Bubble-States Awash in Negative-Equity (Revisited)
Posted on December 5th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research
I originally posted the negative equity story below on November 10th. I am hard to shock, but this one is worth revisiting now that analysts and the media think we are going through some major mortgage recovery. Reality could not be further from that. Remember, in bubble states negative equity is so epidemic that 60% of all homes in CA, greater than 95% in NV, 65% in AZ and 63% in FL are in or near negative equity. Nationally, 41.6% of all home owners are at or near negative-equity and can’t refinance or sell without bringing significant cash into the transaction, which very few ever opt to do.
Rates have come down slightly for the top 5% of all borrowers who can get the best rates offered. They are now about 5.625%, down from about 6% two weeks ago. Now speculation is that rates will come down to 4.5%, but I am also hearing this is only for purchase loans obviously in order to help the builders – we need more homes being built, of course. Nevertheless, in the states that need the most help with their housing markets, the amount of negative and ‘near’ negative equity will keep folks out of the mortgage market even if rates go to zero.
Additionally, for the 95% of folks who do not fit inside the tight lending base-rate box, rates are really not that low. This is because over the past year Fannie/Freddie have significantly tightened their guidelines. Anyone who lies outside that box pays much higher rates. I talk about it here… Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% Does Not Exist For Most
If it were two years ago, the analysts and media would be correct. During the bubble years everyone fit into the box because it was much larger, and when rates fell 1/2% it really did spur massive refinance activity. It is just not the case today. -Best, Mr. Mortgage
BUBBLE STATES AWASH IN NEGATIVE-EQUITY
November 10th, 2008 by Mr Mortgage
One of my primary arguments that the foreclosure crisis has a long way to go has to do with to the massive amount of negative equity in the hardest hit, most populated ‘bubble states’. These are the very states that added so much to the great wealth effect.
Negative-equity is FICO-score and loan type blind. In the new era of ‘my house is my largest investment’, most everyone feels the same way about paying into a massively depreciated asset. This is even more the case when the payment increases on an exotic-type loan such as a 2/28, Pay Option ARM or even a Prime 5/1 Interest Only.
In the hardest hit states, those not in a negative equity position have very little equity remaining given the current data. This is why the all-important move-up buyers are non-existent and over half of the homes sold are from the foreclosure stock. This is also why if rates drop, many will not benefit from refinancing.
With lending tightened to such a large degree, sizable down payments are now required to attain the best financing. Ideally, a buyer wants to extract the down payment and all other purchase expenses through the sale of the property. However, with the median Loan-to-Value’s in the bubble states being so high there is not enough left over from the proceeds to pay a real estate agent, put a down payment on the new property and cover all of the other costs associated with moving. People are stuck in their properties unable to move or refinance.
This recent data from Loan Performance below corroborates my research. The first chart shows the amount of negative equity in each state. In addition, I added the top 10 foreclosure states per Realty Trac in the third column. With the exception of Illinois and Indiana, the top 10 negative equity states are the same as the top 10 foreclosures states. Nevada and Michigan top the list…a solution there may be bulldozers and gasoline.
This second chart shows the median Loan-to-Value in each state. The top negative-equity states have the highest median Loan-to-Value ratio (littlest amount of equity). Note that this does not include second mortgage debt so if there are seconds, the CLTV is going to take the Loan-to-Value Ratio below much higher. The housing markets within these states are frozen, as the majority home owners are unable to freely transact.
Important note – these estimates of equity are based upon Loan Performance’s proprietary House Price Index, which may or may not be accurate – home price indexing has been an impossible task for everyone to date. The numbers could be much worse if their valuation models are off.
The charts above scream loudly about what WILL happen, as loans now considered ‘high-grade’ or ‘Prime’ begin to adjust or even borrowers in 30-year fixed rate loans who put 20% down but bought at the wrong time find it a financially prudent move to de-leverage and walk away. We are seeing this happen today in ever increasing numbers.
Source: Inman News: Nearly 10 million homes upside down
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November 10th, 2008 8:18 pm
thank you, as always, Mr. Mortgage. I keep sending copies of your posts to family members and friends. You are my primary source of basic housing info.
November 10th, 2008 10:09 pm
Hey Mr. M.
On the Negative Equity and Near Negative Equity table is the Near Negative Equity inclusive of Negative Equity thus Nevada now would show the following:
Negative Equity: 47.8%
Close to Negative Equity: (52.8% – 47.8%) = 5%
Truly amazing that half the homes in a single state are under water. That would be bad if it were cars, but for homes its insane.
November 11th, 2008 12:19 am
Can you define quantitatively what near negative equity means/
If housing values continue to drop, Nevada is going to be a dead zone for real estate with the only qualified buyers being first timers or outside speculators, but I can’t imagine there are very many homes left to flip.
November 11th, 2008 2:45 am
Mr. M,
Instead of providing data by state, why not do it by metro area. D.C. metro area is one of the worst bubble areas in the country, but when the data is constructed by state, this area is omitted because it includes D.C., and portions of Maryland and Virginia.
November 11th, 2008 4:21 am
I know this is not possible to do statistically, but is it not the case, that with the exception of the rust belt,
the trouble relates primarily to new build.
In other words, in areas/cities where the proportion of new build is tiny and the vat majority off houses are mature, there is not much of a problem :eg New York
November 11th, 2008 12:10 pm
G Cox,
There is about to be a big problem in NY. Lots of layoffs and the jobs aren’t coming back anytime soon (if at all).
November 11th, 2008 1:42 pm
Someone asked a good question…When your computing the Nevada numbers, are your Near Negative equity and Negative Equity numbers the same, or do you add those two together. If so, then your saying that Nevada is really closer to 98% LTV, then 89% LTV. The numbers don’t make sense in your chart then, and it would be helpful if you clarified.
Thanks
November 11th, 2008 1:46 pm
The data are from Loan Performance. I saw the Nevada discrepancy but either way it is terrible.
November 11th, 2008 2:23 pm
Required – DC (as a state) is in the data – its just doing far better than MD and VA given it is ranked 33rd – one of the stronger (relatively speaking) areas in the US.
Its funny, you would have assumed DC would be doing far worse than its wealthy burbs, but the converse seems true. The closer you are to the city, the better things are.
November 11th, 2008 2:28 pm
>>Nevada and Michigan top the list…a solution there may be bulldozers and gasoline.<<
Same coin, different side. Michigan is in the rust belt with an crumbling old housing stock, an aging poplulation, and a deteriorating economic base. Nevada has (many) newer homes with a much younger population, and likely continued immigration. Nevada will recover eventually (4-6 years) and prosper. Michigan is in for a long slog.
November 12th, 2008 6:33 am
Large employment centers are doing better than the suburbs with large expensive commutes, such as Washington, D.C., San Francisco, San Jose, downtown Los Angeles, downtown Chicago, downtown Boston, etc.
Gasoline is getting cheaper but will not save the suburbs as foreclosures have happened.
The consumer is taped out.
The problem has always been, too much debt. And it is world-wide. Be thankful that your mortgage is not in Yen, like those in Eastern Europe. Be thankful that you can walk and mail your keys to the bank, others do not have this choice.
November 15th, 2008 3:04 pm
Yeah, Nevada doesn’t seem to make sense.
321576 (near neg eq) + 291190 (neg eq) = 612766.
This is well over 609577.
I think near negative equity means the borrowers that are about to enter negative equity should prices continue to fall. So currently around 47.8% of Nevada is currently in a negative equity position while around 52.8% are getting close. But the numbers don’t add up because something is screwed up with the values above.
The two numbers (negative equity and near negative equity) should be added together. This gives us the number of borrowers who are currently in trouble or going to be in trouble in the near future. Nevada is toast.
November 26th, 2008 1:14 pm
[...] the states that need to most help, the vast majority can’t refi due to negative-equity – see chart in this LINK. In CA for example, some 60% of all mortgagees are either underwater or ‘near’ [...]
December 5th, 2008 5:58 pm
It just keeps getting better. When these lay-offs take hold, it’s gonna be “walk a way city”…..
December 5th, 2008 6:36 pm
MM – PLEASE DO A VIDEO
December 5th, 2008 6:55 pm
I am just laughing because the market was up today on a day when it should have tanked due to all the bad economic news, its up 8 of the last 10 days, does anyone feel like every things is being manipulated? which brings me to my question…
On your post today MM I couldn’t agree more but do you think that perception is reality out there? In other words because the media and politicians are basically inept, spinning false positive and generally good news and because the public is a giant SUCKER do you think they can generate enough excitement to turn it around? That seems to be their pathetic strategy at this point…”EVERYONE JUST BE POSITIVE!” LOL LOL LOL
December 5th, 2008 7:11 pm
As Canadian Jack said in reference to Nevada, the pool of people who could even qualify to get a loan will be radically diminished (for a few years) because so many will have had their credit histories demolished by foreclosures and/or short-sales. That portends several additional years before house prices could start to go up – starting only after values have stabilized. We’ll have to wait for such former homeowners to re-establish at least 2 year of perfect credit before they could even contemplate buying again…
December 5th, 2008 7:12 pm
I agree it must be time for another video. Perhaps one on the statistical connection between foreclosure and unemployment(if anybody has data please share)that is here and will trail whatever recovery by 6 – 12 months.
Need a “pre-bubble” correlation because the exotics are extinct. If it does not exist then there probably is no one better
Mr. M to take a look.
December 5th, 2008 7:39 pm
Excellent article, I’m going to have to read all of your writings, probably all night tonight. I haven’t seen such an analysis like yours ever. Mr. Mortgage you are a PH D on this stuff. After looking at this, I just don’t get how Wall Street and every single analyst can’t see what you represent. It’s very weird, this is strange time, with the endless bailouts, its completely scary. I feel we are witnessing the collapse of the USA.
‘
December 5th, 2008 10:54 pm
Near negative equity is =<5% equity. Too little to refi. Remember folks in CA we are down 45% on the MEDIAN. The harder hit areas are down 50-75%. That takes you back to 1999 levels. MOST bought, refied or added a second since.
December 5th, 2008 11:57 pm
Mr. M – I have come to understand that total residential property value is in the neighborhood of 22 trillion.
http://www.housingbubblebust.com/Fed/EQTvsMTG.html
You are showing 11.9T.
Could you or somebody explain the difference?
Thanks,
JAllen
December 6th, 2008 2:31 am
JAllen
11.9 trillion without counting 7 States and the recent decreases from the market peaks.
End of year for 2007- total outstanding mortgages per the Federal Reserve is 11.3 Trillion Dollars not counting newly issued mortgages for 2008 and the 1.2 million foreclosed homes
December 6th, 2008 2:55 am
fedwatcher Said:
“The consumer is tapped out.”
There it is.
MM: “1999 levels…” Correct. And let us not forget your little vignette on Youtube some months back stating an (existing at the time) inventory of 4.5 years worth. And this thing ain’t near unwinding fully yet. Can you imagine the carnage taking place – and yet to take place in LV? Save for solar farms, LV will again return to what it’s original attraction was, that being a place for people with means to toss some green around. It won’t be a ‘hot market’ to ‘invest’ in…
It’s like this: You ever see those fantastic Hubble space telescope pictures of cloud Nebula’s, billions of light years from Earth? The detail is astounding – it looks like you could fly in a plane around it and observe the formations up close. That is, until you realize that the beautiful ‘clouds’ are themselves Light Years across in Size…
It is only from the ‘retro-perspective’ of great distance that a clear picture can be assimilated.
In simple terms, what is happening right now in the mortgage, finance, mfg., and general economy of the United States is so Huge that it is almost incomprehensible from a day-to-day basis to grasp – let alone what the future consequences will be.
Suffice to say that many who clearly understand economic fundamentals are becoming singular in their view of what lies ahead for us as individuals and the economy/country as a whole will be a very different standard of living that what we have become accustomed to for the past (2) generations.
“I feel we are witnessing the total collapse of the U.S.A.”?
Gentlemen like Mr. Mortgage and Peter Schiff provide real data to validate what your common sense and gut reaction has told you for years… And that is that we were indeed living in a phony economy, which has now, like the Titanic, hit the iceberg of market reality.
A big ship must take on a lot of water before it sinks, and (collectively) we have been partying on the deck of that big ship for roughly 30 years – the last 10 of which have been a veritable bacchanalia.
Save what you can, reduce any debts you have if at all possible. Not gloom & doom, Reality.
Peace – and above all, Liberty.
-C.C.
December 6th, 2008 3:17 am
great post cc
December 6th, 2008 3:38 am
CC
I see we are in agreement on a lot of things.
I am afraid that housing is not going to be what pulls us out of this recession. Congress seems to think that housing got us into this mess and housing is going to pull us out…
Now here is a bit of right hand, left hand. Bubble vision talks about lower rates and refinancing. They zero in on a guy who says he can save $300 per month on lower rates. Then they bring up a video of a cash register with $300 being pulled out and explain how this $300 savings will turn into $300 in spending and help the economy. The media is basically correct, the person refinancing at a lower rate will have more disposable income to spend.
Now here is the opposite. Making loans to new home buyers in a recession. Assuming that the new home payment is higher than rent, this would have the reverse effect, making even less money available for local businesses.
Attracting new home buyers at this juncture and only making the low rates available to them would seem to be more of an effort to deepen the recession… Not a bright move, not to mention that potential job loss risk is higher especially with the autos on the blocks. As long as rents are lower than home payments, attracting new buyers to float the RE market is the last thing I think they should be doing right now. The economy needs all the free floating money it can get. This would only serve to tighten things further.
December 6th, 2008 11:21 am
The underlying problem is that the BORROWER is deteriorating faster than the real estate market. It takes time for owners to be 3-6 behind and more time for the banks to finally make up their minds on what they are willing to do. Then the banks take even more time to actually implement the foreclosure process. The feds and the bankers were trying to drag their feet as long as they could, hoping things would improve. However, the borrower looses his job and within 60 days his credit is toast, credit cards maxed, home is 2 months late and the shell game is over. The people are loosing the game faster than the bankers. This whole mess that was created from the top down is imploding from the bottom up and there are exponentally more players at the bottom, making the few at the top fall the furthest because they are the ones with the most to loose. Gambling is great when you are on a winning streak but when the odds strike….it’s a nightmare.
December 6th, 2008 1:04 pm
Bert -
The ‘free-floating’ money is in the works, trust me. Actually, you won’t have to trust me or anybody for that matter. Just watch it play out over the next year.
When the Fed is no longer able to run their ‘heat-exchanger’ sterilization machine (money laundering operation) in the T-bill/bank/bond market facilities, the rising tide of money will again inflate (not raise, as in the classic sense) ‘all ships’.
Meaning, it will inflate prices for everything you purchase, but it won’t put more Purchasing Power back in your wallet…
The focus at the government level, is to try and ‘reflate’ a bubble that has burst. The myriad ‘patches’ so far are not working because the market is in the process of cleansing itself. The government will have no part of that however, thanks to screaming constituents and special interest groups in large industries like Finance and Auto, weaned on easy times and easy credit.
Problem is, the more they interfere, the harder this a$$-pounding is going to be.
We are somewhat caught here in the minutiae of what plan or program might work to float this thing across the river without becoming untethered into the rapids. It is not going to happen.
This ‘race’ (to the bottom) is OVer. We are out of breath and out of gas (credit and disposable income.) Some are feeling it hard, others have yet to feel it, but will. My area (South Bay Area, Ca) is one of those ‘yet to to feel it’.
People are still eating out (a lot) and the fitness centers, gyms and other ‘disposable’ service industries are still humming along as if nothing is awry. They are in for a rude awakening by spring/summer of next year when the high-tech arena here begins to drain out and Alain Pinel offices begin to shutter doors…
Towards your first sentence: What Will pull us out of this (D-pression) is domestic manufacturing – on a large scale. And I’m not just talking about Caterpillar or Southern Pacific locomotive manufacturing, but large-scale manufacturing of just about every line of goods you have purchased for the last (20) years, heretofore ‘Made in China’.
- Clothing
- Textiles
- Electronics
- Chemicals
- Heavy industry
- More?
It is vitally important for people to understand this. We didn’t get into this mess overnight. We have undergone a complete paradigm shift of what brought us to the pinnacle of economic domination, to the depravity of an up & coming, ‘outsourced’ 3rd (Turd) world status.
We ‘Mortgaged’ our future economic security for a false belief that a country could run on finance, credit and housing for ‘everyone’.
Apologies for the long-winded rant, but we are pissing in the wind to think that somehow by way of tinkering with the money supply, or coming up with another novel idea of being able to keep people in their homes or make it easier to refinance, etc., that this is all going to blow over in time. It is not. And thus is the harsh reality that no one wants to face.
Well, it’s going to face them – up close & personal.
Peace -
C.C.
December 6th, 2008 2:31 pm
C.C.
Every time I give that message, people get quiet. They just do not want to hear it, the thought is incomprehensible. Yet you and I know it has to happen as the only way out. I have extreme difficulty seeing California fitting into this new picture with high taxes and environmental regulations as a state of choice.
There is a lot of air between where we are and where we need to be for this to happen. The deficits we are running up now are taking away our advantage of lower taxes. The only thing congress knows is housing, banks and interest rates, not necessarily in that order.
December 6th, 2008 2:40 pm
This mess got it’s start and horse power from incredibly relaxed lending standards. And it developed over a 6 year period. So it wont be resolved in a one year period. These things take a few years to completely unwind. See 1929 and 1873 as a reference point for credit bubbles that burst. I fear that the big volume in low-end home purchases in CA right now will be the wave of foreclosures in 2 more years….after the prime and Alt A’s were going to see in 2009…..the train takes a long time to finally stop.
December 6th, 2008 3:57 pm
Bert/Peterb – right on the $$.
Bert – excellent observation on the regulatory encumbrances that will no doubt halt, or delay economic recovery of any import for this state. It will have to get really painful for those whose committees common sense must suffer through, before we get any kind of meaningful letup in the logjam of government bureaucracy that is the legislative body of Ca.
By the way – and not to ‘rain’ on the parade, but…
Has anyone (here in lovely, uber-regulated Ca) noticed that we haven’t had much rain of late…?
The governor already has his hand out for Fed $$, but in the mean time, 1976-1978 is rearing it’s head again. Those of you not around at the time, the state was suffering through a water crisis – i.e., Drought.
I was 17 at the time and remember it quite well. Difference being, there was roughly half the population back then that there is now. And it was also roughly the time that the last hydroelectric dam was built in the state…
We don’t want to go there, do we? A prolonged dry spell in this state right now, on top of what is already going on would – well, you get the idea.
Hey Governor: Want to jump start the state’s economy a little? How about a few new water projects – like a dam or two. Or perhaps even, a modern day, Dubai-like desalinization program in the large coastal city areas like S.F., L.A., S.D., etc.?
A chance to stimulate the economy whilst preparing for a ‘rainy day’?
Not a chance.
I’ve got a few scabbed over knuckles that are ready to meet the heavy bag this morning, so I’ll dismiss myself now. You’ve all had enough of my dour prose anyway -
Peace -
C.C.
December 6th, 2008 5:19 pm
We could start using congerss-critters as heavy bags. it’s a start in the right direction.
December 7th, 2008 4:16 am
The reality is WE can’t see the forest for the trees… This has been a conspired set up by the global elite…We are now ready to accept the new currency ladies and gentlemen …aren’t we? ANYTHING that will get us out of this mess we’re ready for, aren’t we? Or does it have to get worse for us to accept the inevitable new “Ammero” Yes it will get worse, that’s the plan Stan….
Duckman
December 7th, 2008 4:34 am
Hello everyone,
I picked Anahein, California to research to show why I believe location should be more important and fairer in deciding how much to reduce principle mortgage balances for underwater homeowners than the borrowers income.
The average price for Anahein in 1999 was $224,600. and the average salary was $53,994, this information was grouped under zip code 92803.
At first glance,it would seem that all homes in Anahein are equal, but according to the U.S.Census Bureau for Anahein, California there are 8 different REPORTING zip codes. I listed each zip code and the homeowners income with the median values of the homes for the years 2000 and 2005.
92801- $39,789/$181,800 $44,041/$458,725
92802- $41,408/$191,400 $45,833/$508,640
92804- $41,887/$193,400 $46,364/$517,863
92805- $39,609/$182,700 $43,843/$489,379
92806- $50,555/$223,200 $61,504/$587,581
92807- $76,381/$281,400 $84,555/$743,835
92808- $88,329/$315,300 $97,769/$831,185
Deductions from above:
The ranges of borrowers incomes for both time periods is 223% within the same town. Foreclosures did not begin to increase to 2004, so I am assuming that the affordabiltiy index for 2000 was an acceptable working index, that it was prior to the bubble years created and the majority of sub-prime lending did not exist in 1999.
Using your modification quideline of a 28% qualifying ratio at 5.5% for a 30 yr fixed rate, zip code 92801 would have to be reduced to a low of $116,000. for SOME homeowners and higher loan amounts for homeowners that earned more income. No definate market value for the area nor elimination of negative equity, higher incomes would be left in negative equity according to your guidelines.
If real estate taxes were the same for zip code 92808 the mortgage would be reduced to $350,000. for homeowners who make less money and higher for homeowners who make more money using the 28% guideline ratio.
Higher real estate taxes than $2,500 annually would lower the maximum mortgages for both zip codes though.
In this case I am assuming that Anahein due to the drastic increase in values shown for the bubble years, also has experienced a drastic reduction in value of at least 40%.
Using my plan, I would refinance any mortgage with negative equity or to be affected up to 40% of the market peak to be ahead of the CURRENT market price/value.(Ratio used is 125% of the reported and proven decline for the area)
Unfortunately there is an exception to the plan, in the high bubble states the reduction would have to be up to 50% to be ahead of the decline. This might change the overall cost to cure of 1.43 Trillion Dollars but not by much.
Permanent principal mortgage reductions not payment changes is the only way for any correction to the mortgage industry to work. Housing values can not be artifically inflated by lenders or maintained by any of the government’s proposals to protect the banks cash flow.
There needs to be not only an acknowledgement that housing Values have and are falling but the understanding that Real homeowners are being affected by this negative equity,which is the number one reason for foreclosures.
It is not just the correction of housing values to affordabilty nor the losses of the investors and banks BUT THE TOTAL ECONOMY THAT IS BEING AFFECTED.
The housing industry is in a deflationary cycle not a correcting cycle, there is a difference one is reality and one is idealist,(stating or wishing that housing values are resorting to affordability when over 93% of homeowners SOMEHOW manage to pay their mortgages on time or rents vs mortgage payment ratios when there is no real existing formula to use since the bubble years also affected commerical/rental properties cash flows)
Under my plan , a house valued at $458,725 at the market peak in zip code 92801 would be reduced to a $229,360. value and maximum mortgage for the underwater homeowner who is CURRENT with their mortgage payments and could prove that the new mortgage payment for a 5.5% 30 year fixed rate would LOWER their mortgage payment.( The reduction would lower the payment even if the homeowner had a 1% option arm for the higher loan amount)
Zip code 92808 would also be lowered by 50% to $415,590 for a house valued at $831,185 in the market peak.
If a homeowners house was valued at $775,000 or $900,000, the reduction still would be 50% in Anaheim, it wouldn’t matter that the homeowner purchased in 2004 or 2007 or for $925,000.or $750,000. It is 50% of the market peak value for the individual house based on an appraisal received, with a cap of $500,000 mortgage allowed after reduction.
Three basic requirements-
Current with their mortgage payments and
Lower mortgage payments must be obtained with a principal reduction and
elimination of Negative equity must occur and be proven by an appraisal.
These homeowners have earned the right to refinance without being re-underwritten based on their payment record. Simple logic if they are paying their mortgage which is underwater and has a higher payment on time, they are a GOOD credit risk. It doesn’t matter what their original mortgage program was, SISA, no doc, no income etc.This is a reward for homeowners doing the right thing.
The only personal exception I put in the plan is the borrower must have a job that is paying social security with-holdings.
Homeowners who are deliquent would also be eligible to have the principal reduced but the interest rate would be 1% higher, and qualifying ratio’s would be a factor to be eligible. They have proven they are a POOR credit risk and now must prove why they should be given a chance again. If they couldn’t qualify, foreclosure would occur.
The plan eliminates borrowers who expected a huge profit for taking a chance and buying where they could never have afforded, it doesn’t reward them.
New potential home buyers AND existing homeowners who don’t require a principal reduction would be eligible for the “rumor” of the 4.5% interest rate to stimulate the market at the reduced market values.
I personally feel there should be a 3.5% 10/15 year rate with 28% ratios for existing homeowners to stimulate the market, why would a homeowner with less than 15 years opt for a 30 year mortgage?
Benefits of the plan, no homeowner would have negative equity and there would be affordability for all, deleting the need or desire to walk. The plan erases the main two reasons for foreclosures to occur and stablizing the market. No homeowner earns a profit from receiving a reduction, they are being left at 100% loan to value on owner occupied homes. There is a waiting period to obtain a profit from selling or being able to cash out equity for a period of 5-10 years based on the group, current or deliquent. There is a penalty from IRS and the credit bureaus, if the homeowner defaults after receipt of a principal mortgage reduction. Existing homeowners benefit from the plan, the market stablizes protecting the balance of the anticipated profits.
The foreclosures that had to take place could be auctioned off or be sold at NO LOWER than the NEW market value of the area. The new market value represents the maximum mortgage amount of area, but remember each house has an individual appraised value.
LOCATION LOCATION LOCATION. is real estate motto not income. Mortgages should have been INCOME income income, but it became payment payment payment for a limited time.
I will not be entitled to a principal reduction nor a lower interest rate, nor live in a bubble state, in fact never seen California or even Anahein.
This response is just my opinion that housing values for existing homeowners have to be stablized before new homeowners will enter the market, it doesn’t matter about interest rates.
I am sure of you will disagree with me, but I would appreciate your reasoning.
December 7th, 2008 4:42 am
Sorry, that last line was supposed to be some of you will disagree with me, but I would appreciate your reasoning.
Just in case, you didn’t realize it, I am picking your brains as a group. Thank you in advance for your responses, if any.
December 7th, 2008 5:11 am
It is realy very simple.
The home buying public got into debt beyond their means to service the debt.
The ‘powers that be’ are trying their best to postpone the day of reconking.
When all recognize that home prices are too high and stop trying to prop them up and let them fall and let the foreclosures happen, we will find a bottom.
Until then, the fiction continues.
There is too much debt and default is necessary to cleanse the system.
December 7th, 2008 5:14 am
You can’t get clean in dirty water.
At what point is the water clean?
December 7th, 2008 9:18 am
When we have transparency again the water has become clean.
December 7th, 2008 1:11 pm
Susan,
Your intentions are well meaning – and you are to be commended for seeking (what appears in your mind to be) an equitable solution. The problem is – as you eluded to in your “…The total economy is being affected” statement, that what the general economy is experiencing right now is much more than a ‘subprime’ or ‘housing’ crisis.
‘Subprime’ has become in effect, a ‘sub-terfuge’ argument to localize and minimize exposure to: The Federal Reserve for dropping interest rates that made possible negative savings rates and subsequently, a low-interest rate credit & borrowing Orgy, legislators (repeal in 1999 of the Glass-Steagall act), banks and hedge funds that subsequently repackaged these poison loans and sold them as securities around the world!
As well-meaning as your suggestions are, they amount to the same sort of interventionist ‘tinkering’ that the Fed has been trying to do for the past year – and it’s not working.
In truth however, after the swamp has been drained and all the Wall St. participants have been re-capitalized, liquidity will again flow to ‘mainstreet’ but it’s not going to make a lick of difference to the housing sector, other than to ignite massive inflation.
The mechanisms Susan that got us into this mess, understand that Mr. Market will have the final say. And they know there is nothing that can be done to reflate this bubble, despite all the flowery talk of protecting house-owners. Tinkering around with rates and programs to save/prop-up house owners will not work while a market cleansing is in progress.
“…that housing values for existing homeowners have to be stabilized before new homeowners will enter the market, it doesn’t matter about interest rates.”
Would you rather that legislative ‘tinkering’ stabilize the market, or the Market itself?
If you’re a saver in this economic climate, you bet your Holy A$$ it’s about ‘interest rates’. In case you hadn’t noticed, they’ve been NEGATIVE, thanks in part to what was mentioned in my first paragraph. That is in large part, what got us into this awful mess in the first place – dropping interest rates so low that it Discouraged saving and Encouraged BORROWING – to a very unhealthy degree. Now you want to prop up/patch up what those unhealthy rates begot by trying to ‘stabilize’ housing values?
They’re going to drop Susan. And they’re going to drop Hard. And there isn’t a Damned thing that can be done, nor should be done to stop it. That is the Market at work, not do-gooders from Washington or Ca.
Peace -
C.C.
December 7th, 2008 2:14 pm
C.C. The real issue is not houding anymore, the issue is jobs and where you can find one…
Well I was out on the road and while overnighting in a hotel I caught some local action. No, it was not a bar with dancing girls and lap dances, it was significantly less expensive. It was the televised city council meeting for the city of Monterey California.
On the table amongst other things was the annual budget. The city is preparing for 5%, 10% and 15% budget cut scenarios. This means that the library may not be open 7 day a week as it is now, it may also mean a library may close. It could mean their fire department might lose an engine company. Some city staff have agreed to forgo a 3% raise that was already approved. While the mayor made it clear that these 5-15% cuts were going to be difficult choices, he may be coming back 6 months from now asking for 20-25% cuts (tough choices) because we don’t know how deep this recession is going to run and how revenues are going to be impacted.
As a sign of the changing times, the Mayor noted that they recently had a conference canceled and the reason was that the board of directors were concerned that shareholders might consider the city of Monterey to be expensive and they did not want to take any shareholder flack.. The Mayor said that this was the first time a conference got cancelled because the city of Monterey was deemed to be “too good”.
The Mayor went on to talk about sales tax revenue and while other surrounding cities had passed a 1% sales tax increase to cope, they had not. The Mayor encouraged residents to buy in the city of Monterey so that the city could capture sales tax revenue, going so far as to suggest that if you wanted to buy a luxury car of a certain brand that was not sold in the city, to consider a brand that was sold in the city (I forget the dealerships he named). Even though sales tax to the city is only one penny on a dollar in sales, sales tax equated to 5 million over the course of the year in municipal revenue. While they would like to keep the current sales tax rate as is, it may come to the point to where they have no option other than to raise the sales tax like surrounding cities have. Significant other sources of revenue are tourist tax in the form of hotel room taxes and their conference center which could slow in the current economy.
The city is hoping to make job cuts through attrition and have historically had employees leave to take like jobs in nearby cities as they pay better than the city of Monterey. Thus they are hoping that nobody was going to have to get laid off in order to make budget adjustments.
My observation is this. The City of Monterey is likely better off than a lot of surrounding cities and the past rate of employee loss is likely to tighten up as the surrounding cities are likely to make deeper cuts. I therefore doubt that they are going to be able to rely on attrition for 100% of needed cuts.
My observation to the rest of California is this. Monetray is probably in a lot better position than the majority of other cities in California and the Mayor mentioned a low rate of forclosures in comparison to other nearby towns. If I am seeing Monterey taking this defensive position, I can only imagine what other city council meetings are like right about now.
Imagine what city coffers are going to be like that have historical reliance on revenue from auto malls. They have to be taking a big revenue slap right now. As far as essential services go, which is fire and police, Monterey is blessed with these services taking only a 40-45% chunk of the total budget while in other towns this runs 50-60% of the budget. This is primarily due to tourist tax dollars which the town enjoys. Currently room occupancy is down just 12%.
In addition, they are expecting the state to come in and swipe about 750k of school funding and they have to plan for this.
Bottom line, if your city has not yet done so, expect sales tax increases of around 1% at the city level. This would be in addition of course to raises in sales tax at the state level. Many may be smiling at low gas prices right now but that could suddenly become a state revenue target since gas is suddenly “cheap”. The last time gas was “cheap”, Reagan slapped us with a nickel.
And that is my California city book report. While prices are deflating, taxes will be inflating, removing some of the benefit of lower prices.
December 7th, 2008 4:25 pm
Bert -
Gerald Celente prognosticates that there will be tax ‘revolts’ by 2012 or earlier. Your observations are correct and support his assertion, as tax increasing in the face of falling revenues is the automatic knee-jerk reaction of politicians to protect ‘vital’ services.
There’s a reason Mr. Mortgage’ site is called the ‘implode-O-meter’. What is happening out there right now is _the_ definition of ‘implode’.
Watch though, what happens when the implosion abates and the Reflation begins. And the new Administration has made it clear that deficits will have to wait…
It ain’t cheerie news on a beautiful Sunday, but we’ll somehow pull together and get through it.
I hope.
Peace -
C.C.
December 7th, 2008 10:43 pm
C.C.
“Mr Bush’s now long-forgotten “stimulus package” unveiled a few months ago was a mere $US 168 Billion. Shortly after Mr Obama was nominated to run as the Democratic candidate for President, he was talking about the “possibility” of a further $US 50 Billion stimulus package. Just before the election a month ago, that had been raised to $US 175 Billion. A month after the election, it is
up to $US 1 TRILLION. Who knows where it will be by the time Mr Obama is inaugurated in January?”
Thus it seems that massive Federal spending is on the works, but it sure took them a long time to figure out what the short term fix was. One thing they mentioned in the City Council meeting in Monterey was the need to have ample works projects ready to go when the Federal opportunities arise or they could miss that money. This was one of their immediate focuses.
Here is one of my pet peeves about government funded projects and it is called the Davis Bacon Act. It is depression era legislation that was enacted to prevent low wage workers from coming in and taking jobs. It is a requirement that union prevailing wages be paid along with union benefits. The problem is that over the years, the Union pay and benefits far exceeds what the private sector pays for these types of jobs. You have the private sector price and then you have the government price which is the highest price possible. Some Unions even have two pay scales. One for the government and one for “private party contracts” so that unions can compete in the private sector.
Either the Federal and state government should do away with these laws or lower the prevailing rate to actual private sector rates for government contracts. Why should taxpayers have to pay the highest rates to get anything done? This totally amazes me how much money we waste every year with these laws. As far as I am concerned, the government is entitled to the best price possible, after all, it is my tax dollars. Worse in my mind is that these laws have provisions that keep non union companies from being competitive with Union contractors. In essence, this becomes a Union subsidy.
http://en.wikipedia.org/wiki/Davis-Bacon_Act
Under Humphrey Hawkins legislation, the government is authorized to create low paying jobs that do not compete with the private sector if employment goals are not met. If the government dumps a trillion or more and Davis Bacon laws at the state and Federal levels are not suspended, these dumping of high paying government jobs will put pressure on private sector employers. In essence, the private sector will see trained employees leaving to take the subsidised Union fantasy wage over the private sector wage.
So which is it? Humphrey Hawkins that creates jobs that do not compete with the private sector or Davis Bacon which drains the government supporting private sector of skilled workers?
My guess is that they leave Davis Bacon in place and screw the private sector that will be faced with the cost of retraining new employees to fill the slot vacated for the government subsidised job. The private sector which generates all funds which supports government is about to get screwed by government. I wonder how many private sector employers even understand this?
December 8th, 2008 1:13 am
BertDilbert:
Let’s ask this question – who is going to fill all of these construction and public works/infrastructure jobs? I bet even after the “new deal stimulus” is passed, they can’t find enough people willing to do manual labor if they can’t hire illegal labor. The reality of the construction business is that it is based on a foundation of low-cost illegal workers. Able-bodied Americans who can collect welfare and government assistance are not incentivized to take these jobs when you can sit home and collect a check.
The New Deal and WPA projects worked in an era where the majority of Americans did some type of blue-collar or manual labor and was in an era of shortages and true need to work to bread on the table, literally. Today, these are the jobs that many consider too low to take.
December 8th, 2008 1:25 am
C.C “Gerald Celente prognosticates that there will be tax ‘revolts’ by 2012 or earlier”
December 8th, 2008 1:32 am
Terrible sorry for the double post. But concerning the above quote, American citizens have been pretty laid back during the entirity of the crisis. Congress and the Senate went against popular opinion with the bailout, and have decided to do whatever they please and has there been a single riot?
I think most people are tuning out completely. There is no positive news concerning the whole mess, so why keep watching. Even I can only take so much bull from No Bias No Bull on CNN before I call it a night. I have noticed that most people now on HGTV on shows like Flip That House…never actually got it to sell.
December 8th, 2008 1:55 am
JJ
I am sorry on your view but I was just up in the Bay area. Contractors had flown in workers from Florida to do some nasty work that we would normally expect to be done by Hispanic labor (it just so happens that the majority of workers in the tank cleaning field in CA are Hispanic) Long hours (14 hour days) and no overtime. They were making $12 per hour. The vast majority were white, male, with an average age of I would say 25. As far as I am concerned the employer should be brought up on charges for safety violations, six injuries in 2 days.
I spoke with several of these men and they all said the only reason they took the job was that Florida employment situation is terrible right now. One of the men I spoke to was a housing contractor who had his home foreclosed on two months ago.
Many may share your opinion, and I know that opinion exists, but I thought I would throw a real life example into the mix for balance. Right now people will take anything they can get.
December 8th, 2008 12:09 pm
hey stu,
Looks like the auto bailout is going through. Hate to say it but, “I told you so!” ;P
On a serious note, I don’t know where I stand on this. I’m amazed the big 3 have survived this long. How can a car company in the states compete with foreign car companies that are usually subsidized? I predict that you will be seeing big gov’t taking over more industries. It may be the only way to play fair with the rest of the world?
December 8th, 2008 12:12 pm
I predict that you will be seeing big gov’t taking over more industries. It may be the only way to play fair with the rest of the world?
Drag us down to their 3rd world status and socialisim, in order to preserve our place in the world? That just does not make any sense. We need to make things in America, buy American, and let the rest of the world go to pot.
December 8th, 2008 12:48 pm
Sorry, mistype. I didn’t mean for us to play fair with the world, I meant to even the playing field for the US. It’s kind of hard to compete against foreign industries that are almost completely subsidized by their gov’ts. Especially when ours have to answer to unions, special interests, ecologists, standards, etc.
December 8th, 2008 3:26 pm
CanadianJack -
Indeed, apathy reigns (somewhat) supreme at the moment concerning the visceral intent of the electorate to take up their collective pitch forks.
However:
Economic events are unfolding in real time before us. As such, and unlike 1.3 years ago, they are rapidly departing the ‘regional’ train station to embark on a Nation-wide tour of misery.
The truth has not yet boiled to the surface where everyone is feeling the pain. Local/municipal sales tax, property tax, gasoline tax and myriad ‘other’ taxes about to increase, will foment these revolts. No, it’s not going to be some 200,000-strong gathering for a spectacle in DC. It’s going to be worse. It will start in small-towns across the U.S. where municipalities are at or on the verge of bankruptcy themselves and as such, they will look to tax the remaining producers to fund various government functions and programs.
When the remaining producers (those that still have jobs and are ‘contributing’ to the tax base), see that government continues to demand while expanding their ‘empire’ exponentially over the citizenry, that is when brooding sentiment goes geometric.
I refer to Mr. Celente because a great percentage of his prognostications have proven accurate over the past 25 years. He’s neither genius nor prophet. He, like many others not necessarily in positions of notoriety, understands human nature as the key element of trends and movements.
Peace -
C.C.
December 8th, 2008 4:16 pm
od, yes you were correct, but not as bad as it was at the outset. They wanted $50 Billion so this is a good compromise. The bad thing is that not only will this not be enough, but it will no way get them all through March 09. They are bleeding cash at a rate unsustainable even with a bailout. I know dems are pro unions but this was a golden opportunity to unleash themselves from unions and be competitive again.
I don’t see big gov taking over these companies to make them competitive but rather we need to make some changes in our business model. We have Toyota with plants right next door to our American car companies making money and they do it by aggressive pay structures and using 401K plans for example.
The big 3 need to do away with pensions immediately like most companies figured out many years ago. They need to rework their union contracts to competitive wages in their own industry removing themselves from that equation as none of them are competitive. They need to lesson the pension amounts already promised in some way and they need to make their workers pay a good share of their medical. Then they will instantly be competitive because that is what everyone else that is competitive is doing. Really simple to figure out but harder to implement because the unions will fight it and fight it until they are all eventually out of work. Not smart, but that is what unions do. That is also why bankruptcy was the only option available to allow permanent changes to occur. Now the big 3 will just skirt around the real issues only to allow themselves to slowly bleed to death. Again not a very smart approach but it is what it is when it comes to unions. They have always needed to be saved from themselves.
December 8th, 2008 4:35 pm
Homeowners redefaulting after getting aid
Independent verification that renegociated mortgages don’t stop foreclosures…..
Mon Dec 8, 2008 3:26pm EST
By John Poirier and Patrick Rucker
WASHINGTON (Reuters) – More than half of mortgages modified in a bid to avoid foreclosure fell delinquent within six months, a top U.S. banking regulator (Comptroller of the Currency John Dugan) said on Monday, casting doubt on a proposal to rewrite home loans en masse.
December 8th, 2008 9:46 pm
Kind of like second marriages. If it did not work the first time….What are the odds it will work out the second time? Borrowers are unable to pay….no matter what the effing payment is lowered to because they have NO INCOME. Idiots are rampant in government and Bernanke and Paulson must share the “crown”. The president is just a Jester put in place to catch all the political flack, and was cursed with total intillectual impotentence. Jobs drive markets and not credit. This reversal must be made before any “bottom” can be called or the trend reversed.
December 8th, 2008 10:55 pm
Peter:
What do want to bet that those that have defaulted on their mods never received a principle reduction? I imagine that a large number of the mods done in the first part of the year did not result in significantly lower payments.
“Banks like Chase, Citigroup and Bank of America have only recently put more emphasis on lowering monthly payments.” http://www.nytimes.com/2008/12/09/business/economy/09mortgage.html?ref=business
As has been stated many times in this forum, principle reductions are necessary if mods are going to be successful.
December 9th, 2008 1:14 am
i would define near net negative equity as not having enough equity to cover a brokers commission,
so say equity of less then 5%.
but given this list does not include second mortgages this is going to be very bad, the numbers should be increased
about 10 percent.
December 9th, 2008 2:42 am
Please someone help me to remember. I vaguely remember reading in the news that congress passed some bill to stop foreclosures until January 2009. Is this true? Any one have any info on this? – Thanks in advance.
December 9th, 2008 3:03 pm
Hopefully, the majority of those homeowners will remain employed and not join the ranks of the foreclosed. The full effect of lost equity on consumer spending is yet to be seen.
December 9th, 2008 8:50 pm
Sad when a nation we founded to fix a problem (Liberia)…has a stronger balance sheet than we have.
December 9th, 2008 9:31 pm
lex-
Fannie and Freddie are holding off on foreclosures until Januray 9. Many lenders are doing the same.
December 9th, 2008 11:59 pm
That was a great post Susan – kudos. I need a couple of days to think through and respond.
I think more than 20% of home owners are underwater by the way. The primary survey used for that number that gets thrown around is from Zillow who tracks from purchase price. This of course does not take into consideration refi’s or second mortgages. I have been told their internal HPI does not take into consideration foreclosure related sales, which are comps if they are outside of Trustee Sale which most are.
December 11th, 2008 7:52 pm
Thank you and will wait for your response.
The estimate I used is 30% of homeowners are already underwater or close to it. The cost to cure/correct/fix is 1.428 Trillion dollars for approximately 11.9 Trillion dollars of outstanding mortgages.
Update to the above post is: The most current fiqures I could obtain is there is 12.1 Trillion Dollars of outstanding residential mortgages, which would translate into a 1.452 Trillion Dollars Loss for all investors involved.
12.1 times 30% of homeowners x40% reduction
FYI- Only 2.1 Trillion dollars of outstanding mortgages are held directly by the issuers, themselves.
Assuming ALL of the 2.1 Trillion Dollars of bank held mortgages are the AFFECTED mortgages, that would mean a loss of 840 Billion Dollars.(pretty close to the TARP funds requested)
December 11th, 2008 9:47 pm
CC
Thanks for the compliment, but I disagree on a few points.
The sub-terfuge you speak of is really the unregulated credit defaults swaps that the industry has engaged in and the allowance of overleveraging of depositors funds that have taken place.
The reason for TARP was to cover/correct the balance sheets of the banks involved, never the homeowners. Why are there 117 troubled banks on the FDIC’s list?
The tinkering that has been done so far has only involved protecting the financial system creating “to big to fail” entities, not the market(public). There were no conditions placed on TARP money or its participates, nor on the 7.4 TRILLION DOLLARS of THE TAYPAYERS funds and guarantees provided to the financial market. Where is the deleveraging of the financial system? Or for that matter, the accountablity?
The housing market did not inflate without outside tinkering involved, why would you think it is decreasing and will continue to decrease without outside tinkering involved?
My proposal acknowledges that:
The financial industry has grown to big and needs to be downsized to reflect the current or true need of the public– without the tinkering of creating exotic loan programs that inflated housing prices that exceeded borrowers incomes.
That the American Public has indeed over leveraged themselves and we must go thru a deleveraging period that is painful but doesn’t have to be devastating. I feel it is better to correct the majority not the minority.
The individual deleveraging taking place and that will continue to take place is affecting the overall economy. The public’s spending ability accounts for 70% of the economy.
If the public has less money to spend whether thru loss of income of employment, illiquid assets, lack of or little savings or unable to continue borrowing,or just being frugal, the over economy must also decrease.
Decreases in all sectors of the economy will occur, travel, construction, retail,personal services, transportation manufacturing, education, entertainment, automobiles etc… It is a domino effect. Each decrease represents a loss of employment.
The proposal spells out the fact, that while we need credit to be extended to small businesses, we also need for some of that 7.4 TRILLION DOLLARS to be applied to creating over 5 million jobs in various industries not just intrastructures, again majority not minority.
The proposal does give the public more spending power whether they use that spending power in the economy or just to pay off other bills or save, is up to them.
Is the swamp draining you refer to homeowners?
if so which ones, we are now up to prime loans.
December 12th, 2008 1:39 pm
Admin
My apologies, if I actually read the above charts instead of glancing over them, I would have realized you are correct. The charts shows that over 41% of mortgaged homeowners are already in or close to negative equity.
Do you have a chart that shows the number of mortgages deliquent for each state?
My total cost to cure will have to be increased to 2.1 Trillion Dollars with the above chart in mind.
December 12th, 2008 4:42 pm
Susan,
Again, your thoughts & recommendations are noble, as is your empathy towards those homeowners in distress at this time. Unfortunate as this catastrophe is, it is necessary.
Excerpts from your reply above along with my commentary in italics:
“The individual deleveraging taking place and that will continue to take place is affecting the overall economy. The public’s spending ability accounts for 70% of the economy.”
This is precisely the crux of the problem. Since when did the public’s ‘spending ability’ constitute a metric – of which the viability of an economy is measured?
“If the public has less money to spend whether thru loss of income of employment, illiquid assets, lack of or little savings or unable to continue borrowing,or just being frugal, the over economy must also decrease.”
Agreed. True. Inevitable. It is basic and sound. It’s called saving first, spending later. As in the way we were raised up until about the late 1970′s before borrowing and easy credit became the norm. It was also a time when credit cards were few & far between, ‘lay-away’ was a common form of purchase for the masses and economic ‘growth’ was determined by sound metrics of 5-10X earnings, high dividend yields, low debt, 20% down, cash in the bank and steady growth over time; Not wild swings, house-flipping, market volatility and sweaty palms fearing the economic impact of a dip in ‘consumer spending’.
“Decreases in all sectors of the economy will occur, travel, construction, retail,personal services, transportation manufacturing, education, entertainment, automobiles etc… It is a domino effect. Each decrease represents a loss of employment.”
Agreed again. I would argue however, that a majority of ‘industries’ you list are not fundamental to a strong economy – at least not to the extent that those industries have been over weighted as a source of real economic strength.
“The proposal spells out the fact, that while we need credit to be extended to small businesses, we also need for some of that 7.4 TRILLION DOLLARS to be applied to creating over 5 million jobs in various industries not just intrastructures, again majority not minority.”
How do we create jobs Susan? More importantly, who shall be responsible for administering my Taxes and creating those jobs – the government? (read: re-allocation of your tax dollars from one area to fund another), or the free market of ideas, innovation and private capital investment?
“The proposal does give the public more spending power whether they use that spending power in the economy or just to pay off other bills or save, is up to them.”
‘Give’ the public more spending power? Look at what you are saying. From whence shall these $$ that we give our fellow citizens to ‘spend’ be created?>/i>
There is a fundamental misunderstanding taking place here. $7.4 Trillion or $754 Trillion – it matters not. We are BROKE. These dollars must be created and distributed out of thin air – i.e., INFLATION – that you and I and at least a generation ahead of us will have to pay for.
The bottom line here – again as I’ve mentioned before, is that very few are willing to accept and adapt to the fact that we have been living in a phony economy and beyond our means for the better part of 25 years. That phony economy was based on low interest rates and easy credit – for everyone.
That easy credit trickled down to:
- Construction
- Personal services
- Transportation
- Travel
- Entertainment
- Automobiles
- Education
- And all the rest of the industries you mentioned – and more.
Now that phony economy is crashing back to Earth and easy credit is over, because we are BROKE.
Alas, In the intermediate term Susan, I don’t think you’re going to have to worry, because the new administration has made it clear that ‘deficits will have to wait’. There will be reflationary relief in the short to intermediate term, accompanied by rising inflationary costs in every aspect of day-to-day expenses, likely followed by a hyperinflationary spike and concurrent bursting of the bond-market, which will then close the final chapter on our economy, more importantly, our Liberty. Which by the way, not too many seem overly concerned about these days, but they will in due course…
Peace -
C.C.
December 12th, 2008 9:31 pm
Susan, the fed fix to the dot com bubble aftermath was to lower interest rates resulting in refi’s and thus the addition of lower mortgage payments. Lower mortgage payments naturally result in more disposable income. The other form of economic stimulus was mortgage equity withdrawals (MEW). This was increased through higher home prices. The total national effect of withdrawals on disposable income was 6-9% during the bubble years.
I have no state data on what the effect of MEW was in the stat of CA but one must assume that it was significantly higher than what the Fed applied nationally in their charts.
http://bp2.blogger.com/_pMscxxELHEg/SFFzZFpvUFI/AAAAAAAACI4/lO_HQfXaNxo/s1600-h/MEWQ12008.jpg
Smoothing out the chart, it would appear that normal times would have a MEW rate of around 1% and above that would be economic “juice”. If you were to subtract the juice of MEW and deficit spending, we would have had falling GDP over the entire period. What this shows is that after you remove the smoke and mirrors, our economy has been in a state of decline that has been artificially masked by stimulus.
We can continue to throw trillions at stimulus but it does not cover up the fact that the private sector is unable to show growth and keep up the appearance that the USA is some kind of economic miracle. Being that the National response will be to turn inward with deficit spending packages like Japan, we should look at what happened to Japan’s national debt in the process. Japan’s national debt to GDP went from 60% to 160% and climbing. This ratio is between Jamaica and Lebanon.
Japan did this economic experiment while the world was not in an economic recession. We are embarking this path at the start of one.
Can all the major economies of the world sell bonds to juice their economies at the same time? Is the world stuck at near zero % interest forever or is something going to give here? The world has been reduced to loaning itself money to survive. The world is building giant national debt bombs that will make the housing debacle look puny.
This is the larger picture that we are looking at now. At some point in our future, the bump of an interest rate equivalent to the flicking the ash of a cigarette will set of a chain reaction of national debt defaults. While central banks had the power to pull one out of a hat to combat falling banks, when the national currency falls under question, there is no hat left to pull from.
December 13th, 2008 5:37 am
Thank you both for responding. Unfortunately I read your response Bert and lost it somehow, but I basically agreed with your thoughts, with a few exceptions. When it returns I will respond.
CC
Thank you for the compliment again, but you asked when the economy was related to a metric to show the viability of an economy? It started in 1929 as “Gross Domestic Product”. The
GDP is derived from all economic data from all industries consisting of all goods and services comsumed by the public to show “economic activity” of the nation.
If the public has less or no money to spend, the total “economic activity” for ALL industries and services decreases.
ANY reduction of consumer spending results in a decrease in prices to compete, which results in less profits which results in less productions, which results in less jobs required, which eventually will result in an increase of prices (inflation) for those industries or services directly related to “existing” but the majority of the public has less money to spend making it harder to “exist”. What does that sound like?
I agree with you both that we have been living in a “phony/make-believe/false” economy for a number of years due to the easy credit, that had created a “credit bubble ” and unneccesary and unheard of profits for Wall Street.===credit default swaps
The industries I mentioned and didn’t ARE fundamental to the overall economy. Do you think it is only a specific one? Every person can not work in one specific field for an economy to work. They all must be involved, while some might be decreased or eliminated other industries must be created thru your free market ideas, innovations and private capital investments. If they are not, the government OF THE people must START them. AND IT IS OUR TAX DOLLARS, THAT WILL BE USED FOR THE MAJORITY NOT THE MINORITY, democratic society.
Capitalism only works for as long as it benefits the majority or it becomes a dictatorship of the minority for the majority. (similiar to the financial sector’s mentality)
A strong ecomony would be one, where the MAJORITY of the area, region, state, country had sufficient funds/income to live, save and enjoy life (without borrowing) while maintaining their personal and public expenses that did not exceed the income or revenues. Oh wait, that sounds like a budget.
While I agree with you both, that the USA is broke. BUT WE HAVE GREAT RESOURCES AND PEOPLE.
AND THE ABILITY TO OVERCOME BEING BROKE.
******
BUT, here is where we disagree. I don’t feel the American Public experiencing a catastrophe is necessary when it can be reduced and maintained at the current recession without involving a higher percentage of the American public then it already has.
******
The loss/correction or cost to cure I speak of for the housing industry is 2.1 Trillion Dollars and it would cost the investors of the mortgages or ANY securization vehicle used to “give” the spending power (savings of the monthly payment) back to the homeowners in questioned.
The investors invested knowing the risk that investing had not only the probability of “increased” gains but the possiblity of loses, just like any business should know, capitalism.
I am not a mathematician but it would seem to me that if you as the investor were able to replace a defaulting or potentially defaulting principal mortgage of $500,000,(it doesn’t matter what interest rate=you are not receiving it),that you would only recieve 40-50 cents on the dollar if you foreclosed,
AND it could be replaced with a new principal mortgage of $250,000.or better at the interest rate of 5 or 6% for a qualified homeowner in a STABLIZED housing market, the cash flow would be better even though the principal balance is reduced, which would you choose? Bottom line is profits. correct?
I agree the economic strenght (over-weighted) of the economy has been from the “credit bubble from Wall Street to Main Street” that has also burst, at the same time of the housing bubble. That is what you were speaking of right?
So your suggestion is to let the housing market go, without regard to anything (eventually USA bond market crisis) or anybody (American Public)?
I on the other hand, as well as Mr. M do not agree with doing or saying nothing when we see a problem that can be reduced and/ or corrected admittedly from different points of view. That is our right for living with “Liberty”.
I also am not a economist, but as I stated in an earlier post the proposal exceeds 40 pages:
1- all salaries, bonuses and compensation packages of all executives, upper, middle and lower management would be reduced for any entity receiving or benefitting from a taxpayer infusion/funds, not to exceed the highest paid government employee (the president). Performance equals pay. (* this includes all government sponsored entities, not just the “bail-outs”)
A way around this is, stock options could be given but if the company does not obtain a profit for any given year the options are returned to the company for the previous YEARS, with a delay of 5 years before being able to cash out for any given year.PERFORMANCE equals capitalism not better negotiations
2- all dividents for all shareholders from all above companies would be halted until the taxpayer is paid back in full or until profits are really realized, if taxpayer funds were not involved.
3-all companies in any field would have to realize that profits will be decreased due to the GDP being decreased and they would also be held to abide by the above two conditions before requesting taxpayer funds. (allowing non banks to become banks and the auto industry, with any other industry that comes for a bail out)
4- There will be no middle class stimulus checks received since the government will be spending the stimulus for the overall ecomomy by creating or maintaining jobs.
5-There will be no tax cuts to the middle class or extending of tax cuts/benefits to the uppper class as the government of it’s people need the revenue.
6-The tax on savings accounts would be eliminated to encourage savings. My original proposal had a government matched dollar amount up to $1,000 annually. $1.00 for every $3.00 saved, obviously the limit was increased.
7- Welfare or unemployment, while not taxed during receipt, will be considered a loan to the individual, it must be paid back without interest for a predetermined amount of time. This would not be initiated for 12 months from passing the new rules.
8-Credit will be extended to small businesses from banks/government with a business plan that will show a potential of income.
****9- Education should play a part in the incomes of the public.
Seriously, a factory worker who earns $75. a hour vs a doctor who earns the same, doesn’t make sense to me nor the majority of the public. ($75,x35=?x52=$136,500.)or a factory worker who earns $40. a hour vs a police officer who earns the same $72,800. annually.
10- the pork spending in the government budget accounting for 20% of our over-all economy. It used to be the city,state and federal workers recieved alot less in SAlARY than the private sector BECAUSE of the perks. Now the pay equals or exceeds the private sector and the perks are better.
While my proposal definately addressed the correction needed for the housing market, it also addressed some of the surrounding industries to level the playing field.
This weekend is the “Obama Change” weekend when we get a chance to submit our suggestions and points of view, regardless of who you voted for. OUR NEXT PRESIDENT IS BARACK OBAMA, a direct result of our “liberty”.
I invite everyone to respond or suggest ways/ideas to IMPROVE our economy, NOT JUST CRITICIZE and will record ANY SUGGESTIONS, regardless of my opinions, in a complete typed outline to submit to every senator and President -Elect Obama received by Sunday the 14th of December.
I will post the outline on this web-site if it is agreeable to “Admin”, who I really hope responds as well.
Peace (what a pleasant thought) and have a good night, CC and all.
December 13th, 2008 2:41 pm
Susan,
I will close out my contribution to this thread with the following. We will simply have to agree to disagree. My world-view is much different from yours. However, you asked for ideas to ‘Improve’ and not ‘Criticize’. So then, here they are:
- Shrink the size and scope of government. From bailout programs to 3-letter acronym departments and everywhere in between, save for the what the Constitution prescribes.
- Return our monetary standard to a Gold-backed system of currency in order to preserve the value of said currency and discourage profligate spending.
- Encourage individuals and localities to find and implement solutions, not State/Government power.
Unrealistic? In today’s Nanny-state climate where it’s always somebody else’ fault or where there’s always a do-gooder standing in the wings to use government as their proxy to enact ‘programs’ that will bring ‘equality’ and ‘fairness’?
Yes indeed, unrealistic.
So we’ll continue down this road of never-ending government intervention, bailouts, programs, intricate and complex documents – you name it – and of course, all in the name of bringing ‘fairness’ and ‘equality’. All the way to Tyranny.
Mark my words from here and the last paragraph of my last post – you can take it to your (bankrupt) bank, with 1000% interest, that is where we are headed and You, like the rest of us – freedom lovers or nanny-state cheer leaders, will experience it in one form or another.
Peace -
C.C.
December 13th, 2008 5:10 pm
Susan, there will be no successful mortgage modification program bailout. The bailout money will be spent on Unions through infrastructure programs, not homeowners mortgage principal write downs. The Unions already run Sacramento and Sacramento will opt for Unionized construction programs over homeowner bailouts. Show me a strong union town and I will show you large empty buildings. Show me a strong unionized government and I will show you a state in peril. California politicians are all standing around adding points to their green cards. The more green points the more anti business. There is nothing that can be done to save California at this point. The new taxes and regulations will strangle out business and create business and job flight. The loss of the tax base will further pressure the remaining Californians. End result more loss of business and higher vacancy rates in both residential and commercial. All remoded loans will again fall underwater and those remaining will have higher debt to disposable incomes after the new taxes come into play (AFTER TAX PURCHASING POWER). Leaving California appears to be the superior play over modification. The current tax shortfall numbers are showing about $3,100 per household at the state level. I assume that city and counties will have additional shortfalls to pass on. All these taxes taken to support government are going to further strangle businesses as there will be less disposable dollars to sling around town.
This is a terribly bleak outlook Susan. I am not looking forward to this at all because I am stuck here. I am going to have to stick out this nightmare that is coming down the road at me.
December 17th, 2008 6:03 am
BertDilbert:
California is not the only state affected, agreed it is ONE of the bubble states. Every state has a domino effect on every other state to some extent.
I live in NY and we also had a 25% decrease in values from the market peak, even though it is only being reported/quoted as 8.8% for 2008.
Mr. M and I have different “actions” to get to the same basic result, of admitting and allowing lower prices/values in the market and having qualified homeowners reside in those homes.
While I agreed with your and others bleak outlook at the present and potential future in housing and the economy, I can not understand sitting by doing nothing, just waiting for it.
There are many things you could do, start by calling/writing your local government officials daily, get your neighbors involved in calling them, send this web-site or others like it to them, send copies of articles to them, develop your own proposal.
Do something, even if it is picking up the trash on a vacant property in your area. BUT even this has to be reported to the local, state and federal governmnents for acknowledgement. Let them know how big of a problem this is for Main Street, get involved.