The Housing Bill: Uncle Sam Is Moving Into the Spare Bedroom

Well, over the weekend the Housing Bill was passed by a 72-13 vote in the Senate. Now, we wait for President Bush to sign and all will be fixed it seems. Yeah right !

It must have been an interesting conversation that the Senators had when they discussed how the U.S. government would now be partners with homeowners in their home’s future price appreciation, as long as they take a deal they cannot refuse. To be honest, I think it is unconscionable that the the U.S. government is now going to “own” a portion of the greatest asset that most people will ever have.

Of course that is only after lenders “volunteer” to write-off a portion of what they are due to help out borrowers. Also, with that, Senators also asked Santa for a new train set and a puppy for Christmas. The Wall Street Journal is reporting:

The centerpiece of the legislation is a program of up to $300 billion of FHA-insured mortgages to help refinance cash-strapped borrowers into affordable loans. The program would rely on lenders voluntarily writing down the value of a distressed loan for the homeowner to qualify for the new FHA-backed loan, and in return borrowers would have to share future price appreciation with the federal government.

This should do wonders for the dollar. Already the rest of the world is looking at us with bewilderment. If the U.S. were a publicly traded company, aside from the stock being in the toilet, the bonds would be rated JUNK!

What are they thinking? How is the government going to add another $300 billion to the tab? Between Iraq and this mortgage mess, this administration has racked up more expenses in the shortest time then can be remembered. The truth is that it is Bush’s Administration who is drunk and has been out all night partying with Wall Street, War Street, Energy Street and Reckless Spending Street.

The moral hazard has just entered the red zone gang. Cronyism at its best - and maybe a touch of nepotism as well.

Maybe there is a plan within this somewhere, but I don’t see it. Do you?

Comments

[Smalltownba...:]

My problem is not the sharing of the gains with the Government. That is a fantasy that will never materialize. My problem is that each of us who does not participate in the program will share in the tax burden of the shortfall due to prices continuing to fall over the next 2+ years and the fact that these mortgages will still fail in a high percentage of cases because the mortgagors could not afford what they were buying to begin with.

2008 Jul 28 09:04 AM

[RWCMom:]

Why are we penalizing the people that were ripped off in the first place instead of the lenders who knowingly made loans to individuals who could not be expected to be able to afford the loans as interest climbed to expected levels. If a person cannot afford the going fixed rate loan, there is no reason to expect that they will be able to afford the variable rates to come. These are the same people that do not have IRA's or 401(k)s to get them through retirement, for the most part. They are the ones that will be dependent on Medicare in their old age. Instead of No Child Left Behind, we should demand that individuals pass a class in Financial Literacy before they leave high school; much more valuable than algebra for most.

2008 Jul 28 09:28 AM

[Stephen Met...:]

It would be nice, for once, to read an article on economic policy that did not blame the Bush administration. It seems to me that Congress gave Mr. Bush little choice but to go along with the bailout. Look at the final vote, Mr. Horowitz! What we have on the financial side is a systemic issue, the fallout of far too much liquidity in the economy from 2003 on. I challenge anyone, faced with the need to soak up that liquidity, to do other than what people did--desperately look for someone to borrow. Did they go overboard? Sure, but it would be great not to sound so high-minded in cleaning up the mess. Where we go from here with monetary policy should be the focus. It seems to me that Milton Friedman's advice is right to the point--focus on the money supply and not interest rates. Instead, controls, regulations, and more controls is the path being taken. Back to the good old days of FDR.

2008 Jul 28 09:32 AM

[OldLimey:]

Mr. Metzger: as a foreigner, it doesn't fall to me to criticise your president in a public forum. But I am confused about your comments. In your first sentence you berate writers who question President Bush's economic policy. In your fourth sentence you lay the blame for the present systemic crisis on too much liquidity since 2003, and later in your post go on (quite rightly in my opinion) to highlight the importance of controlling money supply more closely. Did the explosion in credit since 2003 and de-emphasis of money supply by the Fed (which cannot really be characterised as truly independent of the government in power) not happen on President Bush's watch? Has this loose monetary policy not run in parallel with a profligate fiscal policy. (Yes, I could be describing the UK!)

2008 Jul 28 09:57 AM

[flashrob:]

THE HOUSING BILL...AND "WHY" IT "WON'T DO MUCH!"


let's say you put 20% down on a 500,000 house...(you're in for 100,000)...you did this because the marketeers (didn't realize that the chain-letter was about to run out of buyers) told you that your property would appreciate 20% in one year and your house would be worth 600,000, giving you a "theoretical&quot.... profit of 100%. (you invested 100k of your own and your property appreciated 100k). That WAS THE PLAN, however the Ponzi scheme ran out of new buyers...and your house dropped 30% from the 500k original price...Now, your house is only worth 350k...meaning you LOST YOUR WHOLE 100K downpayment (all your money) AND 50K OF THE BANKS MONEY...

the above is a rough but reasonable example of what's happening to MANY across the country.

Now, here's the RUB...with the Proposed Housing Package...

1. It will give you "renegotiated&quo.... lower payments...SO YOU DON'T GO INTO FORECLOSURE...

2. BUT THE PROBLEM IS: THOSE NEW LOWER MORTGAGE PAYMENTS ARE STILL BASED ON A "500K" HOUSE...that is NOW WORTH ONLY 350K (and headed LOWER)...

3. So, you'll take THE NEW LOWER MORTGAGE PAYMENTS...so you don't have to move ahead of time...but what is the "investment incentive" in this for you...

your house WILL NOT RECOVER your 100K LOSS...THE BANK is just FORESTALLING ITS 50K LOSS...which will keep INCREASING...

4. So, you are in a NO RECOVERY situation...AND SO IS THE BANK (fnm, fre, or OTHER).

5. This is JUST A STALL...not a REAL SOLUTION...

6. You, will move and DEFAULT when it's convenient OR YOU HAVE TO (job transfer/loss, etc.) ...BECAUSE YOU'LL WILL NEVER RECOVER YOUR 100K LOSS...

SO, THERE IS "NO REAL INCENTIVE FOR YOU TO STAY" IN A HOUSE that
you will NEVER MAKE A PROFIT ON.

7. REAL ESTATE has to TANK TERRIFICALLY to LEVELS probably well more than 50% to even have a chance of garnering a SIGNIFICANT NUMBER NEW BUYERS to turn the recovery tide.

...and this HOUSING SUPPORT BILL ...trys TO ONCE AGAIN FORESTALL ...

EVERYONE "TAKING THEIR MEDICINE!"

"SIGNIFICANT LOSSES FOR BOTH BORROWERS AND LENDERS...all those who were

part of the REAL ESTATE RUNUP PONZI (CHAIN LETTER) GAME...

all this scheme did was PUT THE ENTIRE ECONOMY AT RISK...and in disruption...

screwing up the "rest of the population" who were NOT MUCH INVOLVED or aware

of THE BANKS GAMBLE...on what looked like "EASY MONEY" instead of Old BANK style CONSERVATIVE MODEST REVENUE STREAM!

HOUSING HAS TO "TANK" REALLY BIG TIME ...LIKE OVER 50% for a chance of recovery...(to garner a sufficient number of buyers).

both homeowners and LENDERS are in DENIAL about this AND PUSHING GOV TO SAVE THEM AND THEIR PONZI SCHEME FAST EAST MONEY...

AIN'T GONNA HAPPEN...

we go DOWN...you already know "your" house did...BUT THE "LENDERS" (BANKS) ARE STILL SCRAMBLING FOR A "MAGIC BULLET!"

there ain't one...so the gov is doing the "get ready" to take MANY OVER...

FINANCIAL SECTOR...pretty much TOAST...for most!

flashrob

2008 Jul 28 10:46 AM

[thku4grace:]

Yeah, no political axe to grind here! Ha ha! Let's get a few facts straight here. Number one, mortgage speculation is hardly the doing of the Bush administration. Alan Greenspan has a hefty amount of responsibility here. He was apprised of the developing problem with sub-prime loans, and chose to not get involved in the free market. There is been no oversight of mortgage lenders ever. This could have happened during any administration. Second, it was the Bush administration that did an annual appeal since 2001 for Congress to reform Fannie Mae and Freddie Mac. Since these GSE's buy most mortgages, do you think the situation would have developed as it has? The problem is that government regulatory powers have to be balanced between what is needed to keep markets functioning properly and allowing for innovative solutions. Congress has a tendency to do nothing or far too much, like the current bailout. My biggest problem is the fact that I don't currently own a home. Some may say that's a blessing. I disagree. While homes will get cheaper, as they should, I will bore the added tax expense of bailing out people many of whom bought outside of their means, and others who out and out lied about their income in order to qualify. Both cases were of people greedy to get into a real estate market that they thought would go up indefinitely. Many buying beyond their means knew they could potentially see their mortgage payments ratchet up considerably but thought they could sell into a great market and pocket a good return. This is what I'm paying for. Additionally, I will pay dearly to buy into a home loan due to the need of financial institutions to make up for what they are losing on these home loans. The spread between mortgage rates and comparable treasury securities will expand exponentially for years to come. There isn't any way around this. So I repeat, if you don't yet own a home, you're screwed!

2008 Jul 28 11:17 AM

[tommytwotimes:]

Don't be mistaken! This bill is not made for any homowners, it is for the banks and politicians which seem to be blending together quite well.

They are getting one last dig on the taxpayer's money and at the same time...... securing Obama's election.

Oh yeah, when the gov't owns all the property and the banks....don't they call that communism?

Here is an idea to help our baffled govt solve the economic problems.... Bring the troops home and have them secure OUR borders (a hundred thousand should do just fine). Mine, drill, windmill, and solar all the energy we need to achieve energy independence. All while putting money and jobs in our pockets, not with all the guys who want to kill us.

2008 Jul 28 11:28 AM

[User 233593:]

@flashrob

You're wrong. The new loans are only 90% of current market value.

Using your example, they would only finance 90% of 350k, or $315k.

Hence the reason why lenders are going to be completely unwilling to writeoff huge losses.

2008 Jul 28 11:31 AM

[soni:]

The title of the article, and Mr. Andrew Horowitz's narrative of this last weekend's shindig at the White House sure made me chuckle. To top it all, Flashrob's analysis was pure joy! What a wonderful start to my week. I have no answers nor comments, save one: BOTH parties (borrower and lender) should be penalised, by the Lone Star Ranger and his side kick!

2008 Jul 28 11:59 AM

[mixter:]

Screw the damn fool government. They have been screwing responsible tax payers for years! The ACLU filing law suits accusing lenders of "red lining" certain areas of cities, with regard to lending practices, resulted in severely relaxing loan requirements, such as the mere detail of being able to afford to make payments. Why doesn't the friggin government just buy everyone a house, and furnish it with flat screen TV's, etc. and get it over with. Screw the people who saved all of their lives to pay cash for a house or make a sizable down payment. They are just fools trying to be self reliant.

2008 Jul 28 12:44 PM

[cfish:]

@233593:

And what do you think determines the current market value when there isn't a market? All those models failed to do so. Banks can easily find someone to appraise them at full value of $500k and scam the tax payers money to bail them out.

If banks let houses go into foreclosure, it will lose about half of the loan balance when all said and done. Any loss smaller than that is better. Especially if they can bribe people to appraise houses at higher value.

2008 Jul 28 01:25 PM

[tommytwotimes:]

If banks wrote down all their loans to 90% of the actual values of properties, it would be a better deal than having them all foreclose. Why do they need a bill to tell them that? They are banks, they are supposed to be good at math.

2008 Jul 28 02:38 PM

[Professiona...:]

The illustration above with the $500k hoome in which a buyer put down $100k in cash is not the kind of homebuyer that is in trouble right now, for the most part. Most if not all of the homes in trouble had close to zero equity in them back when thee mortgages were issued. That is precisely why so many people are sending the key to the bank, since they have invested zero of their own money in the home to date.
A more realistic example of the $500k home.
(1) Home is purchased in 2006 for $500k, with $400k in mortgage and $80k in second mortgage, to avoid having to pay PMI (Standard trick that everyone did). Equity stake is therefore $20k.
(2) Home prices tick down 4% in 2007. Equity is already wiped out, but homeowner stay in house, figuring that market will turn around shortly and they will be able to sell at a profit as originally anticipates.
(3) Home prices fall hard in 2008, say 20%. Home now worth $384k. Prospects for recovery look bad. So homeowner sends keys to bank and walks away. Net: got to live in a nice house for 3 years at a cost of $20k of equity capital.
(4) Wait, govt steps in. Forces lenders to write off loand above 90% loan-to-value. Since home is worth $384k, 90% of that is $345k. Second mortgage issuer gets wiped out 100%, losing $80k. That should have been written off by now anyway. First mortgage holder therefore takes hit from original $400k loan to $345k, i.e. $54k. Government now issues loan to you for $345k, 30 yr fixed rate. Not clear so far if the govt pays some of that $54k loss to the mortgage originator to entice them into doing this deal. But net-net, you got a big bonus for overleveraging yourself and living beyond your means.

2008 Jul 28 03:03 PM

[tommytwotimes:]

My thoughts exactly, but it doesn't look that good when I write it down cause I'm not a "professional analist". Hey, there seems to be some loose ends to the gov't buy out deal. They also share profits? Til when? Giving the keys back sounds easy and economical but will gov't buy out really save people? It sounds like a trap. I would still walk a way. Remember the guys who drafted this deal are the same ones who let it spiral out of control. I would not bite on this hook.

2008 Jul 28 04:29 PM

[kurt walter:]

American's talk freedom and capitalism. But, the congress really likes socialism.

2008 Jul 28 07:39 PM

[elwind45:]

a

2008 Jul 28 10:03 PM

[noserope:]

All this speculator talk is off the mark. Here in New Jersey 20% of the population got replaced by Mexicans because we're being pressured out in favor of cheaper illegal labor that will liv e 20 to a house. I bought my house for $73,000 at 12% back in 95'and refinaced it multiple times because I was told I could get a lower interest rate and lower payment and even get some money out. At closing the rate and payment was always higher, typically the wife already ran up the credit card so I had to sign to cover it. This last refinance we did to get out of a adjustable rate, We were promised a 6.2 mortgage and an $1100 dollar payment which turned out to be over $1300 at closing. the last refi they blamed a tax hike for the jack up in payments and said if we refied again they could make the payment lower. It turns out our taxes hardly went up at all. Anyway the mortgage got sold as is always the case and the new lender found the escrow was undercalculated as always seems to be the case and a new payment of $1752 was established. That is until the first of the year when it went up again to $1850. We got refinances because every time we were promised a lower payment and we beleived them. Why shouldn't we, the government deemed them trust worthy enough toderegulate them so you no longer need a lawyer to refi. The end result after five refies was that my loan did go down from 12% to 6.2 but at the same time my loan balance wwent up from all the closing costs and money out to $180.000. We got reassed at 238,000 by the town at the peak of the bubble which I contested back to $186,000. As part of my bancruptcy I had to have it reassed again. Now they say it's worth $90,000. Through out this roller coaster ride from hell it's been the town's master plan to sell my neighborhood to a developer through eminent domain. New Jersey law says they can only do that if there is blight so the town has manufactured blight to the best of it's ability so as to get big developer campaign contributions. In my case they went so far as to take back permission to start a home business. When the Kelo decision allowed house theft and stripped away the right of self determination over the disposition of property we own it made home owners nothing but paying house sitters. Which made the real worth of owning a home drop which began the cascade of home prices. The trillion dollar bail out won't help me. If lenders are to drop 10% off what I owe I still can't afford it. The bail out is to finance the politicians biggest campaign contributers and therefore indirectly the politicians themselves. It's all just a big scam to rip off regular folks like me who beleved what lenders told them that will still lose there homes and like tax payers who they see an oportunity to gouge

2008 Jul 29 09:33 AM

[tommytwotimes:]

Bon Jovi left Jersey in the late 80's. You should have followed him. And your whining about 20% mexicans? Try So Cal @ 60%. We bitch about the illegals who do our dishes, but we are way too cheap to pay a real citizen to do some work. If we paid double for lawn care and restaurants using citizens we wouldn't even feel it cause the money would stay in our country. You can give mexico a $100 or the US $200.

2008 Jul 29 11:21 AM

[noserope:]

60 is worse than twenty. When 90% of Americans don't want their homes given away by iminent domain for development or to be over run by 20 million illegal aliens yet we have these things our government has ceased to serve us. The Declaration of Independence says it is our duty throw off an abusive usurpatious government. And when politicians, developers and judges rationalize their house thefts by saying "the greater good is more important than the rights of the individual" that means that if you chopped them all up for their organs to preform the greater good of saving seven lives a piece you'd be guilty of nothing but giving them what they are on record as saying they want (like Dr. Kavorkian) and you would fulfilling the duty laid out in the DOI.

2008 Jul 29 02:31 PM

[bbzz24:]

Simple example: Joe Wannabe has taken 0% mortgage on $300k loan. The present value of his home is $200k. He's underwater with nearly $100k and wants bailout by having his mortgage marked to market ($200k). The lender (Angelo) wants to minimize losses and will settle for the highest between $200-300k. Here comes the government (aka Friends of Angelo). It will take the loan if Angelo makes a concession.
Since the Friends of Angelo are in congress, we can expect that the settlement price will be closer to $300k than $200k so Angelo can see some benefit of his friendships.
The taxpayer will be liable for the loan value above the fair home price value and the interest on the bonds the government will issue to fund that overvaluation.
The taxpayer is no friend of Angelo so he gets nothing positive. But if the taxpayer wants to change homes or buy a new one, he has to do it in a market with artificially pumped up prices. So the taxpayer is double screwed or bluntly said gangbanged by Angelo and his Friends.

2008 Jul 30 12:26 PM