CR, this approach makes no sense to me, so perhaps you could explain. Borrowers need temporarily lower payments. In the outyears inflation (or, rather, raises to compensate for inflation) should lighten the burden of payment. Reducing principal will reduce payments in both the present and the future, making it a terrible deal for lenders. Why not simply forego resets for 5 years?
Negam is really only an incentive (to a non-speculator) to abandon a house if (a) job loss or health problems make payment impossible, or (b) there is a need to move in the near future. After 10 years, even a 50% negam is wiped out by inflation. But for a lender to do that at a stroke of a pen requires taking a major hit.
Reducing principal is the worst moral hazard of all.
Let the irresponsible asshole who bid $100000 more than they could ever afford, and got the house by outbidding the responsible bidder, let the asshole get the relief now.
This Bernanke guy is the most criminal of them all.
Some of us who bid in 2004 only to be outbid are now going to get royally screwed by the Fed chair-whore.
Ben, yesterday: "We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief. People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000."
Charles II writes:
CR, this approach makes no sense to me, so perhaps you could explain. Borrowers need temporarily lower payments. In the outyears inflation (or, rather, raises to compensate for inflation) should lighten the burden of payment. Reducing principal will reduce payments in both the present and the future, making it a terrible deal for lenders. Why not simply forego resets for 5 years?
Spread the hit over multiple periods throughout the serviced life of the loan rather than take a large hit upfront with foreclosure costs and having to write-down the portfolio with REOs. my 2 cents.
What I don't understand is the necessity for the banks to use negative equity as the qualifying criterium. Why not whether the borrower signed in blue versus black ink for instance?
But since Tightrope Ben is in a mood to correct past errors in judgement and bookkeeping I have a few suggestions. Disgorging past bonuses and profits from the vintage when these loans were generated comes to mind.
Remsem,
You don't get it. You cantz haz prinzipal reductionz becauz u b a CR readerz. Evidence enough that you don't qualify.
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is. Additionally, it shows just how fearful the Fed is of the waves of foreclosures that are hitting and about to come ashore.
agree with anon. to a certain extend. Since when are people not responsible for their own actions? For the lenders though, sometimes some cash flow is better than no cash flow at all. still the solution is terrible for the CDO investors.
why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.
The only hope is that whoever is the new president, he/she asks for Ben's resignation sooner rather than later.
If Warren Buffett doesn't want Ben to run one of his business since Ben is an economist, we certainly don't want Ben at the helm of the most important business in the U.S.....it's central bank.A message to Mr. Ben B: Please go back to teaching and write another book. Stop messing with the free market and let it correct. Much better in the long term, that is after you are gone from the Fed. Thx.
Without addressing the moral hazard issues op. cit., isn't there a significant regulatory hurdle with respect to principal reductions for securitized mortgage loans?
Absent any legislative fixes, can't this approach be applied only to loans banks carry on their balance sheets?
I expect that down payment requirements would become onerous after an era of principal reductions (if it comes to pass).
No bank is going to lend money in a situation in which it is even remotely likely that borrowers (as a class) will be significantly underwater. I wouldn't be surprised if 50% down payments again becomes the norm.
The tide suddenly went away from the shore. BB and crew were busy picking up the stranded fish and trying to put them back into the water. Looking off into the distance BB sees a ridge that is apparently moving toward the shore. Only too late does he realize he is screwed......
Please, obstructionist GOP senators, please keep on running down the clock as much as you can so the worst borrowers get foreclosed on before government-instigated policies like principal reduction become pervasive. Justice must be served.
Bernanke is correct that it's in everyone's interest to keep homeowners in their homes and that investors will likely write off a large portion principal, due to lending practices lacking principle. But lenders would rather take a guaranteed larger loss later than a potential limited loss today. Tanta's ubernerd post on mods and loss mit indicated that the process is time-consuming and requires expertise. For lenders who couldn't even bother to do proper underwriting in the first place, it's so much easier to close their eyes and pretend.
My layman's nickle view of what is going on in Ben's mind here is that he's trying to avoid one of the massive historical facts of the Great Depression.
A lot of people lost homes because they couldn't pay any more. They couldn't get loans modified, not least because their collateral (the property) wasn't "worth" what they needed to clear the difference. Sure, deflation and unemployment hit it as well, but that bit of being underwater played a big part as well.
As CR and others have noted, a housing-led recession is pretty close to the ugliest kind. It's both massive and slow to change course. The massive makes it have significant impact, while the slow, well, that should be obvious.
I really think Ben's trying to head off a problem he sees hitting in about six months, knowing if we wait till it IS a problem we won't be able to do a darn thing about it.
I also happen to think his chances of the banks cooperating with this action at this time are very low.
The problem with this solution is that the financial institutions are already struggling for their life. Writing down the value of more assets is the last thing they can do at this point.
It's a solvency issue that won't be helped by making the losses explicit more quickly.
I could be wrong, but doesn't bankruptcy entail having the principal reduced on auto loans and CCs? All of us know that by most definitions, many households are completely and totally bankrupt. If so, why can't bankruptcy rules work for mortgage loans?
I don't see an obvious problem here, provided cramdowns are applied to principle residences and the borrower does not get the benefit of future appreciation.
why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.
I see you beat me to the punch.
Well, that's the point of the policies Bernanke has advocated in the past -- to cure economic problems buy devaluing the loans people have made and allowing people to go back on their promises.
However, to have a healthy economic I would think it essential to have trust between borrowers and lenders and the medium of exchange they use (the dollar).
In my simple mind I don't quite see how these policies cultivate such an environment.
So would you all rather that BB suggest that the FED monetize the forgiven principle? This puts it squarely back on the Banks and the investors. As far as price discovery goes, well, the banks certainly will want better appraisals now that they had to take losses.
I just complied this email to my lender:
So i am going through This mornings Fed statement about reduced principle request or reduced interest rate requests. How does one go about requesting such a thing...I pay my mortgage on time.. I am trying to figure out my incentive to continue to do so. What is my incentive to continue ? Do i have any options or do i have to be losing my home for options...inquiring minds would like to know. I have lived in this home for 15 years..yes i see it losing value..and want to remain in this home...what is my incentive? I would love to be paying less...offer me a reduced interest rate no strings attached....help out the ones that want to remain in their homes...again what is my incentive.
I never though I'd hear a Fed chairman suggest something so at odds with modern capitalism. The moral hazard here is profound. Bernake is unfit for this job.
lost in all of Benny boy's comments is the actual reason for doing so.
They could care less about individual homeowners however as the entire financial system is over-run with debt instruments created on the backs of that bad loan you begin to see his motivation for speaking to the homeowners....and attempting to "forstall"-his words not mine- the coming tidal wave of resets.
This is all about leverage and what an additional 5-10% decline will do to those...
This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal.
Reducing the principal is the end game to bailout WS and banks.
Now that I've had a chance to reconsider I'm even more mystified. Eschewing all the sociopathic impetuses what strikes me as that this idea will ultimately result in worsening the very aspects Tightrope Ben is seeking to ameliorate.
There is an incentive for tens of millions of homeowners to come in with a lowball appraisal. Gee, how hard is that in the current environment of starving appraisers, cascading REO comps and niggardly lenders? Result; people with 10-15% equity rush to the bank with their $350 appraisal and ask for their principal reduction. Then off to the county seat to get their property tax deduction. Secondary effect; a whole new raft of comps based on recent appraisals such that those with substantial equity find their houses worth less as well. And face it, a lot of the people who get principal reductions are of the will-o-the-wisp variety. They'll use the new lower debt to flood the market with their houses to avoid getting burned twice.
More appraisal fraud. Check.
Lower home prices. Check.
Reduced municipal revenues. Check.
More inventory. Check.
How can this guy have gotten so inurned so quickly that he is suggesting we throw millions of people under the bus just to try and keep red ink of some bank balance sheets.
I guess I shouldn't have bought those bank stocks 6 weeks ago. This just keep getting worse and worse. Kiyosaki was recommending silver this morning up to $25 an ounce. What is holding the Dow above 12,000?
In the proposal, who decides? Bankruptcy reform was defeated. So we don't want the bankruptcy courts to regulate this. It seems the outrage is overblown because the proposal is another aspect of Mr. BB's "tinkerbell" philosophy, as David Wessel of the WSJ referred to it on NPR this morning.
One of the main problems with foreclosures is when the borrower/occupant sues for wrongful foreclosure. Even if he doesn't have a case, once he files a lawsuit it has to work its way through the court system until a judge renders a decision. That could take up to two years.
I know a guy who bought a foreclosed property on the court house steps, thinking he could flip it. The borrower/occupant sued for wrongful foreclosure. He lived in the house rent-free, without making any loan or tax payments (only untilities) for two years, and when he finally vacated after the judge ordered him to, he gutted the house.
If the banks, our brilliant leadership, and the Fed can't agree on something and now, the system is going to lock up.
It is cute to quip about it here, but that's the long and short of the problem.
It's not enough for the Fed and our brilliant leadership to agree on something.
They have to agree on something that will make the situation better.
So far I see no evidence that they have that ability.
It may well be that the underlying problem is that parts of Rome do more harm than they do good and need to be reduced to ash to have any real long-term improvement.
Again, the US has been one of the greatest economic success stories in history despite 3 depressions. And right now I don't see that we're facing anything so bad as that.
Why do I keep losing my faith in the FED? Oh that's right, the old FED chairman can't keep his mouth shut about how bad it is and the current FED looks like a deer in the head lights of an approaching train. Actually, I feel really bad for Ben as he will be an one-term FED chairman due to the hand dealt to him.
If the Fed can now urge lenders to reduce principal on underwater mortgages, then why do the Shrubbies still have a problem with bankruptcy cramdowns? At least with cramdowns there will be a federal judge examining whether the current mortgage is affordable, balancing it against any other secured creditors, and supervising the borrower's finances for the next several years. The cramdown would be targeted, specifically, towards those Paulson said yesterday he wanted to help: people who can't afford their current debts who want to stay in their home.
Plus, with a law the provision would apply to every such transaction, we wouldn't have to listen to officials whine that some banks won't play nice.
why apply this to distressed borrowers? why not qualify all borrowers? can i rush out and get a jumbo loan and get instant 50% discount? i sure would love that
What the heck? If I (the lender) can make more money on a reduced principal than in a foreclosure, then this is no more than common sense. I guess sometimes lenders just need some encouragement from the FED. No need to feel outrages here at all.
rob dawg writes:
More appraisal fraud. Check.
Lower home prices. Check.
Reduced municipal revenues. Check.
More inventory. Check.
I'm not sure it matters Rob Dawg. If the houses go to FC instead, we still get #2-#4 on your checklist.
This has nothing to do with renters and responsible homeowners, or moral hazard, or anything else. This is about LOSS MITIGATION. This is about BB trying to get the banks to do what is best for the banks.
If you're sitting on the sideline, and you don't like this, too bad. If this is the least-worst option for the banks, they'll do it (yes, yes, I know, if they can even execute on this).
This is only a suggestion. Not a mandate. Nothing will change as a result of Ben's comments. I'm sure the banks already realize one option is to reduce the principal owed. The main reason this is a bad idea is once it's known banks are doing this, everyone will want in and it will make a bad situation worse.
This idea, while I don't agree it's a good idea, is way better than the proposal in New York to not allow evictions. Talk about a stupid idea. People can stop paying their mortgage without any penalty whatsoever.
I'm going to have to side with O-Joe on this one. What else do you expect the Fed Chief to say? He would like to see fewer foreclosures and he is suggesting that in some cases it is to the financial advantage of lenders to entertain mortgage cramdowns rather than foreclose and that they should look harder at those options. What's wrong with that? Of course it takes some work to decide which is the better option.
I wonder if we can sign up for a pre-discounted mortgage?
Actually, in spite of all the problems it may cause, I really think this is the the best course. It's kind of like Churchill's view of democracy: it's the worst form of government--except all the others that have been tried.
Thing of all the costs of all the dislocations as someone gets foreclosed on (or walks away), needs to find a place to rent, old house sits as deteriorating REO for six months, that neighborhood goes further down the tubes, etc.
In total costs to society, it would probably be better to err knowing you will cut a lot of peoples' mortgages that don't really need them to be cut, than to go through the alternative.
I think a progressive negative payment tax would solve this. It could apply to mortgage payments, car payments, and credit card payments. The more you pay, the more the amount is reduced by the fed. This would stimulate the economy and with government deficits being paid by future generations we would be good for years.
Sounds to me like Ben is weighing in on the cramdown proposal. Heck he is going a step further and saying do the cramdowns first. The Democrats in the Senate are saying you have to file bankruptcy (and that is a BIG step and no fun at all) to get a cramdown. The banking industry's head is exploding at that proposal, and Ben is saying just do it, its in your best interest Mr. Banker. If you owe $400K on a house worth $300K, then cutting the rate from 7% to 5% doesn't really give you that much incentive to stay there. A principal reduction gets to the heart of the negative equity problem. Of course it will cause more havoc on banks balance sheets.
In general my recation to his speech was, most of the people here at CR could have given this speech in August, if not earlier.
Rob Dawg hit on one of the wonderful ironies in this situation.
Appraisal fraud played a huge role in the upside of the bubble; everybody involved had a vested (albeit short-term and short-sighted) interest in submitting ridiculously high valuations.
Now Bernanke's plan gives equal incentive for more fraud, only now in the opposite direction.
Wow! BernanSpan is really going off the deep end now. To echo the comments here already, why not reduce all debts for anyone and everyone? This is silly and sad.
Another problem is that BernanSpan and company STILL DO NOT GET IT as it pertains to this era of foreclosures. Here is what I wrote last night:
"The primary purpose of purchases made during the boom years was price appreciation and access to said appreciation. The "use" of the home was a money well, not an "investment". Now that the well is dry, the utility of the home has been erased. Again, like Mish says, a bad credit spot is the "breakup fee" for the business deal, and one many will gladly pay to get out from under long term debt service on a depreciating asset that now has no utility. This is the point that the powers that be simply still do not get. Absent rapid price appreciation and free and constant access to it, the purchase of a home will no longer serve many borrower needs. This is why foreclosures are rapidly escalating. This is why people that CAN pay their mortgage are choosing NOT to pay. If you agree to my premise of the loss of utility of the home, then this all makes sense. It will also make basically all of the proposed bailout plans useless, unless they restore 10% plus price appreciation per year and right away. I am wondering when that plan will start to be circulated!"
What are we supposed to do? Diebold and the Supreme Court elected a delusional retarded guy president. His appointees have been systematically destroying the country for seven years. The American people, including the fairly representative sample in Congress, simply don't have the backbone of the Pakistanis or the Kenyans or any of the other oppressed countries where the folks are at least trying to protest what's going on.
So the idea of loading up on any kind of financial asset may indeed be a joke.
ac
Yeah, remember, puts (and the negative ETFs that use them) are essentially derivatives, and there certainly is the possibility of counter-party risk. What if Proshares used some complex puts bought from a hedge fund for one of their double-negative ETFs?
Wave the magic wand and all that "excess" principal disappears. Why not? That's how it was created in the first place, the joys of fractional reserve lending.
Hey Ben! Mr. SmallBusinessOwner here. I have a couple of deadbeat customers from last year who just won't pay their bills(you know those fortune 500 types). I would like to reduce the principal on their debt but the problem is that that principal came out of our treasury, it was real money we worked very hard for the year before. Can we borrow your big black Fed tophat and pull some cash out it?
How can anyone have an ounce of respect for Bernanke at this point? I guess he did paper, scissors, rock or something to decide that banks and mortgage holders should get screwed rather than the co-conspirator homebuyers. At least many of the people who bought MBS paper did so in good faith, e.g. after looking at the AAA rating.
I believe that Bernanke's statement is nothing more than a bit of ass covering on his part. He can at least pretend that he has given the banking system some sage advice in advance of the tsunami he sees rolling in.
I remember telling a realtor friend of mine in 2003 that I would rather buy real estate in a high rather than low-interest rate environment because over the course of 30 years, I would probably always have a chance to refinance to a lower interest rate, but not a lower principal.
bluestatedon writes:
Rob Dawg hit on one of the wonderful ironies in this situation.
Appraisal fraud played a huge role in the upside of the bubble; everybody involved had a vested (albeit short-term and short-sighted) interest in submitting ridiculously high valuations.
Now Bernanke's plan gives equal incentive for more fraud, only now in the opposite direction.
bluestatedon | 03.04.08 - 11:06 am | #
there will still be incentive for appraisal fraud in the normal direction as banks/holders/servicers will want to minimize property value reductions in order to minimize mtm losses. and who do you think will be responsible for assessing the amount of negative equity in any given property?
Alas, we're now in the position of needing to find the least-bad course of action.
As Robert Dawg notes, a plan such as this will lower market prices rapidly. If the debt on the home is cut in half, an owner wanting to sell will be able to sell at half price without having to bring a check to the closing (which most could never do), or try to negotiate a short sale with the bank.
At least with an approach such as this we will once again have a functioning housing market in which first-time buyers will be able to purchase without having to pay the current owner a fortune.
Of course this will "bail out" the people who used their homes as ATMs -- but face it, they've already spent the money and will never pay it back, anyway. And if they're foreclosed upon in the current climate, they'll be able anyway to move into a nice rental somewhere at low cost. There's not much we can do to punish them.
I hear you. Difference with me is that I've been convinced from the beginning that TPTB couldn't do anything but aggravate the situation. That's their track record.
p.s.: All the indices are looking to break support today. Even PMs are taking a hit.
"In a real systemic failure property rights might become meaningless."
And they should. Henry George was right all along. Property rights are one of the core tenet fallacies of modern capitalism. It is clearly the biggest driver of Ponzi finance.
query_tool writes:
This is about LOSS MITIGATION. This is about BB trying to get the banks to do what is best for the banks.
Yes, I absolutely understand the intent is about doing what is best for the health of the banking industry. My point is that lowering principal balances on some loans is so fraught with secondary consequences that IMO it isn't in the best interests for banks to pursue this idea.
My layman's nickle view of what is going on in Ben's mind here is that he's trying to avoid one of the massive historical facts of the Great Depression.
A lot of people lost homes because they couldn't pay any more. They couldn't get loans modified, not least because their collateral (the property) wasn't "worth" what they needed to clear the difference. Sure, deflation and unemployment hit it as well, but that bit of being underwater played a big part as well.
As CR and others have noted, a housing-led recession is pretty close to the ugliest kind. It's both massive and slow to change course. The massive makes it have significant impact, while the slow, well, that should be obvious.
I have less problems with the idea of some kind of bailout than I do with all the effort put into finding creative methods of bailing people out that minimize the short-term political consequences.
To me this is underhanded and culturally degrading.
If you want to bail people out do it the right way so there's accountability and awarness of the costs of screwing up on a collosal scale -- tax the population explicitly and use that money to bail people out.
Let people understand how and why their money is being taken from them and make a case for why this is necessary.
Don't try to hide it via inflation or other forms of stealth tax hikes.
This is just more of the kind of deceptive maneuvering that got us here to begin with.
Yes, there is more hazard. However, the person who goes from 120% LTV to 100% LTV isn't exactly getting a break, particularly if their alternatives are foreclosure or bankruptcy. They are getting their head above water. The odds are still pretty good that they will drown, for those who need to feel better about them facing some consequences.
I'm with MP. After reading that, I was so stunned, I couldn't even type, let alone try to be funny. This just strikes me as a speech drenched in fear. Friday's employment number is going to be fugly, and Ben already has the numbers. I think he is desperately flailing for a way to stop the downward acceleration he knows is underway.
"and who do you think will be responsible for assessing the amount of negative equity in any given property?"
My sister-in-law for some insane reason volunteered for a spot on her township board of assessors in mid-state Michigan, and she says they're completely inundated with demands from homeowners wanting their property taxes immediately reduced due to falling values. What a headache.
I think many do know how bad it is. We're smiling in the face of financial destruction (as any courageous person would). A change in demeanor will not stop the destruction.
My solution (and also the reason I should be the next Fed Chairman):
Move the decimal point one space to the left for debt, and one space to the right for income. There. All fixed.
Oh, yeah - I want a pony as my signing bonus. A blue one.
Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?
Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.
Ultimately this leads to higher GPAs and, by implication, a more educated population.
" GENEVA (Reuters) - General Motors Corp Chief Executive Rick Wagoner said on Tuesday that U.S. auto sales have been weak in the first two months of the year but have not approached the extremes of some forecasts.
"I think it is fair to say that it has been a little better than some of the doomsday people are thinking," Wagoner told reporters.
This is a strong early contender for 2008's "Whistling Past the Graveyard" Award.
"But where do the banks get the money to do this?"
And
"This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting."
Plus guys sayin
"Good, modern capitalism is a bad joke, and needs to be replaced ASAP."
OK, so... dream big
"This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal."
This isn't just flailing or CYA stuff. There has got to be some very alien political zygote in there somewhere.
Iceman writes:
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is. Additionally, it shows just how fearful the Fed is of the waves of foreclosures that are hitting and about to come ashore.
Yes, I think fear is the operative word here. The problem's are:
Bush won't push for any of this. He knows BK and, gosh darn it, it isn't all that bad. Heck, it made him a man and stopped his drinking.
Who has the staffing, etc., for this proposal? Like Ben, we are laying people off, not hiring dude.
"Lets see. If I take the short term hit to profits well then not only do I lose my bonus but maybe my job!" says Mr. CEO. "Oh, crap, thats right I have a duty to my stockholders not to do this. Yipee!"
Note to Ben: Dear sir, I feel your fear and that makes me fearful. I better sit on my gov. check that Shrub is mailing and ... gulp...maybe we should bail on this house.
Ben's suggestions just sound like common sense. If a lender knows that most borrowers with negative equity are going to just walk away, it only makes sense to reduce their principal to keep them in the house. It is far cheaper to reduce the principal than take the huge cost of a foreclosure, flooding the market with properties that are going to fetch pennies on the dollar.
Please someone, just explain to me how a lender is better off foreclosing and re-selling the property for (much decreased) market values rather than just reducing the principal for the existing owner?
"This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal."
Nothing, absolutely nothing will be passed by this congress and signed by the moron in the White House this year. Nothing will get done until well into 2009 when it is already too late. This is the way government works.
Misean, I agree it is time to clear out the safe deposit box. BB is offering a best loss mitigation but sadly the banks do not have the capital to perform this action.
So let me get this: first they randomly create money/credit out of thin air and redirect it into the wrong hands. Now they plan on destroying money/credit out of thin air and redirecting it to the wrong hands.
Why not just forgive ALL debts, suspend contract law, tear up all deeds and re-boot the whole system?"
Well why not institute the old idea from the Hebrew bible of the "Jubilee Year" where every 50 years all debt is cancelled and the slaves are freed?
Lets start today!
"Ben's suggestions just sound like common sense. If a lender knows that most borrowers with negative equity are going to just walk away, it only makes sense to reduce their principal to keep them in the house. It is far cheaper to reduce the principal than take the huge cost of a foreclosure, flooding the market with properties that are going to fetch pennies on the dollar."
Sniglet: Don't be so myopic. You are missing the PV of the future behavior of home buyers. If everyone that bought in 2005 gets bailed out, when I go to buy my new home in a few years I will be willing to "irrationally" bid up the price, because I too will anticipate being bailed out when the bubble collapses, incurring future losses for the banks.
"Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.
Ultimately this leads to higher GPAs and, by implication, a more educated population."
I hate to inform you, but I think this has already happened.
Remsem's accounting proposal & Kou Jie's intuition of political maneuvering in the background both sound very plausible to me. No doubt we will rehash the S&L goodwill writeoff proposal of yore, but if that is what it takes to get the banking system to take its losses, it is better to have funny accounting than virtual worthless accounting that we have now (HELOCs carried at par, mortgages not written down to their true value, bank refusals to take losses). Something has to be bent to get institutions confident in their counterparties again.
Unfortunately, a number of banks are probably below their minimum capital ratios even with some accounting delay/forgiveness scheme. Ben is calling for triage but the banking industry won't come walking through the emergency room doors.
I need someone to explain to me how this principal haircut thing doesn't send mortgage rates to the moon, if not Jupiter or Saturn. If I was a mortgage investor, the possibility of a trim like this in the future sure won't motivate me to stump up my cash at 6.5% for 30 years.
I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks.
I think part of the problem, mp, is that the minute you mention that there are some systemic advantages that could be had by reducing principal (or the OTS notion of bifurcating a upsidedown loan, reamortizing the 'secured' portion and mothballing the 'unsecured' portion as a silent second), you get 1000 commentors here screaming BAILOUT ALERT! MORAL HAZARD ALERT!! OH NO!!NOT NOT NO noes!
It's probably the same people who can't see the upside to globalization.
The rates are already going up. They have been going up for 6 months in the face of fed rate cuts. To put it another way, investors can have smaller principal reduction now or they can have a bigger one after foreclosure.
Why do you think it is a "stretch" to assume that most home-owners with negative equity will walk away? I would counter that it is a stretch to assume people with negative equity will stay in their homes. You have very little to lose by leaving your home (except a digned credit rating) and can greatly improve your life-style and finances (i.e. you can rent a comparable home much cheaper).
There is little stigma from losing a home, and there is very little down-side. I can't imagine that any more than a handful of moral die-hards will stay in homes, dutifully paying the mortgage, when they have negative equity.
But just to make this more concrete: assume that the lender has statistics that PROVE the vast majority of people in a given region will just walk if they have negative equity. If the lender is certain of this, then wouldn't they be better off just reducing the principal for all borrowers?
somebody has to state the beauty of this scheme. might as well be me. By reducing the principal on marginal loans the banks decrease the amount of debt they have outstanding thus improving their reserve ratios. At the same time they reduce the number of questionable loans and increase the number of safe loans on their books. It makes perfect sense in a vacuum.
Assume for a minute that it was absolutely true that the vast majority of home-owners with negative equity will just walk away. If the lenders have data that shows this to be the case, do you think it is better for the lenders to just reduce the principal of existing borrowers or go through foreclosure?
Another way to look at this problem is to consider the case where the borrower is delinquent, yet still has the ability to pay. Clearly the home-owner has just decided to walk away in this situation.
Wouldn't it be in the best interest of the lender to just reduce the loan principal in these situations (i.e. where the borrower clearly has the ability to pay) rather than go through foreclosure?
I just don't see how the lender wins by going through foreclosure.
My guess, start to stabilize. Since we are speaking of impaired assets, anything that reduces the impairment reduces the at-risk ratio. What seems to be the common theme in this thread is that people are acting like we are speaking about mortgages in good standing. The assumption that this will cause other assets to become impaired is just an assumption. Moving from the brink of bankruptcy to having a man's head just above water doesn't strike me as creating added moral hazard. That train has already left the station I'm afraid.
Yes, I do understand how dire the situation is; and thanks to the internet and sites like this, I'm in the unfortunate position of a front row seat for the train wreck.
It's truly frustrating however, to be in the position of watching everything that we've tried to teach our children come to nought. Read the contract. Honor your commitments. Plan your actions based upon the worst case scenario while working to make the best case appear. Give up plasma TVs, turn off the TV and do your homework; postpone the new car and get a used one. There are future needs for the money, even if you can't identify what they are at the moment.
Bernanke is simply the poster child that everyone can throw darts at. And as soon as I read the title of the article, my first response was cynical - gee, now lowball the appraisal. This is where we are.
I do think that there are a lot of people who will suck it up and do what's necessary to correct this. But I also want - demand - quid pro quo. Forgiveness of loan balances? Okay, now you're going to take a hit on your taxes.
1) Reward the crooks and morons for buying more house than they can afford. Hey, I live within my means - can I get a credit voucher or something that reduces the price on my next house by $50,000 or something?
2) The sheer arrogance of trying to keep housing sky high in price, yet at the same time trying to lower the loan amount so people might be able to afford to keep the house a bit longer. Come on!? What's next: every house will have a "sales price" and an "equity value" which will be $100,000 more than the sale price, thus basically being free money? Or, are we going to have some insane system where housing will be unaffordable for all, until you prove you're a crook or a dead beat, then the loan balance is reduced?!
3) All these loans were packaged into assorted toxic waste products and sent all over the world: how are we going to figure out who owns what and who decides if the loan value is reduced?
4) Property taxes: So, are we going to have "taxes only go up!" with the assumption of endless Bubble pricing, while at the same time housing prices remain flat to slowly declining, AND loan values are reduced?!
Is this the future: A starter house sells for $350,000 in an area with a median household income of $50,000. The price of the house can be reduced up to $100,000 if you can prove you're a dead-beat, but if you have a decent paying job, you have to pay full price, which is more than you can afford. For tax purposes, the house is valued at $400,000 and will increase 10% per year since "housing only goes up?!"
5) Future loans and contracts: If the rules can change for anyone in the middle of the game, why would anyone lend out money? Don't rates need to go WAY UP at this point to do something about runaway inflation and risky loans? Changing contracts at a whim just locks up the credit market.
Insanity!
Why don't we just let the crooks and fools suffer the results of their decisions, lower the darn housing prices, and then start selling houses to people who can afford them? Yeesh...
The reality is that the money is gone. Some combination of principle write-down with dual participation in the upside likely makes sense in many cases.
Americans in general have many faults, but we have an excellent track record for ingenuity.
Yes, by all means, reduce the principal amount owed. I own three properties, at 60% LTV/6.0% APR, 50%/5.875%, and and 70%/4.625% in descending order of value, and I would absolutely love it if my mortgages were smaller, especially on my home, which is a non-performing asset. In fact, when you get right down to it, why shouldn't I be rewarded for, you know, borrowing responsibly, paying on time, earning a 780 FICO, and negotiating favorable mortgage rates in the first place? What an idiot I was not to overextend myself and get bailed out.
Hey ,
I am a renter in NJ , i have saved for a decent down payment. I was looking to purchase a house / town house in the last. I knew a bubble was forming because the home appreciation / rent comparison analysis were way out of reality.
There was one house that went up by 15 K from 1993 to 1997, however from 1997 to 2005 it went up by 345K.
Townhomes and SF homes were going up by more than 100 K in the boom years.
I was hoping that the home prices will come back to reality for me to consider buying.
No i hear these proposals by Professor Bernanke, writing down the principal, keep the rates down , so as to keep people who made bad choices remain in their homes.
hey , may be bernanke must consider asking lenders to under-write loans with reduced principal even for newer buyers. Because none of these proposals matter if current buyers stay in their homes and cannot sell the house because there are no new buyers willing to pony up the cash if prices are still high.
If any of these proposals pass , i will continue renting , any of the SF homes, townhouses , i can easily rent for a cost that is approximately 60% of what it takes to ow
What happens in places like sacramento where we are facing outmigration issues coupled with massive overbuiling and speculation? Do the speculators that bought rentals and get principle forgiveness now begin lowering their rental rates even more to attract the few rentors left? What does that do to gross rents calculations across the area? Honestly this is a pandora's box of unintended outcomes.
Yes, the lenders should reduce your loan principals for any of your properties with negative equity. Unfortunately, it seems as if you have too much equity to justify such a reduction.
There is virtually no chance you are going to walk away (i.e. because you have significant equity). However, in situations where the borrower has negative equity, the lender is far better off just reducing the principal rather than having to foreclose (i.e. because very few people with negative equity will be silly enough to keep making payments).
At this point in time you're wrong. Simple thing to check, really. How many homeowners are believed to be underwater? And of them, how many have walked away?
Now they may become "rational" by your definition, but at this time they're not. They're more interested in keeping that property DESPITE the fact they'd be better off in the short term to walk away and take a lower rent.
Yes, I put rational in quotation marks. Let me examine a few things I can do with my home that I cannot do as a renter. I can choose if I have pets. I can choose to plant a garden. I can set up a workshop for my hobby of choice. I can put ugly lawn ornaments out on display - be they 'permanent' flamingos and gnomes, or be they seasonal lights and turkeys. I get to pick the color of paint I apply.
Oh, and I get someplace that is MINE. I do not have to worry that regardless how diligent I am in making payments, somebody else's decision to sell means I get a 30 day notice - to vacate, or to face a 75% increase in my monthly payment, or... the list goes on, and I've encountered several of the events.
These are not trivial issues. Pricing them is difficult - they're very subjective. But subjective and difficult, they're still rational considerations.
"What an idiot I was not to overextend myself and get bailed out."
If you view your mortgage as a call option, you purchased a deep in the money call. Many so called call options were sold at the money with very little premium.
Ben, we can just stop paying the mortgage and it will take the lenders a decade to take the property away. For this reason Ben is urging banks to cooperate because he knows banks cannot keep up in the court system. GREAT DEPRESSION II here we come.
So what should lenders do if the statistics change, and it verifiably DOES become the norm for borrowers with negative equity to walk away?
If the lender KNOWS there is a 90% chance borrowers with negative equity will default (assume there are statistics proving this for a particular area), is it better to just reduce the principal or go through foreclosure?
Up toward the top Dr.Wu gives two quotes to Ben. Actually the first quote is from the Hanskster
(obviously supplied by the man who talks to God).
Ben's comment seems to be an antidote.
I feel for Ben, as I do for Paulson. The Fed and the Admin. are supposed to work as a team.
Can you imagine what kind of replies Ben gets at meetings with the shrubbery.
Its must be kinda like trying to go hunting with a dog that just lies in the shade and spends hours on end licking his "two best friends"
Moral: The fish stinks from the head
The Fisher King or the Wounded King figures in Arthurian legend .... Versions of his story vary widely, but he is always wounded in the legs or groin, and incapable of moving on his own. When he is injured, his kingdom suffers as he does, his impotence affecting the fertility of the land and reducing it to a barren Wasteland. Little is left for him to do but fish in the river near his castle
NPV sounds so easy. But in times like these, what is the correct discount rate! If the lender is on the verge of bankruptcy too, it will take whatever cash it can get.
Moral hazard for underwater homeowners? I'm not seeing it. The whole point of mortgage contracts spelling out what happens when the borrower stops paying, non-recourse laws and the eradication of debtors' prisons is that in some situations the borrower just has to walk away. The traditional 25% down payment's sole purpose was to make those situations rare and painful. Obviously, increasing LTVs made those situations less rare and less painful. 'Subprime' MEANS more likely to default. The genius of American capitalism has always been, with apologies to F. Scott Fitzgerald, that many lives have post-BK second acts. Lower consequences from BK means more risk taking than in Europe or Japan. But don't say that someone who lost the house, the down payment and the next seven years of FICO is just 'walking away'.
The real moral hazard comes with the split between mortgage servicers and lenders. When they were two guys sitting across from each other in the back room of a bank, it was tough for the servicing department to maximize his own gain at the expense of the bank's as a whole. When they're separate corporations with a few intermediaries to boot, it gets a lot easier.
Sure there are "winners" in foreclosure. The borrower who is able to get out from under a large debt and live a better life-style in a cheaper rental is a huge winner. So what if you get a ding on your credit rating? That's not such a big deal.
Since, it's quite clear that the good will be paying for the mistakes of the bad....why not let us have some pain for our money.
I want to AT LEAST know that the assholes who created this mess will suffer as much as possible. It really will make me feel better as I watch my taxes go through the roof, my wages stagnate and my quality of life diminish right before my eyes for making responsible and non-sociopathic economic choices in the face of the insanity which surrounds me.
Kirk, Good point but it works both ways,would you put a cost on taxes, maintenance, and the stress of being a few paychecks from losing everything? If you want pets, a garden or custom blinds that can all be found/negotiated. A good renter will be greatly appreciated by a good landlord. Just treat the house as if it were your own.
Sniglet writes:
Please someone, just explain to me how a lender is better off foreclosing and re-selling the property for (much decreased) market values rather than just reducing the principal for the existing owner?
The lender has to take a loss either way.
Sniglet | 03.04.08 - 11:30 am | #
lenders mtm their loan portfolios based upon secondary market pricing of certain types of paper. in a foreclosure, lenders look to property value, not market value of the sale of the note. in certain instances, it could be beneficial to foreclose rather than refi or move the note at discount.
PPT is scared of the youwalkaway.com movement. They also know that FFR cuts will probably not get passed through to 30 yr mort. The FAT spread for the banks will be offset by continued losses in housing collateral writedowns.
A truly reflexive process that could take a decade or more to complete.
Give homeowners some equity and maybe they will "stay and continue to pay"
Can one of the members "No-Bailout", "principal reduction = moral hazard" persuasion please answer the following in succinct, impartial language and please do your best to avoid political shrillness:
Our government purports to be "by the people and for the people", N'Cest Pas? How is foreclosing on millions of people a feasible course of action, presuming that our government and its constituent private institutions/enterprises are actually interested in survival?
Please answer MP's question- how are there less losses in selling a gutted REO at a discount?
Sniglet - oh, I think it's smart (so to speak) to deal with, but not for the walkaways. Right argument, wrong basis - and the wrong basis will eventually bite you.
The choice isn't do this or deal with walkaways. It's do this or deal with foreclosure procedings. Foreclosures are actually MORE expensive to the banks. Now we both know the walkaway is also a foreclosure, but the walkaway is less likely to contest or strip - at least so far. The walkaway doesn't fight for the extra few months to which he's entitled.
And probably most important, the walkaway doesn't give your bank bad press. Go look at some of the political cartoons from the 1930s - the fat-cat bank taking the family home is a common theme. That common theme was food for a lot of the regulations that came about. Some of the regulations were necessary, but they might not have been as severe had the banks not been so handicapped in the political arena. A major point that's about to come into play again, I think: Credit :: Money as Money :: votes. (Not completely, but closely nonetheless.)
You're usually on target but your reserves versus liabilities for banks remark goes very wide. Yes, banks have to carry reserves against liabilities. Unfortunately, a principal writedown doesn't affect liabilities. It just cuts assets (to the bank, the mortgage is an asset) and reserves.
Yes it does make sense for each individual situation to simply reduce the principle rather than go through an expensive forclosure.
But, once you can reduce your principle with a late payment and a phone call, that means banks lose money on EVERY upsidedown loan (hence the phone ringing comment by CR).
So, if the bank loses alot of money on say 3 million home forclosures, but will lose slightly less money for each home but now on 7-8 million mortgages that request a princple-adjustment, is the bank better off?
There are many people who may be upside down but not by much, say 30 grand.....wouldn't you make a call for 30 grand?
The complications of this are tremendous.
So do you go out a take out a huge second on your house, hide the cash, and then ask for a cram-down....Free Money! Sure a credit hit but won't need to borrow money for a while now!
Everybody just stop paying. We're too big to fail. If they can't foreclose on less than 5 or 7 per cent, how about everyone? We can all live rent free. Forgiving principle on one or two might be possible, a significant fraction isn't opening a can of worms, it's pulling the pin on a grenade.
Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?
Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.
Ultimately this leads to higher GPAs and, by implication, a more educated population.
Certain universities had policies where everyone got A's and B's. The students were happy, everyone seemed smarter and the universities could bask in their greatness. Princeton was the leader in this strategy. I wonder if Ben, when he headed up the department at Princeton, came up with that policy, which i believe is known as "grade inflation".
"Of course, if it becomes common for lenders to reduce principal, their phones will be ringing off the hook!"
Of course, if it becomes common for lenders to face foreclosures, their financial health will fall off a cliff.
Lenders bears no small part of the blame for the situation they're in. If everyone wants to play the offended virgin and get tough Zbigy on borrowers, watch out below!
I like Ben a lot, he wears nice suits, has nice gloss atop his head (lips too) and love that beard. I also like how his banking pal Paulson came out yesterday to say homeowners need to not be speculators. Now Ben suggests that banks not play casino games.
That concept on the whole -- is not bad, but it comes about six years too late and now in todays harsh light, one recognizes that The Fed is always too slow to react to realtime economic issues. After all, when you have a group of 30 year old spoiled/wealthy prima donna brats running The Fed and running The Printing Presses (at high speed) this all seems nothing short of retarded -- where the blind are running after the blind in a panic effort to make bad bets go away.
Where was this attempt at accountability from The Fed 5 years ago, where was the enforcement of regulation or the willingness to stop their banking friends from reaping record profits from derivatives and financial accounting tantamount to fraud 4 years ago? Where was the Fed to be found when home values had virtually doubled overnight? Why was this two-fisted punch aimed at speculators not offered then, and now far too late?
Feel free to scream moral hazard and voice righteous thoughts.
I have only one thing to say:
If something isn't done immediately, this thing will fall of its own weight. Gravity will do its job.
If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
So, if I were YOU, I'd be telephoning my elected representatives and demanding that they do SOMETHING, and SOON.
Deal Junkie writes:
...still the solution is terrible for the CDO investors.
CDO investors are doomed in any case. The only reason to make a CDO out of MBS is because it lets you take some of the toxic crud you haven't yet artificially raised to investor grade (which is to say lower tranches of the MBS) and elevate it some more. These things will all evaporate over the next few years no matter what is done.
You are correct that even greater problems for the lending industry might ultimately be created if they began to quickly reduce the principal for anyone who was under water. However, for many individual lenders, just trying to manage their portfolio, this might be the best course.
This is a good example of game theory. While the moral hazard that is created by all lenders reducing principals is significant, it is in the interest of individual banks/servicers to rework loans to avoid foreclosure.
In fact, there may be some lenders or servicers who have no intention of ever under-writing new loans anyway, and are simply trying to manage a pre-existing pool of borrowers. For these lenders they may not care one bit what the long term implications for the lending industry are.
Gravity will do its job? The job of gravity is to bend itself back onto the fabric of space/time. What we have here is financial entropy where the chaos is expanding into puzzle pieces that aint gonna fit together ever again. They really need to re-invent the financial system, cause this one has come to an end!
"If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
So, if I were YOU, I'd be telephoning my elected representatives and demanding that they do SOMETHING, and SOON.
mp"
1. Our government purports to be "by the people and for the people", N'Cest Pas? How is foreclosing on millions of people a feasible course of action, presuming that our government and its constituent private institutions/enterprises are actually interested in survival?
Please answer MP's question- how are there less losses in selling a gutted REO at a discount?
Again, the US has gone through similar episodes in the past and has done just fine in the aftermath.
It's a balancing act between preventing economic collapse and taking away peoples' motivation to work.
This situation may be new to the people alive today, but it is not new to this nation.
I have a great deal of skepticism about radically changing something that has worked so well in the past, or grossly overreacting to situations we've dealt with before.
We are fabulously wealthy and have extraordinarily good lives due to the philosophy and rules we've lived by in the past.
Maybe we don't want to throw the baby out with the bath water just yet?
We've been living in a fantasy world for a decade now.
Life is hard sometimes. The government can't make that go away, and will likely fail dramatically trying.
It just baffles me why the Fed wants to step in and prevent what is currently occurring in the marketplace ... the greatest housing affordability initiative ever developed.
This entire financial mess can be summed up bt the little illustration on the right side of the page, which also says: The Monte Carlo method can be illustrated as a game of battleship. First a player makes some random shots.
The point being, if you have ever plyed this game or any other game, you can cheat and move or substitute positions. If the data is changed, the data input results in data output that is false. Oui! We had everyone cheat in the current system and now we have chaos and need a new system where people cant cheat, starting with The Fed, Bush, banks, etc...
More broadly, Monte Carlo methods are useful for modeling phenomena with significant uncertainty in inputs, such as the calculation of risk in business (for its use in the insurance industry, see stochastic modelling). A classic use is for the evaluation of definite integrals, particularly multidimensional integrals with complicated boundary conditions.
Monte Carlo methods in finance are often used to calculate the value of companies, to evaluate investments in projects at corporate level or to evaluate financial derivatives. The Monte Carlo method is intended for financial analysts who want to construct stochastic or probabilistic financial models as opposed to the traditional static and deterministic models.
Once upon a time you dressed so fine
You threw the bums a dime in your prime, didn't you?
People'd call, say, "Beware doll, you're bound to fall"
You thought they were all kiddin' you
You used to laugh about
Everybody that was hangin' out
Now you don't talk so loud
Now you don't seem so proud
About having to be scrounging for your next meal.
How does it feel
How does it feel
To be without a home
Like a complete unknown
Like a rolling stone?
You've gone to the finest school all right, Miss Lonely
But you know you only used to get juiced in it
And nobody has ever taught you how to live on the street
And now you find out you're gonna have to get used to it
You said you'd never compromise
With the mystery tramp, but now you realize
He's not selling any alibis
As you stare into the vacuum of his eyes
And ask him do you want to make a deal?
How does it feel
How does it feel
To be on your own
With no direction home
Like a complete unknown
Like a rolling stone?
You never turned around to see the frowns on the jugglers and the clowns
When they all come down and did tricks for you
You never understood that it ain't no good
You shouldn't let other people get your kicks for you
You used to ride on the chrome horse with your diplomat
Who carried on his shoulder a Siamese cat
Ain't it hard when you discover that
He really wasn't where it's at
After he took from you everything he could steal.
How does it feel
How does it feel
To be on your own
With no direction home
Like a complete unknown
Like a rolling stone?
Princess on the steeple and all the pretty people
They're drinkin', thinkin' that they got it made
Exchanging all kinds of precious gifts and things
But you'd better lift your diamond ring, you'd better pawn it babe
You used to be so amused
At Napoleon in rags and the language that he used
Go to him now, he calls you, you can't refuse
When you got nothing, you got nothing to lose
You're invisible now, you got no secrets to conceal.
How does it feel
How does it feel
To be on your own
With no direction home
Like a complete unknown
Like a rolling stone?
The suggestion that the gov might reimburse banks for their write-downs is already implicit in terms of tax losses, at least for investors who are subject to US taxes. Those losses would be cushioned by the corporate tax rate.
The real losers would be foreign investors who would likely pass their losses to the governments that they pay taxes to.
Wouldn't make us any more popular abroad than we are now, but it seems to meet the objective of most on this board that the best solution is rapid price discovery.
Dylan seems to be talking to Ben here about rate cuts:
I threw the I-Ching yesterday, it said there might be some thunder at the well.
Peace and quiet's been avoiding me for so long it seems like living hell.
There's a lone soldier on the hill, watchin' falling raindrops pour.
You'd never know it to look at him, but at the final shot he won the war
After losin' every battle.
You're usually on target but your reserves versus liabilities for banks remark goes very wide. Yes, banks have to carry reserves against liabilities. Unfortunately, a principal writedown doesn't affect liabilities. It just cuts assets (to the bank, the mortgage is an asset) and reserves.
I understand. Tanta had a great UberNerd on that very subject and I just expressed my thought incorrectly. The principal writedown part is an asset reduction as you explain but it also allows them to reclassify the remainder of the asset as "safe" and not in need of additional reserves against potential loses. Did I say it right this time?
If anyone doesn't understand the moral hazard and potential unintended consequences of this so-called 'plan' (personally, I think it's just more posturing to signal that the Fed and Gov are 'doing something'), try to imagine that you just bought (or received) thousands of dollars' worth of Sharper Image gift cards this past December. Now go and try to use them. Now ask yourself if you will ever trust Sharper Image or any 'gift card' purveyor again.
That only works with truth and honor. This is like the game theory above, where people lie and cheat and the cards on the table may be connected to cards hidden under the table. This is about trust and distrust and fraud versus accountability. The banks were whores and they started using crack, now they look like hell and nobody wants um!
Hey mp- are you sober and not in a funk? Because if you are,...Wow. I've depended on a few commenters here to keep my "Depression" fears at bay, and if you really feel this way, ouch.
Well, here's hoping there is a decent solution. Cheers.
Does it make more sense for a lender to have a bad 500K loan on his books or a questionable 350K loan on his books, or a real estate asset "valued at 500K" on his books?
Measures that lead to a sustainable outcome are to be preferred to temporary palliatives...
This situation calls for the re-invention of our failed system. The Fed has to come to terms with its own failure and lack of oversight, lack of regulation, its collusion with banking members, its distortion of facts and its involvement in systemic corruption, which are compounded by nepotism and treason!
" Today, the poor throughout the world, and increasingly business and government bodies as well, owe a rising proportion of their income to wealthy institutional creditors (including pension funds nominally owned by workers, for whom these retirement savings are not available to pay off their own current debts). At some point the trends of debt must rise so high as to exceed the economys ability to pay, namely, the entire available economic surplus. There is no inherently mathematical solution at this crisis point. The response must be political, as it always has been."
Again, the US has been one of the greatest economic success stories in history despite 3 depressions. And right now I don't see that we're facing anything so bad as that.
Past performance is no guarantee of future results.
--Nostradamus
In regards to personal responsibility, should that have been the lender's reasoning for NOT writing 100% LTV loans on stated income? Seems stupid to bring personal responsibility into it AFTER approving the loan. If a principal write-down is better for these idiot lenders, then they should be stuck with their contracted option of foreclosure.
If home owners bought into a bubble at highly inflated prices...sometimes based on fraudulent appraisals and financed by some questionable or fraudulent loan practices...well why not allow an adjustment to the loan reducing principal.
Especially if the loan was secured at the peak of the engineered and unregulated bubble. The bloggers opposing making these home loans adjust to the reality of home values are opposing a correction that is just and fair in many cases of unfair lending practices and shady appraisals.
Those opposing correcting the bubble appraisals and bubble loans are actually siding with the unfair practices of the RE and mortgage finance industries. You want the ridiculous bubble fantasyland prices to stand.
I still believe in the worst cases of inflated values, it's best for upside down 'home owners' to walk for financial sanity, security, and survival. Many buyers bought into a rigged, fraudulent trap. So reducing the fixed bubble amount or walking are both sane and just strategies for strapped home buyers.
I love to harp and today I want to harp on game theory, like Monte Carlo Simulations, which are the core backbone model for our entire financial system, i.e, our financial universe is based on game theory, like a dog race or a few hands of gin rummy, or shooting marbles, flipping coins, flipping houses, flipping derivatives and goosing Wall Street with a 3/4 rate drop, to help pacify member bankers that have made bad bets on the wrong casino chips.
Thus, why, has our financial game fallen upon bad times, where all the bad bets have hit all the speculators at the same time? Was there not supposed to be risk management for this game and ratings linked to the probability of a coin being flipped the wrong way?
What happens in Vegas when a casino hits a soft patch in its micro-economy, do they print more money or shut the doors? Any one know how the mafia deals with lost dough at a casino? Ask Ben!
IIRC Hebrew law REQUIRES that te devout forgive all debts once every seven years. The idea was exactly to make people more committed to the community and less to their own wealth.
This tradition is carried into Christianity with that famous prayer in which we ask that we be forgiven our "debts" even as we forgive our "debtors".
Huummmm
wheat - have you not yet noticed that no one in our financial or political leadership positions takes responsibility for ANYTHING? It is always a matter of pointing fingers, and shifting blame. Which is why we are where we are. Gigantic moral vacuum at the top of every organization. We r skroo-ed.
If something isn't done immediately, this thing will fall of its own weight. Gravity will do its job.
If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
So, if I were YOU, I'd be telephoning my elected representatives and demanding that they do SOMETHING, and SOON.
mp | 03.04.08 - 12:19 pm | #
yup, the apocalypse is at hand. Soon after we'll have the Rapture.
When a player tries to break the bank at a casino, he is fighting the house edge as well as an opponent with much larger resources. Even a small percentage in favour of the casino reduces the probability of the player ruining the casino to such an extent that his chance of profiting is infinitesimal. If you are anticipating playing a zero sum game then make sure you are aware of the prospect of ruin.
I understand loss mitigation as much as anybody but what pisses me off is the Ben gets on his bully pulpit and deigns to advise the banks on what to do. He said nothing to the banks or the punters on the looong upside - he should just stfu and let banks work it out all by themselves as they see fit in their particular marketplaces.
Now he's giving the banks and the customers an "alibi" - 'Ben made me do it' -
Where do I sign up ? Heck, I've been avoiding and stepping past Ben and Greenspan's machinations for some years now - what's another one - in the meantime the gnomes of Zurich get my money !
"I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks."
and wrote more about that below..
MP i'm with you. my family has saved and invested while others had the shinny boats, cars etc we did not. ok boo hoo.
but now the entire ship of state is sinking, and blaming ben aint helpin
if you are suggesting that who gets hurt more...and do the most deserving amongst us get their fair share of punishment... is no longer the issue.
we are facing an increasing possibility of systemic failure.
decisive and profound action is required or we all go down on this sinking ship.
(historically, yes i appreciate all the decrying about how roosevelt closed the banks and "confiscated" (he didn't he bought it above market value) the gold...but hey when the barbarians are at the gate, somebody has to take charge and DO SOMETHING!
Maybe The Fed bases its economic model on coin tosses and casinos theories and perhaps they bet the farm on pumping the housing buble, with Bush's Ownership Society Boondoggle? Thus perhaps treasury yields are crashing because the odds of the house defaulting are increasing, and thus the only way to get speculators back into this casino is to change the rules and offer more free vodka and cute college chicks with exposed navels? Yah!
Gambler's ruin
http://en.wikipedia.org/wiki/Gambler's_ruin
A typical casino game has a slight house advantage, which is the long-run expectation, most often expressed as a percentage of the amount wagered. In most games, this edge remains constant from one play to the next (blackjack being one notable exception).
For example, the official house advantage for a casino game is 6.25%, and thus the expected value of return for the gambler is 93.75% of the total capital wagered. However, this calculation would be exactly true only if the gambler never re-wagered the proceeds of a winning bet. Thus after gambling 100 dollars (called "action") the idealized average gambler would be left with 93.75 dollars in his bankroll. If he continued to bet (using his 93.75 dollars in proceeds as his new bankroll), he would again lose 6.25% of his action on average and the expected value of his bankroll would go down to 87.89 dollars. If the proceeds are continually re-wagered, this downward spiral continues until the gambler's expected value approaches zero. Gambler's ruin would occur the first time the bankroll reaches exactly 0, which could occur earlier or later but must occur eventually.
The long-run expectation will not necessarily be the result experienced by any particular gambler. The gambler who plays for a finite period of time may finish with a net win, despite the house advantage, or may go broke much more quickly than the mathematical average.
Do I detect that Ben is grasping at straws? Straws won't save you, Ben. Your reputation is probably finished, or soon will be. Wait until you start lowering rates in the face of rising inflation. That'll finish you off but good.
After readin about your casino going broke, I thought I would repost this:
If the proceeds are continually re-wagered, this downward spiral continues until the gambler's expected value approaches zero.
Ben, IMHO, we have two things going on here, first, your casino is going broke. Second, the speculators that generate cash flow in your casino, are going broke.
Ben, as I see it, 1+1 = 2, but if this systemic meltdown continues with hyperinflation and stagflation then, 0+0=0
Again, the US has gone through similar episodes in the past and has done just fine in the aftermath.
No, it hasn't. We're looking at a 20-30% drop in housing prices. According to Case-Shiller that exceeds the Great Depression drop.
Maybe an appeal to self-interest will help with some of the people complaining about Bernanke's idea. Many people here are drooling about buying super-cheap houses. Well, if we have mass foreclosures, that will destroy neighborhoods and make the houses in them uninhabitable due to squatters, neglect, etc. What's the loss of millions of homes from the usable housing supply going to do to those low house prices you're lusting for?
True, the banks have no obligation to modify loan terms. However, they would be mind-boglingly silly not to do so for borrowers with negative equity who are defaulting on their loans (who have the ability to pay).
It is far better for a lender to reduce the principal on a loan, and keep the existing borrower in the house, than to go through a foreclosure.
Just explain to me how the bank benefits by foreclosing on a home with negative equity? They can't possibly be made whole upon re-sale. Whether they reduce the principal for the existing borrower or foreclose and re-sell the house, the bank is going to take a thumping loss.
A local school district had a significant problem with the superintendant several years ago. Gent was subsequently jailed for fraud and the district was in a complete wreck. Applying the moral that the fish rots from the head, the board hired a new supt, who then had major problems getting correct/factual/honest info from the principals at some schools. Upshot was that the new supt actually organized a night-time raid on a principal's office and went through files to get the complete picture. Other principals then fell into line.
Apart from such a draconian measure, I don't rightly know what the reps are expected to do. This isn't a measure for the legislator,it's one for the AG or FDIC regulator.
If securitized mortgages have already been revalued down, and the servicers reduce principal on the mortgages in the securities, and the mortgages are then paid off over the life of the loan, then are investors really losing anything that they have not already lost with the current write downs?
The Great Depression was not about a housing bubble, it was about a lack of market regulation, which is mirrored in this situation today where nepotism provided us with Katrina-like retardation, where FEMA was run by a retard that had his job given to him as a political favor, much ike Paulson, Ben and The Fed Board and evert agency out there, including DOJ, FBI, CIA and the armies of un-qualified people that have done a heck of a job destroying America and our future!
What are the odds of these people turning things around?
w -this is what I'm puzzling about too amid moral hazard cries - reducing principal seems like it could hasten house price declines rather than prop them up.
Also, it seems to make the greediest, most culpable, most foolish party in all this -- the lenders -- bear the burden for screwing up -- as opposed to me, the taxpayer.
But welcome to have someone set me right - I am sincerely confused...
I'm not sure anybody really understands exactly what happened in the great depression. I know i don't. & imho any financially based explanation that doesn't also include the impacts of technology on the financial system itself isn't correct.
but apropos - i'm reading a book from 1937 on the debt situation then right now - and it has this interesting little throw away line in the introduction:
"No category of debt (except Federal*) was completely paid off during the depression."
federal gets asterisked because the move away from the gold standard, meant that federal debt was effectively paid in full - but with depreciated dollars.
When a Fed Chairman makes such a proposal, one has to wonder about the long term prospect of credit availability to prospective homeowners in this country.
There seems to be an ever-increasing drumbeat to punish the mortgage bond investor. That's probably not a real good idea from a long term perspective.
Why weren't Bernanke, Greenspan et al. asking the banks and the Gov't to step in and stop the housing market from going up (AT A RECORD RATE) to unaffordable levels? All this (RE values dropping) is just putting prices back to more affordable historic norms - the reduction in home values is NEEDED. The run-up in values wasn't. I saved my money for a 20% down payment - and each month that meant saving much more to get to the level needed for the same property - and now that it looks like pretty soon I will once again see prices back down to where they should be... but now Bernanke and the Gov't want to step in and keep the prices artificially inflated. F 'em! If they wanted to let the markets rule themselves then, they should let them do the same now.
From the borrower's perspective this plan also suffers from the adverse selection problem. Those with 'better' LTV will be cherry picked for foreclosure, while those with 'worse' LTV's will get modded and allowed to ramin in place.
If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
Please can you paint this picture in a little more detail. Or point me to a link somewhere. As I see it, the majority of homeowners (say 85%), bought their homes before the run up in prices. 1/3 of the public just rents. So it's not the spectre of homelessness that scares you, I assume. It must be the losses the financial firms will take. If you're worried that they won't lend in the future, I'll posit that outsiders will step in and do so. And life will go on. The middle class will be serfs to a new set of (Middle Eastern and Chinese) lords instead of WASPs. So what?
The idea of principal reduction makes some sense, except if the loan was securitized as most of them were. The government would need all bondholders' permission to modify the prospectus. I don't think the senior bondholders, whose bonds may once have been rated AAA, would take kindly to seeing a reduction in their subordination levels.
Unfortunately, they then refinanced during the run up, extracting their ephemeral equity.
True enough - but by CR's estimates, if house prices decline 30%, about 20 million homeowners end up with negative equity. That's out of 115 million households in the US - leaving roughly 83% above water (counting renters).
Ben's proposal doesn't seem so bad to me. From the speech
In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances. For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source.
In other words, if the banks can find a new bagholder, go for it.
Misean, I agree it is time to clear out the safe deposit box. BB is offering a best loss mitigation but sadly the banks do not have the capital to perform this action.
Ministry of Truth
Maybe some banks do. Maybe this can help separate banks with potential to survive from banks that won't. Maybe a few banks can even design an offer that gets them sufficient good PR as to attract decent mortgage applications from consumers who prefer to be indebted to an institution with some flexibility. If just a few banks seize on this idea and manage to execute it reasonably, maybe some interesting new market dynamics will emerge.
Anonymous 03.04.08 - 11:14 am wrote, Henry George was right all along. Property rights are one of the core tenet fallacies of modern capitalism. It is clearly the biggest driver of Ponzi finance.
Agreed, but be careful: you really mean "property rights in land," not "property rights in the products of labor".
it matters little how well our investments or savings are situated, nor how high the fence around our homes nor whether or not the mortgages are paid off.
society is a fabric, and when it freys at the edges there will be fray all around us.
yes it is true that those who accomplish the three goals above will float higher in the flood, but the storm will be awful.
maybe the only solution to this problem is to:
re- regulate the entire system
provide government sponsored insurance to several additional classes of investments besides demand deposit accounts
and begin a massive energy independence Manhattan project, now
Ben's proposal looks great unless you are a bondholder who takes a government-mandated loss as a result.
It is unconstitutional for the government to interfere with private contracts. The only way to know where the market is for the underlying collateral is to sell it.
To be able to sell it, the lender must foreclose. Those are the rules of the game. Sorry, Ben.
even though workouts may often be the best economic alternative, mortgage securitization and the constraints faced by servicers may make such workouts less likely. For example, trusts vary in the type and scope of modifications that are explicitly permitted
So the securitized loans are basically off the table.
Why would Ben's proposal be bad for bondholders? I can't see why it is better for bondholders to have the homes foreclosed upon and sold at a loss (i.e. because the home is worth less than the market value of the home). If the servicer is absolutely certain the borrower is able to make the new reduced payments, then principal reduction is a vastly better option for bondholders than foreclosure.
The implied moral hazard has more to do with the GSEs being the final bastion of support for housing. Yet that implication clearly failed even with the raising of caps. GSEs still have stricter underwriting than NINJA loans and unless Fannie Mae and Freddie Mac go and start giving out Samurai Mortgages, the only other viable option I hate to say is forcing lenders to eat their losses. This is a viable option. Why do you think lenders fought so heavily to block the passage of legislation allowing judges to write mortgages down? We have two moral hazard trains here. We are going to have to choose one.
All this talk of resurrecting antiquated agencies such as the Great Depression Eras Home Owners Loan Corporation which would in essence buy back troubled loans and securitize them into more affordable government loans is a major bailout that helps lenders. This will bring the losses onto the governments (aka taxpayers) books. What Boom Boom said today, will to a certain extent keep losses with lenders forcing them to realize that there is no full fledged government bailout coming. That is why the market is reacting so strongly and financial are getting hammered. They were expecting Ben to say, hey everyone, just give us all your subprime and option mortgages and well refinance them! Even if they wanted to do this there is so much bad mortgage debt out there, no way would it be possible.
Countrywide stated that out of their option ARM pool, 71 percent of borrowers are currently only paying the minimum amount and 80 percent did not verify their income. With delinquencies rising and the California median price off by 21.9 percent in one year, the bottom fell out faster and did not give any bailout plan any traction. I mean think of all the proposals that were going to help the market; FHASecure, Hope Now, Project Lifeline, etc etc. This one seems to favor the OTS negative equity certificate proposal. Just another handful of mud being thrown out on the market; eventually they feel something will stick.
Even Paulson makes more sense then the bearded clam.
Pull the plug already and let the chips fall where they may.
Let this thing go into a left wing administration and we end up with 9th circuit court like law enforcement. Then we will have a real problem.
i.e. because the home is worth less than the market value of the home
This statement makes no sense. An asset cannot be worth less than its market value. The market value of an asset is exactly equal to what it will sell for. No more, no less.
If you change the principal balance of loans, you have to change the $ amount on the front cover of the prospectus. Sorry, not allowed.
Do that and the issuer has to buy back all the bonds.
Sniglet
The reason bondholders would suffer are twofold:
- they take their loss sooner rather than later
- who determines what the market value of the property is? Are you going to write the loan down to its appraised value? Half its appraised value?
Loans are allowed to be refinanced, and even if there are prepayment penalties, those can be waived. The answer lies in refinancing the property, not in writing down loan principal.
Determining the proper market value for calculating a reduction of principal is simple, just get a new appraisal done. You certainly wouldn't want to rely on some appraisal that had been used when issuing the original loan.
I don't understand why the bondholders would rather take a bigger loss (by going through foreclosure) just for the sake of delaying the need to take the hit on their books.
BB obviously is simply been reduced to the bare naked truth. The banks either need to reduce the principal or suck it up and take an even bigger loss in foreclure sale. Big losses will result in failed banks. Now if we follow that trail, we all should know where it leads. All of you who are screaming morals and outrage are missing the point. The darkman is taking names.
Someone back a few posts ago got it right. The Fed is scared to death about the number of foreclosures about to wash up on shore.
BB is looking for a way to avoid a selloff like the S&L crisis. In the end, though, I think that's what's coming, because no one wants to compromise.
When banks change principal balances without a court order or a regulatory order to do so it may open doors for shareholder derivative suits unless Congress provides some authority that would eliminate that potential liability. The Fed is obviously greatly alarmed yet it fails to adequately prepare the public for harder times ahead.
You know how Ben Bernanke was nervous at hearings until after the big time "credit crunch" (reality) began to hit the public consciousness in August?
He knew that no matter what he did or said or what policy he chose, it cannot make the US richer than it is, and that some people and some politicians will blame him for reality.
Banks are harvesting what they sowed and what they sowed was securitization of mortgage loans that made writing loans easy money for a while both in fees and derivatives profits. The bubble was created by deregulation of the banking reform act that kept banks and Wall St apart somewhat. Greenspan advocated for banking deregulation and Bill Clinton signed the repeal of the Depression banking reform act(Glass Steagle)
IMO, this bubble and resulting credit and RE collapse was securitization driven where easy money was pursued in risky mortgage debt. Blaming homeowners for being underwater is simplistic and wanting a bailout makes sense when one considers how this bubble was manufactured step by step by the government and corporate and Fed players.
The time value of money is one reason that investors would rather forestall losses. Suppose we have
a $500K mortgage and a $400K reappraisal. Ben's plan would recast
the loan at $400K (or 80% of 400K?)
and any securitization would take a $100K loss. If the home goes through foreclosure and sells for $400K in three months, that loss is currently less in present value terms.
Sniglet - remember, the bondholders are holding different tranches of the bonds, with different rights to payment depending on the class. Writing down the principal will have different effects on the different classes. If the terms of the bond did not allow the principal to be written down, then the bondholders must consent to the change. However, the change will have different consequences for the different classes, so good luck on getting the junior classes to agree to be wiped out. (Yes, the junior class may get wiped out anyways through foreclosure, but that is only a possibility right now while agreeing to the principal reduction would be a guaranteed loss).
As almost the last word on this subject why wait for negative equity, Benny the Village Idiot ( cf a Brit soap - Crossroads )- surely the fairest is to write down everybody's loans in proportion to the reduction in their property values ? Huh, huh ?
So, if you have a 200K mortgage with which you bought a 240K house and the house now appraises 10% less at 216K then lets reduce the principal amount of the mortgage by 24K too..
There is powerful psychology against recognizing losses.
Many moderately intelligent people will simply not face up to the fact houses won't recover their old nominal values soon, because it's psychologically difficult to face.
The right way to do this as far as deals are concerned is to refinance properties and prepay whatever portion of the balance the refi covers. Prepayment is allowed in most cases without penalties for American mortgages, and deal waterfalls specify what to do with the cash. With the Ben plan, bond holders are in limbo as they don't know when their principal balance will be changed on them.
Might as well write the mortgage with "principal" resets.
Seriously, if the lenders forgive principal, they'll have some guidelines. Once that becomes known there's a huge incentive to hit the mark. And it's a lot easier to hit the mark going on the down side.
And if you're denied? Sue. Discrimination. Why are they 'giving' money to some and not others?
There was concern that people would stop paying because of the HOPE NOW campaign, and that was just a rework of the interest or payments. The incentive to stop to get principal reduction is enough to make me start thinking of how to scam the system. Not that I would,...unless there was enough money in it.
So, this is our option...suffer through systematic financial failure or allow the GSE's to buy and then reduce the principal on certain mortgages. Tanta has already spoke to this: how to decide which mortgages are deserving?
As almost the last word on this subject why wait for negative equity, Benny the Village Idiot ( cf a Brit soap - Crossroads )- surely the fairest is to write down everybody's loans in proportion to the reduction in their property values ? Huh, huh ?
I don't see that happening. It'll be spotty application to minimize the financial losses. Probably certain regions need to be declared disaster areas before any principal reduction can occur.
unless Congress provides some authority that would eliminate that potential liability. The Fed is obviously greatly alarmed yet it fails to adequately prepare the public for harder times ahead
Congress would give BJs to every homeowner in their district if that's what it took to secure their reelection this November.
Here is a proposal for mortgage write down. Call it a reverse Case-Shiller. For 20 biggest markets we have a log of price rises.
Normalize them down to some baseline. So for San Diego feb 2005 you have say 40% rise over baseline. That would be the basis of your write down.
Topeka only rose 10% feb 2005 that is the basis of your write down.
What percentage of the write down will the bank have to eat is a political decision.
Of course writing this legislation would take a political will currently unavailable.
So I called up the Captain,
'Please bring me my wine'
He said, 'We haven't had that spirit here since nineteen ninety nine
I'm late in the discussion but I couldn't disagree more with opinions that "nobody wins in foreclosure" and preventing moral hazard is not a big deal. Well, nobody wins if a person goes to jail. It's costly, it's hopeless for some and needless for the rest. So let's just allow go free because it's a lose-lose situation?
I think that Bernake's comment are important in that he relises that the consumer is underwater in debt and there is a need to reduce debt. His request that the banks reduce principal, i.e partially forgive debt, is going to fail because someone else is going to have to take the losses, i.e bank investors.
The bottom line is Ben is now thinking of principal reduction is a way to fix the economy. If the banks refuse to forgive principal then Ben could do it through inflation which is where I think where we are going. Retirees are going to get screwed.
mp writes:
I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks.
The situation is bad, and it's becoming worse.
mp | 03.04.08 - 10:48 am
100's of trillions of dollars of over-leveraged speculators from banks to hedge funds to pension funds, to EVERYONE all forced into INVOLUNTARY DELEVERAGING all at the same time to the point that clearing houses, etc the whole system is overwhelmed.
How many homeowners are believed to be underwater? And of them, how many have walked away?
One must also ask, how long have they been underwater and by how far? Prices have only been declining in earnest for about a year, give or take, depending on the area. Presumably for the first part of the period they were still in a positve equity position, just less positive than before. So lets say someone hits the zero equity line in October. A) do they realize that they are in a neg equity position at that time? probably not, most American think that their special little piece of creation has actually gone up in value over the last year. B) do they walk right away? Would be pretty dub to do so, would first start going delenquent on the mtg for a few months, then mail in the keys. C) its not like its a binomial choice where equity > 0, no jingle mail, equity < 0 jingle mail. Its not worth taking the hit to your credit, some residual social stigma etc for $500 or $1000. What is the break point? It depends on the person, but the larger the amount of negative equity the greater the probability of jingle mail. How estabilished is the person in that community? If you have 3 kids in the local schools, have lived in that town all your life, and are happy there, do you move away for $10K? If you are single and have no close ties to your neighbors, you are more likely to mail in the keys. Well what about $50K under water, do Mom and Dad move then and tell the kids they can still keep in touch with their friends by e-mail. How about at $100K. Of course as time goes on and prices continue to fall the level of negative eequity continues to rise, so even if its not worth doing it now, it might be worth it 3 months from now or six months from now.
A bunch of people here who are critizing BB are dumber than what they realize. This critics really believe that their skills are so god like that their jobs or their services will still be needed in the economy when we let the whole thing collapse by throwing everyone out of their homes, you are just wrong. I am personally not the person to decide on how exactly to keep people in their homes, but if we don't find a way we are all going to loose, period. I do not care if someone is forgiven 100K on their mortgage as long as that person/family continues to pay taxes, mortgage and not vacate their home. Of course jealousy kicks in and my ego tells me that it is not fair to those who pay their mortgage without help. But I like to keep my ability to repay my loan that way,by keeping eraning income.
We got two choices: help people keep their homes, which will help all of us keep our paychecks/income or 2) foreclose a bunch of homes living them vacant which will depreciate neighborhoods by 50% and causing th Property Taxes for the innocent bystanders to triple because half the homes are vacant and tax collection(revenue) in the county/ city was cut in half which leads to useless schools/ police/ fire/ ambulance services.
Now, is that the kind of Country you want to be part and proud of. I think a lot of greed got us into this mess from all the parties involved in the housing crazyness . But not doing the right thing here will lead only to bring down all those innocents, like me, who are going to get screwed by all the careles and incompasionate people lacking the brain power to think two steps ahead, the same way that home buyers, mortage brokers, realtors, investors etc got us into this mess because greed would not let them think of their action's consequences. I do not want to get the economy in a depression caused by selfish thinkers, who studied "economic theory" at B-School but are narrow minded and can not realize that here we are not dealing with THEORY or WIDGETS. We ca not afford to let theory dictate the survival of our cities/ culture/ country. Homes and shelter are essential to the survival of humans and at the magnitude of contiued projected foreclosures which is larger than what the foreclosure process/system can absorb/handle we need to keep people in their places.
We are dealing with "Human and Economic Survival" not the write-off of widgets as bad investment. Families will be broken, the fabric of neighborhoods will be destroyed and two wrongs do not make it right.
Today we heard that Mortgage Companies are again putting pressure on Appraisers to deliver the numbers they want to see, but this time they want them lower than the agreed Sale price between Buyer and Seller. Don't you think that it is equally wrong to the way we got into this mess. Buyers already got the Upper Hand and I am sure that the agreed prices already reflects it. Mortgage companies do not set the price, they should evaluate very well the Buyers financial ability to repay and the condiion of the asset. Again another bullying action that is illegal but somehow it becomes well accepted by the industry as the norm until it screws us all again. Folks, Why not do the right thing from the beginning and stick with it?
I am tired of Dumb People especially those Greedy and Selfish.
Homes and shelter are essential to the survival of humans and at the magnitude of contiued projected foreclosures which is larger than what the foreclosure process/system can absorb/handle we need to keep people in their places.
I don't get this... No one is saying that people who can't afford to keep their houses should be forced to go live under a bridge somewhere. The alternative to homeownership is renting, not homelessness. And why should foreclosed houses stand empty? If they'd lower the price to something reasonable, I'd buy one (I haven't been able to afford to buy a house, so I've been renting). A foreclosure means that one family moves from owning to renting and another family moves from renting to owning. Doesn't sound like a mad max scenario to me, or that anyone is being especially greedy or selfish.
Now, I can imagine that a case could be made that the financial losses that the banks will suffer in the process might put the whole system at risk, so that it's really somehow in my best interest as a renter to preserve a system under which no one who didn't own a house in 2005 will ever own a house. But I haven't seen that case made convincingly yet.
Time to get your money out of the country. A government that "for our own good" gives irresponsible people housing discounts while they gouge responsible citizens is no government at all. They intentionally created this mess because it served their new interst in overseas equity. They don't care what the houses cost -- what they are after is interest from the peons. That newly granted equity will keep disappearing but that is what debt peonage is all about.
Gosh, what could go wrong with a great plan like this????
Sure Ben, go ahead and suggest that. After all, its not your money.
This is an outrage! "Oh, you can't pay your loan, well lets just cut it in half, there, is that better?"
Like.... does anybody know like.... when Amerikan Idol is on?
Hey, NCC!
Reduce THIS!
ok so could i please have the hot line...why in gods name should i continue paying my mortgage on time or for that matter pay at all...Moral Hazard.
CR, this approach makes no sense to me, so perhaps you could explain. Borrowers need temporarily lower payments. In the outyears inflation (or, rather, raises to compensate for inflation) should lighten the burden of payment. Reducing principal will reduce payments in both the present and the future, making it a terrible deal for lenders. Why not simply forego resets for 5 years?
Negam is really only an incentive (to a non-speculator) to abandon a house if (a) job loss or health problems make payment impossible, or (b) there is a need to move in the near future. After 10 years, even a 50% negam is wiped out by inflation. But for a lender to do that at a stroke of a pen requires taking a major hit.
Gee, I feel like a dope for paying off my mortgage
last summer. I should have asked for a discount.
i can has principal reduction?
Reducing principal is the worst moral hazard of all.
Let the irresponsible asshole who bid $100000 more than they could ever afford, and got the house by outbidding the responsible bidder, let the asshole get the relief now.
This Bernanke guy is the most criminal of them all.
Some of us who bid in 2004 only to be outbid are now going to get royally screwed by the Fed chair-whore.
This is just asking for serious civil discontent.
Mommy,my head hurts...
Chris
Ben, yesterday: "We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief. People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000."
Ben, today: "Never mind."
Charles II writes:
CR, this approach makes no sense to me, so perhaps you could explain. Borrowers need temporarily lower payments. In the outyears inflation (or, rather, raises to compensate for inflation) should lighten the burden of payment. Reducing principal will reduce payments in both the present and the future, making it a terrible deal for lenders. Why not simply forego resets for 5 years?
Spread the hit over multiple periods throughout the serviced life of the loan rather than take a large hit upfront with foreclosure costs and having to write-down the portfolio with REOs. my 2 cents.
What I don't understand is the necessity for the banks to use negative equity as the qualifying criterium. Why not whether the borrower signed in blue versus black ink for instance?
But since Tightrope Ben is in a mood to correct past errors in judgement and bookkeeping I have a few suggestions. Disgorging past bonuses and profits from the vintage when these loans were generated comes to mind.
Remsem,
You don't get it. You cantz haz prinzipal reductionz becauz u b a CR readerz. Evidence enough that you don't qualify.
This has gone from a fender bender to a ten car pile up.
Its like watching a train wreck....
At least Ben has realized that this thing has just started and hes not saying we're thru it....
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is. Additionally, it shows just how fearful the Fed is of the waves of foreclosures that are hitting and about to come ashore.
If this was all going to blow over by next week there would be no need for such extreme measures.
Hmmm...
agree with anon. to a certain extend. Since when are people not responsible for their own actions? For the lenders though, sometimes some cash flow is better than no cash flow at all. still the solution is terrible for the CDO investors.
why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.
The only hope is that whoever is the new president, he/she asks for Ben's resignation sooner rather than later.
If Warren Buffett doesn't want Ben to run one of his business since Ben is an economist, we certainly don't want Ben at the helm of the most important business in the U.S.....it's central bank.A message to Mr. Ben B: Please go back to teaching and write another book. Stop messing with the free market and let it correct. Much better in the long term, that is after you are gone from the Fed. Thx.
Without addressing the moral hazard issues op. cit., isn't there a significant regulatory hurdle with respect to principal reductions for securitized mortgage loans?
Absent any legislative fixes, can't this approach be applied only to loans banks carry on their balance sheets?
This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting.
This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting.
I expect that down payment requirements would become onerous after an era of principal reductions (if it comes to pass).
No bank is going to lend money in a situation in which it is even remotely likely that borrowers (as a class) will be significantly underwater. I wouldn't be surprised if 50% down payments again becomes the norm.
The tide suddenly went away from the shore. BB and crew were busy picking up the stranded fish and trying to put them back into the water. Looking off into the distance BB sees a ridge that is apparently moving toward the shore. Only too late does he realize he is screwed......
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is.
Check!
BB's statement is so egregious it makes me think there is a tsunami right behind it...
Maybe everyone here is an optimist.... Whoaa boy, thats trouble...
Isn't this just another attempt to prevent true price discovery?
Are they going to force all future appraisals in the area of principal-forgiven homes to be decreased by the largest amount of forgiven principal?
"We don't want to admit the house isn't worth $300000, so here is $150000....there, now it's again worth $300000."
I used to think Greenspan was the worst Fed chair ever, but I'm rethinking that assessment. Ben, you're a true idiot!
Please, obstructionist GOP senators, please keep on running down the clock as much as you can so the worst borrowers get foreclosed on before government-instigated policies like principal reduction become pervasive. Justice must be served.
This is half of the plan I suggested a year ago.
The second half was : raise interst rates .
Eliminating failure is the surest way to kill success.
Bernanke is correct that it's in everyone's interest to keep homeowners in their homes and that investors will likely write off a large portion principal, due to lending practices lacking principle. But lenders would rather take a guaranteed larger loss later than a potential limited loss today. Tanta's ubernerd post on mods and loss mit indicated that the process is time-consuming and requires expertise. For lenders who couldn't even bother to do proper underwriting in the first place, it's so much easier to close their eyes and pretend.
Fed Chairman Bernanke today called for lenders to reduce principal on homeowners with negative equity.
Kinda like a short sale to the existing owner? That makes sense superficially.
But where do the banks get the money to do this?
And can I have the principal reduced on my car loan?
How about my credit card?
Do I have to miss a few payments for that to happen, because if so that can be arranged.
My layman's nickle view of what is going on in Ben's mind here is that he's trying to avoid one of the massive historical facts of the Great Depression.
A lot of people lost homes because they couldn't pay any more. They couldn't get loans modified, not least because their collateral (the property) wasn't "worth" what they needed to clear the difference. Sure, deflation and unemployment hit it as well, but that bit of being underwater played a big part as well.
As CR and others have noted, a housing-led recession is pretty close to the ugliest kind. It's both massive and slow to change course. The massive makes it have significant impact, while the slow, well, that should be obvious.
I really think Ben's trying to head off a problem he sees hitting in about six months, knowing if we wait till it IS a problem we won't be able to do a darn thing about it.
I also happen to think his chances of the banks cooperating with this action at this time are very low.
Down payments and higher mortgage rates seem a certainty.
Regardless of any debt forgiveness or modifications, house prices will continue to fall.
The problem with this solution is that the financial institutions are already struggling for their life. Writing down the value of more assets is the last thing they can do at this point.
It's a solvency issue that won't be helped by making the losses explicit more quickly.
I could be wrong, but doesn't bankruptcy entail having the principal reduced on auto loans and CCs? All of us know that by most definitions, many households are completely and totally bankrupt. If so, why can't bankruptcy rules work for mortgage loans?
I don't see an obvious problem here, provided cramdowns are applied to principle residences and the borrower does not get the benefit of future appreciation.
Am I missing something?
Ach, and I just sold my citigroup puts for 60% profit.
Ben's gonna make me wish I was an asshole who bought more house than I could pay for so I could get my principal reduced.
why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.
I see you beat me to the punch.
Well, that's the point of the policies Bernanke has advocated in the past -- to cure economic problems buy devaluing the loans people have made and allowing people to go back on their promises.
However, to have a healthy economic I would think it essential to have trust between borrowers and lenders and the medium of exchange they use (the dollar).
In my simple mind I don't quite see how these policies cultivate such an environment.
So would you all rather that BB suggest that the FED monetize the forgiven principle? This puts it squarely back on the Banks and the investors. As far as price discovery goes, well, the banks certainly will want better appraisals now that they had to take losses.
Can anyone tell the difference between Ben Stein and Ben Bernanke anymore?
Eliminating failure is the surest way to kill success.
I think that's what a lot of people want.
I think people would rather have 2.5% GDP growth per year vs 3.5% GDP growth per year if it felt safer and more predictable.
However now that we have to compete with so many other economies for resources that might not be a viable option.
I just complied this email to my lender:
So i am going through This mornings Fed statement about reduced principle request or reduced interest rate requests. How does one go about requesting such a thing...I pay my mortgage on time.. I am trying to figure out my incentive to continue to do so. What is my incentive to continue ? Do i have any options or do i have to be losing my home for options...inquiring minds would like to know. I have lived in this home for 15 years..yes i see it losing value..and want to remain in this home...what is my incentive? I would love to be paying less...offer me a reduced interest rate no strings attached....help out the ones that want to remain in their homes...again what is my incentive.
Everyone is fiddling while Rome burns.
If the banks, our brilliant leadership, and the Fed can't agree on something and now, the system is going to lock up.
It is cute to quip about it here, but that's the long and short of the problem.
I never though I'd hear a Fed chairman suggest something so at odds with modern capitalism. The moral hazard here is profound. Bernake is unfit for this job.
lost in all of Benny boy's comments is the actual reason for doing so.
They could care less about individual homeowners however as the entire financial system is over-run with debt instruments created on the backs of that bad loan you begin to see his motivation for speaking to the homeowners....and attempting to "forstall"-his words not mine- the coming tidal wave of resets.
This is all about leverage and what an additional 5-10% decline will do to those...
Good Luck with that Ben..
Ciao
MS
This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal.
Reducing the principal is the end game to bailout WS and banks.
Now that I've had a chance to reconsider I'm even more mystified. Eschewing all the sociopathic impetuses what strikes me as that this idea will ultimately result in worsening the very aspects Tightrope Ben is seeking to ameliorate.
There is an incentive for tens of millions of homeowners to come in with a lowball appraisal. Gee, how hard is that in the current environment of starving appraisers, cascading REO comps and niggardly lenders? Result; people with 10-15% equity rush to the bank with their $350 appraisal and ask for their principal reduction. Then off to the county seat to get their property tax deduction. Secondary effect; a whole new raft of comps based on recent appraisals such that those with substantial equity find their houses worth less as well. And face it, a lot of the people who get principal reductions are of the will-o-the-wisp variety. They'll use the new lower debt to flood the market with their houses to avoid getting burned twice.
More appraisal fraud. Check.
Lower home prices. Check.
Reduced municipal revenues. Check.
More inventory. Check.
How can this guy have gotten so inurned so quickly that he is suggesting we throw millions of people under the bus just to try and keep red ink of some bank balance sheets.
Reducing principle could be a little bit of a problem, considering the banks don't exactly have a bunch of extra cash sitting around.
Really Scary Fed Charts: March
One wonders if Ben realizes how much this would translate to in terms of losses for the banks. No wonder the FDIC is staffing up.
I guess I shouldn't have bought those bank stocks 6 weeks ago. This just keep getting worse and worse. Kiyosaki was recommending silver this morning up to $25 an ounce. What is holding the Dow above 12,000?
"This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting.
Mel | 03.04.08 - 10:27 am | # "
This is one of those things that needs reposted once in a while...
Chris
In the proposal, who decides? Bankruptcy reform was defeated. So we don't want the bankruptcy courts to regulate this. It seems the outrage is overblown because the proposal is another aspect of Mr. BB's "tinkerbell" philosophy, as David Wessel of the WSJ referred to it on NPR this morning.
"What is holding the Dow above 12,000?"
DENIAL.
I'm distressed...and I'm gonna stay distressed until I get a principal reduction.
I'm also gonna hold my breath until I turn blue.
Quick, someone call 911 for NoVAMTgeBkr.
One of the main problems with foreclosures is when the borrower/occupant sues for wrongful foreclosure. Even if he doesn't have a case, once he files a lawsuit it has to work its way through the court system until a judge renders a decision. That could take up to two years.
I know a guy who bought a foreclosed property on the court house steps, thinking he could flip it. The borrower/occupant sued for wrongful foreclosure. He lived in the house rent-free, without making any loan or tax payments (only untilities) for two years, and when he finally vacated after the judge ordered him to, he gutted the house.
The guy who bought it ended up losing $40,000.
I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks.
The situation is bad, and it's becoming worse.
Everyone is fiddling while Rome burns.
If the banks, our brilliant leadership, and the Fed can't agree on something and now, the system is going to lock up.
It is cute to quip about it here, but that's the long and short of the problem.
It's not enough for the Fed and our brilliant leadership to agree on something.
They have to agree on something that will make the situation better.
So far I see no evidence that they have that ability.
It may well be that the underlying problem is that parts of Rome do more harm than they do good and need to be reduced to ash to have any real long-term improvement.
Again, the US has been one of the greatest economic success stories in history despite 3 depressions. And right now I don't see that we're facing anything so bad as that.
Why do I keep losing my faith in the FED? Oh that's right, the old FED chairman can't keep his mouth shut about how bad it is and the current FED looks like a deer in the head lights of an approaching train. Actually, I feel really bad for Ben as he will be an one-term FED chairman due to the hand dealt to him.
NoVAMtgeBkr, don't do that honey. Here, if you stop holding your breath Uncle Ben will give you a pony. Won't you Uncle Ben?
"The situation is bad, and it's becoming worse.
mp"
Good, modern capitalism is a bad joke, and needs to be replaced ASAP.
If the Fed can now urge lenders to reduce principal on underwater mortgages, then why do the Shrubbies still have a problem with bankruptcy cramdowns? At least with cramdowns there will be a federal judge examining whether the current mortgage is affordable, balancing it against any other secured creditors, and supervising the borrower's finances for the next several years. The cramdown would be targeted, specifically, towards those Paulson said yesterday he wanted to help: people who can't afford their current debts who want to stay in their home.
Plus, with a law the provision would apply to every such transaction, we wouldn't have to listen to officials whine that some banks won't play nice.
We are all socialists now!
why apply this to distressed borrowers? why not qualify all borrowers? can i rush out and get a jumbo loan and get instant 50% discount? i sure would love that
mp,
I do see how bad this has become. It has to be that bad to issue a statement like this.
We're talking about a systemic failure.
Besides loading up on puts what else can we do? (The puts part was a joke)
why limit mortgage loan, what about commercial loan, auto loan. credit card loan? can we all get 50% instant reduction?
What the heck? If I (the lender) can make more money on a reduced principal than in a foreclosure, then this is no more than common sense. I guess sometimes lenders just need some encouragement from the FED. No need to feel outrages here at all.
BTW: where's my recession, dude?
O-Joe
I´ve found that most things in life can be explained by scenes from Star Wars.
In this scene, after a failed rescue attempt, Ben is screaming at C3PO to shut off all the garbage compactors on the detention level.
He is really sounding desperate now.
The best of capitalism and socialism all in one policy:
"To each according to their desires, from each according to their abilities."
[Unfortunately for those of us with the ability to pay more we know what this means.]
In this scene, after a failed rescue attempt, Ben is screaming at C3PO to shut off all the garbage compactors on the detention level.
I think you mean Luke.
just don't
rob dawg writes:
More appraisal fraud. Check.
Lower home prices. Check.
Reduced municipal revenues. Check.
More inventory. Check.
I'm not sure it matters Rob Dawg. If the houses go to FC instead, we still get #2-#4 on your checklist.
This has nothing to do with renters and responsible homeowners, or moral hazard, or anything else. This is about LOSS MITIGATION. This is about BB trying to get the banks to do what is best for the banks.
If you're sitting on the sideline, and you don't like this, too bad. If this is the least-worst option for the banks, they'll do it (yes, yes, I know, if they can even execute on this).
RD exactly
"To each according to their housing options, from each according to their ability to make payments."
This is only a suggestion. Not a mandate. Nothing will change as a result of Ben's comments. I'm sure the banks already realize one option is to reduce the principal owed. The main reason this is a bad idea is once it's known banks are doing this, everyone will want in and it will make a bad situation worse.
This idea, while I don't agree it's a good idea, is way better than the proposal in New York to not allow evictions. Talk about a stupid idea. People can stop paying their mortgage without any penalty whatsoever.
I'm going to have to side with O-Joe on this one. What else do you expect the Fed Chief to say? He would like to see fewer foreclosures and he is suggesting that in some cases it is to the financial advantage of lenders to entertain mortgage cramdowns rather than foreclose and that they should look harder at those options. What's wrong with that? Of course it takes some work to decide which is the better option.
BB finds himself holding a huge ball of string that keeps unwinding.
So I send my keys off via 'jingle mail' and the next day I get a package from the bank containing:
The Keys
A Toaster
Principal Reductio
We're talking about a systemic failure.
Besides loading up on puts what else can we do? (The puts part was a joke)
In a real systemic failure property rights might become meaningless.
So the idea of loading up on any kind of financial asset may indeed be a joke.
I paid off a mortgage a couple years ago, too.
I wonder if we can sign up for a pre-discounted mortgage?
Actually, in spite of all the problems it may cause, I really think this is the the best course. It's kind of like Churchill's view of democracy: it's the worst form of government--except all the others that have been tried.
Thing of all the costs of all the dislocations as someone gets foreclosed on (or walks away), needs to find a place to rent, old house sits as deteriorating REO for six months, that neighborhood goes further down the tubes, etc.
In total costs to society, it would probably be better to err knowing you will cut a lot of peoples' mortgages that don't really need them to be cut, than to go through the alternative.
I think a progressive negative payment tax would solve this. It could apply to mortgage payments, car payments, and credit card payments. The more you pay, the more the amount is reduced by the fed. This would stimulate the economy and with government deficits being paid by future generations we would be good for years.
I can haz open can of worms?
Sounds to me like Ben is weighing in on the cramdown proposal. Heck he is going a step further and saying do the cramdowns first. The Democrats in the Senate are saying you have to file bankruptcy (and that is a BIG step and no fun at all) to get a cramdown. The banking industry's head is exploding at that proposal, and Ben is saying just do it, its in your best interest Mr. Banker. If you owe $400K on a house worth $300K, then cutting the rate from 7% to 5% doesn't really give you that much incentive to stay there. A principal reduction gets to the heart of the negative equity problem. Of course it will cause more havoc on banks balance sheets.
In general my recation to his speech was, most of the people here at CR could have given this speech in August, if not earlier.
Rob Dawg hit on one of the wonderful ironies in this situation.
Appraisal fraud played a huge role in the upside of the bubble; everybody involved had a vested (albeit short-term and short-sighted) interest in submitting ridiculously high valuations.
Now Bernanke's plan gives equal incentive for more fraud, only now in the opposite direction.
The problem is that the banksters still think they can bleed the public to bail out their losses.
But squeezing an exsanguinated middle class produces no juice.
It can only be gotten from the hedge fund elites.
When they finally realize THAT, this might start improving.
Wow! BernanSpan is really going off the deep end now. To echo the comments here already, why not reduce all debts for anyone and everyone? This is silly and sad.
Another problem is that BernanSpan and company STILL DO NOT GET IT as it pertains to this era of foreclosures. Here is what I wrote last night:
"The primary purpose of purchases made during the boom years was price appreciation and access to said appreciation. The "use" of the home was a money well, not an "investment". Now that the well is dry, the utility of the home has been erased. Again, like Mish says, a bad credit spot is the "breakup fee" for the business deal, and one many will gladly pay to get out from under long term debt service on a depreciating asset that now has no utility. This is the point that the powers that be simply still do not get. Absent rapid price appreciation and free and constant access to it, the purchase of a home will no longer serve many borrower needs. This is why foreclosures are rapidly escalating. This is why people that CAN pay their mortgage are choosing NOT to pay. If you agree to my premise of the loss of utility of the home, then this all makes sense. It will also make basically all of the proposed bailout plans useless, unless they restore 10% plus price appreciation per year and right away. I am wondering when that plan will start to be circulated!"
MP:
What are we supposed to do? Diebold and the Supreme Court elected a delusional retarded guy president. His appointees have been systematically destroying the country for seven years. The American people, including the fairly representative sample in Congress, simply don't have the backbone of the Pakistanis or the Kenyans or any of the other oppressed countries where the folks are at least trying to protest what's going on.
Might as well make a joke or two.
So the idea of loading up on any kind of financial asset may indeed be a joke.
ac
Yeah, remember, puts (and the negative ETFs that use them) are essentially derivatives, and there certainly is the possibility of counter-party risk. What if Proshares used some complex puts bought from a hedge fund for one of their double-negative ETFs?
Wave the magic wand and all that "excess" principal disappears. Why not? That's how it was created in the first place, the joys of fractional reserve lending.
Hey Ben! Mr. SmallBusinessOwner here. I have a couple of deadbeat customers from last year who just won't pay their bills(you know those fortune 500 types). I would like to reduce the principal on their debt but the problem is that that principal came out of our treasury, it was real money we worked very hard for the year before. Can we borrow your big black Fed tophat and pull some cash out it?
How can anyone have an ounce of respect for Bernanke at this point? I guess he did paper, scissors, rock or something to decide that banks and mortgage holders should get screwed rather than the co-conspirator homebuyers. At least many of the people who bought MBS paper did so in good faith, e.g. after looking at the AAA rating.
I believe that Bernanke's statement is nothing more than a bit of ass covering on his part. He can at least pretend that he has given the banking system some sage advice in advance of the tsunami he sees rolling in.
""We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief....."
Dr. Wu, in fairness to Helicopter Ben, I think this statement was Hank Paulsen's. It does seem curiously at odds with Ben's plan though, doesn't it?
why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.
Boat
All these sorts of loans can be modified by a bankruptcy judge, with the exception of a home loan. The question is why stop at the mortgage?
Did Ben just announce that the emperor has no clothes?
How does Ben's (50% write down) declaration impact the valuation of the various mortgage-related securities we're all familiar with?
Will his declaration this morning make them worth even less than their current carry value?
What does it do to the rating companies, the GSE's and the investment banks, as well as the commercial banks?
-- Hiding Out
I remember telling a realtor friend of mine in 2003 that I would rather buy real estate in a high rather than low-interest rate environment because over the course of 30 years, I would probably always have a chance to refinance to a lower interest rate, but not a lower principal.
Now I'm starting to feel a bit naive...
Since when is denial optimistic?
Don:
Don't talk to Dr. Wu like that - she's actually Marcy Kaptur.
WAAA! I want my principal reduced!
bluestatedon writes:
Rob Dawg hit on one of the wonderful ironies in this situation.
Appraisal fraud played a huge role in the upside of the bubble; everybody involved had a vested (albeit short-term and short-sighted) interest in submitting ridiculously high valuations.
Now Bernanke's plan gives equal incentive for more fraud, only now in the opposite direction.
bluestatedon | 03.04.08 - 11:06 am | #
there will still be incentive for appraisal fraud in the normal direction as banks/holders/servicers will want to minimize property value reductions in order to minimize mtm losses. and who do you think will be responsible for assessing the amount of negative equity in any given property?
Heck, why stop at modest 'principal reduction'?
Why not just forgive ALL debts, suspend contract law, tear up all deeds and re-boot the whole system?
Does anyone think there is a chance that BB or congress will end up sending me a down payment for my first house?
It'd be pretty nice....
ac, good point! thanks....
Alas, we're now in the position of needing to find the least-bad course of action.
As Robert Dawg notes, a plan such as this will lower market prices rapidly. If the debt on the home is cut in half, an owner wanting to sell will be able to sell at half price without having to bring a check to the closing (which most could never do), or try to negotiate a short sale with the bank.
At least with an approach such as this we will once again have a functioning housing market in which first-time buyers will be able to purchase without having to pay the current owner a fortune.
Of course this will "bail out" the people who used their homes as ATMs -- but face it, they've already spent the money and will never pay it back, anyway. And if they're foreclosed upon in the current climate, they'll be able anyway to move into a nice rental somewhere at low cost. There's not much we can do to punish them.
mp,
I hear you. Difference with me is that I've been convinced from the beginning that TPTB couldn't do anything but aggravate the situation. That's their track record.
p.s.: All the indices are looking to break support today. Even PMs are taking a hit.
"In a real systemic failure property rights might become meaningless."
And they should. Henry George was right all along. Property rights are one of the core tenet fallacies of modern capitalism. It is clearly the biggest driver of Ponzi finance.
query_tool writes:
This is about LOSS MITIGATION. This is about BB trying to get the banks to do what is best for the banks.
Yes, I absolutely understand the intent is about doing what is best for the health of the banking industry. My point is that lowering principal balances on some loans is so fraught with secondary consequences that IMO it isn't in the best interests for banks to pursue this idea.
Why help these particular homeowners and not all of the homeless people out there who could sure use a home too???
It's not fair!!!
My layman's nickle view of what is going on in Ben's mind here is that he's trying to avoid one of the massive historical facts of the Great Depression.
A lot of people lost homes because they couldn't pay any more. They couldn't get loans modified, not least because their collateral (the property) wasn't "worth" what they needed to clear the difference. Sure, deflation and unemployment hit it as well, but that bit of being underwater played a big part as well.
As CR and others have noted, a housing-led recession is pretty close to the ugliest kind. It's both massive and slow to change course. The massive makes it have significant impact, while the slow, well, that should be obvious.
I have less problems with the idea of some kind of bailout than I do with all the effort put into finding creative methods of bailing people out that minimize the short-term political consequences.
To me this is underhanded and culturally degrading.
If you want to bail people out do it the right way so there's accountability and awarness of the costs of screwing up on a collosal scale -- tax the population explicitly and use that money to bail people out.
Let people understand how and why their money is being taken from them and make a case for why this is necessary.
Don't try to hide it via inflation or other forms of stealth tax hikes.
This is just more of the kind of deceptive maneuvering that got us here to begin with.
Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?
Property rights are one of the core tenet fallacies of modern capitalism.
Looks like dotcommunist has returned under another name.
Market does not like today's plan.
What will be tommorow's plan? A pony for everyone??
Yes, there is more hazard. However, the person who goes from 120% LTV to 100% LTV isn't exactly getting a break, particularly if their alternatives are foreclosure or bankruptcy. They are getting their head above water. The odds are still pretty good that they will drown, for those who need to feel better about them facing some consequences.
With B.S.Bernutty popping off like this we know we must be circling the drain.
The complete lack of vision by some one claiming to be an economist of unintended consequences is shocking.
My mind is seizing up just thinking about them.
Time to clear out the safe deposit box.
Cheers,
Market does not like today's plan.
What will be tommorow's plan? A pony for everyone??
A free copy of My Pet Goat.
What will be tommorow's plan? A pony for everyone??
Yipee!!!
Misean,
Time to revisit the local "hardware" store.
I'm with MP. After reading that, I was so stunned, I couldn't even type, let alone try to be funny. This just strikes me as a speech drenched in fear. Friday's employment number is going to be fugly, and Ben already has the numbers. I think he is desperately flailing for a way to stop the downward acceleration he knows is underway.
Wow, now the appraisers are going to be pressured to come in with low values.
Can you recall a year later if your home value drops more?
Ex: If I adjust from say 700 grand to 500 grand, and then a year later my house is worth 400 grand, can I call for another downward adjustment?
"and who do you think will be responsible for assessing the amount of negative equity in any given property?"
My sister-in-law for some insane reason volunteered for a spot on her township board of assessors in mid-state Michigan, and she says they're completely inundated with demands from homeowners wanting their property taxes immediately reduced due to falling values. What a headache.
OT:PIMCO's Gross buys $1.5 bln of U.S. municipal bonds
Business & Financial News, Breaking US & International News | Reuters.com
Hey mp:
I think many do know how bad it is. We're smiling in the face of financial destruction (as any courageous person would). A change in demeanor will not stop the destruction.
My solution (and also the reason I should be the next Fed Chairman):
Move the decimal point one space to the left for debt, and one space to the right for income. There. All fixed.
Oh, yeah - I want a pony as my signing bonus. A blue one.
Guess I better rush out, over pay for a house, stop paying and then call my lender.
Finally, the real American dream!
Wasn't CR going to come out with a "Not the End of the World" post not to long ago? Hello? Anyone?
Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?
Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.
Ultimately this leads to higher GPAs and, by implication, a more educated population.
Preemptive cramdown?!?!(lol)
Any CPA's out there? Wouldn't this kind of debt forgiveness still be taxable income for the home owner?
Outside of Bankruptcy it should be, or at a very minimum Congress would have to update the Tax Code, correct?
USD-JPY current 102.8650 at Bloomberg. The plunge continues.
I think we're nearing a "Mission Accomplished" moment (for Grover Norquist).
Market's bouncing. Is it on the Whitman MBIA investment?
" GENEVA (Reuters) - General Motors Corp Chief Executive Rick Wagoner said on Tuesday that U.S. auto sales have been weak in the first two months of the year but have not approached the extremes of some forecasts.
"I think it is fair to say that it has been a little better than some of the doomsday people are thinking," Wagoner told reporters.
This is a strong early contender for 2008's "Whistling Past the Graveyard" Award.
If we don't know
"But where do the banks get the money to do this?"
And
"This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting."
Plus guys sayin
"Good, modern capitalism is a bad joke, and needs to be replaced ASAP."
OK, so... dream big
"This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal."
This isn't just flailing or CYA stuff. There has got to be some very alien political zygote in there somewhere.
Iceman writes:
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is. Additionally, it shows just how fearful the Fed is of the waves of foreclosures that are hitting and about to come ashore.
Yes, I think fear is the operative word here. The problem's are:
Note to Ben: Dear sir, I feel your fear and that makes me fearful. I better sit on my gov. check that Shrub is mailing and ... gulp...maybe we should bail on this house.
Ben's suggestions just sound like common sense. If a lender knows that most borrowers with negative equity are going to just walk away, it only makes sense to reduce their principal to keep them in the house. It is far cheaper to reduce the principal than take the huge cost of a foreclosure, flooding the market with properties that are going to fetch pennies on the dollar.
Please someone, just explain to me how a lender is better off foreclosing and re-selling the property for (much decreased) market values rather than just reducing the principal for the existing owner?
The lender has to take a loss either way.
If a lender knows that most borrowers with negative equity are going to just walk away
But thats an enormous stretch....
(and it wouldnt take most, heck if 20% did it might be the end of debt markets.)
Everybody knew the rules of the game at the beginning. Getting screwed? Too bad. BTW: You won't learn to love it.
There is another option, perhaps less repulsive than the others.
Lenders could extend the term of the loans in order to make them affordable.
"This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal."
Nothing, absolutely nothing will be passed by this congress and signed by the moron in the White House this year. Nothing will get done until well into 2009 when it is already too late. This is the way government works.
BTW, the order of preference given was:
1) Increase term.
2) Decrease rate.
3) Reduce principle.
Those hitting step 3 are in pretty rough shape if 1 and 2 aren't going to offer any appreciable good.
Misean, I agree it is time to clear out the safe deposit box. BB is offering a best loss mitigation but sadly the banks do not have the capital to perform this action.
How much more proof does one need to figure out that globalization is a complete failure?
So let me get this: first they randomly create money/credit out of thin air and redirect it into the wrong hands. Now they plan on destroying money/credit out of thin air and redirecting it to the wrong hands.
"Heck, why stop at modest 'principal reduction'?
Why not just forgive ALL debts, suspend contract law, tear up all deeds and re-boot the whole system?"
Well why not institute the old idea from the Hebrew bible of the "Jubilee Year" where every 50 years all debt is cancelled and the slaves are freed?
Lets start today!
"Ben's suggestions just sound like common sense. If a lender knows that most borrowers with negative equity are going to just walk away, it only makes sense to reduce their principal to keep them in the house. It is far cheaper to reduce the principal than take the huge cost of a foreclosure, flooding the market with properties that are going to fetch pennies on the dollar."
Sniglet: Don't be so myopic. You are missing the PV of the future behavior of home buyers. If everyone that bought in 2005 gets bailed out, when I go to buy my new home in a few years I will be willing to "irrationally" bid up the price, because I too will anticipate being bailed out when the bubble collapses, incurring future losses for the banks.
Sorry if this was already posted, on Citibank . . . we're gonna need a bigger [life]boat.
Eschaton
"Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.
Ultimately this leads to higher GPAs and, by implication, a more educated population."
I hate to inform you, but I think this has already happened.
Remsem's accounting proposal & Kou Jie's intuition of political maneuvering in the background both sound very plausible to me. No doubt we will rehash the S&L goodwill writeoff proposal of yore, but if that is what it takes to get the banking system to take its losses, it is better to have funny accounting than virtual worthless accounting that we have now (HELOCs carried at par, mortgages not written down to their true value, bank refusals to take losses). Something has to be bent to get institutions confident in their counterparties again.
Unfortunately, a number of banks are probably below their minimum capital ratios even with some accounting delay/forgiveness scheme. Ben is calling for triage but the banking industry won't come walking through the emergency room doors.
I need someone to explain to me how this principal haircut thing doesn't send mortgage rates to the moon, if not Jupiter or Saturn. If I was a mortgage investor, the possibility of a trim like this in the future sure won't motivate me to stump up my cash at 6.5% for 30 years.
Just a thought
I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks.
I think part of the problem, mp, is that the minute you mention that there are some systemic advantages that could be had by reducing principal (or the OTS notion of bifurcating a upsidedown loan, reamortizing the 'secured' portion and mothballing the 'unsecured' portion as a silent second), you get 1000 commentors here screaming BAILOUT ALERT! MORAL HAZARD ALERT!! OH NO!!NOT NOT NO noes!
It's probably the same people who can't see the upside to globalization.
The government would be better served giving out downpayments to renters who want to buy a house. Give me 100k and I'll buy a 500k house right now.
daredvl,
The rates are already going up. They have been going up for 6 months in the face of fed rate cuts. To put it another way, investors can have smaller principal reduction now or they can have a bigger one after foreclosure.
ades,
Why do you think it is a "stretch" to assume that most home-owners with negative equity will walk away? I would counter that it is a stretch to assume people with negative equity will stay in their homes. You have very little to lose by leaving your home (except a digned credit rating) and can greatly improve your life-style and finances (i.e. you can rent a comparable home much cheaper).
There is little stigma from losing a home, and there is very little down-side. I can't imagine that any more than a handful of moral die-hards will stay in homes, dutifully paying the mortgage, when they have negative equity.
But just to make this more concrete: assume that the lender has statistics that PROVE the vast majority of people in a given region will just walk if they have negative equity. If the lender is certain of this, then wouldn't they be better off just reducing the principal for all borrowers?
Sniglet:
"I would counter that it is a stretch to assume (rational) people with negative equity will stay in their homes."
I can agree with this statement. But you have to realize that most people are not rational.
somebody has to state the beauty of this scheme. might as well be me. By reducing the principal on marginal loans the banks decrease the amount of debt they have outstanding thus improving their reserve ratios. At the same time they reduce the number of questionable loans and increase the number of safe loans on their books. It makes perfect sense in a vacuum.
M.Z. Forrest
That is my point. If rates are already on the march up before this little haricut plan hit the wire today, what will rates do if this plan is enacted?
A new name for BB:
"Bargin Ben" (half off for everyone!)
This bit of dialog from Pulp Fiction is appropriate:
Vincent: Jules, if you give that f**kin' nimrod fifteen hundred dollars, I'm gonna shoot him on general principles.
Jay,
Assume for a minute that it was absolutely true that the vast majority of home-owners with negative equity will just walk away. If the lenders have data that shows this to be the case, do you think it is better for the lenders to just reduce the principal of existing borrowers or go through foreclosure?
Another way to look at this problem is to consider the case where the borrower is delinquent, yet still has the ability to pay. Clearly the home-owner has just decided to walk away in this situation.
Wouldn't it be in the best interest of the lender to just reduce the loan principal in these situations (i.e. where the borrower clearly has the ability to pay) rather than go through foreclosure?
I just don't see how the lender wins by going through foreclosure.
Looks like Gold & Silver did not like Bens commnets.
daredvl,
My guess, start to stabilize. Since we are speaking of impaired assets, anything that reduces the impairment reduces the at-risk ratio. What seems to be the common theme in this thread is that people are acting like we are speaking about mortgages in good standing. The assumption that this will cause other assets to become impaired is just an assumption. Moving from the brink of bankruptcy to having a man's head just above water doesn't strike me as creating added moral hazard. That train has already left the station I'm afraid.
mp:
Nice to "hear" you again.
Yes, I do understand how dire the situation is; and thanks to the internet and sites like this, I'm in the unfortunate position of a front row seat for the train wreck.
It's truly frustrating however, to be in the position of watching everything that we've tried to teach our children come to nought. Read the contract. Honor your commitments. Plan your actions based upon the worst case scenario while working to make the best case appear. Give up plasma TVs, turn off the TV and do your homework; postpone the new car and get a used one. There are future needs for the money, even if you can't identify what they are at the moment.
Bernanke is simply the poster child that everyone can throw darts at. And as soon as I read the title of the article, my first response was cynical - gee, now lowball the appraisal. This is where we are.
I do think that there are a lot of people who will suck it up and do what's necessary to correct this. But I also want - demand - quid pro quo. Forgiveness of loan balances? Okay, now you're going to take a hit on your taxes.
TINSTAAFL
whoa, somebody is trying to forestall gold's inevitable rise, watch this cliff dive -
24-hour Spot Chart - Gold
the fed didn't raise rates while i was in the bathroom just now did they?
What a fool!
1) Reward the crooks and morons for buying more house than they can afford. Hey, I live within my means - can I get a credit voucher or something that reduces the price on my next house by $50,000 or something?
2) The sheer arrogance of trying to keep housing sky high in price, yet at the same time trying to lower the loan amount so people might be able to afford to keep the house a bit longer. Come on!? What's next: every house will have a "sales price" and an "equity value" which will be $100,000 more than the sale price, thus basically being free money? Or, are we going to have some insane system where housing will be unaffordable for all, until you prove you're a crook or a dead beat, then the loan balance is reduced?!
3) All these loans were packaged into assorted toxic waste products and sent all over the world: how are we going to figure out who owns what and who decides if the loan value is reduced?
4) Property taxes: So, are we going to have "taxes only go up!" with the assumption of endless Bubble pricing, while at the same time housing prices remain flat to slowly declining, AND loan values are reduced?!
Is this the future: A starter house sells for $350,000 in an area with a median household income of $50,000. The price of the house can be reduced up to $100,000 if you can prove you're a dead-beat, but if you have a decent paying job, you have to pay full price, which is more than you can afford. For tax purposes, the house is valued at $400,000 and will increase 10% per year since "housing only goes up?!"
5) Future loans and contracts: If the rules can change for anyone in the middle of the game, why would anyone lend out money? Don't rates need to go WAY UP at this point to do something about runaway inflation and risky loans? Changing contracts at a whim just locks up the credit market.
Insanity!
Why don't we just let the crooks and fools suffer the results of their decisions, lower the darn housing prices, and then start selling houses to people who can afford them? Yeesh...
The reality is that the money is gone. Some combination of principle write-down with dual participation in the upside likely makes sense in many cases.
Americans in general have many faults, but we have an excellent track record for ingenuity.
Yes, by all means, reduce the principal amount owed. I own three properties, at 60% LTV/6.0% APR, 50%/5.875%, and and 70%/4.625% in descending order of value, and I would absolutely love it if my mortgages were smaller, especially on my home, which is a non-performing asset. In fact, when you get right down to it, why shouldn't I be rewarded for, you know, borrowing responsibly, paying on time, earning a 780 FICO, and negotiating favorable mortgage rates in the first place? What an idiot I was not to overextend myself and get bailed out.
Hey ,
I am a renter in NJ , i have saved for a decent down payment. I was looking to purchase a house / town house in the last. I knew a bubble was forming because the home appreciation / rent comparison analysis were way out of reality.
There was one house that went up by 15 K from 1993 to 1997, however from 1997 to 2005 it went up by 345K.
Townhomes and SF homes were going up by more than 100 K in the boom years.
I was hoping that the home prices will come back to reality for me to consider buying.
No i hear these proposals by Professor Bernanke, writing down the principal, keep the rates down , so as to keep people who made bad choices remain in their homes.
hey , may be bernanke must consider asking lenders to under-write loans with reduced principal even for newer buyers. Because none of these proposals matter if current buyers stay in their homes and cannot sell the house because there are no new buyers willing to pony up the cash if prices are still high.
If any of these proposals pass , i will continue renting , any of the SF homes, townhouses , i can easily rent for a cost that is approximately 60% of what it takes to ow
I CAN HAZ?!?!?!
What happens in places like sacramento where we are facing outmigration issues coupled with massive overbuiling and speculation? Do the speculators that bought rentals and get principle forgiveness now begin lowering their rental rates even more to attract the few rentors left? What does that do to gross rents calculations across the area? Honestly this is a pandora's box of unintended outcomes.
David in Chicago,
Yes, the lenders should reduce your loan principals for any of your properties with negative equity. Unfortunately, it seems as if you have too much equity to justify such a reduction.
There is virtually no chance you are going to walk away (i.e. because you have significant equity). However, in situations where the borrower has negative equity, the lender is far better off just reducing the principal rather than having to foreclose (i.e. because very few people with negative equity will be silly enough to keep making payments).
Sniglet,
At this point in time you're wrong. Simple thing to check, really. How many homeowners are believed to be underwater? And of them, how many have walked away?
Now they may become "rational" by your definition, but at this time they're not. They're more interested in keeping that property DESPITE the fact they'd be better off in the short term to walk away and take a lower rent.
Yes, I put rational in quotation marks. Let me examine a few things I can do with my home that I cannot do as a renter. I can choose if I have pets. I can choose to plant a garden. I can set up a workshop for my hobby of choice. I can put ugly lawn ornaments out on display - be they 'permanent' flamingos and gnomes, or be they seasonal lights and turkeys. I get to pick the color of paint I apply.
Oh, and I get someplace that is MINE. I do not have to worry that regardless how diligent I am in making payments, somebody else's decision to sell means I get a 30 day notice - to vacate, or to face a 75% increase in my monthly payment, or... the list goes on, and I've encountered several of the events.
These are not trivial issues. Pricing them is difficult - they're very subjective. But subjective and difficult, they're still rational considerations.
"What an idiot I was not to overextend myself and get bailed out."
If you view your mortgage as a call option, you purchased a deep in the money call. Many so called call options were sold at the money with very little premium.
Ben, we can just stop paying the mortgage and it will take the lenders a decade to take the property away. For this reason Ben is urging banks to cooperate because he knows banks cannot keep up in the court system. GREAT DEPRESSION II here we come.
Kirk,
So what should lenders do if the statistics change, and it verifiably DOES become the norm for borrowers with negative equity to walk away?
If the lender KNOWS there is a 90% chance borrowers with negative equity will default (assume there are statistics proving this for a particular area), is it better to just reduce the principal or go through foreclosure?
Up toward the top Dr.Wu gives two quotes to Ben. Actually the first quote is from the Hanskster
(obviously supplied by the man who talks to God).
Ben's comment seems to be an antidote.
I feel for Ben, as I do for Paulson. The Fed and the Admin. are supposed to work as a team.
Can you imagine what kind of replies Ben gets at meetings with the shrubbery.
Its must be kinda like trying to go hunting with a dog that just lies in the shade and spends hours on end licking his "two best friends"
Moral: The fish stinks from the head
The Fisher King or the Wounded King figures in Arthurian legend .... Versions of his story vary widely, but he is always wounded in the legs or groin, and incapable of moving on his own. When he is injured, his kingdom suffers as he does, his impotence affecting the fertility of the land and reducing it to a barren Wasteland. Little is left for him to do but fish in the river near his castle
or more widely see
From Ritual to Romance by Jessie Weston (available online at From Ritual To Romance Index
or see the source
Frazer: the golden bough at Google books for mythology of the wounded king
Like it or no the part in ancient man that brought forth the myths is still alive and well within us.
As in Obamamania
NPV sounds so easy. But in times like these, what is the correct discount rate! If the lender is on the verge of bankruptcy too, it will take whatever cash it can get.
There are no "winners" in a foreclosure.
None. Zero. Zip.
Kirk Spencer has never heard of CC&R's?
Moral hazard for underwater homeowners? I'm not seeing it. The whole point of mortgage contracts spelling out what happens when the borrower stops paying, non-recourse laws and the eradication of debtors' prisons is that in some situations the borrower just has to walk away. The traditional 25% down payment's sole purpose was to make those situations rare and painful. Obviously, increasing LTVs made those situations less rare and less painful. 'Subprime' MEANS more likely to default. The genius of American capitalism has always been, with apologies to F. Scott Fitzgerald, that many lives have post-BK second acts. Lower consequences from BK means more risk taking than in Europe or Japan. But don't say that someone who lost the house, the down payment and the next seven years of FICO is just 'walking away'.
The real moral hazard comes with the split between mortgage servicers and lenders. When they were two guys sitting across from each other in the back room of a bank, it was tough for the servicing department to maximize his own gain at the expense of the bank's as a whole. When they're separate corporations with a few intermediaries to boot, it gets a lot easier.
Well maybe this is the revolution everyone speaks about...,.lest all stop paying our bills...then what?
mp,
Sure there are "winners" in foreclosure. The borrower who is able to get out from under a large debt and live a better life-style in a cheaper rental is a huge winner. So what if you get a ding on your credit rating? That's not such a big deal.
Since, it's quite clear that the good will be paying for the mistakes of the bad....why not let us have some pain for our money.
I want to AT LEAST know that the assholes who created this mess will suffer as much as possible. It really will make me feel better as I watch my taxes go through the roof, my wages stagnate and my quality of life diminish right before my eyes for making responsible and non-sociopathic economic choices in the face of the insanity which surrounds me.
The markets seem to becoming seriously unglued.
MoT,
Check.
Cheers,
Kirk, Good point but it works both ways,would you put a cost on taxes, maintenance, and the stress of being a few paychecks from losing everything? If you want pets, a garden or custom blinds that can all be found/negotiated. A good renter will be greatly appreciated by a good landlord. Just treat the house as if it were your own.
Ooooooooo.... my broker just agreed to cut my margin debt in half!
Ben has just give you blanket permission to screw your mortgage lender for a major principal reduction.
DO IT NOW. And better add something extra to cover the further falls in sale value which will be coming this year.
Tell them The Fed has said this is The Right Thing To Do.
And while they are at it, they should take 100-200 basis points off your rate too, to help ease the affordability problem.
I'd be on the phone already. Get it down now, avoid the rush.
Sniglet writes:
Please someone, just explain to me how a lender is better off foreclosing and re-selling the property for (much decreased) market values rather than just reducing the principal for the existing owner?
The lender has to take a loss either way.
Sniglet | 03.04.08 - 11:30 am | #
lenders mtm their loan portfolios based upon secondary market pricing of certain types of paper. in a foreclosure, lenders look to property value, not market value of the sale of the note. in certain instances, it could be beneficial to foreclose rather than refi or move the note at discount.
PPT is scared of the youwalkaway.com movement. They also know that FFR cuts will probably not get passed through to 30 yr mort. The FAT spread for the banks will be offset by continued losses in housing collateral writedowns.
A truly reflexive process that could take a decade or more to complete.
Give homeowners some equity and maybe they will "stay and continue to pay"
Can one of the members "No-Bailout", "principal reduction = moral hazard" persuasion please answer the following in succinct, impartial language and please do your best to avoid political shrillness:
Sniglet - oh, I think it's smart (so to speak) to deal with, but not for the walkaways. Right argument, wrong basis - and the wrong basis will eventually bite you.
The choice isn't do this or deal with walkaways. It's do this or deal with foreclosure procedings. Foreclosures are actually MORE expensive to the banks. Now we both know the walkaway is also a foreclosure, but the walkaway is less likely to contest or strip - at least so far. The walkaway doesn't fight for the extra few months to which he's entitled.
And probably most important, the walkaway doesn't give your bank bad press. Go look at some of the political cartoons from the 1930s - the fat-cat bank taking the family home is a common theme. That common theme was food for a lot of the regulations that came about. Some of the regulations were necessary, but they might not have been as severe had the banks not been so handicapped in the political arena. A major point that's about to come into play again, I think: Credit :: Money as Money :: votes. (Not completely, but closely nonetheless.)
Dawg,
You're usually on target but your reserves versus liabilities for banks remark goes very wide. Yes, banks have to carry reserves against liabilities. Unfortunately, a principal writedown doesn't affect liabilities. It just cuts assets (to the bank, the mortgage is an asset) and reserves.
People, people,
Yes it does make sense for each individual situation to simply reduce the principle rather than go through an expensive forclosure.
But, once you can reduce your principle with a late payment and a phone call, that means banks lose money on EVERY upsidedown loan (hence the phone ringing comment by CR).
So, if the bank loses alot of money on say 3 million home forclosures, but will lose slightly less money for each home but now on 7-8 million mortgages that request a princple-adjustment, is the bank better off?
There are many people who may be upside down but not by much, say 30 grand.....wouldn't you make a call for 30 grand?
The complications of this are tremendous.
So do you go out a take out a huge second on your house, hide the cash, and then ask for a cram-down....Free Money! Sure a credit hit but won't need to borrow money for a while now!
Moral Hazard
Everybody just stop paying. We're too big to fail. If they can't foreclose on less than 5 or 7 per cent, how about everyone? We can all live rent free. Forgiving principle on one or two might be possible, a significant fraction isn't opening a can of worms, it's pulling the pin on a grenade.
Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?
Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.
Ultimately this leads to higher GPAs and, by implication, a more educated population.
Certain universities had policies where everyone got A's and B's. The students were happy, everyone seemed smarter and the universities could bask in their greatness. Princeton was the leader in this strategy. I wonder if Ben, when he headed up the department at Princeton, came up with that policy, which i believe is known as "grade inflation".
Main Stream Media:
Liquidate labor, liquidate stocks, liquidate farmers, liquidate housing.
Home Economics : The New Yorker
"Of course, if it becomes common for lenders to reduce principal, their phones will be ringing off the hook!"
Of course, if it becomes common for lenders to face foreclosures, their financial health will fall off a cliff.
Lenders bears no small part of the blame for the situation they're in. If everyone wants to play the offended virgin and get tough Zbigy on borrowers, watch out below!
The remarks about future lending only at double digit rates are off the mark. The hazard to be avoided by the lender is negative equity.
If you're going to put nothing down or even 5-10% down, then sure the lenders might demand double digit rates.
You want a 5% mortgage? Then we want 1/3 down.
What's the problem?
"Since when are people not responsible for their own actions?"
I haven't been responsible for anything for years. I have scientifically proven that whenever Bad Things happen, it is always someone else's fault.
You can't possibly expect me to take personal responsibility here.
I never have before, and I don't know how, and I am not interested in learning anything about it.
"let's all stop paying our bills" - Damn, this is brilliant. Sounds good to me, I am boycotting all debt payments. Let them eat shredded paper.
I like Ben a lot, he wears nice suits, has nice gloss atop his head (lips too) and love that beard. I also like how his banking pal Paulson came out yesterday to say homeowners need to not be speculators. Now Ben suggests that banks not play casino games.
That concept on the whole -- is not bad, but it comes about six years too late and now in todays harsh light, one recognizes that The Fed is always too slow to react to realtime economic issues. After all, when you have a group of 30 year old spoiled/wealthy prima donna brats running The Fed and running The Printing Presses (at high speed) this all seems nothing short of retarded -- where the blind are running after the blind in a panic effort to make bad bets go away.
Where was this attempt at accountability from The Fed 5 years ago, where was the enforcement of regulation or the willingness to stop their banking friends from reaping record profits from derivatives and financial accounting tantamount to fraud 4 years ago? Where was the Fed to be found when home values had virtually doubled overnight? Why was this two-fisted punch aimed at speculators not offered then, and now far too late?
That said,
Feel free to scream moral hazard and voice righteous thoughts.
I have only one thing to say:
If something isn't done immediately, this thing will fall of its own weight. Gravity will do its job.
If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
So, if I were YOU, I'd be telephoning my elected representatives and demanding that they do SOMETHING, and SOON.
Deal Junkie writes:
...still the solution is terrible for the CDO investors.
CDO investors are doomed in any case. The only reason to make a CDO out of MBS is because it lets you take some of the toxic crud you haven't yet artificially raised to investor grade (which is to say lower tranches of the MBS) and elevate it some more. These things will all evaporate over the next few years no matter what is done.
Free Markets for everyone!
USA! USA! USA!
Average Joe,
You are correct that even greater problems for the lending industry might ultimately be created if they began to quickly reduce the principal for anyone who was under water. However, for many individual lenders, just trying to manage their portfolio, this might be the best course.
This is a good example of game theory. While the moral hazard that is created by all lenders reducing principals is significant, it is in the interest of individual banks/servicers to rework loans to avoid foreclosure.
In fact, there may be some lenders or servicers who have no intention of ever under-writing new loans anyway, and are simply trying to manage a pre-existing pool of borrowers. For these lenders they may not care one bit what the long term implications for the lending industry are.
Gravity will do its job? The job of gravity is to bend itself back onto the fabric of space/time. What we have here is financial entropy where the chaos is expanding into puzzle pieces that aint gonna fit together ever again. They really need to re-invent the financial system, cause this one has come to an end!
mp:
Go talk to Conjure Bag. I'm sure he's not freeking out.
OTOH, if he is, please let me know.
Personal responsibility was tossed out the door in 2000/01 today is not any different.
"If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
So, if I were YOU, I'd be telephoning my elected representatives and demanding that they do SOMETHING, and SOON.
mp"
Boo-hoo. Revolution is nigh.
1. Our government purports to be "by the people and for the people", N'Cest Pas? How is foreclosing on millions of people a feasible course of action, presuming that our government and its constituent private institutions/enterprises are actually interested in survival?
Again, the US has gone through similar episodes in the past and has done just fine in the aftermath.
It's a balancing act between preventing economic collapse and taking away peoples' motivation to work.
This situation may be new to the people alive today, but it is not new to this nation.
I have a great deal of skepticism about radically changing something that has worked so well in the past, or grossly overreacting to situations we've dealt with before.
We are fabulously wealthy and have extraordinarily good lives due to the philosophy and rules we've lived by in the past.
Maybe we don't want to throw the baby out with the bath water just yet?
We've been living in a fantasy world for a decade now.
Life is hard sometimes. The government can't make that go away, and will likely fail dramatically trying.
Marcus, evidently you haven't been reading what Conjure and I have been writing for the last twelve months.
It just baffles me why the Fed wants to step in and prevent what is currently occurring in the marketplace ... the greatest housing affordability initiative ever developed.
For 5g's, i'll agree to appraise your home for 75% of your purchase price...
leave it under the door mat... be vy later today.
cash
Liquidate labor, liquidate stocks, liquidate farmers, liquidate housing.
Liquidate the internets.
The model is broken because the players all cheat.
Go here: Monte Carlo method
Monte Carlo method - Wikipedia, the free encyclopedia
This entire financial mess can be summed up bt the little illustration on the right side of the page, which also says: The Monte Carlo method can be illustrated as a game of battleship. First a player makes some random shots.
The point being, if you have ever plyed this game or any other game, you can cheat and move or substitute positions. If the data is changed, the data input results in data output that is false. Oui! We had everyone cheat in the current system and now we have chaos and need a new system where people cant cheat, starting with The Fed, Bush, banks, etc...
More broadly, Monte Carlo methods are useful for modeling phenomena with significant uncertainty in inputs, such as the calculation of risk in business (for its use in the insurance industry, see stochastic modelling). A classic use is for the evaluation of definite integrals, particularly multidimensional integrals with complicated boundary conditions.
Monte Carlo methods in finance are often used to calculate the value of companies, to evaluate investments in projects at corporate level or to evaluate financial derivatives. The Monte Carlo method is intended for financial analysts who want to construct stochastic or probabilistic financial models as opposed to the traditional static and deterministic models.
Once upon a time you dressed so fine
You threw the bums a dime in your prime, didn't you?
People'd call, say, "Beware doll, you're bound to fall"
You thought they were all kiddin' you
You used to laugh about
Everybody that was hangin' out
Now you don't talk so loud
Now you don't seem so proud
About having to be scrounging for your next meal.
How does it feel
How does it feel
To be without a home
Like a complete unknown
Like a rolling stone?
You've gone to the finest school all right, Miss Lonely
But you know you only used to get juiced in it
And nobody has ever taught you how to live on the street
And now you find out you're gonna have to get used to it
You said you'd never compromise
With the mystery tramp, but now you realize
He's not selling any alibis
As you stare into the vacuum of his eyes
And ask him do you want to make a deal?
How does it feel
How does it feel
To be on your own
With no direction home
Like a complete unknown
Like a rolling stone?
You never turned around to see the frowns on the jugglers and the clowns
When they all come down and did tricks for you
You never understood that it ain't no good
You shouldn't let other people get your kicks for you
You used to ride on the chrome horse with your diplomat
Who carried on his shoulder a Siamese cat
Ain't it hard when you discover that
He really wasn't where it's at
After he took from you everything he could steal.
How does it feel
How does it feel
To be on your own
With no direction home
Like a complete unknown
Like a rolling stone?
Princess on the steeple and all the pretty people
They're drinkin', thinkin' that they got it made
Exchanging all kinds of precious gifts and things
But you'd better lift your diamond ring, you'd better pawn it babe
You used to be so amused
At Napoleon in rags and the language that he used
Go to him now, he calls you, you can't refuse
When you got nothing, you got nothing to lose
You're invisible now, you got no secrets to conceal.
How does it feel
How does it feel
To be on your own
With no direction home
Like a complete unknown
Like a rolling stone?
Bob has a better one here:
YouTube -
Idiot Wind
Great version!!!!!!!!!!!!!!
Quickly clicking through all the comments...
The suggestion that the gov might reimburse banks for their write-downs is already implicit in terms of tax losses, at least for investors who are subject to US taxes. Those losses would be cushioned by the corporate tax rate.
The real losers would be foreign investors who would likely pass their losses to the governments that they pay taxes to.
Wouldn't make us any more popular abroad than we are now, but it seems to meet the objective of most on this board that the best solution is rapid price discovery.
Dylan seems to be talking to Ben here about rate cuts:
I threw the I-Ching yesterday, it said there might be some thunder at the well.
Peace and quiet's been avoiding me for so long it seems like living hell.
There's a lone soldier on the hill, watchin' falling raindrops pour.
You'd never know it to look at him, but at the final shot he won the war
After losin' every battle.
Punch My Ticket writes:
Dawg,
You're usually on target but your reserves versus liabilities for banks remark goes very wide. Yes, banks have to carry reserves against liabilities. Unfortunately, a principal writedown doesn't affect liabilities. It just cuts assets (to the bank, the mortgage is an asset) and reserves.
I understand. Tanta had a great UberNerd on that very subject and I just expressed my thought incorrectly. The principal writedown part is an asset reduction as you explain but it also allows them to reclassify the remainder of the asset as "safe" and not in need of additional reserves against potential loses. Did I say it right this time?
"...the best solution is rapid price discovery."
Yes, damn it, yes! Get it all out on the table! Now!
If that can be accomplished, then you can set about fixing it.
It makes perfect sense in a vacuum.
Yeah.
It sucks.
If anyone doesn't understand the moral hazard and potential unintended consequences of this so-called 'plan' (personally, I think it's just more posturing to signal that the Fed and Gov are 'doing something'), try to imagine that you just bought (or received) thousands of dollars' worth of Sharper Image gift cards this past December. Now go and try to use them. Now ask yourself if you will ever trust Sharper Image or any 'gift card' purveyor again.
Dick Bove (financial analyst) just said on CNBC:
"I think Bernanke has lost his head."
Sums up my thoughts. Roby
Re: "rapid price discovery"
That only works with truth and honor. This is like the game theory above, where people lie and cheat and the cards on the table may be connected to cards hidden under the table. This is about trust and distrust and fraud versus accountability. The banks were whores and they started using crack, now they look like hell and nobody wants um!
Hey mp- are you sober and not in a funk? Because if you are,...Wow. I've depended on a few commenters here to keep my "Depression" fears at bay, and if you really feel this way, ouch.
Well, here's hoping there is a decent solution. Cheers.
"I think Bernanke has lost his head."
Well, Dick Bove doesn't run the Fed, now does he?
If Dick Bove did run the Fed, he'd probably be in a padded room by now.
Does it make more sense for a lender to have a bad 500K loan on his books or a questionable 350K loan on his books, or a real estate asset "valued at 500K" on his books?
They better act quick the Teenagers are moving in:
Police break up party raging in foreclosed home
404 - Page not found
Re: This situation calls for a vigorous response.
Measures that lead to a sustainable outcome are to be preferred to temporary palliatives...
This situation calls for the re-invention of our failed system. The Fed has to come to terms with its own failure and lack of oversight, lack of regulation, its collusion with banking members, its distortion of facts and its involvement in systemic corruption, which are compounded by nepotism and treason!
Conjure, via history's lessons, knows the outcome if left unchecked.
You, and everyone you know, should read this:
The Mathematical Economics of Compound Rates of Interest - Part 2 - by
Michael Hudson - financial economist and historian
" Today, the poor throughout the world, and increasingly business and government bodies as well, owe a rising proportion of their income to wealthy institutional creditors (including pension funds nominally owned by workers, for whom these retirement savings are not available to pay off their own current debts). At some point the trends of debt must rise so high as to exceed the economys ability to pay, namely, the entire available economic surplus. There is no inherently mathematical solution at this crisis point. The response must be political, as it always has been."
The only thing to do is buy stock in Merck, makers of Campral.
Not only an effective alcoholism drug but also effective for that "ringing in the ears" problem a lot of bankers are going to be having.
mortgage tinnitus
Again, the US has been one of the greatest economic success stories in history despite 3 depressions. And right now I don't see that we're facing anything so bad as that.
Past performance is no guarantee of future results.
--Nostradamus
In regards to personal responsibility, should that have been the lender's reasoning for NOT writing 100% LTV loans on stated income? Seems stupid to bring personal responsibility into it AFTER approving the loan. If a principal write-down is better for these idiot lenders, then they should be stuck with their contracted option of foreclosure.
If home owners bought into a bubble at highly inflated prices...sometimes based on fraudulent appraisals and financed by some questionable or fraudulent loan practices...well why not allow an adjustment to the loan reducing principal.
Especially if the loan was secured at the peak of the engineered and unregulated bubble. The bloggers opposing making these home loans adjust to the reality of home values are opposing a correction that is just and fair in many cases of unfair lending practices and shady appraisals.
Those opposing correcting the bubble appraisals and bubble loans are actually siding with the unfair practices of the RE and mortgage finance industries. You want the ridiculous bubble fantasyland prices to stand.
I still believe in the worst cases of inflated values, it's best for upside down 'home owners' to walk for financial sanity, security, and survival. Many buyers bought into a rigged, fraudulent trap. So reducing the fixed bubble amount or walking are both sane and just strategies for strapped home buyers.
you can kiss the American middle class goodbye
Good riddance.
I love to harp and today I want to harp on game theory, like Monte Carlo Simulations, which are the core backbone model for our entire financial system, i.e, our financial universe is based on game theory, like a dog race or a few hands of gin rummy, or shooting marbles, flipping coins, flipping houses, flipping derivatives and goosing Wall Street with a 3/4 rate drop, to help pacify member bankers that have made bad bets on the wrong casino chips.
Thus, why, has our financial game fallen upon bad times, where all the bad bets have hit all the speculators at the same time? Was there not supposed to be risk management for this game and ratings linked to the probability of a coin being flipped the wrong way?
What happens in Vegas when a casino hits a soft patch in its micro-economy, do they print more money or shut the doors? Any one know how the mafia deals with lost dough at a casino? Ask Ben!
IIRC Hebrew law REQUIRES that te devout forgive all debts once every seven years. The idea was exactly to make people more committed to the community and less to their own wealth.
This tradition is carried into Christianity with that famous prayer in which we ask that we be forgiven our "debts" even as we forgive our "debtors".
Huummmm
There go the appraisals, too.
wheat - have you not yet noticed that no one in our financial or political leadership positions takes responsibility for ANYTHING? It is always a matter of pointing fingers, and shifting blame. Which is why we are where we are. Gigantic moral vacuum at the top of every organization. We r skroo-ed.
If something isn't done immediately, this thing will fall of its own weight. Gravity will do its job.
If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
So, if I were YOU, I'd be telephoning my elected representatives and demanding that they do SOMETHING, and SOON.
mp | 03.04.08 - 12:19 pm | #
yup, the apocalypse is at hand. Soon after we'll have the Rapture.
Yah, this is good:
When a player tries to break the bank at a casino, he is fighting the house edge as well as an opponent with much larger resources. Even a small percentage in favour of the casino reduces the probability of the player ruining the casino to such an extent that his chance of profiting is infinitesimal. If you are anticipating playing a zero sum game then make sure you are aware of the prospect of ruin.
I understand loss mitigation as much as anybody but what pisses me off is the Ben gets on his bully pulpit and deigns to advise the banks on what to do. He said nothing to the banks or the punters on the looong upside - he should just stfu and let banks work it out all by themselves as they see fit in their particular marketplaces.
Now he's giving the banks and the customers an "alibi" - 'Ben made me do it' -
Where do I sign up ? Heck, I've been avoiding and stepping past Ben and Greenspan's machinations for some years now - what's another one - in the meantime the gnomes of Zurich get my money !
Sheesh - what a useless Central Reserve Bank.
-K
Loss Carryforwards, now to become infinite.
Loss Carrybacks? Bernanke's next proposal is 100 years, unadjusted for inflation.
mp at 1048 wrote
"I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks."
and wrote more about that below..
MP i'm with you. my family has saved and invested while others had the shinny boats, cars etc we did not. ok boo hoo.
but now the entire ship of state is sinking, and blaming ben aint helpin
if you are suggesting that who gets hurt more...and do the most deserving amongst us get their fair share of punishment... is no longer the issue.
we are facing an increasing possibility of systemic failure.
decisive and profound action is required or we all go down on this sinking ship.
(historically, yes i appreciate all the decrying about how roosevelt closed the banks and "confiscated" (he didn't he bought it above market value) the gold...but hey when the barbarians are at the gate, somebody has to take charge and DO SOMETHING!
Maybe The Fed bases its economic model on coin tosses and casinos theories and perhaps they bet the farm on pumping the housing buble, with Bush's Ownership Society Boondoggle? Thus perhaps treasury yields are crashing because the odds of the house defaulting are increasing, and thus the only way to get speculators back into this casino is to change the rules and offer more free vodka and cute college chicks with exposed navels? Yah!
Gambler's ruin
http://en.wikipedia.org/wiki/Gambler's_ruin
A typical casino game has a slight house advantage, which is the long-run expectation, most often expressed as a percentage of the amount wagered. In most games, this edge remains constant from one play to the next (blackjack being one notable exception).
For example, the official house advantage for a casino game is 6.25%, and thus the expected value of return for the gambler is 93.75% of the total capital wagered. However, this calculation would be exactly true only if the gambler never re-wagered the proceeds of a winning bet. Thus after gambling 100 dollars (called "action") the idealized average gambler would be left with 93.75 dollars in his bankroll. If he continued to bet (using his 93.75 dollars in proceeds as his new bankroll), he would again lose 6.25% of his action on average and the expected value of his bankroll would go down to 87.89 dollars. If the proceeds are continually re-wagered, this downward spiral continues until the gambler's expected value approaches zero. Gambler's ruin would occur the first time the bankroll reaches exactly 0, which could occur earlier or later but must occur eventually.
The long-run expectation will not necessarily be the result experienced by any particular gambler. The gambler who plays for a finite period of time may finish with a net win, despite the house advantage, or may go broke much more quickly than the mathematical average.
Do I detect that Ben is grasping at straws? Straws won't save you, Ben. Your reputation is probably finished, or soon will be. Wait until you start lowering rates in the face of rising inflation. That'll finish you off but good.
The banks have no obligation to modify terms for the general betterment of the economy.
If reducing principal and/or modifying loan terms improves their bottom line, then they should absolutely do it.
Ben seems to be asking banks to fall on their swords on individual loans to prevent to housing bubble's continued deflation.
I've no sympathy for the irresponsible lenders or the irresponsible borrowers in this situation.
Dear Ben
After readin about your casino going broke, I thought I would repost this:
If the proceeds are continually re-wagered, this downward spiral continues until the gambler's expected value approaches zero.
Ben, IMHO, we have two things going on here, first, your casino is going broke. Second, the speculators that generate cash flow in your casino, are going broke.
Ben, as I see it, 1+1 = 2, but if this systemic meltdown continues with hyperinflation and stagflation then, 0+0=0
Why not double the balance in my bankl account?
Again, the US has gone through similar episodes in the past and has done just fine in the aftermath.
No, it hasn't. We're looking at a 20-30% drop in housing prices. According to Case-Shiller that exceeds the Great Depression drop.
Maybe an appeal to self-interest will help with some of the people complaining about Bernanke's idea. Many people here are drooling about buying super-cheap houses. Well, if we have mass foreclosures, that will destroy neighborhoods and make the houses in them uninhabitable due to squatters, neglect, etc. What's the loss of millions of homes from the usable housing supply going to do to those low house prices you're lusting for?
Wallster,
True, the banks have no obligation to modify loan terms. However, they would be mind-boglingly silly not to do so for borrowers with negative equity who are defaulting on their loans (who have the ability to pay).
It is far better for a lender to reduce the principal on a loan, and keep the existing borrower in the house, than to go through a foreclosure.
Just explain to me how the bank benefits by foreclosing on a home with negative equity? They can't possibly be made whole upon re-sale. Whether they reduce the principal for the existing borrower or foreclose and re-sell the house, the bank is going to take a thumping loss.
mp:
So contact my rep and ask him to do what?
True Story:
A local school district had a significant problem with the superintendant several years ago. Gent was subsequently jailed for fraud and the district was in a complete wreck. Applying the moral that the fish rots from the head, the board hired a new supt, who then had major problems getting correct/factual/honest info from the principals at some schools. Upshot was that the new supt actually organized a night-time raid on a principal's office and went through files to get the complete picture. Other principals then fell into line.
Apart from such a draconian measure, I don't rightly know what the reps are expected to do. This isn't a measure for the legislator,it's one for the AG or FDIC regulator.
Quick question,
If securitized mortgages have already been revalued down, and the servicers reduce principal on the mortgages in the securities, and the mortgages are then paid off over the life of the loan, then are investors really losing anything that they have not already lost with the current write downs?
Re: Great Depression
The Great Depression was not about a housing bubble, it was about a lack of market regulation, which is mirrored in this situation today where nepotism provided us with Katrina-like retardation, where FEMA was run by a retard that had his job given to him as a political favor, much ike Paulson, Ben and The Fed Board and evert agency out there, including DOJ, FBI, CIA and the armies of un-qualified people that have done a heck of a job destroying America and our future!
What are the odds of these people turning things around?
"No, it hasn't. We're looking at a 20-30% drop in housing prices. According to Case-Shiller that exceeds the Great Depression drop."
it sure has.
Oil country in the mid 80's went this far faster.
This is only the coasts. And not all the coasts.
This has happened before.
But the US was not indebted as today.
w -this is what I'm puzzling about too amid moral hazard cries - reducing principal seems like it could hasten house price declines rather than prop them up.
Also, it seems to make the greediest, most culpable, most foolish party in all this -- the lenders -- bear the burden for screwing up -- as opposed to me, the taxpayer.
But welcome to have someone set me right - I am sincerely confused...
It is all overbought. I cant wait to see the entire thing fall on its face.
I'm not sure anybody really understands exactly what happened in the great depression. I know i don't. & imho any financially based explanation that doesn't also include the impacts of technology on the financial system itself isn't correct.
but apropos - i'm reading a book from 1937 on the debt situation then right now - and it has this interesting little throw away line in the introduction:
"No category of debt (except Federal*) was completely paid off during the depression."
interesting times.
When a Fed Chairman makes such a proposal, one has to wonder about the long term prospect of credit availability to prospective homeowners in this country.
There seems to be an ever-increasing drumbeat to punish the mortgage bond investor. That's probably not a real good idea from a long term perspective.
from Woody Allen in 'Annie Hall'
"[Bankers] are like sharks, they have to keep [the debts] moving or they die. And I think what we have here.......is a dead shark."
I might add, I think the black swan beat the $hit out of those sharks. All hail the black swan.
Why weren't Bernanke, Greenspan et al. asking the banks and the Gov't to step in and stop the housing market from going up (AT A RECORD RATE) to unaffordable levels? All this (RE values dropping) is just putting prices back to more affordable historic norms - the reduction in home values is NEEDED. The run-up in values wasn't. I saved my money for a 20% down payment - and each month that meant saving much more to get to the level needed for the same property - and now that it looks like pretty soon I will once again see prices back down to where they should be... but now Bernanke and the Gov't want to step in and keep the prices artificially inflated. F 'em! If they wanted to let the markets rule themselves then, they should let them do the same now.
From the borrower's perspective this plan also suffers from the adverse selection problem. Those with 'better' LTV will be cherry picked for foreclosure, while those with 'worse' LTV's will get modded and allowed to ramin in place.
For those who like charts
Really Scary Fed Charts: March
MP,
You say:
If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.
Please can you paint this picture in a little more detail. Or point me to a link somewhere. As I see it, the majority of homeowners (say 85%), bought their homes before the run up in prices. 1/3 of the public just rents. So it's not the spectre of homelessness that scares you, I assume. It must be the losses the financial firms will take. If you're worried that they won't lend in the future, I'll posit that outsiders will step in and do so. And life will go on. The middle class will be serfs to a new set of (Middle Eastern and Chinese) lords instead of WASPs. So what?
Wheat/DocHoliday/Whoever,
Could you cut n paste the rules to Uno and how that game theory will affect BB's decision making process?
The idea of principal reduction makes some sense, except if the loan was securitized as most of them were. The government would need all bondholders' permission to modify the prospectus. I don't think the senior bondholders, whose bonds may once have been rated AAA, would take kindly to seeing a reduction in their subordination levels.
As I see it, the majority of homeowners (say 85%), bought their homes before the run up in prices.
Unfortunately, they then refinanced during the run up, extracting their ephemeral equity.
crabsofsteel, very good point. My head hurts trying to figure out how this would work with securitized loans.
MGIC to Offer More Common Stock
Expired
Wow, what a deal. Buy before you get priced out. They aren't making any more near-collapsing bond insurer stocks!
Shnaps said:
Unfortunately, they then refinanced during the run up, extracting their ephemeral equity.
True enough - but by CR's estimates, if house prices decline 30%, about 20 million homeowners end up with negative equity. That's out of 115 million households in the US - leaving roughly 83% above water (counting renters).
Ben's proposal doesn't seem so bad to me. From the speech
In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances. For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source.
In other words, if the banks can find a new bagholder, go for it.
Misean, I agree it is time to clear out the safe deposit box. BB is offering a best loss mitigation but sadly the banks do not have the capital to perform this action.
Ministry of Truth
Maybe some banks do. Maybe this can help separate banks with potential to survive from banks that won't. Maybe a few banks can even design an offer that gets them sufficient good PR as to attract decent mortgage applications from consumers who prefer to be indebted to an institution with some flexibility. If just a few banks seize on this idea and manage to execute it reasonably, maybe some interesting new market dynamics will emerge.
Anonymous 03.04.08 - 11:14 am wrote, Henry George was right all along. Property rights are one of the core tenet fallacies of modern capitalism. It is clearly the biggest driver of Ponzi finance.
Agreed, but be careful: you really mean "property rights in land," not "property rights in the products of labor".
it matters little how well our investments or savings are situated, nor how high the fence around our homes nor whether or not the mortgages are paid off.
society is a fabric, and when it freys at the edges there will be fray all around us.
yes it is true that those who accomplish the three goals above will float higher in the flood, but the storm will be awful.
maybe the only solution to this problem is to:
re- regulate the entire system
provide government sponsored insurance to several additional classes of investments besides demand deposit accounts
and begin a massive energy independence Manhattan project, now
Ben's proposal looks great unless you are a bondholder who takes a government-mandated loss as a result.
It is unconstitutional for the government to interfere with private contracts. The only way to know where the market is for the underlying collateral is to sell it.
To be able to sell it, the lender must foreclose. Those are the rules of the game. Sorry, Ben.
CrabsofSteel - That's not what Ben is saying.
even though workouts may often be the best economic alternative, mortgage securitization and the constraints faced by servicers may make such workouts less likely. For example, trusts vary in the type and scope of modifications that are explicitly permitted
So the securitized loans are basically off the table.
crabsofsteel,
Why would Ben's proposal be bad for bondholders? I can't see why it is better for bondholders to have the homes foreclosed upon and sold at a loss (i.e. because the home is worth less than the market value of the home). If the servicer is absolutely certain the borrower is able to make the new reduced payments, then principal reduction is a vastly better option for bondholders than foreclosure.
The implied moral hazard has more to do with the GSEs being the final bastion of support for housing. Yet that implication clearly failed even with the raising of caps. GSEs still have stricter underwriting than NINJA loans and unless Fannie Mae and Freddie Mac go and start giving out Samurai Mortgages, the only other viable option I hate to say is forcing lenders to eat their losses. This is a viable option. Why do you think lenders fought so heavily to block the passage of legislation allowing judges to write mortgages down? We have two moral hazard trains here. We are going to have to choose one.
All this talk of resurrecting antiquated agencies such as the Great Depression Eras Home Owners Loan Corporation which would in essence buy back troubled loans and securitize them into more affordable government loans is a major bailout that helps lenders. This will bring the losses onto the governments (aka taxpayers) books. What Boom Boom said today, will to a certain extent keep losses with lenders forcing them to realize that there is no full fledged government bailout coming. That is why the market is reacting so strongly and financial are getting hammered. They were expecting Ben to say, hey everyone, just give us all your subprime and option mortgages and well refinance them! Even if they wanted to do this there is so much bad mortgage debt out there, no way would it be possible.
Countrywide stated that out of their option ARM pool, 71 percent of borrowers are currently only paying the minimum amount and 80 percent did not verify their income. With delinquencies rising and the California median price off by 21.9 percent in one year, the bottom fell out faster and did not give any bailout plan any traction. I mean think of all the proposals that were going to help the market; FHASecure, Hope Now, Project Lifeline, etc etc. This one seems to favor the OTS negative equity certificate proposal. Just another handful of mud being thrown out on the market; eventually they feel something will stick.
Even Paulson makes more sense then the bearded clam.
Pull the plug already and let the chips fall where they may.
Let this thing go into a left wing administration and we end up with 9th circuit court like law enforcement. Then we will have a real problem.
i.e. because the home is worth less than the market value of the home
This statement makes no sense. An asset cannot be worth less than its market value. The market value of an asset is exactly equal to what it will sell for. No more, no less.
check out the disclaimer to FAKEPAYCHECKSTUBS.com ......extremely funny!!!
Jus me
If you change the principal balance of loans, you have to change the $ amount on the front cover of the prospectus. Sorry, not allowed.
Do that and the issuer has to buy back all the bonds.
Sniglet
The reason bondholders would suffer are twofold:
- they take their loss sooner rather than later
- who determines what the market value of the property is? Are you going to write the loan down to its appraised value? Half its appraised value?
Loans are allowed to be refinanced, and even if there are prepayment penalties, those can be waived. The answer lies in refinancing the property, not in writing down loan principal.
crabsofsteel,
Determining the proper market value for calculating a reduction of principal is simple, just get a new appraisal done. You certainly wouldn't want to rely on some appraisal that had been used when issuing the original loan.
I don't understand why the bondholders would rather take a bigger loss (by going through foreclosure) just for the sake of delaying the need to take the hit on their books.
BB obviously is simply been reduced to the bare naked truth. The banks either need to reduce the principal or suck it up and take an even bigger loss in foreclure sale. Big losses will result in failed banks. Now if we follow that trail, we all should know where it leads. All of you who are screaming morals and outrage are missing the point. The darkman is taking names.
Someone back a few posts ago got it right. The Fed is scared to death about the number of foreclosures about to wash up on shore.
BB is looking for a way to avoid a selloff like the S&L crisis. In the end, though, I think that's what's coming, because no one wants to compromise.
The banks are harvesting what they sowed.
When banks change principal balances without a court order or a regulatory order to do so it may open doors for shareholder derivative suits unless Congress provides some authority that would eliminate that potential liability. The Fed is obviously greatly alarmed yet it fails to adequately prepare the public for harder times ahead.
You know how Ben Bernanke was nervous at hearings until after the big time "credit crunch" (reality) began to hit the public consciousness in August?
He knew that no matter what he did or said or what policy he chose, it cannot make the US richer than it is, and that some people and some politicians will blame him for reality.
Banks are harvesting what they sowed and what they sowed was securitization of mortgage loans that made writing loans easy money for a while both in fees and derivatives profits. The bubble was created by deregulation of the banking reform act that kept banks and Wall St apart somewhat. Greenspan advocated for banking deregulation and Bill Clinton signed the repeal of the Depression banking reform act(Glass Steagle)
IMO, this bubble and resulting credit and RE collapse was securitization driven where easy money was pursued in risky mortgage debt. Blaming homeowners for being underwater is simplistic and wanting a bailout makes sense when one considers how this bubble was manufactured step by step by the government and corporate and Fed players.
Sniglet 2:53
The time value of money is one reason that investors would rather forestall losses. Suppose we have
a $500K mortgage and a $400K reappraisal. Ben's plan would recast
the loan at $400K (or 80% of 400K?)
and any securitization would take a $100K loss. If the home goes through foreclosure and sells for $400K in three months, that loss is currently less in present value terms.
Sniglet - remember, the bondholders are holding different tranches of the bonds, with different rights to payment depending on the class. Writing down the principal will have different effects on the different classes. If the terms of the bond did not allow the principal to be written down, then the bondholders must consent to the change. However, the change will have different consequences for the different classes, so good luck on getting the junior classes to agree to be wiped out. (Yes, the junior class may get wiped out anyways through foreclosure, but that is only a possibility right now while agreeing to the principal reduction would be a guaranteed loss).
As almost the last word on this subject why wait for negative equity, Benny the Village Idiot ( cf a Brit soap - Crossroads )- surely the fairest is to write down everybody's loans in proportion to the reduction in their property values ? Huh, huh ?
So, if you have a 200K mortgage with which you bought a 240K house and the house now appraises 10% less at 216K then lets reduce the principal amount of the mortgage by 24K too..
Seem fair heh ?
-K
There is powerful psychology against recognizing losses.
Many moderately intelligent people will simply not face up to the fact houses won't recover their old nominal values soon, because it's psychologically difficult to face.
sk 3:46
The right way to do this as far as deals are concerned is to refinance properties and prepay whatever portion of the balance the refi covers. Prepayment is allowed in most cases without penalties for American mortgages, and deal waterfalls specify what to do with the cash. With the Ben plan, bond holders are in limbo as they don't know when their principal balance will be changed on them.
Might as well write the mortgage with "principal" resets.
Seriously, if the lenders forgive principal, they'll have some guidelines. Once that becomes known there's a huge incentive to hit the mark. And it's a lot easier to hit the mark going on the down side.
And if you're denied? Sue. Discrimination. Why are they 'giving' money to some and not others?
There was concern that people would stop paying because of the HOPE NOW campaign, and that was just a rework of the interest or payments. The incentive to stop to get principal reduction is enough to make me start thinking of how to scam the system. Not that I would,...unless there was enough money in it.
So, this is our option...suffer through systematic financial failure or allow the GSE's to buy and then reduce the principal on certain mortgages. Tanta has already spoke to this: how to decide which mortgages are deserving?
sk writes:
As almost the last word on this subject why wait for negative equity, Benny the Village Idiot ( cf a Brit soap - Crossroads )- surely the fairest is to write down everybody's loans in proportion to the reduction in their property values ? Huh, huh ?
I don't see that happening. It'll be spotty application to minimize the financial losses. Probably certain regions need to be declared disaster areas before any principal reduction can occur.
unless Congress provides some authority that would eliminate that potential liability. The Fed is obviously greatly alarmed yet it fails to adequately prepare the public for harder times ahead
Congress would give BJs to every homeowner in their district if that's what it took to secure their reelection this November.
Here is a proposal for mortgage write down. Call it a reverse Case-Shiller. For 20 biggest markets we have a log of price rises.
Normalize them down to some baseline. So for San Diego feb 2005 you have say 40% rise over baseline. That would be the basis of your write down.
Topeka only rose 10% feb 2005 that is the basis of your write down.
What percentage of the write down will the bank have to eat is a political decision.
Of course writing this legislation would take a political will currently unavailable.
So I called up the Captain,
'Please bring me my wine'
He said, 'We haven't had that spirit here since nineteen ninety nine
I'm late in the discussion but I couldn't disagree more with opinions that "nobody wins in foreclosure" and preventing moral hazard is not a big deal. Well, nobody wins if a person goes to jail. It's costly, it's hopeless for some and needless for the rest. So let's just allow go free because it's a lose-lose situation?
I think that Bernake's comment are important in that he relises that the consumer is underwater in debt and there is a need to reduce debt. His request that the banks reduce principal, i.e partially forgive debt, is going to fail because someone else is going to have to take the losses, i.e bank investors.
The bottom line is Ben is now thinking of principal reduction is a way to fix the economy. If the banks refuse to forgive principal then Ben could do it through inflation which is where I think where we are going. Retirees are going to get screwed.
mp writes:
I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks.
The situation is bad, and it's becoming worse.
mp | 03.04.08 - 10:48 am
100's of trillions of dollars of over-leveraged speculators from banks to hedge funds to pension funds, to EVERYONE all forced into INVOLUNTARY DELEVERAGING all at the same time to the point that clearing houses, etc the whole system is overwhelmed.
I know what's coming.
Canadaman--"I really don't think many of you here realize just how dire the situation is."
There are a few of us that do at least, and probably quite a few.
How many homeowners are believed to be underwater? And of them, how many have walked away?
One must also ask, how long have they been underwater and by how far? Prices have only been declining in earnest for about a year, give or take, depending on the area. Presumably for the first part of the period they were still in a positve equity position, just less positive than before. So lets say someone hits the zero equity line in October. A) do they realize that they are in a neg equity position at that time? probably not, most American think that their special little piece of creation has actually gone up in value over the last year. B) do they walk right away? Would be pretty dub to do so, would first start going delenquent on the mtg for a few months, then mail in the keys. C) its not like its a binomial choice where equity > 0, no jingle mail, equity < 0 jingle mail. Its not worth taking the hit to your credit, some residual social stigma etc for $500 or $1000. What is the break point? It depends on the person, but the larger the amount of negative equity the greater the probability of jingle mail. How estabilished is the person in that community? If you have 3 kids in the local schools, have lived in that town all your life, and are happy there, do you move away for $10K? If you are single and have no close ties to your neighbors, you are more likely to mail in the keys. Well what about $50K under water, do Mom and Dad move then and tell the kids they can still keep in touch with their friends by e-mail. How about at $100K. Of course as time goes on and prices continue to fall the level of negative eequity continues to rise, so even if its not worth doing it now, it might be worth it 3 months from now or six months from now.
Dumber, BB is not that Dumb.
A bunch of people here who are critizing BB are dumber than what they realize. This critics really believe that their skills are so god like that their jobs or their services will still be needed in the economy when we let the whole thing collapse by throwing everyone out of their homes, you are just wrong. I am personally not the person to decide on how exactly to keep people in their homes, but if we don't find a way we are all going to loose, period. I do not care if someone is forgiven 100K on their mortgage as long as that person/family continues to pay taxes, mortgage and not vacate their home. Of course jealousy kicks in and my ego tells me that it is not fair to those who pay their mortgage without help. But I like to keep my ability to repay my loan that way,by keeping eraning income.
We got two choices: help people keep their homes, which will help all of us keep our paychecks/income or 2) foreclose a bunch of homes living them vacant which will depreciate neighborhoods by 50% and causing th Property Taxes for the innocent bystanders to triple because half the homes are vacant and tax collection(revenue) in the county/ city was cut in half which leads to useless schools/ police/ fire/ ambulance services.
Now, is that the kind of Country you want to be part and proud of. I think a lot of greed got us into this mess from all the parties involved in the housing crazyness . But not doing the right thing here will lead only to bring down all those innocents, like me, who are going to get screwed by all the careles and incompasionate people lacking the brain power to think two steps ahead, the same way that home buyers, mortage brokers, realtors, investors etc got us into this mess because greed would not let them think of their action's consequences. I do not want to get the economy in a depression caused by selfish thinkers, who studied "economic theory" at B-School but are narrow minded and can not realize that here we are not dealing with THEORY or WIDGETS. We ca not afford to let theory dictate the survival of our cities/ culture/ country. Homes and shelter are essential to the survival of humans and at the magnitude of contiued projected foreclosures which is larger than what the foreclosure process/system can absorb/handle we need to keep people in their places.
We are dealing with "Human and Economic Survival" not the write-off of widgets as bad investment. Families will be broken, the fabric of neighborhoods will be destroyed and two wrongs do not make it right.
Today we heard that Mortgage Companies are again putting pressure on Appraisers to deliver the numbers they want to see, but this time they want them lower than the agreed Sale price between Buyer and Seller. Don't you think that it is equally wrong to the way we got into this mess. Buyers already got the Upper Hand and I am sure that the agreed prices already reflects it. Mortgage companies do not set the price, they should evaluate very well the Buyers financial ability to repay and the condiion of the asset. Again another bullying action that is illegal but somehow it becomes well accepted by the industry as the norm until it screws us all again. Folks, Why not do the right thing from the beginning and stick with it?
I am tired of Dumb People especially those Greedy and Selfish.
Homes and shelter are essential to the survival of humans and at the magnitude of contiued projected foreclosures which is larger than what the foreclosure process/system can absorb/handle we need to keep people in their places.
I don't get this... No one is saying that people who can't afford to keep their houses should be forced to go live under a bridge somewhere. The alternative to homeownership is renting, not homelessness. And why should foreclosed houses stand empty? If they'd lower the price to something reasonable, I'd buy one (I haven't been able to afford to buy a house, so I've been renting). A foreclosure means that one family moves from owning to renting and another family moves from renting to owning. Doesn't sound like a mad max scenario to me, or that anyone is being especially greedy or selfish.
Now, I can imagine that a case could be made that the financial losses that the banks will suffer in the process might put the whole system at risk, so that it's really somehow in my best interest as a renter to preserve a system under which no one who didn't own a house in 2005 will ever own a house. But I haven't seen that case made convincingly yet.
Time to get your money out of the country. A government that "for our own good" gives irresponsible people housing discounts while they gouge responsible citizens is no government at all. They intentionally created this mess because it served their new interst in overseas equity. They don't care what the houses cost -- what they are after is interest from the peons. That newly granted equity will keep disappearing but that is what debt peonage is all about.