Tag Archives: bailout

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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Missed it by One Day…

Posted on June 1, 2009 | Leave a comment

Well in a previous article talking about my predictions for GM I said:

Now I’m ready to double down.  GM goes into a pre-arranged bankruptcy by the end of May 2009.

Well I missed it by 1 day (forgot that May 31st was a Sunday).  Did I mention we were using “The Price is Right” rules.

Heck I think that’s still pretty good ;-)

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Posted in American Auto Bailout

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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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New York Times FINALLY Says NO to Housing Bailouts…

Posted on March 14, 2009 | 4 Comments

An article published on March 14th by Joe Nocera of the New York Times finally called it out clearly that homeowners who got  in over their head shouldn’t be helped by the government. Take this part from Mr. Nocera’s article:

I suppose you could argue that most … lacked the ability or the financial sophistication of someone like Mr. Hedges. But it shouldn’t have mattered…

“These were people with a fair amount of money, and most of them sought no professional advice,” said Bruce C. Greenwald, who teaches value investing at the Graduate School of Business at Columbia University. “It’s like trying to do your own dentistry.” Mr. Hedges said, “It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.”

And that’s the point. People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves…There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it.

And how about this snippet:

“The government should come and say, ‘We bailed out so many others, we can bail you out, and when you will do better, you can give us back the money,’ ” he (Elie Wiesel) said at the Portfolio event.

But why? What happened … is terrible. But every day in this country, people lose money due to financial fraud or negligence. Innocent investors who bought stock in Enron lost millions when that company turned out to be a fraud; nobody made them whole…People lose it all because they start a company that turns out to be misguided, or because they do something that is risky, hoping to hit the jackpot. Taxpayers don’t bail them out, and they shouldn’t start now. Did the S.E.C. foul up? You bet. But that doesn’t mean the investors themselves are off the hook. Investors blaming the S.E.C. for their decision to give every last penny to Bernie Madoff is like a child blaming his mother for letting him start a fight while she wasn’t looking.

OK, now for a little truth-telling. As you may have been able to surmise this WASN’T and article about housing bailouts but about victims ot Bernie Madoff’s Ponzi scheme but isnt’ the sentment the same? In fact its worse than that with respect to homeloaners.  Here Mr. Nocera is saying that vicitms of an outright fraud and theft don’t deserve government help.  The victims in the housing industry are, for the most part, NOT vicitms of fraud (yes there was some but seriously its a VERY small part of the market) and therefore should get even less help. I mean if you aren’t going to help vicitms of crime then why would you even help those that are victims of themselves and just plain bad circumstances.

Does it make any difference that the money lost was in investments as opposed to a house?  Technically it shouldn’t (you spend less either way) but housing has been given a special, irrational place in society as something different.  True you don’t live in your investments but you can always rent, you don’t have to actually own a house (and if you hold a mortgage you don’t “own” your house anyway, you have an option to own in 15-30 years).  But renters are the invisible detritus of society but that is a topic better covered here.

Thank you Mr. Nocera (you can also email him your thanks as well) for being a voice of reason! Please help the New York Times editorial department see that reason as well. Or is that not what you really meant?

(You can see the original text of Mr. Nocera’s article here.)

P.S. See how the Obama administration has now come out AGAINST  in-bankruptcy loan modifications in this article.

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Posted in Housing Bailout

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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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They’re Cool…

Posted on January 7, 2009 | 1 Comment

bailout1

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Posted in American Auto Bailout, Parody

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Congress Takes a Page from GM Playbook -WHY???

Posted on December 7, 2008 | Leave a comment
On Saturday there was an article in the New York Times entitled “At GM, Innovation Sacrificed to Profits“.  The headline of this article should have been “At Congress, Innovation Sacrificed to Profits” and it should have been about the House’s current proposed solution to GM’s “problem” because the parallels are prophetic, ironic and downright scary.  According to this article, GM, when faced with a chance to innovate, would eventually take the money for innovation and redirect it to fund the base business.


If the current proposal goes through to reassign the $25 billion fund, which is slated for innovation, because, and I quote the article, “the money was needed elsewhere” then Congress will be following in GM’s footsteps (a set of footsteps it has been criticizing strongly for the past two weeks) and, one can rightfully assume, will be doomed to the same fate – That’s the PROPHETIC.


Are Ms. Pelosi and Mr. Frank aware that they are behaving just like GM in their current actions? That’s the IRONIC. 


While GM can go to Congress when it fails who can Congress go to when it makes the same bad decisions?  We the taxpayers – That’s the SCARY.


Is anyone else concerned that Congress has shown no ability to learn EITHER from its own mistakes (how’s their last financial bailout plan going?) let alone the mistakes of others? That’s just SAD. 

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Posted in American Auto Bailout, Deja View, Sense & Sensibility

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I Couldn’t Have Said It Better Myself

Posted on November 15, 2008 | Leave a comment

I recently stumbled upon this excellent response to a misguided New York Times editorial that argued that GM needed to be protected from bankruptcy.  The response, posted by Mr. Lancelot Fletcher, argued that, in fact, bankruptcy was exactly the remedy that is needed, is not all that bad and is the best course for GM and the economy.  While these were the exact points I wanted to make Mr. Fletcher beat me to it and I like to give credit where credit is due.  To that end I have reproduced Mr. Fletcher’s comments below:

Isn’t this — the current plight of the big auto makers — exactly what Chapter 11 of the US Bankruptcy Code was designed for? Chapter 11 is not the “drop dead” option. (That would be Chapter 7.) A Chapter 11 debtor normally proposes a plan of reorganization to keep the business alive, pay creditors over time, and ultimately return to profitability. Many large companies have entered Chapter 11 bankruptcy without ceasing operations and some (e.g. Delta Airlines) have subsequently emerged as profitable enterprises.

I don’t think the opponents of a Washington bailout for the auto industry are proposing that the Big Three should be simply liquidated under Chapter 7. Hence talk about the millions of jobs that would be lost if bailout legislation is not enacted is misleading and exaggerated.

If the opposing sides on this issue would listen to each other, they might discover that they are not that far apart. The advocates of the bailout are not proposing to have the government simply lend money to the auto companies with no strings attached. They are proposing to require, as a condition of the loan, that the industry agree to a far-reaching reorganization of the industry. On the other hand, reorganization is precisely what is required in a Chapter 11 bankruptcy. It’s true that in a Chapter 11 bankruptcy the US Congress does not normally get to dictate the terms of the reorganization. But most Americans would probably agree that having the government specify the terms of business organization is not a good idea. So the argument of the opponents of the bailout might be that we should not enact new laws to do what the existing laws are already capable of accomplishing.

Thank you Mr. Fletcher!

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

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How to vote NO on the GM, Ford and Chrysler Bailout

Posted on November 12, 2008 | 6 Comments

GM is mounting a campaign to save itself after years of self-neglect.  Even Thomas Friedman of the New York Times thinks protecting the current company and management is a bad idea.

GM has set up a number to have your voice heard.  Granted they want you to call and profess support but you can also call this number to say “NO!” to bailing out inefficent companies that have had ample time to fix it themselves (35 years since this problem happened once before). 

Simply call 1-866-927-2233, enter your zip code and you will be able to connect with your representatives (Senate and House).  When you are connected say:

“I DO NOT support any bailout of General Motors (or Ford or Chrysler) and feel that, in the long run, the country will be better positioned if the current companies are left to make the hard-choices that will make them competitive in the future.”

In addition you can also send a personalized email to the President, Vice President and your members of congress though FreedomWorks.org.

If you need more reasons just ask the New York Times or The Wall Street Journal.

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

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A “Division” Problem for General Motors

Posted on November 12, 2008 | Leave a comment

So lets do some quick math. 

In the 1970s when General Motors had 50% US market share they had 5 consumer divisions (we’ll leave GMC as a “business” division).

That meant that each division, could, on average, have 10% market share.  That’s an OK-sized business.

Now GM has 7 divisions (again leaving GMC aside) and has 25% market share.

That means that each division could, on average, have less than 4% market share (3.57% to be precise).  That is not a very healthy nor sustainable business model (given the marketing and infrastructure costs to keep these divsions alive – as it were)

This division is the heart of GM’s division problem.  Before they can ever even hope to get better they need to benefit from a concept that made them successful in the past, namely “economies of scale”.   Right now there is no chance to take advantage of that because they have NO SCALE.

This is why there should not be a bail-out of GM and at most a “bail-down”.  They should pare down to 3 divisions at most (Cadillac, Chevy, Saab)

Until they scale-down they can never hope to scale-up.

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

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