After the bailout....

[Art G]

So, assuming the bailout goes through, what happens to the value of homes?
The way I see it, credit scores needed to buy a house should shoot up about 50 points. If people can't get loans, people can't buy houses, if people can't buy houses, people obviously can't sell houses. Values must drop in order for people to be able to qualify.
Will only the very wealthy be able to buy and sell?
What will it take to fix things? A good answer may win you a Nobel.

 

[FinanceDude]

We'll be back to the early 80's, and all the ER folks on here will rejoice because 12% CDs will trump their paying $6 a gallon for gas........

 

[Art G]

[FONT=Arial, Helvetica, sans-serif]The financial system bailout plan may increase the risk of stagflation and will probably cause problems for hedge funds and smaller banks, Mohamed El-Erian, co-CEO of bond giant Pimco, told CNBC on Monday. The plan will also lead to slimmer, less risky and probably less efficient banking management over the long-term, while short term it is going to be messy. El-Erian said, View this in the context of massive crisis management response. It came late but when it came, it's big. It's going to be messy; it's not going to be elegant. Over the next two years, the risk of stagflation has increased as the bailout plan needs to be financed, but over the long term the government actually stands to gain,¿ he added. Here's a prediction: they're going to make money out of this.[/FONT]

 

[samclem]

[FONT=Arial, Helvetica, sans-serif]The financial system bailout plan may increase the risk of stagflation and will probably cause problems for hedge funds . . [/FONT]

Good!
[FONT=Arial, Helvetica, sans-serif]
[/FONT]

[FONT=Arial, Helvetica, sans-serif]Here's a prediction: they're going to make money out of this.[/FONT]

"They" equals "us" as taxpayers. That sounds good, but if we're counting on the accumen of the government to manage this right and come out in the black--well, I'll believe it when I see it.

 

[ladelfina]

AFAIK Paulson's plan does not have any taxpayer upside..

naked capitalism: Why You Should Hate the Treasury Bailout Proposal
long post but worth reading .. Check out this alarming Paulson conference call report:

Yet as we discussed, the plan makes no sense unless the Orwellian "fair market prices" means "above market prices." The point is not to free up illiquid assets. Illiquid assets (private equity, even the now derided CDOs were never intended to be traded, but pose no problem if they do not need to be marked at a large loss and/or the institution is not at risk of a run). Confirmation of our view came from a reader by e-mail:

I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in.

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won't sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that's because he didn't want to admit that the government would just keep offering more and more.

another small segment:

Losses on the paper acquired are guaranteed. This is not a bug but a feature. The whole point of this exercise is an equity infusion to banks. The failure to be honest about it upfront will lead to a taxpayer backlash (or will lead to the production of phony financial statements for the rescue entity, which will lead to revolt by our friendly foreign funding sources).

Taxpayers have no upside participation.

There is no regulatory reform as part of the package. This would seem to be a minimum requirement for a donation of this magnitude.

There is no admission that deleveraging is inevitable. This plan seems to be a desperate effort to keep bad debt from being written down. Yet the sorry fact is that a lot of these assets simply will not be repaid.

There appears to be no intention to do triage. The financial services industry, on the back of an explosive growth in debt, has reached an unsustainable size. The industry will have to shrink. Yet the Administration does not address this issue; indeed, it appears it intends to forestall the inevitable. Regulators need to decide who will make it, who won't, and figure out what to do with damaged institutions. Instead, the reaction is ad hoc. The stunner was the contemplation of a possible merger between Morgan Stanley and Wachovia. As far as I can tell, the only thing the two firms had in common was coming into crisis on roughly the same timetable. For all I know, their IT systems are not compatible (many an otherwise promising bank merger has been scuttled over IT integration issues).

The short text of Paulson's draft plan is here:
http://www.nytimes.com/2008/09/21/business/21draftcnd.html

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

someone on Brad DeLong's blog wrote: "I would oppose this even if Jesus Christ himself were the Secretary"

 

[FinanceDude]

AFAIK Paulson's plan does not have any taxpayer upside..

naked capitalism: Why You Should Hate the Treasury Bailout Proposal
long post but worth reading .. Check out this alarming Paulson conference call report:



The short text of the draft plan is here:
http://www.nytimes.com/2008/09/21/business/21draftcnd.html

So, your post states that HE has the AUTHORITY to structure the plan? I don't think a Democratic controlled Congress is going to allow that......

 

[ladelfina]

FD, .. those are the words from the horse's mouth.

Sen. Jack Reed (D-R.I.) has proposed granting the federal government warrants to acquire stock in financial firms that profit from the bailout. This way, taxpayers would share in the gain if the industry recovered -- which, of course, is the whole point of this exercise.

E. J. Dionne Jr. - Improving Paulson's Cure - washingtonpost.com

Did you see anything about warrants in Paulson's draft?? I didn't.
This is NOT like the RTC.. see the naked capitalist post. The message is "trust me and only me with $700 billion.. 'at any one time' " That is an amount more than the size of the entire economy of Turkey, and closing in on that of Mexico or Australia.

 

[FinanceDude]

FD, my post does not state it.. these are the words from the horse's mouth.


E. J. Dionne Jr. - Improving Paulson's Cure - washingtonpost.com


Did you see anything about warrants in Paulson's draft??

There will be another 100 drafts of this legislation before it's watered down and signed.

Paulson is a Goldman Sachs guy. If there's ANY WAY for the govt/taxpayers to make money at it, he'll figure it out.

 

[samclem]

Ladelfina wrote:

Quote:
Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

someone on Brad DeLong's blog wrote: "I would oppose this even if Jesus Christ himself were the Secretary"

Of course, this phrase is just boilerplate and means absolutely nothing. Neither the legislature nor the executive branch can tell the courts what they are "allowed" to review.

 

[ladelfina]

you did mean..

Paulson is a Goldman Sachs guy. If there's ANY WAY for Goldman Sachs to make money at it, he'll figure it out.

n'est-ce pas?

sam, why does boilerplate (assuming it is) = meaningless? This is a short document so forgive me if I assume it is there for a reason. If Congress passes an Act, then that is the new law that the courts have to follow. If it includes immunity, then that's also what they have to follow... unless they are going to overturn the whole thing as unconstitutional. It seems pretty clear to me what Paulson wants: a completely free hand to run the markets and buy and sell as he chooses, with a $700 billion piggy bank.

p.s. GS is only standing now because they pioneered the use of this derivative crap, and then sold much of it off to greater fools. This looks a lot like round 2.

p.p.s. a blog trying to assess the legal aspects is here:
http://fabiusmaximus.wordpress.com/2008/09/21/paulson-plan/
(N.B. I have never read this source before and need to put off reading the above link as I have something on the stove!)

 

[samclem]

you did mean..

sam, why does boilerplate (assuming it is) = meaningless? This is a short document so forgive me if I assume it is there for a reason.

It's there because it doesn't hurt anything and looks imposing. I'm sure it effectively prevents review by the Post Office IG, and maybe it is intended to discourage review by State courts, but there's no way that Congress or anyone else can pass a law that is not subject to judicial review. If such a thing were possible this handy clause would appear in every law and the SCOTUS would be unemployed.

 

[Independent]

So, assuming the bailout goes through, what happens to the value of homes?
The way I see it, credit scores needed to buy a house should shoot up about 50 points. If people can't get loans, people can't buy houses, if people can't buy houses, people obviously can't sell houses. Values must drop in order for people to be able to qualify.
Will only the very wealthy be able to buy and sell?
What will it take to fix things? A good answer may win you a Nobel.

Middle income people were buying and selling houses long before the advent of liars' loans and interest-only ARMS.

Prices will fall until "average" people can afford to buy at terms that allow the borrower to repay the loan and lenders to make a profit.

 

[Art G]

Middle income people were buying and selling houses long before the advent of liars' loans and interest-only ARMS.

Prices will fall until "average" people can afford to buy at terms that allow the borrower to repay the loan and lenders to make a profit.

Except you may be assuming that middle income people have decent credit. House prices will fall, but to where? In California, they'd have to freefall. What was the average price on a home in LA 20 years ago?

 

[samclem]

Except you may be assuming that middle income people have decent credit. House prices will fall, but to where? In California, they'd have to freefall. What was the average price on a home in LA 20 years ago?

They'd probably fall pretty far*--to exactly where the market, undistorted by gobs of risk-free money dumped into it by Uncle Sam, would dictate. This would accomplish the "affordable housing" goal that so many people say they want, but it does it fairly and prudently, with everyone paying getting the risk they are being paid for.

*This general drop in prices would, of course, exclude Honolulu, where prices can only go up, Up, UP and any downward trend is a hoax.

 

[Art G]

They'd probably fall pretty far*--to exactly where the market, undistorted by gobs of risk-free money dumped into it by Uncle Sam, would dictate. This would accomplish the "affordable housing" goal that so many people say they want, but it does it fairly and prudently, with everyone paying getting the risk they are being paid for.

*This general drop in prices would, of course, exclude Honolulu, where prices can only go up, Up, UP and any downward trend is a hoax.

Should be, except hardly anyone will be able to get the loan, and those who can, won't be able to sell their houses for the same reason. It'll be a trickle up effect.

 

[samclem]

Should be, except hardly anyone will be able to get the loan, and those who can, won't be able to sell their houses for the same reason. It'll be a trickle up effect.

So "hardly anybody" will be able to live in California? If the loan-to-true-value ratio is right, lenders be there. As soon as the prices come down to the levels they should have been all along, there will be buyers.

They don't cal 'em "corrections" for nuthin! (aside from the marketing spin of the word)

"No one goes there no more, it's too crowded!"
Yogi Berra, commenting on a popular St Louis restaurant;

 

[Art G]

Again, I half agree with you. Housing should be set at "market value" whatever that means, however, most people will still not be able to qualify for loans, so it won't matter. What you'll probably see are a bunch of people stuck in their houses, and those who can't afford the current payments will just file for the new whine tax credit, have their debt forgiven, and the taxpayers will help them make the payments for them.
The moral of the story, buy a house you can't afford, refuse to make payments and wait for the government to reset your value so you can at least pay taxes.

 

[Independent]

Again, I half agree with you. Housing should be set at "market value" whatever that means, however, most people will still not be able to qualify for loans, so it won't matter.

I don't follow this. In the olden days, bankers figured that you could handle a mortgage payment of about 25% of your income. The median income for a family of four is about $70,000. This converts into a 30 year loan of $247k at 6% or $235k at 6.5%. Sale prices would be about 125% of this if you're making a 20% down payment. So this is a market value for houses that median income families could afford.

Anybody with a steady income and a history of paying bills on time could qualify for a loan on these terms.

What you'll probably see are .... those who can't afford the current payments will just file for the new whine tax credit, have their debt forgiven, and the taxpayers will help them make the payments for them.
The moral of the story, buy a house you can't afford, refuse to make payments and wait for the government to reset your value so you can at least pay taxes.

I can agree with this part. If we have the gov't bail out people who make "dumb" decisions, we can expect that what used to be "dumb" is going to become "smart".

 

[HFWR]

I don't follow this. In the olden days, bankers figured that you could handle a mortgage payment of about 25% of your income. The median income for a family of four is about $70,000. This converts into a 30 year loan of $247k at 6% or $235k at 6.5%. Sale prices would be about 125% of this if you're making a 20% down payment. So this is a market value for houses that median income families could afford.

You can't buy a McMansion for that! Yet...

Or, you could buy a house for $113,000, re-fi until you get to 5.5%, then have a $563 house payment. Worked for me...

 

[Gone4Good]

Paulson is a Goldman Sachs guy. If there's ANY WAY for the govt/taxpayers to make money at it, he'll figure it out.

This is likely true, only his goal isn't to make taxpayers money. His goal is to save the [-]world [/-] financial system. Bernanke gave up the game when he explained to Congress today that "there are two prices for these assets, the fire sale price (which is the current market price) and the hold-to-maturity price." The government is looking to pay the "hold-to-maturity" (read higher) price.

 

[Gone4Good]

What will it take to fix things?

Equilibrium pricing . . . ta-da (although I think someone else already claimed the Nobel for that little discovery).

 

[HFWR]

Al Gore?

 

[Art G]

I don't follow this. In the olden days, bankers figured that you could handle a mortgage payment of about 25% of your income. The median income for a family of four is about $70,000. This converts into a 30 year loan of $247k at 6% or $235k at 6.5%. Sale prices would be about 125% of this if you're making a 20% down payment. So this is a market value for houses that median income families could afford.

Anybody with a steady income and a history of paying bills on time could qualify for a loan on these terms.



.

I'm not sure how back your "olden days" goes, but in the olden days, there were no credit cards, nor were there cable bills, day care, car leases, cell phone bills; all the things I like to call "monthlys'". The things that never get paid off. In other words, you may have a good job (whatever the heck that means anymore?), but still not be able to qualify for a home loan because you have a late pay or two on your cell phone bill. The olden days didn't have credit scores.

 

[Independent]

I'm not sure how back your "olden days" goes, but in the olden days, there were no credit cards, nor were there cable bills, day care, car leases, cell phone bills; all the things I like to call "monthlys'". The things that never get paid off. In other words, you may have a good job (whatever the heck that means anymore?), but still not be able to qualify for a home loan because you have a late pay or two on your cell phone bill. The olden days didn't have credit scores.

Okay, my personal "olden days" go as far back as the mid-70's when I bought my first house for 10% down, with private mortgage insurance, and a fixed 9% 30 year loan. It cost 2x my annual salary. People had credit cards and day care. People borrowed money to buy cars. We didn't have cell phones, but we did get bills from Ma Bell. I didn't have a "late pay or two" on any of my "monthlys".

I don't see any financial evidence that it's harder for people to live within their means in 2008 then it was in 1976, with the exception of housing. I believe that house prices have gone up faster than incomes, and that's the correction in prices that needs to occur.

It's possible that people today are more willing to go into debt so they can "have it all, right now" than they did then. So when they get to the point of buying a house (often the last big purchase) they are already over-extended. But I don't know how to prove or disprove that.

 

[Art G]

Oh it's much tougher to live within your means, because people consider so many more things to be necessities. In the mid 70's, you may have had a couple of tv's, but you didn't have a computer and laptop. You didn't have a cell phone or the bills that went with it, including texting which according to my kids is mandatory, and the Blackberry. If you had kids then, you didn't have nearly the kid's fees you have now for every activity they're involved in because as kids, we just went outside and played (sheesh I'm sounding old). With the computers you also have your internet bill, and with the tv's you must have cable. And as you point out, you must have it and you must have it now, so just add it to the credit card. Oh, and don't forget about the family vacations. Gotta take the family to Disney World before they get too old to appreciate it, and don't forget the cruises. In my neighborhood, I was shunned because I didn't buy my kids a horse! And as I mentioned, way back in the 70's, they didn't have credit scores. You met with your banker and explained how you could afford the loan, and there was a chance you knew the banker personally.

Oh yeah, and in my city, houses have definitely not risen much in value. Welcome to Texas.