Archive for the ‘Mortgage Crisis’ Category

An ironic twist to Team O’s plan for refinancing underwater mortgages …

February 7, 2012

Last week, the Campaigner-in-Chief stumped for a program to allow folks with underwater mortgages to refinance at current market interest rates.

According to Obama:

There are more than 10 million homeowners across the country who, because of an unprecedented decline in home prices, owe more on their mortgage than their homes are worth.

For those responsible homeowners, there are actions we can take now to provide some relief.

That’s why I’m sending Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at today’s low rates.

No more red tape or runaround from the banks.

A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.

I’m basically ok with the idea, but there’s some irony: Remember when the payroll tax cut was extended (for 2 months)  last December?

Well, it was also pitched as deficit neutral.

How was it going to be paid for?

Well, the 2-month payroll tax holiday is being offset (over 10 years) by an increase in mortgage fees,

Every new or refinancing loan going through Fannie Mae or Freddie Mac – that’s over 90% of all mortgages – get tagged with an added fee (20 basis points, .2 %)

According to NPR, the added fee works out to about $17 per month for an average mortgage of about $200,000.

So, let me get this straight: Team O is going to force lenders to cut the rate on underwater mortgages — most of which will go thru Fannie and Freddie — and then hit the folks who are refinancing with a an added fee for cover the cost of payroll tax cuts.

This stuff gets wackier by the minute  …

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WSJ: A Home Is a Lousy Investment

July 11, 2011

An analysis of home-price and ownership data for the last 30 years in California — the Golden State with notoriously golden property prices — indicates that the average single family house has never been a particularly stellar investment.

If a disciplined investor who might have considered purchasing that median-price California house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016.

The stocks would have been worth more than the house by $1,503,196.

If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850.

Full article < Worth reading

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Great Quote: The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit.

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Ken’s Take: But, who put 20% down? Lots of upside potential with little downside risk if you don’t care about your credit rating … living in a house for free a couple years – while the bank tries to foreclose – offsets much of the difference .

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Want a mortgage? … Then quick, what’s 300 divided by 2 ?

June 18, 2010

Punch line: If you can’t add & subtract, then you probably can’t do a budget … and will eventually end up in financial hot water.

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Excerpted from NY Times: Study Says Math Deficiencies Increase Foreclosure Risk. June 9, 2010

If you can’t divide 300 by 2, should you qualify for a loan?

That is one of the questions raised by a new study led by a Columbia business professor who found that borrowers with poor math skills were three times more likely than others to go into foreclosure.

Survey respondents were asked five questions, with the first requiring borrowers to divide 300 by 2, and the second to calculate 10 percent of 1,000.

About 16 percent of the respondents answered at least one of the first two questions incorrectly. The results were consistent among all levels of education and income.

Over all, 21 percent of the respondents whose math abilities placed them in the bottom quarter of the survey experienced foreclosure, versus 7 percent of those in the top quarter.

Mr. Meier said the study had at least two implications for mortgage lenders.

One alternative would be working to help borrowers improve their financial literacy before they took out the loan.

Another alternative might be to add math tests to the process and screen the math-challenged away.

“People say they’re doctors, so they don’t really need math … So what? We see doctors who took out loans they didn’t understand, and who are in foreclosure now.”

“Many of them don’t understand how to do a budget — which is basic math, I guess,” she said.

Full article:
http://www.nytimes.com/2010/06/13/realestate/13mort.html?ref=business

Mr. President: my Toyota lost market value … how about writing off some of my auto loan ?

April 23, 2010

This one just won’t die … and it gets me riled every time its heart starts beating louder.

Why should people who bought houses they couldn’t afford have their bad behavior rewarded with loan forgiveness while their mortgage paying neighbor has to pay off the full amount they borrowed ?  It just doesn’t make sense.

Maybe they should cut mortgage principle balances across the board — good loans and bad loans.  Let real home “owners” (like me) feed at the trough, too.  Better yet, extend the program across all loans — say auto loans.  I bet many Toyota’s are underwater these days …

CNBC: Force Banks to Cut Mortgage Principal: Watchdog, 20 Apr 2010

The watchdog overseeing the $700 billion bank bailout said that the Obama administration should consider forcing lenders to make principal reductions for struggling homeowners who owe more than their home is worth.

Further, he  urged the administration to consider extending the amount of time unemployed homeowners are forgiven from making mortgage payments as the maximum six months now allowed may not be long enough.

Full article:
http://www.cnbc.com/id/36658764

How to live in your home for free … and buy the things you’ve always wanted

April 20, 2010

Punchline:  Steve Martin has a dated comedy routine: how to get a million dollars tax-free.

First, get a million dollars.  Then, simply don’t pay any taxes.  If the Feds come knocking, say “I forgot”.

Here’s a contemporary twist: how to live in your home for free and buy the things you’ve always wanted.

First, stop making your mortgage payments.  Then, buy whatever you want until your cash runs outs.  When the repo man comes, say “I forgot”.

It used to be that American homeowners would pay their mortgage first, then the rest of their bills, and then spend whatever is left over.

My, how times have changed …

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Excerpted from CNBC: Mortgage Defaults May Be Driving Consumer Spending, 12 Apr 2010

Recent studies show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.)

That means they pay off their credit cards, cable bills, car loans in place of their home loans.

Paul Jackson, publisher of Housingwire.com, wrote a fascinating article last week that describes a case study of someone who applied for the government’s Home Affordable Modification Program.

The person had an $1,880.00 monthly mortgage payment on which they’d defaulted, but said person’s monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc. 

Writes Jackson:  Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things. 

Since it currently takes well over a year, in some cases nearly two years, to go from missing a payment to being chucked out of your home … it’s just another, innovative way of using your home as your ATM.

Full article:
http://www.cnbc.com/id/36422316

Thanks to SMH for feeding the lead

Just in case you thought the housing crisis was behind us …

November 25, 2009

Just in case you thought the housing crisis was behind us … some factoids:

Underwater Mortgages

Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don’t have any mortgage.

But, the proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%.

Nearly 10.7 million households had negative equity in their homes.

5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value.

Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth.

More than 40% of borrowers who took out a mortgage in 2006 — when home prices peaked — are under water.

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home’s value.

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Mortgage Delinquencies

About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure.

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay — more than double the number in 2007.

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House Sales & Starts

Sales of previously occupied homes in October jumped 10.1% from September to a seasonally adjusted annual rate of 6.1 million, the highest since February 2007.

Realtors reported that home sales in October were up 24% from a year earlier.

The number of homes listed for sale nationwide was 3.57 million at the end of October, down 3.7% from a month earlier.

Jittery home builders and bad weather led to a 10.6% drop in new home starts in October.

Excerpt from WSJ: One in Four Borrowers Is Under Water, Nov. 24, 2009
http://online.wsj.com/article/SB125903489722661849.html?mod=WSJ_hps_LEADNewsCollection

Reprise: Rallying private capital to stabilize the housing market.

September 29, 2009

According to the WSJ:

While policymakers are beginning to unwind some of the other emergency programs extended to financial markets during the financial crisis, housing remains a weak spot that some view as too fragile to survive without significant government backing.

The Obama administration is close to committing as much as $35 billion to help beleaguered state and local housing agencies continue to provide mortgages to low- and moderate-income families,
http://online.wsj.com/article/SB125409967771945213.html?mod=WSJ_hps_LEFTWhatsNews

I have a better idea.  Below is a reprised post from November 2008 with my plan for handling part of the foreclosure problem and getting housing back on track. 

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Ken’s Plan Summary: (1) eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months, (2) allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and (3) allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

The positive results are practically guaranteed.  Nonetheless, I haven’t even heard the ideas mentioned.  Guess the politically correct folks in DC don’t read the Homa Files.

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From HomaFiles archive, “Big Idea: Rallying private capital to stabilize housing prices”, November 23, 2008.

A stark reality of the current mortgage crisis is that there have been — and will continue to be – an unprecedented and destabilizing number of foreclosures that need to be absorbed into the housing market.  Until they are, home prices will continue to slide and the crisis will persist..

To date, most of the government’s programmatic emphasis has focused on mitigating the financial pressures on lending institutions and investors who funded bad loans, by injecting supplementary capital (loans or preferred stock purchases), or by buying toxic securities..  Some political rhetoric has centered on preventing distressed citizens from “losing their homes”, but few substantive steps have been taken.  Why?

First, once a mortgage has been “securitized” – as most have been — there are contractual limitations on possible loan modifications.   In these instances, mortgage “servicers” have their hands tied.  They are only empowered to collect payments and foreclose on non-payers, with very little latitude between the extremes.

Second, there is the proverbial elephant in the middle of the room.  Many so-called home owners are – truth be told — really “occupants” not “owners”.  Some have no equity in the homes.  Some never did – even before housing prices crashed, submerging loan balances under water.   Many wouldn’t qualify today for restructured loans under the most liberal of terms – e.g. lowered interest rates, extended payment periods, reduced principle balances (to the current fair market value of the homes).  Whether the people legitimately qualified for their initial loans is irrelevant.  Whether their initial loan terms were predatory is also largely irrelevant. Objectively, the low bar is whether they can foot the bill for a restructured mortgage.  The emerging evidence seems to suggest that many – maybe most – can’t.

That leads to an inescapable conclusion: regardless of what remedial government bailouts are enacted – the housing market will continue to be flooded with foreclosures.

So, a pivotal economic policy question is how to get the foreclosed properties off the market and into the hands of private owners (i.e. not onto the government’s asset rolls), and how to keep them there until they can be remarketed at an orderly pace and higher prices.

Three straightforward changes to the income tax code – throwbacks to yesteryear — could provide the necessary financial incentives to rally private capital back into the housing market to buy, hold, and rent foreclosed homes: (1) eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months, (2) allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and (3) allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

For example, assume that an investor buys a foreclosed home for $200,000 and rents it out at a price that simply breaks even on a cash flow basis.  That is, the rental price just covers interest, taxes, insurance, maintenance, etc.  Assuming a 5-year accelerated depreciation schedule, the rental would generate an annual non-cash tax loss of $40,000 that could be used to offset the investor’s ordinary income.  If the investor were in the Obama-boosted 39.6% marginal tax bracket, that ordinary income offset could save the investor almost $16,000 in federal income taxes each year that the property is held and rented.  If the home were then resold – say, in 3 years for $250,000 –  the investor would book $170,000 in capital gains (the $50,000 home price increase, plus the $120,000 in depreciation claimed against ordinary income when the property was being rented), but the investor would owe no capital gains taxes.

Such a program potentially offers several benefits: (1) it would entice private capital to buy (and hold) foreclosures and other distressed residential property, (2) it would likely provide affordable rental housing to people (maybe the current occupants of the homes) who realistically can’t and shouldn’t shoulder the costs of home ownership , and (3) it might take some of the sting out of President-elect Obama’s proposed tax hikes.

It’s a win-win solution to part of a thorny problem.

Original post:
https://kenhoma.wordpress.com/2008/11/25/big-idea-rallying-private-capital-to-stabilize-housing-prices/
© K.E. Homa 2008

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Re: the economy, keep your eyes on bondholders and bond buyers …

May 29, 2009

Ken’s Take: Team Obama thought it was a good idea to screw Chrysler bondholders (secured creditors) un favor of the UAW (unsecured “junior” creditors), and has assumed that investors (mostly the Chinese) would continue soaking up US Treasury bonds to fund the current spending spree. 

Now, Treasury bond yields are soaring.  A function of the massive amount of debt being put on the books, and the realization that the rules re: the security of bond offerings is subject to government whims.  This is going yo become a big story …

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Excerpted from WSJ: “The Bond Vigilantes”, May 28, 2009

Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong,

As risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.

They have cause to be worried, given Washington’s astonishing bet on fiscal and monetary reflation. The Obama Administration’s epic spending spree means the Treasury will have to float trillions of dollars in new debt in the next two or three years alone.

No wonder the Chinese and other dollar asset holders are nervous. They wonder — as do we — whether the unspoken Beltway strategy is to pay off this debt by inflating away its value.

The surge in the 10-year note is especially notable because its rate helps to determine mortgage lending rates, and the Fed is desperate to keep mortgage rates low to reflate the housing market,.

Full article
http://online.wsj.com/article/SB124347148949660783.html

Remember the mortgage loan modifications that were supposed to slow foreclosures?

May 28, 2009

Ken’s Take:  Wasn’t a fan of the rush to modify deadbeats’ loans to “keep then in their homes” … pointed out several times that most of these folks made no downpayment and never built any equity in the homes.  They aren’t “owners”, they’re simply “occupants”.  No surprise that the modification program had little impact.

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Excerpted from WSJ: “Foregone Foreclosures”, MAY 27, 2009

A central tenet of Washington economic policy for the past three years has been that the key to ending the recession is stopping mortgage foreclosures, whatever the cost.

Well, a new study shows that … mortgages are continuing to sour at a rate nearly as fast as they can be modified.

Fitch Ratings looked at mortgages bundled into securities between 2005 and 2007 and managed by some 30 mortgage companies. Fitch found that a conservative projection was that between 65% and 75% of modified subprime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes.

Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.

The reasons for the high redefault rate aren’t surprising. Many of the borrowers never could afford these homes in the first place.  And, and as home prices continue to fall in some markets, borrowers remain underwater and many of them simply walk away from the home and thus redefault.

This study has to come as a blow to the Federal Deposit Insurance Corporation, which has invested a great deal of political capital in the modification thesis.

On the evidence so far, the mortgage modification fervor has been a giant political exercise with little impact on housing prices.

http://online.wsj.com/article/SB124338503008056785.html#printMode

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One for the good guys who pay their mortgages … Senate blocks mortgage "cramdowns"

May 1, 2009

As loyal readers know, I’ve been opposed to mortgage cramdowns from the get-go. 

In essence, cramdowns reduce the principal owed on a mortgage based on a borrower’s ability to pay.  That is, if a guy took on a mortgage that he couldn’t afford and stops paying, then the lender would have to reduce the amount owed to fit the deadbeat’s budget.  A fundamentally wacky idea for lots or reasons.  Most notably, if lenders had to absorb principal risk on all mortgages, they would naturally just up the interest rates on all mortgages in order to cover the added risk.  In other words, good borrowers would end up subsidizing the deadbeats.

Team Obama was pushing aggressively for cramdowns — to slow foreclosures and spread the wealth (by having good borrowers subsidize bad borrowers).

According to the WSJ:

“Senate Republicans defeated the budget bankruptcy “cramdown” bill …that had easily passed the House and was one of President Obama’s housing priorities.

The cramdown would have allowed bankruptcy judges to rewrite contracts to reduce the amount that people owe on their mortgages. But a bipartisan majority understood that relief for today’s troubled borrowers would be paid with higher rates on the next generation of homeowners, as lenders priced the added risk into mortgage contracts.

Speaking for millions of renters and nondelinquent borrowers, Mr. McConnell said that the vote “ensures that homeowners who pay their bills and follow the rules won’t see an interest-rate hike at the whim of a bankruptcy judge.”

Full article:
http://online.wsj.com/article/SB124113493922575179.html

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Glimmers of Nope ….

April 20, 2009

Consider the following:

(1) Last week, it was broadly reported that foreclosures have continued at a brisk and increasing rate since Team Obama’s mortgage rescue plan was announced.

According to USA Today: “Foreclosure filings in February jumped nearly 6% from January, despite foreclosure moratoriums and prevention programs … Foreclosure filings were up almost 30% from February 2008, … one in every 440 U.S. homes received a foreclosure filing in February.”
http://www.usatoday.com/money/economy/housing/2009-03-11-higher-housing-foreclosures_N.htm

(2) The WSJ reports that lending has been declining at banks that have received TARP funds

“Lending at the biggest U.S. banks has fallen sharply … despite government efforts to pump billions of dollars into the financial sector.

The biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February …  than in October, the month the Treasury kicked off the Troubled Asset Relief Program.

The total dollar amount of new loans declined in three of the last  four months …  All but three of the 19 largest TARP recipients … originated fewer loans in February than they did at the time they received federal infusions.” http://online.wsj.com/article/SB124019360346233883.html#mod=testMod

(3 Most banks have been reporting better than expected Q1 earnings making rosy projections, and moving to pay back TARP funds.

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Ken’s Take:

Sure, Wall Streeters and the banks blundered big time in the mortgage mess.  Still, they are a shrewd bunch.  Obama’s Team of career government bureaucrats and academics are no match for the big league finance sharks.  The Administration’s haphazard programs are easily exploited.  The banks can take the near-free money and generous processing cost subsidies and simply drop them down to their bottom lines without doing much differently that they otherwise would.  For the bank’s, it’s like taking candy from a baby …

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Quick takes …

March 18, 2009

In 2008, 75% of AIG’s Congressional political contributions went to Dems …

image

… about half of that went to Dodd and Obama (and that doesn’t count  $$$ to the DNC)

image

The Stimulus Bill contained an amendment called the “Dodd Amendment”, which says:

“Bonuses can only be paid in the form of long-term restricted stock, equal to no greater than 1/3 of total annual compensation, and will vest only when taxpayer funds are repaid. There is an exception for contractually obligated bonuses agreed on before Feb. 11, 2009.”

Sen. Dodd says the exception to his amendment was slipped in without his knowledge.  Hmmm.

If an amendment had your name on it, wouldn’t you read it before signing it ?

http://www.foxbusiness.com/story/markets/industries/finance/dodd-cracks-aig—time/

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What ever happened to Roland Burris?

A couple of weeks ago, Obama, Reid, Durbin, the new governor of Illinois, and most pundits were calling on him to resign after acknowledging that he “forgot” that he raised money for ousted governor Blago. 

Seems that the old coot survived the firestorm …

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New bumper sticker popping up …

image
http://www.worldnetdaily.com/?pageId=89958

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One man’s foreclosure is another man’s affordable housing …

March 18, 2009

Ken’s Take: Yes, there is a silver lining in the decline in home prices.  For many responsible people, sky high home prices made ownership out of reach.  Now, maybe some of these folks will have a fair shot.

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Excerpted from RealClearPolitics.com, “Subsidizing Bad Decisions”,  Sowell, March 10, 2009

The current political stampede to stop mortgage foreclosures proceeds…  

What if the foreclosures are not stopped?

Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices– prices perhaps more within the means of the new occupants?

The same politicians who have been talking about a need for “affordable housing” for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?

The political meaning of “affordable housing” is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit.

Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

Study after study, not only here but in other countries, show that the most affordable housing is where there has been the least government interference with the market– contrary to rhetoric.

When new occupants of foreclosed housing find it more affordable, will the previous occupants all become homeless? Or are they more likely to move into homes or apartments that they can afford? They will of course be sadder– but perhaps wiser as well.

The old and trite phrase “sadder but wiser” is old and trite for the same reason that “saving for a rainy day” is old and trite. It reflects an all too common human experience.

Full column:
http://www.realclearpolitics.com/articles/2009/03/subsidizing_bad_decisions.html

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Here’s a plan: Give California to Mexico … works for me!

March 11, 2009

Excerpted from IBD, “Home A Loan”,  March 06, 2009

A revealing study by researchers at the University of Virginia took a look at foreclosures in all 50 states, 35 metropolitan areas and 236 counties. They found that 66% of potential housing value losses in 2008 and subsequent years may be in California, with another 21% in Florida, Nevada and Arizona, for a total of 87% of national declines.”

What do they have in common? They are Sun Belt states, the location of second homes, investment properties and the playground of flippers who invested in properties hoping to ride the housing bubble to a quick profit. Nevada, California, Arizona and Florida rank first, second, third and fourth in foreclosure activity, together accounting for 55% of foreclosure activity.

One out of 76 homes in Nevada went into foreclosure in January. The figure for California was one out of 173, with Arizona and Florida close behind. In New York state, by contrast, only one out of 2,271 homes went into foreclosure in January.

California had only 10% of the nation’s housing units, but it had 34% of foreclosures in 2008.”

California was vulnerable to foreclosures because the median value of owner-occupied housing in 2007 was 8.3 times the median family income. The national average was only 3.2 times higher than the median family income.

Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=321237777275418 

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Obama’s foreclosure plan gets strong support … that is, from folks who don’t know what’s in it

March 10, 2009

Excerpted from  the Diageo/Hotline Poll,   March 5, 2009

According to the Diageo/Hotline Poll, a majority of voters (56%) support President Obama’s $75 billion home foreclosure plan,

People who know the most about what’s in the package are evenly split on it … the blissfully ignorant (2/3s of the folks polled) support it 2 to 1. 

image 

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Not surprisingly, support varies widely with party affiliation: Dems favor the package 4 to 1 … GOPs oppose it 2 to 1

image

http://www.diageohotlinepoll.com/documents/diageohotlinepoll/FDDiageoHotlinePoll_topline03.09.pdf

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Note: the Diageo/Hotline Poll is managed by an MSB alum: Brent McGoldrick, MBA ’04.  Brent is a VP with Financial Dynamics (FD) and can be reached via email at:
Brent.mcgoldrick@fd.com  

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The worse your credit record, the lower your rate … (that's not a typo)

March 5, 2009

Well, Team O announced their mortgage foreclosure plan.

Folks who have — or soon will default on their mortgage commitments will get their loans repriced at 2%, lengthened to 40 years, and then have their loan balance reduced, if necessary, to cram the defaulters down to payments (P&I, insurance, taxes) equal to 31% of their income.

If you’re sitting with pristine credit, banks MIGHT give you 5% to 6% for 30 years with a 10% downpayment.

Default, you get 2%; credit worthy, you get 5%.

Who in the world thinks that’s fair ?

Gov’t fact sheet:
http://blogs.wsj.com/economics/2009/03/04/treasury-loan-modification-guidelines/

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The worse your credit record, the lower your rate … (that’s not a typo)

March 5, 2009

Well, Team O announced their mortgage foreclosure plan.

Folks who have — or soon will default on their mortgage commitments will get their loans repriced at 2%, lengthened to 40 years, and then have their loan balance reduced, if necessary, to cram the defaulters down to payments (P&I, insurance, taxes) equal to 31% of their income.

If you’re sitting with pristine credit, banks MIGHT give you 5% to 6% for 30 years with a 10% downpayment.

Default, you get 2%; credit worthy, you get 5%.

Who in the world thinks that’s fair ?

Gov’t fact sheet:
http://blogs.wsj.com/economics/2009/03/04/treasury-loan-modification-guidelines/

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Buffett on home ownership … desirable, but not a primary objective

March 5, 2009

Excerpted from the Berkshire Hathaway 2008 Annual Report

Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans).

Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have
made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage.

Instead, they walk when they can’t make the monthly payments.

Home ownership is a wonderful thing … Enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities.

And the home purchased ought to fit the income of the purchaser.

The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future:

Home purchases should involve an honest-to-God down payment
of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. And, that income should be carefully verified.

Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.

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To support home prices, cut the mortgage interest deduction … huh ?

March 3, 2009

This stuff just keeps getting wackier and wackier …

“The budget came with a painful and unexpected surprise:

After 2010, American households making over $250,000 would see the rate at which they can deduct mortgage-interest payments and other items from their taxes reduced to 28% from the current 35%, costing them $318 billion over 10 years.”

Question: Will that help or hurt home real estate prices?

Also taking this hit: tax deductions charitable contributions.  Guess NFPs will just have to grovel (more) to the government bureaucrats.

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Source: WSJ, “Taxes Test Obama’s Support Among Higher-Income Voters”, Feb 27, 2009
http://online.wsj.com/article/SB123570454670090115.html

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Salvaging Team O’s Mortgage Foreclosure Plan

March 3, 2009

Most taxpayers support giving aid to workers who lost their jobs to the sputtering economy, but they are livid about Team Obama’s plan to stem foreclosures by rewarding irresponsible borrowers with extraordinary government subsidies. 

Obama’s brain trust appears  blinded by their politicized sense of social justice and so enamored with the elegance of their mortgage math that they miss the fundamental holes in their plan. While their intentions may be good, they lose sight of the forest in the trees.

The good news is that Team Obama’s problematic program can probably be salvaged —  by simply tightening the program’s qualifying criteria and changing the basis for determining the taxpayer subsidy going to distressed borrowers.

First, consider program qualification criteria.  Even Team Obama agrees that only mortgages on owner occupied primary residences should qualify.  That eliminates speculators, flippers, and vacation homes.  It also eliminates rental housing provided by  investor-landlords, but so be it.

Going a step further, why not explicitly limit the program to people who have a history of filing U.S. tax returns?  That would limit the program to  legal U.S. residents with proven (and determinable) earnings potential.

FDIC Chairman Sheila Bair … told public radio that it would be “simply impractical” to review old mortgage applications and try to distinguish between honest and dishonest borrowers.

Not so, Ms. Bair.  Simply set fair but tight qualifying criteria  based on the borrower’s past mortgage repayment history.

Rather than trying to qualitatively evaluate a borrower’s level of financial responsibility and good faith, they should look quantitatively at the borrower’s actual behavior.   For example:

Did the borrower make a down payment from his own resources? If not — if he made no down payment or funded one with a second home loan — then he doesn’t really have much of an ownership stake.

If the borrower had an ARM, did he make all payments before his ARM was adjusted upward? If not, it’s hard to blame his financial  fix on deceptive loan practices.

Did the borrower make at least a year or two of loan payments before defaulting? If not,  he doesn’t have much equity in the house — financial or psychological.

The point is that there are non-disputable behavioral metrics that can be used to sort “owners” from “occupants” and responsible borrowers who may have been duped from outright deadbeats.

Similarly, for those who qualify, Team Obama should determine the  level of any government subsidies based on the borrower’s past mortgage repayment history, not income.

Team Obama’s plan pressures lenders to bring a borrower’s payment to income ratio down to 38% by cutting interest rates or principal. Then, taxpayers share the cost (dollar-for-dollar with the lender) of bringing that ratio down to 31%. 

In other words, the borrower gets a taxpayer subsidy equal to 3.5% of his income.   So, a guy in an American average $200,000 home who earns $35,000 gets a $1,250 annual taxpayer subsidy.  Plus, he gets a $1,000 annual incentive rebate (for 5 years) if he does the right thing and makes his payments. That boosts his taxpayer subsidy up to the equivalent of a 6.5% refundable income tax credit — “earned” by defaulting on a mortgage.

Team Obama sees great beauty in that arrangement.  Many taxpayers do not. 

As an alternative, why not scale any taxpayer subsidy based on past mortgage payments made rather than proportionate income?  That is, give borrowers credit for having demonstrated good faith in the past by having made payments before their ARMs exploded or the economy imploded?

Illustratively, consider this rule: add the borrower’s down payment to the sum of P&I payments he made against the mortgage, then divide that total by 12 (or some other equalizing factor) and use the result as the basis for his subsidy.

For example, assume that a good faith guy earning $35,000 buys a $210,000 home with $10,000 down and makes $5,000 in P&I payments before his  teaser rate ARM gets upped to an unexpectedly high (and unreachable)  payment level.  Give the guy $15,000 in good faith ownership credit, and allow him a maximum taxpayer subsidy of $1,250 per year — the same as Team Obama’s income based subsidy.

Now, assume that a bad faith guy, also earning $35,000, buys a comparable $210,000 home with no money  down and makes a couple of payments totaling $2,400 before starting to skip payments.  Give this guy $2,400 in good faith ownership credit, and allow him a maximum  taxpayer subsidy of $200 per year — a much smaller subsidy reflecting his proven irresponsibility.  If that’s enough to get him to the 31% payment to income ratio, that would be fine.  ut, it’s not, so too bad.

The numbers are arbitrary, but the guiding principle is not: don’t help deadbeats. do help people who have demonstrated good faith and responsibility, but have run into hard times. 

Keying the maximum  taxpayer subsidy to a borrower’s past payment history has an added benefit: it provides help to the guy who has made years of on-time payments before getting laid off.  Since his near-term income is zero, Team Obama’s income based subsidy would provide him with no help.  That’s not fair.

The bottom line is that the plan proposed by President Obama is seriously flawed and, understandably, has aroused taxpayer ire.  But, if Team Obama shows some flexibility (and some rational creativity), the plan can be salvaged to rally taxpayer support for helping responsible but distressed  home owners.

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Still sympathetic re: foreclosures? … then read this

March 3, 2009

Excerpted from WSJ, “Call Them Irresponsible”, March 2, 2009

Rewarding those who put the ‘liar’ in liar loans …

At the height of the housing boom, Americans were pulling $300 billion each year out of their home equity

Since 2005, cash-out refinancings have represented a third of all mortgage originations in the United States.

Close to half of subprime mortgages were cash-out refis … meaning that borrowers were converting to more risky mortgages, typically with higher monthly payments.

According to Freddie Mac, most of its refinancings have resulted in larger loan amounts in every quarter since the middle of 2004.

Full article:
http://online.wsj.com/article/SB123595305743805193.html

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Obama’s Mortgage Plan … Just how much do deadbeats get rewarded ? Answer: LOTS !

March 2, 2009

For the record, I’m all for giving aid to folks laid off because of the sputtering economy.  But, like many others, I’m livid about Obama’s plan to reward irresponsible borrowers with extraordinary government subsidies. 

Frankly, I think Obama’s brain trust is so blinded by their politicized sense of social justice and so enamored with the elegance of their mortgage math that they miss the more fundamental implications of their own plan.

Below is an example of how the plan works.  The highlights …

Lenders will be encouraged to reduce P&I payments to 38% of the borrowers earnings by adjusting the loans payback period, the interest rate,  or the loan balance (i.e. the principal) — or all three.

Think about that for a second.  The government is encouraging (forcing ?) lenders to give different borrowers different prices for their product (i.e. mortgages) based on the borrowers ability to pay (ignoring other accumulated debts and using their current level of earnings as a proxy for ability to pay).  That’s called “price discrimination” and in most businesses, it is illegal to offer different prices to customers in the “same class of trade”.

Legalities aside, adjusting the payback period, say from 30 to 40 years has minimal impact on P&I payments.  At the extreme, the payback period could be stretched forever.  That’s called an interest-only loan, and under its terms, a borrower never pays back the loan.  Most people think that’s a bad idea.

What about cutting the rate to something in the range of 5%? 

If the loan is currently hanging with a predatory rate (say, 10% or more), cutting the interest rate to a fairer market rate probably makes sense. 

But, what if a rate cut to prevailing fair market rates isn’t enough?  Well, the lender could reduce the interest rate further, say to 3% or 4%. 

In other words, the lender could offer an “upside down risk-adjusted rate”.  Usually, a more credit worthy borrower is rewarded with a lower interest rate (think “prime”) that reflects the high likelihood that the loan will be repaid.  Giving favorable rates to the least credit worthy borrowers (i.e. ones who have already defaulted) defies any reasonable economic or financial logic.

Or, the lender can simply write-off some of the money owed.  Most people think that’s a very bad idea.  After all, the borrower made a legal and moral commitment to pay the loan back.  Why should they be let of the hook ?

Still, let’s pretend that the lender can find a way to get the borrowers payments and earnings in alignment at the magic 38% ratio.

In comes Team Obama. To provide the borrower with a softer financial cushion, the government drives the payment to income ratio down to 31% — splitting the incremental subsidy with the lender.  

In other words, the lender reduces the borrower’s annual P&I payments by 3.5% of the borrower’s income and taxpayers kick in 3.5% of the borrower’s income.

Think about that for a second.  The lender is pressured to give an even more favorable price to one  its least credit worthy customers and we, the taxpayers, reward the borrower with the equivalent of a 3.5% refundable tax credit — earned by simply having bought a house beyond his means and defaulting on his loan obligation.  Team Obama sees beauty in that arrangement. Many taxpayers don’t.

But wait, it gets worse.  The borrower qualifies for a “good boy” incentive — $1,000 per year for up to 5 years — if he makes timely payments.  So, for a defaulting borrower earning $50,000 per year, there’s an extra 2% kicker from the taxpayers — boosting the taxpayers’ subsidy to the equivalent of a 5.5% refundable tax credit.

That, my friends, is a big reward for acting irresponsibly.

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Obama’s Mortgage  Foreclosure Plan – An Example

Consider the following case: Skipper earns $35,000 annually and buys a $205,000 home with no money down, signing up for an ARM that starts at a teaser priced 5% with a 30 year payback term.  His initial P&I payments are about $1,100 per month.  That’s right at the government’s magic ratio of 38% payment to earnings ratio, so Skipper is classified as a responsible buyer.

A year or two later,  the ARM gets bumped up to 8% (per the written mortgage contract).  Let’s assume that Skipper’s loan balance went down to $200,000 over the period (a liberal assumption that works to his advantage).  Skipper’s P&I payments get upped to about $1,500 per month — that’s $17,765 annually, or over 50% of his annual earnings.

Skipper’s in a bind and defaults on his mortgage. 

Enter Team Obama.

First, they pressure the lender to reduce Skipper’s rate to get him back into the 38% payment to earnings ratio.  Even though Skipper has proven beyond a shadow of a doubt that he’s a credit risk, the lender sucks it up and cuts his rate to a credit worthy borrower’s 5%.  That gets his annual P&I payments back down to about $13,000.

Then, to provide Skipper with an economic cushion, Team O moves to cut Skipper’s payment to a more secure 31% of his income — that is, to reduce his P&I payments to about $10,500 per year.  (note: itdoesn’t matter whether the reduction comes thru principal reduction or interest rate cut — the economics are the same). And, team O offers to split the $2,500 difference — lender paying half and taxpayers paying half.

Finally, Team O offers Skipper a $1,000 annual bonus (for 5 years)  if he doesn’t default again.

Let’s recap the bidding:

First, the lender gives unreliable Skipper a loan at “prime” rates.

Second, the lender subsidizes Skipper with a $1,250 reduction in annual P&I payments

Finally, we taxpayers give Skipper a $2,250 annual subsidy ,,, the equivalent of a 6.4% refundable tax credit … which Skipper earned by buying too expensive of a house and defaulting on his mortgage.

Does that sound like a good idea?

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Foreclosures hurt all property values … NOT !

February 26, 2009

Ken’s Take: Obama keeps claiming that foreclosures have a debilitating economic impact on practically all homes prices.  That’s just not true.

First, U.S. foreclosures are concentrated in only a handful of states: AZ, CA, NV, FL, and MI … and within a handful of overbuilt, price-bubbled communities within those states.

Second, the evidence suggests that homes need to be immediately proximate to — i.e. within a couple of blocks of — a high number of foreclosures for there to be any significant impact.  In other words, foreclosures in California don’t impact home values in New York.

Third, even if homes are proximate to foreclosures, the impact on home values is minimal and short-lasting, unless there has been a significant economic causal shock in the community (e.g. an auto plant closing)

Bottom line: stopping foreclosures will only help those being foreclosed upon — most of whom deserve to be foreclosed upon.

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Below is a summary of the article’s context.  See the source article for the analysis.

Excerpted from Weekly Standard, “Obama’s Fuzzy Housing Numbers”, Feb 24,2009

If President Obama is to sell his mortgage bailout plan to the public, an important argument will be his claim that preventing foreclosures actually helps all homeowners by preventing housing prices from dropping:

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

The claim that the program helps “shore up housing prices for everyone” has been frequently repeated by administration officials. Housing and Urban Development Secretary Donovan elaborated on the point:

And in all, this will help, as I said, 3 to 4 million families. But let’s be clear: This will also help millions of other families, as well. Recent research shows that neighboring homes to foreclosed homes lose as much as 9 percent of their value. So people who are not in danger of foreclosure still are suffering from nearby foreclosures. This will help those families, as well. Our estimates are that the average home — not the average home in foreclosure, but the average home across the country will gain $6,000 in value relative to had this plan not been put in place.

The president, the administration, and its advocates can promote any mortgage relief plan they choose on whatever basis they wish. But any claims that there is evidence that bailing out the mortgages of particular individuals helps all property owners is simply not supported by any real research and should be viewed with great skepticism.

Read the full analysis – with numbers and sources:
http://www.weeklystandard.com/weblogs/TWSFP/2009/02/obamas_fuzzy_housing_numbers_1.asp

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How much hope can the market withstand ? … Update

February 24, 2009

For folks who like to keep score:

The Dow closed at 8,228 on inauguration day.

The Dow closed at 7,114 yesterday (Feb. 23, 2009)

A decline of 1,114 points (13.5%) for the presidency to date.

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The Dow dropped 382 points on the day that Geithner’s speech bombed.

The Dow dropped 298  points on the day that Obama signed the non-stimulus package (the first day that the market was open after the bill was passed).

The Dow dropped 468  points on the days after Obama announced his mortgage modification plan.

The total decline since recovery initiatives were mobilized 1,114 points

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Fasten your seat belt for Obama’s announcement of his intention to increase in the capital gains tax rate in 2010.

Keep the change …

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Just me, or is the tail wagging the dog ?

February 24, 2009

Regarding mortgage modifications, I think this chart says it all. The 93% of folks doing the right thing (and most paying taxes), get upended by the 7% who are irresponsible,

image

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The slippery slope of setting prices based on ability to pay.

February 23, 2009

Imagine walking into a car dealer, seeing a shiny new sedan on the floor, asking the salesman “what’s its price?”, and having the salesman ask you how much money you earn.  You answer $80,000 and he says “half a year’s pay — $40,000.”

As you stand pondering, you overhear the salesman talking to another customer about an identical car. That customer says he only earns $50,000 per year.  So, the salesman quotes him $25,000 — half of his annual pay.

Sound absurd ?  It should because its commercially and legally problematic  The practice is called price discrimination based on ability to pay, and any merchant who tried it would probably be stoned by the public while being hauled off to court.

This technicality didn’t faze Team Obama in the development of their mortgage foreclosure plan.  In fact, price discrimination based on ability to pay is the plan’s central operating principle.

Consider the example that Team Obama circulated on the day the President unveiled the plan.  A person (call him Able) is holding a $220,000 mortgage at 6.5% with a 30 year payback term.  Able’s principal and interest payment is about $1,370 per month, or $16,365 per year.

Team Obama’s magic ratio of payment to income is 31%, so if Able earns more than $53,000 then he doesn’t qualify for a government induced loan modification. Let’s assume Able makes just over $53,000 and doesn’t qualify.

Able’s neighbor (call him Skipper) lives in an identical home with an identical $220,000 mortgage at the same terms – 6.5% for 30 years.  But, Skipper only makes $40,000 per year and is falling behind on his payments.

Enter Team Obama’s loan modifiers.  Since Skipper only makes $40,000, Team Obama says that he should only be expected to pay $12,400 — 31% of his income — towards his mortgage.  No problem. The lender – subsidized by the dwindling number of taxpayers – just lowers Skipper’s interest rate to about 4% (3.93% to be precise) and he’s officially modified.  And, if Skipper doesn’t start skipping payments again, he gets a check for $1,000 for each of the next 5 years.  Is this a great country, or what?

Let’s look at Skipper’s loan modification another way.  Assume that the lender holds the interest rate constant at 6.5% — the same rate that Able is paying.  How can the lender get Skipper’s payment down to $12,400 ?  Simple.  Write off about $53,000 of Skipper’s principal balance — getting it down to about $167,000 – which amortized over 30 years at 6.5% crams the annual payments down to the magic 31%.

In other words, Able and Skipper bought the identical houses at the same prices.  Because Skipper didn’t earn enough to make the payments, the lender, in effect, gave him a $53,000 price rebate to make it affordable.  We taxpayers then give him an additional $5,000 rebate if he makes his reduced mortgage payments.  So, Skipper gets the house for $162,000.

Able – since he is able to pay — gets no rebate. He still owns his house at the original price — $220,000.

Whether Skipper’s mortgage is repriced by adjusting the interest rate or by reducing the outstanding principal balance, the economics are the same.  It is price discrimination based on a buyer’s ability to pay – a morally bankrupt tactic that should be illegal if it’s not.

Otherwise, why not sell cars that way?  Or for that matter, why not force all merchants to price all their goods proportionate to customers’ incomes?  Why should I have to pay the same price for a can of Coke as Warren Buffet does?  That’s not fair, is it?

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Foreclosures will NOT hurt your neighborhood’s property values … (unless you live in CA, FL, AZ, NV, MI)

February 23, 2009

Ken’s Take: This is a very insightful, must read analysis … one of many that Team Obama seems to have missed.

Big idea: Federal subsidies to bailout delinquent homeowners will not often involve helping “neighbors” but rather those who live thousands of miles away, mainly in just five states: California, Florida, Arizona, Nevada, and Michigan. 

In truth, Obama’s “Homeowner Affordability and Stability Plan” compels taxpayers in most states to help those in just a few.  And,there is neither evidence nor logic that suggests a drop in property values in those 5 states impact property values in the other 45 states. 

Foreclosures aren’t a national problem — they’re an isolated regional problem and, of course, a personal problem for overstretched borrowers.

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Excerpted from NY Post, “The Foreclosure Five”, Reynolds, Feb 21, 2009

When President Obama discusses his $275 billion mortgage bailout, he talks as if it was a national problem, caused by a national decline in home prices. “We must stem the spread of foreclosures and falling home values for all Americans,” he says.

But there is no national market for homes and no national price for homes. Instead, most of the United States will pay for the folly of few.

The beneficiaries of taxpayer charity will be highly concentrated in just five states – California, Nevada, Arizona, Florida and Michigan. That is not because the subsidized homeowners are poor (Californians with $700,000 mortgages are not poor), but because they took on too much debt, often by refinancing in risky ways to “cash out” thousands more than the original loan. Nearly all subprime loans were for refinancing, not buying a home.

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Foreclosure Rates

One out of 76 homes in Nevada went into foreclosure in January, for example, compared with one out of 173 in California, with Arizona and Florida close behind.

But,nationwide, foreclosures fell 10% in January, to one out of every 466 homes … in the 25th ranked “median” state,  only one out of 949 homes was in foreclosure – just one-tenth of 1% … in New York, by contrast, only 1 out of 2,271 homes went into foreclosure … in Vermont, foreclosures amounted to just one out of 51,906 homes

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Home Prices

As of the third quarter of 2008,  home prices were still higher than a year before in 18 states, and down less than 2% in a dozen others. Double-digit declines in home prices were confined to just four states – surprise, every one of the Foreclosure Five except Michigan.

Even though California home prices fell 20.8% over the year ending in the fall of 2008, however, they were still 50% higher than they were just five years ago.

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Underwater Mortgages

Obama is particularly interested in mortgages that are underwater – that is, larger than the value of the home.

But again, this varies enormously by state. The state with the tenth highest percentage of underwater mortgages, Texas, has the same 16.5% underwater as the so-called national average. The other 40 states have a below-average percentage of homes that are worth less than their mortgages, which means the mean average is not at all typical of most states.

Only 4.4% of New York mortgages are underwater, not even a tenth as many as in Nevada.

Full article:
http://www.nypost.com/seven/02212009/postopinion/opedcolumnists/the_foreclosure_five_156287.htm?&page=0 

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Angry renters say “Don’t bail out Bob …”

February 23, 2009

Excerpted from Angryrenter.com

All we hear these days is whining from reckless home borrowers and their banks.

But did you know that renters are 32 percent of American households? And that homes in foreclosure are less than 2 percent?

So why is Congress rushing to bailout high-flying borrowers and their lenders with our tax dollars?

Unfortunately, renters aren’t as good at politics as the small minority of homeowners (and their bankers) who are in trouble. We don’t have lobbyists in Washington, DC. We don’t get a tax deduction for our rent and we don’t get sweetheart government loans.

Quite simply, we are just Angry Renters. And now it is our time to be heard: no government bailouts!

To sign the Angry Renter’s petition, go to Angryrenter.com

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Short video, worth watching:
http://www.youtube.com/watch?v=UOaDrM3rMXs 

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CNBC’s Rick “the Plumber” Santelli asks: Raise your hand if you want to pay some deadbeat’s mortgage

February 20, 2009

On air yesterday, Rick Santelli — a CNBC reporter — lashed out at Obama’s stimulus and mortgage plans.

Live on the floor of the CBOE, Santelli asked  folks: ” How many of you people want to pay for your neighbor’s mortgage (because they) don’t pay their bills? Raise their hand. (no hands raised, lots of booing) President Obama, are you listening?”

The video was looping on cable yesterday and rcord-setting on YouTube and other video sites. Link is below if you haven’t seen it.

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Ken’s Take:Santelli’s rant was a Joe the Plumber moment. 

Rick the Reporter captured the frustration of the more than 90% of Americans — mostly tax payers — who work hard, live within their means, pay their bills, etc. 

Even Obama admits that sub-prime mortgages are only 12% of all mortgages but more than 50% of all foreclosures.  He wants responsible folks  to kick in to provide sweet deals to irresponsible deadbeats.  

I don’t think that’s going to fly.  My hunch: Santelli has started an avalanche.

This may be Obama’s “New Coke” moment — a misread American tastes …

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This will get you fired up (unless you’re behind on your mortgage on have your hand out).
http://www.youtube.com/watch?v=bEZB4taSEoA

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What about the guy that got laid off?

February 19, 2009

No surprise that I’m not a big fan of Obama’s plan to bailout the mortgage deadbeats.

For starters, consider the following (none of which I’ve heard the pundits pounce on):

First, even I am sympathetic to the working stiff who anted in a down payment and has a history of making his payments on time, but has been jolted by the economy with declining home prices and, worst of all, a lost job.  I say, cut that guy mucho slack.  I don’t mind my tax dollars helping him out.

But, Plan Obama says multiply earnings times 31% to calc mortgage payment.  The nuns taught me that anything times nothing is nothing — so this guy — the most deserving, in my opinion —  is out in the street,  That’s not fair, is it?

Second, Obama says 10 million mortgages will be impacted at a cost of $75 billion.  That’s $7,500 per loan — of which $5,000 is the sum of the annual incentives (principal reduction) if the borrower makes his payments, and at least $1,500 are processing costs to the lender.  That leaves a whopping $1,000 that goes to modify loans that average over $200,000.  Doesn’t add up to me.

Third, politically incorrect, but shouldn’t this plan be limited to social security card carrying US citizens.

Fourth, keep in mind that 1/3 of all home owners don’t have a mortgage — they own their homes free and clear of any liens or mortgages … and over 90% of all mortgage holders are making their payments — just as they always have.

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If you think mortgage loan modifications are a good idea … read this

February 18, 2009

Ken’s Take: Is this a great country or what ?

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Excerpted from WSJ, “Don’t Let Judges Tear Up Mortgage Contracts”, Feb 13, 2009

Imagine the following situation:

A few years ago a borrower took out a $300,000 loan with nothing down to buy a new house.

The house rises in value to $400,000, at which time he refinances or takes out a home-equity loan to buy a big-screen TV and expensive vacations. He still has no equity in the house.

The house subsequently falls in value to $250,000, at which point the borrower stops making payments and defaults on both the mortgage and the home equity loan.

The home equity loan gets written off and the mortgage gets modified: the principle gets written down to $250,000.

The homeowner keeps all the goodies purchased with the original  home-equity loan.

Several years from now, however, the house appreciates in value back to $300,000 or more — at which point the homeowner sells the house for a $50,000 profit.

Bottom line: By defaulting, the stiff gets $100,000 in goodies and walks away with $50,000 in cash.

Full article:
http://online.wsj.com/article/SB123449016984380499.html 

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The mortgage market: when government intervenes …

February 13, 2009

Ken’s Take: It continues to amaze me how Congress and past Presidents are able to deny their part of the blame for the mortgage crisis …

Excerpted from IBD, “What Happened To Business Prudence?”, Bradley, February 06, 2009

For decades, government has intervened in the mortgage market, in the name of the “public interest.” There was the creation of Fannie Mae and Freddie Mac, the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977, the Financial Institutions Reform Recovery and Enforcement Act of 1989 and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

There was the demand in 2000 by HUD that Fannie Mae dedicate 50% of its business to low- and moderate-income families. And there was President Bush pushing homeownership for all as the way to prosperity.

In 2000, for example, the Fannie Mae Foundation identified the “Outstanding Accomplishment” of Countrywide Financial Corp. as making almost one-sixth of its mortgages to blacks, Hispanics and Native Americans.

And Countrywide was hardly alone in the assault on invisible-hand decision-making. A decade ago, a senior managing director at Bear Stearns said this about mortgages made pursuant to the Community Reinvestment Act:

“While credit scores can be an analytical tool with conforming loans, their effectiveness is limited with CRA loans. Unfortunately, CRA loans do not fit neatly into the standard credit score framework. We believe a broader array of credit analysis data is needed to get a clearer perspective of the situation.”

Certainly, the people formerly employed by Bears Stearns now have a clearer perspective on the value of those mortgages.

Government regulation and political correctness are at the root of recent organizational failures that, in turn, have resulted in massive taxpayer-financed bailouts. New government intervention is trying to address the problems created by prior intervention — and futilely, it appears.

Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=318815966519210 

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Stemming foreclosures is tricky … no kidding

February 11, 2009

Excerpted from WSJ, “Finding a Way to Stem Foreclosures Proves Tricky”, Feb 11, 2009

The Obama administration provided few details about its plans to address the foreclosure crisis when laying out its economic-recovery program Tuesday, highlighting the challenges of creating a program that is fair and effective.

Nearly five million families could lose their homes between 2009 and 2011.One question facing the administration is how to win investor support for modification efforts while providing meaningful relief to borrowers.

President Barack Obama suggested that he would propose legislation to make it easier for loan-servicing companies to ease up on troubled borrowers while taking steps that might win investors’ support. Right now, he said, servicers are limited in their ability to modify mortgages that have been packaged into securities and sold to multiple investors. In addition, “the borrower is going to have to probably — if they get some assistance — agree to give up some equity once housing prices recover”.

Another challenge is determining who should get help. Those facing foreclosure aren’t just local residents hurt by job losses, but also real-estate speculators.

Another worry is moral hazard, or how to help those truly in need without encouraging others to fall behind on their payments.

Government officials are expected to create national standards for loan modifications that would be adopted by Fannie Mae and Freddie Mac. But there is little data on what types of workouts are most cost-effective. Data released in December by federal banking regulators show that more than 40% of borrowers were at least 60 days past due eight months after their loan was modified.

Forty-seven percent of loan modifications completed in November resulted in higher payments for borrowers, typically because unpaid interest and fees were added to the loan balance.

Coming up with an effective modification is complicated by the fact that many troubled borrowers also have home-equity loans or credit-card debt, auto loans or other obligations that can make it difficult to afford even a lower mortgage payment.

“You don’t want to modify a loan that you think will eventually redefault …. All that will do is delay the process and increase the cost.”

A focus for the government has been on how to determine the “net present value” of homes. Government officials think that if they can agree on a common metric for determining a home’s value, they can expedite how the loan is modified.

Full article:
http://online.wsj.com/article/SB123431365164570827.html 

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What Really Lies Behind the Financial Crisis?

January 23, 2009

Published: January 21, 2009 in Knowledge@Wharton

Ken’s Take: Jeremy Siegel (a heavyweight finance prof) dismisses gov’t programs that encouraged sub-prime mortgage lending and pins the tail on investment banks, etc., that undermanaged a few “smart guys” who took large, over-leveraged bets on assets that had fatal levels of hidden risks.  His value add: pointed out that when IBs were privately held they managed risk more prudently because they were playing with their own money.  After going public, they were playing with shareholders’ money …

I think he underestimates the impact of “action one” — the origination of fundamentally bad loans.  But, I hadn’t heard the argument that public ownership of IBs enabled the problem.

* * * * *
What was the true cause of the worst financial crisis the world has seen since the Great Depression? Was it excessive greed on Wall Street? Was it mark-to-market accounting? The answer is none of the above, says Jeremy Siegel, a professor of finance at Wharton. While these factors contributed to the crisis, they do not represent its most significant cause.

While angry investors and taxpayers are anxiously looking to assign blame for the current state of the economy, it’s important to know not only which factors led to the meltdown, but which ones did not. The government programs encouraging home-buying by low- and middle-income families and short-selling of financial stocks — which was halted for a time last fall — have little to do with the crisis on Wall Street.

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Betting the house on mortgage backed securities

Here is the primary reason: Financial firms bought, held and insured large quantities of risky, mortgage-related assets on borrowed money.

The irony is that these financial giants had little need to hold these securities; they were already making enormous profits simply from creating, bundling and selling them.

“During dot-com IPOs of the early 1990s, the firms that underwrote the stock offerings did not hold on to those stocks … They flipped them. But in this case, the financial firms decided mortgage-backed securities were good assets to hold. That was their fatal flaw.”

There was a massive failure, not only by traders, but by CEOs of financial firms, their risk management specialists and the major rating agencies to recognize that an unprecedented housing-price bubble began building after 2000.

Their faulty reasoning was that the inability of homeowners to pay their mortgages — and the consequent foreclosures — would not pose a threat to their mortgage-backed securities. They believed that as long as home prices kept rising, the underlying value of the real estate would provide a hedge against the risk of such defaults.

They failed to realize that this reasoning was based on the assumption that home prices would go in just one direction — up. In fact, these assets became enormously risky once the housing bubble burst and home prices began their inevitable decline.

* * * * *
Under-managing the (few) smartest guys in the room

Many troubled banks and insurers continued to prosper in almost every other aspect of their businesses right up to the 2008 meltdown. The exception was the billions of dollars in mortgage-backed securities that they bought and held on to or insured even after U.S. home prices went into a free-fall more than two years ago.

AIG —  the insurer that received an $85 billion federal rescue package last September — is a prime example. Some 95% of its business units were profitable when the company collapsed. “AIG has 125,000 employees … Basically, 80 of them tanked the firm. It was the New Products Division, which had an office in London and a small branch office in Connecticut. They came up with the idea of insuring mortgage-backed assets, and nobody at the top decided it wasn’t a good idea. So they bet the house — and the company went under.”

Ultimately, the buck stops with corporate CEOs who didn’t ask hard enough questions about the risks posed by mortgage-backed assets.

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Playing with other people’s money

Firms like Lehman Brothers, Bear Stearns and Morgan Stanley  survived the much more severe Great Depression of the 1930s but collapsed during 2008. Why? One reason: back then, these firms were organized as partnerships. In such an organizational structure, the partners would have to risk their own capital. When the partnerships were reorganized as widely held public companies, however, they no longer had such constraints. “Back when it was a partnership, you had your life invested in that company.” Investment banks began making higher-return but higher-risk investments in recent years as public ownership increased.

* * * * *

By many important measures, the economy is not nearly as battered as it was during the early 1980s, when unemployment, inflation, and interest rates were all considerably higher than they are today. Stocks — as evaluated by their price-to-earnings ratios — are undervalued to the point where they could draw enough investors to spark a recovery before the end of 2009.

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Full article:
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2148#

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Talk about rewarding failure … How about free housing for mortgage defaulters ? … Here’s the math

January 22, 2009

There are plenty reasons to object to the recent groundswell of support for modifying distressed mortgages (badly delinquent or already in foreclosure) by slashing rates, lengthening payback periods, and writing off part of the loan balance if a home is under water (i.e. the loan balance is greater than the market value of the home.  The latter provision — forgiving part of the loan because housing prices have fallen is particularly troublesome.

First, there’s the moral issue: when somebody borrows money, they accept both a legal and a moral responsibility to pay it back.  Whether or not the collateral they posted retains its value is irrelevant.  Brokerage houses don’t write-down clients’ margin accounts because the stock market tanked.  Banks don’t write-down auto loans if a borrower totals their car.

If that argument doesn’t carry sway, consider this: under reasonably realistic assumptions, folks who default on their mortgages and get government induced loan modifications may, in effect, get their housing for free for an extended period.  Here’s the math.

Assume the Subprime Sam “buys” a home for $150,000 with no downpayment.  After making a couple of payments, he stiffs the bank.  Property values fall in his neighborhood — say, by 25%.

In the old days, the bank would have simply foreclosed on the loan and booted Sam out of the house.  Not so fast these days.

Instead, the Feds “encourage” the lender to modify the loan — say, by lowering the mortgage rate to 4.5%, by lengthen the term to 40 years, and by reducing the loan balance to the current fair market value of the house. 

Let’s say that Sam’s house dropped by the 25% neighborhood average and has a current $112,500 fair market value.

The bank writes off $37,500 of the original $150,000 loan, and Sam’s monthly mortgage payment drops to $500 — less than half of what he used to pay. (Trust me on the math).

Now, things get interesting,

If Sam is an typical mortgage loan “modifiee”, then — based on empirical data — there is at least a 40% chance that he’ll default on the loan again — within 6 months.  That is, unless housing prices fall more — in which case, Sam is virtually certain to default again and walk away from the home and his mortgage obligation.

Let’s be positive, though, and assume that Sam takes his debt seriously this time, and that real estate prices bottom and start to creep up again.

For the sake of argument, let’s pretend that home values claw their way back up.  Let’s pretend that — in around 7 years — Sam’s  house is worth the original $150,000 again.  (Note: that’s a home inflation rate of less than 5% annually — maybe a bit optimistic, but not wildly so)

And, let’s pretend that Sam sells the house then and walks away with about $40,000 —  $150,000 from the sale, less the roughly $110,000 he’d still owe on his loan. (Note: Principal pay-down is minimal during the early years of a 40 year mortgage).

Now, over that time period, Sam made 80 monthly mortgage payments of $500 each — totaling about $40,000

So, Sam pitched in zero down payment and $40,000 in mortgage payments — then, he netted $40,000 on the sale. Presto.  Free housing for about 7 years.

Of course, home prices might stay in the dumper and Sam may end up “out of pocket” for his housing.

But, that’s only fair.  Especially since his mortgage payments are less than half of his non-defaulting neighbor’s, and since the bank had to write-off $37,500 to get the whacky process rolling.

Talk about unintended consequences and moral hazard …

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$1 trillion down, $1 trillion to go …

January 19, 2009

Goldman Sachs economists estimate that financial institutions and investors world-wide will ultimately realize $2 trillion in losses on U.S. loans, but have recognized only half those losses so far.

Note: roughly half of the projected write-offs are residential mortgages.  Good news: “only” $234 billion in commercial real estate.

image

Source: WSJ, “U.S. Plots New Phase in Banking Bailout”, Jan. 17, 2009
http://online.wsj.com/article/SB123214588361091677.html

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To stem foreclosures, you have to “cram down” loan balances … NOT !!!

January 16, 2009

If you’re up to speed on the proposals to modify mortgages to stop foreclosures, scroll down to  Loan Modification Math …

Background:

There seems to be momentum to “keeping people in their homes” by modifying the bulk of the 4.6 million mortgages that are currently in foreclosure or payment delinquent for longer than 90 days.

There have already been some voluntary lender efforts to modify distressed mortgages by lowering interest rates or extending the term of the mortgages (say, from 30 to 40 years).  Generally, the programs haven’t generated many modified loans … and for the loans that have been modified, about 40% become delinquent again within 6 months. (Note: I’ve seen ranges on this number from 35% to over 50%).

So, the Feds are pushing lenders to sweeten the mortgage modification packages.  Specifically, there’s talk of a broadscale government program that would pare mortgage interest rates to 4.5%.  And, there seems to be support for “cram downs” — having lenders reduce the principal loan balances to the current fair market value of the homes collateralizing the loans.  That is, if a defaulting loan is on a home that is “below water” — i.e. loan balance is greater than the home’s market value — the lender writes off the difference and issues a revised mortgage at the home’s market value.

These proposals strike me as both naive and very problematic.  In this and subsequent posts, I’ll summarize why I think cram downs are a bad idea.

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Loan Modification Math

A frequent pundit refrain is that “you can’t get there with just rate and term adjustments — you have to reduce the loan balance to keep these loans out of foreclosure.”  Not surprisingly, there’s a lot of hand-waving but few numbers.

For the record, here’s how the math works.

Say, a person buys a home for $150,000 with no downpayment (as is typical with sub-primes), a 10% mortgage interest rate (maybe a bit low for sub-prime loans), and a 30 year term.  The monthly mortgage payment — for principal and interest — would be $1,269.

If the interest rate on the loan is cut to 4.5%, the monthly payment would drop by over 40% to $752.

If the interest rate is cut to 4.5% and the loan’s payback period is extended from 30 to 40 years, then the  monthly payment would drop to $666.  That’s about half of the original monthly payment! {Note: If the starting interest were more than 10%, the new payment would be more than half off).

Apparently, some politicos think that cutting the payment in half isn’t enough to make a difference.  So, they propose that lenders accept “cram downs” and reduce loan balances.

Let’s assume that the home’s fair market value fell by 25% since the time of purchase.  That would mean writing off $37,500 of the loan balance and reissuing it with a $112,500 balance.

If the interest rate is cut to 4.5%, the loan’s payback period is extended from 30 to 40 years, and the principal balance is reduced to $112,500, then the monthly payment drops to $499.  That’s less than 40% of the original monthly mortgage payment — a discount of more than 60%.

Are these folks serious ???

Cutting the mortgage rate in half for a defaulter — while keeping the hardworking, creditworthy folks next door at the full rate — is morally bankrupt.  Especially when the defaulter didn’t legitimately qualify for the loan by any reasonable underwriting standards … and is equally likely to default again.

What about the hardworking guy who has made payments for years but but just got got laid off in the tough economy?  Well, the half-payment may even be too much for him to handle.  Unfortunate, but true.  I say the bank (and Feds) should give that guy plenty of breathing space (e.g. suspend payments for 6 months).

In a subsequent post, I’ll show how government largesse might even give a defaulter free housing under the proposed plan.  This stuff gets nuttier by the day …

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Technical Stuff

Below is a graphical display of the above math.  The top line is reducing the interest rate to 4.5%; the middle line reduces the interest rate to 4.5% and extends the term to 40 years; the bottom line reduces the interest rate to 4.5%, extends the term to 40 years, and writes off 25% of the loan balance.

The takeaway: within a representative range of original interest rates, modified mortgage payments can be roughly halved by simply cutting the interest rate to 4.5% and extending the loan term to 40 years.

image

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Stop foreclosures: Keep people in "their" homes … huh?

January 15, 2009

Background

There seems to be momentum to “keep people in their homes” by modifying the bulk of the 4.6 million mortgages that are currently in foreclosure or payment delinquent for longer than 90 days.

There have already been some voluntary lender efforts to modify distressed mortgages by lowering interest rates or extending the term of the mortgages (say, from 30 to 40 years).  Generally, the programs hadn’t generated many modified loans … and for the loans that have been modified, about 40% become delinquent again within 6 months. (Note: I’ve seen ranges on this number from 35% to over 50%).

So, the Feds are pushing lenders to sweeten the mortgage modification packages.  Specifically, there’s talk of a broadscale government program that would pare mortgage interest rates to 4.5%.  And, there seems to be support for “cram downs” — having lenders reduce the principal loan balances to the current fair market value of the homes collateralizing the loans.  That is, if a defaulting loan is on a home that is “below water” — i.e. loan balance is greater than the home’s market value — the lender writes off the difference and issues a revised mortgage at the home’s market value.

These proposals strike me as both naive and very problematic.  Here’s another take on why these loan modification programs are generally bad ideas, and why cram downs, specifically, are a bad idea.

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Ken’s Take: Keep people in”their” homes … huh? 

The underlying premise of the proposed loan modifications —  “keep people in their homes” — is logically flawed

The overwhelming majority of foreclosures are investor-speculators and sub-primers — people with shaky credit ratings and undocumented incomes who put little or no money down when they “bought” their homes, who often made few if any mortgage payments — not even making a rounding error dent in their principal loan balances, and who have seen home prices slide in their neighborhood — putting their loan “under water”. 

Said differently, most of the mortgage delinquencies and foreclosures are on people who have no equity in the homes — they never did if they didn’t make a downpayment or a couple of years of mortgage payments and, in most cases, they have “negative equity” — since they owe more than the the homes are worth on the open market.

Bottom line: these folks are “occupants” not “owners” — unless they get credit for some sort of squatter’s rights.  There may be some legitimate reasons for enabling them to stay in the homes — but there’s no way that the homes are their homes.

In the next couple of posts, I’ll walk thru the economics: what crams downs aren’t even necessary, and the “free housing” moral hazard.  

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From economic crisis to moral crisis …

January 14, 2009

There are plenty reasons to object to the recent groundswell of support for modifying distressed mortgages (badly delinquent or already in foreclosure) by slashing rates, lengthening payback periods, and writing off part of the loan balance if a home is under water (i.e. the loan balance is greater than the market value of the home).  I find the latter provision — forgiving part of the loan because housing prices have fallen — to be particularly troublesome.

Let’s start with the moral issue:

When somebody borrows money, they accept both a legal and a moral responsibility to pay it back. 

A lender may require collateral to mitigate the riskiness of a loan, but the posting of collateral doesn’t relieve borrowers of their repayment obligations.  

If the collateral that is posted loses some or all of its market value,that’s a bad break for the lender.  But, the lender is still entitled to get its money paid back.

For example, when folks buy stocks on margin, they are borrowing money from a brokerage house and posting stocks as collateral.  If the stocks tank, the brokerage houses don’t altruistically write down the loan balance.  They sell off the borrowers’s stocks to cover the loan balance.

If somebody totals their car (i.e. value goes to zero), the bank doesn’t simply write off the auto loan.  Nope, the borrower is still on the hook — even if the insurance company stiffs them.

So, why should a home mortgage get written down when the real estate market stumbles and homes drop in market value?  It just doesn’t make sense morally.

Skipping on a debt is skipping on a debt.  Period.

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The liberal politicos’ response is that we have a moral responsibility to keep people in their homes during rough economic times.  As I’ve said a few times already, most of these folks are occupants, not owners.  They have no equity in the homes, and in most instances — with no money down and interest only payments — they never did.  These aren’t “their” homes we’re talking about …

In subsequent posts, I’ll give the economic arguments against writing down mortgage loan balances.  I’ll even show how mortgage defaulters are likely to be rewarded with free housing if their loan balances are written down.  Talk about moral hazard …. 

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Fannie moves to speed “short sales”

January 12, 2009

Background:  In the housing market, a short sale occurs when a home is resold for less than the outstanding balance on the home’s mortgage.  Either the seller has to make up the difference, or the lender has to write-off the short portion of the loan. Of course, most sellers aren’t able to make the lender whole, so either the lender bites the bullet or forecloses — hoping to sell the property at a higher price.  That’s not likely these days either.

Ken’s Take: This is a good move by Fannie — reflecting the realities of the market.  More posts this week on the mortgage market and Fed proposals re: foreclosures.

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Excerpted from AP, Fannie Mae tests ‘short sale’ program, January 9, 2009

Real estate agents nationwide have complained about how long it takes for a lender to sign off on a short sale, often derailing the deal and leading a homeowner into foreclosure.

So, Fannie Mae — the  mortgage giant — is testing a new program aimed at reducing the number of foreclosures by pre-approving sales where homeowners sell houses for less than the amount owed on them.

The company will determine an acceptable listing price for a so-called “short sale” even before a buyer has been found.

Fannie Mae wants to make the short sale as fast and easy as possible so distressed homeowners can avoid foreclosure.

Full article:
ttp://www.businessweek.com/ap/financialnews/D95JTMFG1.htm 

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Markets bounce … Is that a light at the end of the tunnel ?

January 7, 2009

Though light trading volumes may be exaggerating movements and most pundits say a bear market that remains under way, there are some bright signs in the markets …  at least a short-term bounce, if not a turnaround.

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Excerpted from WSJ, “Suddenly, a Markets Turnaround”, Jan.  7, 2009

From junk bonds to currencies, mortgages, stocks and commodities, the markets that were most battered in the second half of 2008 are staging rebounds, sometimes of 10% and more from their low points.

The breather comes as the U.S. government continues to push investors toward taking more risk because the returns on risk-free assets like Treasury bonds are extremely low.

The Dow has gained 19.37% from its November low point, and the S&P 500 is up 24.22%.

Still, the fear has ebbed somewhat in the shell-shocked credit markets. Junk bonds have rebounded by over 11% from their low in December … and higher-quality corporate bonds have gained more than 4% amid an increasingly robust calendar of new offerings. Led by GE, at least $6.6 billion in new corporate bonds were offered Tuesday yielding investors well over 6%, compared with Treasury bonds, which yield between 0.1% and 3%.

The Fed has cut interest rates nearly to zero, and by June, the Fed plans to buy $500 billion, or nearly one-tenth of the entire $5 trillion market for good-quality bonds backed by mortgages that conform to standards set by Fannie Mae and Freddie Mac.  The hope is that by midyear the plan will have brought down mortgage rates and sparked enough refinancing that the housing market may bottom, which would give banks more leeway to lend money into the economy. Consumers have already been applying in droves to refinance their mortgages as the average 30-year fixed rate conforming mortgage hovers just over 5%.

The Fed’s buying, which would average out to about $4 billion a day, has already sent spreads in the mortgage market almost back to what traders call “normal.” Before the credit crisis took hold, the yield of an average agency-backed mortgage bond was 1.5 to 1.6 percentage points over comparable Treasury bonds.

After hitting 2.8 percentage points in late November, that spread finished Tuesday at 1.7 percentage points.

Still, many investors and market participants  are concerned about what happens when the Fed help  dries up.

“The government can make mortgages cost 3%, but they can’t improve anyone’s credit score”

Though major indexes’ gains from their November lows so far fit the traditional definition of a bull market, up 20%, few participants are interpreting them that way. Many say the market’s recent.

image

Full article:
http://online.wsj.com/article/SB123128801585159197.html?mod=testMod 

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4 million existing homes on the market … so what?

January 5, 2009

There’s a lot of hand-wringing going on over the fact that there are about double the number of existing homes on the market now versus historical averages.  And, there 4 million number is probably low since some people would like to sell but aren’t listing their homes because of the bad market.

But, put the number in perspective.  The 4 million homes represent only about 3% of total households and about 5% of owner-occupied households. That means that for 95% of home owners, the number is largely irrelevant.  They’re paying their mortgages and taxes, and they aren’t planning on selling to move.  Sure, house prices are down, but — unless they have  home equity loans  — the only short-term impact is simply “on paper”.  These folks will be fine until the housing market rebounds … and it eventually will !

My suggested remedy to the problem: (1) set a zero capital gains tax rate on houses bought in 2009 and 2010 as long as they’re held at least 2 years, and (2) allow landlord-investor’s who buy residential homes in 2009 and 2010 to accelerate depreciation and offset ordinary income with all rental losses.  The 2 million “overhang” in houses would be cleared in weeks, and folks who can’t afford to buy houses would have more rental choices,

[Buyers' strike]

Source: WSJ, 01-02-09
http://online.wsj.com/article/SB123084433166547199.html

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Low-interest mortgages are the answer … Not !

December 18, 2008

Here’s the newest twist on how to stabilize the housing market: price fix the retail mortgage rate at 4.5%, with the government (i.e. you and me) subsidizing the rates for folks who wouldn’t otherwise be able to afford the mortgage payments.  My suggestion for stabilizing housing prices is below.

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Excerpted from WSJ, “Low-Interest Mortgages Are the Answer”, Hubbard & Mayer, December 17, 2008

The Treasury Department is considering a plan to offer a 4.5% mortgage for home buyers for a period of time. Let’s hope it does. It would help arrest the decline in house prices that is at the base of the ongoing financial crisis and recession.

In most markets house values are today lower than what is consistent with the average level of affordability in the past 20 years. Current futures markets suggest that house prices will decline by 12%-18% in the next 18 months.

Nonetheless, without policy action house prices are likely to continue falling. Conversely, we see little risk that increasing the demand for housing will touch off another housing bubble. While the economy is contracting, low interest rates would spur housing activity.

A 4.5% mortgage rate is not too low. The 10-year U.S. Treasury yield closed at 2.3% on Dec. 12, 2008. Hence a 4.5% mortgage rate is 2.2% above the Treasury yield, above the 1.6% spread that would prevail in a normally functioning mortgage market.

Recall that a mortgage can be thought of as a risk-free bond plus two possibilities that increase risk to lenders: default and/or prepayment. Historically, the risk of default adds about 0.25% to the interest rate. The remaining spread of the mortgage rate over the Treasury yield represents the risk of prepayment and underwriting costs. With falling house prices, the risk of default could indeed add 0.75% or more for a newly underwritten and fully documented loan.

Moreover, a 4.5% mortgage rate will raise housing demand significantly. A simple forecast can be obtained by applying the 2003-2004 homeownership rates to 2007 households. We use the 2003-2004 home ownership rates because those were the years of the lowest previous mortgage rates (the average mortgage rate was 5.8%).

An increase in the homeownership rate from 67.9 (third quarter, 2008) to 68.6 (the average rate from 2003-2004) would increase homeownership by about 800,000 new homeowners. A simple statistical analysis examining the impact of lower mortgage rates and higher unemployment rates yields an even higher, and firmer, estimate of 2.4 million additional owner occupied homes in 2009.

4.5% mortgage rate that the Treasury is considering also should be available for present homeowners who want to refinance, because of the benefits for the economy as a whole. We calculate that up to 34 million households would be able to do so, at an average monthly savings of $428 — or a total reduction in mortgage payments of $174 billion.

Research article:
http://www4.gsb.columbia.edu/realestate/research/housingcrisis/mortgagemarket

WSJ article:
http://online.wsj.com/article/SB122948162452913103.html

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Ken’s Way:

Eliminate capital gains taxes on all residential property that is acquired during 2009 and 2010, provided that the property is held at least 24 months. (Note: that the tax exclusion would depend on both the purchase date and the holding period)

The goal: get private investors — large and small — to buy residential property (i.e. houses) and rent them to folks who neither really can’t afford to buy a house on their own.  To sweeten the deal, let landlords depreciate the property on a highly accelerated basis for income tax purposes, and allow all current tax losses to offset ordinary income when calculating taxes.

It would be a win-win.  Investors would have a place to park their money; more rental housing would be available for non-owners; tax payers wouldn’t have to subsidize anything.  

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Feds in "stand off" over foreclosures … is that bad news or good news ?

December 16, 2008

Excerpted from Business Week, “A Standoff Over How to Rescue the Housing Market”, December 11, 2008

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image 
        http://images.businessweek.com/ss/08/12/1211_numbers/2.htm

Without reducing foreclosures and ending the slide in home prices, it will be nearly impossible to stabilize banks and lessen the depth of the recession. And sharply rising unemployment has added new urgency: Last spring, Rod Dubitsky, Credit Suisse’s (CS) head of research for asset-backed securities, projected 6.5 million foreclosures. With unemployment set to top 8% in 2009, he says up to 10 million families may lose their homes.

What’s the best way to stabilize plunging home prices?

Treasury Secretary Hank Paulson and his staff are considering plans to push mortgage rates down to 4.5% in hopes of bringing buyers back into the moribund market.

Democrats—in Congress and on President-elect Barack Obama’s team—seem more set on pressing lenders to renegotiate troubled mortgages. That tack, championed by FDIC head Sheila Bair, is aimed at trimming foreclosures and ending fire sales.

Bair’s plan offers a guarantee to lenders that modify a mortgage so payments are trimmed to 31% of a homeowner’s gross income. If they cut interest rates or stretch out the life of a loan, Washington would cover part of the lender’s losses should a homeowner redefault. Bair says the plan would save 1.5 million homeowners at a cost of $24.4 billion. [Note; lenders would get subsidies only on loans that redefault.]

But conflicting investor interests make it legally tough to modify securitized loans. And new statistics suggest that more than half of loans modified early this year are already at least 30 days past due.

Treasury says it’s studying several options, including the plan to subsidize low rates. Proponents say that by bringing new buyers to the market, the move could help end the pricing slide.   Problem is, low rates would do little for those now facing foreclosure or trapped in homes worth less than their mortgages.

Full article:
http://www.businessweek.com/magazine/content/08_51/b4113030318539.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis

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Ken’s Take:

In rough numbers …

  1. 2/3’s of roughly 125 million households are owner-occupied
  2. 1/3 of owner-occupied households are owned free and clear of any mortgage
  3. 20% of mortgages are sub-prime; most with no down payment; many “under water”
  4. Vast majority  of sub-primes were “unqualified” at fair market (vs. “teaser”) interest rates
  5. 12% of sub-primes are in foreclosure, accounting for 40% of total foreclosures
  6. 50% of foreclosed sub-primes don’t qualify at modified terms (e.g. writing loan down to house’s FMV)
  7. 50% of modified sub-prime loans re-default within 6 months

image

Bottom line: Many of the people being foreclosed on are “occupants” not “owners”.  Help legitimate owners who are going through some tough times; stop delaying the inevitable for the sub-primes — and certainly don’t reward them with deals better than the people who played by rules have.  That’s not fair !

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"Stop those foreclosures, now !" … Nope, that’s a bad idea.

December 10, 2008

Ken’s Take:

“Stop those foreclosures, now !” is one of three recent mortgage-related refrains that make me scratch my head.

The first is a variant of the above one: “we’ve got to keep people in their homes” — with the emphasis on “their”.  Seems to me that folks are conveniently confusing “ownership” with “occupancy”.  Some lug who makes no downpayment and makes at most a couple of mortgage payments at promotional interest rates doesn’t own anything.  He started with no equity, built no equity, and may even be in a negative equity position.  It’s not “his” home simply because he squatted there for awhile.  Geez.

The second came from the mouth of Ben Bernanke himself: “Putting these people through the foreclosure process (instead of cutting rates & principle) will put a permanent, detrimental mark on their credit records.”  No kidding, Ben.  Isn’t it the role of credit records to report to prospective lenders that somebody has a history of stiffing people who lent them money in the past.  Seems fraudulent to me that the government puts together a process that spackles over that serious flaw.

Now, here’s one of hundreds of reasons that we shouldn’t “stop those foreclosures now.” …

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Excerpted from IBD, “Bad-Loan Lipstick”, December 09, 2008

Foreclosures: A new federal report shows that most bailed-out borrowers slip back into default within six months.

It seems agreed on all sides that bad home loans got us into our economic crisis. So, goes one argument, wouldn’t it make sense to modify those loans into good ones — that is, loans not in default? That would seem to get at the root cause of the trouble. Besides, help for struggling homeowners is good politics. Sounds like a plan.

The chairwoman of the FDIC and  leading Democrats in Congress want to modify some 2 million high-risk loans by [cutting interest rates, lengthening terms, and even cutting the principle loan balance].  

This week,the Comptroller of the Currency released data showing that … 53% of the mortgages modified by lenders end up back in default –usually within 6 months.   

Were the loans so badly underwritten that borrowers simply could not afford them, even with reduced payments?

After al, they went to borrowers who put little or nothing down, and who lacked the credit history and documented income that lenders would have demanded in saner times.

These loans started to sour in good times. And easing up on their terms now won’t cure their fundamental flaws. 

For these toxic loans, the best thing to do is to let them run their course into foreclosure, and work to contain the damage.

Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=313719048815277

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What percentage of mortgages are subprime?

December 2, 2008

In the early 1990s, subprime mortgages were virtually unheard of.

By 2000  they made up more than 9% of the market for mortgage originations.

Today they’re 20%.

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Excerpted from IBD, “Stop Covering Up And Kill The CRA”, November 28, 2008
http://www.ibdeditorials.com/IBDArticles.aspx?id=312766781716725

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Big Idea: Rallying private capital to stabilize housing prices.

November 25, 2008

Summary: Ken’s plan for handling part of the  foreclosure problem and geting housing back on track.  Guaranteed.

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A stark reality of the current mortgage crisis is that there have been — and will continue to be – an unprecedented and destabilizing number of foreclosures that need to be absorbed into the housing market.  Until they are, home prices will continue to slide and the crisis will persist..

To date, most of the government’s programmatic emphasis has focused on mitigating the financial pressures on lending institutions and investors who funded bad loans, by injecting supplementary capital (loans or preferred stock purchases), or by buying toxic securities..  Some political rhetoric has centered on preventing distressed citizens from “losing their homes”, but few substantive steps have been taken.  Why?

First, once a mortgage has been “securitized” – as most have been — there are contractual limitations on possible loan modifications.   In these instances, mortgage “servicers” have their hands tied.  They are only empowered to collect payments and foreclose on non-payers, with very little latitude between the extremes.

Second, there is the proverbial elephant in the middle of the room.  Many so-called home owners are – truth be told — really “occupants” not “owners”.  Some have no equity in the homes.  Some never did – even before housing prices crashed, submerging loan balances under water.   Many wouldn’t qualify today for restructured loans under the most liberal of terms – e.g. lowered interest rates, extended payment periods, reduced principle balances (to the current fair market value of the homes).  Whether the people legitimately qualified for their initial loans is irrelevant.  Whether their initial loan terms were predatory is also largely irrelevant. Objectively, the low bar is whether they can foot the bill for a restructured mortgage.  The emerging evidence seems to suggest that many – maybe most – can’t.

That leads to an inescapable conclusion: regardless of what remedial government bailouts are enacted – the housing market will continue to be flooded with foreclosures. 

So, a pivotal economic policy question is how to get the foreclosed properties off the market and into the hands of private owners (i.e. not onto the government’s asset rolls), and how to keep them there until they can be remarketed at an orderly pace and higher prices.

Three straightforward changes to the income tax code – throwbacks to yesteryear — could provide the necessary financial incentives to rally private capital back into the housing market to buy, hold, and rent foreclosed homes: (1) eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months, (2) allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and (3) allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

For example, assume that an investor buys a foreclosed home for $200,000 and rents it out at a price that simply breaks even on a cash flow basis.  That is, the rental price just covers interest, taxes, insurance, maintenance, etc.  Assuming a 5-year accelerated depreciation schedule, the rental would generate an annual non-cash tax loss of $40,000 that could be used to offset the investor’s ordinary income.  If the investor were in the Obama-boosted 39.6% marginal tax bracket, that ordinary income offset could save the investor almost $16,000 in federal income taxes each year that the property is held and rented.  If the home were then resold – say, in 3 years for $250,000 —  the investor would book $170,000 in capital gains (the $50,000 home price increase, plus the $120,000 in depreciation claimed against ordinary income when the property was being rented), but the investor would owe no capital gains taxes. 

Such a program potentially offers several benefits: (1) it would entice private capital to buy (and hold) foreclosures and other distressed residential property, (2) it would likely provide affordable rental housing to people (maybe the current occupants of the homes) who realistically can’t and shouldn’t shoulder the costs of home ownership , and (3) it might take some of the sting out of President-elect Obama’s proposed tax hikes.

It’s a win-win solution to part of a thorny problem.

© K.E. Homa 2008  

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Glub, glub, glub … mortgages under water.

November 20, 2008

Excerpted from WSJ, “How to Help People Whose Home Values Are Underwater”, Feldstein, November 18, 2008

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More than 12 million homeowners now have mortgage debt that exceeds the value of their homes.

That gap is typically already very large. Half of the homeowners with negative equity now owe more than 120% of the value of their homes … on average, that’s about $40,000.

If  house prices continue to fall at the current rate for the next 12 months, as experts generally expect, the median loan-to-value ratio of negative-equity homeowners will increase to more than 135%.

* * * * *

These negative-equity homeowners have an incentive to default because mortgages are generally “no recourse” loans. That means creditors can take the property if the individual defaults, but cannot take other assets or income to make up the difference between the unpaid loan balance and the lower value of the house. As a result, mortgage default rates are now rising rapidly and are expected to go much higher.

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Full article:
http://online.wsj.com/article/SB122697004441035727.html

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Bold Stroke: Get investors to buy buy & rent distressed residential property … here's how & why

November 18, 2008

Some history
In the old days, investors would snatch foreclosed properties at bargain basement prices, rent them out for a couple of years, and bag the profits — paying taxes at capital gains rates.  Housing prices were increasing at a slow steady rate, but that was good enough.  Why? Ordinary income tax rates were high relative to capital gains rates, and gains on the sale of rental property were capital gains.  Investors could deduct depreciation when they owned and rented the property — creating a tax loss that could be applied to ordinary income. In effect, the investors were arbitraging the ordinary income tax rate against the capital gains rates,

Fast forward
Today, there are plenty of cheap properties on the market (think foreclosures).  Why aren’t investors snatching them up?  Well, in part because they fear the housing market hasn’t bottomed out, and in part because the tax laws aren’t as favorable as they used to be.

What happened?  Well, the “paper losses” from depreciation lost some value when rules were established to limit so-called “passive losses”. Then, ordinary income tax rates were slashed, narrowing the gap between ordinary income and capital gains rates.  The incentives to buy and rent property diminished.  Now, Obama plans to raise capital gains rates MORE than ordinary income rates — further diminishing the tax advantages of buying and renting.

The opportunity
Imagine a flood of private capital swooping in to buy distressed residential properties at current market values.  The benefits: takes properties off the market (for awhile) and potentially bids prices up (a little).  After the market stabilizes, the properties “naturally” flow back onto the market at an orderly pace.

How to do it

(1) Allow very accelerated depreciation on rental properties — say, 10 years — to increase the “paper” tax losses

(2) Eliminate passive loss limitations on residential rental property — allowing unlimited rental property losses to be applied to ordinary income (and carried forward, if necessary)

(3) Cut the capital gains tax rate to ZERO on residential property purchased after, say, November 15, 2008 — re-establishing the incentives for investors to buy, rent, and sell

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Are those Warren Buffett’s fingerprints ?

November 18, 2008

Excerpted from Portfolio.com, “The End of Wall Street”, Lewis, Nov. 14, 2008

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“As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s . The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating [of sub-prome mortgage backed securities] will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”
This wasn’t Fitch or even S&P.

This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett.”

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Ken’s Take: How come Mr. Buffett gets a pass on this mortgage mess?  Until this article, I hadn’t seen his ownership stake in Moody’s — which rated the toxic assets AAA — mentioned anywhere.

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For an “inside baseball” narrative of the sub-prime mortgage backed security mess — the best I’ve seen —
read the full article :
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

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