February 19, 2009
Details And Limits On The Fed's Foreclosure Plan Begin To Emerge
"Only about 50 percent to 60 percent of securitized prime jumbo or Alt-A loans meet the loan-modification standards requiring borrowers to live in mortgaged properties and owe no more than Fannie and Freddie’s loan limits, according to a report yesterday by Bank of America strategists including Akiva Dickstein and Vipul Jain. The refinancing plan will be limited by a standard preventing homeowners from qualifying if they owe more than 105 percent of their homes’ value, they said."
“If anything, the announcement of the new program created more questions than it answered,” the New York-based Barclays analysts led by Ajay Rajadhyaksha wrote in a report today. “This suggests to us the details for the plan are still being worked out.”
UPDATE: Details to date: Homeowner Affordability and Stability Plan Fact Sheet (pdf).
∙ Mortgage Plan Effect May Be Limited, Analysts Say [Bloomberg]
∙ The Bailouts Are Coming But Is The Bay Area Dying On The Vine? [SocketSite]
∙ Homeowner Affordability and Stability Plan: Fact Sheet (pdf) [treas.gov]
First Published: February 19, 2009 9:30 AM
Comments from "Plugged In" Readers
What's the old quip made about the consulting business? Something like, "When you don't have a solution, there's good money to be made in prolonging the problem."
I guess our government is now in the consulting business, and will continue burning billions in a futile effort to delay price discovery and restoration of market equilibrium. Luckily, the effects of this program will be limited in the bay area, as the Chronicle picked up on today:
And as I've said many times, I'm just waiting for the adverse incentive to kick in on this.
Posted by: Dude at February 19, 2009 10:17 AM
My two cents is that this move is quite smart. It will save the banks and the govt substantial sums by convincing several million people to keep paying on an asset that is worth far less than they owe and still depreciating -- and leave them convinced they have been helped!
I've said many times, I can't see the govt doing much to help anyone in a million dollar-plus home -- i.e. much of SF. We're largely on our own here, which will be better for the city in the long run.
Posted by: Trip at February 19, 2009 10:22 AM
If I understand correctly, none of this helps those that are underwater by 105%. Can anyone else clarify/confirm?
Posted by: trying to make sense at February 19, 2009 10:49 AM
So what 105%. Anyone figure out how you determine that? You hire the most dishonest crooks ever minted, otherwise known as "Appraisers" who will again "hit the number required" to allow the bank who hired them to get at that gubment money.
Appraisers know how to appraise high, when the bank, who hires them, tells them to. So the appraisal business, which had been heading towards a modicum of honesty, will now go back to doing what it does best: ignoring transactions on the basis of "overly motivated sellers".
Did the seller want to sell now before things got any worse? BUZZZZ. That transaction is out of the picture as a comp! And therefore, EVERYTHING is out of the picture as a comp!
So let's now go to the bayview, where all transactions are from overly motivated sellers. What to do?
I know! Use pac heights as the comps! Those people are rich and could not possibly be overly motivated!
Mr. Peak buyer from bayview, congratulations, your home has INCREASED in value since 2005 and is now worth, ta-da, exactly what your loan amount is. You now qualify for a subsidized loan. (I should say WE, the bank, qualify for the government's subsidy). Need any cash out with that to help pay your next year's mortgage payments?
Thanks for playing our new game of fraud! Operators are standing by.
And you, the honest people! Shame on you! None of this would ever occur to you, and so we the bankers can fleece you, of whatever is left.
Posted by: tipster at February 19, 2009 11:06 AM
1. the details are here:
2. my opinion is on this video:
3. unfortunately the effects of this will NOT be limited on the Bay Area. We got the money and we pay the taxes that are gonna pay for this down the road.
Posted by: resp at February 19, 2009 11:09 AM
resp, I have to say that's one of the best videos I've seen in a long time, and summarizes my opinion as well, along with probably every other rational, thinking person left in this country. I only hope the ire catches on.
Posted by: Dude at February 19, 2009 11:39 AM
Love the video - thanks for helping me crack a smile today.
Posted by: gowiththeflow at February 19, 2009 12:27 PM
Same for me. Awesome video.
Posted by: San FronziScheme at February 19, 2009 12:42 PM
The reward will be buying a marked down home in 2 years right next door to a "bailed out" upside-down home-ower. 10 years from now he'll probably still be upside-down (aka bank renter) and you'll be debt free!
Posted by: San FronziScheme at February 19, 2009 12:47 PM
Look on the bright side, everyone, at least we'll all have the satisfaction of knowing we helped a bunch of octuplets, and their six sweet siblings, avoid foreclosure:
Posted by: DataDude at February 19, 2009 12:58 PM
Wow. Amazing. What a leech that woman is.
Posted by: Fishchum at February 19, 2009 1:13 PM
I am having trouble understanding the outrage over the mortgage bail out (and it may be that I don't really understand the bail out). Let me proffer this scenario, and if I am missing something, please let me know what that is.
If you have a 500k house (bought for that) and that house needs to sell, and you can not get more than 300k for it under current market conditions, then the only way to have a transaction happen is through foreclosure. Assuming 20% is held by the owner in 'equity' from down payment, the bank is going to lose about 120k plus the carrying cost and transaction cost of the home until it changes hands. Writ large, you are talking about a lot more holes blown in the balance sheets of banks and investors.
This new program then allows someone to stay in that house by writing the loan down to lets say 300k. Now, that house has transacted in a way, and is now "worth" 300k, not 500k. It should be a new comp in the area at what the actual price this 'transaction' happened at. One way or the other, the gov't was going to have to finance the loss on this mortgage, either directly through bank bail-outs or buying of bad assets attached to these mortgages, or through the front end with the owner. The owner isn't really getting anything, except to stay in a house they bought for 500k, but now is worth 300k (their down payment now gone). So, in this scenario the bank is getting part of the write down on the loan from 417k to 300k financed by the gov't, and the owner gets the down payment and any equity wiped out, but gets to still live there at a price they can afford.
So, the outrage seems to be that the owners are getting a deal out of it, which they really aren't. But, why no outrage when the deal is to "reacpitalize" the banks, which is at the end of the day the same thing, providing gov't money to ease their losses on these kind of assets?
Anyway, if I am missing something, let me know, but there seems to be a lot of people really up in arms about this thing.
Posted by: The Bunk at February 19, 2009 1:16 PM
The outrage is that it is done with other people's money. And that some of these people:
1 - Haven't participated into the giant PONZI
2 - Haven't had the pleasure to live in a house bigger than they could afford
3 - Will see their savings wiped out by inflation when all the "funny money" currently being printed hits the street.
One day taxes will have to be raised. That will be bullet point #4.
Let the weak banks fail. The void will be filled with strong healthy smaller banks. Yes it will be painful, but better a quick sharp pain than a death by a thousand cuts.
Let the owners lose their houses. They probably overbid many people out of a decent home. Too bad they screwed up. They put their family in arm's way but it was their choice. It is a free country.
Posted by: San FronziScheme at February 19, 2009 1:24 PM
@ The Bunk
A few points: first, I'm not sure that a new comp of $300K will be established. The gov wants to keep RE prices as high as possible, and would rather collect property tax on $500 K, not $300 K. Can anybody clear up the comp issue?
Let's assume that the gov will spend the same amount of money either recapitalizing banks and/or buying toxic assets vs. helping underwater home owners.
Because the gov will reduce the principle amount and interest rate, the underwater homeowner now has a much lower mortgage payment. They get to buy more goodies and rebuild their nest egg. But responsible owners who didn't get in over their heads by buying a house they couldn't afford don't get a lower mortgage payment. No goodies, no refurbished nest egg. So, that's just not fair.
Also, many so-called owners didn't put 20% down. They maybe put 10% down, or 0%. So, some aren't out their down payment because their never was one.
Plus, new home buyers will be buying homes at inflated prices.
So, in a nutshell, the irresponsible people get the rewards, and the people who lived below their means and acted responsibly get screwed.
Does that sound fair to you?
Posted by: DataDude at February 19, 2009 1:36 PM
Datadude - Didn't borrowers have to put at least 10% down, if not more, to get a conforming loans from Fannie/Freddie? I was not aware people could get those products for no money down.
Also, your last point pre-supposes that the new price of the home is not established after someone reduces their mortgage. I think that is a no brainer, you can propertyshark those things, and if not, there will be a movement that will make that public knowledge. I would be very surprised if all these 'transactions' just went totally under the radar, but I don't think either of us know that yet.
I guess my overall point is this, what is the alternative? Either you are for doing nothing about the banks solvency issues, and then you can stand on principal and I don't argue with you, or you think that we should rescue the banks but not do it in a way that some actual people benefit from it.
Look, I am a renter, to my dismay, I would much rather own a home and have wanted to for years, but could not 'afford' one here. We are going to get screwed with future taxes no matter what, either Federal money will go directly to banks, or it will go into a program like the mortgage bail out, either way it is future tax money gone. There is zero chance of the gov't just standing pat and doing nothing.
So, to me, you are arguing that the money is better spent directly to banks. My guess is that this mortgage program is not going to be a huge speed bump on the way to price discovery, because it is forcing prices down immediately. That 500k house is now going to be on record as 300k. Unless you can say that is not the case, then I don't see the rest of the reasoning working very well. And lets face it, in this area if you are looking for homes in that price range, there are already plenty of deals out there to be had right now, hence the huge volume in foreclosure activity.
And Fronzi, you have to admit that people buying a house in the Bay Area for 500k or less were not "buying more house than they could afford", they were buying the only thing that was out there, there were virtually no homes less than that available. I recognize the mistake a great many people made, but I think we are past the moral hazard grandstanding, there is plenty of that to go around.
Posted by: The Bunk at February 19, 2009 2:23 PM
Has anyone heard about this or have additional info? In the news just now re: passing of the CA budget:
For Ashburn's support, legislative leaders included an amendment he backs that provides a $10,000 tax credit for those who buy new homes. The credit, supported by home builders, would be available starting in March and run through 2010. It would be capped at $100 million.
Would this be in addition to the Stimulus 8k?
Posted by: goldsunrising at February 19, 2009 2:51 PM
the real problem with me is that fairness has nothing to do with the free markets. people work and earn money and from that are able to buy the things that they are able and willing to buy. If you buy a home for $500K, even if that is the only home available and you can't afford to keep it for whatever reason, you lose it. When one buys a car with financing, you are upside down for a long time, you don't return the car or walk away from it unless you can't make the payments. Whats the difference? If many people bought homes and they cannot afford the payments,they lose the house. Trying to keep them affordable by taking money from others is not right, forget about fair, RIGHT. That just means that those who could use their own money for their own purposes have to give it up for someone else's. And because this is future earnings, people have to work for someone else's future and well being while foregoing their own.
But then again, the budget of 5 trillion jumped to 11 trillion and that is far more damaging than the additional 1 trillion plan being proposed, and all of the now 12 trillion still has to be paid back. I guess our future was screwed sometime during the last 8 years and our protests are a little too late.
Posted by: viewlover at February 19, 2009 3:06 PM
Don't underestimate the greed/stupidity of those who bought homes they couln't afford.
Just because they get a principal write down it doesn't mean that they will pass this on to a future buyer. I think that it is more likeley that they have mentally recorded the purchase price of their home at $500K and will not want to sell it for less even though the taxpayers have given them a cramdown to $300K.
Don't forget the $1K a year welfare check for paying a mortgage on time could also be looked at as an annual principal reduction too. I am even more sure that selers will not pass along this discount to future buyers.
Posted by: HappyRenter at February 19, 2009 3:13 PM
viewlover, thank you for hitting on the issue which pisses me off more than most others at play.
If we had a surplus of cash, and were a creditor nation, this might make some sense. But we don't. This is money we need to BORROW to throw away on mortgages which will likely re-default anyway. BORROW To subsidize the inflated prices of assets temporarily, so the deadbeats who can't afford them today can keep living in them another few years at a discount before they walk away anyway.
Who pays for these stimuli and bailouts? Not us - we couldn't pay this debt down in the lifetimes most of us have remaining. No. Instead, we're selling our children, the next generation of Americans, into indentured servitude to the rest of the world to make this happen. Sickening.
Posted by: Dude at February 19, 2009 3:29 PM
My point is simple, this is going to come onto our balance sheet either way. You can moan about it when it is a person down the street getting help on their mortgage a lot easier than you can when it is a $206 billion bail out of Citi, or a $30 billion subsidy to JPM for the honor of taking over Bear, or the $90 billion to AIG. If the single issue you are complaining about is the debt, this measly $75 billion should be a blip on your radar compared the the waste going around these days. And, either way, this debt is going onto our balance sheet. Either through a mortgage program like this, or through insolvent banks being taken over because their mortgage related assets are worth nothing. No matter what our kids are paying for it.
Posted by: The Bunk at February 19, 2009 3:40 PM
this is going to come onto our balance sheet either way
Only because Obama/Geithner/Summers dont' have the guts to wipe out shareholders and debt holders of insolvent financial institutions.
Posted by: unearthly at February 19, 2009 4:08 PM
Bunk, I agree that we (and our kids) will pay for this anyway. But given the option, I'd rather pay for a program that actually has tangible benefits for all of society. Keeping the banking system functional is a better use of funds, IMO, than helping Joe Cultcab hold on to his $500K 1-bedroom condo for another 2 years, when he re-defaults anyway because the place next door sells for $350K. Or at least it's less of a waste of money.
And therein lies the problem: it's not this OR more bailouts, it's this PLUS more bailouts. This program will not stop foreclosures, and it will not prevent home prices from falling further. How could it? The problem is too large. So get ready to buy more bad bank assets on top of this.
The government knows that. But they feel compelled to do something to appease the sheeple stomping their feet. Most of whom would be better off financially by renting anyway. Let's face it - not like these folks end up living under bridges. They trade their $5,000/month albatross payment for a $2,000/month rent payment on a similar or smaller place. Credit is ruined for a few years...but is that so bad? God forbid they have to face that stigma, though, right?
"Grandpa, why do I pay a 50% tax rate, but get no free college or healthcare like the europeans & asians do?"
"Oh, well, I don't recall exactly, but how do you fancy these antique granite counters in the house all 4 generations of our family shares? Back in my day, these were all the rage....now pass that cat food, I'm hungry!"
Posted by: Dude at February 19, 2009 4:14 PM
I don't know if it's Obama/Geithner/Summers but agree with unearthly that it's the shareholders/debtholders of financial institutions that should be picking up the tab.
Let the lenders that did a lousy job of screening loan applications or loaded up on bad debt fail along with the buyers who spent beyond their means.
We are pissing away tax dollars, rewarding the irresponsible and getting in the way of a real recovery. Yank the band-aid already.
Posted by: Dan at February 19, 2009 4:24 PM
Dude - I just don't think we are going to see re-default if principal is written down. I mean, if we are talking about a place bought originally for 500k, why do you assume someone could not afford a 300k price with a low mortgage rate attached? I think they almost certainly can. Secondly, it will stop some foreclosures. Not all of them of course, but for those people that take advantage, they will be able to stay in the house instead of leave when the only other alternative was foreclosure.
Posted by: The Bunk at February 19, 2009 5:03 PM
Bunk: what about the moral hazard of principal reductions? If your neighbor gets their principal reduced by $150K, why the hell would you (or any of us) keep paying if you owe more on a similar property? You wouldn't, as the increase in ruthless defaults has shown.
This program has the potential to increase defaults even more than we're already bound to see. What then?
Posted by: Dude at February 19, 2009 5:13 PM
I'm still confused. In the above scenario, the owner refinanced for $300k, which is 139% more than what the house was worth. ($417k/$300k = 139%) I undestood the max amount is 105%. So, as I understand it, this owner would not qualify for refinancing. Correct? Or am I missing something?
There are many places way more than 105% underwater. Not SF maybe, but just about everywhere else. Even fishy appraisals cannot overcome that much desperatey.
Posted by: trying to make sense at February 19, 2009 6:41 PM
Your post was of interest to me, so I went digging. here is the actual amendment. Cliff's Notes:
1. It only applies to brand new homes
2. Only if purchased between 3/1/09 and 3/1/10
3. Apportioned over 3 years
4. Non-refundable (as far as I can tell)
5. Limited to total credits of $100 million
How are they going to cap it at $100 million? Do it by filing date? Or purchase date?
Posted by: rr at February 19, 2009 10:02 PM
Dude - You are just explaining the scenario that is happening already. The neighbors house, if it does not go through the write down scenario, would then be a foreclosure, so either way your neighboring house is going to be worth a lot less. A new comp at what should be the new market value is going to be established next door either through a new sale post foreclosure, or through the write down process. I don't think you can argue that this program 1) is going to support inflated prices and 2) that is will artificially reduce the comps in the neighborhood. It will do one or the other, or it will actually signal the proper price for the home in the new market.
My thinking is that since it is tied to actual income and a reasonable percentage of debt to equity, then the new price should signal what someone in the neighborhood can actually afford, which is closer to the true value of the home than what we typically see today in many areas.
Posted by: The Bunk at February 20, 2009 8:01 AM
rr very interesting, I wonder if one can take the 10k CA credit + the 8k Fed Credit, together. I can't take it as I bought over the past few months but if I was still on the sidelines I would be pretty happy about the extra incentive.
Posted by: gowiththeflow at February 20, 2009 9:37 AM