Bill Gross on housing:

Bond Guru Bill Gross on the Housing Crisis - US News and World Report

I'll only go along with this if we can find a way to outsource all the work to India and China...

Where do we sign up against this exactly? While I agree it'll take several years to get this underway, home sellers are using every straw out there to justify their inflated prices (and inflated profits). This all need to come to a screeching halt sooner rather than later.

Will refi's be eligible?

Good Morning, Tanta.....thoughts on this lame-brain idea are 1) since you added the 4 "requirements", that will probably cut the 749B in half. Good luck with that!

Second, I think most of the problems are on loans that were stated income-stated assets. Sure, teasers played a part along with 100% financing. But at the end of the day, loans were made to people who cannot afford them over the long haul. This program appears to exclude that bucket; if that is the case, it will do very little to help. Or do I need to review again after a 2nd cup??

Fair Economist,

Excellent point.

No doubt this will all manage to be rushed through well before the November elections.

If I'm reading this right, doesn't this amount to a ginormous short sale? If so, that could unstick the market and allow prices to reach equilibrium. Right now people are stuck in homes they can't afford (or walking away), because they are underwater and banks are leary to eat the loss on short sales. If banks are backstopped then they have no reason not to allow short sales to willing buyers at sensible prices.

"If the government overpaid or became caught by an even further decline in the market value of its mortgages, taxpayers would indeed be bailing out both the industry and imprudent home buyers."

I love the assumption that we are actually already at or near the bottom as far as prices are concerned.

"Yeah, and who ends up paying for these short sales? The taxpayer. No thanks."

Calculate the cost to the taxpayers (federal, state and local) of the on-going market disruptions. I am happy to bet a case of good Burgundy that it is already equal to the cost of this plan.

Having worked for the government in DC for six year, imo it takes three years to get anything off the ground ... so we're talking 2011.

I estimate that ten Tantas working ten hour days six days a week doing just the legal doc due dilly on $739 billion worth of loans from a jillion different servicers would get through it all in just over two years.

now wait a minute, we would need at least eleven Tantas for this to work. someone has to do the Excel Art. i can't go two years without seeing Mortgage Pig.

PS, good mornin' Tater!

Imagine the spectacle of the Federal government foreclosing on private citizen's homes.

Politicians may be economic dunces but they sure as hell can grasp this calculus. I find it difficult to imagine a bailout plan that would have any agency actually owning the paper.

A guarantor? Maybe. Getting themselves into the position of dropping wedding invitations on the front doors of delinquent borrowers saying, "Dear homeowner: please contact the Federal government immediately about your mortgage. We are here to help".

No. Way. In. Hades.

"Over the last two decades, few industries have lobbied more ferociously or effectively than banks to get the government out of its business..."

Ummmm, no. Banks spend a significant portion of their operating cost dealing with government regulation. And my unofficial survey suggests that this portion has been increasing, not decreasing.

The problem is, a lot of it's just busywork. Much of this regulation and interference has very little real correlation with the stated goals of protecting consumers or ensuring sound business practices.

The proposed nonsense is no exception.

Dirk writes:
Countrywide? Nah.

Halliburton.
Tanta | Homepage | 02.23.08 - 8:30 am | #

Or Blackwater, who would be better at persuing collections, pay on time or we waterboard you.

I vote Exxon-Mobil. They have more money than God and just think how good it would make you feel to know that you are keeping the banks afloat everytime you fill up your car.............

transient writes:
"Calculate the cost to the taxpayers (federal, state and local) of the on-going market disruptions. I am happy to bet a case of good Burgundy that it is already equal to the cost of this plan."

Please show me these calculations.

For simplicity, let's look at stocks alone-say around $ 20 trillion total market cap. A 10% drop equals $ 2 trillion. That money will not show up in capital gains. At a 15% tax rate, that is foregone revenue of $ 300 billion for the feds. States will vary, but let's say a 5% rate on average-so $100 billion there.

Now add in all the towns and agencies paying dramatically higher interest rates. Add in sales and property tax revenue. Gets very big very fast.

Well, the problem with this proposal, like that of all government proposals, is the law of unintended consequences.

After the savings and loan debacle in the 80s, Congress changed the law regarding appraisals. Before that, a licenced Realtor could write a property appraisal. After, only a licensed appraisal could, and--this is the key change--he had to be given a copy of the sales contract prior to writing the appraisal, which corrupted the entire process.

What this did was generate upward pressure on prices, since the appraiser's job was changed from valuing the house to justifying the loan. If the house did not appraise at the sales price or higher, the loan could not be justified and the sale could not proceed. And if the appraiser did not value the house at the sales price or higher, thereby effectively killing the loan and the sale, the lender would not hire that appraiser for future valuations. So were the clouds seeded for the making of the perfect storm.

I truly believe that this corruption of the appaisal process led directly to the run up in prices and the advent of creative financing over the last decade. As prices went up, lenders had to come up with more and more creative ways to make loans for borrowers who otherwise wouldn't qualify. Appraisers then justified those loans by overvaluing overpriced homes. And thus the bubble expanded until it finally burst.

I write price opinions for MGIC practically every month. I've written hundreds over the last five years, although fewer recently than previously. Dozens of these requests for a price opinion came with a copy of the appraisal. Why? Because the mortgage insurer was questioning the appraisal. I have yet to come across one in which the appraiser did not overvalue the house by at least $25,000.

I wrote this price opinon about two years ago in which I valued the house at $85,000. And everyone threw a fit. I got phone calls asking me if I could rewrite the price opinion, because they were expecting a value at or above $120,000 (which was the amount of the home equity loan the borrower wanted to take out). And I told them, no, I can't rewrite the price opinion. I'm using next door comps. I found three houses, all by the same builder and of the same age, within two blocks of the subject that all sold within the last six months. A reasonable estimate of the fair market value of this house is $85,000. The appraiser is using new brick construction in a gated community ten miles away as comps. That's why he's able to come up with a value $35,000 over what the market will bear. They weren't very happy about it, but I refused to rewrite my price opinion.

This is the problem, and it hasn't gone away. It will continue to be a problem until the corruption in the appraisal process is removed, because appraisers will continue to search for comparable prices instead of comparable homes. And who created this problem? Who corrupted the appraisal process? The Congress of course.

I suspect much the same will happen with any bailout the government comes up with. It might look or sound good at first, but in the end it will only make matters worse.

I defer to Mark Twain. "Imagine you were an idiot. Imagine you were a member of Congress. But I repeat myself."

"For simplicity, let's look at stocks alone-say around $ 20 trillion total market cap. A 10% drop equals $ 2 trillion. That money will not show up in capital gains. At a 15% tax rate, that is foregone revenue of $ 300 billion for the feds. States will vary, but let's say a 5% rate on average-so $100 billion there."

When did this become about rescuing the stock market? And you talk as if the market will forever be stuck at a 10% lower level. OK, let's for arguments sake say we bail out the banks to preserve capital gains for the government. What do we do when the market goes up 10%? Double capital gains taxes to make up for it?

"Now add in all the towns and agencies paying dramatically higher interest rates. Add in sales and property tax revenue. Gets very big very fast."

I was under the distinct impression that injecting 2-3 billion into the monolines and splitting them up was going to fix the muni markets. Or at least that seems to be what they would have us believe. So we should have the government buy $750 billion in poop to avoid that?

AOTC,
Except that about 1/2 of the stock market is tax free, 401K's IRA's pension funds etc, so no cap gains there. Also over what period, there are still some people who buy and hold long term.

Oh, and I support the suggestions above to claw back as much as possible from the crooks as part of any deal. That will somewhat lighten the load.

First were does the money come from?

Borrow more from foreigners and debase the dollar this gets us no where fast.

This is just another feel good program that even at 739 billion is to small. The problem is probably closer to 5 trillion in size before all is said and done.

It also doesn't do three things that are important.

Lower prices where new buyers can afford to buy a home.

It doesn't go back in time and have people have more children in the 1970s and early 1980s. Since these people weren't born they don't need homes. Median first time buyer 31 median largest home 41.

It also doesn't fix the ATM in the kitchen, without that the economy tanks.

The whole thing rests on the appraisal of the collateral, and the resulting discount for the loans.

People hated Bill Seidman of the RTC. The man just destroyed S&L's when he took their assets, and then he dumped them on the market.

I will repeat: THE RTC WAS NOT A BAILOUT. Reporters older than 20 at the time (are there any?) should remember that.

1989 FIRREA legislation created the RTC to dispose of the assets of failed thrifts. The legislation was a backlash against earlier attempts by the S&L FHLBB regulators to go easy on troubled thrifts (in the Keating 5 scandal, five senators, including John McCain, called in the FHLBB head for an arm-twisting session in support of Liconln Savings and Loan).

So the point is this: be careful what you wish for, BofA. A mortgage "RTC" would be charged with reducing the cost to taxpayers of fixing the mortgage crisis. To do so, they would buy troubled mortgages at a discount to market value, and the banks would be forced to write down loans. Housing prices would fall as homeowners sold for their reduced obligation, the market would clear, and we could move on. A great solution for taxpayers, homeowners and renters: for everyone but bank shareholders and mortgage investors dreaming of being made whole. Oh yeah--the investors would get a call option on the home's value, which is another great incentive for the re-fi'd mortgage holder to ditch his house for another one.

I wonder if Bill Seidman is interested in the job?

Tanta writes:
And as we all know, there are quite a few mortgage brokers looking for work, so problem solved!

They're going to need hands with opposable thumbs.

I'd say that pretty much rules out the broker community.

Hey! You don't need one to use the spacebar on a keyboard. The times they are a changin'.

with Tanta calling bofa's bluff, i'm beginning to believe BAC may slip from it's number one US bank slot...

Next up? WFC?

Just to be clear, the need for government intervention is most strongly made if the greater economy or non-participants are feeling pain due to housing market troubles. Most people agree that it's wrong to selectively "bailout" lenders, borrowers, and Wall Street, just because the music has finally stopped and they don't have a chair to sit in.

It often makes sense to "go to the source of the problem." But not in the current case. The housing trouble is the deflating of a price bubble caused by toxic mortgages and the euphoria that inflates bubbles. From the economy's sake, this bubble MUST deflate to reallocate resources to their most efficient use. Government intervention should not be used to keep the bubble inflated.

If you want to keep collateral damage low, policy makers do things like lower interest rates, make sure that tax policy is progressive and that there is an adequate social safety net, and try your best to keep credit flowing to NEW borrowers who want to use the funds for productive purposes.

Is it possible to write a bill taxing current and former bank executives to fund such a program without running into the problem of a bill of attainder?

"......it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s"

It really galls me that the misconception persists that the S&L industry was bailed out. It was depositors who were bailed out, and the obligation to do so was inferred before the crisis. As I see it, no precedence was set for the current bailout proposal.

G'day, Tanta.

(a) THERE IS NO LOST CAP GAINS REVENUE. Most all gains on the sale of private homes are not taxed (at least the first $250,000/$500,000 thereof, which is most), thanks to Bill and Hillary.

(b) Why does there have to be forgiveness? Why can't the new loans have the same stated principal (lien value) with negative am? Is there a regulatory issue I don't understand? Why should the chance for appreciation be left with the defaulting homeowner? Why does this have to be done with NECs and not all in one instrument.

(c) Why would there be a refi market for this stuff if there isn't now? Is that because the refi would be guaranteed? But then wouldn't it be cheaper and faster to just have the agency sell puts to the banks rather than dick around with moving the paper, and then attempt to remarket the puts or sell notes to back them? This is the 21st century why do we have to move paper around instead of just notional risk?

BTW on the "bill of attainder" issue...you could sure have a requirement that any bank participating in this with balance sheet loans must set aside a litigation reserve to settle derivative litigation brought by shareholders wanting to know what directors approved that compensation" or some such.

Don't count on it.

I'm afraid in this environment (calling "Atlas Shrugged" there is almost no limit to what could be done without generating court decisions overturning same on constitutional grounds.

For one thing, Congress can under the Commerce Clause preempt state law that would otherwise expose these clowns to liability (it largely already has in the form of SLUSA) to persons aggrieved.

I think we should nationalize the oil companies and use the money to bail out the banks - then nationalize them. Average Americans fought and died to grab those oil fields and clear those pipeline routes, so we should take what we earned.

Yeah, well, I don't think that's where the bid will be.

my point, though, is that for this to benefit mezz/residual holders the discount would have to be quite small given the volume of loans we're talking about.

Tanta, obviously you are quite right that REMIC tax status and Q eligibility are screwed without new legislation and regulation.

However.

If you include only loans that are in default or in reasonably foreseeable likelihood thereof (assuming your PSA language let's you do that, and no they're not all the same as you know), ok, let's play along.

But in that case you've just forgiven principal to a lot of bad people (I didn't say they're all bad, but it just has to be that most of the bad ones are in this group relative to the performing group), and you haven't forgiven principal to the good ones.

This is policy? You get a reward for being a fraud or an idiot?

On the other hand, if you include the performing loans, then you've just screwed all the residual holders and alot of the others.

To accomplish what (assuming as you say it's not "banks" but REMICs)?

Furthermore...If a REMIC were allowed to offer a neg am conversion and eschewed that for a discount sale, then why wouldn't they be liable for breach of fiduciary duty for protecting one class against another? So why wouldn't you have to allow such a conversion so that the costs could be borne by all tranche holders?

All I see (in the REMIC context) is a wealth transfer from one class of interest to a group with the highest concentration of unsympathetic persons.

Chris Dodd has already used the words:

Home Ownership Preservation Corporation

See this link:

New subprime bailout on the table - Jan. 31, 2008

"A proposal to bail out subprime mortgage borrowers who are at risk of foreclosure was floated at a Senate Banking Committee hearing Thursday.

Senator Chris Dodd, the committee chair, said he is working to create a Home Ownership Preservation Corporation, which would purchase mortgage securities that are backed by at-risk, subprime loans from lenders and investors.

This corporation would give these lenders and investors a better price for the securities than they would get if the properties backing them were put through foreclosure.

Additionally the loans on these properties would be restructured so that borrowers could afford the new payments and remain in their homes."

Question: Did the banks reject his proposal so they are circulating their own?

If I sound like I'm not in favor of chips falling, I am, true believer, let the losses go where they should.

I'm only posting my outrage combined with the pesky legal and tax details that this will stir up.

Nick,

"No way anything like this happens before a new administration takes office in January."

No way this happens at all. At least the BoA thing, what fred, Tanta, et. al. is another thing (don't think so either).

The BoA thing would be accomplished how?

By the gov't selling an additional 3/4 of a TRILLION dollars in debt. Helloooo. That market is groaning under our rulers already slated $400B debt it plans to sell over the coming fiscal year. This would send the dollar through the floor and interest rates on gov't debt, and therefore all debt, to the MOON! Not gonna happen.

FCB's aren't gonna buy it, and the Fed isn't going to monetize it.

M1 2008-01-01 1364.7B

http://research.stlouisfed.org/fred2/data/M1SL.txt

739B/1364.7B = .54. That's an instant 54% increase in M1. NOT GONNA HAPPEN.

So while I am enjoying the hell out of the debates and comments, I thought I'd chime in on the absurdity of this proposal.

Cheers,

i vote in favor of the boa bond holder bank investor home owner bailout if:

1. anyone anywhere in the u.s. at anytime in the future has a mortgage on a property who's property goes below value can also automaically have their loan re-done to the new lower value with the excess amt forgiven; no exceptions for income levels, race, gender, or sexual preference
2. any loan reduced with debt forgiven as per # 1 above, where the value of the property in question rose above the amt owed in the loan would have that amt added to their loan as monies due, with the loan debt portion to be carried by the bank or $ institution that had gained by the debt reduction / forgiveness during the process of # 1 above
3. fees and interest earned by any $ institutions gained on the portion of the debt reduction / forgiveness program would be removed from the $ institution's balance sheet and paid back to the tax payers' govt and used to reduce the deficit and not used to fund new or continuing tax funded programs in place
4. a simple 10% fee paid daily to me on all savings ever actually accomplished by any of the above actions, tax free, and to my heirs as long as the dollar exists, there after to be paid in gold or silver, as thanks for the simple fair solution of how to fairly handle the current mess (no in-kind pmts please

Lemmie see here: BOA buys Countrywide at a huge discount. Then it comes up with a genius scheme for a government rescue to bail out the mortgage market.

Reminds me of my history. Speculators bought up all the bad paper the Continental Congress issued for pennies on the dollar - then agitated for the new government to make good on it's obligations.

Ordinary citizens got the double shaft. Not only had they taken bad paper for real goods (selling when it became worthless) but after the politically connected got the redemption okayed, they (as taxpayers) picked up the tab for the speculator bailout.

The banks have racked up huge profits during this run. The expect now to not only be subsidized but to wind up owning an enormous amount of property - that I am sure they will be happy to sell back to us when the market has turned around. Meantime, I'm also sure they will be happy to employ us maintaining their properties - as soon as they figure out how to get the government to pick up the tab (minus a small skim) for that.

LOL Fred!

"Or check this box if you prefer that the $10,000 be confiscated from the inflated salaries and bonuses of the myriad of scam artists who originated and profited from the bad loans."

Seems like the Dodd proposal (as described) is better for banks (who hold the MB securities) and bond investors than the Bank of America proposal!

What absolutely kills me when I read these types of articles is the underlying and unshakable assumption that failing to prop up the “weak” housing market (i.e., allowing home prices to revert to their long-term inflation-adjusted average) is somehow undemocratic and a fate to be avoided at all costs. The tiny morsel of logic behind this dogma, to the extent there is one, appears to be that as home prices decline certain individuals who made stupid purchases in the past few years will have to do without homeownership. Well, how about individuals (like me) who first entered the workforce in the past few years and have been denied admission to the American dream because of a housing market gone mad (with the active encouragement of Washington)? We finally reached a point in time where some semblance of sanity may begin to kick into the housing market, so that us non-imprudent [would be] homebuyers can participate in the American dream. Yet Washington and everyone else argues that allowing us to enter the game should be avoided like the plauge. I just don't get it!!! Mind you – We are not looking for special favors: we simply want to be able to purchase a home for a similar amount of our gross incomes (or multiple of rent, or any other objective metric) that practically every generation of Americans have been able to do since the inception of our great democracy. Is wanting that undemocratic?
How about this proposal do deal with the “sick” housing market? Amend the bankruptcy code to make jingle mail easier to accomplish. That would solve most problems overnight and force the risk-takers in this whole mess (i.e., the lenders, banks, hedge funds, etc.) to internalize the risks they assumed by lending boatloads of cash to entirely unqualified gamblers. True, changing the bankruptcy code may go against the “spirit” of their contracts with homebuyers. However, they are hardly in a position to assume the moral high ground. Under this plan, mortgage servicers will have an incentive to provide real loan restructurings. Homes will start once again selling for their real value. AND PRUDENT, PRODUCTIVE MEMBERS OF THE US ECONOMY WILL BE ABLE TO BUY A F**KING HOUSE!!!

The coming cries of outrage by the prudent few will be overwhelmed by the pleas to "do something to help me" from the struggling many.

The prudent are actually a big majority. Remember 30% of households are renters. Of owners, 30% have no mortgage at all. Of the rest, even if half are in trouble, that's only .70 * .70 * .5 = 24% of households.

If Bank of America is suggesting the government buy the sludge at a "deep discount", my thought is the BOA number is closer to a 20% markdown than 70%. You forgot WHO is making the suggestion.

Do You Know HOW MANY b of a LO's bought and used http://www.FAKEPAYCHECKSTUBS.com  To GET THE DEAL DONE? 2000 and counting!

http://www.FAKEPAYCHECKSTUBS.com  HELPING PEOPLE HELP THEMSELVES! GET THE LOAN YOU DESERVE BY FAKING HOW MUCH YOU MAKE! IF YOU CANT MAKE IT, NOW YOU CAN FAKE IT!

"...It will be an effort to stop the bleeding by the lenders, the bond insurers..."

An even less worthy goal than bailing out the "homeowners."

Our government seems to have learned one lesson from Japan's lost decade (cut rates quickly) while completely ignoring the other (let the poor stewards of capital fail and get it over with.)