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Old 12-01-2007, 08:37 PM   #41
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Let's dig for that pony!

Are there more home owners or more first-time buyers?
Sure there are more home owners. But what % of those home owners are downsizing in any given year? Seems like those are the only ones hurt.

What difference is it to me if my house (on paper) goes from a market value of $400K to $350K, especially if I'm not selling? And if I am selling, well the house I'm buying dropped from $400K to $350K also. Heck, I save on realtor fees - it's gravy

Yes, if you over-extended yourself and are forced to sell and are going to rent afterwards, you are hurting. For most of the rest of us, I don't understand the fuss.

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Old 12-01-2007, 08:44 PM   #42
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What difference is it to me if my house (on paper) goes from a market value of $400K to $350K, especially if I'm not selling?
Like I said, two things:

1) The wealth effect. People spend less when they feel less rich.

2) Less equity extraction. People have been spending via home equity loans.

Both of these will potentially ding the economy. Now, add that to a credit crunch where both consumers and businesses will find it more difficult and more expensive to take on debt. The current bank write-downs are just the first symptom of a potentially nasty disease.

But, you're right that conditions will favor buyers and investors with lots of cash.

Also, if your home is worth less than your mortgage, you tend to both feel bad and consider walking away from the house....
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Old 12-01-2007, 08:55 PM   #43
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Like I said, two things:

1) The wealth effect. People spend less when they feel less rich.
OK, some will see that from an emotional viewpoint. Again, it probably does not make real sense, unless you are downsizing. Maybe I feel a bit more immune to this as I don't bother to count my house equity in my 'net worth' - since I can't get an EOD or EOM quote on it at a click of the mouse, I just think of it as a little 'back pocket' insurance (if I downsize or reverse mortgage) on my SWR.

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2) Less equity extraction. People have been spending via home equity loans.
Yes, it will have an effect there. In the long run, I'm not sure that is a bad thing. If people never learn the dangers of over-extending, then why not always over-extend? That will lead to a super-bubble someday.

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Old 12-01-2007, 09:02 PM   #44
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Maybe I feel a bit more immune to this as I don't bother to count my house equity in my 'net worth' - since I can't get an EOD or EOM quote on it at a click of the mouse, I just think of it as a little 'back pocket' insurance (if I downsize or reverse mortgage) on my SWR.
Agreed. For some on this board, it will be easy to ignore -- as long as it doesn't spread beyond home values. But understand that home equity represents most of America's net worth. The value of all the houses out there is $21 trillion. 160% of GDP. A large drop will have a serious and long-lasting effect on every aspect of our economy.
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Old 12-02-2007, 01:13 AM   #45
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The problems extend well beyond subprime. I think it was Bill Gross who used a plankton analogy for subprime. Once the plankton dies, the entire ecosystem is affected. The subprime lenders are already dead. The Alt-A lenders are near death. Even the GSE's are hurting. They need to raise capital to meet their capital requirements, and that new capital is expensive in this environment.

But those are all first- and second-order effects. As brewer points out, an extended credit crunch would choke the economy. And combine that with depressed consumer demand, and you have a potentially lethal combo.

If a large number of ARMs were allowed to reset, there would be an increased default rate. Most of the current focus is on the new wave of bank write-offs that would lead to.

But that would also dump a bunch of REO inventory on an already saturated market. That would drive down prices for everybody, and we could start to see lots of "prime" mortgages upsidedown. This thing goes all the way up the food chain.
But here is my problem with any 'bailout'.... why doesn't the bank or other entity give the borrower a break IF IT IS IN THEIR INTEREST.... I mean, if I had lent you money at 5% and you could not pay 7%... then can we agree on 6%? Could you still pay? If not, then maybe you can continue at 5%... I would rather have a 5% interest rate than a repoed house..

And since I made the loan (or bought it), then I should be the one to suffer my bad decision..

Some of the problem is that home prices had gone up at a higher rate than they should have BECAUSE OF CHEAP MONEY... and now the home prices have to correct back to where they should be... but will not if there is a bail out... so to me it is just kicking the can down the road... the correction will happen eventually...
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Old 12-02-2007, 07:23 AM   #46
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To the extent that these loans have been securitized and sold off to investors, it is no longer the lender's prerogative to renegotiate the terms of the loans. I am not familiar with what is presently being proposed in terms of a bailout, but if the government is suggesting that securitization trusts be denied the ability to exercise their remedies for the "greater good," this would be a truly astounding move.
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Old 12-02-2007, 09:39 AM   #47
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To the extent that these loans have been securitized and sold off to investors, it is no longer the lender's prerogative to renegotiate the terms of the loans. I am not familiar with what is presently being proposed in terms of a bailout, but if the government is suggesting that securitization trusts be denied the ability to exercise their remedies for the "greater good," this would be a truly astounding move.
I read some of the articles to see what was being reported....

This seems to be the action that is being proposed... that the loan servicing company makes the call, not the actual owner of the loan... and the article said that there would not be gvmt money...

There were complaints from some that a blanket move would mean that there would be some people who can actually pay the higher rate get a break... and why would they want to do that.. they want their investment back...

And it is hard (impossible) for the gvmt to change a contract after the fact... so it seems like a lot of wind being spent for something that might not happen..
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Old 12-02-2007, 10:16 AM   #48
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My biggest problem with all of this isnt that homeowners who made bad decisions might get bailed out.

Its that speculators that bought two or more homes that arent their primary residence might enjoy the same bailout benefits. I sincerely hope they restrict this to loans on a primary residence only.
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Old 12-02-2007, 11:01 AM   #49
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And it is hard (impossible) for the gvmt to change a contract after the fact... so it seems like a lot of wind being spent for something that might not happen..
Yup, I think you've hit on the hitch in the plan. Work-outs involve contract modifications. Massive automated work-outs are unprecedented. It'll be interesting to see how (or if) they actually implement this.
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Old 12-02-2007, 11:49 AM   #50
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Yup, I think you've hit on the hitch in the plan. Work-outs involve contract modifications. Massive automated work-outs are unprecedented. It'll be interesting to see how (or if) they actually implement this.
Just guessing, but I don't think the gummint will end up imposing anything on anyone. Remember, we are talking about a republican administration that hates gummint and wanted to privatise SS. And I think Sec'y Paulson is smart enough to know that if you piss in the securitization punchbowl this time, nobody will be willing to get a glass of punch for a long, long time.

What I really think will happen is that the administration is trying to get everyone with a stake at the same table to talk things out. The gummint may nudge things along with an implied threat, but that's about it. What I think Paulson wants to end up with is a set of ground rules that everyine voluntarily agrees with. Right now, banks can modify their own loans at will when it benefits them to do so, but have very little leeway in modifying loans that are securitized, even when it would benefit the investors in the deal. If everyone agrees on ground rules for how securitized loans shouldbe modified if necessary, a lot of defaults will be avoided and a lot will be pushed out several years.
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Old 12-02-2007, 03:39 PM   #51
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Brewer...

You probably have seen how the CMOs are structured... I handled insurance trusts and some CDOs, but knew people who did the CMOs... some have HUNDREDS of traunches...

Now, this total risk has not been changed at all.. so there are some who are winners and some who are losers.... it is kind of hard to ask a winner to give up his 'win' to bail out the loser...

If you had bought an IO, then I would think that it would have some value as the interest rate goes up with only a certain amount of defaults... but if to many defaults then it might not be... but if you keep interest low, then for sure you lose..

We will see what happens... but I still think it should be 'the market' that fixes the problem without any bailout money from the gvmt... talk is fine, but $$$$$s are bad.
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Old 12-02-2007, 05:15 PM   #52
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Interesting thread. I find amusing Brewer's faith in the Republicans being anti-big government (War in Iraq? Illegal spying and evesdropping on U.S. Citizens' communications? Holding citizens without trial? Medicare drug hike is fiscally conservative? Not sure...) But I'm getting off topic here.

About bail-outs: the government has been screwing the citizens and bailing out cronies longer than anyone here has been alive. Just look at the depreciation of the dollar just in your lifetime. It's headed for zero, and then we will have an unpleasant time for all.

The biggest problem with government bail-outs is we're against them when they're for somebody else, but when YOUR ass is in a sling, of course the government should bail me out!

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Old 12-02-2007, 06:39 PM   #53
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Interesting thread. I find amusing Brewer's faith in the Republicans being anti-big government (War in Iraq? Illegal spying and evesdropping on U.S. Citizens' communications? Holding citizens without trial? Medicare drug hike is fiscally conservative? Not sure...) But I'm getting off topic here.
You've got to be kidding. I think those people are assclowns, but they clearly do not wish to stick their hands into the markets (civil rights, sovereign nations, torture, etc. are obviously another matter). But even these clowns have had it explained to them that something needs to be done. If they can get all the parties to agree on how loans can be modified, it reduces the chances that a real gummint bailout will be required. There will still be plenty of pain to go around.
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Old 12-02-2007, 06:43 PM   #54
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Ummm, you do know that US laws were originally written in part to allow defaulting debtors to have other options than debtors' prison, right? What would you like to do with those who default? 40 lashes and a year of hard time?
Indentured servitude until they make good on the bill suits me just fine.
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Old 12-02-2007, 06:46 PM   #55
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Old 12-03-2007, 08:39 AM   #56
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Wow.... this topic just keeps coming back to this forum it seems. But you will not find any name calling, inflamatory statements, or wishful thinking coming from me. Folks who inject such statements into this thread make themselves look foolish, and do not help their arguement, if in fact that was really their intention at all.
When you break this issue down all the way, it really has to do with individualism, vs. collectivism. Yes... I have mentioned this before, but it seems to bear out repeating again. individualism says, "What is best for me?". Collectivism says, "What is best for all of us?". While the above two statements seem obvious, some of the implications of it are certainly not.
So you have a bank that made an irresponsible loan, and a person that was foolish enough to accept it. We are assuming here that no coersion was being used (no knives, guns, kidnapping of family members etc) to make either party go for that loan. This was an individual's personal decision. Now you have thousands of such individuals decisions that are just as bad going on, that has led us to the subprime mess that we currently find ourselves in.
There are many here that have expressed the position that the govt needs to do something, because the govt inaction will cause banks to fail, people to lose their homes, and the economy in general will tank. All of these things are probably true. As least for the short term they will be. If the govt does intercede, and artifically "helps" this situation, a lot of that pain to the economy, and to individuals can be reduced or eliminated. However, there is no such thing as a "free lunch", even for the govt. When the govt steps in and "helps", it encourages more of the the "irresponsible" behavior that occured in the first place. Sort of like when a drug addicts parents give the child money "to help them" that they know will be going for drugs. In the short term it takes away their pain and suffering, but in the long run, it just makes things even worse.
If people in this forum still believe that the collective "all of us" (when they talk about the economy, jobs, etc) are more important than the individual's wants, then let me ask the following questions. Should the govt outlaw Mcdonalds and all fast food restaurants? The US would be healthier if that option was not available, and medical costs would go down. Should boxing be outlawed as a sport? A very large percentage of boxers have long term medical problems that are directly related to their time spent in the ring.
How about a question near and dear to everyone in this particular forum. Should the govt outlaw early retirement? The more people that we have in the workforce, the more taxes are being paid. The more taxes that are being paid, the more SS can be funded, and that helps out everyone... doesn't it? IMHO our democracy protects the individuals right to choose for himself. And sometimes those decisons are bad, even disasterous. Sometimes the problems are so bad, that it can affect larger things like the economy as a whole. But the fact remains, that I would much rather live in a system that allows my failure by my own hand, than a system that denys my right to choose because I might pick a bad road for myself. I am an adult.... I live for myself... and not for others.
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Old 12-03-2007, 10:10 AM   #57
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So, Armor, you don't use public roads? Think the military is an abomination? Can't stomach the thought of clean air regulations, drug purity standards, etc.?

I think this is not the thread for another "Atlas Shrugged" diatribe.
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Old 12-03-2007, 12:59 PM   #58
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I agree with Texas Proud that home prices have been artificially inflated because of subprime loans. This will eventually correct itself. Home prices tend to go down slowly, but this correction will take place slightly faster this time because of the huge number of foreclosures. When an appraiser goes out obtain comparables for a house that has sold, there is a good chance that he may have to use one of the foreclosures in the neighborhood to base his appraisal on. This will have a serious impact on prices, especially areas where there are a high percentage of subprime loans.

The problem though is this: Too many people went out and refinanced their homes with the inflated prices and cashed out. Many others obtained seconds on their home. Basically, homes were used as an ATM machine.

Many banks are reporting that people are now maxing out their credit cards, as they've used up all of the equity in their homes and have no where else to go for money.

IMHO, the problem with the artificially inflated home prices, is that Americans have borrowed more money than if the subprime money had never become available. I'm not referring to just the homes that were purchased with subprime money, but the resulting 1st and 2nd mortgages that people took out because of the "wealth effect."

Two-thirds of GDP is consumer spending. With so many having already taken all of the equity out of their homes and maxed our their credit cards, what will drive the economy? It was the housing market that helped prop of the economy after the dot-com bubble burst. What will serve to prop up the economy this time?

It's my belief that we are in for one of the worst recessions in U.S. history. In fact, it's probably already begun.

Another thing to take into consideration is to what extent this bailout and subsequent freeze on interest rates will help. The whole notion of a bailout is based upon the premise that people want to stay in their homes. When home prices drop 20% in some areas and people are upside down on their mortgage anyway, with huge payments and rental prices going down, many will elect to walk away from their mortgage responsibility. What will they have to lose, but bad credit for 7 years?

Let's face it, right now the U.S. Treasury, banks, securitization trusts, and federal and state governments are running scared and have a very good reason to be. Many of these subprime borrowers have bad credit and are not the most responsible people in the world. What makes anyone think they will sacrifice to stay in homes with increasing negative equity?
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Old 12-03-2007, 01:27 PM   #59
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If people in this forum still believe that the collective "all of us" (when they talk about the economy, jobs, etc) are more important than the individual's wants, then let me ask the following questions. Should the govt outlaw Mcdonalds and all fast food restaurants? The US would be healthier if that option was not available, and medical costs would go down. Should boxing be outlawed as a sport? A very large percentage of boxers have long term medical problems that are directly related to their time spent in the ring.
How about a question near and dear to everyone in this particular forum. Should the govt outlaw early retirement? The more people that we have in the workforce, the more taxes are being paid. The more taxes that are being paid, the more SS can be funded, and that helps out everyone... doesn't it? IMHO our democracy protects the individuals right to choose for himself. And sometimes those decisons are bad, even disasterous. Sometimes the problems are so bad, that it can affect larger things like the economy as a whole. But the fact remains, that I would much rather live in a system that allows my failure by my own hand, than a system that denys my right to choose because I might pick a bad road for myself. I am an adult.... I live for myself... and not for others.
Maybe you should take these musings to your own new thread instead of perpetually inserting inflammatory strawman arguments into a fairly straightforward discussion about the govt's attempt to influence the subprime mess.

But you can do it without me.
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Old 12-03-2007, 01:44 PM   #60
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Another thing to take into consideration is to what extent this bailout and subsequent freeze on interest rates will help. The whole notion of a bailout is based upon the premise that people want to stay in their homes. When home prices drop 20% in some areas and people are upside down on their mortgage anyway, with huge payments and rental prices going down, many will elect to walk away from their mortgage responsibility. What will they have to lose, but bad credit for 7 years?
A few quibbles:

- Any freezes as being suggested would only be for people who have kept current on their loans and want to stay in the house. Otherwise, its going to the courthouse steps, if it hasn't already.
- Many people are very happy living where they are and will stay there if they can keep up with the payments. Others won't be willing or able to take a loss by walking away (sunk cost fallacy at work here on a grand scale). Personally, I don't care what my house is worth. I only want to live there.
- Rents in many areas are going up, not down. The people who used to be buying houses for the first time now are shut out and must rent at the same time that many formers owners are no longer owners. Obviously this varies considerably by market.
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