Tag Archives: mortgage relief

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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Rearranging Deck Chairs on the Peninsula

Posted on May 22, 2009 | Leave a comment

With a good run on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.

To play it safe you need to think about where we are in the economic cycle the same way as an important scene in the movie Titanic.  This is the scene where the ship, which has been slowly sinking for about an hour, suddenly levels off when the submerged part of the boat (partially) breaks away.  Everyone is relieved that they are floating level when all of a sudden they get pulled down in a rush to the bottom.  The sinking part of the housing market just (partially) broke away and everyone is giving that sign of relief.  Strike up the band!
 
 
Here is why we are in for that second more hellish ride straight to the bottom.  In the short term the credit markets will get a swift kick when we finally have a large bank failure come to light. Give it 3-6 months and my FDIC insured money is on Bank of America (eventhough they passed their “stress” test). There goes the financing revival. Second of all housing will get another kick in the pants in two years when interest rates have to start going up again (to combat eventual inflation).  We have seen the recent good news being the result of lower interest rates so what happens when those interest rates go up? 
 

Also as any real estate agent will tell you “location, location, location”.  Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula.  Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year.  Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median.  That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median).  Its only a matter of time before it finally hits here.

My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs.  This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010.  Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.
 
Impossible you say?  Remember it was once said that the housing market could not possible crash the same way the NASDAQ did during our last bubble.  Really??  Have a look at this graph which offsets the NASDAQ peak to correspond with the peak in Bay Area housing prices.

housing-vs-nasdaq1

Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market).  For a detailed analysis of these myths please point your browser here.

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Posted in Housing Bailout, How to Lie with Economics, 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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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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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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What Would Jesu…Uh, I Mean, Warren Do?

Posted on September 30, 2008 | Leave a comment

So I have a very simple question, why don’t we get our bailout ideas from someone who knows how to pick a market as opposed to a former Wall Street CEO, failed President and 535 desperate and economically naive, attention/vote hungry lawyers?  Its not elegant but why not just take a page from Warren Buffet?

So he recently gave a cash infusion to Goldman Sachs (see the Wall Street Journal article) in a way meant to maximize his shareholder(s’) value.  The plan basically provided money with a fat interest rate that gave him priority over the exisiting shareholders.  Simply put he got protection and payout while the normal Goldman shareholders assumed most of the risk.   Isn’t that what would make for a very palatable bailout (in the eyes of the taxpayer/investor) for the rest of the banking industry?

True, Goldman is a going concern and the “cream of the crop” in terms of banks.  That is different then the cream-of-the-crap that we (the US taxpayer/investor) would be investing in but we would be the preferred shareholders.  If anything that is much better than purchasing, by design, self-described “toxic assests”. 

This plan has all the benefits of the equity portions of the bailout plan with much less of a downside, namely:

  1. No valuation issues so its quick to accomplish.  Here’s $5 billion, give us a check for $500 million every year and we’ll call it square. 
  2. First in line for payback so we get the upside
  3. Last in line for risk so we don’t get, for the most part, the downside

In short when all else fails, plagiarise

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Its time for homeowners to take responsibility for their actions

Posted on September 23, 2008 | 1 Comment

Representative Barney Frank was quoted in the Wall Street Journal today (9/23) as saying:

 

“I just think it’s inconceivable that people would say that the taxpayers should put some money at risk because of bad decisions made by people who then continue to be rewarded without any restrictions and, in fact, would be rewarded for their mistakes,”

 

While he was referring to financial executives this logic also applies to the individual homeowners when considering the “bailout” and “mortgage relief”.  It is wrong to have taxpayer money going to reward, without any restrictions,  the bad financial decisions of corporate executives or our neighbors. We have to remember that a large percentage of loans that are currently going bad were due to voluntary cash-out refinancings and NOT new mortgage originations.

 

According to RealtyTimes in 2006 (the peak of the bubble) 80% of all refinancings involved taking extra cash out against the growth in home equity to pay down consumer debt.  In short many of the people the government is trying to help with the “mortgage relief” plan are those who endangered their homes because of their consumer debt.  Without that consumer debt they would not have refinanced and would have had an equity cushion to protect them in this type of market.

 

The net effect is the currently contemplated home-owner bailout is going in a large part (indirectly) to paying down consumer debt and rewarding consumers for profligate spending.   Is that a proper use of taxpayer money?  Not according to Mr. Frank

 

So back to Mr. Frank’s quote.  What should those restrictions on homeowners be?

                                       

  • Raise loan standards to pre-bubble norms (e.g. stringent payment/income ratios, down payment minimums, loan documentation)
  • Limit loans/refinancings/modifications/relief to people that meet those proper standards.
  • Offer loans based on current house appraisal prices and at standard market (NON-subsidized) mortgage rates.

 

There is no objective/reliable way to determine who deserves help and who doesn’t (did you lie on your app? were you lied to? blow your equity on a new car?) so why not just use the proper standard consistently as that would be fair, logical, and not reward people for their mistakes. If you cannot meet the standard there is NO REASON why you should keep your house otherwise we are doomed to repeat this over-and-over again.

                                     

Its time for everyone to take their medicine (banks, financial executives and, yes Mr. Frank, even individuals). Don’t fear the falling of prices, welcome the reshuffling of assets from those that cannot afford them to those that can.  That’s how you build an engine for growth and a stable economy.

 

Also remember that saving a borrower who can’t meet the proper standards prevents another family who could meet those standards from buying a home and therefore prolongs this societal pain.  You are hurting as many people as you help.

 

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