Tag Archives: bailout plan

A Silicon Valley/Venture Capital Solution to the Housing Crisis

Posted on March 25, 2010 | 2 Comments

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

So President Obama  has finally decided to do ”cram-downs” with taxpayer money.  This is the idea that one should reduce (cram-down) the amount owed on  a house to put it more in line with the new (reduced) value of that house so a person can refinance or won’t just abandon the property.

I am totally opposed to cram-downs (especially for those that are underwater because they chewed up their equity on cash-out refis for frivolous spending) but if Obama is going to do it let’s at least do it in a way that protects taxpayers, encourages the right kind of behavior going forward and isn’t just a handout to the unfortunate or financially ignorant or profligate.  That lesson comes from the way venture capitalists invest in Silicon Valley startups and the answer is “cash for equity.”

Yes cash for equity has already been done with the money going to the banks but the valuation method has all been wrong.  For housing cram-downs its very simple and it aligns everyones goals (at least the ones we want to support)

Take for example you have a house that has $600,000 in loans against it but it is now worth $500,000 .  The owner is seeking to refinance it but can only do so for $500,000 so they need a $100,000 “cram down”. 

If the government (or the bank ) provides it they should get a percentage of equity in the house equal to the cram down amount divided by the new appraised value of the house.

In this case that would be $100,000/$500,000 = 20%

Now when the owner goes to sell the house 20% of the proceeds immediately go to the entity providing the cram-down (government, bank, etc..).

Why is this fair?  Well if you are going into foreclosure you have effectively lost the asset.  Refinancing is a way to buy it back but to buy it back you need a partner to provide some of the financing.  So, in this example, you are effectively asking someone for $100,000 to buy a $500,000 asset (remember $600,000 is irrelevent at this point in the game).  They are putting up 20% of the money so effectively they own 20% of the equity.

Here’s why you do it this way:

  • Supposedly preventing foreclosures will “save the market” so the taxpayer/bank investor should get to partake in the upside (and share the risk on the downside).
  • If the goal is to keep people in their homes with our money then those people better damn well stay in those homes.  This will make that likely because they’ll have to wait it out until either they have paid down the principal on their loan by the equity percent  or the home has risen in value enough so they can sell the home and pay off the cram-down equity holder and the mortgage lender.
  • This should also separate the real homeowner from the “flipper”.  The “flipper” won’t want this “long term commitment” and will just give up the house.  The real homeowner who is committed to staying will be much more agreeable because they truly plan on riding this thing out.

Administering this program is simply done by the IRS which is informed of all major income events and can act as a collection mechanism for this.

So PLEASE don’t do cram-downs but if we must lets do them right.  It works for Silicon Valley to take cash for equity so why not let it work for the rest of the country.

Oh and don’t forget to email Timothy Geithner to tell him what a horrible plan this is.

(Follow Me on Twitter at watchingmarcitz)

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Posted in $700,000,000,000 Bailout, Sense & Sensibility

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Houses Can’t Possibly Behave Like a Stock…

Posted on March 19, 2009 | 2 Comments

Around March 2006 I started to theorize that housing prices in the San Francisco Bay Area might be this decade’s bubble.  It followed that we could see a collapse in housing prices to the same dramatic proportion as we saw in the NASDAQ.  When discussing this concept with friends, relatives and even a tax accountant I was presented repeatedly with these arguments of why that was impossible:

  1. The Bay Area is still a highly desireable place to live so housing prices could never decline and if they did never that dramatically.
  2. Houses take longer to sell and can’t be traded like a stock so prices can’t fall as fast.
  3. Also since you can always live in your house (and you can’t live in your stock) there is no reason for a fire-sale so prices can’t fall as far.

At that same time I saw a chart of house prices in which the curve was shifting to the point where it was almost going straight up.  That reminded me of what the NASDAQ looked like in March of 2000 and we all know what happened in April of 2000.  So could this happen again?   Were all bubbles fundamentally the same (eventhough the assets were dramatically different)?

Well clearly we are in the midst of a price adjustment but evenso it can’t be as bad as the NASDAQ, or can it?

So the other night I decided to do a little data-diving and found two key pieces of information:

  • Month-end NASDAQ prices from 1981 to the present.
  • Month-end median housing prices for the Bay Area back to 1987.

I then overlaid the data on top of one another after shifting the NASDAQ data up by 6 years.  Why 6 years?  Simply put the NASDAQ bubble popped in 2000.  The housing bubble, it is currently agreed, popped in 2006.   By shifting the NASDAQ data by 6 years we could see how well the curves aligned.

So what you see graphed below are month-ending NASDAQ prices starting in 1981 and month-end median house prices for the Bay Area starting in 1987.  See anything interesting?

housing-vs-nasdaq

So there you have it.  All three arguments as to why the housing prices wouldn’t collapse like the NASDAQ were COMPLETELY WRONG and now we see that no matter what the asset the dynamics of the bubble are the same.  Yes it is true that the run-up in housing prices is not as fast BUT the fall was just about as fast and there is a good chance that it will go as far.

So next time someone says “this time its different” make sure to laugh discretely and sell quickly. 

Now the next question is when do you buy?  Certainly not now. 

I wouldn’t advise using the chart above as a way to peg a specific date and I would go back to fundamentals.   The key fundamentals you need to check are:

  • Is owning now cheaper than renting?
  • Are prices equal to or less than 3 times the median of incomes in the area?

If you answer “no” to either of these questions then  DO NOT BUY.

Now what if the fundamentals do check out but the market is still falling?  This is where the trend information in the chart can come in handy.  To find a bottom wait until prices move upward for about 3 consecutive months (make sure they are prices for your city and NOT the county or region).  If they do and the fundamentals still check out then its time to buy.  While its true you will miss the absolute bottom its much better to buy on the upswing than to “catch a falling knife”.  Until it turns you have no idea how much more its going to fall so its worth paying a small premium for some certainty.  As you can see from the chart waiting a little bit won’t result in you missing a big upswing.  It took the NASDAQ about 6 years to reach HALF of what it was worth at the peak.  Missing three months of house price gains isn’t going to break the bank.


Oh and according to this article house prices are in for another fall and there is an interesting analogy to the sinking of the Titanic you might find interesting (with video)

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Posted in Housing Bailout, Market Cycles, Recession

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Obama HURTS 100 Million to Help 9 Million

Posted on February 22, 2009 | 25 Comments

Dear President Obama,

HI!,  yoo-hoo, over here, we are 100,000,000 men, women and children who rent and we seem to be invisible to you and the media (including NPR, New York Times and the Wall Street Journal) but clearly our numbers make us important.  We are wondering why you are helping 9 million people at the expense of me and my 99,999,999 friends, neighbors and fellow countrymen.   Not to mention the additional millions of former homeowners who will soon join us because they rationally decided to live within their means and rent.

But how is your plan hurting 100,000,000 renters?  It is hurting them in three major ways:

  1. By putting a floor (and debatable how stable or realistic that floor is) under housing prices above what they were before the bubble began you are continuing to price renters out of the market.
  2. By raising the deficit you are going to be putting some of the tax burden on renters (yes some will go to homeowners as well).
  3. Because many former owner-occupied properties have turned into rentals rental prices are actually falling.  By keeping people in houses they can’t afford you will, in effect, raise rents again.

The net result is that you are charging renters, through the eventual taxes needed to pay for this, for the privilege of NOT being able to afford a house while also raising their current rents.  This reminds me of the former Soviet practice of making soon-to-be-victims of execution pay for their own bullets and then charging their families for their burials.

Point #1: This plan is further eliminating renters ability to buy a home by reducing their income (through higher taxes and raising rents) and through maintaining artificially high prices (through so-called “stabilization”). 

To make matter worse renters comprise those who either can’t or have decided not to overextend themselves to have the “American Dream” (which was originally “life, liberty and the pursuit of happiness” until it got co-opted by marketing experts in the real-estate industry in the last century).  Renters are STILL disproportionately Hispanic and African-American and lower income.  Homeowners are disproportionately white and have higher incomes.

Home Ownership by Race - (US Census Bureau)

Home Ownership by Race - (US Census Bureau)

Point #2: Helping homeowners at the expense of renters is yet another transfer of wealth from the lower class to the upper class.  How Bush-league.

Oh and why would the the vast majority of homeowners (who do, truthfully, outnumber renters) care to help us ? Very simply because the  survival of any market (or pyramid scheme which the housing market has proven to be) depends on a continous stream of first-time buyers to fuel growth from the bottom.  By attacking renters you are attacking the first-time buyer base and, while you may temporarily save the market, you are draining the pool in the medium to long term.

Point #3: Homeowners need to watch out for renters if they want to truly protect their home values.

How can you help?  Well if you can’t bring yourself to let the market work out the right price then at least provide renters with some rental income tax deductions so they don’t wind up paying (two to three times) for the mistakes of homeowners.  Additionally this will help incent those on the edge of home-ownership not to over-stretch to buy a house so they can get the equivalent mortgage income tax deduction.  Its the least you can do.

Finally, of those 9 million you are helping, at the expense of 100,000,000, how many got themselves into their situations by cashing out their equity cushion for home-improvements, new cars or family vacations?  I guess its comforting to know that the money we saved by renting will go to buy some nice stuff…even if it isn’t ours.

DO YOU HAVE A STORY OF HOMEOWNERSHIP GONE BAD?  If so share it on reallyfuckedhomeowner.com.

ADDENDUM: In honor of Rick Santelli’s Tea Party I have posted his poll here so you can voice your opinion to the Obama adminstration.

Rick Santelli  of CNBC (as do I)  want to know the following:

To see what the Rick Santelli Housing Bailout Tea Party is all about see this video

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Posted in Benefits of Renting, Housing Bailout

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Don’t Negotiate with Real Estate Terrorists

Posted on February 6, 2009 | 1 Comment

Finally a lower cost way (from a taxpayer perspective) to keep many people in their homes and to prevent foreclosures.  Lets start with the only two reasons for foreclosure:

  1. You can’t afford your house.
  2. You can afford your house but choose not to (e.g. because its “under water”).

The thing is that there is a big difference between the two.  The first are unlucky or irresponsible.   The latter are engaging in common extortion by threatening to help trash the economy if they don’t get paid off through debt restructuring (even though they can afford their homes without help).  Simply put they are real estate terrorists and we shouldn’t negotiate with terrorists

So how do you differentiate the between the two?  Very simple, instead of using a carrot (restructurings) to keep #2 in their houses use a stick (more severe penalties for leaving).  Carrots are expensive and we  all have to pay for them, sticks are cheap and don’t cost taxpayers a dime.

Foreclosures look bad on your record but we should make them look worse than if you declare bankruptcy.  If you abandon your house we should double the time it stays on your credit report, put a lien on any future tax refunds that then gets paid into a foreclosure fund to pay banks at least part of the debt lost from those who abandoned their houses (that might also help relieve the negative downward pressure on banks’ desire to lend).  Even tax, as income, the amount left behind on the loan as if it were a forgiven loan.  Oh, I’m open to other punishments from people who know better.

Now what about those that truly can’t afford their homes, should they be punished as severely? Well they can be offered a trade-off.  Simply put if you declare bankruptcy (which if you are truly under financial water is a viable option) you don’t suffer the enhanced punishment for those who don’t declare bankruptcy.  As stated above this may even be a better option with less severe penalties.  Granted there are still penalties but now bankruptcy is the more attractive option.

Why favor bankruptcy as opposed to foreclosure out of bankruptcy?  In bankruptcy you have to report to a bankruptcy judge that helps you make the tough decisions to become financially solvent again and the burden is on you.  In bankruptcy you learn how to get back on your feet and stay on them.  If you just walk away from your house in a standard abandonment you learn nothing, the burden is mostly on others, and may very well find yourself in this situation again (and so will all those around you who pay to bail you out).

So now you have a choice.  If you are truly bankrupt you declare bankruptcy.  If you aren’t you may have to think twice about walking away because you either face even more severe penalities than you would have in bankruptcy.   You certainly won’t declare bankruptcy because well, uh, you’re not really bankrupt.  You’ll just have to stay in that house and tough it out at no cost to the taxpayer.  Oh and we just prevented a foreclosure.

(Make sure to email the Treasury Secretary Timothy Geithner to make sure he doesn’t negotiate with Terrorists)

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Posted in Housing Bailout

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Contacting Economic Influencers in the Obama Administration

Posted on January 11, 2009 | Leave a comment

I now have dug up email addresses for Obama’s top two economic advisers Timothy Geithner and Lawrence Summers.  See this page to see how you can email them and make sure that irresponsible homeowners are not bailed out.

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Posted in Recession

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Don’t Sellout with the Bailout

Posted on September 24, 2008 | Leave a comment

In reviewing the draft of the current bailout plan I noticed these two little chestnuts:

 

Sec. 4. Reports to Congress.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

 

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

 

Here are the 3 major problems with this current plan:

 

NO ACCOUNTABILITY

First, what does presentation matter if they can’t be reviewed?  Is congress willing to just hand over $700 billion in taxpayer money without any checks-or-balances?

 

UNKNOWN SECRETARY OF TREASURY (post election)

Second, not only are you about to hand $700,000,000,000 without the ability to review but you are giving it to an unknown person.  Can you tell me who the Secretary of the Treasury will be in late January ’09?  Oh you can’t?  Well at least tell me what their political party affiliation is?  Oh don’t know that either?  OK I guess you should just make this check out to cash…

 

EXTREMELY WEAK REPORTING REQUIREMENTS

Third, this unknown and unchecked Secretary of the Treasury only has to present to congressional committees once every 6 months.  As this is the largest and most public of public corporations why are they NOT held to the same level of regulation as all other public companies including quarterly reporting requirements, financial GAAP accounting rules and, most importantly, Sarbanes-Oxley?  We may disagree about whether there is too much or too little corporate regulation but a least the current regulations should be applied the same way to all public corporations.

 

Please don’t sell out reason, the US system of checks-and-balances and $700,000,000,000 of taxpayer money in a fit of panic and political positioning this week.

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Posted in $700,000,000,000 Bailout

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