"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
...However, if the issue is just one of giving the hedge fund crew time to dump their bad debts, then the Fed has no business getting involved.
I guess I disagree. I have no problem with the Fed providing liquidity to allow securities to trade without the market seizing up, so long as the Fed doesn't start doing trades itself.
If hedge funds want to dump toxic securities and there's a buyer for them in a functioning market, IMO there's no problem with the Fed providing support fpr somebody else to throw away their money away.
"Given VMware's dominant position, compelling growth prospects and a proposed valuation with lots of room for upside, VMware's IPO is bound to make a big splash in its debut," Renaissance Capital said.
Why do I get the feeling some dirty tricks ala 1998 are once again at play. Hmmm...
If hedge funds want to dump toxic securities and there's a buyer for them in a functioning market, IMO there's no problem with the Fed providing support fpr somebody else to throw away their money away.
ac, but it appears that there is no buyer for them. Baker's argument is that the Fed "calms things down enough" so that the buyers cancel the strike, buy, and then find out that it's still toxic because the Fed's action was only temporary.
Rumour: Many holders are to announce withdrawals from hedge funds August 15. This is the last day of notice for withdrawals that are to be made at the end of Q3 for the many funds that have a 45 day notice period.
Oh, and I just liquidated my 401-k to rollover to an FDIC insured CD. Wish I did it a month ago, but not much difference either way.
I have a guy at work who's mad at me because I suggested a couple of weeks ago that if I where him I'd move my 401k from emerging market stocks to "Short-Term Bond Account A", which is now down a staggering 0.15%.
I take it he actually did that, so I said "yeah, what about the emerging market funds?", and he says "oh, I don't look at those anymore since I got rid of them."
I just requested to transfer a good portion of my money market funds (BDMXX) to my bank for a CD. Reviewing the prospectus, 25% of the paper and debt held is between financial companies. It also has ABS and MBS debt. A CD will yield a bit more and is insured; I see no point in keeping money in funds that are not transparent and may have faulty rated debt.
ac, but it appears that there is no buyer for them. Baker's argument is that the Fed "calms things down enough" so that the buyers cancel the strike, buy, and then find out that it's still toxic because the Fed's action was only temporary.
Regardless of price? If so, that would suggest a more fundamental breakdown in the market. If it's just that they're not selling at a specific price that they feel they deserve, then I just say "boo hoo..." (with a mocking sneer).
Is there some unusual mechanical problem in the market that developed recently? (Again, falling prices don't count. And fund specific policies that attempt bar fire sale liquidations don't count either.)
I wonder if this would be a realistic "bailout" for homeowners? It seems there'd be a lot of arguing over what the fair market rent should be, etc.
Though, I like the idea. It keeps the houses occupied which would be better for neighborhoods. People could pay less per month in exchange for giving the house over to the bank (or whoever the heck would technically own it).
Regarding turning them into renters - great idea. I first saw evidence of this with builders who are stuck with high end spec homes.....took them off the market and are renting them for 2-3 year lease terms and for enough to cover the carrying costs plus. One I remember is a +/-5000 sq ft baby that leased for 6500/month, 2 year lease.
It is a great idea for many borrowers who were doing ok until the rate adjusted.....and a helluva lot cheaper than foreclosing and carrying that on the books for a year while the possums take over.
Be interesting to see how the accounting would be done on those.....
From LA TIMES article:
"....In part, the hedge fund industry may have grown too fast for its own good, with too many funds pursuing some of the same strategies, making it harder for any of them to earn the spectacular returns the industry first became known for."
We just didn't understand! The problem was they were just TOO POPULAR for their OWN GOOD.
Now move along, there's no toxic waste waste around here....
BTW, I guess the way I would describe my philosophy is "the Fed should do everything it can to support the markets, but nothing to support the securities being traded".
The PPT is properly funded and their agents well-paid. It would be a complete waste of taxpayer money to pay the Fed for doing the same thing.
wow, long time ago, told my husband that allowing them to stay as renters was a peaceful solution.
nobody in the neighborhood needs to know, it's almost stress-free, kids don't need to change school, lose friends. relocation is a waste of money and time too.
after all, there were never owners. they were just renting their homes from the bank.
» Sentinel is a pioneer in the field. Since 1979, our success has been the result of managing clients' cash with utmost safety, daily liquidity and a high rate of return. Throughout our history, no client has suffered a loss as a result of its dealings with Sentinel.
» Sentinel is recognized by clients and peers for its professionalism and performance.
» Sentinel is registered with the Securities and Exchange Commission (SEC) pursuant to the Investment Advisers Act of 1940. Our
stewardship of client funds is overseen by multiple federal and industry regulators.
» We provide our clients with liquidity and operational ease. Funds can be added or withdrawn as late in the day as 4pm, Eastern.
time. A complete report of activity and value is provided daily.
How do you benefit from Sentinel's specialization?
By focusing on corporate and institutional clients, we can tailor our services and operations specifically to meet the unique needs of our clients, without the distraction of maintaining a retail network. Our services make investing and cash management easier for institutional and corporate clients. We simplify our clients' record-keeping while they earn the highest possible rate of return consistent with a prudent investment strategy.
Will your funds be accessible when you need them?
Absolutely. Sentinel is prudent in its placement of funds, in order to provide a minimum of risk while maintaining maximum liquidity. All client funds are placed in readily marketable government and corporate securities, a large portion of which are in overnight investments, allowing us to meet client withdrawal needs while maintaining the integrity of our portfolios.
Sentinel is Client Focused-- we adhere to strict criteria in determining the clients with whom we will work. We choose clients whose businesses we understand, thereby enabling us to provide the flexibility, innovation and responsiveness that develops into long-lasting, client-sensitive relationships. This focus enables us to customize portfolios that will meet our clients' investment objectives. Sentinel skillfully balances the need for liquidity and safety with higher returns, providing an ideal investment vehicle that reflects the specific needs of our clients.
Who will work with you?
Our clients deal with people who know them and understand their business. We foster these ongoing personal relationships, and as a result, there is no need to memorize account numbers or PINs, or to maneuver through a frustrating, multilevel phone system when you contact us. At Sentinel, we diligently learn and adhere to each client's specific expectations. We recognize that business practices and corporate policies often differ. Sentinel's clients deal directly with decision makers who are sensitive to these differences and can accommodate urgent or unique needs. The net result is a transaction that is expedited faster than ca
If they sell to low the go in a destructive spiral of looses and margin calls
Yes... this is what I picture as the real problem: panicked fund managers calling each other saying "don't do that trade or it's all going to hell", and the market just locking up.
But I say, the market itself is functioning normally in this case, even if the participants aren't.
What happens to these tenants when market rents (say, in bubble markets with huge inventory overhangs) decrease? Can they just decide to go across the street for the cheaper rent and leave the lender to deal with it, or will they have to sign agreements that they'll stay and pay for x years?
>
A quick look at the evidence strongly argues for scenario # 2. The problem is that homes are worth less than the value of the mortgages. This is the main fuel for the surge in defaults
Its likely more than just declining home prices. A large number of hedges use leveraging to increase profits. Assumming that some hedge funds are facing margin calls on their investments, they need to liquidate them into cash. Hence, sell off in equities, commodities and bonds. Pehaps declining real estate prices are only half the problem.
I would like to know who is buying on the dips. I know there are few hedge funds purchasing assets of bankrupt mortgage lenders and defunct hedge funds at bargin prices, but in my opinion, equities are a long way away from bargin prices. Does anyone know who is buying?
I know that the NPR guys are smarter than me, but listening to them explain the financial situation in 60 seconds seems futile after reading this site. Thanks for the education!
So, the NPR reporter was explaining that (paraphrasing), "The hedge funds were modeled to make a lot of money when the market went up and make a lot of money when the market went down. The managers are being forced to look at those models and find the errors."
Seriously? Is that how they found investors, by selling that line? If 3 guys with an MBA come up to me and say, "Come invest with us... we have figured out a way so that you CAN'T lose!" I am sure that I would punch them on the nose and throw them on the heap with the Amway guys and alchemists.
How could savy investors NOT be reminded of Joe Kennedy before the crash in '29? If the shoe shine boy is giving you financial advice... sell!
"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
exactly , the home slips down the slope from Home to apartment...
no input, no ownership rights, nada...
wanna change the carpet... call hedge fund houdini
need new blinds...
call sarah servicer
great Phuggin idea seb, brilliant...
back to the lab...
Credit spreads are coming under real pressure today, and it's spreading to emerging markets, which had been holding up fairly well in general, and there's a (for that market) huge move going on in the spread between overnight-index based and libor-based interest rate swaps. Sounds arcane, but this is the mother of all arbitrage markets, and will impact the pricing of pretty much every money market product. I suspect there's more than one bank and hedge fund fixed income trading group heading to the nuclear fallout shelter about now.
Posted this in another thread, but never got an answer as newer posts appeared, but would dearly love to hear some thoughts on this
This may be an overly naive question, but occurred to me after reading the FT article (about SIVs and conduits) referred to above. THe article says that a lot of the current liquidity is due to the fact that nobody really knows what the underlying collateral is worth.
Perhaps that's the way the holders of this paper want it??? If it's only worth 20-60 cents on the dollar and that's a known fact then they have to show the losses for all to see - with the attendant fallout. With the value obscured by lack-of-bid, they don't have to write down anything and so can merrily depend on the CBs to keep the ball rolling?
Of course, if the above is true the avalanche will begin as soon as one of these issuers actually has to publicly sell the underlying assets because of dire circumstances, then everybody is exposed and the game is over.
Thoughts ? Please be gentle as I'm not in the biz, just a rubber necker.
Right on, Tanta, mein Liebschen. Let's keep this blog informative and educational about the economics of the mortgage and real estate businesses.
Thanks.
Credit spreads are coming under real pressure today, and it's spreading to emerging markets, which had been holding up fairly well in general...
I got the impression a little while back that Jeremy Grantham was going to start shorting the emerging markets. I figured he might have the capital to break their back and start a landslide with other funds jumping in too. This was just pure speculation on my part, but the funds I track are now (as of this hour) down close to 15% since then, so who knows.
Also I think the dollar has been depressed against some emerging market currencies due to cross-border carry trades, another factor that would push the prices of these securities down providing the credit turmoil continues.
Chophouse -
That is definitely the idea... the whole reason that many funds are halting redemptions. They want to stop everyone from running to the fire exists while they put the fire out. If they stop redemptions, they don't have to find the current market price at all. Unfortunately, investors don't like having their feet held to the fire while being told everything will be just fine. If the market keeps on going down while they are being prevented from cashing out, the investor loses even more money.
I smeall desperation.
I don't think there are that many defaults. Seems that the mortgages are down in price, because of the rise in rates over the last few years. This caused the HFs to get margin calls, so they started selling mortgages, prices went down farther, now they are selling quality investments, ie stocks, to make the calls.
If this were a serious proposal (allowing owners to stay as renters rather than foreclose), which investors would take the hit from the reduced monthly payments? If the mortgage was part of a CDO, would it likely affect all tranches up to AAA?
It seems the investors owning the mortgage would be less likely to agree to this if housing prices were expected to decline for a period of many years... If they were coerced by law, then it would probably be a VERY long time before investors were willing to invest in mortgages again!
"A quick look at the evidence strongly argues for scenario # 2. The problem is that homes are worth less than the value of the mortgages. This is the main fuel for the surge in defaults. This process will only get worse as house prices continue to decline. With the inventory of unsold new homes more than 50 percent above its previous peak, and the number of vacant ownership units nearly twice the previous record, there can be little doubt about the future direction of home prices."
A memo was sent out to the news desks, ordering them not to talk about the continuing effects of falling home prices and increasing foreclosures on the markets. They must at all costs avoid bringing attention to the elephant in the room.
OK. So they stay as renters. What happens to the CDOs and MBSs? The income stream from renters is probably going to be way less than the anticipated income stream from resetting mortgages. This will probably reach deep into the highest rated tranches and diminish cash flow. How do investors liquidate such positions? Does it become a function of the actual amount of cash flow generated by owners and renters?
I guess that could work. The actual cash flow would provide a legit mark to market value for the underlying securities.
The main problem I see is that there are a lot of people in 4 bedroom 3000 sq ft houses who, if they lost the house, would go rent a much smaller place for less money. If they were paying a $1500 teaser neg am and the fair market rental value of the house is $2500 they still can't afford to stay.
"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
While this sounds good to me-its a very human thing to do in times of trouble.
Is this what we--as a society want to do?
I think it would be a governmental taking of private property without just compensation. The hedge funds own the house and have the right to lease to whom they want--to sell it etc.
Maybe the condemnation laws might be made to apply--but that a governmental bail out of the sub prime market.
He was discussing insolvency vs. illiquidity. Isn't this what Baker is saying here? The Fed should only provide liquidity, and should not bail out insolvent hedgies? Also, the Fed should not provide liquidity, if hedgies use that liquidity to buy enough time to dump their toxic crap on someone else?
How can that happen? The problem right now is that hedgies cannot find anyone to dump their crap on. How can you force someone to buy the crap?
"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
Why would anyone else continue to pay their mortgage then? Stop paying and Congress lets you keep the house anyway? The problem is not a lack of renters to sit in the houses.
of-course this proposal would be bad for the economy. When people move from their foreclosed homes to a rental place, they spend money on moving trucks,fixing-up the rental,etc.
However, if it were to pass it will create a fantastic opportunity for investors. Not only you get an occupied property, you also get a potential buyer living inside.
Mortgage investors may not have a better choice.
BTW, after two miserable years of selling short, Now I can sing.
Back in black
I hit the sack
I've been too long I'm glad to be back
Yes, I'm let loose
From the noose
That's kept me hanging about
I've been looking at the sky
'Cause it's gettin' me high
Forget the hearse 'cause I never die
I got nine lives
Cat eyes
Abusin' every one of them and running wild
CHORUS:
'Cause I'm back
Yes, I'm back
Well, I'm back
Yes, I'm back
Well, I'm back, back
(Well) I'm back in black
Yes, I'm back in black
Baker's idea makes more sense than floating cheap long-term loans to dispossessed homeowners so they can all buy RVs -- a brilliant idea I read in the Atlantic, of all places, last year. Migrant workers, anyone?
Truthfully, though: if the problem got bad enough, where would all those people go? Better as a society to find some way to allow them to stay in place while the financials work themselves out.
Beyond financial chaos lies social chaos, and we do not want to go there. Sometimes it's best to find an economic solution that satisfies the social need, and work backward from there. Or there can be hell to pay.
I'd like to see Baker or Tanta for that matter write about this new era where we have the huge and growing Department of Homeland Security in the mix unlike all the financial fun times before. No doubt it is making some calls to keep the homeland safe and secure.
Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home.
Anyone care to extrapolate what that would do to the CPI 27% component called Owners Equivalent Rent (OER)?
Moving on. Rent in SoCal is often 1/250th or roughly half the mortgage costs. Reducing the revenue by half wipes out everything below the AAA paper (the bottom76%) in those tranched securities and even intrudes into the principal value of those AAAs. Ouch.
I know your firmly planting your tongue in cheek but whenever I hear the words "fair" and "Congress" in the same sentence I can't take the chance.
Bernanke's solution? Capitalism is once again proving to be reverse socialism. Let HF's keep the wealth transferred to them (through borrowers who could be counted on to default when rates returned to norms) from billions of dollar holders.
Brilliant!
Congress will con us all again, just like when they raised deposit insurance back in the early 80's. That worked out really well.
From some comments here, some of you know the reputation (based on their modus operandi) of many of these companies. It appears in many instances they have a profitable business and are being run in a prudent manner, but overnight they are being vapourized? WOW ! Highly unusual. Depression anyone ?
I could (can) see new housing starts falling harder than even CR forecasted even before this for various reasons (OK I am a lumberman), but I never imagined things would get this bad on the credit side. Please, let's not mention subprime anymore, eh ?
Well now you know you have another canuck hanging out here sometimes. Keep up the good work, it is a joy to learn from you all !
Lawyer L and SDmisfit are right. It would be a highly illegal grab of private property without compensation. And why bother? The private alternative will emerge. Example: Countrywide has 10,000 REO houses for sale. Before adding a new one, they go to the "owner" and offer them the house at 80% of previous value with resonable loan terms. The owner gets to stay with a 20% markdown, Countrywide gets 80% value instead of 50% they would likly get is the open market. Now, if only they had a way to unload those new loans . . . and a way to discourge those who can pay from taking advantage of the program.
Dean Baker's idea about turning the units into rentals are something I've been thinking about for awhile. He describes it very concisely and elegantly.
The idea seems outrageous until one realizes all the normal liquidation mechanisms will be overwhelmed. So keeping the houses occupied, potentially saves on insurance, security, having the plumbing torn out of the house..in short destruction of the collateral value (the house) by neglect.
There simply is nothing I can conceive where there are not going to be losers in general liquidity squeeze.
All of the Fed operations were Temporary, since they were short-term Repos. You give me $1 million, I give you these Freddie Mac MBSes. Tomorrow, I give back the $1 million (plus interest) and take back my MBSes. Ok, maybe in three days, but I believe that only happens on Fridays, since the government doesn't work on weekends. Yes, part of Thursday's Repo ($12 billion) was a 14 day Repo. If you look back through the last couple of Open Market actions, you'll see that the Fed regularly does this to the tune of $7 - $12 billion A DAY normally. Thursday's and Friday's actions were above normal. Today (Monday) only $2 billion of Repos were performed, below average.
The actions were not UNLIMITED on the Fed's part. Today, $52.8 billion of Open Market Repos were submitted, only $2 billion were accepted. You cannot low-ball the Fed, they are much too smart for that I agree that the actions should have happened at the discount windows (6.25%) instead of as an Open Market action. I believe the discount window is only for federally chartered banks, while the Open Market actions occur with Primary Dealers.
ahnotamoose | 08.14.07 - 10:55 am | #
While I don't agree that "we're all duped", I do appreciate the fact that you recognize this for what it is. A transfer of wealth. Everyone is forced to play, but nobody said what team you have to play for...
Everybody GETS what they want from the markets (not just stock markets, housing and debt markets too). Everybody.
Some people subconsciously want(need?) to lose... you might as well help them achieve their desires.
treasury monger I addressed the 15th in the June trade deficit post as anonmoosly as i could. But know that it s out.
slightly OT but wanted to remind everyone that tomorrow is the 15th and the 15th is the cut off date for investors to notify hedge funds of redemption requests under standard terms of 45 days notice per quarter. After the 15th the hedge funds know who is pulling the plug and how much they have to liquidate to meet investor redemptions. If they liquidate, that forces prices down. Alternatively, the hedge funds will have to suspend redemptions - further spooking the markets with the implication that their holdings are illiquid and unmarketable. Either way it could be the start of a bad down cycle that is self-perpetuating. Instead of runs on banks this time around, we'll see runs on the 9,800 hedge funds - many of which could only survive (like American homeowners) with increasing levels of leverage and liquidity.
ahnotamoose | 08.14.07 - 10:59 am | #
Beyond financial chaos lies social chaos, and we do not want to go there. Sometimes it's best to find an economic solution that satisfies the social need, and work backward from there. Or there can be hell to pay.
Bob Dobbs
So sorry bob,
there are people present on this site that are precisely aware of just how bent over the prudent were taken...
Ok anyone who bought before 2000 should qualify for help. Anyone after that deserves to lose.It was just, rub it in your face greed and
showing off. Needless to say that these people will lose somewhere else
if bailed out today. It was and is their own doing. That includes the lemmings as well as the wolves.
thats all.
Ah you guys are so creul. I came to America so I can live the American Dream. I knew I could, lie, cheat, steal and get away with it, because you stupid Americans have sympathy for my cause. Now I can count on you
idiots to make sure all my mindless
investments will payoff. Admit it, you can't help yourselves. You want to live vicaroiusly through me.
"So is this suggestion serious? Allow people to stay in their houses and rent? Has this ever been done anywhere?"
Of course it has and it would not require any legislation to do so. That said, most of these yucks couldn't pay the mortgage so why would they be able to pay the rent? Much better for them to find a suitable housing experience somewhere else and let another buyer get a good deal on the old home.
Have appraisers go to distressed borrowers and work out mnageble terms for a 30 year. Borrowers who don't have problems making the nut get the term of the mortgage cut to adjust for the new(lower) values. That way responisble people can get ahead quicker.
The banks write off the distressed loans to fix up the balance sheet, yet still have managable cash flow from those who can afford things. 15 years down the line, who in the banks will care as the execs will be a new bunch of crooks.
Are most of you people on drugs, or just pulling my leg?
Congress does not need to pass a law. If the lenders want to foreclose and rent back the property to the borrower, they are free to do so.
Forcing lenders to do so would devistate the market. Prices would tumble and the value of the pools would further decline.
The hedgies would be better off to demo the houses. "Sometimes, you need to burn the village to save it".
In the long run, home prices need to get back to what people can actually afford. New (old) underwriting will bring the market back to reality. No-down lier loans caused this problem.
If I'm paying $4,000 per month and my neighbor is paying $1,500 for the same size home, I would be nuts to not call my lender for the same deal. Pride of ownership has a limited value.
If this idea is implemented, why would anybody continue paying mortgage? Rent is lower in most of the country, as much as 3 times lower in some "formerly known as hot" areas.
"Honey, the Congress just passed this bill, we can default and pay $1,500 rent instead of $4,500 mortgage, and we can stay in the house! No more mortgage checks. Whoopee!"
Fast forward 5 years:
"Let's buy this beautiful 2 million dollar house. And if it turns out our median incomes are not enough and we default, we can stay and pay rent. Or the Congress will figure something else out to help us out"
We seem to have developed a mentality that says, if someone is dumb enough to make a bad loan they should just eat it, and the poor borrower get off scott free.
Legions of borrowers lied through their teeth to get these loans. They should not be rewarded with low rents to ride out the storm.
Before taking action on a default, the lenders should review the file for fraud. If the borrower lied on his app. don't cut him any slack. The hedge fund manager owe it to their pensioner clients to prudently manage these assets. The pension and insurance fund managers who placed these funds with the hedges have a duty to this be done.
Lets not loose sight of the fact that Joe worker bee is positioned at both extreme ends of this crisis. His home and his pension plan. The intermediaries should be forced to refund some of their profits. I'm sure lawyers are standing by.
OK. So they stay as renters. What happens to the CDOs and MBSs? The income stream from renters is probably going to be way less than the anticipated income stream from resetting mortgages. This will probably reach deep into the highest rated tranches and diminish cash flow.
If the market hadn't finally blown up, most of these mortgages were going to refi as soon as they reset anyhow, so I don't think they were ever going to get anything close to the full potential cashflow anyhow. This lets the lender make a little bit on some of their REO properties while the market clears (ie the homebuilders go BK). Three years later the mortgage holder sells into a less flooded market or negotiates a buy here/pay here deal with the once and future homeowner and the mortgage is cleared from the books.
Many won't be able to afford the fair market rent.
Everyone seems to be forgetting the job losses that the recession will bring.
Any way you try to fix it aside from allowing capitalism and free markets to do so (deflation), there will be massive monetary losses or hyperinflation, or both.
Last!? Hey, Tanta, it occurred to me earlier today that what we really need as we make our way through the subprime, Alt-A, hedge fund, MMF, liquidity crisis is a Modest Proposal For the Solution of All Economic Problems. I mean, if Swift were alive today surely he would be a CR regular. Sadly, I am not up to the task. How about you?
First?! I love this site! Thank you!
Hell, I thought I was first
Wao! Dean Baker is out there!
Wow. I say it here...
HaloScan.com - Comments
...and it comes out there...
"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
S.
Regardless of sources, great idea.
Is this criminal:
Mortgage Grapevine: looking for co-borrower
Is this criminal: Maybe.
Is this A criminal: Almost certainly.
Yal, are you male or female? For some reason I always assumed female until I read banker's comment. Couldn't tell you why.
Oh, and I just liquidated my 401-k to rollover to an FDIC insured CD. Wish I did it a month ago, but not much difference either way.
I'm in the process of evening out my savings so as to maximize FDIC insurance. Can't hurt...
Folks, nothing personal, but I posted this to get off the bank account thread.
Seb, Dr. Baker is doing what I believe some people refer to as "calling their bluff."
Is this criminal:
Yes. It is. A "co-borrower" cannot be rented for a cash payment; that is known as a "straw borrower" fraud.
...However, if the issue is just one of giving the hedge fund crew time to dump their bad debts, then the Fed has no business getting involved.
I guess I disagree. I have no problem with the Fed providing liquidity to allow securities to trade without the market seizing up, so long as the Fed doesn't start doing trades itself.
If hedge funds want to dump toxic securities and there's a buyer for them in a functioning market, IMO there's no problem with the Fed providing support fpr somebody else to throw away their money away.
"Pace of foreclosures and delinquencies rose due to tighter lending standards" - what a stupid headline.
CNNMoney.com: 404 Page Not Found
Gary has the hots for Yal
oh oh!
IPO Flashback
"Given VMware's dominant position, compelling growth prospects and a proposed valuation with lots of room for upside, VMware's IPO is bound to make a big splash in its debut," Renaissance Capital said.
Why do I get the feeling some dirty tricks ala 1998 are once again at play. Hmmm...
Hedge funds should be criminalized.
I'm in the process of evening out my savings so as to maximize FDIC insurance. Can't hurt...
I just dumped my money market accounts for CD's and Treasuries also. I guess we are now contributing to the liquidity problem!
If hedge funds want to dump toxic securities and there's a buyer for them in a functioning market, IMO there's no problem with the Fed providing support fpr somebody else to throw away their money away.
ac, but it appears that there is no buyer for them. Baker's argument is that the Fed "calms things down enough" so that the buyers cancel the strike, buy, and then find out that it's still toxic because the Fed's action was only temporary.
Rumour: Many holders are to announce withdrawals from hedge funds August 15. This is the last day of notice for withdrawals that are to be made at the end of Q3 for the many funds that have a 45 day notice period.
Folks, please. Discuss your money market problems on the thread below.
Oh, and I just liquidated my 401-k to rollover to an FDIC insured CD. Wish I did it a month ago, but not much difference either way.
I have a guy at work who's mad at me because I suggested a couple of weeks ago that if I where him I'd move my 401k from emerging market stocks to "Short-Term Bond Account A", which is now down a staggering 0.15%.
I take it he actually did that, so I said "yeah, what about the emerging market funds?", and he says "oh, I don't look at those anymore since I got rid of them."
I just requested to transfer a good portion of my money market funds (BDMXX) to my bank for a CD. Reviewing the prospectus, 25% of the paper and debt held is between financial companies. It also has ABS and MBS debt. A CD will yield a bit more and is insured; I see no point in keeping money in funds that are not transparent and may have faulty rated debt.
It looks like a loosing battle Tanta.
I feel for you.
Sorry tanta.
Baker has some excellent points. His 23 page primer from last week was also a great read.
But of course the hedgies will try to hold us all hostage. It's up to us to lean on our representatives to make sure they don't cave in.
I just reported the Broker Universe poster to the FBI.
Good thing he or she left a phone number on the post.
ac, but it appears that there is no buyer for them. Baker's argument is that the Fed "calms things down enough" so that the buyers cancel the strike, buy, and then find out that it's still toxic because the Fed's action was only temporary.
Regardless of price? If so, that would suggest a more fundamental breakdown in the market. If it's just that they're not selling at a specific price that they feel they deserve, then I just say "boo hoo..." (with a mocking sneer).
Is there some unusual mechanical problem in the market that developed recently? (Again, falling prices don't count. And fund specific policies that attempt bar fire sale liquidations don't count either.)
Tanta,
I wonder if this would be a realistic "bailout" for homeowners? It seems there'd be a lot of arguing over what the fair market rent should be, etc.
Though, I like the idea. It keeps the houses occupied which would be better for neighborhoods. People could pay less per month in exchange for giving the house over to the bank (or whoever the heck would technically own it).
Regarding turning them into renters - great idea. I first saw evidence of this with builders who are stuck with high end spec homes.....took them off the market and are renting them for 2-3 year lease terms and for enough to cover the carrying costs plus. One I remember is a +/-5000 sq ft baby that leased for 6500/month, 2 year lease.
It is a great idea for many borrowers who were doing ok until the rate adjusted.....and a helluva lot cheaper than foreclosing and carrying that on the books for a year while the possums take over.
Be interesting to see how the accounting would be done on those.....
I suspect ac is right.
If they sell to low the go in a destructive spiral of looses and margin calls
Folks, please. Discuss your money market problems on the thread below.
Sorry Tanta, didn't see that one till it was too late...
From LA TIMES article:
"....In part, the hedge fund industry may have grown too fast for its own good, with too many funds pursuing some of the same strategies, making it harder for any of them to earn the spectacular returns the industry first became known for."
We just didn't understand! The problem was they were just TOO POPULAR for their OWN GOOD.
Now move along, there's no toxic waste waste around here....
Only about 140 point to go to Dow 13000.
Major U.S. Indices - Yahoo! Finance
BTW, I guess the way I would describe my philosophy is "the Fed should do everything it can to support the markets, but nothing to support the securities being traded".
The PPT is properly funded and their agents well-paid. It would be a complete waste of taxpayer money to pay the Fed for doing the same thing.
Separation of concerns is vital to efficiency.
wow, long time ago, told my husband that allowing them to stay as renters was a peaceful solution.
nobody in the neighborhood needs to know, it's almost stress-free, kids don't need to change school, lose friends. relocation is a waste of money and time too.
after all, there were never owners. they were just renting their homes from the bank.
Why should you choose Sentinel?
» Sentinel is a pioneer in the field. Since 1979, our success has been the result of managing clients' cash with utmost safety, daily liquidity and a high rate of return. Throughout our history, no client has suffered a loss as a result of its dealings with Sentinel.
» Sentinel is recognized by clients and peers for its professionalism and performance.
» Sentinel is registered with the Securities and Exchange Commission (SEC) pursuant to the Investment Advisers Act of 1940. Our
stewardship of client funds is overseen by multiple federal and industry regulators.
» We provide our clients with liquidity and operational ease. Funds can be added or withdrawn as late in the day as 4pm, Eastern.
time. A complete report of activity and value is provided daily.
How do you benefit from Sentinel's specialization?
By focusing on corporate and institutional clients, we can tailor our services and operations specifically to meet the unique needs of our clients, without the distraction of maintaining a retail network. Our services make investing and cash management easier for institutional and corporate clients. We simplify our clients' record-keeping while they earn the highest possible rate of return consistent with a prudent investment strategy.
Will your funds be accessible when you need them?
Absolutely. Sentinel is prudent in its placement of funds, in order to provide a minimum of risk while maintaining maximum liquidity. All client funds are placed in readily marketable government and corporate securities, a large portion of which are in overnight investments, allowing us to meet client withdrawal needs while maintaining the integrity of our portfolios.
Sentinel is Client Focused-- we adhere to strict criteria in determining the clients with whom we will work. We choose clients whose businesses we understand, thereby enabling us to provide the flexibility, innovation and responsiveness that develops into long-lasting, client-sensitive relationships. This focus enables us to customize portfolios that will meet our clients' investment objectives. Sentinel skillfully balances the need for liquidity and safety with higher returns, providing an ideal investment vehicle that reflects the specific needs of our clients.
Who will work with you?
Our clients deal with people who know them and understand their business. We foster these ongoing personal relationships, and as a result, there is no need to memorize account numbers or PINs, or to maneuver through a frustrating, multilevel phone system when you contact us. At Sentinel, we diligently learn and adhere to each client's specific expectations. We recognize that business practices and corporate policies often differ. Sentinel's clients deal directly with decision makers who are sensitive to these differences and can accommodate urgent or unique needs. The net result is a transaction that is expedited faster than ca
So is this suggestion serious? Allow people to stay in their houses and rent? Has this ever been done anywhere?
I suspect ac is right.
If they sell to low the go in a destructive spiral of looses and margin calls
Yes... this is what I picture as the real problem: panicked fund managers calling each other saying "don't do that trade or it's all going to hell", and the market just locking up.
But I say, the market itself is functioning normally in this case, even if the participants aren't.
What happens to these tenants when market rents (say, in bubble markets with huge inventory overhangs) decrease? Can they just decide to go across the street for the cheaper rent and leave the lender to deal with it, or will they have to sign agreements that they'll stay and pay for x years?
>
A quick look at the evidence strongly argues for scenario # 2. The problem is that homes are worth less than the value of the mortgages. This is the main fuel for the surge in defaults
Its likely more than just declining home prices. A large number of hedges use leveraging to increase profits. Assumming that some hedge funds are facing margin calls on their investments, they need to liquidate them into cash. Hence, sell off in equities, commodities and bonds. Pehaps declining real estate prices are only half the problem.
I would like to know who is buying on the dips. I know there are few hedge funds purchasing assets of bankrupt mortgage lenders and defunct hedge funds at bargin prices, but in my opinion, equities are a long way away from bargin prices. Does anyone know who is buying?
We can thank Alan Greenspan, The Maestro, for helping the US financial system get to where it is now.
And, lest we forget, the funds are largely UNREGULATED.
I know that the NPR guys are smarter than me, but listening to them explain the financial situation in 60 seconds seems futile after reading this site. Thanks for the education!
So, the NPR reporter was explaining that (paraphrasing), "The hedge funds were modeled to make a lot of money when the market went up and make a lot of money when the market went down. The managers are being forced to look at those models and find the errors."
Seriously? Is that how they found investors, by selling that line? If 3 guys with an MBA come up to me and say, "Come invest with us... we have figured out a way so that you CAN'T lose!" I am sure that I would punch them on the nose and throw them on the heap with the Amway guys and alchemists.
How could savy investors NOT be reminded of Joe Kennedy before the crash in '29? If the shoe shine boy is giving you financial advice... sell!
In the Great Depression of the 1930s, foreclosed folks were often allowed to stay on for rental or just to keep the place from being looted.
But that was in the day when the local bank owned the property. Now a days, an investor might just want to take the loss and go.
Joe......c'mon. Hope their problems don't force them to lay you off.
Queequeg,
Tilting at windmills, are ya? FBI is too busy chasing terrorists to return your phone call.
You need a pre-packaged indictment with files from the institution (prepared on your dime) to get the FBI to even read the file.
"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
exactly , the home slips down the slope from Home to apartment...
no input, no ownership rights, nada...
wanna change the carpet... call hedge fund houdini
need new blinds...
call sarah servicer
great Phuggin idea seb, brilliant...
back to the lab...
Credit spreads are coming under real pressure today, and it's spreading to emerging markets, which had been holding up fairly well in general, and there's a (for that market) huge move going on in the spread between overnight-index based and libor-based interest rate swaps. Sounds arcane, but this is the mother of all arbitrage markets, and will impact the pricing of pretty much every money market product. I suspect there's more than one bank and hedge fund fixed income trading group heading to the nuclear fallout shelter about now.
Posted this in another thread, but never got an answer as newer posts appeared, but would dearly love to hear some thoughts on this
This may be an overly naive question, but occurred to me after reading the FT article (about SIVs and conduits) referred to above. THe article says that a lot of the current liquidity is due to the fact that nobody really knows what the underlying collateral is worth.
Perhaps that's the way the holders of this paper want it??? If it's only worth 20-60 cents on the dollar and that's a known fact then they have to show the losses for all to see - with the attendant fallout. With the value obscured by lack-of-bid, they don't have to write down anything and so can merrily depend on the CBs to keep the ball rolling?
Of course, if the above is true the avalanche will begin as soon as one of these issuers actually has to publicly sell the underlying assets because of dire circumstances, then everybody is exposed and the game is over.
Thoughts ? Please be gentle as I'm not in the biz, just a rubber necker.
Queequeg,
It looks like she pulled her comment.
Are you people going to be this spastic all week?
Because if so, I could lose interest in the quality of my posts. This could turn into, you know, some news clip blog with a Yahoo! comment section.
SNAP OUT OF IT.
Where the heck are the NAHB/Wells confidence numbers...
jb
Right on, Tanta, mein Liebschen. Let's keep this blog informative and educational about the economics of the mortgage and real estate businesses.
Thanks.
Credit spreads are coming under real pressure today, and it's spreading to emerging markets, which had been holding up fairly well in general...
I got the impression a little while back that Jeremy Grantham was going to start shorting the emerging markets. I figured he might have the capital to break their back and start a landslide with other funds jumping in too. This was just pure speculation on my part, but the funds I track are now (as of this hour) down close to 15% since then, so who knows.
Also I think the dollar has been depressed against some emerging market currencies due to cross-border carry trades, another factor that would push the prices of these securities down providing the credit turmoil continues.
Chophouse -
That is definitely the idea... the whole reason that many funds are halting redemptions. They want to stop everyone from running to the fire exists while they put the fire out. If they stop redemptions, they don't have to find the current market price at all. Unfortunately, investors don't like having their feet held to the fire while being told everything will be just fine. If the market keeps on going down while they are being prevented from cashing out, the investor loses even more money.
I smeall desperation.
I don't think there are that many defaults. Seems that the mortgages are down in price, because of the rise in rates over the last few years. This caused the HFs to get margin calls, so they started selling mortgages, prices went down farther, now they are selling quality investments, ie stocks, to make the calls.
Did ya'll just wake up today?
If this were a serious proposal (allowing owners to stay as renters rather than foreclose), which investors would take the hit from the reduced monthly payments? If the mortgage was part of a CDO, would it likely affect all tranches up to AAA?
It seems the investors owning the mortgage would be less likely to agree to this if housing prices were expected to decline for a period of many years... If they were coerced by law, then it would probably be a VERY long time before investors were willing to invest in mortgages again!
I love the Idea. I can buy foreclosures with the tenant already in it. Really, I love it.
OT: Roubini coming up on Bloomberg Radio for those who have XM/Sirius.
"A quick look at the evidence strongly argues for scenario # 2. The problem is that homes are worth less than the value of the mortgages. This is the main fuel for the surge in defaults. This process will only get worse as house prices continue to decline. With the inventory of unsold new homes more than 50 percent above its previous peak, and the number of vacant ownership units nearly twice the previous record, there can be little doubt about the future direction of home prices."
A memo was sent out to the news desks, ordering them not to talk about the continuing effects of falling home prices and increasing foreclosures on the markets. They must at all costs avoid bringing attention to the elephant in the room.
OK. So they stay as renters. What happens to the CDOs and MBSs? The income stream from renters is probably going to be way less than the anticipated income stream from resetting mortgages. This will probably reach deep into the highest rated tranches and diminish cash flow. How do investors liquidate such positions? Does it become a function of the actual amount of cash flow generated by owners and renters?
I guess that could work. The actual cash flow would provide a legit mark to market value for the underlying securities.
The main problem I see is that there are a lot of people in 4 bedroom 3000 sq ft houses who, if they lost the house, would go rent a much smaller place for less money. If they were paying a $1500 teaser neg am and the fair market rental value of the house is $2500 they still can't afford to stay.
Still, a very interesting idea.
I wonder if the Fed is goign ot ask our Japanese friends for a little saki to drop that pesky rising Yen?
That is hurting ma and pa Sakibari with their Samurai bonds from New Zealand, and MBS junk from here.
Lol, not only did Japanese retail buy sinking currencies, but sinking bonds.
Great return, wait, I just want return of my capital!
TANSTAAFL strikes again.
The funny thing as an economist, I literally get paid to remind people of that fact, again and again and again.
Someday this war's gonna end...wake me when the dow is in four digits again.
"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
While this sounds good to me-its a very human thing to do in times of trouble.
Is this what we--as a society want to do?
I think it would be a governmental taking of private property without just compensation. The hedge funds own the house and have the right to lease to whom they want--to sell it etc.
Maybe the condemnation laws might be made to apply--but that a governmental bail out of the sub prime market.
Are you people going to be this spastic all week?
Because if so, I could lose interest in the quality of my posts. This could turn into, you know, some news clip blog with a Yahoo! comment section.
SNAP OUT OF IT.
Yes ma'am.
Roubini had an interesting post( unlike his ususal screed) last week RGE - Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch
He was discussing insolvency vs. illiquidity. Isn't this what Baker is saying here? The Fed should only provide liquidity, and should not bail out insolvent hedgies? Also, the Fed should not provide liquidity, if hedgies use that liquidity to buy enough time to dump their toxic crap on someone else?
How can that happen? The problem right now is that hedgies cannot find anyone to dump their crap on. How can you force someone to buy the crap?
"...Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home...."
of-course this proposal would be bad for the economy. When people move from their foreclosed homes to a rental place, they spend money on moving trucks,fixing-up the rental,etc.
However, if it were to pass it will create a fantastic opportunity for investors. Not only you get an occupied property, you also get a potential buyer living inside.
Mortgage investors may not have a better choice.
BTW, after two miserable years of selling short, Now I can sing.
Back in black
I hit the sack
I've been too long I'm glad to be back
Yes, I'm let loose
From the noose
That's kept me hanging about
I've been looking at the sky
'Cause it's gettin' me high
Forget the hearse 'cause I never die
I got nine lives
Cat eyes
Abusin' every one of them and running wild
CHORUS:
'Cause I'm back
Yes, I'm back
Well, I'm back
Yes, I'm back
Well, I'm back, back
(Well) I'm back in black
Yes, I'm back in black
Baker's idea makes more sense than floating cheap long-term loans to dispossessed homeowners so they can all buy RVs -- a brilliant idea I read in the Atlantic, of all places, last year. Migrant workers, anyone?
Truthfully, though: if the problem got bad enough, where would all those people go? Better as a society to find some way to allow them to stay in place while the financials work themselves out.
Beyond financial chaos lies social chaos, and we do not want to go there. Sometimes it's best to find an economic solution that satisfies the social need, and work backward from there. Or there can be hell to pay.
I'd like to see Baker or Tanta for that matter write about this new era where we have the huge and growing Department of Homeland Security in the mix unlike all the financial fun times before. No doubt it is making some calls to keep the homeland safe and secure.
Congress can just pass legislation that allows homeowners who default to remain in their house as renters, as long as they pay the fair market rent (as determined by an independent appraisal) for their home.
Anyone care to extrapolate what that would do to the CPI 27% component called Owners Equivalent Rent (OER)?
Moving on. Rent in SoCal is often 1/250th or roughly half the mortgage costs. Reducing the revenue by half wipes out everything below the AAA paper (the bottom76%) in those tranched securities and even intrudes into the principal value of those AAAs. Ouch.
I know your firmly planting your tongue in cheek but whenever I hear the words "fair" and "Congress" in the same sentence I can't take the chance.
Bernanke's solution? Capitalism is once again proving to be reverse socialism. Let HF's keep the wealth transferred to them (through borrowers who could be counted on to default when rates returned to norms) from billions of dollar holders.
Brilliant!
Congress will con us all again, just like when they raised deposit insurance back in the early 80's. That worked out really well.
From some comments here, some of you know the reputation (based on their modus operandi) of many of these companies. It appears in many instances they have a profitable business and are being run in a prudent manner, but overnight they are being vapourized? WOW ! Highly unusual. Depression anyone ?
I could (can) see new housing starts falling harder than even CR forecasted even before this for various reasons (OK I am a lumberman), but I never imagined things would get this bad on the credit side. Please, let's not mention subprime anymore, eh ?
Well now you know you have another canuck hanging out here sometimes. Keep up the good work, it is a joy to learn from you all !
I was going to sew all my money into the mattress, but when I opened it up, I found it was full of ABCP my wife had been issuing behind my back!
I'm looking now for a mattress that's insured by the FDIC. You can check that tag which is protected by law.
I know your firmly planting your tongue in cheek but whenever I hear the words "fair" and "Congress" in the same sentence I can't take the chance.
Robert Coté
If you include the President and the Supreme Court and Fed in that statement then it would be valid.
-K
Lawyer L and SDmisfit are right. It would be a highly illegal grab of private property without compensation. And why bother? The private alternative will emerge. Example: Countrywide has 10,000 REO houses for sale. Before adding a new one, they go to the "owner" and offer them the house at 80% of previous value with resonable loan terms. The owner gets to stay with a 20% markdown, Countrywide gets 80% value instead of 50% they would likly get is the open market. Now, if only they had a way to unload those new loans . . . and a way to discourge those who can pay from taking advantage of the program.
Okay if it is impractical to turn them into renters, can we turn them into share croppers instead?
Dean Baker's idea about turning the units into rentals are something I've been thinking about for awhile. He describes it very concisely and elegantly.
The idea seems outrageous until one realizes all the normal liquidation mechanisms will be overwhelmed. So keeping the houses occupied, potentially saves on insurance, security, having the plumbing torn out of the house..in short destruction of the collateral value (the house) by neglect.
There simply is nothing I can conceive where there are not going to be losers in general liquidity squeeze.
As I annonmoosly posted earlier thread:
All of the Fed operations were Temporary, since they were short-term Repos. You give me $1 million, I give you these Freddie Mac MBSes. Tomorrow, I give back the $1 million (plus interest) and take back my MBSes. Ok, maybe in three days, but I believe that only happens on Fridays, since the government doesn't work on weekends. Yes, part of Thursday's Repo ($12 billion) was a 14 day Repo. If you look back through the last couple of Open Market actions, you'll see that the Fed regularly does this to the tune of $7 - $12 billion A DAY normally. Thursday's and Friday's actions were above normal. Today (Monday) only $2 billion of Repos were performed, below average.
The actions were not UNLIMITED on the Fed's part. Today, $52.8 billion of Open Market Repos were submitted, only $2 billion were accepted. You cannot low-ball the Fed, they are much too smart for that
I agree that the actions should have happened at the discount windows (6.25%) instead of as an Open Market action. I believe the discount window is only for federally chartered banks, while the Open Market actions occur with Primary Dealers.
ahnotamoose | 08.14.07 - 10:55 am | #
Thanks Wanderer. Now if I can figure that out, why don't we see more written about it?
puravidavid-
While I don't agree that "we're all duped", I do appreciate the fact that you recognize this for what it is. A transfer of wealth. Everyone is forced to play, but nobody said what team you have to play for...
Everybody GETS what they want from the markets (not just stock markets, housing and debt markets too). Everybody.
Some people subconsciously want(need?) to lose... you might as well help them achieve their desires.
Sell Mortimar! Sell!!!!
treasury monger I addressed the 15th in the June trade deficit post as anonmoosly as i could. But know that it s out.
slightly OT but wanted to remind everyone that tomorrow is the 15th and the 15th is the cut off date for investors to notify hedge funds of redemption requests under standard terms of 45 days notice per quarter. After the 15th the hedge funds know who is pulling the plug and how much they have to liquidate to meet investor redemptions. If they liquidate, that forces prices down. Alternatively, the hedge funds will have to suspend redemptions - further spooking the markets with the implication that their holdings are illiquid and unmarketable. Either way it could be the start of a bad down cycle that is self-perpetuating. Instead of runs on banks this time around, we'll see runs on the 9,800 hedge funds - many of which could only survive (like American homeowners) with increasing levels of leverage and liquidity.
ahnotamoose | 08.14.07 - 10:59 am | #
Beyond financial chaos lies social chaos, and we do not want to go there. Sometimes it's best to find an economic solution that satisfies the social need, and work backward from there. Or there can be hell to pay.
Bob Dobbs
So sorry bob,
there are people present on this site that are precisely aware of just how bent over the prudent were taken...
OT
I was wondering anyones thoughts on Credit Suiess hiring Greenspan as an advisor yesterday ?
Lance aka ahnotamoose
Baker's proposal is basically distinguishing treatment of owner-occupiers versus flippers. Better than a mortgage bailout, but I still don't like it.
Ok anyone who bought before 2000 should qualify for help. Anyone after that deserves to lose.It was just, rub it in your face greed and
showing off. Needless to say that these people will lose somewhere else
if bailed out today. It was and is their own doing. That includes the lemmings as well as the wolves.
thats all.
Ah you guys are so creul. I came to America so I can live the American Dream. I knew I could, lie, cheat, steal and get away with it, because you stupid Americans have sympathy for my cause. Now I can count on you
idiots to make sure all my mindless
investments will payoff. Admit it, you can't help yourselves. You want to live vicaroiusly through me.
Forget it,
You know why they call it the american dream?
Because it only happens when you are sleep.
Hedge Funds Out of Excuses?
Good read from Minyanville's Scott Reamer
dh, what if I bought in 1994 but refi'd 6 times since then? Am I covered?
What if I refi'd once just to put in a new deck?
What's so magical about the year 2000?
"So is this suggestion serious? Allow people to stay in their houses and rent? Has this ever been done anywhere?"
Of course it has and it would not require any legislation to do so. That said, most of these yucks couldn't pay the mortgage so why would they be able to pay the rent? Much better for them to find a suitable housing experience somewhere else and let another buyer get a good deal on the old home.
Have appraisers go to distressed borrowers and work out mnageble terms for a 30 year. Borrowers who don't have problems making the nut get the term of the mortgage cut to adjust for the new(lower) values. That way responisble people can get ahead quicker.
The banks write off the distressed loans to fix up the balance sheet, yet still have managable cash flow from those who can afford things. 15 years down the line, who in the banks will care as the execs will be a new bunch of crooks.
Are most of you people on drugs, or just pulling my leg?
Congress does not need to pass a law. If the lenders want to foreclose and rent back the property to the borrower, they are free to do so.
Forcing lenders to do so would devistate the market. Prices would tumble and the value of the pools would further decline.
The hedgies would be better off to demo the houses. "Sometimes, you need to burn the village to save it".
In the long run, home prices need to get back to what people can actually afford. New (old) underwriting will bring the market back to reality. No-down lier loans caused this problem.
If I'm paying $4,000 per month and my neighbor is paying $1,500 for the same size home, I would be nuts to not call my lender for the same deal. Pride of ownership has a limited value.
Lee in Santa Rosa, CA
If this idea is implemented, why would anybody continue paying mortgage? Rent is lower in most of the country, as much as 3 times lower in some "formerly known as hot" areas.
"Honey, the Congress just passed this bill, we can default and pay $1,500 rent instead of $4,500 mortgage, and we can stay in the house! No more mortgage checks. Whoopee!"
Fast forward 5 years:
"Let's buy this beautiful 2 million dollar house. And if it turns out our median incomes are not enough and we default, we can stay and pay rent. Or the Congress will figure something else out to help us out"
HF Waif: "Please, Sir. May I have some more liquidity?"
History: "The amount of correction fluid necessary to fix the magnitude of mistakes that were made would swamp the dollar."
Congress: "Don't mind Scrooge, here. Step right up."
It's breath-taking in a Weimar-like way.
We seem to have developed a mentality that says, if someone is dumb enough to make a bad loan they should just eat it, and the poor borrower get off scott free.
Legions of borrowers lied through their teeth to get these loans. They should not be rewarded with low rents to ride out the storm.
Before taking action on a default, the lenders should review the file for fraud. If the borrower lied on his app. don't cut him any slack. The hedge fund manager owe it to their pensioner clients to prudently manage these assets. The pension and insurance fund managers who placed these funds with the hedges have a duty to this be done.
Lets not loose sight of the fact that Joe worker bee is positioned at both extreme ends of this crisis. His home and his pension plan. The intermediaries should be forced to refund some of their profits. I'm sure lawyers are standing by.
Lee in Santa Rosa, CA
OK. So they stay as renters. What happens to the CDOs and MBSs? The income stream from renters is probably going to be way less than the anticipated income stream from resetting mortgages. This will probably reach deep into the highest rated tranches and diminish cash flow.
If the market hadn't finally blown up, most of these mortgages were going to refi as soon as they reset anyhow, so I don't think they were ever going to get anything close to the full potential cashflow anyhow. This lets the lender make a little bit on some of their REO properties while the market clears (ie the homebuilders go BK). Three years later the mortgage holder sells into a less flooded market or negotiates a buy here/pay here deal with the once and future homeowner and the mortgage is cleared from the books.
I still say the answer is 'share cropping'... lenders need to think outside the box (they are in).
Two points:
Any way you try to fix it aside from allowing capitalism and free markets to do so (deflation), there will be massive monetary losses or hyperinflation, or both.
Last!? Hey, Tanta, it occurred to me earlier today that what we really need as we make our way through the subprime, Alt-A, hedge fund, MMF, liquidity crisis is a Modest Proposal For the Solution of All Economic Problems. I mean, if Swift were alive today surely he would be a CR regular. Sadly, I am not up to the task. How about you?
Polonius: "The problem right now is that hedgies cannot find anyone to dump their crap on. How can you force someone to buy the crap?"
I am willing and able to purchase this "crap" for pennies on the dollar. They just won't accept my current bid. They'll come around eventually.
And I'll be more than happy to have a "stay and rent" policy. But there will be a pet deposit.
Tanta,
Your blog readers may find the relevant info at Home interesting. Look forward to some comments. Thanks.