Mr Mortgage: My Case FOR Mortgage Principal Reductions

Posted on December 14th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

This weekend a top reporter, Teri Buhl at the New York Post, wrote about one of my weekly research reports to clients that I put out a couple of weeks ago.  In it, I talk about terrible bank- and regulator-led mortgage mods, Indymac and my solution. Most regular Mr. M readers already know my views, as I have been very vocal on this topic for months. Here is the Post story:

From the New York Post by Teri Buhl: Reworked Loans Aren’t Working Out at Indymac Bank

Below is the full write-up of my views on the mortgage market, mortgage modifications and where this has to go. Not included are the proprietary default and foreclosure data released in the original report.

Before I start, I believe that the housing market will ‘fix’ itself over time. But regulators, politicians and banks are hell-bent of ‘saving’ us all with programs that will just not work. In my opinion, the only way to ‘fix’ the housing and mortgage markets is to undo 2003-2007. To ‘undo’ means to:

  • a) force de-levering the home owner/consumer through mortgage principal balance reductions based upon what the borrower really earns using market-rate financing
  • b) make it so home owners can freely refinance and sell their homes
  • c) make it so the vitally important move-up buyer comes back
  • d) stop defaults and foreclosures without making home owners underwater, fully-leveraged, renters for the rest of their life as the present mortgage modification plans do
  • e) allow home prices to fall to historic multiples of incomes and rents without exotic loan programs or artificial, temporarily, government induced low mortgage rates.

This can all be accomplished quickly if the right steps are taken. Below is how I believe we can get there.

HOME OWNERS AS A GROUP ARE NOT TO BLAME

The reality is that at the time most troubled loans were made, the borrowers really could afford their payments.  This is because everyone made $150k per year for the purposes of qualifying for a loan due to the way the loans were structured.

This greater housing and mortgage crisis is not a result of millions of borrowers going wild, buying beyond their means blinded by greed or some massive consumer driven multi-year mortgage fraud era where everyone lied to buy a home.  Nor was it caused by gangs of mortgage brokers who cruised the streets with 1003’s and pens in hand recruiting straw buyers to steal homes.  This crisis was caused by fraud alright – but not by the consumer or loan officer to any great degree.

The greatest real estate bubble of all time was only able to occur because of the unregulated investment and commercial banks’ insatiable thirst for parts for their Frankenstein securities.  As parts ran low when housing stretched or interest rates rose to levels that made the asset class unaffordable every few months, the constant re-engineering of loan programs focusing on low monthly payments and the elimination of income and assets as a variable brought affordability back in check. This continually repeated for years until virtually anyone with a heartbeat and a hand needed to sign the loan documents were active participants in the market. By turning a blind eye, regulators turning a blind eye endorsed their actions.

The problem going forward is that most don’t realize that during the bubble years, everything was exotic – even 30-year fixed rate fully documented loans. 

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 old days, when housing was viewed as a place to live, financing was sound; down payments were required and no more than 28% of gross income could go towards housing debt. When homes prices fell, it was alright because home owners could still save money and do the things they wanted to in life. 50% debt-to-income ratios changed the game.

Make no mistake about it – MOST ALT-A, JUMBO PRIME AND PRIME BORROWERS ARE NOT WALKING BECAUSE THE CAN’T TECHNICALLY 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 such a massively depreciating asset, it makes good financial sense to dump that asset. When you can’t sell, you walk away.

That 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 real estate professionals 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, as was stated income. You could not turn on the radio or television without being inundated with ads for $350k mortgage loans for 1% and $1000 monthly payments.

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. It was 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 for very long.  Exotic loans with teasers were sold as a ‘way to get into the home more cheaply’ or a ‘way to improve your credit before refinancing into something better a couple of years from now.’  The high churn rate 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 obtaining a mortgage loan.  Teaser rates, interest only, negative amortization, high allowable debt-to-income ratios, zero down, stated income, and others made all homes affordable and all borrowers rich. Home prices responded by surging higher to meet the new-found national high affordability level. As home prices surged, new loan programs were rolled out 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 hourly day-laborer 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 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 were 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 This has rendered the nation’s financial institutions and millions of home owners instantly insolvent. The same household that earns $85k per year could have bought a $650k home with no money down two years ago. Today they can buy a $275k – $300k 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 the smartest guys in the room never thought 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 and will never be ‘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 people 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 banks’ part was the real driver of home prices. Taking that away is ‘going straight’ and the leading driver for the destruction of the housing market and consumer.  It’s simple; housing prices are just going to the levels determined by incomes, rents, interest rates and the macro-economy.

ARTIFICIALLY LOW RATES WILL NOT HELP EITHER

Who Can Really Benefit From a 5% CONFORMING (=<$417K) Mortgage?

With a 69% home ownership rate at the peak and values at least 50% across the bubble states, who is left to take advantage of these low rates? While low rates are a great thing for those who qualify, it is very possible that the excitement over low mortgage rates will end up exactly like the excitement surrounding the previous 20 bailouts, acts, proposals and ‘lights at the end of the tunnel’ that ended up being trains over the past two years.

The reality is that rates for most are not as low as people think. In addition, too many home owners in the bubble states are underwater and therefore unable to refi or sell. Remember, selling is needed in most cases to get the down payment needed to re-buy.

Exotic Loan Affordability Comparison

100k at 4.5% (5/1 interest only) = $375 per month or a 2.1% – 30-year fixed full doc
100k at 5% (7/1 interest only) = $417 per month or a 2.9% – 30-year fixed full doc
100k at 1.25% Pay Option ARM = $333 per month

For those who went “limited documentation” as with 83% of all Alt-A borrowers, affordability and interest rates and comparable affordability are moot points.

‘Back Then’

In the good old days, when rates dropped 50bps in a short period of time, the entire country would refinance for a lower rate, cash out or combine a first and second into a new first mortgage while adding a HELOC.

Back then, when values went up every month and there were hundreds of lenders with thousands of programs and interest rate structures, it was very easy to pump the mortgage money.  Back then, the refi waves came every 6-8 months and within a few months after a wave began, it was noticeable how this injection rejuvenated the consumer. This can’t happen any longer.

Refinances Now

Negative Equity- Within the states that need the most help and are most beneficial to the macro-economy, the vast majority can’t refi due to negative equity. In CA for example, 60% of all mortgagees are either underwater or ‘near’ underwater and will not be able to take advantage of the rates. NV, FL and AZ are even worse. Most home owners in the top 10 trouble states are underwater in their homes, rendering them unable to move or refinance.

Rates are lower than last week for sure, but these ‘low rates’ are ONLY for the best AAA Prime gold borrowers with 80% LTV’s and 740 scores. This represents a small fraction of borrowers. THE REST STILL GET RATES WELL ABOVE the rates being recklessly thrown around by the media. As a matter of fact, most borrowers with the previous profile may have not participated in the past several years of serial refinancing. Many already have low 30-year fixed rates at 5% attained in 2003-2004. These rates are not for anyone less than perfect.

Folks don’t qualify – ‘Back then,’ nearly everyone could benefit from a drop in rates because values always went up and stated income and interest only loans made it so everyone could qualify.  Until mid-2007, lenders actually funded 75-80% of all loan applications!

Now, lenders are funding 40-50% of applications. That is serious fall out. Now, you must have two years tax returns, a current pay stub, great credit and sizable equity to take advantage of the best rates. This profile represents a small minority of borrowers.

Purchases Now

Given that over half the market is distressed sales and foreclosure related properties, rates do not matter as much – home prices do.  6% or 5% will not change things – its about how cheaply they can buy.  Everyone wants a ‘deal’ on a foreclosure.  Many ‘investors’ pay cash and it is all about price, rents and cap rates.

Renters and first time home buyers are a different story and should see some benefit from lower rates if they hold. They will either save money or qualify for slightly more house.  But remember, first time home buyers and renters are the weakest portion of the market and have always been.

What is missing is the all-important move-up buyer, which lower rates will not help to any great degree.  This is because of the gross amount of negative equity already discussed. Without the exotic loan programs and easy qualifying, many can’t even afford to re-buy the home they live in now.

THE SOLUTION

The solution is not for regulators to force interest rates down to artificially low levels for a brief period of time to sucker people into buying homes. That’s what got us here in the first place. That said, sustainable low rates are good for the housing market.

But low rates mean very little when millions will default and lose their homes over the next few years because all of that added supply can’t be absorbed by the available buyers.  The fact is that there are fewer buyers than ever before given that home ownership was at 69% a couple of years back and now the largest sector of the purchase market, move-up buyers, are all but non-existent. Please see the stories below regarding this. It is my opinion that low mortgage rates do not mean what they used to.

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 and saving people, they ought to do it the right way.  Their present ‘solutions’ only kick the can down the road and ensure housing is a lost asset class for many years.

This blame does mostly lie with the banks, law makers, and regulators (including Greenspan) who branded and endorsed exotic 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’ in the media.  Then they 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 refinance borrower 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 are its primary participants.  Low rates may be great for low priced homes in foreclosure epicenters, but as the default crisis 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 highly exotic 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.  The re-default rate after loan mod is over 50% because most loan mods keep the borrowers leveraged up and underwater in their homes. The plans by Fannie, Freddie, 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 macro-economy. It is worth spending a few more trillion on quickly de-leveraging US households so they are free to save and spend money on other things besides an underwater house.  The present mortgage modification structure takes care of the institutions at the expense of the very same tax payer that is bailing them out in the first place. I relate it to how the taxpayer has given AIG $150 billion, much of it to pay off losing bets to other financial institutions. The reason AIG has a blank taxpayer check is because it passes right through them to the financial favorite children like Goldman Sachs and Chase.

Undoing the Past 5-Years

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 to 28/36 DTI 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 and live the lifestyle their income level allows.  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 winds up being $100k lower than the present value of the home, the bank should receive the differential through an equity warrant to 90% of the value of the property. This way the home owner is not upside down in the home, they can freely sell or refi, they are not getting anything more than they deserve and the bank is still protected.  But the home owner gets all of the upside. Anything less and the program will fail. If the borrowers can’t prove income through bank statements at the very least, then they need to leave the house and rent. They should have been renters all along.

For the small percentage of folks who can afford the payments with DTI’s under 28/36 but are underwater solely due to house price depreciation, principal balance reductions to 90% of the present value of the property is likely in order WITH a full-recourse provision to thwart fraud.

For the minority with equity who may owe $200k on a $400k home or have no mortgage at all, you get a multi-year tax break and a lollipop.  By de-leveraging and stabilizing the consumer, you will stabilize house prices much faster, which will benefit you.  Left unchecked and the consumer de-leveraging and housing price depreciation will continue for years, which brings you down too. You may end up underwater in your home unless the right solution is brought forth.

These things will not prevent housing prices from coming down over the next few years to reach a level of affordability consistent with present mortgage rates and lending guidelines. 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 house prices and affordability are based primarily on traditional factors such as rents, incomes, interest rates, macroeconomic conditions and sentiment. – Best, Mr Mortgage

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143 Responses to “Mr Mortgage: My Case FOR Mortgage Principal Reductions”

  1. This is not analogous to giving somebody the keys to a car. Nobody is injured from this. These idiots were loaned massive amounts of money – by other idiots – and won’t be paying it back. So who should be suing who?

  2. Kevin

    Well Kevin, I was thinking in an ideal situation, that due to the enormity of the losses and widespread damage, perhaps the State of California should sue on behalf of the State and its citizens. In the event the State were to fail in it’s fiduciary duties, I would think that it might be possible for a derivative action to come about.

  3. And somebody that bought a bubbled house has nobody to blame other than themselves. I told everybody back in 2005 that wanted to buy “DON’T DO IT”. Their response: “Fuck you, I’m going to get rich from this.” They don’t deserve one red cent. Just like the idiots that gamble their money away at casinos, except these idiots were gambling the banks’ money away.

    It’s fascinating that the homeowners are being pegged as some sort of victims when they have the opportunity to actually walk away from their loans.

  4. California’s financial woes started before this housing crisis. And you didn’t hear any state or municipality complaining when the housing bubble hit its stride and they were making bank on all the action going on.

  5. Kevin,

    Yeah Kevin, but this is California and we are known to be suit happy and let’s face this simple fact, nobody sues when things go right, they only sue when things go wrong. Unfortunately, there is a whole other class of people who were harmed who never participated. This would be inclusive of migrant dishwasher and maid who had to go back over the border and accept a lower wage. They have rights too.

  6. BertDilbert, are you trying to elicit sympathy from me for people that come in this country illegally and don’t want to stay when the economy rots? What next, sympathy for greedy homeowners? Wait, already got that one done.

  7. I’ve been telling people for the past year that principal reductions were the only way to go. I’m glad you took that idea a step further. Good read.

  8. Why not pay off my student and car loans as well? Give me $100k and then I’ll start shopping, boost the economy!

    You people are so fucking stupid it’s jaw dropping.

  9. Kevin,

    Your bitterness possibly exceeds the taste of orange juice right after brushing your teeth. Your self-proclaimed dead-on balls accurate moral compass is admirable, but you have an apparant inability to grasp the big picture.

    This housing market and economy could have a much greater social impact than the horror of offering bailouts and principle reductions to homeowners, banks, local govts, etc. While I don’t disagree with a lof of what you say, I would rather see people be able to stay in their homes to prevent more broken homes (divorces), increased crime, deterioration of neighborhoods, and other social ramifications which would hurt children. I don’t have a lot of sympathy for people who made bad decisions, and there are no shortage of them, but it pains me to see all of the kids who are being affected by this. Perhaps this is more of an issue in my neighborhood, but it hits home for me as my kids have seen several of their friends have to move away, the deterioration of local parks, increased graffiti and vandalism, etc. I don’t really want to pay more than I already do in taxes, especially when a lot of it will likely go to programs for deadbeats, but if it benefits my kids in the end it becomes a bit more bearable.

    On a side note, how is it you have any school loans at all since your obvious intelligence would have warranted academic scholarships to cover your college tuition? Honestly though, thanks for making the blog a bit more interesting this week.

  10. What sort of end-of-the-world scenarios are we talking about? I hear a lot of these “destroyed neighborhood” excuses, but think they’re pretty empty. So a house goes into foreclosure, then is bought by somebody that can afford it and is responsible. What’s the problem with that? Aside from a large number of for-sale signs, I see no increase of graffiti, deterioration of parks, etc. I find it hard to believe that you all are really buying into this whole “rotting USA” depiction. Sure, just take $5 billion, reward the idiots that overextended themselves, and everything will be peachy!

    I am going to go on a limb here and spell out where I think you all are coming from, including Mr. Mortgage. You guys are either so deep underwater that you’re promoting this very self-serving idea of bailing out idiots underwater, or you really believe it will help raise the values of your properties back to their overinflated peak bubble values. Bottom line: there is no way somebody would want our tax dollars to subsidize these irresponsible idiots unless they themselves are the ones getting the bailout.

    I actually don’t have any loans. I’m the fool for living without debt, not buying into the market craziness during the bubble, and living within my means. So I don’t think it’s too self-righteous of me to believe that some greedy asshole that bought a $800,000 house on a $100,000 salary then refinancing to buy his Russian bride and two Benz’s should NEVER EVER geta $400,000 govt check to cover his greedy lifestyle and continue living like a reckless jackass. That is not a dead-on-balls moral compass accuracy, it’s the most basic notion of responsibility, humility and maturity that our parents shouldn’t even have needed to tell us.

  11. Social ramifications; Crime, divorces, ‘The Children’, etc., are here already and about to go exponential as unemployment mounts and a broken value system based upon ‘victim-hood’ accelerates the process of social deterioration.

    Given the ‘entitlement’ mentality of a great majority of the populace, it is seriously doubtful that the federal government – with all it’s agency programs and permutations, is going to allow kids to go without heat and starve without a roof over their head. Of course they may not be able to keep Mom’s & Dad’s together but… Stick around, I’m sure the social re-engineers have a taxpayer-funded program in mind for that too, just give it a bit more time.

    Relief for underwater house-owners in some form is going to come. Whether it be allowed by the states themselves, or by federal decree. It may not come in a package of your discrete choosing, but it will come. And along with it, the strings (flowery word for: Chains) that government is wont to drape.

    Like the current administration, but with a tinge more empathy towards the ‘downtrodden’ and ‘disadvantaged’ among us, the incoming administration has made it clear that “Deficits will have to wait…”

    The remedial translation of which is: Squeaky wheels are going to get their $$ grease. And our taxitory and regulatory noose along with it –

    There’s a tried and true old saying folks: We get the government we deserve. And we are about to get it straight, no chaser forthwith.
    To some, this will be euphoric – just look at what happens to the market every time another bailout is proposed… To others, it is but another ominous sign of the road to dictatorial perdition via government mandate.

    Peace –

    C.C.

  12. Kevin

    C.C. and I are the same age and live in the same approximate area. I am going to say that he has seen the effects of what I have seen, areas that have become economically impacted which results in lower property values and rents. When this happens and prices take a sudden drop, people who live in crappy neighborhoods “move up”. You look around and say WTF, my neighborhood is going downhill!

    You have every right to be pissed off. This whole episode in the life of America should never have happened. At the same time we can be pissed about the housing bubble, we just blew a trillion on Iraq, killed thousands of our troops, injured thousands more, damaged our military equipment and your tax dollars supported this action. We know for a fact that Americans are dumb, I submit Bush being elected for a second term as proof.

    What we need to be able to do is say “That was really stupid, here we are and let’s move forward.”

    I appreciate your posts because you are a shining example of what I am trying to show Susan. That is that there is a segment of people out there that are saying “If these people are given one lousy dime off the principal I am going to be mad as hell.”

  13. Well at least I conveyed that opinion effectively, and “mad as hell” would certainly be an understatement. I just don’t understand why principal deferment isn’t acceptable. It does the same thing, makes the house affordable. They just don’t get to keep that money in the end. Sounds more than fair.

  14. BertDilbert,

    What’s wrong with people in crappy neighborhoods moving up? You seem to be frustrated that the housing bust has lowered the barriers of “economic segregation” which keep “those people” out of your neighborhood.

  15. John

    Well, before when you tapped the bumper of the car in front of you it was no big deal. Now when you tap the bumper of the car in front of you your insurance company gets a call from a lawyer claiming 5 neck injuries from people trying to game the system.

    As a result, my insurance rate go up. My wallet has just become disenfranchised.

  16. BertDilbert,

    Let’s bring it out in the open. Many people live at the edge of their financial ability in order to keep distance from individuals in the lower classes who are doing the same.

  17. John,

    I am merely pointing out to Kevin what happens when the demographics of a neighborhood changes. Homeowners insurance is likely to go up as well as auto. I am not pointing any fingers, I am just saying it just is. As the nature and rate of insurance claims increase, the insurance companies have to raise rates in order to remain in business.

    Personally I think CA is doomed for the next few years because CA has a more fluid population that tends to move in and out with economic prospects. This will worsen the state deficit as time goes on and raise the vacancy rate depressing values further.

  18. BertDilbert,

    This discussion raises the interesting question of whether the new neighbors are the real tipping point when deciding whether to walk. How many individuals are defaulting on their mortgages because they don’t want to live next to their new neighbors? Had they liked the social environment of their neighborhood, they might have continued paying the mortgage, even though they are up-side-down and in negative equity territory; but it is no longer worth it to them to continue to pay when they will have to live next to their new neighbors.

  19. John,

    You 7:45pm post hits home for me. I have a home that I like with great neighbors in a nice neighborhood which is ~ $250k underwater. The home is about 3.5 times my gross income so it is affordable, although much more expensive than renting. As are so many people in my situation, I am giving the option to walk away some consideration. But the wildcard in the equation is whether or not we would be lucky enough to have the kind of neighbors that we do right now. We can let our kids play in the cul-de-sac and know that they will be safe because of the very family friendly neighborhood we have. This a bit different than considering walking because of bad neighbors, but the concept is the same.

    I talk to the other dads on the street, and they all agree that they would walk if it were not for the people around us. To answer your question though, I am pretty confident that we will all walk because the savings would be too great to justify staying put.

    A related question…Most of us have the same mortgage company as there were very attractive incentives when we bought. If we submitted a principal reduction request to our lender as a group (6 of us share the same lender), would they take it more seriously? We have talked about submitting a letter together and stopping payment unless they modify us. Some of us put down as much as $125k but realize that we would recoup that money much much faster by walking and renting for a few years than if we stay in our current underwater homes. Even with that much skin in the game, it may be the best financial move to make at this time. If a lender (or servicer) was put to a decision and faced multiple foreclosures all right next to each other, would it change their stance? As a side note, we have talked about going door-to-door in our subdivision (~300 homes) and inquiring as to how many other families are considering walking to increase our “power in numbers”. I can’t imagine how a letter like this from potentially 25-30 homeowners in one square mile would be received by a mortgage company.

    Additionally, we all submitted a reduction in value form to get our property taxes reduced and the county responded with a ~5% value decrease when in reality our homes have gone down 40-50% over the past 12-18 months. The same type of letter would be sent to the assessor’s office to get them to give a realistic tax bill. Each of us pays 8-10k a year in taxes so an honest deduction is a significant amount of $.

    All opinions are more than welcome, even the haters.

  20. Partyboy

    You said.

    “I talk to the other dads on the street, and they all agree that they would walk if it were not for the people around us. To answer your question though, I am pretty confident that we will all walk because the savings would be too great to justify staying put.”

    I am going to go for the low blow, reach down to the bottom of the barrel, I am going to bring the children into this….

    While it does not appear to be factor in your case, people pushed to the edge on the house payment are going to have stressed relationships, more arguments about money and unfortunately since these things can be spontaneous, they can happen in front of the children. I don’t have a statistic to pull, but I am going to say that the divorce rate will be higher as well.

    Let’s move beyond the stressed relationship caused by strained finances and lack of a savings pool. Let’s fast forward into the future, your kids are looking at graduating high school. Where is your collage education fund? When you take the best case scenario, housing prices will go down through 2011 and applying the average 3% annual just above inflationary gain, if you are 200k underwater on your home, you have zero chance of drawing down on your home equity to make that happen.

    At 200k underwater, your house has ceased to perform as a forced long term automatic savings bank account. Further, as I understand it, if you have negative equity, you cannot refinance and take advantage of today’s lower rate. (Somebody please tell me this isn’t so.) This would certainly serve to increase the chance of someone walking.

    Something to consider talking about with the other dads on your street, is what would the size of your children’s future collage education fund be walking verses not.

    In a normal 3% average annual house appreciation world, you would be stacking away 15k per year in home equity on your 500k home. Supposing that your child was 8 years old and would need collage expenses in 10 years, you would have accumulated (annually compounded) approximately 172k in home equity.

    The home equity potential for a collage fund at 200k underwater has now been obliterated all together. How is it possible that you can be the provider for your child’s higher educational needs? OK, so since we can no longer count on home equity, those needs are going to have to come from a savings account (or other investment vehicle).

    Now consider walking with 10 months free rent in your current location. What is that savings after deducting moving expenses? How much are you going to save by not paying the property tax bill when it is due? Consider it Federal Grant money that is due you as a result of their failure to regulate.

    If your neighbor thinks your scum for walking, tell him to send his complaints to the Senate Banking Committee, the Federal Reserve System, and the Securties and Exchange Commission. You’re only doing this because they failed and after all, it’s for the children.

    Now let’s suppose you walk. You have your Federal Grant money as a starter for a new down payment, plus you are renting for half the money and that annual property tax bill is someone elses problem. Keep in mind here that rents are going to continue to go down as flight from CA increases with higher unemploymnet and the new higher taxes leading to higher vacancy rates.

    In three to five years you will be able to rebuy with 20% down and if we are anything like Japan, house prices will have continued to fall the entire time. Truth of the matter is, in five years we could still be posting on this blog with evidence that “bottom” is still somewhere off in the distance.

  21. Bert,

    I appreciate the comments and all of these issues are things I have considered. I do have two children and do have college financing plans as well as concerns.

    My personal financial situation is not as dire as many other situations certainly are. That being said, when I take a step back and forecast the next 5 years of staying in the house compared to walking and renting, the difference is staggering. I had absolutely no desire to buy and sell if my home appreciated but I did not anticipate the home falling into the abyss and essentially becoming a trash recepticle for money which could be better spent elsewhere.

    Speaking of college tuitions, I wonder how many young families such as mine will have any money at all to help their kids pay for college in 10-15 years. I’ve said it before, but I think that the economic consequences of this housing mess are relatively small when compared to the far-reaching social ramifications you touched on in your post. I think it is too soon to look at actual data as the social implications seem to lag the economic ones, but I am morbidly confident they will be something we can measure in the next 5 years.

    If you have any comments as to whether or not a lender would take a group of “homeowners” requesting serious modifications more seriously than individuals I would love to hear them.

  22. Partyboy

    I certainly was not implying that you did not have these items under control and I was careful to start out that this was probably not your situation. I just wanted to point out the “lost decade” and how “walking” could minimize it. I also wanted to point out that the future level of education of our nation could be impacted but never got into that. It could also impact the future careers of people who have chosen higher education as their profession, as we will now have a deficit of projected future money for collage due to the “missing” home equity and inability to save by the masses.

    In other news, a “California Burning” update. I talked about the ports of LA and Long Beach before as being the primary consumerism trade conduit for the nation and how that was the number one employer in CA. I believe that I also touched on the Marine Exchange reporting that Ship Bookings for the first six months of 2009 are down 30%. Just as steel production is a reliable gauge for future output of an industrialized nation, a consumerized nation’s GDP can likewise be determined by the number of inbound loaded containers. I am not in anyway claiming that a potential 30% drop in ship traffic will translate into a 30% decline in GDP but let’s face it, this will have a substantial impact on retailers as well as trade related jobs in CA.

    On yet another front, the state has decided to stop funding all construction jobs. This is going to be a tough bite for unionized construction workers. Let’s however look at why they likely came about that decision. First they do not have the money. Second and more importantly, they are likely expecting to take infrastructure spending off the state budget and fund that with Obama bucks, taking construction out of state taxpayers hands entirely.

    The problem is that this is likely to turn into a case of monkey see, monkey do. City and county budget committees are likely going to recommend the same move. It is an entirely brilliant move, unless of course you are a Unionized construction worker, in the cement/aggregate industry, building materials and other related construction support businesses.

    How long is this total dry spell going to last? Due to budget shortfalls, quite likely until the actual money is in hand from the Federal government. I have not talked to any of my contacts in civil engineering to see if things there are getting put on hold until Obama bucks arrive. If so though, that would further delay until actual construction, as engineering needs to be performed prior to going out to bid. I will make contacts next week to follow up on this.

  23. Here’s the deal guys. In a nutshell. The banks allowed this mess to happen by, 1, subprime – This was EQUITY BASED lending at birth. That means, we forgive your lousy credit if you pay more DOWN and a higher rate. This has been around since the early 90’s and before. It had worked until greedy banks / wall street decided their returns would be higher if they slowly removed equity from equity based lending. Then they sold it to investors as totally “secured” by real estate. 2, “no doc” lending. Also in it of itself, is not terrible. Someone who’s self employed having several income sources, substantial DOWN payment, and stella credit should be spared from the financial proctogy exam. Especially since banks don’t even have the necessary talent anymore in their underwriting depts to know how to even read these docs. 3. Banks drilling appraisers for their whims and getting away w/ it. Push it up, push it down, etc… They need to be supervised by someone OTHER than the banks – period. 4. Exotic mortgages, how about psycotic mortgages. Negative am? What greedy bastards came up w/ this. I’ve been in the mortgage bus for 15 years, well 13 if you don’t count the last two, b/c my income is below minimum wage. I have never sold one of these p.o.s. to someone. I need to sleep at night, sorry wall street. As far as how to fix the mess. Real easy. If banks want TARP $, reduce their interest rate by 2% effective immediately on all their mortgage loans. This probably around where markets rates are anyway- and banks won’t lend so……. This will keep the leaving the keys on the counter and walking to a minimum. It would also stabilize values. Now the current values, at least where I am in Florida are artificially deflated. In other words, if you gave me land for free, access to a GC, also for free, I still could not build the same house for the same dollars as what current sales are. One of the basic principles of appraising is that adaquate financing is available, it’s NOT. Another is comparable sales should not be distressed properties, also untrue. Our government is doing everything it can, however, is confused about what that should be. That’s my bitch for today. I’m not sure this is not already beyond repair.

  24. So we bought early in 2007 putting 28% down on our home. The builder put us in a 5/1 arm and values have dropped 50% here. We weren’t offered any other options and didn’t know to seek them out. This is my 4 step up home. The builder also had us go stated income when we could have easily gone full docs even though we are self employed. We did it for our last home. We should have done more homework but our past experiences we were able to trust the lenders we were dealing with.

    We feel like they took us for a ride and should write down some of this neg principle especially give how much we put down. They made a lot already(almost half of what the home is currently worth).We also paid extra on our principle the first 9mos in the home, stopped when things started looking so bad.

    So we tried to do the right thing, no lying on our application but we are victims anyway since we are unable to refi in this current mess.

  25. Mr. mortgage, I fully agree with your basic position that losses in inflated housing will have to be eaten, the only question is who is going to eat that unappetizing dish, the lending industry or the general public. The thought occurred to me that there is a possible way for the banks stuck now with unsaleable homes with inflated mortgages to start to emerge from their self inflicted problem. Which is to convert those unsaleable homes into rentals, preferably renting to those already occupying the houses who can’t possibly meet the monthly mortgage payments, but could rent at a fair market price. People who bought homes with nothing down, got into those ludicrous repayment schemes where they weren’t even paying all of the monthly interest but were adding to principal of the debt, etc., never were home owners in any conventional sense of the word. They were just, as someone remarked a while ago, renting with an option to buy, and have chosen not to exercise that option. I know that banks are not keen on being land lords, but if the only option is to foreclose, lose tens of thousands in that process, then have to put on the market a depreciated house which could be vandalized and will rapidly lose what value is left, they aren’t benefitting from that either.

  26. IT LOOKS LIKE ROUBINI READS MR MORTGAGE

    Debt Destruction through Principal Reduction
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    Rich Hartmann – Miss America | Dec 12, 2008

    From time to time, I’ve been told that I ramble on too much, or that I’m a little too wordy, longwinded, tedious, etc… In an effort to be a bit more concise, I’ll get to my point! (HA… yeah right! Buckle up!)

    You can’t save the economy, without saving its most important part! The GENERAL PUBLIC (the consumer, producer, service provider). In a nutshell, the problems we face are: Too much Debt, Too little credit, and no transparency between the two. (In order to further break that down, we have to look at the way this affects the following 2 groups: Wall St and Main St. …and how the problem is addressed by The Powers That Be and the dollar that was. …but we’ll get to that later.)

    Plain and simple, the average person is in over their heads. …and we have to throw out our grandparent’s book on what needs to be done. We are in unique times. Deflationary trends will rear their heads in the world of excess, but inflationary trends will emerge in the world of necessities. With the cost of living, surviving, and thriving becoming so expensive, those without “SHOULD” drive the cost of everything down. …but the levels of debt owed are far too vast to be absorbed by the overburdened system. Since the consumer, wall st, and the government are already so overspent, they no longer have the buffer of existing credit to meet our current obligations.

    Faced with this catastrophe, the options that have to immediately be addressed are to add credit and destroy debt. The Powers That Be (TPTB – The Government, Fed, Treasury, SEC, FASB, etc…) have gone to great lengths to save the Monoliners, Banks, Credit, Financial Firms, Insurers, Auto, etc… in grand socialist fashion. In short, where they had too much debt, TPTB eased the burden of debt obligations by taking debt off the hands of Corporate America. Where they had too little credit, TPTB provided liquidity in every conceivable way and slashed interbank rates to keep markets from freezing. …and where transparency issues existed, TPTB absorbed the toxic mess, and placed it in the vortex of Unknown Financial Obligations (UFO’s), where they will disappear from existence, but someday, magically reappear as a long term gain. (…while looking and smelling like freshly printed dollars which no one will question 10/20/30 years from now.)

    By saving Wall St, we have temporarily saved the arms and legs of our economy… Now it is time to save the body. Main St!

    Principal Reduction: (aimed at primary residence)

    To immediately address the needs of Main St, debt must be destroyed. Obviously, the overspent consumer can no longer spend without availability of, or access to, credit and current debt obligations. The subsequent obligatory pullback by the consumer will directly feed the deflationary spiral, which then can only be absorbed through inflationary printing by TPTP. (more quantitative easing via ) 0% rate, and T-buy backs)

    The most direct way to avoid this death spiral and put money back in the pockets of the consumer, while at the same time, reducing debt obligations, is through principal reductions of debt. Time is of the essence as every day that this is not done exacerbates the speed and depth at which our economy will fall. There is a multiplier affect, which requires immediate action to put the necessary floor down. Currently, the “wait and see” reactionary approach by TPTB, have us trying to save those already in trouble, rather then taking the proactive approach of saving those who will inevitably be in trouble. (I’m not saying those who are in trouble are not a top concern, but rather they need to be tended to in a manor that addresses the future problems first. Like on an burning airplane, you put the oxygen mask on yourself first…. Then you can help other. Otherwise, you’re just compounding the problem.)

    Perhaps a better analogy is, when addressing the Tsunami of debt that our country is in, you don’t put up a wall to block the tidal wave that already came in! You put up a wall to block all the future waves that will be coming!!! For the wave that already came in, you sift through the wreckage and repair what you can. In an effort to help the public, TPTB have spent a great deal of time and money working on providing aid for those already in foreclosure. Unfortunately, they have failed to build the wall that is needed to stop the next tidal waves of foreclosures and bankruptcies! The compounding of losses as the concept of waiting for someone to go into foreclosure/bankruptcy is far too late in the process to help.

    How Principal Reduction Works?

    If you bailout every bankrupt person, then responsible people will choose not to pay. You can NOT create fail/reward system. A balanced approach is needed. With that said, to stem further risk of escalating bankruptcy/foreclosures a mathematically modeled approach needs to be taken where the percentage of money owed on primary residences can be reduced by a factor greater then the next projected overall net loss within the spectrum of the consumer’s reduction of spending + obligations.

    In a prior article, (http://www.rgemonitor.com/globalmacro-monitor/254144/friends_romans_countrymen_lend_me_your_ears) I used hypothetical 10% and 20% reductions to draw how this works. What I stated was that many of the underlying secondary market securities have already been written down this much or more already. (many by up to 80%) By reducing the principal value of these assets even further, it would seem to that this would cause these securities to take additional hits. …but this is not the case. A “less is more” approach will actually raise the amortized value of the securities, as their likelihood of being repaid increases.

    At the same time, when Main St feels the “rolling stimulus” of reduced the monthly bills, the immediate capital/credit inflow will flow to the following places:

    1. Pay off debt

    2. Saving

    3. Spending

    4. Under the mattress.

    For the first 3 scenarios, you have cash flowing back into the system, thus feeding the “less is more” concept. “Debt repayment” will help aid putting a floor under default or the confidence/fear of default by investors. “Savings” will immediately recapitalize the banks, thus helping start an upward cycle. And “Spending” will start to resume when fear resides and credit exists. Unfortunately, “under the mattress” will have to be addressed. (this can be done through increased bank rates and raising of FDIC caps or restoration of confidence in the fact that the first 3 scenarios are once again working.)

    For the portion of written down principal, TPTB would create “open receivables” in equal amounts. (TPTB could even securitize these severely distressed assets, much like the Tobacco Bond Debt. I wouldn’t be in favor of more securitization… but at least the perverse incentive would be in aiding the economy to recover to the point where even the open receivables were potentially paid off. Investing here would be a true investment in the future/confidence of the net worth of the economy. That’s far better then requiring people to smoke, just so debt can be repaid!!!)

    VOLUNTARY!!! Not MANDATORY!

    The concept of this stimulus plan is voluntary but equal. For those who do not want to participate (for fear of reducing the “principal value” of their home further) they do not have to participate. Alternative stimulus should be provided for their responsible behaviors of spending within their means. (Unfortunately, they will eventually come to the realization that their asset isn’t worth what they paid for it or what they felt it should be worth, as the market currently dictates. Their prudence through “potential” house price recovery could pay off, if the market was to return. (which is most likely through a “less is more” theory/reality)) For example, those whom have paid off their MTG debt, or choose not to write down their principal: a tax break can be created to reward them annually (similar to a STAR reduction).

    For all those that choose to reduce principal, an open receivable is kept on the books for the length of ownership of the home. If the housing market was to recover and you were to see a windfall, the open receivable would have to be paid prior to seeing a profit.

    For example, You have a $200,000 mortgage. TPTB writes down 10%.

    * TPTB creates an open receivable for $20,000. (which TPTB could then securitize as skin in the game for aiding a recovery focused on the broad US economy)

    * The homeowner now has a $1,140 monthly payment as opposed to a $1,266 payment, saving them $126 per month which gets infused back into the financial system (This is your “rolling stimulus plan”. For a typical $417,000 conforming loan, the savings would be $264 per month.)

    To look further down the road, if the housing market were to recover, this is what would happen. You sell your $200,000 home (which you were only paying on $180,000) for $230,000. Instead of walking away with a $50,000 profit (230k – 180k = 50k) you would have to pay off your open receivable first. So you’d walk away with $30k (or maybe less if interest is added???)

    In the event, that the market continued to stay depressed, the likelihood of you selling your house at a loss (or flat) versus just filing for bankruptcy/foreclosure would be significantly diminished by the parallel difference between the equity owed versus the current market price. Let’s say, you were somewhat responsible, and put 15% down on the purchase of your home. ($200,000 price, $30,000 equity, $170,000 debt.) In addition, let’s say the market dropped by 40%. Your house would be valued at $120,000. In order to keep the homeowner’s skin in the game, rather then walk away from the negative equity, TPTB will need to lessen the 30% difference of $170,000 owed versus the $120,000 value. If say a 15% Principal Reduction was set, owing $145,000 on a house that you paid $200,000 for, would leave less of a risk of homeowners walking away, and promote potential sales. At the same time, that homeowner would see their monthly debt burden reduced by nearly $150.00 a month. That’s $150, this month, next month, the month after that, and so on. That’s your “rolling stimulus”. When 150,000,000 homeowners see this reduction of debt, it pans out to over $250,000,000,000.00 billion in new liquidity, and destroyed debt per year. (which like I said earlier, will be printed regardless, as a necessity for replacing the fictional monopoly money (of finance) that has already left the system. (The “monopoly money” will be further explained in the future post on “The Financial Industry’s overgrowth”. – still in pre-production)

    Which ever way the market goes, the issue of “transparency” where homeowners are holding “illiquid assets” (their house) is addressed as their debt is less, their credit is more, and the glut of unsold houses reverses course due to the momentum in price discovery of a bottom. (this bottom is unattainable right now as people cannot come to grips with the reality of where the current market prices are at versus their equity owned)

    ***Interest Rate Reductions for Homeowners***

    TPTB have already floated around the concept of mass interest rate reductions for homeowners. In theory, and mathematically, this concept looks the same as Principal Reduction, but is flawed. It lacks Incentive! It does NOT put equity in the homeowners hands in relation to their debts. In sum, it only addresses the credit side of the problem.

    Quantitative Easing: By taking the drastic measures they have, TPTB have played a high risk game of chicken with the value of the Dollar. When our financial system started to systemically implode, the dollar and all financial companies based in dollars fell with it. The markets dropped as the fear struck the players and well informed financial communities. Eventually, when that fear became reality, and losses started to be felt around the world, the losses around the world balanced out. The subsequent flight to safety saved the US Government, and its entire economy.

    The current confidence boost in the power of the dollar has given our current financial decision makers a false sense of confidence. Now that economics has taken over the mainstream media and further educated the masses on large parts of the existing problems, the general public has grown tense. Already gripped with fear, and having seen the value of their general investments cut in half, the public is now too well informed to a blatant devaluing of the dollar. If the government is serious enough to take the next steps in “Quantitative Easing”, I believe they run a serious risk of sliding down a slippery slope of trust and good faith in the value of the currency in relation to easing our country’s financial burden by inflating our way out of the debt.

    The precedent of printing credit without parallel debt destruction becomes cyclical, and hyperinflationary. (Since all solvency issues with the government will be averted through printing) The “ground level fear” of “what has value” that exists on the street will no longer just pit the USD versus import/export products like oil, foreign currency, cheap labor. The reality is: “what has value” will be revised from financial engineering to putting food on your plate. This is reality. Right now, in the current environment, this potential risk is significantly upped if Quantitative easing takes place. We saw oil rise to $147, (when it is currently at $45), which begs the question: Will food be next? Why not? Why is oil capable of inflating by over 200% of its current value, while rice is not? Especially, when hoarding is much easier of food products by the general public.

    Playing with the confidence in the value of the dollar is NOT a healthy risk right now!!! Quantitative easing could work if the core (the body and head) of our economy was stable. Currently, the backstop of our economy only owns debt and illiquid assets. As the net redemptions, expenses, losses, etc… continue to grow, the more bad news and debt reality hits. This will cause more obligations, larger bailouts and greater outflows. (Take a moment to work through the logic.) This is a doomed process through liquidity injections alone as the only reasonable solutions would require so much liquidity that hyperinflation would be a guarantee. The time is now. Debt Destruction. It’s time for the public to call upon TPTB and demand it for our economic salvation. Without this, and fast, I fear what’s around the corner. The second the general public is saved, I will be prepared to start giving real investment advice. Until then, our economy is walking blindfolded through a nuclear minefield!

    Thanks for listening… now it’s your turn to talk.

    All the best, Miss America – Rich Hartmann

    p.s. If you believe… Then do you part and spread the word!

  27. Let’s go ahead and pay everybody’s student loans too. They’ll be able to spend more. And their cars, we have to pay down the balance of their cars, they’ve depreciated. And while we’re at it, let’s put everybody in subsidized mansions as well. Let’s take every person that loses in Las Vegas and give them a winning lottery ticket. After all, why should anybody have to pay for their debts and decisions? This is the single worst idea I’ve ever heard of that people are taking seriously. I thought that was Mike Huckabee’s “fair tax”, but this is a thousand times worse.

    Do you people want this because you have an absence of morals? Did you buy near the market’s peak, and for self-serving reasons want taxpayers to pick up the tab? I cannot imagine anybody wanting this without personally gaining from it. Can you honestly tell me you’re for this and you yourself wouldn’t gain?

  28. I am ALL for it and dont see how i would be gaining by getting BACK my 20% CASH deposit that i was PONZI schemed out of….

  29. Kevin,

    You just can’t seem to see the forest for the trees. Save your moral outrage rants, they are not providing analysis, lucid thought or alternatives. And in case you hadn’t noticed it, the taxpayer has been bailing out the financial sector, (and others) for quite some time.

  30. Jacktar

    Everyone is going to vent from time to time and all that does is tell us that it remains a charged issue. Everyone is also going to vent based on their particular position in this housing crash game be it high price, low price, above and below water, renter verses owner etc.

    We can all gain value from vents, and turn them into useful information as to whether something might be politically acceptable or not. At the same time, we have to accept that we are not all built with analytical minds, that is just the way it is.. We can’t change that. We have 4 types of minds to deal with in life and only one of those types of minds are analytical. Within the 4 groups we have 4 subsets giving us a total of 16 basic mind types.

    In short, that means that however you are viewing it, there are 15 mind types viewing it another way, leaving us totally outnumbered in any given situation. I myself have not figured out how to overcome this outnumbering, other than to observe that it makes life “spicy”.

    http://www.typelab.ru/en/1.1.types/club.html

  31. Jacktar

    It’s not just a moral outrage. How can we shoulder a debt of trillions of dollars? If the largest single economic strong horse we have – housing, as Mr Mortgage has advocated to be bailed out for just such a reason – is in need of a full-on subsidization, how can we weather that? It’s impossible. It’s laughable. I mean it when I say that if we do that, we should just as well bail out auto and student loans too. After all, it’s all about creating spending power, right?

    I stand by my challenge. Those that are really in favor of this immoral, financially impossible, and communist plan of paying off principal with taxpayer/federal money: Which of you would not stand to gain? If I bought near peak market as I assume some of you have, I might silently be for such a plan, not that I think it would “fix” anything other than my balance sheet. So I guess I can empathize with people that want to pass off their bad investments on taxpayers. But I don’t sympathize. So who here has no chance of gaining a cent from the principal reductions? Why would you want to pay for idiots’ loans?

  32. Can I ask a few questions?

    When you reduce these principal amounts, where does the amount that was reduced go?

    Is it immediately vaporized?

    Ameliorated?

    Absorbed – and if so, by whom?

    Does anybody out there take the ‘hit’ on the amount sawed off?

    What impact does doing this have on bond holders?

    Does it impact nobody and everything is fine?

    Win/win?

    When we save main street, who is ‘we’?

    Thanks.

    Peace –

    C.C.

  33. To “book report” Roubini, he said:
    Dear America, (congress treasury president Fed)
    You saved the arms and legs and forgot the heart!

    And maybe so. We then go into principal reductions. The essence of the benefit of the principal reduction is putting more money in the hands of the consumer in which propels the nation back to recovery. In his example, the consumer saves $126 per month on a principal reduction to propel us forward with our consumer economy. Roubini, you come up short! $126 does not even begin to solve the problem!!

    Here is the real deal. TPTB already said that they are going to save the arms and the legs, it is a given. That means that any loss to the bank is going to go to treasury debt!

    Now here is the BertDilbert high school drop-out solution to the situation. First off there are no homeowners, mostly debt holders for this situation. People have this crap idea in thier mind that because they signed a contract they are homeowners. Never happened. I call it a home owner when a majority interest has been obtained. Even if they drop the principle down to market, it still doesn’t make it a homeowner.

    I say let them walk, they will in most cases save well over $126 per month. In many cases 10 to 20 times your capital injection of “new money”. In the end Roubini, this is what it is about “new money”! The whole idea behind lowering interest rates is to allow refinance to free up money to propel the economy forward.

    California is the H bomb state. It has over supply and likely population drain which means we are not going to have a housing shortage anytime soon. Your talking saving the house that they do not own even after principal writedown for $126 and I am talking $1,260 plus in hand. Which Roubini, is going to pull the economy out of the toilet faster? $126 and a house you don’t own or $1,260 and a house you don’t own?

    Walk and save is the far superior option. When the consumers health and the nations is resuscitated, the consumer can get back into a house for far less money and in a superior position than a principal writedown now. The end result is a consumer down the road with far less debt, the pressure of the payment removed and a rejuvenated cash balance each month.

    How do we do this? We bust out the million dollar plates from the engravers vaults, the treasury can print them up and give them to the Fed. The Treasury can then give the Fed Treasury notes to use as backing for the currency released. The released notes can go to the vault at bedrock under the NY Fed stored with all the monetary gold as loaned assets to the banks to cover the loss on the defaults and stand as bank assets to keep them with sufficient capital requirements to keep them out trouble.

    As long as America is destined to be the consumer of the world, money in the hand is king, a house propels nothing. A walk away today will be a winner tomorrow, for themselves, for California, for the USA and for the world.

    The end result four years from now is that the walk aways are going to be laughing their asses off at the ones who stayed and “got something” from a principal reduction! This is one of those situations where “saving” the consumer is the wrong thing to do. If there was a housing shortage, that would be one thing. It is the blantant oversupply that makes this the better move.

  34. “The essence of the benefit of the principal reduction is putting more money in the hands of the consumer in which propels the nation back to recovery.”

    Hmmmmmmmm…. why not just mail cash to every person in the country?

    Oh yeah, just those that gambled on real estate.

  35. I guess my take on principle reductions is more pragmatic. The RE market (right now anyway) is the foreclosure market. Additional foreclosures will with have a downward effect on housing prices. If I held the note on a house and my options were to either: A) get the property back and attempt to sell it in a depressed and over saturated market or B) take a haircut on the principle and continue to receive cash flow. For me, it’s option A (continued cash flow trumps).
    Granted, their are many more variables to a real world calculus, but I think you get the drift.

    I think Bert’s got it nailed from the borrowers perspective. If I’m over 20% upside down in a house, it’s a slam dunk from a financial analysis point of view to walk (after living rent and property tax free for as long as possible). This being a rational option with a non-recourse mortgage. Real life tends have many more intangibles in the mix. ie: wife loves the house/neighborhood, stigma, uprooting kids, etc.

  36. “why not just mail cash to every person in the country?”

    Probably would have been cheaper and less complicated if the guvmit just paid off everyone’s mortgage thereby freeing consumer spending power and recapitalizing the banks at the same time. I’m sure someone here will point out how the TARP is a superior plan..

  37. The best thing to do is to do nothing. Let the market work. What kind of message does it put out if we use taxpayer money to reward the greedy liars who fraudulently bought a house they could not possibly afford? Let them rot I say.

  38. “Let the market work.”

    The banks (and others) have already been bailed out by the taxpayer. Why shouldn’t the taxpayer get some relief as well?

  39. JackTar, I’m a taxpayer. What relief would I get? Let’s see… I didn’t buy a house I couldn’t afford, I don’t owe more thank my house is worth, in fact I’m a renter and don’t own at all. Answer: I get ZERO relief and will pay for idiots’ mortgages with my tax dollars.

    I see nobody thus far has said they support tax payer subsidized principal reductions that wouldn’t personally stand to benefit from it. My theory thus far holds true then. You all in favor of this disgustingly immoral plan would essentially be receiving checks for hundreds of thousands of dollars. How noble.

  40. Your probaly going to paying much more in taxes (at least in California). Declining property values equate to declining property tax revenues. Sales taxes are going to rise, new taxes on previously untaxed services, new fees (taxes) will sprout out of the woodwork. The legislature can possible see its way clear to cut any spending. This is one of the consequences that will affect mortgage debt slaves and renters alike. Accelerating foreclosures will only compound this problem.

  41. I can accept higher property taxes. Is that it? Is that the horror that’s so worth avoiding that we should just give trillions of dollars to the most irresponsible borrowers out there? Oh the horror, higher property taxes!

  42. Not property taxes since they are tied to declining property values. My property taxes went down last year and will likely be reduced again this year. So the government will be looking for new sources of revenue. Howbout a sales tax on rent? Sounds good to me and you don’t seem to be concerned about it either. Just as long as we don’t allow a loan modification under any circumstances.

  43. Loan modifications are fine. Principal reductions are not. Let them do 40, 50, 60 year loans if these “poor homeowners” really want to keep their houses.

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