November 11, 2008

Fannie, Freddie and Citigroup To Join The Payment Cutting Parade

"Mortgage companies Fannie Mae and Freddie Mac and Citigroup Inc. plan to cut home-loan payments for hundreds of thousands of borrowers facing foreclosures, following similar moves by the nation's biggest banks.

Fannie Mae and Freddie Mac will reduce principal or interest rates on some loans and extend the terms of others, people briefed on the matter said. The Federal Housing Finance Agency, which seized control of Fannie and Freddie in September, scheduled a press conference at 2 p.m. in Washington to announce the plan."

Citi, Fannie, Freddie to Halt Some Foreclosures [Bloomberg]
JustQuotes: Proposing To Change The Terms To Protect The Principal [SocketSite]

First Published: November 11, 2008 8:30 AM

Comments from "Plugged In" Readers

yay! let's try to keep this housing bust going longer than Japan's! We can win!!!

Posted by: smarty at November 11, 2008 8:58 AM

Who does this help? By keeping home prices artificially high a bit longer, it certainly helps states like California collect more in property tax.

But does it help the homeowner? Some homeowners are so upside down in their mortgage that they really should sell, so this is either a chance to get out while prices are still somewhat artificially high, or an opportunity to marinade in delusion a little longer (which harms the homeowner more and more as prices continue to fall and fall).

And for renters who have saved up a down payment and are waiting for prices to fall to a level that matches your family income, well, you'll just have to wait a little longer...

Posted by: BayDog at November 11, 2008 9:35 AM

In related news, turns out the $100 billion earmark for FNM and FRE may not be enough now:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.iQh4uHj3X8

If either of them are allowed to go under, our mortgage market is shot. Mortgage rates have been kept artificially low by the government for months now. If the subsidy becomes too costly to maintain, watch for mortgage rates to rise substantially, almost overnight.

I don't think it'll come to this, but then again, how much can the Treasury borrow until our creditors say no or raise rates on us?

Posted by: Dude at November 11, 2008 9:44 AM

What's to stop people from abusing this soon-to-be-announced plan. Why not just miss a few payments and call and get your loan modified. Trust me, it will happen.

Any loan modification should be in the public domain so prospective buyers know what the heck is going on....

Posted by: eddy at November 11, 2008 9:48 AM

All these things were tried during the Great Depression, too. At its peak, about 50% of mortgages were delinquent (in 1934-ish). I'd say we're about 10% of the way there now. Anyone who believes that we're 'near the bottom' need only look to the increasingly desperate measures coming from Washington to see that we're nowhere close.

Oh yeah, where do I sign up for a $1M mortgage with a 'reduced payment'? Can I apply at my local bank? I'd really like to move into a bigger place with a view, but I don't want to pay more than the $3k/mo I'm paying now ...

Posted by: Jimmy (Bitter Renter) at November 11, 2008 9:49 AM

"Who does this help?"

Primarily the banks. This "new" plan is no different from what they've been doing for quite a while, although it may be a genuine effort to beef up the staff to individually assess the borrowers' situations.

This only applies to owner-occupiers. If the borrower can afford the current loan, no help is available. If the borrower could not afford a re-vamped loan (i.e. the lender is better off with a foreclosure), no help is available.

So this targets that relatively small percentage that will have no choice but to walk on a current loan but who could be persuaded to stay with a modified loan -- lower interest, extended loan period, reduction in principal. But if the only way to make the modification workable is to lower everything below what the bank could get in a foreclosure, the bank won't do it. So the lender will only go this route if it is to the lender's advantage. May result in a win-win situation for some, but the lender will not do anything that does not result in a win for it. The borrower may or may not benefit and may end up staying in a home at payment terms that are less favorable than just walking away.

Banks have obligations to shareholders, and they are not going to give away something to assist a debtor.

Posted by: Trip at November 11, 2008 10:02 AM

Good point Dude.

Except the govt has been keeping mortgage rates artificially low for decades using Fannie and Freddie. It's just been that much more outrageous the last year.

But it does seem like we're going to need an awful lot more money, huh?

AIG has blown through their money and "needs" more (at more favorable terms), Fannie/Freddie are blowing through their money at a rapid pace, American Express is now going to be a bank holding company (like Goldman Sachs and Morgan Stanley) to feed like a pig at the TARP trough (because evidently Credit Card companies are "essential" to our lives), Ford/GM/Chrysler are lining up to gorge themselves, JPMorgan's acquisition of Bear wasn't so "safe" to the taxpayer as was proposed, Wells Fargo/JPMorgan are getting huge (and presumably illegal) tax benefits to take over WaMu/Wachovia.

Oh yeah, and we'll get 1-2 stimulus checks too.

where's all this money coming from again? and don't be too quick to say China, because they just announced a nearly $600B stimulus themselves.

I think people are just finally starting to see that our entire globalized economy was based on sick fundamentals (overwhelming debt). and that debt cannot be repaid.

I wonder how long until the average Joe realizes that we've just blown over $1 Trillion on the financial industry so that they could give themselves golden parachutes and record bonuses!

Yes yes, there will be those supposed "profits" that will be made on all these "investments" done by Paulson on behalf of his Wall Street Cronies... uh, I mean taxpayers. Yes he's for the taxpayer!

I wonder if Joe will even care. After all, I heard that Brittney has a new album out. And that gays are threating heterosexual marriages.

Unfortunately, we've only had the financial services dislocation and secondary credit crunch. we haven't even seen this hit the "real" economy for the most part. yet. that is just starting now. unfortunately it will feed back on itself.

sadly it looks like our "leaders" will blow their entire wad on their insider cronies leaving nothing for us regular joes... because we are going to need that money in the future when we face possible depression, and we won't have it. Luckily our betters will still have their multimillion dollar homes and Bugatti cars though. I figure my extensive high end education and MD degree should give me an "in" so I can be their nanny or manservant. At least I'll have a job, and can hopefully live in their house. I'll be better off than 99% of citizens in the newly Brazilified America.

I think it's time for me to throw up now.

Posted by: ex SF-er at November 11, 2008 10:04 AM

Think ... "revolution"

The Canadians sacked Washington in 1812, then retreated back to the land of back bacon and rye whiskey. No reason we can't have a do-over in 2012.

Posted by: Jimmy (Bitter Renter) at November 11, 2008 10:10 AM

Banks have obligations to shareholders, and they are not going to give away something to assist a debtor.

until they are nationalized, or pseudo nationalized.

it goes something like this:
Barney Frank: "you guys better start modifying those loans or else!"
Innocent Bank: "we can't or we'd take big losses!"
Barney Frank: "here's $25 Billion. that should tide you over"
Innocent Bank: "we still can't!" (as they take that money and buy up their competitor and use 1/2 of it for bonuses)
Barney Frank: "ok fine, here's another $25 billion, to be used ONLY for loan mods"
Innocent Bank: "we still can't do it look at our stock price!" (as they take the new money and give it to their traders trying to double it or nothing)
Barney Frank: "ok, we'll pressure your regulators to change accounting rules so that you can look better than you are"
Innocent Bank: "due to unforeseen circumstances, we are now insolvent"
Sheila Bair: "ok, we the FDIC will take you over. we will guarantee all insured losses. As a govt agency we can loan mod however we want since we don't have to show profit/loss. However, we're SURE that these new loan mods will turn a profit in the long term for the taxpayer!"
Hank and Ben: "and we'll a new lending facility the BYOB or "buy your own mortgage" facility. it will be used to buy mortgages directly from banks at cost so that the poor banks don't take a loss on their very valuable but illiquid assets"
Arnold: "and I will make it illegal to start foreclosure proceedings for the next few months!"

(lots of winks all around)

Posted by: ex SF-er at November 11, 2008 10:13 AM

Ex SF-er, I agree your scenario is a real possibility. However, I think with the election now over, the impetus to bail out Joe Overextended Homeowner (thank you for your vote, now piss off) will ebb, even though the Dems now have the numbers to do so. Most members of the public are not in this situation, and any stimulus will be directed at good hardworking types, not overextended debtors.

The legality of modifying anything that is securitized is also extremely difficult. We do still have a Contracts Clause in the Constitution. I understand Citi's new plan only applies to those loans that Citi holds.

Posted by: Trip at November 11, 2008 10:21 AM

And here's a real Sheila Bair quote from yesterday's Wall Street Journal:

"People say we should punish all these people because they got these mortgages they couldn't afford. Why? Who is that going to help? It's just going to put more empty houses on the market, and more houses where the lawn maybe isn't going to get mowed and the windows may broken, or the owner isn't there so they aren't paying taxes."

And later in the article, she says: "Getting back to basics, saving before you buy, thinking through expenditures, and not getting too deep into debt. We need to get back in touch with those cultural values."

Hmmm... Anybody see a contradiction here?

And, Trip, excellent explanation about how banks are helped--let's hope they focus on that small percentage and not overstep.

At least judges who know nothing about the mortgage industry aren't stepping in and re-writing private contracts. Yet.

Posted by: BayDog at November 11, 2008 10:31 AM

Trip:
I agree with you. once the pigs eat at the trough there won't be enough money for the little people. we'll just have to wait until the money trickles down (and we'll have to wait a LONNGGGG time)

FWIW: keeping those homeowners in their homes has absolutely nothing to do with helping the homeowners. the govt wants to stop the foreclosure problem to keep property tax revenue up, and to keep the foreclosures from causing MBS defaults that affect the banking/financial system and subsequent cascading cross defaults on the overlying CDS market.

As for the contract problem, it can be dealt with. The govt need just buy the entire securities (and not just the mortgages). This is why I think we'll have a Resolution Trust Corporation part 2. It will buy all the bad paper out there (CDS, MBS, CDO, CDO squared, you name it) at very advantageous prices for the banks and bank holding companies (cough). then the losses can roll in on the taxpayer. the financial types of course will make big bucks off this, through their leadership experience and expertise.

Once the govt owns the whole security it can modify it as it wishes (since govt is not in the business of profit, it is in the business of votes). It will modify the mortgages as is politically expedient at the time.

And then the free-marketeers will come on and talk about how the Govt is wasteful.

There is a hitch to this plan: hyperinflation. The govt can enact my plan whenever it wants to. 'the market' is crying for the govt to do it (because they want govt to be the next chump in the American Ponzi finance system). However, this program will be inordinately expensive and push the US Government towards insolvency/default itself. It could cause massive interest rate/currency dislocations and even hyperinflation.

I haven't quite figured out if our leaders are ballsy enough to do it, but I'm leaning towards them trying it.

I should stop posting today now though, because I'm in an irritable snarky mood (can you tell?). one shouldn't blog while bitter.

luckily, as I've said before, there are more important things than money. We as Americans are going to learn that the hard way, but it IS a truth. I don't worry so much about the money I'm going to lose, the bad taste in my mouth is the outright theft that is being perpetrated every day right on the front page of the paper, and only 0.01% of people even understand they're being robbed blind.

Posted by: ex SF-er at November 11, 2008 10:44 AM

@ ex SF-er: you forgot GMAC and the homebuilders. Plus our beloved state of California is also broke and recently accessed Treasury aid.

I try not to let it get to me, though. Here's how I rationlize things:

First off, any type of modification plan will create huge adverse incentive. As I mentioned before, when Joe Cultcab gets his 95% LTV loan modified because he's late on payments, Sammy Slowfood next door will stop paying, and it cascades from there. Home prices fall another 5%, Joe Cultcab needs another modification, etc. As BayDog mentions, this only puts speed bumps on the home price depreciation ramp. It will not support inflated home prices. Nothing will.

Second, what position would you rather be in? These bailouts are being funded by taxes paid by ALL OF US, owners and renters alike. People who bought inflated property during the bubble are seeing the value of their leveraged asset falling, wiping out what equity they had. Or they walk away and get their credit ruined. They're getting double-screwed, for lack of a better expression (I know you own, but you have no net debt, so this doesn't really apply to you).

Meanwhile, we laughing renters are only getting screwed once via tax burden, and we live in comparable shelter for a fraction of the cost. So it could be worse. People who bought pre-bubble also probably don't care that much unles they've liberated their equity to spend on yachts and monster trucks with spinning wheels. Otherwise they're just fine.

Posted by: Dude at November 11, 2008 10:46 AM

As i said yesteday, I don't think these bailout plans should help anyone with a higher than median priced home, or anything more than a $250K mortgage.

We shouldn't be bailing out homeowners with large mortgages. Anyone borrowing over $250K should have known better.

This would still cover the majority of foreclosures in the country and would help out, lower, lower middle and middle middle class.

Posted by: spencer at November 11, 2008 11:07 AM

Spencer raises a good point. If some version of ex SF-er's arm-twist bailout comes to pass, I find it quite unlikely that they would include poor SF residents who can't keep up with their $900,000 mortgage. Or their $1.5 million one. A real long shot that anything even remotely possible will trickle down (up?) to SF.

Posted by: Trip at November 11, 2008 11:16 AM

Dude - like you, I'm going to try to not let this fiasco get to me. Everyone here has made some great points and at least is aware of what is going on. But I can't help feeling as ill as ex SF-er. This is an outright theft and he is right that most Americans don't understand what is being taken from them. Crony capitalism, kleptocracy, socialism, bailouts, and massive deficits - these are our new core values.

Posted by: FSBO at November 11, 2008 11:21 AM

A side effect of re-sizing the loans could be a faster price recognition. Will the new loan amounts be recorded? And if so, will the homeowners be able to use this as a proof of price depreciation? This could lead to more property tax reductions if that's the case.

Posted by: San FronziScheme at November 11, 2008 11:35 AM

Sheesh, who would have thought it, but it looks like I was surmising a program that is more generous toward borrowers than the real thing! From the FHFA press release:

"The program creates a fast-track method of getting troubled borrowers to an affordable monthly payment where “affordable” is defined as a first mortgage payment, including homeowner association dues, of no more than 38 percent of the household’s monthly gross income. This affordable payment will be achieved through a mix of reducing the mortgage interest rate, extending the life of the loan or even deferring payment on part of the principal."

And "The borrowers’ ultimate obligation to repay his or her current mortgage does not change."

Does not even contemplate principal reductions at all! Just payment modifications and deferrals to stretch out the repayment process and sucker, er incentivize, the borrower into not walking away.

It also appears not to apply to seconds (or thirds) or HELOCs.

(and see if you can spot the grammatical error in the last quoted sentence of the release)

Posted by: Trip at November 11, 2008 12:03 PM

Trust me, you have nothing to be sad or upset about. The same banks who tricked the buyers into taking loans they couldn't afford will now trick people into paying more for homes than they are worth.

In return, the congress will declare the problem not worthy of congressional action and will not authorize bankruptcy court judges to modify the terms to suit the buyers, because the bankers have already modified the terms to suit the bankers.

Watch for the wiggle language where they lump principal reductions in with modifications: "we have modified the terms (for 99%) or reduced the principal (1% for our best friends and business associates) for 5 Billion in loans". When you go back to look at the modifications, they are just making formerly interest only loans negative amortization. The buyers will have to pay every penny. And most of those modifications will be for people who refinanced, yet still have substantial equity in their homes that can be grabbed if they go to sell them. The people who bought with no money down won't get jack.

They are just going to lock more buyers in their homes for 3-5 more years. The reality is the banks can't deal with the volumes being foreclosed on as it is, so it beats having the homes sit vacant. If, for some reason, home prices rise, the banks get their money.

But make no mistake, buyers are not getting anything. This is being done for the banks benefit. Will it cause home prices to decline more slowly? I think the answer is yes. Will it change the magnitude of the decline? Probably not.

And the money is FLYING out of the TARP program faster than it can be used to buy bad loans. I'll be surprised if a single dollar is ever used for that purpose. So I don't think the taxpayers are getting screwed.

The reality is that TARP will be used for unemployment insurance. Instead of GM going under and dropping millions of people onto the unemployment rolls, the government can hand them the money they'd have to pay out in benefits (OK, maybe its 5x that amount - whatever) and pretend unemployment isn't as bad as it is. So Joe six pack in Michigan keeps his $50K per year job, and instead of 25% depression unemployment, we pretend we have 10% recession unemployment.

Posted by: tipster at November 11, 2008 12:05 PM

Soon.

Very, very soon, the U.S. Treasury market is going to collapse. And it will collapse under the weight of an ever-expanding pledge of support from the U.S. government to backstop all the poor decisions made during the past 25 years. There is a very simple axiom:

Bad debt is not made good with more debt.

Just ask GM, which has been among the corporate walking dead for many years. "What's good for GM is good for America." Well - that remains true, but unfortunately, it implies bankruptcy.

Foreign Central Banks have been an important source of demand for agency debt the past half-decade or so. Well, the data I see suggests they are backing away. That's a crack in the Bretton Woods II system - despite the Treasury pledge to FNM/FRE, agency spreads remain wide. Imagine what mortgage rates might have been if China hadn't expanded its holdings to ~$500 billion?
http://blogs.cfr.org/setser/2008/07/12/too-chinese-and-russian-to-fail/

Well, it appear you ain't gonna have t'magine for much longer. Tsk-tsk.

But agency debt is nothing more than an inconsequential local lead act to the Main Event run on the U.S. Treasury itself. U.S. Treasurys outstanding increased from ~$5.75 trillion in 2000 to over $10 Trillion just last month. With hundreds of billions more scheduled for auction in coming months.

once this panic into U.S. Treasurys ends, it will be like nothing we've ever seen. Wait until our foreign creditors back away from the U.S. treasury market itself.

The "prosperity" of recent decades has been to some extent - not entirely, but to some extent - illusory, because it was consumption purchased forward through debt that was never seriously expected to be repaid. That growing debt was successfully rolled over for far longer than most could ever have imagined. But as we have seen in credit market after credit market, the opportunity for rollover is, umm, constrained.

The Treasury wants to act as lender of last resort, but the burden is too large.

Game over.

Posted by: Debtpocalypse at November 11, 2008 12:19 PM

@ Debtpocalypse: I've been wondering about this for a while now. The bailouts and other debt hangover remedies will surely continue until the Feds run out of money.

But when does that happen? When do the other nations of the world give up on us and stop lending? Do we see the end of the Pax Americana in our lifetimes, or just a shift from deflation to massive inflation? I'm curious what others think.

Posted by: Dude at November 11, 2008 1:34 PM

"just a shift from deflation to massive inflation? I'm curious what others think."

I'll hazard a guess.

Deflation - nasty, ugly debt deflation - until debt/gdp reaches a sustainable 100-150%, OR until the USG has taken on all the bad debt itself (look for USG external debt to rise to 100% gdp equivalent - it's about 40% now, but who can really figure it out anymore? Don't count the IOUs in the trust fund - they'll be defaulted on).

By the time these figures are reached, the USG directly, or indirectly though states that are backstopped by the USG, will employ double or triple the number of workers it does now.

After those condition, virulent, nasty inflation, that may go hyper- (but probably not). Old people eating cat food because that is all they can afford. Doctors refusing to treat the sick or "going slow" because they aren't being reimbursed with dollars worth anything. Interest rates on real estate in excess of 15% - if you can get a loan. Etc. That sort of inflation and all the societal problems inherent in a system where private safety nets (families, churches, communities) have been systematically destroyed by the siren song of government programs.

Just a guess. But FWIW, I'm strapping in and expecting a wild decade or two ahead!

Posted by: Laughing Millionaire Renter in Marin at November 11, 2008 1:54 PM

Thanks Satch...er, I mean Laughing Millionaire Renter. But debt at 100% of GDP? You honestly think other nations will keep lending us money to that point? What you're essentially talking about sounds like complete socialism, followed by America becoming a 2nd world country in the next 20 years. Seems extreme.

Posted by: Dude at November 11, 2008 2:02 PM

"But debt at 100% of GDP? You honestly think other nations will keep lending us money to that point?"

Yes, no problem with that level. 10,000 or so nuclear weapons buys you a lot of "goodwill" :) That's only USG government debt I'm talking about. Japan, for instance, is more than 100% today on that measure, and even lowly Italy funded at 140% gov debt/gdp in the 90s (but it wasn't always pretty).

The other debt (corporate, household - including mortgages, state) is more worrying. That's what has to be deflated/defaulted IMO, or else absorbed by the USG. If they try to absorb it all at current levels, then we'll have debtpocalypse's scenario immediately. If they take their time and allow the deflationary pain, we might survive. More likely, the pain will get too great, and the government will be "forced" to do something in a year or two. And then the real pain will begin....

Posted by: Laughing Millionaire Renter in Marin at November 11, 2008 2:10 PM

The AP news item includes a local angle:
Indeed, Tuesday’s announcement comes too late for Troy Courtney, a 44-year-old San Francisco police officer.
He moved out of his home in Mill Valley, Calif., at the start of this month — taking his children, three dogs and one cat with him — after failing at several to attempts to get a loan modification or a short sale — where the lender agrees to receive less than the loan is worth.
Courtney worked overtime and tapped into his retirement account to try to catch up with two loans on his home. But in the end he couldn’t convince Countrywide Financial, which managed the loan for Wells Fargo, to modify the loan.
“I feel like I missed the boat,” he said of the new efforts to help more homeowners. “I’m just mad at the whole system.”

No mention of a health crisis or other extenuating circumstances. Here's what the public records have to say:
5/14/99: Bought property for $320,500 ($256,400 First, $64,100 Second mortagage)
3/16/05: Refinanced $630,000 Variable mortgage

Trustee’s Deed upon Sale on 2/13/2008 for $69,292, which may have been the second (NOD filed on 10/16/2007)

Various judgements from different collections agencies on:
11/1/2003, 8/3/2004 (released after refi on 3/16/05)
6/11/2004 (released 8/17/2004)

I noticed on Craigslist that some nice 3/2 units are renting in Mill Valley for around $2500 (this one's for you, LMR). I’m guessing that is significantly less than what their mortgage payment was.

Posted by: EBGuy at November 11, 2008 2:16 PM

Hyperinflation? Bring it on! I'd love to be the last buyer to take on huge debt right before things go haywire.

I have a pet theory that massive inflation might be the way that the housing price gets re-aligned with wages. (High inflation with a stagnant housing market)

Posted by: mr94102 at November 11, 2008 2:36 PM

Sort of makes you curious what Mr. Courtney did with the ~$300k that he cashed out with the refi. I hope he bought a nice boat with his tax free gains. No sympathy here... come on, people need to take some responsibility for their actions.

Posted by: JR at November 11, 2008 2:39 PM

"the siren song of government programs"

Hmmm... until the bailout, the siren song Top 40 for the last few decades has been all about privatization and jumping into the market, no? Government safety-net programs haven't grown much. In fact, many have been cut. The most popular tune I can recall is that the government no longer needed to force companies to set aside sufficient reserves to fund pensions because investing in the market was our salvation.

Different station, I guess.

Posted by: BobN at November 11, 2008 2:43 PM

Sort of makes you curious what Mr. Courtney did with the ~$300k that he cashed out with the refi.
Well, his debts with two of the collections agencies weren't settled until after the refi, so I suspect much of it was already spent.

Posted by: EBGuy at November 11, 2008 3:18 PM

BTW, I agree with tipster; the proper term is not modification, but zombification -- amortize for 40 years and put a balloon payment on the end.

Posted by: EBGuy at November 11, 2008 3:40 PM

EBGuy - great detective work, please e-mail this to the reporter! I love how the AP story is content to paint Courtney as another victim of predatory lenders, pulling on reader heartstrings.

Courtney might be "mad at the whole system," but I'm mad at people like him who wanted toys and thought housing prices would go up and up and that interest rates would stay low forever.

As for "zombification" (great word!): If an asset bubble has already burst, any efforts to re-inflate it are futile.

Posted by: BayDog at November 11, 2008 3:57 PM

Worse than futile, every attempt throughout history has unintended consequences that always ends up making the problem worse.

Posted by: tipster at November 11, 2008 4:26 PM

What other historical examples are you thinking of tipster?

Posted by: NoeValleyJim at November 11, 2008 4:35 PM

San FronziScheme wrote:


A side effect of re-sizing the loans could be a faster price recognition. Will the new loan amounts be recorded? And if so, will the homeowners be able to use this as a proof of price depreciation? This could lead to more property tax reductions if that's the case.

Why would they do that if the stated reason is to keep the property from going into foreclosure? I ask that question sincerely, I can't think of a reason to record the new mortgage terms.

Since we're discussing price discovery, I noticed that our own just-outside-the-Bay Area exurb of a href="http://en.wikipedia.org/wiki/Mountain_House,_California">Mountain House made it into the New York Times today, in an article that is the number one, most e-mailed article, on mortgages with negative equity, to wit:

Because of plunging home values, almost 90 percent of homeowners here owe more on their mortgages than their houses are worth, according to figures released Monday. That is the highest percentage in the country. The average homeowner in Mountain House is “underwater,” as it is known, by $122,000.

...of course, if there is any justice at all present in the american system, someone who purchased a house in an exurb a long commuting distance away from their job will not get any assistance "to help [them] stay in their homes", as the Citibank program described in the linked-above article attempts to do.

First American has been refining its figures on underwater mortgages, formally known as negative equity. The data company evaluated 42 million residential properties with mortgages. ...A computer model was used to calculate current values, using comparable sales.
The figures rank the 20 ZIP codes that are furthest underwater. The 95391 ZIP code, which includes all of Mountain House and some properties outside it, has the unwelcome distinction of being first in the country.
Out of 1,856 mortgages in the ZIP code, First American calculates that nearly 90 percent are underwater. Only 209 owners owe less on their mortgages than the homes are worth.

...it will be very interesting indeed what the "median" price of a home is in Mountain House in 2010.

Posted by: Brahama at November 11, 2008 6:39 PM

If I may, a few more unintended consequences with perverse ramifications (thanks to Wikipedia):

The introduction of rabbits into Australia for sport led to an explosive growth in the rabbit population; rabbits have become a major feral pest in Australia.

The stiffening of penalties for driving while intoxicated in the United States in the 1980s led, at first, to an increase in hit and run accidents, most of which were believed to have been drunken drivers trying to escape the law. Legislators later stiffened penalties for leaving the scene of an accident.

Prohibition in the 1920s U.S., originally enacted to suppress the alcohol trade, drove many small-time alcohol suppliers out of business and consolidated the hold of large-scale organized crime over the illegal alcohol industry. Since alcohol was still popular, criminal organisations producing alcohol were well funded and hence also increased their other activities. The War on Drugs, intended to suppress the illegal drug trade, has likewise consolidated the hold of organized drug cartels over the illegal drug industry.

Rent control leads in the long run to housing shortages, and drops in housing availability and quality. It may even lead to the creation of slum areas where owners permit rental property to run down until it becomes uninhabitable.

Government biofuel subsidies, especially of corn-based ethanol, may actually harm the environment and increase CO2 emissions, and raise the price and reduce the availability of food grains.

What's the road to hell paved with? Good intentions (and their unintended consequences...)

Posted by: BayDog at November 11, 2008 7:26 PM

"10,000 or so nuclear weapons buys you a lot of "goodwill" :)"

When your organization's "core competency" is force projection the temptation is always to turn to extortion and banditry in order to earn your daily bread.

Posted by: diemos at November 11, 2008 7:28 PM

Agreed, diemos.

However, sunny personality person that I am, I prefer to look at it from a sunnier point of view.

Pax Americana has (more or less) worked reasonably well (for many of the first world nations anyway). It is sort of remarkable that there hasn't been large scale war using the terrible weapons that we now have. How long after the gatling gun was invented was it used to mow down 100s and 1000s? How long after the machine gun? (ever see those depictions of horse cavalry marching into sheets of lead in WWI?) Mustard gas, mechanized warfare, the list goes on.

Status quo really isn't so bad if you are the elite of your country, and that's probably never been so true and so widespread in human history I'd wager (even the African kings live, well, like kings!).

There are probably some strong institutional forces that are trying to keep the status quo game going. Let's hope they are successful. A rerun of the 1930s played out geostrategically with modern weapons after the US sinks into isolation as in the 1920s could be pretty bad.

Posted by: Laughing Millionaire Renter in Marin at November 11, 2008 8:13 PM

Satch,

The PAX Americana will last right up until the moment that america can no longer acquire the resources it wants through free trade and turns to military force to acquire them.

At that point the rest of the world will turn against us and we will have little choice but to withdraw to our borders.

To paraphrase Gandhi, "300M Americans cannot rule 6.6B foreigners unless the foreigners wish to be ruled."

Which is why I think it's so important to invest in energy resources that we control within our own borders.

Posted by: diemos at November 11, 2008 8:27 PM

Definitely agree on energy resources. I'm no expert, but it seems fossil fuels for cars (including hybrids), nat gas for fleets and buses (so that only limited filling station infrastructure is required), coal and nuclear for electricity, and a smattering of solar, hydro and wind in the areas where they make sense, would probably work as well as any combo for the next 30 years or so. Who knows for sure? One thing I do know for sure is that when the decisions on what energy resources to invest are made by the politicians - inevitably on the basis of lobbying $$ - the result will be a mess.

About the rest of the world turning against us? Could happen, but I doubt it. It would be like herding cats! OPEC for instance can't even enforce no cheating among themselves. More likely we'd have a breakup of the world into spheres of influence if the US is forced to withdraw (I sort of agree with you that it is inevitable). Russia and China trying to peel off Europe from the US sphere has echoes of Molotov-Ribbentrop to my ears. Who knows? I suspect a hungry China will be very bad for resource rich Africa, and I think the old enmities of the 1920s and 30s will awaken some ghosts across the Sea of Japan.

Momentous times. Getting back to real estate, I am always amazed how people tend to look at the postwar period (typically, only at the period 1980 onwards) and think that is the "norm". I suspect that the next 30 years are going to be nothing like the last. Anyway, at least no one really laughs at people who said a year or two ago that a repeat of the Great Depression is possible and perhaps likely, and that's progress I guess. Still, getting the diagnosis right (too much debt that cannot be repaid) is little consolation when the proposed cure (an attempt to force even more reckless debt, when the markets are screaming for a deep recession/cleansing/BK of the system) is as bad as the disease.

Posted by: Laughing Millionaire Renter in Marin at November 11, 2008 8:53 PM

Getting back to this Fannie Freddie "bailout" program. Lots of interesting comments above, but FWIW I think this is just another attempt to keep hope alive. TPTB knows it is not going to work, and they don't care. The goal - as it always has been - is to slow down the adustment of housing prices so that as many homeowners are "trapped" in the asset as possible.

There're really only two ways to get nominal housing prices up in the high value areas that we care about: 1) get equilibrium wages to rise (impossible IMO as the recession deepens) or 2) institute governmental loans for NEW buyers (who cares about the existing ones?) with no credit standards so that they can buy as recklessly as the fools did in 2005.

I don't see any movement towards those goals - only a systematic theft of resources from the population for the benefit of the banksters. I mean, come on, the USG will borrow from the population in order to give that money for free to their bankster buddies so that that bankster group can then loan that same money back (at interest, and after dipping their beaks in it first) to the same group they borrowed it from? Does that sound like a sensible plan?

If and when the USG institutes no-money down (or practically no-money down) mortgages I will buy 10-20 properties, after having bled as much of my welath as possible into bankruptcy-remote vehicles. Until then, cash is king (and maybe a little gold - just in case!).

Posted by: Laughing Millionaire Renter in Marin at November 11, 2008 9:15 PM

doggone investment properties keep spitting off so much cash it gets hard to invest it all.

so what are these 'bankruptcy-remote vehicles' of which you speak...

which cash/currency and what form of gold?

Posted by: paco at November 11, 2008 9:30 PM

All is not -- glub, glub, glub -- underwater in the East Bay, at least according to Forbes. I almost called my Used Home Sales Professional to get a CMA for my home...
Berkeley, Calif., known sometimes as a hippie haven, is becoming a hotbed for home sales.
Prices in the Bay Area suburb are up 9% this year, with homes selling for a median price of $790,986. Properties are sitting on the market for 73 days on average, the lowest of any area with positive price trends within the confines of the country’s 75 largest Census-defined metro areas. Only 37% of sellers have been forced to reduce their prices, one of the lowest rates in the country.

Uh-oh... LMR mentioned gold... this is getting serious.

Posted by: EBGuy at November 11, 2008 10:47 PM

Sorry, that should be Forbes.

Posted by: EBGuy at November 11, 2008 10:57 PM

Just fyi guys, i have a $1.3 million mortgage taken out about 4 years ago from Citibank. The house has probably gained roughly 35% at the peak last year. Probably up only 20-25% now. It's in a very good location in SF.

Anyway, I had a 5 yr arm that was expiring in 1.5 yrs at a rate of 5.75%. The Citibank rate mod contacted me and asked if i want to lock in 5.125% for another 5 years, with the same amortization period (26 yrs left). I said, what's the catch? They said, no catch, just a $300 app fee. We still own your mortgage, so we can do this. I said "OK"!

My payment is literally $680/month lower, and more goes to principal to boot. I didn't even need this rate mod. I was just a good debtor on time, and never missed a payment for several years.

Shurg, i'll take it. I plan on owning my house for at least 10 more years.

Thanks

Posted by: Gotrefied at November 12, 2008 1:07 AM

"what form of gold?"

disc shaped lumps of element 79 stored in a secure place would be my preference.

These days I would be nervous about buying pieces of paper that have written on them, "The bearer of this note owns 1 Troy Oz of gold - signed Lehman Brothers"

Posted by: diemos at November 12, 2008 6:41 AM

"so what are these 'bankruptcy-remote vehicles' of which you speak..."

All strategies require planning and lead time. This is not legal advice and you should consult your attorney. Here're a few hints:

IRAs/SEPs are candidates, but they are very restrictive and you are generally limited to whatever you’ve got in them now (only the SEP lets you put in some significant dollars, but at the expense of payroll and income taxes – laughing millionaires prefer capital gains tax rates to income tax, and we never pay payroll taxes).

Irrevocable trusts for the benefit of trusted (extended) family members and kids that take advantage of the gift tax exclusions ($24K per couple per recipient per year, $26K from 2009) are also classic methods. One could make a strategic decision to use all or part of the $1M lifetime exclusion to "speed up" the process. And of course, any estate tax person can explain to you how to "daisy chain" trust contributions through multiple beneficiaries so as to reestablish concentration of the corpus with the intended (trusted) beneficiary without violating the gift tax exclusions.

There are a number of strategies for getting assets into a business venture. Tax issues and commingling and related "piercing the veil" issues become important, so consult your attorney.

All equity in certain property in Florida (the “homestead” rules) is bankruptcy remote. At the reduced property prices prevailing there now, at some point a strategic decision to "move wealth" into a homestead property makes sense (not for me yet). It certainly made sense for OJ Simpson. This would have the added benefit of establishing a presumption of Florida residence, which might come in handy if one were to decide to cash in longstanding capital gains within taxable trading accounts and didn’t want to pay confiscatory California taxes. Strategic fleeing to time recognition of gains should never be far from one’s mind, especially as the the fiscal prospects for California are abysmal as far as the eye can see.

A recent twist on 529 plans in the new bankruptcy law makes them irresistible for this kind of planning. 529s are bankruptcy-remote, and unlike the trust/gift strategies, do not require relinquishment of control and also contain a front loading provision that allows fairly significant contributions. 5 years of contributions can be front loaded, so $120K ($130K from 2009) per child every five years (for a married couple). We've done this of course for our kids - and getting ready to make the second round of contributions for one of them. These can also be set up for multiple extended family members (not just kids) and so significant dollars can come into play. The beauty of the 529 structure is that the grantor retains control of the assets and there are no time limits. There is no problem just dumping it into cash. Withdrawals for other than qualified educational expenses (say, to just cash it out and give it back to yourself) will incur a 10% penalty on the earnings only, so this is cheap insurance against BK.

Anyway, there are a number of other ways, and remember that these structures can be used to continue to bleed your assets even after the gov lets you buy your 10-20 properties for free (that was the supposition).

"which cash/currency and what form of gold?"

USD and JPY only for now (maybe a little EUR as well, through long-term sovereign bonds). Probably some emerging market currency exposure in the relatively near future depending on how quickly the blowups happen (buy EM currencies after there is blood on the streets, just like in 1999). Gold – physical only, preferably in offshore depositories. Spread the risk around, and hope for the best (it’s insurance after all, not a trading position).

Posted by: Laughing Millionaire Renter in Marin at November 12, 2008 7:04 AM

One other issue about mortgage modifications: I suspect a BIG group of people getting them will be people for whom the documentation on the original loan is so sketchy that the bank could never foreclose.

They modify the mortgage and this time, they don't lose the documentation. If housing prices fall and the owner decides it is in his best interest to stop making payments and wait for foreclosure, if they hadn't accepted the modification, the bank could not have foreclosed and the owner could live there for years rent free. But since they did accept the modification, the paperwork is airtight and they get tossed out.

So Gotrefied above, crowing about how he got some tiny rate reduction, may discover that he took his home from one on which, literally, no payments were owed, to one on which the bank can now readily foreclose. Good job, mate!

A little hint for the future: banks never do anything that isn't in their best interest.

Posted by: tipster at November 12, 2008 7:19 AM

"preferably in offshore depositories."

and which foreign government do you trust to care more about your interests than your current one?

Personally I'm more worried that I'll wake up one day and find that, with the push of a button, all of my bank accounts have been converted to 30-year victory bonds so that the gov can raise the money to pay off the external debt.

Posted by: diemos at November 12, 2008 7:24 AM

diemos,

Sorry, I should have added the "Bank of Backyard" is acceptable too. Kilo bars make a very nice paperweight. Hide in plain sight - the agents that knock on the door will go crazy tapping the floorboards....

I worry more about forced conversion of 401(k)/IRA balances into victory bonds. Obama has said he will allow $10K per year withdrawals tax free ($20K per couple) and I hope he makes good on it. There should also be some regs to allow easier withdrawals for "hardships" (already allowed) and purchases of property (I guess to pay the closing costs for the no money down purchases in my scenario). Obviously it will take awhile to get the assets out, but I do think we have some time. Maybe 5 years of deflationary depression? Hard to imagine the money still being there in 20-30 years so I intend to take advantage of any easing of restrictions....

As for foreign governments, the usual suspects. Switzerland and UK, Western Australia, Bermuda - you know the drill I'm sure. Will it be there if TSHTF? Who knows. But someone who made $500M in one year trading (and who sat literally right next to me for part of every day) once told me that "there is a thin film of wealth that floats above all the flotsam and jetsam of the world - wars, dislocations, crashes, nothing disturbs that", or something like that.

Posted by: Laughing Millionaire Renter in Marin at November 12, 2008 7:52 AM

hear that gotrefied,

you should take tipster's advice; when your bank calls to offer a re-fi you should assume that you do not owe anything anymore-don't be a chump, stop paying...

and here i had read your story and thought 'what a great deal'.


clearly i am not sophisticated enough to realize that you could just have 'stolen' your house from your creditor based on faulty paperwork...


Posted by: paco at November 12, 2008 8:12 AM

btw tipster,

do you know anyone who has actually done this (as opposed to just talked big on the intertubes...)?

Posted by: paco at November 12, 2008 8:18 AM

Good job on the refi Gotrefied, though I would have personally pushed for a 30 year. Right now the banks (and everyone else) are just trying to keep people in their homes.

BayDog, those are all interesting examples, but none of them have anything to do with asset bubbles bursting. Do you have any specific examples of situations where attempts to sustain the example after an asset bubble bursting have "making the problem worse"?

Posted by: NoeValleyJim at November 12, 2008 8:51 AM

Welcome back Satchel.

Posted by: The Bunk at November 12, 2008 9:30 AM

NoeValleyJim

Here's another example. A very recent one. From 2001 to 2003--in response to the tech crash, 9/11, and accounting scandals--the Fed lowered rates from 3.5% to 1%.

IMO the Fed's job is to control inflation. Period. But here the Fed over-reached and attempted to stimulate the economy through cheap credit. Resulting in this housing bubble. As rates lowered, Washington turned its back as consumers bought houses at increasingly inflated prices with mortgages that would most likely become unaffordable once rates reset. In fact, Fannie and Freddie helped engineer some of these exotic loans so that people who couldn't afford homes, could afford homes (huh?).

Plus, households took on more and more debt, with the average saving 1% of income (that's probably too optimistic). Average HH owns 9 credit cards. Police officers living in Mill Valley refinancing at twice the purchase price, treating homes like endless ATMs, in order to buy toys. Etc.

So the USG traded a smaller deflating equity asset bubble from 2001-2003 for a bigger uglier housing bubble that's now blowing up all around us. I'm sure LMR and others can add some color here. Go for it!

Posted by: BayDog at November 12, 2008 10:19 AM

BayDog -- low rates (cheap credit) is not the same as lax lending standards.

Of course, combining the two is very (ahem) effective.

I assume everyone has read the "End of Wall Street" article at portfolio.com by now.

Posted by: dub dub at November 12, 2008 10:42 AM

Posted by: debtpocalypse at November 12, 2008 12:48 PM

@ BayDog and JBR -

Sorry for the delayed response, I don't have as much time to keep up with SS as I used to.

Creditors are now accepting as low as 20 cents on the dollar if you can provide a one-time payment for credit card debt (probably for other types of unsecured debt as well). It sounds like free money, right?

Here is the problem: The IRS considers debt forgiveness to be income. It's not real income you object? Yes, I know -- the IRS doesn't care. So the creditor sends the IRS a statement showing the amount of debt they forgave. You now have to pay taxes on that amount.

Currently, there is an exception to the debt forgiveness = income rule. If your home ends up in forclosure or you perform a "short sale" the difference between the loan amount and the sale amount is not considered income.

The "bailout plan" included a provision extending this exception for another couple of years (2011 I think).

There is no such exception for credit card debt. You must pay taxes on any amount forgiven as if it is income.

Posted by: Publius at November 12, 2008 3:50 PM

@debtpocalypse - we also were looking in Berkeley for about a year, and I agree with what you wrote. My favorite is 1730 Sonoma, that place hit the market 6 months or so ago asking $1.85MM, it is now down to $1.15MM. Another 300k and maybe I'll buy it.

Posted by: The Bunk at November 12, 2008 4:48 PM

Regulators were considering a plan put forth by the banks to allow the forgiveness of credit card debt and let borrowers defer (not eliminate) the taxes on the forgiven debt. The lenders, in turn, would be permitted to defer the recognition of the write-off.

News reports indicate the proposal was shot down today.

Posted by: Trip at November 13, 2008 11:13 AM

"News reports indicate the proposal was shot down today."

That's almost certainly part of the puzzle why the TARP was expanded away from its original goal of buying mortgage securities. You see, credit card companies (just like banks) need to stay solvent long enough to pay bonuses this winter, and the process of converting every cc and consumer ABS firm to a bank holding company might have raised some suspicions.....

Suckers! It's sad that the spirit to fight the TARP plan fizzled a bit after the first 777 point drop in the market, and even sadder that the few congresscritters who seemed to have a backbone couldn't sustain the fight.

It's too late now. Once the camel gets his nose under the tent, he can't help but get his whole smelly body in. FWIW I think Depression is absolutely guaranteed now, and apparently so does a former head of Goldman, who says this crisis will be "worse than the Great Depression":

http://www.reuters.com/article/Finance08/idUSTRE4AB7HT20081112

Posted by: Laughing Millionaire Renter in Marin at November 13, 2008 11:23 AM

@The Bunk
Yeah. 1730 Sonoma is ridiculous. I remember when that first appeared on craigslist at the $1.85m asking. Heroically ridiculous. Another I've watched - and gone to see - is 745woodhaven.com: it started out months ago at $1.175m, and now is asking $899k. It is worth viewing in person only to familiarize one's self with the apparent advances in trick-photography - pool & kitchen are tiny.

The price cuts are coming quicker and sharper now over there. Another six months, and a full route will be on... especially when the creeping stock of transacted foreclosures starts destroying comps for loans. Another 10-20% from here in the coming year seems real easy.....

Posted by: debtpocalypse at November 13, 2008 12:46 PM

"But when does that happen? When do the other nations of the world give up on us and stop lending? Do we see the end of the Pax Americana in our lifetimes, or just a shift from deflation to massive inflation? I'm curious what others think."

@Dude

I think the jury's still out on deflation v. inflation. It isn't clear - to me at least - whether the wholesale deflationary destruction of "wealth" and its associated debt via equity, fixed income, and real estate will be overwhelmed by the wholesale fiscal and monetary efforts of gub'mints around the world to prevent it. Japan ran massive public deficits during the 1990s and it still didn't solve its deflation; I don't know whether ZIRP did alone, or in conjunction, or whether deflation had simply burned itself out there. Umm, assuming it has....

I have a sizable U.S. federal reserve note position to gain from deflation, and a sizable bullion/miner/Japanese Yen position for the threat of inflation. I'm only interested at this juncture in preserving whatever wealth I can - secular monsters destroy all wealth, and this is shaping up to be a mother of one.

He who loses least wins.

We've been living under what some have called the "Bretton Woods II" system involving the recycling of dollar reserves from managed-currency nations in Asia into U.S. Treasurys.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2005/IO+May-June+2005.htm

I have no idea when it will end - I only know that those things that cannot be sustained do end, and the rest-of-world's financing of our excessive consumption will and must end. Maybe as a function of China's effort to stimulate its own domestic economy? Maybe out of the wreckage of a failed G-20 meeting this weekend in Washington DC?

I think the global subsidy is will very soon come to its end.

Posted by: debtpocalypse at November 13, 2008 1:13 PM

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