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Bailing out homeowners?
Old 08-23-2007, 03:19 PM   #1
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Bailing out homeowners?

Gross: Bush needs to rescue homeowners: Financial News - Yahoo! Finance

What do you think? I generally think Bill Gross is a pretty smart guy, but can't figure out his position on this? Wouldn't this just make the problem worse? i.e. bailout the speculators and allowing the bubble to continue?
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Old 08-23-2007, 03:51 PM   #2
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I think Bill A) "talks his book" and B) has been smoking too much wacky tabacky. But full points for creativity.

The Fed and banking regulators are probably not all that upset that non-bank lenders have pretty much been vaporized. But I don't think they wanted things to go this far. The attempts to inject liquidity in the system are good, but probably not enough. I think we will see more discount rate cuts and a fed funds rate cut before things really stabilize. But the fact that the Fed is finally on t he job makes me a lot more confident.
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Old 08-23-2007, 03:53 PM   #3
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IMHO Bill Gross is one of the smartest guys around. I always pay attention to what he does but never to what he says. He probably has a bunch of bonds he wants protection on, probably doesn't care a rat's a$$ about poor home owners.

I preferred the Cramer meltdown last week, now that was entertaining.
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Old 08-23-2007, 05:13 PM   #4
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I'm trying to figure out exactly who all these homeowners that are losing their homes are, and what it is that they are actually losing. Senator Dodd talks about all the people that are losing homes "not because of job loss, not because of a bad economy, but because of a bad mortgage". Those that got no down payment or small down payment loans and are now in a negative equity situation because the price of the home dropped really haven't lost anything, IMO. They were able to live in a house they couldn't afford for a couple of years at a below market rent. Those people aren't losing any equity. It is the lenders who are the potential losers in these situations, since the foreclosed homes aren't worth the amount of the loan. Actually in these, cases, the lenders would rather refinance these loans than foreclose. The only homeowners I feel sorry for are those who had a lot of equity in their homes and were "tricked" into a loan they didn't understand, although in most cases it probably is their own fault for not taking the time to understand the terms of the loan. But I have absolutely zero sympathy for those who levered up with teaser rate ARMs, or interest-only loans, assuming house prices would keep going up. Most of them knew what they were doing - it just didn't work out the way they hoped - housing prices stopped going up.
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Old 08-23-2007, 07:00 PM   #5
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Gross should stick with managing his portfolios.
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Old 08-23-2007, 07:18 PM   #6
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Is Gross a democrat? His article reads like a sarcastic dare to GW, so we can blame GW for not fixing the mess.

Original article here:
PIMCO Bonds - Investment Outlook- September 2007 "Where’s Waldo?"
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Old 08-24-2007, 05:01 PM   #7
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I don’t understand all the losses in the mortgage industry.
  • Most primary lenders lend 80% of the value of the property. The other 20% is either private mortgage insurance, down payment, or second loan.
  • If the institution does get the home back, they still have an asset to sell. So on the average $150,000 home, $30,000 is covered by insurance. They could sell the place for $120,000 and only loose the cost of sale and legal fees to foreclose.
  • While I am not in the mortgage business, they have to believe some percentage of their loans are going to go bad. It also appears that they charge higher rates for those with lower credit ratings to make up for this expected foreclosure rate
  • The ‘down payment’ loans i.e. the other 20% are often at higher interest rates because they have a second position to the first loan, and are considered more risky. I would assume these are a loss, however, as with most loans they are weighted up front with Interest, so if a second at $30,000, at 8% for 15 years, forecloses after say three years, the lender has collected almost $7,000 of principal, and $7,000 in interest. So they have received almost half of their investment back. Admittedly with no profit.
So, what went wrong? The housing markets have dropped, however, just because your property is underwater, does not mean it is going to be foreclosed on. In Texas, Okalahoma, and Louisiana in the 80’s the problem was a drop in real estate values accompanied with a marked increased in unemployment in the oil industry. People lost their jobs, could not make payments, and foreclosure followed.

So, I don’t understand where the losses are.

BTW, I distrust most articles on this, as many deal in conflicting statistics. Example: Are the number of foreclosures up from last year, or the percentage of foreclosures? Are the numbers based on an abnormally low base. i.e. with an umemployment rate of 4.6%, when it rises to say 5.6% it will have gone up 21.74%! wow, but it is still under what economist thought was ‘full employment’, and only 1% higher.
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Old 08-24-2007, 08:17 PM   #8
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I donít understand all the losses in the mortgage industry.
  • If the institution does get the home back, they still have an asset to sell. So on the average $150,000 home, $30,000 is covered by insurance. They could sell the place for $120,000 and only loose the cost of sale and legal fees to foreclose.
Try selling 79000 homes in a down market.

http://www.cohhio.org/pdf/dimensionsforeclosure.pdf
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Old 08-24-2007, 08:24 PM   #9
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I don't understand Gross's position, a Federal bailout of individual borrowers would be very inflationary since the government would be vastly expanding the money supply to do it. Isn't that what bond traders fear the most?
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Old 08-25-2007, 10:05 AM   #10
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UncleHoney,

So have home values in Ohio dropped 20%?

It appears you picked Ohio, the worst case in the nation, as stated in the article. Once more statistics. How many homes are there in Ohio? So 79,000 represents what percentage of the total market? Yes hard to sell 79,000 homes is a city of say 100,000 homes. My guess is some markets are not doing well, but as I said, I doubt that the mortgage companies are losing their shirts.

Once more, the loss in the 80’s was due to the drop in the value of homes. There the mortgage companies could not unload their inventory at anywhere near their loans. There were town houses that were financed at $80,000 that were appraised at the worst of the downturn at less than $8,000! Major office buildings with loans of $30,000,000 with values less than $5,000,000. I have not heard of those kind of drops in values anywhere in the nation, while I would concede you could find pockets. That still does not answer the question, ‘Where are all the losses’.
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Old 08-25-2007, 10:07 AM   #11
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In the downturn in Texas in the 80's the federal government did not bail out the consumer. Nor did it bail out local financial institutions. In 1990 there was not a single Texas owned bank in the state. In fact Bank America is what they are today because of the banks purchased by NCNB during that time.
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Old 08-25-2007, 10:20 AM   #12
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Rustic...

The problem is the example you gave is for PRIME... their is not a problem in the prime market...

The subprime will lend 100% at times... and on seconds will go as high as 125%... the extra interest in these loans did not pay for the potential defaults...

And the whatever A loans... there are a lot of interest resets... so someone who was working and could make the $2,000 per month payment now has a $2500 payment when interest rates go up.. true, nobody got laid off, but that house is about to be taken over when the market is already oversupplied...

The last piece of the problem IMO is that there were a lot of speculators that have been seeing to many of the get rich quick in real estate late night shows... and they owned two or three condos or houses etc... and now they want to 'flip' and there is no other fool to buy...

It is a normal cycle... you do not buy when it is like this... you wait until it is close to bottom or hits bottom and buy then...

But lots of money is being lost by many of the 'smart' investors...
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Old 08-25-2007, 10:29 AM   #13
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Did lenders make subprime loans as 100% with no private mortgage required? I don't know. As I said I am not in the mortgage business. If they did, and they did it on a large scale, then I might understand some of the problem. As far as the home owner, well if the government bails them out, then I got some stock picks I made greedy dicisions on and want my money back!
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Old 08-25-2007, 12:05 PM   #14
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Just a couple of notes about Ohio. The housing market in Ohio has been weak for several years, even before the subprime mess started. Ohio didn't participate in the real estate boom of the past five years. The Ohio economy has been terrible for many years - unemployment has been running about twice the national average. Ohio is basically a manufacturing state with a lot of workers tied closely to the fortunes of the automobile industry.
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Old 08-25-2007, 02:01 PM   #15
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Just a couple of notes about Ohio. The housing market in Ohio has been weak for several years, even before the subprime mess started. Ohio didn't participate in the real estate boom of the past five years. The Ohio economy has been terrible for many years - unemployment has been running about twice the national average. Ohio is basically a manufacturing state with a lot of workers tied closely to the fortunes of the automobile industry.
Actually it isn't nearly as bad as you say.

Ohio Economy at a Glance
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Old 08-25-2007, 02:25 PM   #16
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Did lenders make subprime loans as 100% with no private mortgage required? I don't know. As I said I am not in the mortgage business. If they did, and they did it on a large scale, then I might understand some of the problem. As far as the home owner, well if the government bails them out, then I got some stock picks I made greedy dicisions on and want my money back!
Lots of such stupid things were done in the midst of the boom, but mostly not by banks (they were held to higher standards).But the problem now is not being caused by actual losses. It is being caused by a lack of liquidity in the market, an entirfely different thing.
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