwater debtors as “owners”. Anyone who put 0 down or 3% down is, de facto, a 0% or 3% owner; and when the property goes underwater, such a title owner has nothing. Why should he/she receive any special consideration?
There is a good idea here, and it should only apply to new loans. Require mortgage loans to comply with responsible lending ratios (e.g. 28/36). And as a further check against bubble lending, add IR’s suggestion and limit the appraised value to the lesser of market (comps) and an appraisal tied to fair rental value.
Awgee and others seem to miss one important point. The banks took bailout money from gov/tax payers and hence we can tell them how to treat their existing loans. I fully agree that it would be wrong to force a lender to change a 450k loan to 400k if they didn’t take tax payer money but since they did, I think we have the right to do so.
I’m sorry, but that attitude is wrong.
Many of the banks were FORCED to take bailout money while staring down the barrel of a gun.
We should get out now before the government screw up the market even more.
I did not miss anything and I adressed the bailouts. It was wrong of the government and the Federal Reserve to give your money to the banks and the correct solution to that wrong is to take it back, not create more liberty destructive legislation.
BTW, are folks finally starting to realize what the true function of the Federal Reserve is?
What is the true function of the Federal Reserve?
To bail out the govt for its mistakes?
To enrich and empower the member banks.
“This would give homeowners an important degree of security, since they could not simply be thrown out on the streets,”
I can’t even believe this appalling quote, let alone that Irvine Renter could support such ridiculous thinking. “Homeowner”? “security? They aren’t homeowners if they aren’t paying their mortgage. If you want security, pay your mortgage or go rent somewhere else.
And what about people who played by the rules, and have a huge amount of their assets invested in homes that will now further depreciate because we want to keep idiots in their homes? Just more MORAL HAZARD. Homeownership as entitlement.
Does this program go on forever, preventing any actual RE market from existing? Basically instead of pumping up a bubble the government’s job will now be to permanently deflates the RE market? Great, really males me want to buy a house now! An asset the government intentionally caps appreciation on! Careful what you wish for. Have we not learned what happens when the government tinkers with markets?
I can’t believe I am reading this here. Government OUT OF ALL MARKETS.
I consider myself pretty freakin’ left wing, but I do think that private property and contract rights should be tampered with only in limited circumstances. This does not look like one of those circumstances.
Just as it’s an abuse of eminent domain to restrict the location of a mosque, so, too, does this look like government overreach. Right-to-rent looks like a solution with far too many unintended consequences.
Capping appraisals to rental parity would accomplish much the same thing, but without effectively legislating price controls on housing.
Banks will still be free to make idiotic loans, but rental-parity appraisals would force them to acknowledge to their investors that, yes, they’re betting on a market in which people are willing to pay a premium to own.
I see the bubble as a result of outright fraud in the mortgage securities market, so this colors my view. Right-to-Rent would be overkill, when all that is needed is more accountability in our securities markets.
Change appr
some unintended consequences are OK, but too many unintended consequences might be a bad idea. that makes no sense.
Banks should have the freedom to lend to anyone they deem worthy. They should also have the freedom to go out of business – same goes for wall st firms and securities investors. Without fear of loss, market mechanism does not function properly.
I’m not saying legalize fraud, I’m saying let the fraudulent lose clients. This is free market regulation. It is not perfect; it is the job of the consumer to avoid fraud and the job of the govt to enforce the laws against it.
Calif. homeowner optimism plummets
http://lansner.ocregister.com/2010/09/27/only-15-of-calif-homeowners-see-rising-prices/82674/
jesus that was a poorly written article
[quote]15% of Californian homeowners predicted that their home’s value will rise in the next six months [/quote]
[quote]79% of owners nationwide think their home is worth more than their agent’s recommended listing price![/quote]
home owners. lol.
Why in the world would a squatter who is paying nothing (no payments to the bank) be willing to rent from the bank for real cash?
I’m surprised that so few people understand the purpose and intent of the Federal Reserve and the GWB and BHO bailouts.
The US Supreme court has put a very low bar on what constitues public usage. Since the banks will control the appraisal process for the taking of their property for public usage, the taxpayers should be prepared to bend over. If it the Joe six-packs property that being taken, Joe will need to bend over.
Right to rent would destroy most banks. But, something seems to be afoot for next year. Check out the bottom of this FDIC link:
http://www.fdic.gov/deposit/deposits/insured/basics.html
That would be small business banking accounts. Why is the FDIC insuring these accounts after the November elections? And why for only two years?
Hmmm.
Oops, I missed this part:
“will be fully insured, regardless of the amount in the account”.
That would be all business accounts. Wow.
That’s kinda a big deal. Someone big is going down.
The sounds like an extension of Transactional Account Guarantee Program:
http://www.fdic.gov/regulations/resources/TLGP/faq.html
Banks could opt out of the current program, but it looks like they are extending it for all banks (non-optout) through 2012.
My guess is that this has nothing to do with any individual bank, but is a hedge by the Obama administration to prevent a political catastrophe along the lines of IndyMAC’s bank run and eventual collapse in 2008.
If a bank were on the verge of collapse in 2012, and there was no Transactional Account Guarantee Program, business customers with large transactional accounts would be among the first to jump ship and the last to come back.
Hey, excellent info. Thanks! Now I think I remember reading about it around the time of the Lehman fiasco. You’re right. This new thing is just an extension of the old thing, but with no opt-out.
Damn. I so want to see one of the big players fall that it has fogged my vision.
My captcha says “believe66”. So, I guess if a big bank is going to fail it will be on June 6, 2011.
http://www.ritholtz.com/blog/2010/09/principal-reduction-balloon-payment/ “Better Idea: Principal Reduction/Balloon Payment” seems like a complimentary proposal. The Dems and Reps can surely figure out a way of letting the government assume all the bad loans the banks made.
Note: the above URL posting is of the website referenced and is not mine.
IR:
> In Detroit, however, the marginal saving is only $89 between owning and renting home.
My advice is to leave Detroit out of any normal analysis, since it’s a special case – post-apocalyptic America.
There’s no personal security there even in broad daylight, and the city council hasn’t functioned in decades.
Its kind of telling that IR hasn’t posted a single comment in defense of the idea. I think someone hadn’t had their cup of coffee yet when they wrote that post. 🙂
I’m sorry IR, I can’t support you on this one. While you are right on one hand that it would cause the market to correct quickly, removing all of the bull$hit government props and letting the market work would do the same thing more efficiently. Instead, you are creating even more moral hazard and rewarding loan owners while punishing current renters: now people will get to squat for 12-24 months rent free, then essentially squat for another 5 years. Banks won’t write loans for most of the housing stock period if this legislation goes through.
This is BAD legislation and BAD economics.
Nah, you’re mostly wrong on this one. There is some moral hazard, but this program would be a practical solution to the problem. Renting from the bank is hardly squatting and they could always amend the legislation so that the “loan owners” have to pay back rent from their date of default.
Overall, this program would reduce the total losses from this “free market” debacle. It would, however, take down a bunch of banks unless they allowed mark to fantasy valuation of the home until the rental period was up.
BWahahahahahahahaha you think for one second “renters” are going to sign an agreement to pay back rent on a property that they are not paying on? Man, I would like some of that you are smoking because it obviously makes you very optimistic.
The crooks voted to bailout the banksters with OUR money, yet people are concerned with Joe Sixpack getting over a few months of rent.
How about this? No bailout, let the whole market collapse, we can start buying homes for what the DEMAND really is. Lose your home? Too f’ing bad. Lose your equity? Too f’ing bad. Lose your retirement “savings” because you invested in your house? Too f’ing bad.
Remember, according to most here, housing is *not* an investment, it’s just a place to eat, breed, and defacate correct?
Um, if they want to rent the property then yes. If they don’t want to rent the property then no.
Pretty simple concept.
Thanks for relating the news about the proposed legislation; I see litle chance of it passing. As I’ve commented before, I believe that a Financial Regulator with broad powers will be announced by the President, and that this Credit and Housing Boss, will direct banks to rent out properties.
Alos, in my linked Financial Market News Report for September 29, 2010, I relate The chart of Active Real Estate, PSR, shows a 2% fall in value over the last seven days compared to the S&P. When taken in conjunction with the 3% fall in Banks, KBE, I conclude that the FASB 157 entitlement to value real estate at the bank manager’s best estimate, rather than at market, has ended.
The ability for the real estate cartel consisting of the banks, and the the GSEs Fannie Mae and Freddie Mac, to pretend and extend unreal real estate prices, is done and over.
This means that the GSE policy of loss mitigation will now be taken seriously, and those living payment free in the bank’s shadow inventory will be foreclosed upon and then either evicted or asked to pay rent.
The corporate mission of banks will change from one of lending to one property management and renting of REO properties.
Americans will be very much surprised to see the value of their home values plummet in value.
And unfortunately, it won’’t be like in Hungary, where the government lets people go scotch free in paying of Swiss Franc and Euro denominated carry trade mortgages.