The housing market has a hole in it.

[IChing]

Paulson knows full well that the housing market is headed for a crash and probably won't bounce back for the next 4 or 5 years. That's why Congress is slapping together a bailout package that will keep struggling homeowners out of foreclosure. If defaults keep skyrocketing at the present rate they are liable to bring the whole economy down in a heap.

Last week, the Senate convened the Joint Economic Committee, chaired by Senator Charles Schumer. The committee's job is to develop a strategy to keep delinquent subprime mortgage holders in their homes. It may look like the congress is looking out for the little guy, but that's not the case. As Schumer noted, “The subprime mortgage meltdown has economic consequences that will ripple through our communities unless we act.”

Schumer's right. The repercussions of millions of homeowners defaulting on their loans could be a major hit for Wall Street and the banking sector. That's what Schumer is worried about — not the plight of over-leveraged homeowners.

Every day now, another major lending institution unveils its plan for bailing out the housing market. Citigroup and Bank of America have joined forces to create the Neighborhood Assistance Corporation of America which will provide $1 billion for the rescue of subprime loans. This will allow homeowners to refinance their mortgages and keep them out of foreclosure. The new “30- year loans will carry a fixed interest rate one point below the prime rate, putting it currently at 5.5 percent. There are no fees, and the banks pay all the closing costs.”

But why are the banks being so generous if, as Paulson says, “the housing market is at or near the bottom.” This proves that the Treasury Secretary is full of malarkey and that the problem is much bigger than he's letting on.

Last week, Washington Mutual announced a $2 billion program to slow foreclosures (Washington Mutual's subprime segment lost $164 million in the first quarter) while Freddie Mac committed a whopping $20 billion to the same goal. In fact, Freddie Mac announced that it “would stretch the loan term to a maximum of 40 years from the current 30-year limit.”

http://www.marketoracle.co.uk/Article882.html

[Gregorian]

1. I wonder if this is going to take down the banking system.

I mean, if the banks are ones who have lent the money, and the money isn't going to be paid back in it's regular way, then aren't the banks going to lose?

I only ask this since I have reluctantly gone from real property, to digits in a bank. I'd hate to wake up next week and find out my digits don't exist, after all of the years of struggling it took to build them up.

What a mess.

[magellan]

2. Okay, I've been staring at those photos for five minutes

...and can't figure out if that house is photoshopped, staged by the owners, or had a missile go through it. Please explain!

[IChing]

6. Artwork, the front is a facade

I don't know where but it is real and in the US.

[this_side_up]

3. Worse than a hole.....

I cannot find it online or even on local paper's website but....
Thursday's paper had a small article from Consumer Reports
which said that inspections of new housing turned up
an incredible number of functional and structural defects.

Even worse, they say this trend will not only continue
but the number of defective buildings will increase.

I don't remember the percentages.
Makes me wonder about commercial buildings.

You've done a heck of a job, republiCONS.
Karma's coming.

[brokensymmetry]

4. The banks don't hold the paper.

They generate fee based income when they originate the loan,
but the loans are repackaged and sold in all sorts of interesting
ways. Pension funds are a big buyer of such paper.

So, massive default would create a lot of problems through
the system. On the other hand, the bail-out is going to cost
a lot. The problem with your digits in the bank is that they
are slowly eroded by inflation.

And I suspect that will be a big

[Warpy]

5. The last year of subprimes has been a scam

in that wildly unqualified buyers were solicited, pushed through all the paperwork with no closing costs, often taking on mortgages that were up to 90% of their monthly take home pay. Such people were usually so unsophisticated about money that all they heard was "we're getting a house for free." Having them "own" the house on bad paper took it off the books and the brokerage out from under the carrying costs for up to three months--more if the "owners" actually tried to pay a few months of the mortgage. It also showed the local price comps as being unreasonably high.

You bet this is worse than the Fed is letting on.

[Adsos Letter]

16. You're right

my daughter is a real estate appraiser, and she says they have been under increasing pressure from agents to inflate comps way beyond actual values. She says this has always been true with some agents, but that it is becoming more widespread.

She is fortunate; she works from a local office whose owner had known her since childhood, and trained her to have integrity in what she does. Appraisers who don't are setting themselves up for a world of hurt.

[tridim]

7. So what advice would you give a 5 year home owner

with a ARM that's about to "adjust"?

I see all these articles and very few of them offer advice for homeowners. It sounds like I should get close to default so I can get the bailout money and a good fixed rate, no?

[CountAllVotes]

10. if you wait for bailout money

likely your credit will really suck. By this time, interest rates may be well above 7 or 8% the way it is going. You likely won't qualify for the loan being you are close to default now even. :shrug:

My advice would be to refinance now at at 30 year loan if you can get it. Otherwise, you'll have to fit the government's standard to qualify for this bailout money that looks perhaps sweet. Most likely you'll have to have almost zero in assets to qualify for such assistance is my belief. And we don't even know IF this is going to happen. Will it?

Just remember: When life looks like easy street, there is danger at your door. You should know by now that you don't get anything for free from the government or something with very long and tenuous hooks to it.

:dem:

[ProgressiveEconomist]

8. K&R. Blame this one on Greenspan too. His wacko rightwing aversion to

financial regulation, among other sound practices, prevented those who saw this coming from taking sensible measures to prevent it. Now Greenspan's successor Bernanke is gearing up to put those very same measures in place, but YEARS too late to prevent foreseeable and in fact foreseen damage to the economy from overleverage to mortgage default.

It is essential to keep scammers and greedy Gordon Gekkos from transforming noble public purposes into private blood money. The secondary mortgage market was created to allow risky loans to poor people to be offloaded from their originators into government-backed securities. But very few of the riskiest loans made over the last 10 years have gone to the new homeowners for whom they were intended. "No money down" real estate scams and speculations soaked up trillions that could have transformed inner cities with homeownership. While rates of minority homeownership stood still and then declined, risky mortgage securities proliferated until their high leverage to default now threatens huge parts of the financial services industry and the rest of the economy.

One of the Clinton-appointed Fed Governors who warned Greenspan about the need to regulate subprime lenders seven years ago is going to publish a book about his Fed experiences at the end of the month. Greenspan's successor is pushing ahead with plans to implement these regulatory moves. but years too late to stave off impending serious damage to the economy.

--------------------------------------------------------------------------------------------------------------------------------

From today's WSJ, via a blogger at http://www.nakedcapitalism.com/2007/06/greenspan-opposed-greater-oversight-of.html :

'June 9, 2007

From the Wall Street Journal, "Did Greenspan Add to Subprime Woes?":

A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed's broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers. Democrats in Congress are now turning up the heat on regulators, especially the Fed, for failing to do more to stamp out those practices, and the Fed appears increasingly likely to overhaul its approach.

Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies.

"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board. "He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors....

Mr. Greenspan, in an interview, says he doesn't recall a specific discussion of the idea but confirmed his opposition to it....

On June 29, the Urban Institute will release a book by Mr. Gramlich, "Subprime Mortgages: America's Latest Boom and Bust." It argues, among other points, that all lenders affiliated with banks and thrifts could "be brought under the same supervisory conventions as their parents seemingly without major culture shock." It wouldn't be a huge undertaking by policy makers, and it would lead to more uniform, stringent practices.

Mr. Gramlich ... says, "There are certain things that unsupervised lenders do that a Fed supervisor would not let you get away with," such as not escrowing taxes and insurance, not verifying an applicant's stated income, or assessing the borrower's ability to repay based on an introductory "teaser" rate....'

[IChing]

11. Yes this was a house of cards waiting to fall but

aloud the borrow to use the money from refinancing
to prop up the economy.


Nice link BTW

[papau]

9. the housing market is not going to destroy the economy and subprime problems are limited

The latest estimate is 1 million homes are or will be in trouble at the low end of the market - a couple of months overhang that will take a year or two to work out of.

Prices have already fallen about 10% from the 4th qtr 2005 high and are now rising again in all segments of the market except the low end. The effect on the million dollar plus market outside of California and Miami was minimal as to price.

The thing to watch is the ratio of an areas income to the price of its housing. New England has a higher than national average all the time - but it is currently above what would be expected - so price rises will be very small -1% to 3% - until 1st qtr of 2009 per the financial projections known to me.

The sky is falling will only be true if a recession hits before the housing backlog is out of the system in 2009.

[Rockholm]

12. Finally, an intelligent answer to this drivel.

I am so sick and tired of these gloom and doom sky is falling real estate threads. The only ones who seem to relish in prices dropping are renters and REIT investors who are shorting real estate.

[IChing]

13. Actually I wanted

First and foremost to have a way to show this very cool sculpture

and second to
address some of some of problems of the housing market
otherwise the tread would have gone into the lounge.

[papau]

14. Well - the very cool sculpture was indeed very cool :-)

:-)

[ProgressiveEconomist]

15. Interest rates just passed the 5 percent mark; where will they stop?

This question needs to be answered before previous forecasts of damage from the subprime crisis can be reassessed.

Bernanke was doubting rosy mortgage-market scenarios even before interest rates jumped over the tipping point and the stock market tumbled.

When and if interest rates stabilize, maybe I'll tend to agree with rosier scenarios like those coming out of the White House from Ed Lazear. The financial news media have managed to overlook recent revision of t;he most recent measured economic growth rate to 0.6 percent. Previously favorable trends in interest rates, inflation, and growth may be reversing, IMO.

[Gregorian]

18. This is the reason I think prises will not continue to rise.

For the record, I'm not one of the doom and gloomers. What I said in my post above is from decades of real estate experience. I'll just say that inventories are huge, and sales are nonexistent, and population isn't growing like it was. The economy is not going anywhere, yet.

And interest rates absolutely cannot and will not go down.

[Speck Tater]

17. We've all heard of the boy who cried wolf.

But don't forget, in the end, he got eaten.
In this instance I think the "doom and gloom" camp is probably closer to the truth of how things will work out.

[Deja Q]

20. *sigh* I wish I'd read this one before responding...

[IChing]

21. From the Wall Street Journal and LBNs

Economists See Housing Slump Enduring Longer
Downturn Is Expected To Keep Growth Tepid; Retailers Feel the Pinch

By James R. Hagerty, Jonathan Karp and Mark Whitehouse
June 9, 2007; Page A1

Economists are giving up on the idea that the U.S. housing slump will be quick and relatively painless.

Instead, more are concluding, the downturn that began nearly two years ago will last at least through the end of 2007, remaining a major drag on the U.S. economy. The culprits: a glut of homes for sale and growing caution among lenders who now regret being so free with their mortgages during the boom.

(snip)

Housing accounts for a lot of jobs, not only in construction but in related areas such as mortgage finance and furniture sales. Zoltan Pozsar, senior economist at Moody's Economy.com, estimates that housing-related sectors created nearly 1.3 million jobs between January 2003 and March 2006. Since then, he says, housing jobs have declined by almost 300,000. He sees more losses to come during the summer, which is usually a big building season.

Home values can also influence consumer spending, as people use cash-out mortgage refinancings and home-equity loans to pull money out of their houses. At the peak of the housing boom in the third quarter of 2005, people were taking cash out of their homes at an annual rate of $709 billion, according to Michael Feroli, an economist at J.P. Morgan Chase & Co in New York. As of the first quarter of 2007, that number had fallen to $178 billion.

A prolonged housing slump would be particularly painful for retailers of the kinds of things people often buy when they move, such as building and gardening supplies. According to the Commerce Department, those retailers saw sales drop by 6% in the year ending April.

[On the Road]

22. The Housing Market Will Probably Not Destroy the Economy

The S&L crisis took hundreds of billions out of economy but it wasn't destroyed. Neither did the two oil shocks and double-digit inflation of the 1970s. The economy took a hit, but it came back.

Mortgages are so expensive for average homeowner that it's hard to see any more dramatic gains for the next ten years without substantial inflation. However, real estate prices, like wages, are sticky downwards. With the decline of the dollar, they have become much cheaper for overseas investors. And there are plenty of investors from the last ten years who have tons of equity remaining for picking up additional properties.

So the housing slump may continue further but it's unlikely to lead to disaster. It *is* likely to result in a moderate decline in private ownership in favor of investors, some of whom will be from overseas. It may also cause either a recession or a long Japanese-style stagnation. The upper class will do better than the lower and middle classes, and after the market has hit bottom, pick up cheap properties.

One thing that optimists seem not be taking into account is that while there have been other real estate booms, this one is about twice as high as any previous boom for the last hundred years. That is unsustainable. The best the market can hope is a sideways motion like the stock market for the last sever years.

[ProgressiveEconomist]

23. Watch out! Things have changed a lot since the S&L crisis of the early 1980s

You mention the S and L crisis of the early 80s. Lessons learned and "reforms" implemented in response to that crisis make today's mortgage default risk many times greater than 1981's.

S&Ls got into trouble in the 80s when high unemployment left millions unable to keep up with their mortgage payments. The institutions who originated the mortgages largely still retained the deeds for the defaulted collateral. Since they weren't set up to rent them out or even resell them for a "reasonable" loss, they had to auction-liquidate them through a clearinghouse, driving property values down for years.

This time, most institutions that originated mortgages quickly sold them into securitized pools of loans with similar risk profiles. Those securities were sold and resold and used as collateral in loans for other purposes, such as stock speculation by totally unregulated hedge funds.

When higher ARM interest rates or higher unemployment triggers defaults this time, the value of the securities into which defaulted mortgages were wrapped declines. "Contagion" triggers massive sales of other assets, such as popular stocks, all at once. People who own those other assets and never had anything to do with subprime mortgage securities then face sharp wealth declines too, and the situation can cascade.

This overleveraging of an entire economy creates a situation similar to what happened during the 1930s. But federal deposit insurance, which has prevented repetition of "bank holdiays" and other signs of deep recession, doesn't apply to most huge brokerage accounts or to any hedge funds or big financial speculators.

Nobody knows how bad the situation could get if interest rates skyrocket, unemployment rises, and millions default on ARMs. It's not time to panic, but risk is high.

[On the Road]

24. I Would Agree That Interest Rate Hikes are Probably

the biggest threat. I suspect that Bernanke and Paulsen will err on the side of inflation rather than deflation. This will draw down monetary assets and further devalue the dollar, and will bring stagnant real estate values back into line with other assets more quickly. It will still take awhile.

[Deja Q]

19. Wait wait wait. The same government that tells people to pull up by their own bootstraps

are getting bailed out?

Or the banks who gave the loans to people, of which qualifications aren't an issue because too many people are losing their jobs for reasons not of their own making and can't easily find replacement work, or work that allows them to continue to pay back the loans?

Or don't they want it to crash until AFTER it's assured the US economy is properly untethered from world economy so that their way of live will remain unfettered?

I don't know anything anymore. It's as simple as that. And since stranger things have happened, I may as well take a leap of faith.

[Tierra_y_Libertad]

25. Housing starts are down 28% this year. Consider the ripple effect of the industry.

Not just carpenters and plumbers, but the folks who make all the stuff that goes into building houses. And, the all collateral industries attached to them. Transportation, banking, home improvement, etc.

Looks like a recipe for massive unemployment of people who would also be home buyers or bought at the wrong time. And, because a lot of people will be un/under-employed, less spending on everything else. Which leads to more layoffs and "restructuring".

[Nikki Stone1]

27. Good points all TyL

Lots of responsible people bearing the brunt for the recklessly greedy

[KG]

26. good 'ol short sighted american greed; buyers, sellers, and lende.rs

this has to be is the most democratic economic bust ever!