Taking It To The Hood
Note: This is a first for the AVC blog. I did not write this post. It was written by Jeff Minch, known to this community as JLM. Jeff has been leaving comments on this blog for the past six to nine months and I've enjoyed reading them very much. Jeff has a very different view than I do about politics and about other areas as well. But you cannot read his opinions and not come away impressed and thinking differently. That's the kind of voices we have here in our community and I am excited about sharing some of them with all of you every once in a while. I don't plan to do this very often, but I do plan to do it from time to time. With that said, please enjoy Jeff's thoughts on the President's housing plan.
Taking it to the Hood
The Homeowner Affordability and Stability Plan
Fred Wilson asked me to react to the President’s housing initiative and I am honored to do so. I find “A VC” to be the single best blog that I have the opportunity to read primarily because of the content offered by its participants and their obvious qualifications but also because of the comity of the dialogue and the ability for strong willed folks to disagree without being disagreeable. Fred has chosen some great blog topics and while there is a “forum” quality to the actual dialogue, it is the selection of the topics which focuses all of that intelligence.
The TARP was for Wall Street. The Stimulus was for Main Street. The HASP is for the Hood. There will be much to like and there will be much to dislike. A frame of reference:
1. Our Nation was in great measure formed by folks who had a desire to have their own house. A gross oversimplification, I am sure but a bit of truth nonetheless. Increasing home ownership in the United States after World War II was one of the single most important elements in the wealth creation and evolution of the culture of that extraordinary time.
2. Housing is both physical and emotional as it is where our sweetest memories are made, discussed and lived. It is where our hearts are and if we fail in this arena we have more than just financial failure, we have broken hearts and a diminishing of the American dream. [If you knew me well, you would be amazed to hear me say something so “squishy” like that but I have my own reasons. More importantly, I truly believe it.]
3. Housing — or perhaps I should say abuses of housing, particularly housing finance — is at the root of our current financial problems. There is plenty of blame to go around without resorting to political finger pointing. A good idea got swept up in the euphoria of the times and we allowed basic rules of finance to be violated at the personal, industry, banking, regulatory, legislative, GSE and securities levels. Housing was the spark which ignited the flames which fanned out of control. It is good therefore that President Obama is addressing a root cause of the problem.
4. Homes are very important to the fabric of our Nation from a social perspective and while I cannot readily quote any supporting figures, I can say with some conviction that a child raised in a stable home is more likely to become a contributor to society rather than a cost center to society; and, conversely the opposite is also true. [At the end of the day, all we are trying to do is to get the taxpayers to outnumber the recipients of government largesse.]
5. Home equity represents the most important (and generally hidden) asset in most folk’s lives when it comes to building long term retirement equity.
So, I am a big fan of stable homes for a number of reasons.
On the whole, the HASP is a damn good start but it is only a start. Is it perfect right out of the chute? Hell no. Here are the things I like in the order in which I like them:
1. I think the probability of the plan working is dramatically heightened by the President’s wisdom in originating the plan in his office rather than having the Congress draft legislation and running afoul of the partisan minefields such action would generate. President Obama can barter a bit of political capital in this endeavor by direct sponsorship and can avoid the unifying opposition of having Speaker Pelosi being the plan’s sponsor.
2. I just love the idea that a Federal Bankruptcy Judge can intervene in the dialogue between a bank and a borrower and take immediate and almost unappealable action to force a mortgage settlement. This is a shadow of the “cram down” provision of bankruptcy law but it is even more effective because neither party regularly appears in that Court and thus there is a real balance of terror. Federal Bankruptcy Judges are the most powerful Judges in the judiciary, they are experienced in dealing with tales of woe, they are very decisive and do not suffer fools well. It will also motivate banks to settle things quickly once they know the model which will be used. This will help deal with all of the mortgages, including jumbo mortgages, which are not held by the GSEs. The Federal Bankruptcy Judges I know will be able to modify a mortgage in about 12 minutes.
3. The application of a specific financial yardstick at 38% of gross income able to be “bought down” to 31% is pragmatic. Of course, this will be complicated by the ability of a borrower to free up other funds to inject equity but it is a good start. I would have liked the final residual number to have been 25% because I think we are still headed downward for about 12-18 months.
4. The other important element of this buy down approach is the ability to now put a definitive price on the formerly “toxic” assets. Remember, the most important element to trading this stuff off balance sheets has been the inability to price it. This solves a lot of that problem.
5. Discrimination between those already in the ditch and those who are at the edge of the abyss as well as those whose only real problem is the declining value of their home is useful and while it doesn’t cover every single circumstance, it does cover a huge portion.
There a couple of areas which merit a bit of discussion and undoubtedly will require some modification.
1. First, let me ask that everybody go re-read the Parable of the Workers in the Vineyard. Why? Because like laborers in the vineyard, the HASP will leave some folks feeling like they were mistreated because they were prudent in their mortgage dealings and will not benefit from the HASP. My answer? “Friend, I am doing you no wrong.” There are just some things in the life of a Nation in which you simply cannot get the toothpaste back into the tube regardless of how firmly we believe that is the just solution.
2. The plan is simply too complex on its surface. This is a problem with President Obama, he is smart and he assumes that others are equally smart. The average Wharton MBA could not read the Executive Summary of this plan and “brief back” its provisions from memory. The borrowers? Hey, they didn’t provide income documentation and were not interested in a lot of paperwork to begin with — do you think they are going to come trotting into their bank with a bunch of documentation now? The plan has to be simple enough that a high school grad (OK, in the top half of his class.) could understand it.
Does a fish taste any different if you catch it with a worm, hook, bobber, line and a cane pole? KISS — keep it simple for the stupid!
3. The plan does nothing to stop pending foreclosures. I would like to have had a 90-day moratorium on foreclosures currently pending. It is outrageous that banks receiving TARP funds are not called to cooperate fully with all government sponsored bailouts. They were first in line to receive assistance and they should also be first in line to provide assistance. These guys owe us!
4. I hate the provision that if a borrower who has received a loan modification is current in their payments that they receive $1,000 annually for five years. When a cute little mouse has his leg removed from a trap, he does not negotiate for a piece of the cheese before scurrying away. This paternal approach is really insulting to all involved. Everybody should get one chance to be saved with no do overs.
5. I wish the plan had a provision that the “work out” financing could also be applied to first time home purchasers in order to soak up some of the excess inventory out there. Missed opportunity to work down the supply of troubled housing and for banks to reduce their REO.
6. There is a sense that the mortgage modifications are only going to be for five years. This is silly. Make them permanent and make the solution permanent. Five years is not very long for an asset which is normally financed over 30 years and which can last for 100 years. There is ample evidence that re-default rates are as high as default rates. Solve the problem permanently.
7. The government should get an “equity kicker” for their trouble. If you participate in the plan and peg a new value on your home, then the government should get either a par payoff of a 25% equity kicker above the marked down price for the next ten years. Why not?
In closing, let me say that of the three plans advanced thus far I like the HASP the best. Remember we are only talking about a national mortgage delinquency rate of something less than 7%, so while the problem is huge in terms of dollars it is really more manageable in terms of the numbers of folks impacted. We desperately need a win on the economy and this may be a promising start.
I rate the TARP at zero probability of working because I think that Darwin was right all along. I rate the Stimulus at 25% with its most significant failing its disconnect between the spending and the creation of jobs. I rate the HASP at 50% with the possibility to engineer that upward with some simple modifications. Thanks for listening.
Fred's Update: You might enjoy watching the Rick Santelli rant on CNBC in conjunction with this post. What a great discussion and debate we are having here. I love it.
Fred's Update 2: I measure the success of a post by the number of comments. By that score, JLM hit one out of the park with over 100 comments and still growing in less than 24 hours. Well done JLM, great topic, great post, and great discussion. You will be a tough act to follow.
“Friend, I am doing you no wrong.”So….you won’t need my money for this? Instead of allowing me to use that money to purchase foreclosed assets at TRUE market prices, the Federal Government will take it from me, by force, and use it to prop up the irresponsible.I find that this entire article could have been written at any point in the last 30 years, cheerleading the CRA, Fannie and Freddie…. and the government’s role in “promoting home ownership”. This time it just has a “we’re in crisis because of all these things” wrapper on it. Not buying.Liberty first.
you are up next Andy, either before or after steve kane. but i need to find the right issue for you to tackle. you’ve got strong opinions on evertyhing!!
Very risky, Fred 🙂
i will unsubscribe if andy is ahead of me.
Then get busy leaving comments longer than five words howardThis blog’s comment threads are not twitter 🙂
Exactamundo.Here is a novel approach: Keep the government out of it. It is not the solution. The market is.The whole reason responsible people are upset is because their money will be used to keep the people that made all these mistakes from being punished.The market punishes for a reason: to prevent these things from happening again and acts as a disincentive to those that may attempt it. Had the government not been involved in the first place, the market would have solved this years ago and the pain would be much less. Now it is time to pay the piper. Same with the auto industry.The reasoning that is being handed to responsible people is that they will benefit from their neighborhood’s housing prices being stabilized by this. What a load of crap? No, you are punishing the people that hold the water rather than the people that drink it. This will not fly with the majority of [email protected], stay out of it!
That’s true, but markets always overshootOn the upside and the downsideA totally free market is not always the best approach
Market theory also assumes informed buyers and sellers. I have friends, bright engineers, who didn’t understand the market. Many of the mortgage sellers didn’t understand the market and they didn’t have to. Most of the news media published stories contrary to what any rational person could think about the housing market.The housing market was not rational and many of the participants honestly thought they were doing the right thing. As JLM points out “Home equity represents the most important (and generally hidden) asset in most folk’s lives when it comes to building long term retirement equity” is something we hear our entire lives. Some people believe it.Am I mad that I’m paying for other people’s mistakes? Of course. But the people who made these mistakes are my co-workers and my friends and they made them for the best of reasons, with the best of intentions, in many cases. For these people at least some forgiveness is in order, especially because I have a small company, and I want customers to buy our products.I’m far more pissed off at the bankers and their CDOs and the SPVs , because these are the people who were experts in the field and they used that expertise to directly profit from a system they had to have known was unsustainable.
but why do they overshoot, and why do they overshoot to such preposterous levels as they did in the dot com bubble and the housing bubble? i would argue it is not just a coincidence that these bubbles occurred when US monetary policy was the most reckless it has ever been during alan greenspan’s tenure (though bernanke is giving him a run for his [soon to be worthless] money)govt mismanagement created the mess, and now govt mismanagement is exacerbating the mess. barring a well-guided transition to the post-nation state world (keyword being well-guided), only a return to sound money and limited govt can solve the crisis, so long as we are playing within the nation-state paradigm.
Jeff, Whow ! That was really KISS (keep it simple for the stupid!) . I do not had time to read the original HASP and I am not involved, but your post has made it clear simple to me.Thanks
Wouldn’t it be a thousand times simpler to allow the temporary tax deduction of 200% of mortgage interest paid on your primary residence for pre-existing loans? No rewriting mortgages, cram downs, etc. The costs of this are known exactly from IRS data and it can be repealed at any time.
This seems logical. Any comments?
Very well written. Thank you.My biggest issue with the current HASP and all other proposed housing bailouts is “how about a little something for the good guys?” There are clearly 2 sides to this. I realize that when taking a loan from the bank it’s the borrowers responsibility to make payments on time and be in good standing with the loan/bank. Those are the terms. Hell, that assumption is why the bank made the loan in the first place, right? So should I be rewarded for simply following the terms of my loan? Sometimes I think so. Sometimes I’m not so sure. However, clearly I should be penalized for failing to comply with the terms.Why should the person who was irresponsible in getting a loan be rewarded for this? 100% financing, buying properties with no income verification, etc etc. What’s the impact to these people who have their loans modified? What’s the penalty?
Lee, I get your frustration. I follow your logic. However, I’m not sure looking at it from a punitive perspective is the way to go. Yes, people screwed up, yes many were irresponsible. But, if we don’t fix this problem and provide relief for these people and others to come, the impact will descend on the more responsible. In the macro, taking a punitive perspective, will in the end, take down “the good guys”.Sometimes to save our selves, we have to save those who are part of the problem. We are first and foremost a country. We are intricately tied. I think we are loosing site of this. Part of us can’t fail, why the other prospers. It’s not sustainable. I say let’s come together, fix it, whether you were part of the problem or not, make the changes so it can’t happen again and get back to what makes us good.
Agreed that we’re a country and if we don’t fix it now, it’ll bite us “good guys” later on. But how about a broad ranged plan that is of some benefit to all. A colleague and I often discuss the concept of a 5 year deferral of interest payments. So for the next 5 years, you simply make principal payments. Let people build back equity, lower their monthly payment, and after 5 years the interest owed could be somehow re-figured into the loan. Kind of the anti-interest only loan.
Let’s say I’m a 25 year old married couple with one kid. I’ve been renting for the past 5 years, trying to save money for a downpayment on a house, but waiting until I could actually afford it before borrowing the money.What this scam does is STOPS my dream from coming true. Without it, a house would go into foreclosure after home prices fell further and became affordable to me. Look! I did the right thing, I waited, and now I can afford a house that someone else can’t pay on!But wait. Along comes team O. And now he says not only will he not allow the others to fail or that house to go into foreclosure, but he’s going to use MY TAXES to prop them up!Explain to me how this isn’t “punitive”.
I think there are going to be plenty of homes available via foreclosureAndy, even with this planThere’s a for sale sign on america right nowIt’s time for that 25 yr old married couple to be thinking about buying now
OK…and more of them could afford it if prices were allowed to come down tothe point where supply meets demand.My point is….why are we more concerned about the CURRENT irresponsiblehomeowners, than the future homeowners who are waiting in the wings?
I am concerned about bothThe future home owners need a stable market tooNobody’s buying when they don’t know where the bottom is
my read here is that fred is saying that we should be backstopping from an overly damaging correction (I’d reluctantly term it an over-correction) whereas andyswan sees no need to intervene at all in the housing market correction.i think the government is providing a floor for the sake of stability of the economy and in the country overall. Moving forward we need to provide a ceiling too.
I’m not in favor of an absolute floor or ceilingBut I do like intervention in markets (like the fed raising rates to put adamper on excessive speculative forces) at market extremesI know that kills andy to hear me say thatAnd I understand that I might be wrong on this oneIt’s just how I feel
Bottoms occur naturally. There is no need for the O-team to pick winners and losers.
I can’t help but look at the economy from the perspective of dynamic systems. Ideally we want the economy to be critically damped – same as a car – where it returns to the center as quickly as possible.Left to its own devices, the market is under-damped, oscillating much longer than necessary. This type of situation would directly lead to a lack of risk taking behavior because living in this environment requires far more cash on hand.The governmental meddling is more like active control, it can work amazingly well, or it can send things into a tailspin very quickly (financial engineering is an “active” control system” as well.)I guess my question is, for the economy, what is the equivalent of the mechanical damper? What slows things down and puts them on a trajectory towards stability, without overshooting it? And what does it as quickly as possible?
I was Course 2 at MIT Michael so this is where my head is at too.I love this analogy and am going to reblog it at fredwilson.vc
I had an oscilloscope pictured when I talked about floors and ceilings. Well done reading my mind Michael 🙂
market is a self-correcting system, i.e. too many bad loans made, this results in bank failures (bad lenders erased from market), contraction of money supply due to destruction of credit which leads to a strengthening of the dollar and falling prices, which encourages savings. these savings can then be the foundation for investments and production.at least that’s the way it’s supposed to work 🙂
I guess I have 2 approaches to answering your comment:-One of the interesting ideas of systems dynamics is that there are many stable points and the exact trajectory the system is on determines which stable region the system winds up in. I’d argue that the economy is at least as complicated as, say, the electrical grid and that similar things can happen. As an example, think about the idea of a very stable event, the cascading power failure. It’s stable because all the power has gone to 0, but it’s not a good stable point for the electrical grid, and the grid certainly has other stable points in which all power generated and consumed are not 0.Similarly, the economy has the same problems as a cascading power failure, mortgage defaults screw up CDOs, which screw up insurance, banks are underwater and afraid to lend, companies run out of short term cash and lay off people and people stop buying because of all of the above, perpetuating the cycle. Essentially leading to as close to 0 as can be.Now you are right, eventually the economy will come back. But I don’t want to live in a world in which it takes a decade for that to happen. And I’ll do better if we can get growth of some sort started again.-The other way of looking at it is that the markets frequently oscillate more than they should. Banks *completely* stopped lending to each other and companies because of *some* bad debt. Commercial paper completely dried up, even for companies that can pay it back. This kind of overshooting affects every sector of the economy. And it punishes people who have never done anything wrong.Now I’m not arguing on behalf of people who took advantage of the market, merely that there are people and companies suffering because the market is a dynamic system, and I want it to land on a beneficial stable point.I’m actually quitting early today and heading to Reno/Tahoe for the weekend. But if you reply, I’ll certainly see it, and respond when I can.
i think the economic equivalent of the cascading power failure you mentioned is referred as a “deflation spiral.” this is where collapsing asset prices lead to falling wages, which leads to rising unemployment, which leads to decline in aggregate demand, which leads to further asset price declines….and so the loop repeats. this is what happened during the great depression and what current policies are meant to avoid. at least that is what we’re told.the conventional answer from the non-interventionists is that while there is some truth to the deflation spiral, it is not as bad as it often is made out to be. for instance, it does not need to take a decade to get all the crap out of the system and start rebuilding things. in fact, in november of 2008, we saw an increase in both savings AND consumption (link: http://stefanmikarlsson.blo…. this is a result of the magic of falling prices.also worth noting is that panics, like what we saw in oct 2008, really just take excess value out of the market. put another way, panics pop bubbles; once the bubble is popped, the system is stabilized, and can resume growth. myself and many others in the austrian school of economics think a bottom is around 500 on the S&P. the logic here is that we are going back to the pre dotcom and housing bubble levels, as those bubbles were false forms of value. why did the market get so distorted? federal reserve policy of creating too much money is the answer of the austrian school. in fact, if money supply were determined by the market instead of by a central bank, we would not have had these huge bubbles, according to austrian logic. (money supply is determined by the market when the govt guarantees the convertibility of dollars into a commodity; i.e. $20 = 1 oz of gold. the US operated on such a system for much of its history, prior to the creation of the fed in 1913). now when govt intervenes, they make it harder to get the crap out of the system, which is what actually prolongs the depression. this is why japan has been in a downturn for over a decade, and why teh great depression lasted for over a decade, according to austrian logic.but for the sake of discussion let us assume there is a way for govt to intervene and make things better. right now what govt is doing is printing money and giving it to banks. this dilutes the value of the existing money supply and transfers it to banks in hopes that they will lend again, and that an economy built on credit can resume. but an economy built on credit can never last, and is what got us in this mess in the first place. a real economy rewards those who save and allows them to turn those savings into investments. when govt is constantly inflating the money supply and devaluing the currency, it encourages consumption, not savings, which hinders long-term stable growth. and thus those who embrace austrian logic but still think there is a way for govt to tweak the system a bit for the better favor a decrease in govt spending, and an allocation not to banks but to consumers and those who are in debt. in other words, stimulus packages for those in debt, not those who lend. this would reduce foreclosures and stuff like that as those in debt could now pay off their debts with their govt handout.right now we are on pace to kill the economy from govt’s “stimulus” packages. my biggest fear is that we are going to see a rally in the stock market. not because i dont want to see the economy get better (obviously i do), but because if there is a rally, it will be totally phony and will be the result of printing money/currency devaluation, not real productivity gains. this turns the stock market into a speculative casino at the expense of those who are working hard and saving.a systems analogy that you might find useful is to think of how the human body behaves when addicted to drugs. the high we get off drugs is like the bubble. the hangover/withdrawal symptoms are the falling asset prices. yes it is painful, but necessary. and if we try to “stimulate” ourselves with more drugs, well we may feel better for a little bit, but ultimately we run the risk of doing more damage and possibly even overdosing (the equivalent of an overdose is hyperinflation, in which the currency has become completely worthless. this is still unlikely in my opinion but not by as much as many would think, and i see an increasing number of smart economists who have been right all along grow more concerned about this risk in the US.)phew, long comment! hope i did not bore you to death with my rambling. i could talk about this stuff forever. 🙂 anyway, hope you are enjoying reno/tahoe.
You didn’t bore me at all. I actually have questions that I want to ask you, but they’ll have to wait for a full sized keyboard and screen.Thanks for taking the time.
I’ve got my head in your austrian school and my heart in rattner’s systemdynamics class.One thing I’ve been trying to understand is the increase in the savings ratehere in the US over the past year as the gov’t has thrown money at theproblemThat’s a good sign, no?
yes that’s a GREAT sign IMO, and if it were to continue and even accelerate we’d be out of this mess in a relatively short time. the problem is that the “stimulus” packages thus far look like they may have kicked in as we are starting to see prices rise: http://money.cnn.com/2009/0… . gold topping $1000/oz this friday suggests the market is pricing in inflation as well.so now we are setting the stage for rising unemployment and rising prices. this will make savings really, really hard, especially for those at the bottom of the wealth pyramid.
Michael I am totally digging your econ as engineering riffs. They maketotal sense to me. Thanks and have a great weekend skiing.
All the engineers ultimately reduce every discussion to either dynamics or statics — as it should be. I think the challenge is to decide whether there is a natural dampening force (rolling resistance, friction, free markets) in addition to an interventionist dampening force (brakes, government) and whether they are detectable and equally important to each and every participant.In a free market, a seller sells convinced of the wisdom of the transaction while an equally convinced buyer buys the very same asset from the very same seller. It is the right thing for both of them because of their relative positions or personal circumstances in the market. They are “normally” motivated though with different objectives.Timing, personal circumstances, balance sheet, liquidity (school district) needs all influence the decision.An empty nester sells a too big house to a growing family who desperately needs more room and, interestingly enough, the transaction is perfectly correct for both of them at that instant in time.The really funny thing about real estate is that you almost can’t make a bad investment if you are willing to hold it for 20 years.The issue then becomes, in part, the utility of the investment in the time period that it is a “useful” asset. As shelter? As a well spring of wealth? As a social dividend? As a party crib?In addition, the very best neighborhoods (the very best assets?) perform differently from other perhaps newer neighborhoods.The market is an almost infinite set of different subsets many of which may be impacted in polar opposite directions ($150K homes bad, $1.5MM homes good).It is the asset class at the macro economic level which becomes suspect at an instant in time rather than the entire asset class OVER time.The macro economic dampening mechanism is too insensitive to the micro economic differences — said another way, there is always a “good” deal somewhere and there always will be as long as you don’t try to pick the absolute bottom or top.
JLM,I think you just called me an engineer! I suppose I’ve been called worse :PI’m packing right now, so this will be quick, but I think that the only true type of static financing is cash up front. In that situation market actors decouple and network effects are limited. In all debt financing, there are situations where, when enough debtors can’t pay back the the debt, the system will fail. I guess my argument is that anything big enough to be called a system is probably also big enough to be called dynamic.Now I do realize that I’m forcing an engineering model onto something that may or may not be an engineering problem. But it is the lens through which I see the fundamentals here.One other comment, external factors may change facts about how even the housing market moves over 20 year periods. For example, a global population drop could cause the stable point for housing prices to fall. On an unrelated note, this is what I think happened to the stock market. We’ve been in a bubble for 30 years, with the stock market growing at 7% or something crazy (I forget exactly what) and GDP being nowhere near that growth. Now some of that is projected productivity gains, which can’t really fill the gap. Over any 20 year period the stock market has been a great investment. But this time, it may or it may not be. Who knows? (And I say this as someone who would love to take a company public some day.)
Oh… and I suppose that wasn’t a quick reply 🙂
Funny, this oscillator talk is the theme of the day; see David Brooks:http://www.nytimes.com/2009…Years ago I was making the same argument about affirmative action. There was a very vocal group against it, calling it reverse discrimination. The point was, it is a government program designed to dampen a social oscillation: institutionalizing advantages for historically disadvantaged groups, thereby discouraging militant radicalization…
The Brooks article is really interesting. I hadn’t seen it before.I also think it’s interesting when you map an engineering model onto a social science. It breaks down at some point but I really like the framework.
I know some super smart people here in NYC who have lived here as long as Ihave (23 years now) that have never bought an apartment or a home. They arealways waiting for the bottom and by the time it is revealed as the bottom,it’s well past the bottom, so they wait some more. They are still renting.Meanwhile, the Gotham Gal and I have bought and sold four homes in thattime. We’ve lost on one and probably two, and won big on two others. Andwe’ve substantially increased our net worth in the process. You gotta be init to win it.
> The governmental meddling is more like active control, it can work amazingly well, or it can send things into a tailspin very quickly (financial engineering is an “active” control system” as well.)Actually, it’s like active control driven by a combination of malice and ignorance.The malice comes from regulatory capture and its analogs. Politicians behave like politicians and any system which depends on different behavior is doomed, no matter how nice it would be if politicans behaved differently.
I suppose that’s one of the reasons I asked about a “damper” which could be viewed as a more passive and neutral way of moderating things. While not helpful anymore, an example of a damper would be requiring 20% down on all houses. It doesn’t really favor anybody, but it makes the system more stable. (ok so that’s technically not a damper, it’s “sending the poles to infinity” but you get the idea)In this model we look for passive type levers that prevent oscillation. I’m out of my area when I make specific suggestions, but government loans that must be repaid to business that can’t get bank credit but are oterwise strong would fall into this category.
I’m a big fan of more skin in the game in every asset class.
Take Canada for example. They have more conservative practices stemming from six large banks that are under heavy government regulation. Canadian banks rely on large retail banking networks, which in turn is used as a capital base for its investments. While I know that all commercial banks across the world seek deposits, those trying to grow may employ alternative tactics to increase deposits. For example, I have seen banks lend money to a customer and deposit those funds into a standard deposit account. On the balance sheet it looks as if deposits and loans are more evenly matched, but in reality it is similar to using a credit card balance transfer to fund future growth. The longer tactics such as these are utilized, sustainability decreases and you reach a point where funds need to be borrowed and the Bank risks failure. In addition, Canadian banks required viable financial documentation from its customers and didn’t lend in excess of 75% of a home’s value. This helped reduce many of the housing problems that homeowners in the United States are facing today.The problem with this approach is that heavy regulation limited growth of Canadian banks during the financial boom earlier this decade, but are holding up well as many US and European banks are racing towards bankruptcy. It is hard to argue with a financial system whose banks haven’t cut dividends since the Great Depression, and have been commended by President Obama and other world leaders. In October, the World Economic Formum named Canadian banks as the soundest in the World. In my humble opinion, the Warren Buffett philosophy of slow and steady growth is the only way to go.But touting the strength of our neighbor to the north’s financial system isn’t going to get Americans out of this mess. We can wish that greed was never a factor in this mess and the many others we have faced over the years, but it has been and probably always will. I have had my issues in the past; financing a life I couldn’t afford with credit card debt — but I lost my credit, cut my expenses, and worked hard to repay my debt. I had help in the form of reduced interest rates, which made a difficult task slightly more achievable. Having been through that experience, I understand the need to help American’s with their housing problems but cannot condone completely bailing out people that misrepresented their incomes to purchase a house they could not afford.What are your thoughts on using funds from private investors to purchase homes at reduced prices, and lease them back to the current tenants?
Most macro problems have to be solved with an “all of the above” solution set, so yes, this will happen and it will work.I think your observations about Canadian banks are right on the money. I think the other thing about Buffett that is important is to stick to what you can understand — he understood cheeseburgers and then he bought Dairy Queen. LOL
so right. this is all crap. the foreigners are going to own it anyways so might as well speed up the process.If you are going to pass this plan, let’s set up a fat tax so these slobs who we are saving get taxed and lose the home anyway 🙂
> I think there are going to be plenty of homes available via foreclosureAndy, even with this planObama says otherwise. Pelosi says otherwise. Acorn says otherwise. They’re all demanding a moratorium on foreclosures.Andy is correct – he’s being hosed out of a house so someone else who took a loan that they couldn’t afford can stay in that house.Yes, there’s a “value” to home ownership, but it isn’t dependent on who owns those homes. Let’s let Andy have a shot.
I am sure andy’s got a very nice homeMany of the people who are the most upset about this plan have nice homes, Ibet santelli does too.They are arguing for a class of people they are not part of.All well and good, but they are not being denied a shot at anything
I could not agree more. I think that the government propping up the house of cards is simply a band aid. I mean, how will the irresponsible people/banks learn if there are no consequences? Realistically, we are talking about a very low percentage of people who could benefit from this plan. To me, it does not pass the sniff test.I do not believe in “do-overs,” if you did not take the time to diligently review your mortgage paperwork, or ask the advice of a lawyer before making the single biggest purchase of your life, that is on you. “Big, bad business” did not forge your signature on that paperwork.To illustrate this, I saw a CNN segment where they profiled a woman who admitted, on national television, that she did not fully read the loan document. She did not realize that she had an ARM. This is ridiculous, it makes me want to be a tax evader.
From a macro perspective, I agree with you completely. Unfortunately the problem has gotten so big and it has gotten into our national psyche in such a manner that it has become a matter of confidence rather than just market behavior. We are on the psychiatrist’s couch and he is trying to talk us down off the ledge.Now is the time for triage and in a few months we can become a bit more critical. I am firmly convinced that the investment and commercial banks who caused the problems and the regulators who overlooked or otherwise empowered them have got to be eliminated.We are not saving the individual participants, we are saving the system and the coherent whole. Then we should punish the individual misbehaviors who by then may have been punished by the dismemberment of their employers. When Citi lays off 52K workers, you have to believe they will get a few folks who led them down the wrong paths. I hope so.The most powerful among us use their power sparingly for it is the illusion of power which is the real power. Now is the time to be just a bit compassionate and then lower the boom once the entire system is safe again.Wait until we are in harbor to begin the board of inquiry as to how we got on the rocks in the first place.
I agree with you that this problem has created the self-perpetuating fear that the Depression was prolonged by. I think that it is Obama’s obligation as the President to come out and reassure the country. However, I think that there is a major difference between assurance, and spending nearly a trillion dollars that our government does not have. To me, that is not any assurance (especially because I am not actually going to see any of the “stimulus” benefit me directly, I employ the strategy of living within my means). In my opinion, that money is just going to be wasted. I think that the leadership in our government needs to come clean, and make sure that the entirety of the populace knows the facts about this crisis. Specifically, the percentage of people who are in or near foreclosure of their primary residence, relative to that number over time, as well as the percentage of unemployment currently, relative to that number over time. To me, the 24 hour news cycle is making this financial mess significantly worse than it really is. I mean, we are at ~8% unemployment right now. Yes, that number will increase over the next several months, but I just do not see us reaching the astronomically high employment levels of the Depression era. Not only that, the vast majority of people in this country still have a job, and are still current on their mortgage payment. However, if you watch CNN, Fox News, etc., they would have you believe that the whole country is getting ready to shut down.
Yeah, this is the other side of the issue.Is helping the people who screwed up, be it banks, investors, people whobought a home they could not afford, etc going to stabilize the economy foreveryone?
TARP is despicable. It is a rape of our nation. The owner of the Phoenix suns gets 140 million, keeps his team , can continue to foreclose on people and it took two pieces of paper to get it.In the meantime, entrpreneurs who want to start a bank hav no chance and small banks that are struggling to survive are being penalized each month by having to put up more deposits, basically in a slow strangle.criminal.
and the other option?
We can start a bank howard. I am sure of it.Watch andreessen on charlie rose. He talks about that.
That interview was fantastic
This is an important pointBut there’s another side to this which is that if this program stabilizesprices for everyone, and a lot of people own real estate in this country, itmay actually help a lot more people than just the people in trouble withtheir mortgages
Great read, but the point no one ever mentions is 30 to 40% of the folks currently in trouble and doing this intentionally to capitalize on the opportunity to file foreclosure and live for 6-7 months in the same house rent-free. Not to mention that on average they are saving $1500/month of rent for last 6 months as well as the extra $150,000 they picked up on home line of equity and never pan to payback, not a bad return for owning a house they never deserved for 2 years and making $175K. According to your KISS strategy that is straight-up criminal, why is that not being addressed. As you noted that folks who come from stable households are not the majority in current situation to begin with anyways, Isn’t that the downfall of the larger corporation called the “USA”
I know a builder that did this game on a grand scale. One house cost him $1.7M to build. At the peak he got it appraised for $2.7M. He refi’ed into a $2.3M loan extracting $600K cash out. Since the house wasn’t selling he rented it for $10K/mth. But he also stopped paying on the $2.3M loan and pocketed the $10K rent. After three years in court he lost the house. It sold later for $1.6M.Multiply this by ten houses and he extracted over $9M. He didn’t purposely set out to do all of this he just sort of accidentally fell into it. The only thing he purposely did was pocket the rent while not making payment to the bank. INAL but apparently the only recourse when payments are not being made is foreclosure. Each house was built inside a LLC. There was no way to chase the pocketed rent money. He used every legal defense to drag the game out for as long as possible.
Hmmm, this is a very, very curious tale. It is difficult to believe that a bank would make a $2.3MM permanent loan to take out a “construction” loan to a builder operating as an LLC without a complete personal guaranty when the home was not “owner occupied” and the original construction loan amount would be known by looking at the county property records. This is, in effect, a commercial loan for a rental property. This is not the arena of the “no doc” market and has nothing to do with the HASP arena.An LLC provides protections against garden variety liability — hence the term ‘limited’ — but it is not a defense against “piercing the corporate veil”, “alter ego” or “aggregation” claims. Bearing in mind that these theories of law while fairly arcane are exactly the right application when a party adopts a legal structure to forestall the collection of legitimate debts. These theories are very formulaic and almost all of the elements of the formula are in the facts which you present. This is a textbook case.LLCs provide protection to the owners against claims in excess of the equity in the property and the insurance policy limits while providing a pass through conduit for tax purposes. They are not a two hand dunk shot as it relates to liability exposure. In addition, the usage of an LLC in a credit relationship is a red flag that would have any prudent banker reaching for the Personal Guaranty form thereby in effect “piercing” the sham protections provided by the LLC. Pretty tame and routine stuff in the banking world.The banker would then both foreclose and sue for satisfaction under the terms of the Guaranty. Having borrowed over $1B in my real estate career, I can assure I have signed a boat load of personal guarantees. They have more teeth than a mako shark.Further, a serial offender opens himself up to a RICO — in this instance both civil and criminal — claim which provides for huge damage awards, including punitive damages, with an automatic tripling of damages. His diverting the funds from the rentals probably elevates this to a criminal complaint and the pattern of conduct is very, very troubling. This is the kind of thing that a contingency lawyer would send his grandchildren to graduate school on.It is difficult to believe that the legal fees and the ongoing legal exposure — to say nothing of the lost brain cells — would not consume all of the “profits” to say nothing of the prospect of punitive damages. The damage to the builder’s reputation would be fatal not something a fella building $1MM homes can dine out on.I would think after a couple of appearances in court a Judge would undertand the scam and would rule or manage the case accordingly. The lawyer representing the builder better have a fall back career plan after the second or third such set of documents he approves. He is now part of a conspiracy and his law license is in jeopardy.Very curious.Other than that Mrs. Lincoln……………………………
The process was fatal to his career as a builder. I believe he is heading for personal bankruptcy too, but there is still a large amount of cash that is missing. I do know that he spend an awful lot of time in court.The initial construction loans were from other places. He got WaMu to do the cash out refi’s. The cash out was supposed to let him build more houses but when his first ones didn’t sell he just sat on the money. The $2.7M appraisal was probably valid when the $2.3M refi was done. Prices just didn’t stay there. I know specifics on this property because I tried to buy it from the bank.The process wasn’t serial, it happened in parallel. It also wasn’t done with intent. He was divorced in the middle of this. She took a large cash settlement and he got all of the houses. This ruined his ability to make payments which led him to discover that if you didn’t send the rent money on to the bank nothing much happened. He’d go whine in court about his wife taking all of his cash and everything would get deferred.
Ahhh, marriage the single most important and largest business decision you will ever make!Meet a beautiful woman, fall in love, drink wine, dance, have babies, foresake all others and what does it cost you?EVERY PENNY YOU MAKE FOR THE REST OF YOUR LIFE!Of course, I think of it as the very best decision I personally have ever made. LOL
I am enjoying watching you play my normal role JLMYou are doing it with humor too!
Don’t worry, I won’t quit my day job. I am going to have lunch w/ a company which has relocated to Texas from California. Thanks for the opportunity, Fred, it was great fun.
WaMu needs some of the blame too. Why did they let the foreclosure drag on three years? The house I wanted went to auction on the front yard status over fifteen times. Everybody would show up and then they would cancel it. The auctioneer joked with me that he was making a career just off from this builder’s properties.Of course I’m not privy to a lot of the details about what was happening behind the scenes. But now that I think about it the divorce at the peak of valuations extracted all of the working capital from the business and it was a fatal blow. She ended up with millions and he ended up in bankruptcy.Dennis Kozlowski’s wife (Tyco) out bid us on another property we were trying to buy and we know how she got her money.
JLM – I added a link to the Rick Santelli rant on CNBC yesterday to the end of this post so we could have some more energy in this discussion! I hope you don’t mind.
JLM I agree because the explanation of LLC makes sense and definitely personal guarantees prevent lot of us from taking steps that jeopardize our credit and not to mention our construction careers to those it matters in case it is a career damaging step. However, the point is if someone robs a bank, do we bail him out and give him some of the robbery money he owes the bank from a stimulus package. I am all for supporting others to save the larger ship from sinking. In case we all believe that greed is good, in the same speech we should also believe that the survival of the fittest matters and I am not saying that we let this place turn into a jungle, but as you said things should be simple, the benefits should only be used for where it matters very cautiously. I personally do not believe in saving the housing market, I do believe in making room for new players which will create new jobs and new markets as compared to dumping good money behind bad. We have so many options, alternative energy plants, I would love to not pay a penny to PG&E in California, I support american car manufacturers especially the new generation ones including Tesla 🙂 not GM’s of the world. Why can’t we focus on deregulating teleco’s as well while we are at it, that will bring a new wave of competitors and jobs and finally fix medicare and medicaid instead of H1B’s why not bring doctors, I bet you that will fix part of those problems. Finally look into what the hell FDA does, why it takes so long for some fo the drug research and put some strick laws on people that file law suits as well as folks that file bankruptcy. Finally back to housing, I live in the silicon valley, have many properties here, we also do farming and buisness in retail as well as a startup, yes the prices are down in our real-estate, sales are slightly down in retail, our mortgages are not killing us, almond prices are at an all time low, I also see lot of folks who fall under the category of foreclosures, majority of them are laughing at it in the background because they are actually making money in the process because majority bit off more they can chew and they knew it when they did it, Just some thoughts since fred wilson encouraged us all by calling his great blog a forum for last week or so 🙂
Thanks AJ for participating in this forum! I love that you do farming,retail, housing, and tech. that’s entrepreneurship at its finest.
What do you think of the tenet “If you cannot afford it, you shouldn’t own it?”
I think you have it backwards. This country was not founded upon home ownership. It was about sacrifice for freedom. Having sacrificed by living in an apartment waiting for home prices to correct, I am upset that the government wants taxpayers to bailout the irresponsible ones and keep home prices unnaturally high. This is not what America is about. We need to really figure out where our political parties stand on this. Are we going to be socialists Democrats versus capitalists Republicans? As a ventures capitalist, aren’t you concerned about this? Are the best startups coming out of France? Of course not. The effects of handouts are complicated and often not as beneficial to the recipient as some politicians would have you believe. Freedom is not free. And, it is certainly not a handout. When that happens, someone else is less free.
right on AJ
“capitalist republicans”….lol. boss you mentioned it was guest post day but you forgot to tell us it was comedy hour as well! :)the past eight years of rethuglican rule have been about fascism, now that the dumbocrats are in charge we have socialism. both are two sides of the same big govt coin and run in direct conflict to limited govt free market ideology that the US was founded on but has since long been abandoned, admittedly at a faster rate in the post 9/11 world.
I think we are agreeing. Do we just sit back, continue to be partisan, and throw around hyperbolic name calling? Or, do we do something about this and save our country? Are you aware of the scope of what is going on right now? As entrepreneurs and people who can look around the world and see the effects of economic policy throughout history, are we going to let the political parties lead us? So much of what I hear sounds like it is coming from a DNC or RNC press release. The people who understand economics, the entrepreneurs, the risk-takers, the freedom lovers, need to set aside petty differences, join together, and be the adults when our leaders are acting like irresponsible children — on both sides.
And step up and take some risk with our capital and our instinctsIt can be in startups or real estate or the stock market or somewhere elseBut when fear is ruling the roost, it’s time for greed
It is time to start making some bets. You are absolutely right.I run a little public company which is engaged in a quirky little business acting as the real estate landlord to charities who conduct bingo as a fundraising mechanism for their charitable purposes. Arcane niche but highly profitable business. At the end of the day, it is a very specialized real estate business to which we add a “franchise manual” value added proposition whereby we teach charities (in appropriate regulatory environments) how to make more money playing bingo. It is a simplistic multi-unit, multi-state (Tx, Fla, SC, Ala) operating business (not unlike the apartment business or the fast food business).If you can run one, then you can run 1,000 units. It has the same gross up, roll up, consolidaton implications of any similar unitary enterprise. We are just taking a mom & pop business and slapping it with a checkbook, running it using modern business concepts, bringing the marketing into the current century, standardizing procedures, documenting performance, benchmarking the analytics and upgrading the personnel involved — then we feed, fertilize and grow the number of units thereby reducing overhead as a percentage of revenue. Simple, simple, simple.In the last year I have made 4 acquisitions. Some are multi-unit acquisitions. The first returned a 25% cash on cost return in its first year of operations. The second is looking like a 145% cash on cost return. The third is looking like a 130%. The last is also going to be over 100%. These are unleveraged returns and with just a pinch of leverage, the returns are astronomical. These returns are improved by our expertise and the assurance that ALL of the $$$ gets into the cash register, a real problem with any cash business these days.The point is that the returns are already accelerating as the market chaos spreads. Another way of saying the same thing is that selling prices are going down. We usually negotiate a cash and note arrangement and then get an “all cash” discount.Today I have about 40 + units (up from 16 some time ago) and I hope to grow to about 125 units. There are deals out there and we are actively engaging any and all sellers whether the pricing is right or not because they will change their minds as the economy continues to present challenges.In every instance, we are buying from someone who is dealing with a “D” — death, divorce, disability, disease, corruption, regulatory issues, fear, etc. Nobody is just monetizing their investment.Unfortunately, I cannot deploy much capital in these deals as they all trade in the $300-600,000 range and each deal is like pushing an elephant through a transom window but we have perserverance.So, yes, I think the time has come to do some deals and to build for the future. Having done this before in the S & L crisis, I can also say that there is a huge premium to be had for simply having a coherent plan and the confidence of it not being your first trip to the rodeo.In the land of the blind, the one eyed Jack reigns supreme.
Great comment JLM. It’s also interesting that small is the new big. I’drather be doing dozens of $600k deals in this environment than one $600mmdeal.
absolutely, i totally agree. MASSIVE change has to happen, and it requires political change. basically over 99% of people are getting screwed by this system, even relatively wealthy folks like much of the AVC audience. when you have such blatant theft a revolution, hopefully a peaceful one, is inevitable. it is just a question of how bad things will get before people wake up and see this is what must be done.
When the Republicans had been vanquished at the polls, the electorate had cast them out into the darkness, when they had lost their leader, their governing philosophy had been disavowed, they had been relegated to back benchers, their manhood had been pawned —- who breathed life into them, gave them a unifying purpose, rallied them to stand like a “stone wall” and gave them political Viagra?When the Messiah came forward to lead the American people to the land of “hope” and “change” and the perfect storm delivered unto us the promise of Martin Luther King’s great vision — who undid it all?Who? Who was that great leader? Who?NANCY PELOSI!Is this a great country or what? LOL
LOL, poetic and humorous! tragedy always brings comedy. nature’s built-in bailout. 🙂
I love when kidmercury calls Fred “boss.” Isn’t it just the greatest? I think I’m going to start calling Fred “boss.”
lol you know when boss launches the AVC fashion line, and when they accept user-generated submissions from employees/fans, i’m going to design a shirt like the obama hope poster ( http://techbuddha.files.wor… ), except it’s going to have fred’s avatar, and instead of the word “HOPE” beneath it it’ll say “BOSS.” you know it’ll sell like hot cakes!
Of course I am concerned about this. That’s why I asked JLM to write a postabout this. He made a fortune for himself and his investors buying realestate cheap in the last housing crisis (RTC/S&L)That is the purpose of this post and this debate to decide what thisprogram is likely to do and how we can profit from it and where it will workand where it will not workMaybe now is the time for you to stop renting and go into the foreclosuremarket and purchase some real estateThat’s what I was talking about in my “greed is good” post last week
The way I see it, the things happening now are only delaying the bottom. I will buy a house, but only after all these tax dollars propping up banks and irresponsible homeowners runs it’s course. It has to correct eventually, or am I missing something? Also, I have to factor in the additional tax burden of all this on me and my family into my future income calculations which may lower my future buying power.
I am looking at investing in a mortgage backed securities fund right now that is buying A rated paper incredibly cheap. So, you’ll get principal appreciation and a fat monthly dividend. This, in my opinion, may be the best way to invest in real estate right now. If I were to buy property, the taxes and operating costs hurt my upside. Mortgage-backed securities may be the best way to go…
Or, as George Carlin put it, this nation was founded by a group of slave owners who wanted to be free.
France, a country smaller than Texas, ran out of really good ideas with French fries, French kissing and French cuffs. OK, Catharine Deneuve, the Louvre and the Hotel du Cap, too. But I draw the line at the Statue of Liberty and the Eiffel Tower. Ok, they do have some damn good food.Home ownership and freedom are not mutually exclusive. You don’t have to pick one or the other. Let’s go for both. And, yes, freedom is not free. You are so right!
My primary objective to the HASP program is it’s underlying assertion that it will somehow put an end to the fall in residential home prices – it will not. Here’s why:There is in aggregate some percentage of take-home earnings that individuals can commit to housing. You can argue the %’s (let’s say around 35%) but there is simple math here. Only when housing prices fall to a level where household incomes can support that mortgage debt will prices stabilize. And we’re not there yet. On a nationwide basis prices still need to come down at least 10%. So, either housing prices need to continue to come down or real household earnings must rise to bring the income/mortgage ratio in to balance. And household earnings aren’t going up.In addition, I hate the way the administration is attempting to sell it to the American public by playing the fear card of “If a home on YOUR block falls in to foreclosure, then on average the value of YOUR home will fall by 20%”. Their message is clear, this plan is good for YOU because it maintains the value of YOUR house. Nice try. The real-time value of your home is really only important if you’re planning on moving in the short term. In the long term the market is going to go where supply and demand take it. Deal with it.I applaud the administration’s desire to try something to stabilize home prices, but this plan (while well intentioned) is only likely to do two things: 1) Fail to stem the slide in US home prices 2) Completely piss off 90+% of the electorate.The HASP plan must be substantially reworked or rejected in favor of a more rational long-term solution. If not, an already sinking consumer confidence will surely worsen.
In thinking about housing recovery, remember to take into consideration changing housing “demand” — based upon the net birth rate of the country. legal and illegal immigration as well as the number of young folks graduating college every year. About 4,000,000 of each.Also remember that it will take some time — maybe 12-36 months — and that the slope of the curve is the important thing initially. Are values still going down or have they hit bottom and are they headed up even if just barely?During the S & L crisis, it was determined that there was a 30-year supply of single family lots on the ground in Texas, Oklahoma, Louisiana. In 18 months there was not a lot to be had. Everybody missed the turn cause it happened so fast and yet it was possible to observe that new houses were being built — houses that were substantially less expensive than their predecessors because values had dropped substantially.Why?The net in-migration (intra state, inter state, legal immigration, illegal immigration) and organic growth (babies and college grads) of these states had been ignored. People were moving to these states at a huge rate. In addition, probably some not so good arithmetic projections based upon fear.The bumper stickers in Texas used to say: “I don’t care how the Hell you used to do it in New Jersey.”Now they read: “I don’t care how the Hell they do it in California.”Housing, like any asset class, needs a correction from time to time to reset the floor values. This is a healthy correction.
Jeff -Agreed that the slope of the curve is important, but my contention is that the HASP plan as written will have only a marginal impact on overall home prices, if any at all. If we’re to believe that the % of homeowners that will qualify for the program is as low as it is, then it’s not going to make a degree of difference that will instill confidence in the rest of the American public – and that’s the sector (and their spending) that’s going to stabilize this economy.And I would respectfully contend that there is an important distinction to be made between the current economic situation and that which existed during the S & L crisis that will affect both a housing market bottom and it’s eventual recovery; Consumers balance sheets are far more compromised now than they were back then. There’s some work to be done.
Fred – Awesome blog/forum. First time/long time.Andy – I find my self often nodding in agreement while reading your comments. I look forward to your guest post (if it ever happens).JLM – Great post. I’m not so sure the Parable you cite is an appropriate analogy to HASP. In order to be so, the vineyard owner would have to withhold half the denarius from all the workers, and then decide to redistribute the proceeds to only the late workers! In my view, the outrage towards HASP from responsible homeowners who pay on-time does not stem from a ‘what about me, where’s my handout’ attitude. Rather, it’s the use of everyone’s tax dollars to bailout the few that triggers such a reaction. “Isn’t it lawful for me to do what I want to with what I own” – Yes. But Uncle Sam’s tax dollars come from my pocket.
I agree with CFCampbell’s comments. Great post and great comments all around. The quality of the discussion is the main reason I read this blog even though I disagree with 75% of the posts.On the scripture side, there is a big difference between getting into heaven and getting a government handout. We are not doing these folks a favor by enabling their bad behavior.When a child does something wrong you make them live with the consequences. These folks behaved like children and should learn the lesson. I would save the grace for folks who are truely destitute and would not be able to afford renting an apartment or other type of dwelling.
Be careful BT, you may be asked to do a guest post tooAt least that way, I can get the disagree rate down just a bit!
Very useful and very interesting.I have to admit that halfway through, I had to go look at the specifics of the HASP, because I had been so busy at work I paid little attention to the details. I was reading the post and was surprised at how different this was than I had heard from the news (and the bitter reactions, Rick Santelli, comments here, etc.). And the specifics are consistent with Jeff’s commentary and very different from the categorizations from Santelli, critics here, etc.The HASP does very little, if anything, for the speculator, for the no-doc guy, the 100% down guy, etc. I find the whole “moral hazard” argument to be empty. This is really ONLY about helping the guy who did it right, and who got caught in the market downdraft. To some degree, the HASP is really trying to answer Bill Gross’ theory that we need to support asset values to stop the downward spiralhttp://www.pimco.com/LeftNa…Thanks – this really made me more informed.
4. Homes are very important to the fabric of our Nation from a social perspective and while I cannot readily quote any supporting figures, I can say with some conviction that a child raised in a stable home is more likely to become a contributor to society rather than a cost center to society; and, conversely the opposite is also true. [At the end of the day, all we are trying to do is to get the taxpayers to outnumber the recipients of government largesse.]You think kids who grow up in an apartment are less likely to succeed in life? Well that’s pretty obnoxious, screw you buddy!
Please accept my apology if you have inferred from my comments any pejorative attitude toward specific types of housing. An apartment or a condo or a townhome or a zero lot line home is just as much a “home” as a fee simple single family home on 0.5 acres of land. That was not the distinction I was trying to draw.The comment about a “stable home” was only intended to suggest that the trumatic loss of a home through foreclosure contributes to social instability. Obviously being evicted from an apartment creates the same poignant sense of loss.Loving families can and do raise wonderful and successful children in both environments.I grew up on Army posts and my family never had a “home” we owned until I was in high school. We were proud of that little, modest home and we took great care of it.The most important thing was that my Mom made it our refuge against the world regardless of the fact (unrealized at the time) that we were dirt poor. My Mother’s love made that pile of bricks and wood a “home” not the legal description on the deed.To this day, I still drive by that home when I am in that part of the country. It seems a bit smaller than I remembered it and very, very modest but it is still the towering mountain of love that I remember. And, I cannot look at it without smiling.Again, I did not mean to imply any offense and I am sorry that I offended you. The subject was however the housing crisis.
I grew up an army brat too JeffMaybe that’s one of the reasons why I’m such a big fan of yours
I think he means “homes” in the sense that there is a stable living place,not vs an apartment
lol, let’s keep it clean, none of us wants security to have come in and break things up.– kid mercury, official AVC bouncer
Doing your job Kid. I love it!
this couple banks their home buying future on the house market crashing and people failing on their mortgages. the government takes action to mitigate the housing crisis. and now the couple has been wronged? they were somehow entitled to the market decline? seems like most people should be budgeting and saving for housing prices in ranges that they exist, not where they hope they will end up after a crash.
Interesting you mention “cram down”, a bankruptcy term where a creditor is forced to modify terms of a loan. FHA insured mortgages have such loan modification provisions, a service the homeowner pays for via FHA premiums, should there be payment difficulties. By accepting an FHA mortgage banks are bound to FHA terms and procedures, to exhaust such remedies before beginning foreclosure. Normally mortgages, because of a Supreme Court decision, as a secured loan, cannot be modified. BUT under the loose goose Bush administration, it seemed that FHA regs have been cast to the wind, as if they and the contract didn’t exist. In doing so, it seems that bankruptcy judges were backing big business and forcing foreclosure of FHA insured homes. Complaining to the FHA, or the Comptroller of Currency, does no good, because policy is that they do not interfere in any way with cases that are in litigation.Likely very few of distressed mortgages were the result of borrower shortcomings, and today, mortgagors certainly did not make the current mess, financial institutions did. It might have occurred anyway, a bit later and not as severe if it had not been for the speculative run up in oil prices. My theory is, that Bush, being an ‘oil man’… if he didn’t have anything to do with it, turned a blind eye as a favor to big business. It was the gas prices which disrupted the economy, squeezing homeowners, and kicking off lay-offs and downsizing. The rest is History…Bush’s big business solution was to throw money at the banks, which was like, trying to fix a flat by waxing the car. This go-around, besides other economic stimuli, I would have liked to see a mandatory cram-down, with the Treasury Dept. buying a certain amount of bank shares for every reconfigured mortgage. To me, that puts the money and the fix directly into the problem. As long as the bank’s tax write-off for bad loans is larger than any alternative, I see, foreclosures continuing.Consumers didn’t make the mess and should’t thave to pay for it.
JLM, time for you to upload a picture in your disqus profile.
Here is another post about Obama’s housing plan readers here might find interesting – http://activerain.com/blogs….
Thanks for the link DrewI’ll check it out
Thanks Fred. Full disclosure that Zillow’s COO Spencer Rascoff wrote it (and I work for Zillow), but I thought it was a great article worth sharing.
I just read it. It is very good and mirrors a fair bit of what JLM says.Consensus among smart people is a good thing.
Jeff. Thank you for investing your time to write this up. This is exactly the kind of rational analysis I was hoping to find SOMEWHERE. It is pretty sad, that until your post, the Santelli rant was what I identified with most.I really like your suggestions for modifications – particularly 4. and 7. > no free lunch.To REALLY understand this at the next level, the Engineer in me needs: EXAMPLES. If anyone finds a good post that would walk through cases of who gets helped vs. who does not, and how – that would really bring this home to me. I think what many of us want to see is:1. Speculators get screwed2. Unqualified buyers that are still not qualified – don’t get a life raft from a situation they should never have entered3. Employed, currently qualified buyers that bought at the peak, but are getting crushed with balloon rates – are relieved because the BANK holding the mortgage gets crammed down – how is this going to cost us taxpayers?4. All the other scenarios that I don’t understand.Thanks again JLM and thanks Fred for starting the conversation.
I am not afraid to point out the elephant in the room. His name is president Obama and he’s little qualified to fix this mess. In fact, he’s shown no aptitude (sadly) even to be able to use trillions of giveaways to calm the markets. I also do not believe John McCain would have been any better — my post is not meant to be political because this crisis is just way too serious for that. What am I trying to point out? That this crisis is out of control and there are no easy answers.
There are a few critical factors that haven’t been mentioned, that make Obama’s plan seem reasonable to me.First, as taxpayers we are already on the hook for a lot of underwater mortgages. The refinancing portion of the plan only applies to Fannie/Freddie loans — ie., owned by us. We have also set a floor on losses for hundreds of billions of other loans through assistance to big banks.Second, when a homeowner stays with an underwater mortgage guaranteed by us, they are doing us a huge favor to their own long-term financial detriment. They could walk away right now, leave us with the loss, and start rebuilding their savings in a new residence. Instead, they are paying in money that will go to us as loan-holders, that they will never see again in equity.Third, there are large transaction and societal costs to foreclosure. The government has to take the latter into account, whereas private lenders do not.Obama’s plan seems to split the difference, and focus on win-win situations where the homeowner stays in the home, and we spend less money than we would lose in a foreclosure. It makes sense to provide a little help and incentivize people to stay in their homes. In return, they are doing us a favor to pay off the underwater loan.I understand (and share) some of the anger of responsible people. But the Obama plan seems to be in the best interest of everyone, including responsible taxpayers.
I’m new to this blog. I don’t understand a lot of stuff that’s written on it, but feel like I’m getting an education every time I’m here. I especially appreciate this post, that explains in clear language what the stimulus package is and what it intends to do.On a personal note, as a renter in the Silicon Valley I am grateful for whatever stimulus keeps people in their houses and out of the rental market. I already pay more for my one-bedroom apartment than my mom pays on the mortgage of a house she bought 10 years ago. And as people get kicked out of their homes, the rental prices go up.
On the other hand, you could argue that the whole “homeownership as the american dream” philosophy is a real problem for us. The thousands (millions?) of underwater homeowners in economically unproductive areas might have been much better served by rental housing that they could leave at no significant financial cost for new housing in economically productive areas. Indeed, much of the commentary I’ve heard in support of the auto bailout has been centered around the possible negative economic effects specific to Michigan, Ohio, etc.To be a “lean/mean” entrepreneurial machine (as a country), we need to make it possible for our labor to have an appropriate level of mobility. When and if wind turbine construction gets off the ground in the US (for example), it would be great for the masses of employed machinists in Michigan and Ohio to be able to move to it. The more tightly we tie people to their houses, the harder this is. I think most people would agree that the ex-auto workers who don’t have a house to worry about are going to have an easier time finding productive employment elsewhere than the ones who have to worry about selling their house in this economy.More generally, the idea that “the american dream” involves making an investment with leverage that PE shops would be giddy about is kinda crazy. Do home buyers not realize that by purchasing a house with even a modest (80/20) mortgage, they are making a hugely speculative and substantially leveraged investment? Would they do the same with their 401k? Just like most people realize they aren’t financial instrument investing professionals (and as such, leave their retirement savings either to a mutual fund or a pension plan), people should realize that they probably aren’t real estate investment professionals. Our tax system shouldn’t subsidize home ownership over rental housing to the ridiculous extent it does now, and it certainly shouldn’t be regressive in the way that it is (the guy with the $1 million mortgage shouldn’t get to deduct more interest than the guy with the $200k one).Obviously there are social and cultural benefits that accrued to communities with high rates of home ownership, but I think there are other ways to maintain those benefits.
That’s an interesting point about home ownership vs labor mobility. You gotme thinking about that.
Fly over the landscape from Abilene to Lubbock to Amarillo and you will see windmills as far as the eye can carry. This is T Boone Pickens country.The old Texas (cattle, oil) is now morphing into the new Texas but equally important is that the manufacturing companies who supply the components of this emerging industry are relocating there because the costs of transport are so high, local community colleges are delivering skilled workers educated to the specifications of these new economy employers and everybody in the oil patch who can weld a straight line is looking for work there.The guys in the auto industry don’t stand a chance and the compensation rates are in the $14-20/hr range.Texas windmill employer: Son, can you weld a straight line?Texas welder: Hell yes, sir, I can weld anything but tissue paper, the crack of dawn or a broken heart.Texas windmill employer: Son, you got a job!
Our problem is equity in the home, no? Everyone has experienced a decline. For some, that decline has wiped out the equity and made them wonder why they should hang in. Depending on how much their house payment is, they may not be able to afford to hang in.This problem of having equity is not unlike buying options in the market. I can buy Google’s stock, or I can buy options in Google. The stock is unlikely to reach a value of zero, but it’s actually pretty easy for options to do so. Before I can buy those options I have to sign a document with my broker that tells me just how speculative what I’m doing may be.Regardless of why they did it, those with no equity were a lot more speculative about their house purchase than those that still have equity. You can argue that a house is not the same as an investment, and it isn’t because you live in it, but OTOH, JLM very much says it is most people’s biggest investment asset.So what is the responsibility of government to help me if my investment goes south? If I buy those Google options, and the market goes south, nobody has much sympathy for me. If I join one of Fred’s startups, and the plug gets pulled, still not a lot of sympathy. Why are these things especially my responsibility, but when I invest in a house that I was overly speculative about, it is everyone else’s responsibility?Are we really arguing about an ability to find shelter if you kick me out of my house which I have no equity in? I can appreciate the, “It’s not a house it’s a home argument,” and how kids suffer, but really, is that what this is about? I know multiple divorced parents who lost their homes and had to rent before this crisis ever came along. I know other parents who rent because they never got to be able to afford a home. Are all of these people bad parents? Do we owe them a home so they won’t be bad parents? No, surely not.The only good argument I’ve heard yet is the damping argument. I like that one. Markets need a little damping. Not too much, mind you, but they do need some damping. They also need diversification. When we let economic forces drive too much homogeneity into a market, we eliminate diversification. We let the deregulation of the market and the actions around interest rates and fiscal policy create exactly that situation.There was too much economic pressure to buy a house because you could do so with no or very little equity and it looked like you’d make a killing while having a great place to live in meanwhile. But the vast majority of those goings on were not about putting roof over head, it was about grabbing your pan and heading to the Yukon, whether the Gold in them thar hills was getting your first house sooner, getting a bigger house than you should, or just out and out enabling ridiculous real estate speculation.A lot of people didn’t go to the Yukon. Those people have equity still. They’re being asked to pay for that little gold rush. They’re upset about it. I can’t blame them and I have heard no good reason why they shouldn’t be upset, or why they should be punished.It’s very unclear to me that HASP is good either for damping or diversification, let alone for educating the speculators not to run off to the next Gold Rush they come upon. I do, however, understand why real estate investors would want to prop up the market ASAP. If they’re mostly in cash, that’s the wrong move. Better to let it bottom and buy in. But many of them will be in the position of the rest of the speculators, and so they’re begging to put a floor in that the rest of us must pay for.
I like the damper argument too Bob
I wanted to weigh in on the discussion about the home buyer who has made the mistake of taking out a mortgage on a home that they can no longer afford. You used the term “hood” in your post – and I think it’s worthwhile to point out the disconnect I see much of the time between the Santelli’s of the world and the lower/middle class.There is an initial thought that people need to PAY for their actions – they took out a bad loan, it’s their fault, so too bad. Sadly, most people in this world are simply not educated enough to make correct financial decisions if offered bad deals from a lender who is pushing (SELLING) hard. Tell someone who thought they could never buy that they in fact CAN…and they will.Who should be punished most – the drug user, or the drug dealer?
> Sadly, most people in this world are simply not educated enough to make correct financial decisions if offered bad deals from a lender who is pushing (SELLING) hard.Car salesmen sell hard too, but no one says “hey, let’s tax Andy Swan so someone making $15k/year can keep an Escalade.”> Who should be punished most – the drug user, or the drug dealer?Telling someone that they have to go back to what they can afford isn’t “punishment”.As to the lenders and the folks who bought the paper, let them take the loss.And, stop with the govt restrictions on lending. If person A won’t loan money to person B except at the point of a gun, perhaps person A’s judgement of person B’s ability to repay is correct. If you disagree with person A’s judgement, feel free to loan your money to person B so you can reap the rewards if you’re correct and take the hit if you’re wrong.
What if modification for underwater borrowers is the wrong answer? HASP is all about modifications. What if the pressure to modify loans is totally misguided?A recent report by Firtch Ratings shed light on the huge issue of mod re-defaults: The most shocking finding: Principal reductions do not seem to improve re-default rates: 28% of loans with principal reduction greater than 20% re-defaulted within 6 months. Are you kidding me? How is that possible? Even the best performing mods experienced 21% re-default in 6 months. Over the life, more than half of such loans are likely to go down.I can think of two possible explanations: 1) What if we are asking borrowers to catch a falling knife? Isn’t modifying a loan (even with principal and interest reductions) the same thing as asking someone to buy Citi stock with 100% borrowed funds? Who is crazy enough to do something like this? Borrowers may be saying to themselves – ok, you want me to do this mod – sure, but if property values continue to fall, I will stop throwing good money after bad. 2) Modifications have become the new piggy bank. It is important to note that only people with verifiable income can be modified. It used to be that mortgages were the highest priority debt. Now, mortgages have become the lowest. Stop making your mortgage payments for 4 months and payoff your car loan – no problem, the lender will just roll it into your balance at 5%!!! In six months, do it all over again.I am not saying that we should not try to prevent foreclosures, but modifications may be the wrong answer – the borrower is still stuck with a 100% levered house that is very likely to continue to lose value and the lender is wide open to abuse. I think a new mechanism is needed that will balance those risks. Something like a leaseback, where the Lender (or the Government) takes ownership of the house through a deed-in-lieu (or a short sale) and immediately leases it back to the borrower with an option to buy it back at a set price. As a side benefit, instead supporting prices for toxic mortgage assets, we will be supporting prices of the actual physical houses! Some may argue against either kind of price support, at least with houses it is much easier to get market pricing!Link to Firtch report(http://finance.yahoo.com/ne…
Hi Jeff,As always I love your posts on Fred’s blog/forum 😉 and like you I’ve loved everyone of Fred’s posts even though we have opposing views in a number of areas. I would beg to differ with you on the parable. The parable teaches us that there is nothing to hold us back but ourselves. It teaches us that fear is created in the mind of the individual and only that individual has the power to truly set him/her self free. No one else can do better for you than yourself. Self reliance, confidence, and faith in yourself – it’s what America was built upon.There’s actually a 2nd lesson in the parable as well and I need to quote a passage in the parable – ‘Friend, I am doing you no wrong. Didn’t you agree with me for a denarius? Take that which is yours, and go your way. It is my desire to give to this last just as much as to you. Isn’t it lawful for me to do what I want to with what I own? Or is your eye evil, because I am good?’ So the last will be first, and the first last. For many are called, but few are chosen.”The problem I have with you including this parable is that you equate Obama with doing homeowners who have been responsible no wrong. In fact Obama is doing what he wants not with what he owns but with what we own. What responsible homeowners have worked hard at.The responsible homeowner is picking up the tab for the renegotiated loan, the extra 1,000 per year for 5 years being paid to the delinquent homeowner, and difference in interest that the bank will make up to cover their losses on the deliquent homeowner.Then u factor in the historical data of refinanced homes currently and you see the 50% recitivism of delinquency AGAIN by the “former” delinquent homeowners and you then have the responsible footing the bill for that as well.Additionally you have hundreds of billions of dollars in this plan being floated back into Fannie and Freddie to institutions that should have failed long, long, ago. Who pays for this? Taxpayers which we know is not all Americans. In New York City alone 1% of the population pay 50% of the taxes.This plan IMHO is the worst possible plan and really is just a redress on the Community Reinvestment Plan. This is a classic redistribution of wealth plan. Marc Andreesen talked about acute pain vs. chronic pain in his interview with Charlie Rose (Thanks for the link Fred). I believe it’s time we all start looking at needing to go through the acute pain quickly so we can stop experience chronic pain over and over again.Let me close with this sentence from the parable – “Take that which is yours, and go your way.”I hope that in the future Americans quit looking for handouts and realize that as individuals there are plenty of Americans willing to give a hand up.Hope Fred continues your guest blogging.Peter
You’ve just been added to the list of voices that need to be amplified pete
Simply being added to your list is an honor for me Fred. Thanks.
One of the things that I have been frustrated with over the last year is that we tend to spend a lot of time talking about the economic crisis and the various government actions without realizing that what we are talking about are symptoms to a disease and the treatments of said symptoms, while we ignore the disease. The economic crisis is simply a symptom of the disease that is the lack of *financial literacy* in the country.Walk into a room of highly educated home owners and ask them what percentage of their gross income should be spent on housing, and I am willing to bet that less than 10% will have any clue. Ask the average American about interest rates, how much debt they should carry given their income, the costs of credit card debt, etc. and they will look at you like you are their HS math teacher asking them about trigonometry. Yet, these are the practical life financial decisions people make every day.I had the privilege of going to some great schools and I didn’t take a single course that focused on any aspect of financial literacy. We have college students graduating with a mountain of credit card debit, and they don’t even understand the hole they are in because they aren’t financially literate. How many people who are carrying credit card debt run around passing along hot stock tips? Their financial ignorance results in them not knowing that the best return on investment for them would be to pay off their credit cards.I believe that financial ignorance + greed is what fuels speculative bubbles and the logical crashes that follow. If the government wants to truly address the financial problems of the country they should put in place policies and programs to address the financial literacy disease that faces our country. After all, it was financial ignorance + greed that took us from one bubble (internet stocks) to the next (homes).If don’t improve our financial literacy today’s financial crisis will feel like a walk in the park compared to the decades ahead of us when we will have millions entering their retirement years without the cushion of a pension and social security.Finally, the lack of financial literacy makes it impossible for our elected officials to make the right financial decisions for our future, because their constituencies don’t understand the problems we are headed for with respect to entitlements & our twin deficits.Until I see action in this area I am going to continue to buy gold, because the worst will be ahead of us, rather than behind us.
Alas, its Friday. While the wife enjoys an evening with friends she tasked me with the responsibility of feeding the kids. No problem. I go gourmet. Perhaps I can persuade the little folk to get past grilled cheeses every once in a while? (The kids haven’t passed the decade mark) Mission accomplished. They loved it, especially the crab – i dunno, could have been the fun with the shell crackers. Now they’re content and enjoying a disney picture in the den, while I sip on a glass of wine suited for more formal occasions but matches this evening perfectly. Full disclosure….I’m on my 3rd glass.I’m drawn to JLM’s approach. Sounds sensible, but for some reason it feels too easy. I keep coming back to the sobering thought that this crisis is more profound than a housing subsidy and as Rick S points out…collectivism is not the answer. Not to sound sensationalist, but I think we’ve reached peak life quality in the conventional sense.We’re at the precipice of a profound transformation…I don’t have the answer but I suspect it has something to do with our sense of the American Dream….Dinner cost me around 30 bucks – plus 5 years of angonizing temptation to open a great bottle of wine…priceless.Salute…dinner cost me 20 bucks…..less the sacrifice of 5 years of wine aging….thats priceless.
Maybe we’ve reached a reevaluation of the american dreamI know a lot of 20 somethings who don’t want much of what my generation hasobtained
> There is ample evidence that re-default rates are as high as default rates. Solve the problem permanently.If the re-default rates are as high as the default rates, that’s telling you that those people shouldn’t be owning houses, or at least not those houses.The only permanent solution is to get them out of said houses and into what they can afford.Since you’re going to take Andy Swan’s money to help them, it’s only fair to let Andy Swan buy the houses that these people can’t afford.
I agree with Andy’s comments. The parable of the Vineyard does not apply. The workers agreed to a rate, so the “do no harm” may apply. The taxpayers that are meeting their obligations did NOT agree to pay their neighbors mortgage.I see countless articles of people complaining the government should bail them out. When they signed on the dotted line at closing, they promised to pay the mortgage back. They didn’t promise to pay it back if the government guaranteed they wouldn’t lose money. They didn’t promise to pay it back as long as their neighbors would pay their bills. They didn’t promise to pay it back if they were guaranteed not to lose money.As soon as it is possible to stop paying your mortgage and not receive punishment (financial or otherwise), folks of all kinds will stop paying, even if they can afford to. This madness has to stop.If TARP has a 0% change of working (agree), the stimulus (pork bill) has a 25% chance, and HASP has a 50% chance, how can there still be so much support for Obama? That’s $2 trillion of taxpayers’ money that has a very high expected value of not working at all. Insanity. The arguement that there is no other option discounts all of our abilities.Liberty First
There is still support for Obama because the country isn’t placing the samehandicaps on TARP, Stimulus, and HASP as JLM is
“6. There is a sense that the mortgage modifications are only going to be for five years. This is silly. Make them permanent and make the solution permanent.” JLM – This is an excellent point and yes to a kicker for for Uncle Sam It is a pleasure to find a person who understands it is all about Income Streams and not emotion,bricks and mortar-
The HASP is perhaps the first initiative in resolving the issue. As many commentators have pointed out – until the toxicity (foreclosure of mortgages) has been removed from the financial system, nothing is going to change and we will forever be propping up failing institutions. For all that HASP is a step in the right direction I think it ignores two fundamental issues. 1) the principal is too large on those loans (5 years isn’t going to change that) 2) fear of losing jobs.Until loans reflect the actual value of the assets, foreclosure rate will be high. Subsidised payments and modifications notwithstanding. It simply doesn’t make sense to continue to pay a mortgage, even at subsidised rates, when the value of the underlying asset is 20% or more less than the mortgage. In the end the mortgage principal needs to be reset to be within shouting distance of the underlying value of the asset. Governments need to look at wholesale reduction in principal. Something along the lines of financial institutions writing down the principal by 15 to 30%, the government purchasing 30% of the principal from the institutions. Depending on the location the Government can either write off their purchase principal, suspend interest on their part of the principal or do nothing. The mortgage principal in effect is reduce by between 30 to 60%. The price of housing gets a massive reset to something resembling reason. The principal reset has the effect of creating massive re-balancing of household balancesheets and freeing up income for discretionary spending.Where it that simple of course. Unfortunately, underwater equity is only a small (although extremely toxic) part of the problem. The abject fear of not being able to keep food on the table and roof over their head is causing consumers to save. That fear undermines all stimulator policies. While new jobs may be created they are not going to be created fast enough to replace the jobs lost. Job loss happens far faster than job creation. The fear is creating a spiral to disaster that needs to be short-circuited. A short circuit would be to guarantee 75% to 90% of previous salary for a period of 12 to 24 months (the time length depends on time lag between job loss and job creation). This would remove the fear of not being able to buy food or keep a roof over their heads. Existing unemployment benefits don’t work in this situation as people can’t downsize their life nor do you want people to down size their life quickly as that only exacerbates the asset and consumption problem. Broadly, the economy needs a short circuit and breathing room to allow stimulus and automatic re-adjustment to gain traction. The current disaster spiral overwhelms normal automatic adjustment in the economy.The finial leg is the more traditional stimulus packages. In this case, though even that requires some extra radicalism. Stimulus is needed from the governments simply because the massive reduction in demand brought about by job loss, credit freeze and re-balancing of household budgets. Tax cuts versus cash handouts are a red herring. The sheer amount of demand lost cannot be replaced by increasing discretionary income. Most of the consumer demand was credit based that 140 to 160% leverage of households. Trying to replace that with tax cuts or cash handouts is like trying to refill a reservoir with a bucket after the dam as broken. Its not going to even touch the sides.Nor can businesses replace the demand. They are inextricably tide to the crisis as businesses have been just as profligate as consumers over leveraging and not building up capital reserves (this weeks Economist has a good article on this). Few companies have built up cash reserves that they can use to invest during the down turn. Government handouts or tax cuts to businesses aren’t going to do much to create the necessary investment in growth. To many companies need to repair balance sheets (just like households).The only point is for governments to step with their own demand. The idea isn’t to replace all the demand lost (that will never happen) rather to break the cycle of lost demand causing further lost demand. Government stimulus initiatives need to be more direct than perhaps they have been in previous recessions. For the demand replacement to work it can’t focus on make work like ditch digging. Stimulus programs need to consist of short, medium and long term that focus on energy, transport, communications and maintenance in order to produce a trajectory that gets us out of the spiral.Short term are programmes that can be started in a very short space in time. Insulation or wheatherisation are good examples. But also rebates/low interest loans for households to install renewable energy systems and general energy efficiency for both households, schools, hospitals and government buildings. Maintenance is also a very good short term stimulus as maintenance requirements are obvious and verifiable. Medium term are projects such as creating a national conduit system which any communications company can use to run fibre, soft loans for electrical re-charge stations, funds for replacing old trains and buses. Long term projects are upgrade and extension of power grid, mass transit systems for cities and the development of fast rail.Development projects are only one part of the stimulus package. Additionally, help to start new businesses is needed (many of the old businesses need to die as we progress from centralised to edge economy). For small business the hardest part is getting the capital/resources together to get the business to a point of being cashflow positive. Venture funding is not the answer. Most small businesses are not venture businesses but rather businesses that will turn a tidy profit but never exit. For many (if not most) small businesses labour is the largest cost in the early years. To help new businesses start, governments need to provide income-contingent loans that pay salaries for up to 5 employees for the first year with an option to extend for a 2nd year. The income-contingent loans would be on the employee and not the business (reduces gaming of the system and also means the employees are invested in getting the business to succeed). Large numbers of new small business will go a long way to address demand destruction.Why energy, communications, transport and maintenance? Energy has two effects it addresses the simmering problem of peak oil and energy security (that hasn’t gone away only been pushed to the background and will come roaring back soon). Additionally, by increasing energy efficiency cash is freed up (households, business and government) that can be used else where whether repairing balance sheets faster or for consumption. Communications and transport projects also go to increasing energy security but primary reason is that improved communications and transport increase the productivity of the economy. Maintenance improves the performance of assets while also extending their life.Moral hazard will be raised along with the supposed unfairness to people who where sensible. This is a concern but one that shouldn’t, mustn’t, hold up initiatives to break the spiral. The market can only work if there is a market and we are all part of a system. Just like destruction of one part of an ecosystem flows on to destroy other parts, so to will the spiral flow on to effect even the sensible. Within the three pronged approach you can put in place methods to address moral hazard and poor behaviour. For example, with the mortgage principal reduction the government can take a majority of any future realised capital gains. People who have the mortgage reset can also face additional credit restrictions in the future.All of this is further complicated by the need for Western countries (particular the Anglo-Celtic countries) to coordinate the implementation of such a sweeping initiative. If the countries go it alone they will only make the whole job harder.
This is an amazing comment. I am sure many will disagree with parts of it but its an essay in its own right. You should post it to your blog
Thank you.I keep meaning to turn it into a blog post. I’ve done it twice now as comments (here and on Tom Evslin’s blog). I wrote a post about the stimulus part sometime ago (admittedly in the context of Australia but the fundamentals remain the same whether in US, UK or Australia).Oh and I’ve tweeted on it as well. Still a full blog post(s) would allow me to expand to expand on the points.
I’d be much happier about all this if we were focusing more on poor people, and less on homeowners, auto companies, or anyone else. Because whether you own or rent, if you’re poor you’re screwed in this economy.
I can offer a perspective of someone who has not participated/benefited from the housing boom. As a “responsible” person, I did not buy a house and save money instead. In the mean time, the prices that already looked very high historically have double in the area (Washington,DC) in the last decade, overshooting any savings I managed to accumulate.So it may be right to say that HASP is not fair to me. Folks who have spent more than they can afford are rewarded by it, and prices are not coming down, preventing me from buying a house.But I’m not sure that’s entirely true that I or rather we all have not benefited from the housing boom. We’ve all made money in the economy fueled by this housing boom haven’t we? Yes we may now be paying for the mistakes of others but we also must acknowledge that we have reamed the benefits of a booming economy. Would you have made as much money from your investments if there wasn’t such a boom? My income have almost tripled in the last 15 years. Can I claim all the credit to myself? Don’t think so. Similarly, we will all now suffer from the bust. HASP is an attempt ease that suffering. Sure it’ll help more to tthe homeowners who have taken more risk that they should have than it will help me, but if dampens the contraction, it will help us all.I love Michael Rattner’s dynamic systems explanation to government’s role as the dampener of the markets. The government is now trying to dampen the crash. The problem is we were explicitly not willing to dampen the boom. As I understand it, Greenspan and the gang thought it would be better/easier to deal with the problem of the bust then dampen the boom, hence they did not intervene with markets. I think it is safe to say most of us agreed with that sentiment and any attempt to dampen the growth would not have been popular. It turns out, they were wrong and it’s not so easy to deal with the bust, hence we’re here trying to figure out what to do.
Great comment and at some point in this downturn, you might want to considerdeploying some of those savings into real estatePrices are coming down and will come down furtherMarkets almost always overshoot on the upside and the downside
That’s the plan/hope.No one wants to buy a house when wide spread expectation is that prices will continue to drop. I would not want to buy a house with all my savings and watch it disappear in couple of years.This is why I don’t want more houses to foreclose so that I can buy a house cheaper. The sooner the market stabilizes the better. For everyone.
To personalize this a bit — my wife and I are looking to buy a house in the Bay Area where average home prices are well above $400K and in some of the nicer neighborhoods in San Francisco are easily above $1M for a a simple 3BR homeBack in 2006 lots of people in the Bay Area decided to upgrade from their $750K house to a $1.4M house by using un-natural mortgages — these are smart and educated people who understood that they were extending themselvesto get the extra bedroom, top of the line kitchen, larger backyard, and better location.Fast forward to 2009 and one of the breadwinner’s has lost their job and their mortgage on the $1.4M is no longer affordable. Modifying their loan terms and/or reducing their principal to $1M would keep them in their house, yet it keepsme and my wife out of a home and in our rental apartment.While I feel for this type of family they made some serious mistakes and while they are clearly not going to be homelessthey may have to settle for a lesser home that is affordable to their new reality. What is not acceptable to me is thatmy tax dollars are supporting this families 2006 desire to be in a “Lexus” house while it keep me and my wife effectively priced out of a new home for our growing family.
That’s an argument that’s been made a few times in this comment thread andits true that these situations exist but there are plenty of homes coming onthe market via foreclosure and distressed sale that are driving the marketlower even if this particular family stays putHousing prices have dropped at least 20% nationwide and will likely dropanother 20% before this is all overYou’ll get your oppty to buy something cheap regardless if this plan worksor not
Good and interesting example. A couple of observations.First, I don’t think this is the typical HASP scenario and I don’t know that HASP helps them particularly. If they are smart SF type folks who have come upon “hard” times, then they have to go into the bank and negotiate a “work out” even if it entails a deficiency note. This happens all the time.I don’t see the general public being impacted by their deficiency note.If they are honorable folks, they regroup, get another job, downsize for a while and pay off their deficiency and get started again. If their earning power is based upon advanced degrees or other intellectual property, they have not lost their earning power so they can come out of this fine. They just have to deal with it.Their house will find an equilibrium point in the marketplace at a substantially lower price and then you and others will be provided with the opportunity to get that extra bedroom, upgraded kitchen, larger backyard or better location for FREE. Well, not really for free but at a price that makes it feel like free.I don’t think HASP is intended to salvage the affairs of otherwise solvent families with strong earning power or loans that are beyond the Fannie, Freddie or FHA thresholds. They are going to have to fend for themselves and retrench. There is nothing wrong with dealing with the negative outcomes of a risk gone wrong as long as one deals with them honorably.The folks are likely to consider moving to Austin, TX where they will be able to afford three times as much house for half the price as California. There are a 100,000 of them there already. LOL
Here is a simple example.Two home buyers purchase a $500k house. One puts $200k down and the the other nothing.Home prices drop and both houses are worth $300k. One guy has lost $200k of cash he put into the house, but is otherwise fine.The other owes the bank $200k that he may never get back stops paying mortgage and is trying to renegotiate with his bank.Does one owner get help here and the other doesnt? Say the guy with the $500k mortgage loses his job, but has $200k in investments and 401k elsewhere, but stops paying mortgage to conserve resources an because he just heard on the news the government might bail him out.The point that Rick Santelli was making is that everyone is hurting. Here one guy is paying is mortgage, but he has lost $200k in equity that he put in as hard cash. However he doesn’t get any help, the person that took a wild chance does.
I guess the unfortunate answer is that yes the guy w/ the $200K equity does get screwed but his loss of equity just now is a paper loss only. If he continues to own the house then he has a chance to recover and you have to believe that over the long run everything recovers.When I was buying large commercial buildings in the late 1980s for $20-30/SF I could not believe they would ever recover to their original creation cost ($125-150/SF). When they were selling for $250/SF 7 years later, I began to believe. Markets change and it will not last forever.Much of what we are dealing with has multiple loci of pain — bad housing situation, bad job situation, etc. Bank failures in addition to personal real estate issues.There is no single solution which solves all the problems fairly and instantly.There are many folks (myself included) who never want any help. Leave me alone. Let me eat what I kill. I seek no other man’s chili bowl and I will eat no other man’s bread. Tax me as little as possible and I will create jobs for others that you may tax. Alas, I am not holding my breath.
I reblogged part of this at fredwilson.vc the part about markets
No one is talking in enough detail about the core solution. The creation and retention of “Wealth Generation” JOBS…versus makework jobs.The world economy that has developed from 1946 through 2009 rests primarily on the shoulders of the American and European middle to upper middle class worker/taxpayer who works a skilled or white collar job and earns between $50K and $200K per year.The 12 percent of the world’s population that lives in North America and Western Europe accounts for 60 percent of private consumption spending. And that consumption is a very ‘global consumption’ model. Those people, me included, spend on goods from the entire planet. (That point is key point.)So what we have here is an osmotic pressure problem. The global economy opened big outsourcing channels moving significant numbers of the high paying jobs of those 12 percent into low cost BRIC economies. Brazil, Russia, India, China.When even a seemingly small percentage of the jobs of the 12 percent evaporate. The 60 percent consumption number begins to collapse in a nonlinear fashion. That is what is happening now. Even those that keep their jobs in that $50K to $200K range start a drastic reduction in spending due to economic mood and fear of job loss.Also they start to spend in a less global fashion. They start to buy more locally versus globally as the mood changes to protectionism and nationalism. Now the money moved to BRIC countries gets lodged in those economies because those consumers are not global consumers. They pretty much buy local products only.Unless something is done to both slow the movement of critical “job ions” across this “cell wall”, AND generate the RIGHT kind of “net new”, “job ions” on the America/Europe side of the cell wall, the entire global economic organism will suffer collapse.The core problem is not tax rates, the core problem is not the toxic mortgage debt, the core problem is when enough people lose jobs in the $50K to $200K range the econmy stalls and it cause more people to lose jobs.Stop the job loss of $50K to $200K workers in America/Europe and the ENTIRE GLOBAL system will stabilize and you’ll get a soft landing and then we can process through the toxic investments.
40 acres and a Mule 2.0. That’s all this is.Wonderful article and I admire your idealism and inherent faith in the ability of the government to pull off a fiscal recovery in the face of such overwhelming evidence that they are not only incapable of this but not even all that well-intentioned in the first place. But ain’t gonna happen. Not on Bernanke’s watch and not on Geithner’s either. President Obama himself is delusional if he believes in his heart of hearts that this will restore stability to the crippled housing market.Leave the beast alone.Or as someone told me the other day… “Stop poking the bear”Had the housing market not been doped up on hallucinogens (sorry, I live in San Francisco where you are lucky to score a dump for under $600k), we could have prevented all this in the first place.How about a re-evaluation of housing prices first and foremost? Why are we focusing on those in foreclosure and not those who made it their jobs to inflate values based on obscure Bizarro World methods?No one has enough fingers to point.Had equity not been based upon largely fictional figures in the first place, perhaps profound losses would be easier to chew on. Now we have stimulus footing the bill for our military service people who are forced to move so THEY don’t have to take an equity hit and I as a taxpayer should also foot the bill so someone can stay in their house which they probably couldn’t afford in the first place while I rent in the U.S.’s 2nd most expensive city?Someone slap me.But yes… wonderful article.
Funny thing is that it will all eventually recover — perhaps because the market itself was really the BEAR and nobody acknowledged that to be so. Or, it may happen and nobody really knows why or how it happened in which case Pres Obama will end up on Mr Rushmore. But it will recover. Even with all the stories of the Depression, it ended and the markets recovered. This too shall pass.I love SF and used to go there often on business. I used to sometimes make up reasons to go to SF just to enjoy the fog and to eat at the Tadich Grill and when I was very, very brave to swim down at the harbor — maybe the Olympic Club’s lanes? The coldest I have ever been.So, I guess that if you love it that much, you have to pay a price — not a fair price but a good price for such a lovely mistress.You are absolutely right about the mass hysteria that caused this mess. I marvel that so many people could make such small but collectively huge contributions to such an obvious and enormous mess.
Jeff,Wanted to get your thoughts on Fannie Mae increasing the MBS limit from 4 properties to 10 starting March 1st. Here’s the parameters:Effective March 1, 2009 FNMA will be accepting MBS pool loans for real estate investors with up to four properties on credit according to the following rules on properties FIVE (5) through TEN (10):1. Middle credit score of 720 or higher (no exceptions)2. Maximum purchase LTV on single units 75%3. Maximum limited cash out on single units 70%4. Maximum purchase LTV on 2 to 4 unit 70%5. Zero … and they mean ZERO … delinquencies in the last 12 months6. NO BK or FC in the previous SEVEN (7) years7. Rental income on the subject property must be fully documented8. All borrowers must complete a form 4506-T9. SIX (6) months of PITI payments for ALL properties owned*Now it looks good on first read to me. Properties 5 through 10 are based on true credit worthiness and low risk of payoff. However – what about properties 1-4? Why the cash out of 70% on them? Why wasn’t this trumpeted out publicly? On it’s face it looks pretty smart but I have a gut check on this and it’s not feel good.I’m curious as to whether this is just a prop up of riskier MBS packages sitting in Fannie Maes portfolio? How does the HASP billions for Fannie play into this? Are they trying to help Banks reduce their REO? Is this just covering up bad debt with good money?Like I said I have a gut check that says somethin ain’t right here but with your expertise in this arena I was hoping you could provide some feedback.Thanks.BTW – Here’s the link to Fannie Mae’s MBS Program – http://www.fanniemae.com/mb…Update: Just forgot one thing to add here – It might be me but doesn’t number 9 look like a veiled “AIG” bailout program?
All of my experience in actually doing deals was in the institutional, pension fund, insurance company, PE and big bank arena (well, when we actually had big banks), so I would only be fishing to try to draw some perspective as it relates to the history of the GSEs and their securitization practices or history.I had a lot of knowledge of the various apartment programs but always finally opted to fund them the old fashioned way — take a tin cup and beg for money on the above money circuit. Having said that, it is my sense that the GSEs are desperate to re-light and re-load if for no other reason other than to save their own bacon. They are in a jobs preservation mode just now.I think we are going to see a lot of more conservatively crafted financings of real estate. Isn’t RE even when envisioned as “conservative” (80/20) still highly leveraged? I used to put up nothing and raise the equity and debt separately and end up with 50% of the deal. Exactly why I liked real estate. Also the fact that I was making money when I slept, played golf or swam. Plus I used to have a strong, silent partner — inflation.As always, the pendelum will swing way too far and there will be no cats sitting on that particular stove for a long, long time and then things will change.Sorry I could not be of more hope.On a side note, I suspect that most banks are paralyzed just now and that the HASP will have one good impact, they will all get back into the game. Envision Tom Cruise in Top Gun — “Engage damn it, Maverick!” The banks are just as disengaged as everybody else.
Thanks Jeff. You still provided great insight indirectly. Your 2 best lines – “Sorry I could not be of more hope” (Please if that was a misspell don’t tell me – just claim the fantastic wit)and”Engage damn it, Maverick” is pure visualization through words. I can just see the flat spin of the Tomcat rushing down 1000s of ft per sec. What a great analogy.One final note – U need a picture now – you’re a guest blogger on AVC – show some respect 😉
Hey, c’mon, I’m a hard core hope pusher these days.I will get a picture as soon as the lobotomy scars are healed. LOL
LOL – Very nice Jeff.
Enagage Damnit, Maverick is going to be my new motto
In recognition of your new motto, I’ll share these 2 morsels:My drill instructor in the Marines was famous for saying this to us – “If you’re just sitting around, you ain’t nothin but dead, maggots!”And I thought this was very appropriate for your line of biz Fred:Jester: “The clock is ticking and as of now we are keeping score.”Here’s the sound clip – http://www.entertonement.co…
I play basketball with my 13 yr old son and his basketball team after theirpractice every Saturday (with a few other dads)I find myself yelling “you gotta move”As in the great mississippi blues song covered by the rolling stones onsticky fingers
Allowing bankrupcty judges to modify mortgages is akin to disavowing contract law in the U.S.Having a bankruptcy judge intervene with contracts works because the shareholders are wiped out, and thus have nothing to gain. With houses, the owner benefits and is not wiped out – creating moral hazard. Millions of current loans will become delinquent if the house owners are able to get their mortgage payment lowered and house basis reduced. Additionally, real estate lenders will reprice and remove themselves from the market if judges are allowed to set mortgage rates causing either the government to nationalize the system totally, or we all will live with dramatically higher mortgage rates because the lenders have to price regulatory risk.Please stick to writing on topics within the realm of your expertise.Bill Bennett
JLM knows a good bit about this stuff. That’s why I asked him to write aboutit.
the comments have been great …the main job of “those in charge” now is not fixing anything .. it has its own momentum, and is unfixable …now is about managing expectations, so that the drop is incremental, instead of everything in just a few days …enjoy the next three years, they will be the best of our lives, looking back from 30 years out …paradigm shifts are rare, wonderful, disorienting if one is looking in the wrong direction, at what is falling apart ..what is growing, still a bit hidden, is a higher order of functioning … enjoy the flow
>Car salesmen sell hard too, but no one says “hey, let’s tax Andy Swan so someone making $15k/year can keep an Escalade.”I don’t understand this – do you lump everyone in to this extreme comparison? This is irresponsible…but having lenders behave like financial advisors to low-income earners should be illegal.>Telling someone that they have to go back to what they can afford isn’t “punishment”.>As to the lenders and the folks who bought the paper, let them take the loss.Are the lenders really taking the loss? Aren’t they getting bailed out…despite their bad behavior? They are corporations – there are apparently no repercussions. The borrowers are paying the price for their bad behavior. Even the responsible borrower is.Final Point: I agree with a point made on this blog awhile ago – Too Big to Fail = Too Big To Exist. Which means regulation of some form.
To the baboons who insist on letting the market take care of it:Were you paying attention over the last eight years? Markets do not take care of “it” or anything else that resembles “it.” Markets take care of those with wealth, period. That is what they are designed to do. Look back historically, anthropologically, or economically. Market serve a single purpose: not the distribution of goods, but the centralization of private wealth. Yes, markets are efficient. Markets are seemingly democratic, or at least they do not violate any laws of democracy that we can prove. But the end result remains the same in every society. Wealth accumulates with the wealthy. This financial fiasco is not about you and your second and third house. It is about regular folks who take the hit for the market magicians who manipulate a system reliant on a notion of fair play and a sense of community. The part that really kills me is Adam Smith was famous in his time, not for the invisible hand of greed in capitalism, but for his moral investigation of what every citizen’s duty must be. That duty entailed a deeply felt sense of protectiveness toward one’s community, not the desire to put all of that community’s wealth in a single pocket. Let the market take care of it, my butt!