Donny Deutsch Has ‘The Right Idea’ On Mortgage/Housing
Posted on November 24th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research
In case you have not watched Donny Deutsch over the past few weeks, his new format is in-your-face coverage about the financial crisis using CNBC anchors or contributors as guests each night. His favorites seem to be Gasparino and Jeff Mackey. It is very good. It’s funny to see the CNBC guys say things they would never say during the trading day. The word ‘insolvent’ comes up more times during the Donny hour than during than regular 12-hour CNBC day.
Housing and exotic mortgages comes up a lot. Donny is very vocal about helping out the little guy.Gasparino is all about blaming irresponsible home owners for ‘buying homes they could not afford’. Donny on the other hand says ‘people are not financial experts, they do what their banker, Realtors and mortgage professionals tell them to’.
BINGO Donny – you nailed it! Gasparino is wrong.
But Donny needs to take it one step further - at the time the loans were made, most of the people really could afford it.
This housing and mortgage crisis is not a result of millions borrowers buying beyond their means or some massive consumer driven multi-year mortgage fraud era where everyone lied to buy a home. This crisis was caused by fraud alright – but not by the consumer.
The greatest real estate bubble of all time was only able to occur because of the bank’s allowing home owners to use extraordinary leverage created through exotic loan programs and easy credit that never existed before and never will again.
PEOPLE VIEW THEIR HOME AS AN INVESTMENT – NOT A PLACE TO LIVE
What’s worse is that over the past five years there was a fundamental shift of how people viewed their home – from ‘a place to live’ to their single ‘largest investment’. How could they not when all loan programs from Subprime to Prime allowed 50% of gross income (greater when considering limited income doc loans) to be used towards debt. In the good ‘ol days when housing was viewed as a place to live financing was sound with down payments required and no more than 28% of gross income going towards housing debt. 50% debt-to-income ratios changed the game.
Make no mistake about it – MOST BORROWERS ARE NOT WALKING BECAUSE THE CAN’T AFFORD THE PAYMENTS. They are walking because all of their after-tax income each month is going out in bills and the largest portion is going to a home worth half of what they owe. When they are spending such a large portion of their income on a massively depreciating asset, it makes good financial sense to dump that asset. When you can’t sell, that means walk away.
That being said, there are many who can’t afford their payments because of an ARM adjustment. But at one time they were qualified by the bank and given the way the loan was structured they could in fact afford the home. Banks and Realtors in every city in the nation used high-leverage, exotic loans in order get people to qualify for ever increasing loan amounts. By 2005, interest only was industry standard, so was stated income.
Lenders didn’t worry over what would happen to the loan after a few months because the loan was sold and they lose all liability after six months or so. The 2/28 Subprime ARM was a perfect example of a loan program not designed to hold over the initial teaser period and one that the lender didn’t care about because most were sold and securitized. Therefore, who cares about creating loans that will last – just make loans that will last at least six months.
Even the securities investors never planned on holding these long. Exotic loans with teasers were sold as a ‘way to get into the home more cheaply’ or a ‘way to improve your credit then refi into something better a couple of years from now’. The high churn rate out of these loans was what kept MBS money flowing into this sector. They were short-term, high yield investments. This philosophy was not isolated to Subprime 2/28’s either – Prime 5/1 interest only ARMs and Pay Option ARMs were also sold the same way. ARMs were the majority of mortgages in the bubble states through the bubble years.
EVERYONE EARNED $150K PER YEAR
Due to the way the loans were structured, from 2003 through 2007 everyone made $150k a year for the purposes of buying a home. Teaser rates, interest only, high allowable debt-to-income ratios, zero down, stated income etc made all homes affordable and borrowers rich. Home prices responded by surging higher to meet the new found nationally high affordability level. As home prices surged, new loan programs were rolled out what seemed like daily to keep affordability in check.
Everyone was suckered, as these loan programs became the norm. Folks who really earned $150k a year went out and bought over priced homes based upon flawed and temporary fundamentals not knowing they were being suckered. Now they too are upside down in their home by 50% and have seen their life savings go up in smoke. They overpaid because the janitor was bidding against them using a stated income 100% interest only combo. Hey, the loan officer at the bank and the Realtor told the janitor that ‘based upon his income and credit you qualify for this loan’. Why should he argue with his bank? They know best. They are the experts.
REALITY
But now it is obvious that the past six years was an illusion and none of those easy credit, high-leverage programs exist any longer. Prices are coming down to the real affordability levels using 15 and 30-year fixed rate loans and a down payment, which has rendered the nations financial institutions and millions of home owners instantly insolvent. The same household that earns $75k per year that two years ago could buy a $650k home with no money down can now buy a $275k home with 10% down. It now takes at least $150k a year and a large down payment to buy a $650k home.
100% stated interest only and Pay option ARMs will not return. Nor will 100% HELOCs. They were doomed to fail from their creation. The banks had modeling systems that they never stress tested. You mean to tell me that it never occurred to the smartest guys in the room to plug into the model that home prices could actually fall? That was a fatal error that the world is paying for.
This is why this crisis was never ‘contained’ to Subprime. This is why those who put down 20% are walking away from their homes – it makes for a sound financial decision. Negative equity is now the leading cause of loan default among higher paper grades. As house prices fall further, more will walk.
Yes, there were people who took advantage of the system. But, that was a small percentage of everyone who bought a home on flawed and temporary market fundamentals induced by easy credit and exotic loan programs that never should have existed in the first place. This five year period of absolute recklessness and blind greed on the bank’s part was the real driver of home prices. Taking that away is ‘going straight’ is the leading driver for the destruction of the housing market and consumer.
THE SOLUTION
If not for the unregulated institutions providing unlimited and irresponsible credit and leverage to every household in America this never would have happened.
First off, I am a fan of letting the market work and the housing/foreclosure crisis clearing itself up on its own. We are already seeing positive signs that the Subprime crisis is on the other side of the hill mostly on its own. The problem is that the Alt-A, Jumbo Prime and Prime mountains lie ahead. However, if the government and banks are hell bent on modifications, I am going to use whatever voice I have to try to convince as many as possible to do it the right way.
This blame does mostly lie with the banks, law makers, and regulators (including Greenspan) who branded and endorsed these loans as mainstream until 80% of all loans in the state of CA in 2006 were exotic by definition. This is very similar to the cigarette makers not telling the American consumer for decades that Cigarettes were highly addictive and cause cancer. They were branded as the ‘cool thing to do’ and then lied about the health effects and addictive qualities in nicotine for two decades until science caught up.
To fix the housing market and greatly aid the economy you must focus on two important segments that made up 80% of all housing activity – the refinancer and move-up buyer. Now they are the minority. This is a major problem. We need to get these people back into the market. Investors, vacation home buyers, renters and first-time home buyers have always been the smallest segments of the market and now they its primary participants. The may be great for low priced homes in foreclosure epicenters, but as the problem jumps tracks into Alt-A, Jumbo Prime and Prime, higher end areas will follow down the same path. Without any reasonable financing available for loans over $417k, it is already a foregone conclusion.
Prices are coming down fast and the market will clear at some point and at some level. But that level could be years away. The banks, regulators and lawmakers with all of their terrible loan modification plans will ensure it takes two decades for this to happen. See ‘The Great Loan Modification Pump- God Save Us All! for the reason why. Recidivism rate after loan mod is 50% because most loan mods keep the borrowers levered up and underwater in their homes. The plans by FDIC, banks and lawmakers do exactly this. My plan will achieve the same within a couple of years. Yes, there will be pain but much less. As with the financial institutions, the quicker the borrowers de-lever and raise cash the better for the housing market and economy in general.
It is time for the very same financial institutions that created all of this to do what’s right and re-underwrite every loan originated between 2003 – 2007 using prudent underwriting guidelines. Then, they must reduce the principal balance to what the borrower really earns using a 28% housing and 36% total debt-to-income ratio at a market rate 30-year fixed loan. When home owners are levered at 28/36 they are able to save money and live a decent lifestyle. If they go upside down in their property who cares – they are still able to save money. At 28/36, their home once again becomes a place to live.
If reducing the principal balance to 28/36 on a market rate 30-year fixed loan is $100k lower than the present value of the home, the bank can take can take the differential through a second mortgage or equity warrant. if the borrower sells or walks away then, the banks gets paid. But the home owner gets all of the upside. If the borrowers can’t prove income, then they need to leave the house and rent. They should have been renters all along. Anything less and the program will fail.
This will not prevent housing prices from coming down substantially over the next few years especially considering the massive multi-year foreclosure overhang, gross amount of negative equity across all paper grades and terrible mortgage modifications that the banks and regulatory agencies are now trying to push. But at least it would be the best way to begin to undo the irresponsibility of the past five years and get back to basics where prices are based primarily on traditional factors such as incomes, interest rates, macroeconomic conditions, sentiment and rental rates. - Best, Mr Mortgage
November 24th, 2008 4:54 pm
Mr Mortgage,
Herein lies the problem. What about us souls who knew this was going to implode and just want mark to market? Lowering the principal just allows someone then to possibly cash out after they already cashed out a heloc. Once again, the savers and responsible get screwed at the expense of those that partied. If you lower the principal, then you must re-appraise like it was a sell, so any house in the neighborhood has that new price appraisal. It is only fair.
RGDS,
Rod
November 24th, 2008 5:02 pm
So under your plan the person who has $100,000 income and bought a $1 million home no money down, gets his principle reduced so that 28% of his after tax income pays the mortgage and someone else with $100,000 income who bought a $300,000 home gets to watch the other person gloat and gets to pay taxes to support the person with the $1 million (now $600,000 home).
Yeah, that will really prevent this from happening again since everyone will now know that whoever lies and gets the biggest mortgage gets to keep the biggest house, coutesty of the suckers didn’t leverage as much.
November 24th, 2008 5:14 pm
Really excellent post, but everyone was suckered everywhere by cheap credit, it was not just housing. The big picture needs to be put under the looking glass. The entire global financial system needs a reset with transparency and open books throughout before trust will ever return. Cheap credit along with intentionally created and strategically placed derivatives have allowed the ruling elite to have everyone by the credit balls.
Bye bye middle class, and say hello to world wide cheap labor and a ruler and ruled world, with the ruled in perpetual conflict.
Its a neocon financial coup and Obama continues with the neocon cabal.
November 24th, 2008 5:28 pm
I love the show. And YES – I did notice that they were a lot more “honest”, about this situation, than they are on the early morning shows.
hmmmmmm….LOL!
November 24th, 2008 5:29 pm
Mr. Mortgage — your knowledge is top notch, and I admire your enthusiasm and energy, but I’m having trouble continuing to read your blog when you suggest solutions such as this. “Lance” above me has it right.
People who cannot afford a home the conventional way need to rent — it is no big deal.
-Tom
November 24th, 2008 5:42 pm
MrM-
It is time for the very same financial institutions that created all of this to do what’s right and re-underwrite every loan originated between 2003 – 2007 using prudent underwriting guidelines.
Why should they do this? What about those of us who DO make 100k+/yr, have both (wife and mine) ~$30k cars paid for, no debt, both credit scores over 800? We’re the ones who looked at the IOs and oARMs and realized theres no way in HELL we could cover the recasted payment, so we figured we’d rent for MUCH longer.
On top of that, these foreclosures are not the source of the price declines (as many of us know) – but they ARE helping with the speed IMHO. They’re the gas pedal back to ‘normal’. I’d like to buy a house now, as we have a down payment ready to go, but its just not there yet.
And to say all these people who bought are victims is a load of crap. “They did what the professionals told them to do” – you mean professional salesmen? Do you go to a car lot (esp a used one) and listen to every word the guy says? NO! You do your research via the INTERNET.
Much of the buying that went on is America’s problem of buying what’s pitched to them, rather than taking at least a hint of time and researching the single largest purchase you’ll ever make in your entire life.
November 24th, 2008 6:03 pm
A lot of mortgage professionals could actually afford their homes before the industry imploded. In fact, I’d go further and say that most commissioned people could afford their homes until the economy tanked. We had a huge economic boom (in all sectors of the economy) and most everyone was making really good money (not saying everyone was making 150k), but when things slow down and you were relying on that income it’s going to hit you hard.
November 24th, 2008 6:52 pm
Mr. M. I am surprised you came back to this story line so quickly and you know your going to take another beating over it. I on the other hand couldn’t agree with you more!!
I have a new twist to share with you and would like your thoughts on it. The cure you offer up to help clean up this mess is sound and will do the job. With that being said let’s assume for a minute the talking heads actually know this too. Now they feel the public wouldn’t buy into this idea (they don’t appear too on your site and your in favor by many on other issues) so they come up with a plan to accomplish it over time and also that time helps them help the wealthiest. I know what your thinking… this is a consiracy theory. humor me and follow me it gets interesting. The banks would need to be in on this to pull it off and Paulson did arrive later in this game. He knows a lot of people in the biggest of our banking industry now doesn’t he? Elections played a part too as you will see. This was actually brilliant in many ways!!! Now let’s play…
First you take control of the mortgage market and quickly right up front. Kind of like the bridges and main passages in any war. By taking over Fannie and Freddie they quickly took control of 50% of homeowners paper. They know AIG is ailing and sit waiting to pounce on another 15% or so upping their controling stake in this game. Mean while in the background they start talking with the banks in secret to lay out a way in which they will be well positioned to take on huge hits in write downs. All of this back stopped by the tax payer off course. So let’s see how this is setting up…
The Government now holds 65% of the housing mortgage paper in the entire country. The Government has sent $250 Billion (with another $250 Billion just waiting in the wings) to banks in this country with some kind of agreement… wink – wink. The subprime issue is behind us and that distressed inventory wll appease the lower class for quite sometime. Now let’s focus on Obamas middle class. Next up we hear some talk about the Government allowing judges to take care of this if the lenders don’t. Trust me this was not a scare tactic, but rather a shot accross the bow.
Today we now hear the Government has taken control of over nearly $400 Billion in toxic loan paper from CITI. Hmmm kind of fits the bill doesn’t it. This foes along with Fannie and Freddies crap right? So now they start creating a backroom plan to have several banks (the big 9 for certain), that will be selected to start writing down principle and taking the write downs to their portfolios. These lenders will also start to recieve the balance of $250 Billion as a direct shot in the arm. The Government has in essence at this point taking complete control over all of the L3 and much of the L2 on all of these selected major lenders books and have back stopped all (at tax payers expense off course) the toxic paper in the mortgage markets.
The ultimate plan was for the write down of principle. They knew it was the only way any plan would work, but they needed time. Float some ill concieved ideas out at very little cost (100 applicants in the $400 Billion Hope for Homeowners Plan) to the plans approved amount and presto you just captured $400 Billion more for principle write downs and your going to need it. So how much do they have in the wings and how much principle needs to be written down? Are we there yet? Have we got enough that was approved for other plans and already sent out to get this off of the ground? I think we do!!!
Principle write downs coming to a bank near you…
November 24th, 2008 6:58 pm
We had a boom because of a massive credit bubble which juiced the economy and created much of those high paying commissioned jobs you refer to. You can’t build the foundation of an economy on credit which is all the U.S. had left. People believed the boom was sustainable, and credit was readily available, so they leveraged themselves to the hilt hoping to catch the gravy train as asset values soared like never before. Well of course it wasn’t sustainable, and now we are all left to pick up the pieces. Frankly, I’m one of those people who is sick and tired of hearing no one saw this coming or that homebuyers were victimized. Baloney. If you are going to make what for most people is the largest purchase of your life then you look at all the fine print and if you can’t understand it you hire a lawyer who can. Let me tell you, people didn’t due ANY due diligence at all and most people new exactly what they signed up for. In my area, for 4 years house after house went under contract within 2 days with absolutely no contingencies and usually with escalation clauses. People didn’t care because they were always sure they would be saved by appreciation which was unprecedented due to speculative fervor and leveraged financing. In my view, absolutely anyone with there eyes open could see clearly that this was a classic bubble that would end badly. The signs were everywhere. Those of us who were paying attention and were prudent and cautious will unfortunately have to pay along with everyone else.
November 24th, 2008 7:09 pm
MR.M
I AGREE WITH YOU ON HOW HOMEOWNERS PURCHASED AND HOW BANKS RAISED THE VALUES. THERE ARE JUST A FEW EXCEPTIONS:
1- PRINCIPAL SHOULD BE REDUCED FOR ALL UNDERWATER HOMEOWNERS NOT JUST WHO PURCHASED BETWEEN 2003-2007
2- THE REDUCTION SHOULD BE BASED ON THE TRUE CURRENT MARKET VALUE OF THE AREA REGARDLESS OF THE BORROWERS INCOME.
3- I AGREE WITH RE-QUALIFICATION OF THE BORROWERS WITH QUIDELINES, WHY USE CONVENTIONAL GUIDELINES AND NOT FHA’S OF 29/41 ALLOWING FOR THE AVERAGE HOMEOWNERS CAR PAYMENTS AND CHARGE CARDS?
4- I ALSO AGREE WITH IF THEY CAN’T QUALIFY FOR THE REDUCED PRINCIPAL LOAN PAYMENT AT A FIXED 30 YEAR RATE, THEY SHOULD HAVE BEEN RENTERS, LET THEM RETURN TO RENTING.
4- I AGREE WITH LENDERS SHOULD TAKE A LOSS ON EVERY UNDERWATER HOMEOWNER, BECAUSE THEY ARE THE REASON FOR THE CORRECTION OF PRICES NEEDED ( ALLOWING PRICES TO INFLATE ABOVE NORMAL INCOMES) AND THEY ARE ALSO THE REASON FOR THE DECLINE IN VALUES. ALL CLOSED SALES IN YOUR AREA ARE THE COMPARABLES USED TO VALUE YOUR HOUSE. SINCE REO’S, ALMOST 50% OF THE MARKET, ARE SELLING AT 30-50% UNDER THE MARKET VALUE, THEY ARE EFFECTIVELY LOWERING THE VALUE WITH EVERY CLOSED SALE.
5-SINCE HOME VALUES HAVE DECREASED, AND THEY WON’T BE ABLE TO RETURN FOR “?”, MY ESTIMATE IS AT LEAST 10 YEARS AND IN SOME AREAS LONGER TO MATCH BORROWERS INCOMES AND INFLATION, WHY ALLOW FOR A SECOND MORTGAGE TO KEEP THE HOMEOWNER IN NEGATIVE EQUITY?
OKAY, I AM SLOW, IT TOOK ME TWO TIMES TO UNDERSTAND WHAT YOU ARE SAYING, IT WILL BE THE BANKS PROTECTED EQUITY.
MY QUESTION THEN IS, IF YOU AND I ARE NEIGHBORS BOTH IN NEGATIVE EQUITY, BUT ONE OF US MAKES MORE THEN THE OTHER, WHERE IS THE FAIRNESS IF MY PAYMENT IS LOWER THEN YOURS BECAUSE I ALSO HAVE TWO BRAND NEW CARDS IN MY DRIVEWAY?
6-WHERE IN YOUR PLAN, DOES IT SHOW HOW THE MODIFIED LOANS WILL NOT RETURN TO THE STATUS OF BEING UNDERWATER, IF NOTHING IS DONE TO STOP THE DEFLATIONARY CYCLE OF HOUSING PRICES OR THE NEGATIVE FEEDBACK LOOP AS YOU CALL IT?
DAFAX:
7-HOMEBUYING HAS ALWAYS BEEN ABOUT THE MONTHLY PAYMENT AND CAN THE BORROWER AFFORD IT TODAY. JUST LIKE A CAR PURCHASE, ALL MOST PEOPLE CARE ABOUT IS HOW MUCH DOES IT COST MONTHLY. THAT IS HOW THE PROFESSIONALS “PITCHED” IT TO THEM FOR THE LAST 30 YEARS OF BANKING.
THE PROBLEM WAS THE PROGRAMS OFFERED AND THE LIBERAL UNDERWRITING RATIO’S THAT DID QUALIFIED “SOME” HOMEOWNERS FOR MORE HOUSE THEN THEY SHOULD HAVE PURCHASED BUT FOR MOST PART IT WAS THE INCREASE IN MONTHLY PAYMENTS FROM ADJUSTABLE RATE CHANGES OR JUST THE PRICE OF BASIC LIVING EXPENSES, HEAT, FOOD,PROPERTY TAXES ALSO INCREASED WHILE QUALIFIED AT TOO HIGH OF A RATIO FOR IT TO WORK 50% EVER BUT THEY WERE ISSUED A MORTGAGE LOAN BY THE LENDER WHO WAS SUPPOSED TO BE THE EXPERT ON WHAT WORKED AND DIDN’T FOR HOMEOWNERS, OR WHY ELSE WILL THEY HAVE GOT THE MORTGAGE? THIS GROUP OF HOMEOWNERS REPRESENT APPROXIMATELY 20% OF THE 75 MILLION HOMEOWNERS.
PRICES WILL CONTINUE TO FALL UNTIL FORECLOSURES BEING DISCOUNTED UNDER THE MARKET ARE ELIMINATED,
SO YOU WILL HAVE A WHILE LONGER TO WAIT.
November 24th, 2008 7:15 pm
MR.M
I ALSO WANTED TO SAY THANK YOU FOR THE SITE, IT IS INFORMATIVE BESIDES FOR THE FACT DOESN’T IT STATE MR. MORTGAGES RESEARCH AND OPINION AT THE BEGINNING.
I LIKE THE SITE BECAUSE I DO GET TO READ NOT JUST YOUR OPINIONS BUT EVERYONE ELSE’S AS WELL.
KEEP UP YOUR GOOD WORK
November 24th, 2008 7:30 pm
Check you CAPS lock. Difficult to read.
November 24th, 2008 7:35 pm
You have got to be an a$$hole to buy a house you cannot afford.
This stupid notion that someone other than the borrower had some obligation to counsel them that they shouldn’t take a loan out that has payments of 3500 per month, when their take home pay is $4000 is nothing more than some one stupid moron making excuses for another.
If the borrower is so stupid to enter into that agreement, they get what they deserve – and that probably means they should be renting.
November 24th, 2008 7:51 pm
[...] Full Article Here [...]
November 24th, 2008 8:03 pm
I agree that your remedy rewards greed. To add salt to the wound, it leaves someone like me that left my homestate, a bubble zone w/my friends and family and everything I knew to raise my kids in prudent solvency in some state with different ideals and different attitudes a real kick in the pants.
I guess I should have given in and become a poser.
November 24th, 2008 8:13 pm
Susan, if I may be so bold as to answer this as well seeing as how I just laid out the plan I feel the Government has in place to do this very thing… which will indeed work.
1- PRINCIPAL SHOULD BE REDUCED FOR ALL UNDERWATER HOMEOWNERS NOT JUST WHO PURCHASED BETWEEN 2003-2007 >>> No it shouldn’t. You want to take the most money that you have and hit the largest target area you have right in the bullseye. This is not a buckshot approach, but targeted as it is , it will help so many more in the end.
2- THE REDUCTION SHOULD BE BASED ON THE TRUE CURRENT MARKET VALUE OF THE AREA REGARDLESS OF THE BORROWERS INCOME. >>> No it shouldn’t. Again this is not a buckshot approach. There is a very targeted result here to be had. Strict standards of things like documented income will play a huge role. Not everyone can obviously be saved, so you save whomever you reasonably can. How many as that? As many as you can save using a pre-determined guide line approach. If those results don’t get it done then you open up the paremeters until they do. Specific peoples situations are what rules here and not the area that they live.
3- I AGREE WITH RE-QUALIFICATION OF THE BORROWERS WITH QUIDELINES, WHY USE CONVENTIONAL GUIDELINES AND NOT FHA’S OF 29/41 ALLOWING FOR THE AVERAGE HOMEOWNERS CAR PAYMENTS AND CHARGE CARDS? >>> I use the guidelines that will get the desird results myself. You can always tweak numbers to gain a greater result, but without a solid build foundation with this in mind you will fail. Not easy to pull off, but very possible with a bright person allowed to act on his / her notions. I think personally a more conservative approach here will be more prudent to get the overall desired results. Give too much away on incedentials to your main plan and the whole plan could falter. Not a good idea to include other things that are other than the target.
4- I ALSO AGREE WITH IF THEY CAN’T QUALIFY FOR THE REDUCED PRINCIPAL LOAN PAYMENT AT A FIXED 30 YEAR RATE, THEY SHOULD HAVE BEEN RENTERS, LET THEM RETURN TO RENTING. >>> I couldn’t agree with you more and this plans guidelines kick these folks to the curb. Them and non primary residence speculators and investers as well. This is once again very targeted.
4- I AGREE WITH LENDERS SHOULD TAKE A LOSS ON EVERY UNDERWATER HOMEOWNER, BECAUSE THEY ARE THE REASON FOR THE CORRECTION OF PRICES NEEDED ( ALLOWING PRICES TO INFLATE ABOVE NORMAL INCOMES) AND THEY ARE ALSO THE REASON FOR THE DECLINE IN VALUES. ALL CLOSED SALES IN YOUR AREA ARE THE COMPARABLES USED TO VALUE YOUR HOUSE. SINCE REO’S, ALMOST 50% OF THE MARKET, ARE SELLING AT 30-50% UNDER THE MARKET VALUE, THEY ARE EFFECTIVELY LOWERING THE VALUE WITH EVERY CLOSED SALE. >>> The lenders take the losses and the subsequent gains down the road as a result of this short term move. These losses are covered for now with these bailouts. The Government (and the public should too) hopes prices come back to a level that ups what we paid and if so that means the economy and stimulas is working which is good for everyone. If it doesn’t then we all will pay for a long time to clean up the mess. The part I hate about it, but the price we all pay for not democratically putting our votes to good use and getting some of these idiots in office out. You don’t like what they are doing then vote these career politicians out of office. We screwed up our last chance but have another even more important one coming in two more years.
5-SINCE HOME VALUES HAVE DECREASED, AND THEY WON’T BE ABLE TO RETURN FOR “?”, MY ESTIMATE IS AT LEAST 10 YEARS AND IN SOME AREAS LONGER TO MATCH BORROWERS INCOMES AND INFLATION, WHY ALLOW FOR A SECOND MORTGAGE TO KEEP THE HOMEOWNER IN NEGATIVE EQUITY? >>> I am not in total agreement with this portion of the Mr. M. plan either. I don’t see room for seconds in this deal.
MY QUESTION THEN IS, IF YOU AND I ARE NEIGHBORS BOTH IN NEGATIVE EQUITY, BUT ONE OF US MAKES MORE THEN THE OTHER, WHERE IS THE FAIRNESS IF MY PAYMENT IS LOWER THEN YOURS BECAUSE I ALSO HAVE TWO BRAND NEW CARDS IN MY DRIVEWAY? >>> Guidelines will address this so either your in or your out. One of you or both of you could be kicked to the curb or given a loan. That decision however is answered in the very targeted and strict guidelines.
6-WHERE IN YOUR PLAN, DOES IT SHOW HOW THE MODIFIED LOANS WILL NOT RETURN TO THE STATUS OF BEING UNDERWATER, IF NOTHING IS DONE TO STOP THE DEFLATIONARY CYCLE OF HOUSING PRICES OR THE NEGATIVE FEEDBACK LOOP AS YOU CALL IT? >>> I have not determined that as of yet because I have two scenarios that I don’t feel like laying out right now because niether is needed until I see what the numbers are. The plans for this will be a result of how much is truly needed once the guidelines are in place in high enough numbers to take some surveys.
This is a plan that will work and principle write downs are in my opinion as well as Mr. M. it seems, the only way a plan will work. It is the only thing that gets the owner back to right, and affordable numbers for their income and the situation of the area. Under water homeowners cannot possibly be expected to not walk without anything short of this. They hold the cards by law so pony up or go under should be their view. Let me say this… any and all attempts at fixing this problem without the reduction of principle will fail miserably and will just cost us all that much more money down the road… period!
November 24th, 2008 8:20 pm
I am amazed how many people just dont get what you are saying Mr. Mortgage….its spot on , yet amazingly most come on here to bitch , that they do not get anything out of it….half of these crybabbies, i guarantee you, will NEVER buy a house they either cant afford one or they are afraid to take the leap and because they will always be deer frozen in the headlights, they do not want to look at the whole problem and the ONLY solution….i believe in 100% personal responability , HOWEVER when FRAUD is involved that trumps any responability…..why the crybabies do not see how the prices were a FRAUD , yet someone who bought a house with 20% down and 30 year fix, isnt just someone who bought a house they couldnt afford and there is no reason they should be upside down in less than 24 months time….and i dont want to hear the 20/20 hindsite experts who said they knew this bubble would burst and they are still waiting to buy a home …..sounds like someone who will never do anything in their life, except complain and judge others
November 24th, 2008 8:26 pm
STU:
TO ELIMINATE NEGATIVE EQUITY , USING THE FIQUIRES OF 33% OF ALL HOMEOWNERS ARE OR WILL BE AFFECTED BY NEGATIVE EQUITY OF THE OUTSTANDING MORTGAGES OF 11.3 TRILLION DOLLARS. THEN IF YOU REDUCED THE MORTGAGES TO 60% OF THE MARKET PEAK, IT WOULD COST THE GOVERNMENT, BANKS AND INVESTORS THE SUM OF 1.492 TRILLION DOLLARS.
THIS IS REALLY DOABLE EXCEPT FOR A FEW PROBLEMS,
YOU COULD LET THE BANKS BORROW THE TARP AND NERA FUNDS OF ONE TRILLION DOLLARS TO START THE BALL ROLLING , AS THEY REQUALIFY, MODIFY,OR REFINANCE A HOMEOWNER FROM $300,000. TO $180,000. THEY WILL LOSE AN ASSET OF $300,000 FROM THEIR BALANCE SHEETS THAT WILL BE REPLACED WITH AN ASSET OF $180,000, TIPPING THEM OVER INTO THE “NEGATIVE” THAT IS HOW OVERLEVERAGE THEY MADE THEMSELVES, UNLESS THE FDIC AND RESERVE CHANGE THE REQUIREMENTS AND WRITE DOWNS ALLOWED DURING THE TRANSITION OF THE PROPOSAL, OTHERWISE BASICALLY ALL BANKS WILL FAIL.
THE REAL PROBLEM THOUGH IS THE CREDIT DEFAULT SWAPS, INSURANCE, DERIVATIVES,SHADOW MARKET OR WHATEVER YOU WANT TO CALL THEM.
RIGHT NOW SOME OF THEM ARE BOOSTING THE BANKS BALANCE SHEETS AS INSURED ASSETS HELPING THE REQUIRED RESERVES STAY LOW, IF THE LOAN BALANCES WERE ACTUALLY REDUCED, MARKERS/PAYMENTS WOULD BE CALLED IN AND NO ENTITY HAS ENOUGH MONEY TO PAY FOR ALL THEIR BETTING, THERE WAS NO RESERVE REQUIREMENT, IT WAS JUST A WAY TO TAKE A PROFIT OUT OF A PRODUCT.
MY OPINION IS HARSH THOUGH, I BELEIVE MOST OF THEM WOULD CANCEL EACH OTHER OUT, EXCEPT FOR THE CDS THAT WERE TRADED/GAMBLED OUTSIDE OF THE USA. BUT CDS IS A FORM OF A BET OR GAMBLE AGAINST A PRODUCT FOR “NOT PERFORMING” FOR WHICH INSURANCE WAS SUPPOSELY ISSUED AND A PREMIUM/PROFIT WAS INDEED PAID FOR, AND THE SWAP COULD BE RE-SWAPPED AGAIN AND AGAIN ON THE SAME PRODUCT
IN MY OPINION, THAT IS WHAT THE GOVERNMENT IS WORRIED ABOUT THE COLLAPSE OF ALL OF OUR BANKS THRU GREED AFFECTING OTHER COUNTRIES AND SECOND THE PUBLIC MIGHT ACTUALLY DEMAND THAT THE CEO’S AND UPPER/MIDDLE MANAGEMENTS SALARIES AND BONUSES BE REDUCED, ESPECIALLY WHILE THEY ARE USING OUR MONEY. AN EXAMPLE, THIRTY CEO’S IN THE MORTGAGE/BANKING INDUSTRY EARNED 1.47 BILLION DOLLARS IN ONE YEAR,I LEFT EACH CEO, ONE MILLION DOLLARS AS SALARY, I AM GENEROUS. I STOPPED COUNTING TO INCLUDE ALL OF THEM.
I ALSO BELIEVE WE ARE NOT BEING TOLD EVERYTHING, AND THE CURRENT GOVERNMENT IS JUST TRYING TO HOLD ON TO THE REINS FOR THE NEW PRESIDENT TO TAKE OVER FOR BLAME OR CHANGE, WE WILL SEE.
November 24th, 2008 8:40 pm
Mr Mortgage, you nailed it! Finally someone get’s it! Thank you! Your biggest fan! Rob
November 24th, 2008 8:46 pm
Great comments all of you – Stu…get your own blog damnit.
Dafox said: “Why should they do this? What about those of us who DO make 100k+/yr, have both (wife and mine) ~$30k cars paid for, no debt, both credit scores over 800? We’re the ones who looked at the IOs and oARMs and realized theres no way in HELL we could cover the recasted payment, so we figured we’d rent for MUCH longer.”
I say ‘good for you’. Now you can but cheaper.
November 24th, 2008 8:51 pm
So I take it you are not discounting my idea?
November 24th, 2008 8:54 pm
Mr. Mortgage
Your plan is expedient, like pissing in your boots to keep your feet warm.
People are in houses that they don’t belong in. The forclosure process will reshuffle the deck. After your plan, all the responsible 100k earners are living in a home that they owe $300K on but is worth 150K (no writedown of principle because they can afford the payment). The irresponsible 100k earners are living in a home that they owe 300K and it’s worth 300K (after being written down).
If we do the hard work of kicking people out of homes that they shouldn’t have, then those who can afford them will occupy them. It will be painful, but it’s the right thing to do, and we’ll be better off in the long run.
November 24th, 2008 9:01 pm
Dafox quoted: “And to say all these people who bought are victims is a load of crap. “They did what the professionals told them to do” – you mean professional salesmen? Do you go to a car lot (esp a used one) and listen to every word the guy says? NO! You do your research via the INTERNET.
Much of the buying that went on is America’s problem of buying what’s pitched to them, rather than taking at least a hint of time and researching the single largest purchase you’ll ever make in your entire life.”
The bankers were legally bound not to extend toxic credit to borrowers. It is against the law to loan to people that do not show the ability to repay in the underwriting context. Let the lawsuits – beginning by the “prime” borrowers (now defaulting for the next greater wave…) who were actually lied to by the bankers… If you can’t trust a banker, who can you trust? Your government?
November 24th, 2008 9:04 pm
Susan – For the love of god, turn off your caps lock. You look like you time warped from a 1995 AOL board. No one does that if they want to be taken seriously.
And I hate to go around and around on this, but I still don’t think we should give bubble buyers a break because they were “fooled” by the experts around them. Why should some people (who have been living in and enjoying their homes) get hundreds of thousands of dollars handed to them, while those of us who didn’t buy (and have been making sacrifices in our small apartments to save for a down payment) get nothing except more artificially inflated prices when we finally make the move to buy?
I understand how forgiving the debt would keep people in their homes and foreclosures off the market, but I think that rewarding people for making stupid mistakes (and lets be honest, that’s exactly what it is, since this will benefit people who bought WAY too much or who shouldn’t have bought at all) is too high a price to pay for short-term stability. I don’t think it’s worth it, but I can see why other people would think otherwise.
November 24th, 2008 9:20 pm
Admin – “I say ‘good for you’. Now you can buy cheaper.”
Yeah, but not as cheap as we could if all the foreclosures that SHOULD be on the market WERE on the market.
If I’ve been saving for two years and buy a $500K place that had gone for $700K two years earlier, is that really a benefit when the neighbor who bought at $700K but has $200K of his debt forgiven? Why is buying cheaper “good for me” when I could have bought earlier and ended up owing exactly the same amount of money?
November 24th, 2008 9:21 pm
What’s that term for people who peddle grand *solutions* for the theoretical problems of third parties????
Oh, yeah. It’s “politicians”.
Mr. M, why are you shifting from *analyst* to *advocate*?
November 24th, 2008 9:30 pm
The market needs to cleanse itself the good old fashioned way. Homes get foreclosed. That’s all. Govt intervention at this level is socialism. This zombify’s the housing market just like the govt intervention did to Japanese banks. And the US govt is now doing. The market worked fine up until the lenders went crazy and regulation took a powder. Now it’s coming back into line. That’s good. And how it should behave. This is a normal part of any business cycle where credit got way outta hand. It’s happened before in history plenty of times.
The analysis is great work. But like all blogs, that I read, there’s a tendency for the people to want to create a “solution” to the event. I guess that’s human nature.
November 24th, 2008 9:43 pm
Mr. M., I always enjoy reading your posts, but what drives me nuts is the reduced principle idea.
So, the clueless homebuyer gets more goodies even after they have HELOCed to the max. Is there going to be any accountability for HELOCs or should they just be able to write that to zero? Keep the Hummers, boat, the 52 inch plasma, the exotic vacations and the house and then when the house appreciates in ten years they get to keep the entire profit from the reduced price the bank gave them. Perfect, especially if you live in bubble mania CA, AZ, NV, FL, GA, but if you live outside the big bubble, you get to pay for all the clowns that can’t understand anything but sunny weather all the time. Solution: leave the house, rent and save some money to buy something you can afford at a later time. But then again, if the banking thieves get bailed out, the lousy automakers get bailed out, then the financially clueless and even the no doc liars should, too.
Conversation on the bubble-state lawns: Hey, Fred, I just had the principle on my home reduced by 120k and now I pay a lot less in my mortgage payment than you do. Too bad for you Fred, you should have stopped paying your mortgage. Maybe next time and there will be a next time.
Or, I only make $10 an hour, but I want to keep the 3500 sq ft house I bought for 500k. Can you drop the principle to a point where I can afford to stay there?
Sorry for the rant, but this bailout BS gets old after a while.
November 24th, 2008 9:45 pm
this massive re-u/w would encompass previous stated income loans. If the income on the new, fully u/w 28/36 principle reduction loan is not the same as (or very near) the income stated on the original loan’s 1003, these borrowers have just self incriminated themselves on perjury charges. The consequence? A multi thousand dollar principle reduction. This takes moral hazard to a new level.
November 24th, 2008 10:05 pm
oops…I meant to say, “let the lawsuits BEGIN!”
November 24th, 2008 10:18 pm
Prices are coming down fast and the market will clear at some point and at some level. But that level could be years away. The banks, regulators and lawmakers with all of their terrible loan modification plans will ensure it takes two decades for this to happen. My plan will achieve the same within a couple of years. Yes, there will be pain but much less. Who care about those who did everything right by putting 20% down – they get a principal balance reduction too to what they really earn or 90% of the home’s value.
November 24th, 2008 10:25 pm
i put 20% down and took a 30 year fixed instead of some bozo 2 year no interest, so i should be one of the clowns bashing Mr. Mortgage as i could have been paying $1000 a month less than i do, HOWEVER i see the whole picture AND i am more pissed at the lying bankers for casuing this mess and having my 20% down payment basically disappear….i hope to get a reduction in principle for EVERYONE as its the only answer i have seen so far that addresses the real problem and is the quickest solution ,but if it doesnt happen then i will make sure i get mine back in TRIPLE from these banking thieves
November 24th, 2008 10:31 pm
One good thing about govt in general is that they’re not really interested in “solving” the problem for most americans. They’re trying to rescue the lenders. And that’s about impossible at this point. So down we’ll go. And that’s the way it should be. Eventhough the lenders will flail and some will be zombies, the prices for homes will continue to fall. Especially as unemployment takes many more buyers out of the market. The market forces will trump the govt every time. It always has.
November 24th, 2008 10:44 pm
This coin has two sides:
I don’t particularly buy the notion that all or most all of the people who got into these exotics were duped. Some for sure but lets consider here that human nature has a big role to play. When you offer someone a carrot like the sellers did its hard not to go for it. And why on earth did they (the buyers) do that?? Obviously, (to me anyway), it was on the belief that the prices would keep on going up and the asset value of the properties would continue to increase. We all know how that turned out. I’m not giving the slime who pushed this crap the benefit of the doubt here, as on the other side of the coin was the tremendous greed and anyone’s expense. The government has a huge responsibility here as well as the easy credit was high on the agenda (can you say Greenspan!) These “sellers” were as corrupt and crooked as they come and many should be vacationing in jail cells where they can test to see how anal retentive they really are.
Just my .02
November 24th, 2008 10:53 pm
Mr. M – I’m sorry but if the majority of our society cannot take responsibility for the biggest purchase they may ever make, God help us! Personal responsibility is a thing of the past. It was not a “few” people as you indicate that knew they were buying more house then they could afford. I talked with a number of the dumb sob. They thought the house would go up, and they would sell it or refinance it. Yes, lenders were a big part of the problem, but guess what, I have to sign my name to the doc. and I better know damn well what I’m signing. Being in the industry, why do you give the homeowner a pass. I’m disgusted by the ignorance of our society. If Tom Brokaw wrote a book about the “greatest” generation, than we are living amongst the “dumbest” generation!
November 24th, 2008 11:12 pm
Carrie: To add salt to the wound, it leaves someone like me that left my homestate, a bubble zone w/my friends and family and everything I knew to raise my kids in prudent solvency in some state with different ideals and different attitudes a real kick in the pants.
I know someone like you who left Maryland/Washington DC U.S.A. to live in Saskatoon Saskatchewan so he could raise his kids in prudent solvency. Unlike you he has family in Saskatoon.
I tried to look up Donny Deutsch on CNBC video’s. I found Tom Deutsch, Jim Crammer and Maria Bartiromo but no Donny Deutsch.
November 25th, 2008 12:13 am
“Gasparino is all about blaming irresponsible home owners for ‘buying homes they could not afford’.”
Sorry but have not watched the show. Blaming the home holder is like saying the dumbest people in the room brought down Wall Street and the financial system, Wiped out the stockholders of the banks and threw us into a deflation. Not too much different from the G20 stating that it was people buying investments that they did not understand rather than blaming the investment products themselves.
The reason we have consumer protection laws is that the consumer is considered the least sophisticated. So here is the question that should be put forth to Gasparino. What has Wall Street done to prevent a second wave attack of these home holders?
November 25th, 2008 12:53 am
General apology, I am sorry for the caps, I work in them, so I don’t see them any more.
Stu:
Unless you were Mr. M, my note wasn’t to you, it was a response to his article.
I also laid out a plan that addresses, terminates and controls the deflationary cycle of falling values at up to 60% of the market peak for each individual area, if appreciation exceeded the 40% increase since 2000, the beginning and the decrease is also evident. It is not targeted for the biggest bang or bulleye, but Nationwide for all homeowners. It doesn’t rely on a trickle OVER effect, but works for all homeowners. I admit the hardest hit bubble states, do get the biggest bang, but all states get a bang right away.
Are you aware that real estate’s motto is,
LOCATION, LOCATION, LOCATION. not income, but it is true that people of the same income bracket are drawn to the same location creating the value of the location.
Since any plan works with people not fiqures, it has to have some flexibility and exceptions to certain situations, or it will never work. Examples, allowing a co-signer, or letting the first ratio be higher if the second ratio is at 41%,or the ratio would be reduced when a car loan is paid off in 6 months. My plan has all these exceptions and more, so it would work.
Gains on a short term move, if prices increase in a normal market 2-4% per Case-Shiller Indexes, Not counting in stricker underwriting guidelines, or higher unemployement or less savings on borrowers or inflation or no return of exotic loan programs, how long will it take at 2% appreciation to realize a 40% loss in equity?
The losses are not covered by the bail out.It will cost 1.492 TRILLION dollars to erase negative equity.
While I believe the only real solution is PRINCIPAL REDUCTIONS to eliminate negative equity, it will not work without having a plan in effect to stop the deflationary cycle, or principal reductions will be needed again and by more homeowners eliminating negative equity.
Oh and bye the way, I can answer the question about is it fair that my payment would be lower than MR. M’s , no it wouldn’t. In my plan, it would never happen number one, and second the homeowner that had two new cars and expected a principal reduction would be renting instead.
November 25th, 2008 2:18 am
Mr. M,
You have to differentiate the borrowers with purchase mortgages vs the cash out refinance mortgages. while i can understand some logic behind reducing principal balance on purchase loan, there is absolutely no way to understand or support a balance reduction for cash out refinance.
Those scumsters, pulled out tons of cash and used to for whatever they wanted. They have to repay it, if you forgive the loan, you must take possession of the stuff they have and liquidate it.
Because based on your idea, that scumster that cash refinanced his house, pulled the cash and bought fancy cars or maybe even investment houses, now will have his mortgage reduced…then after say 10 years, value (nominal maybe) will pick up so he could sell the place, and yet again keep the profits to himself….Fool me once, I’m stupid, but fool me twice…what am I?
November 25th, 2008 2:41 am
for those of you who are pating yourselves on the back for having “seen this one coming” and didnt take on too much debt well congrats. but guess what? that doesnt help us, by us i mean america; hell the world for that matter, out of this mess. just because you didnt over extend yourself does not mean your not affected. with every new bailout we dilute the $ further. look what happened to the $ today after the citi bailout. soon we’ll need to bailout GE, GMAC, B of A, Wells, Goldman and on and on and on. we’ve already seen what happens after some of these companies get their handout. they go right back and get in line again. AIG. so unless you want to be using $100 bills as kindling in 5 years i suggest you get on board with some sort of drastic measure, such as the one mr. m is proposing, and quit worrying about whether or not it’s fair to you.
November 25th, 2008 3:02 am
Stu I like your idea,i do believe it is a game and they make up the rules as they go, and not everyone gets to play. I think they should give the money to main street bail out the people, give the people the bail out money, 200,000 or 400,000, they would pay off the mortgages or buy a house or pay off the 2nd or pay of credit card debt and they should also reduce the principle loan amount.The government would still be ahead vs giving the money to the big boys(CEO’s)and wall street.
November 25th, 2008 3:37 am
hello, mr. mortgage,
i really like your article, but still can’t understand about the concept of 28/33 DTR income, as a loan underwriter for many years, we only used this concept for a purchased and refinance loans. for loan modification, we used the net income of a borrowers minus his/her expenses monthly such as car payment, credit card payment, utilities, groceries and other expenses necessary to survive every month. remember on a loan modification you have hardship such as mortgage payment increased, declined in property value, decreased in income, loss of job, illness, divorces and death in the family. the borrower must have a remaining surplus after all the deduction including their new mortgage payment, taxes and insurance. if the borrower has a deficit, she/he must adjust their monthly expenses or the worst option file for bankruptcy so their credit card payment will not be determined as part of their expenses. i started helping my family and friends to do their loan modifications who are having a hard time paying their mortgage. it is hard to deal with the lender when it comes to work out plan, but hiring a lawyer to do it for you is easier to achieved your goal. my advise to the homeowners who are underwater, they should hire a lawyer to do the loan modification. thanks
November 25th, 2008 9:19 am
Here’s my solution besides the BAILOUTS, LOAN MODS:
HELP ALL ALL THE EX HOME OWNERS THAT LOST THEIR HOME GET BACK IN THE GAME NOW (THAT WOULD BE A LOTS OF BUYERS)..
November 25th, 2008 10:32 am
How utterly stupid.
All the Bush admin. is doing is propping the whole mess up as high as they can in a final gasp, before they shove it all over to Obama’s plate.
We just have to accept that houses are worth no more than 3x the wages of the average citizen in most areas, GET PRICES BACK TO THESE LEVELS, so that people can actually afford houses and let’s move on!!
We just have to face the PAIN, and we are a very pain-averse society.
November 25th, 2008 10:36 am
Hi Linda – recidivism rate after loan mod is 50% because most loan mods keep the borrowers levered up and underwater in their homes. The plans by FDIC, banks and lawmakers do exactly this. A 28/36 prevents this because even if home prices fall a bit further, borrowers can save money and live a decent life sytle. At 28/36, their home once again becomes a place to live.
November 25th, 2008 10:46 am
Laker – 50% of all subprime and alt-a loans are cash out refis. It is what it is. The other plans work them out – this has to be a blanket effort. It will come down to principal reductions you watch. It will just take two years, 5 million new foreclosures and 2 million failed mods for them to figure it out.
November 25th, 2008 11:54 am
Here’s my idea:
Follow the FDIC Plan, but allow a pro-rated forgiveness over a ten-year period of the amount of the principal forbearance so long as the homeowner is current on their mortgage.
By my calculation, using a 5% annual increase in home values, a person could legitimately sell his home at a profit in 6-7 years. This adjustment would continue to promote preservation of home ownership with an affordable payment option, help stabilize the market by curtailing the tsunami-like volume of foreclosures, but without forcing indentured servitude upon those who modify their loans. All in all we would have a more orderly disposition of properties.
Just my two cents.
November 25th, 2008 3:04 pm
If you reduce the principal the bank MUST report this as a new sale to the existing homeowner with the new home value. If that is not done than how does anyone EVER figure out what the market value is when purchasing a house. Principal reduction is fine, just make sure everyone knows the NEW home value based on the principal reduction. But this obviously causes new problems, for the people that actually are in good standing or own the home outright. Why not just GIVE EVERYONE MONEY. Everything is just so ridiculous it is beyond comprehension.
November 25th, 2008 3:13 pm
Mr. M. do you seriously think that we have two years to wait? I think something will need to be done before that time frame. If nothing else something to stem the tide until we get there must occur don’t you think?
November 25th, 2008 3:23 pm
There will be no 5% annual increase in home values for many, many years. Look at a chart of home values after the Great Depression began. There was no home appreciation for over 20 years. It is time to look at history to get some idea of where we are going for the next few decades.
November 25th, 2008 3:23 pm
I wonder why no one is complaining about falling gas prices or huge discounts on automobiles. We have to do something now to stop them from falling!
How well everyone seem to bit into the idea of an urgent need to salvage the crashing economy, which was based on … “housing market” and keep the thing the way they were with the housing prices steady and indefinitely going up. Don’t you feel the whole idea of such the economy is sounding wrong? Why everyone seems to be willing pay more and more for the houses or at least looking for the ways to do so? Can’t we find some better ways to spend our earnings?
November 25th, 2008 6:04 pm
I have to agree with the majority of writers here and glad there is some degree of SANITY left in this world. It all comes down to personal responsibility. To all you that are temporarily under water, sorry your greed led you to pay too much for something you shouldn’t have bought in the first place. (No wait, I’m not really sorry for you.)
After the third or so article of this tone Mr. M, I’ve really lost respect for your personal view. I do appreciate some of the information you provide however, you obviously have a personal agenda to pimp, just like the mortgage brokers, bankers, realtors, et al.
Bravo for those who waited and have cash and credit. We are in the same camp and will buy when there is value. You’ll (we’ll) have our day!
November 25th, 2008 6:11 pm
Mr. M, Does the individual who paid cash for a house at the peak of the bubble also receive a rebate to account for the lose in value of his purchase?
November 25th, 2008 6:35 pm
Mr. Mortgage,
Am I reading this right? You are saying (or agreeing with Donny) at the beginning that it is the banking community’s fault that we got into this mess because the average consumer is not a financial expert?
This sounds a lot like saying it’s the gunmaker’s fault when someone gets shot. The gunmaker makes the gun and makes it available, but it’s the person that pulls the trigger.
As a marketing professional, I do not consider myself to be a financial expert. However, my wife and I still managed to set up spreadsheets and calculate our income and future expenses to figure out what we could afford. The lender approved us for way more, but we decided we couldn’t afford it. We put in weeks and months of research before pulling the trigger. We are in the process of waiting to hear back on an offer on a short sale. If we were to rent it out, it would be cash-flow positive after paying mortgage, insurance, taxes, and HOA. Cash-flow positive?? Yeah, I came across that term in my research.
If we can be smart about it, why can’t the average american? If they can’t, then I would argue they are too dumb to make that kind of investment. And if they do go thru with it, they shouldn’t cry about it and point fingers at the banker who was only making the product available. The consumer only has themself to blame.
November 25th, 2008 6:36 pm
If you paid cash at the height of the bubble without running analysis such as a simple cap rate spreadsheet you were just being greedy or are a terrible investor. There would be no way that would work out to be a good investment.
The ones in the high-leverage, exotic loans doomed to fail from their creation were made to purchase more home than they should have by virtue of the structure of the loan. These people were looking for a place to live and Wells Fargo said ‘based upon this 5/1 interest only ARM that qualifies at interest only payments with a 50% debt-to-income ratio and the 15% second we will put behind it, you only have to put down 5% and you can have this $650k home. Your income of $85k per year works just fine. You qualify’.
November 25th, 2008 6:50 pm
Jack, you go to buy a home and find the one you like. Wells Fargo Bank and the Realtor give you fancy booklets saying how much you can afford based upon a specific down payment and loan program type. Only 20% of all loans going off at the time are fixed and the rest are exotic, high leverage interest only, stated, piggy-backs etc. They were branded over the years as the new normal complete with Greenspan endorsing them. The person buys the home then all of this financing disappears and values drop back to where they were prior to the time when all this leverage was available.
First, the consumer was participating in a marketplace doing the same as 80% of the players doing what the bank and Realtor instructed. They really could qualify using the loan programs provided. Why the hell would Wells Fargo and Coldwell Banker set them up to fail.
Your gun analogy makes no sense. It is apples to oranges. This is how it was done.
Now, if guns were advertised every minute of television, every household had guns, the President told everyone to buy a gun asap and gun and ammo makers, the government and all of their respective industry advocates spent years branding the notion that by pointing a gun at peoples head and pulling the trigger, it is the responsible thing to do because it tests true loyalty between family members and friends, then yes they would be responsible.
This mortgage deal is more like the Cigarette makers not telling the American consumer for 50-years Cigarettes caused cancer.
November 25th, 2008 7:54 pm
Mr. M, What about the individual who paid cash to invest/speculate in a house as an honest primary residence and sell later at a profit — does that individual receive a rebate to account for the loss in value of his purchase? Terrible investor or not.
November 25th, 2008 7:59 pm
While Mr. M and I might disagree on a few minor technical items, his plan reducing the principal mortgage according to borrowers income and my plan reduces the principal mortgage by the decrease in property values for each neighborhood. Our the main idea is the same, principal mortgage reductions is a necessary requirement to reduce foreclosures for the middle class.
In reply to the notion that a profit could be obtained within 6-7 years and also proving that the real estate prices DID increased because of the lenders changing their qualifying ratio to 50%.
Lets take an example of a homeowner who purchase a home for $300,000. and with a 33% decrease in property values, leaves the home with a value of $200,000. Negative equity of $100,000. it doesn’t matter whether they can afford the payment or not. Why should the homeowner stay if it will take 18.5 years of making mortgage payments every month before paying down the mortgage to a principal balance of just below $200,000.? A mortgage should cost more than a rental monthly.
To modify(mr.m’s) or refinance (my way-term of loan starts at 30 again, that is one of the homeowners penalities) the homeowner at 6.5% for a (30 year) fixed rate with the principal mortgage amount of $200,000. using the ratio of 28% making the home affordable, the borrower(s) has to earn $69,000 a year, documented. ( with real estate taxes of $3000 a year and homeowners insurance of $1200 a year included in the ratio)
Jumpshoot ahead 9 years at a steady 5% per year appreciation increases, the value is now roughly $309,000. Now if there was a 5% appreciation or inflation increase, the original real estate taxes lets say ONLY went up 2% per year and the interest rate ONLY increased by .25% per year.
The NEW purchaser will need to earn $115,800. per year to qualify at a 28% ratio for a mortgage loan of $300,000. UNLESS
lenders increased their housing ratio over 28% or issued exotic mortgage loans, then the new purchaser earning the same $69,000 a year could afford to purchase your house for $309,000. in 9 years time for you to make a profit.
In my opinion, lenders aren’t going to go back into sub-prime underwriting again in the next decade or two nor will home prices appreciate at 5% per year for the same decade or two.
Once the market finishes over-correcting unless the government mandates the banks to stop discounting their REO’s, a maximum appreciation of 1-2% will be seen for the next decade or two, allowing borrowers incomes time to increase before housing values increase again. I hoped I explained why principal mortgage reductions are necessary for all homeowners and potential homeowners alike.
November 25th, 2008 11:04 pm
MM/admin I’ve said this before.. this is not fair..
- to the person that paid cash for their home in
- to the person that already lost their home ..
- to the person that never bought a home…
- to the person that bought before, but never refied
NOT A GOOD SOLUTION PRESENTED YET! Help all or none!
Susan.. can we also increase the principal balance back up, if he/she gets a raise, or a better paying job ??
What about the laid off person, should we reduce it accordingly to the unemployment pay amount??
What about if the unemployment ran out? reduce it to 0?
November 25th, 2008 11:51 pm
Why not give every family 100K cash and 100K at 2% interest and it would only available to be used for mortgage related (help you keep your home, or help you buy a home) if you want it.
This will help everybody. yes this may add 15 trillion on top of the 5, I’m just suggesting to speed this thing up..
November 26th, 2008 1:46 am
ex owner:
My mortgage reduction plan is based on the location of the property to eliminate negative equity, not matching the borrowers income to a mortgage payment. The borrower still must qualify for a 30 yr fixed rate with the reduced principal balance mortgage payment. If they can’t qualify, they should be renters. My plan also eliminates the “shouldnt have” been homeowners at “that” purchase price, I am not calling anyone stupid but I am putting some responsiblity on the homeowners.
Take a house that was purchased anyway from $393,750 to the market peak of $525,000.already having negative equity.( at the market peak the house would have been worth $525,000. now there has been a 25% reported and verifiable decrease in the market, these homeowners already loss their equity and if their mortgage is higher than the current value, they are in negative equity. This includes your prudent homeowners who put down 20%, they loss their equity too )
Under my plan the new reduced market value would be $350,175. * this is based on a 25% decrease in values/prices since the market peak creating negative equity situations. The formula uses 1.33% of the reported and verifiable decrease to be ahead of the deflationary cycle. The homeowner if they were current on mtge payment would have to earn $93,000. a year to receive a reduced principal balance, rewarding the homeowners who pays their bills . If they were delinquent would have to earn $126,000. a year, since they already shown that they couldn’t budget their money. and to pay for the FHA premium charged they need to earn more money.
My plan will control the market value at $351,750. stopping negative equity from occurring, and the area will have working homeowners who could afford the mortgage payments comfortably.
Note: the homeowners who fall in between $3507500. and $393,750. , would also be eligible for a reduced principal mortgage reduction equal to the current loan balance to decrease value they are currently at, a mortgage loan balance issued at 375000 divided into 393750 decrease value equals 95 % or a mortgage reduction to $334,150.
The main difference in reducing the principal to an area’s location instead of a borrowers income . In the example printed earlier, a borrower who earned $69,000 a year could have purchased a home for $525,000 under an adjustable rate of 3.5% at 50% ratio, which again proves how the banks regulated the values of the housing market upwards by qualifying some borrowers who shouldn’t have been homeowners.
Using Mr.M’s income to match the mortgage balance guideline, the borrower who earned $69,000. would get his mortgage reduced to $200,000. under my plan, they wouldnt qualify.
It does help everyone but the homeowner who already lost their house. My plan stops and controls the price reductions at up to 40% of the market peak for each area which protects all homeowners from further losses in equity, which they are already taken, even if they paid cash for the property.
The number one reason for foreclosures is negative equity, the number two reason is the borrower can’t afford the payment.
November 26th, 2008 11:31 am
Susan… you want to control the market? are we now moving even further to comunism? You know what hapends then right?
November 26th, 2008 4:16 pm
The housing market were controlled by the greed of Wall Street, thru exotic loan programs enabling the rapid increase in housing prices without regard for Main Street’s true income capacity. The government allowed capitalism or free markets without over-sight and the reduction of laws to protect the consumer.
Now the government is trying to control the market only for the greed of Wall Street, as shown in their “modifications” programs proposed. All modifications purposed by any bank or branch of government is solely for the benefit of the banks to ensure their cash flow regardless of protecting the consumer. What kind of government is that called?
My plan doesn’t create communism( which is a political theory of the public owning private property/entities), it makes a democratic government take an active role in governing by controlling that the losses to Main Street for the majority are reduced and redirected back to Wall Street the elite few where they belong.
November 26th, 2008 4:44 pm
I am going back to my original off the wall theory.
The big banks are basically bankrupt – right ? So anyone who invested in them has already lost their investment.
The majority of houses are in negative equity. Including those who bought with 20% down.
The car industry is bankrupt.
The likes of starbucks etc and malls will be bankrupt.
The taxpayer has to pay to fix the situation because there is no one left to fix it.
Essentially Mr Mortgage you have declared America Bankrupt.
So why not – let the banks collapse completely guarantee the deposits to the $250 000 level as promised. Let the government re-create a money lending market for business creation. Give all businesses and property their homes / offices that were in debt to the banks these properties as 100% paid up. Now people don’t have to pay mortgages and have disposable income available.
Its a crazy idea but it seems sane because the alternative seems to bankrupt the middle class tax payer for life in order to try save some rich bankers and their overseas friends in the long term.
I would rather see the millionaires of the finance world all wiped out then the entire middle class of the USA.
November 26th, 2008 5:43 pm
Mr. M says: “If you paid cash at the height of the bubble without running analysis such as a simple cap rate spreadsheet you were just being greedy or are a terrible investor. There would be no way that would work out to be a good investment.”
I enjoy your blog but I’m a bit disappointed here by this. A buyer who paid cash at the height of the bubble without thinking is greedy or stupid, but a buyer who bought a house 6x their income w/a teaser rate is a poor cheated soul who deserves to have their principle reduced on a handout. ok.
And this: ..”The ones in the high-leverage, exotic loans doomed to fail from their creation were made to purchase more home than they should have by virtue of the structure of the loan. These people were looking for a place to live and Wells Fargo said ‘based upon this 5/1 interest only ARM that qualifies at interest only payments with a 50% debt-to-income ratio and the 15% second we will put behind it, you only have to put down 5% and you can have this $650k home.Your income of $85k per year works just fine.”
No one “made” anyone purchase anything. It was done by choice and free will. Anyone w/an $85k income who bought a $650k home at *anytime* is just plain silly. The ratio has never worked. Shady mortgage brokers can’t be held responsible for buyers’ stupidity.
The principle reduction described may very well come to pass and may eventually be necessary, but it won’t help to re-condition the silly buying & financial habits of those that helped get us into this mess. And re-conditioning and re-educating is needed, otherwise we’ll be right back to square one.
November 26th, 2008 6:26 pm
Mish
If bars can be sued for serving an intoxicated person who later goes out and injures somebody then banks should be sued when they issue loans designed to fail or without due diligence to confirm income, or with debt to income ratios to high leaving a high probability of default. The reckless actions of the banks lending practices unleashed severe economic trauma to a nation. We are now all economically injured.
Moving on to some law. I would like to bring your attention to the word “shall”, which means that it is not voluntary but a responsibility. In this instance it would seem to be the responsibility of the Chairman of the Federal Reserve Bank of San Francisco to report on California conditions. It is the duty of that Chairman to report to the Board of Governors of the Federal Reserve.
I would like to see Bloomberg dig into this little point of law and see what the various Fed bank Chairmen covering the bubble states reported to the Board of Governors and if the Board of Governors acted or ignored etc.
TITLE 12 > CHAPTER 3 > SUBCHAPTER VII > § 301Prev | Next § 301. Powers and duties of board of directors; suspension of member bank for undue use of bank credit.
“Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a view to ascertaining whether undue use is being made of bank credit for the speculative carrying of or trading in securities, real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts, or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall report to the Board of Governors of the Federal Reserve System any such undue use of bank credit by any member bank, together with his recommendation. Whenever, in the judgment of the Board of Governors of the Federal Reserve System, any member bank is making such undue use of bank credit, the Board may, in its discretion, after reasonable notice and an opportunity for a hearing, suspend such bank from the use of the credit facilities of the Federal Reserve System and may terminate such suspension or may renew it from time to time.”
http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_00000301—-000-.html
November 26th, 2008 7:16 pm
Mish, I could not possibly agree with you more!!!
November 26th, 2008 9:11 pm
Mish – America being bankrupt is being confirmed by 10-year notes and TIPS.
November 26th, 2008 9:15 pm
Mel – I was being patronized so thought I would swing back for a change – I have said many times EVERYONE WAS SUCKERED including those who bought at the wrong time paying cash. To be honest I don’t know what to do with the person who did everything right other than fix all the messed up people with my plan and get housing back on a stable footing in 5-7 years vs 15 years. That would benefit them. Perhaps a tax break. What’s most important is undoing all of the toxic loans with re-underwriting and principal balance reductions.
November 26th, 2008 11:05 pm
Mr. M, You are performing a great service for the general public thru your web site. As for your proposal to lower mortgage principles, all corrective plans require attention to details. The devil is in the details. That’s how plans and laws become complicated. Your plan as proposed may work on paper, but to be politically viable, it needs to ensure that financially responsible individuals end up better off than those who got caught-up in financial arrangements they can not afford.
November 26th, 2008 11:51 pm
The greatest real estate bubble of all time was only able to occur because of the bank’s allowing home owners to use extraordinary leverage
“…allowing home owners to use…”. This is an example of enabling, and enablers cannot be the main cause; they require another participant to take action. A gun enables murder, it alone cannot commit one.
“over the past five years there was a fundamental shift of how people viewed their home – from ‘a place to live’ to their single ‘largest investment’.”
There is your main cause.
November 27th, 2008 12:56 am
Truth doctor
Did the bank enable the home buyer or did the home buyer enable the bank? While the home buyer saw a house as their biggest investment, the banks saw fat profits. From this side of the fence, it looks like the banks were the ones that got into the big accident and totaled their cars while the homeowners just walked away…. Is it the home buyers fault that the banks were lousy drivers and did not understand their investment?
While the home buyer might have viewed their house as their biggest investment, zero, five and 10% down is not much of a vested interest, whereas the bank is putting up 90% or more of the money. Truth be told, it was the banks biggest investment regardless of what the home buyer thought.
November 27th, 2008 3:02 am
These victims that you describe are those that would spend more time conducting research before purchasing a plasma tv than buying a $500k house. They each should have hired a CFA and a lawyer that graduated top-of-class from a good school, rather than hastily dropping a lifetime of earnings based on the musings of an ex-convict turned loan officer.
It’s just common sense. Do your due diligence or else you face a higher chance of getting rocked.
December 1st, 2008 7:17 pm
[...] the already demonstrated incompetence of the overly compensated Financial Industry CEO’s, their legions of sycophants, as well as [...]
December 1st, 2008 10:57 pm
THE FINANCIAL INDUSTRY TAKES TOO MUCH
Well that was pretty much what I was saying, the banking industry allowed DTI to expand well beyond reason and the bubble sucked in so many home buyers that the end result was a choking off of the economy even without the current crisis. In essence, banking had turned into a leach on the productive efforts of society, consuming all like a hungry lion that in the end would even eat their young.
One certainly has to ponder the worth of finance when the benefits provided are then totally erased and we lose decades of accumulated wealth in the process. Clearly banking is an item that needs to be kept on a short leash and as we have observed, other entities cannot exist that pressure banks into unsound loans.
With Japan being a recent example of banking gone bad, how was this allowed to happen? Somewhere lurking under the covers I suspect we will find that it was allowed due to an otherwise inability to show any growth in GDP via a straight economy.
You would think by now that congress would have straightjacketed banking back to it’s post depression cage….
December 1st, 2008 11:34 pm
And it looks like it played out exactly as I said. The congress having their moment of glory with the auto makers to show “tough on bailouts” when what they should have done is funded it to Obama and got the autos off the Christmas table. Instead everyone went into Black Friday weekend with doom on their minds which showed up on Wall Street today with a 9% drop, one of the largest in the history of the stock market.
You think our leadership would perform better than that and not torpedo the number one shopping day of the year. When all the cards are counted, I would not doubt that not funding the autos and getting them off the table does not in fact end up costing the economy in excess of the 25 billion the autos wanted in the first place.
So where are we now? The consumers are standing around looking at Wall Street saying “OMG, it IS worse than we thought!” We are now reduced to a downward spiral with the consumer and Wall Street feeding off of each other all the way down…. Nice move congress, hope you enjoyed your get tough stance while torpedoing consumer confidence. Happy Holidays… It boggles my mind that they did this, you would think they are working for Osama.
Yeah, I might be a little opinionated but that is how BertDilbert sees it.
December 2nd, 2008 2:01 am
Lots of interesting discussion going on here and it’s clear we have a big split between those that want to help the homeowner and those that refuse to bailout the homeowner. Some of my best friends are homeowners and like Mr. M said they began to think of the home as an investment. All of the ones that bought after 2004 were absolutely sure they couldn’t really afford the house they were buying but, “hey, its an investment” it will go up won’t it? I’ve done that same thing with stock but I never got to live in a nice “stock”. Some of my friends got to live way beyond their means in a nice house for a couple of years. Lately I’ve had a few stock investments tank. I sell that stock, take my lumps and try to figure out how to do better next time. I never even thought of asking anyone for a rebate on what I invested. From what I see on this board and in the streets there will be to much of a backlash against principle reduction. It might happen but people are going to be upset.
My thinking is that we don’t need a plan. Let them forclose and let the market clean them up. If people really want to help then lets uncover and publicize every forclosed home out there as they forclose and tell the banks, (which we will soon all own), that they have 18 months to sell after forclosure. That’s an 18 month slow motion auction but it will eventually work as after the last month the property lists for a $1. If you’ve been to many house actions you will find that investors will come out of nowhere and the values on these homes will be more real then anything you will get from a real estate estimator.
December 3rd, 2008 9:35 am
David Said:
November 25th, 2008 10:32 am
How utterly stupid.
All the Bush admin. is doing is propping the whole mess up as high as they can in a final gasp, before they shove it all over to Obama’s plate.
We just have to accept that houses are worth no more than 3x the wages of the average citizen in most areas, GET PRICES BACK TO THESE LEVELS, so that people can actually afford houses and let’s move on!!
We just have to face the PAIN, and we are a very pain-averse society.
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David, you are the stupid one. This whole mortgage thing falls soley on the democrats and gay boy Barney Franks. Did you not watch the 5 minute YouTube clips where the Republicans were fighting for the people and the democrats were saying “nothing was wrong”?
December 8th, 2008 11:50 am
[...] faced in 2008 with much higher reset mortgage costs to pay down the debt on a depreciating asset. Notes Mr. Mortgage: “The same household that earns $75k per year that two years ago could buy a $650k home with [...]