Sunday, November 16, 2008

More Bad News to Come?

Anyone figure out why the upside down home owner must be saved rather than prosecuted? They got free and clear 100 to 400 thousand dollars out of their home. They weren’t stupid when they withdrew the equity and they certainly aren’t stupid by giving the house back to the bank. Now Congress is upset because the banks haven’t taken the bail out money and helped out the homeowner. You can’t accuse the banks of being stupid on this call.

The average bank robber gets a couple of thousand dollars and some prison time. Consider the housing bubble a bank robbery of massive proportions. The reality is, that not only wasn’t the money recovered, it was spent! Let's prosecute these liar loans as grand theft fraud.

In today’s paper they talk about these poor people that are losing their homes. From a realistic point of view they are only losing a mortgage not a home. In a lot of cases, they had more than one to lose. Kind of boggles the mind. One guy had 8 properties that are now in foreclosure. It’s not like you have to pay the money back, just give the bank the house.

What the government is trying to do with REO housing is rather pathetic. Imagine the Dutch government trying to keep the Tulip Bubble going? They could have discounted million dollar bulbs (in inventory) to 100k apiece and provided financing to boot. Such a deal!

The housing boom is over. Somebody’s hard earned money financed these dreams that went bust. There is a hidden story here. We know the money was spent. It’s not where it's suppose to be anymore and we know that also. Just whose savings are gone? Do you get the feeling that the really bad news, isn’t news ---just yet?

Copyright 2008 All rights reserved


Anonymous said...

This all makes me think of a relative several years ago. Came driving up in a new pickup. My brother said "you can't afford that" and the relative responded "I know it but takes them six months to repossess and I get a new truck to drive for six months". It's a real mixed bag out there and we're acting like it's not. I agree with your statements. This is being done to get votes ie keep the politician's job pure and simple. If they really cared about the economy, this would have been prevented in the first place.

Anonymous said...

I totally agree with you. All these idiots who went out and tried to buy homes they freaking new they couldn't afford should be imprisoned. Why am I having to pay for their mistakes. I've stopped talking to serveral neighbors knowing they are so idiotic. It just makes me so mad when I know each month the price of my home is going down because of these idiots. Well I'm keeping track and when the prices of their homes reach a number I like, i'm going to scoop it up to rent back to them. According to a survey conducted at this site. Prices will continue to drop at a horrid pace so that opportunity may be coming in a few years for me.

Anonymous said...

The FBI should arrest everyone that lied on their mortgage loan application! It is a federal crime to lie on your mortgage loan application!

Anonymous said...


The price of your house went up in the first place because of these idiots.

Anonymous said...

In a traditional bank robbery, the bank is 100% victim. With the mortgage issue though, it's more like mutually agreed destruction. Blaming only the homeowner is like blaming a irresponsible surgery patient for not healing properly after a botched operation. It takes two to tango here.

I'm of the belief that not everybody can properly understand the details of a home purchase; yes, sad, but some people are unteachable. Ninty-nine percent of us can, but 1 percent cannot. It is the mortgage brokers (it was THEIR money after all) job to either put them in a loan they -can- afford or to tell them to take a hike. Rather than performing their professional duty, many mortgage brokers salivated when the "unteachables" walked into their office.

For every so-called idiot with a pickup, boat, etc..., I can find somebody who is losing their house due to a lost job or, usually, medical expenses.

People who outright lied on their loans (without the insistance of mortgage brokers) should be prosecuted, but I think we'll find most people simply weren't asked.

This doesn't mean I think the government should bail them out; far from it. However, I find the bailout of the banks FAR MORE offensive because the banks, being money experts, knew -exactly- what they were doing.

Anonymous said...

If you fall into the trap of getting suckered into a bidding war on a piece of garbage contemporary piece of art, and you win, and a year later want to sell but just realize that you were HAD, go back to the auction house for a refund, or the government for a bail out - they will both laugh their asses off at you for being so damn stupid. This goes for the buyers, and the banks that were idiotic enough to lend money in excess of value.

Anonymous said...

It is offensive that banks could even consider asking for money for this mess. I worked in lending, it is the banks JOB to screen clients and evaluate the loans being made. If they made loans on these overrpriced dumps, like the shacks in California or worse Florida for 700K that they cannot sell for 150K, well that is simply tough. If they didn't know that these places were NEVER worth that kind of money, then they deserve to eat it. These bankers need to tough up and act like men, they certainly knew how to be cocksure when they were writting the loans and quickly selling them off weren't they? It is disgusting, and I don't want to pay for it.

Anonymous said...

That person is right. I grew up in Southern California. Places like Santa Monica and Culver City are drowning in negative equity in "Leave it Beaver" type neighborhoods with 1950s houses that for lack of phrasing cannot be given away. How can people be so damn stupid to ever consider basic houses for over 300K or worse 500K anywhere? How? Greed. And where the hell is the regulation on banking that they were allowed to throw such money out the window so freely? It was sheer insanity to me that they did not realize this was coming, yes they have to eat it.

Anonymous said...

Well, this is another issue aside from affordability who would WANT a dump for outraigous prices? That is an idiot. You know what kills me, they keep manipulating the public buy the BS realtor line "renting is throwing your money away," LOL well you know what, for the past seven years after selling our house, I rented! And NOW I am the one without the 700K debt over my head. Suckers. No, I too do NOT want to pay for these greedy idiots. The only people that want bail outs are the one with buyers remorse, stupid bankers, and greedy realtors who pushed this crap on the public. It is just like the auto industry, they had a wild ride for too long and made a ton of money in the process. Do not come crying to me now that the "S" has hit the fan.

Anonymous said...

Blame, blame, blame. There is plenty to go around. Home builders, mortgage brokers, banks, lenders, appraisers, borrowers. It's a perfect storm, based on human nature and greed.

Let's amend the bankruptcy code to allow borrowers to "cram down" their mortgages to fair market value. Rewrite the loans and start digging out of the mess.

The we can start tackling Social Security and Medicare...and the defcit....and Global Warming....and Terrorism.

Do you really think McCain is sad that he lost? I bet he's secretely dancing a jig every day!

Anonymous said...

Hi. I agree with you... and I was one of those people who helped finance it. In mid 2007, I "discovered" the stock market. Because I had never had met with a financial advisor, I had amassed $300K in cash. The advisor said all these bad things about cash. So did the internet (Motley fool for example). I took her advice and made a nice portfolio of index funds - balanced out amongst asset classes. As you might imagine, so far I have contributed about $140K to "financing" these other people's homes. I am not happy.

Anonymous said...

Susieclue, you say when the prices bottom out you will buy and rent back to them? What makes you think these losers will pay you? I also agree that the prices were "ARTIFICIALLY" propped up to begin with. A HOUSE IS "NOT" Meant to be an INVESTMENT, Regardless of what all these Realtors keep telling everyone. A Home is Shelter "PERIOD"!!! Shut off the PROPAGANDA MACHINE (TV) Until you get an education.

Anonymous said...

It's "funny money". Fractional reserve banking system based (banks loan out 10-12 times their reserves... the money doesn't exist). Not as much money as you think will be lost from these defaults because most of the "money" is just numbers on a computer screen. Just need to change their balance sheet figures. Of course this crashes out all the value in the CDOs and MBSs and causes the cascade of CDSs defaults. It is all air and pretend anyway. Let it all blow away and lets get back to homes for 75k, cars for 4k, etc. Let the greedy, corrupt and ignorant take their hard knocks. Cash will be king for awhile so the savers will be rewarded. People depending on their home equity, 401ks, pension plans, etc. for retirement... oh, well, too bad. This is your system, you helped to create it, you participated. Take your hard knocks.
Only thing that is important now is that we allow the purge to occur, reduce government, return to a strong dollar (by getting production and manufacturing and export going again), bring our military home and put everyone to work on infrastructure, etc. If we don't do those things and more... USA becomes a 3rd world country that China will outsource all of it's low wage labor to. Time is running out. If China, Russia and Japan and oil exporting countries stop buying our bonds and also dump their USD back into our economy, and if China buys gold and goes to a semi-gold standard and becomes the world reserve currency... say bye bye to USA. How much longer do you think they are going to tolerate us using their investment money for bailouts and other non-production non-profit activities. We are showing them that we are the biggest risk they have. Soon they will drop us. Everyone stopped buying US bonds due to inflation before Volker came in. Now they'll stop buying bonds due to deflation and insane fiscal and monetary policies. This is historical and is going to be an interesting experience. I don't know how to prepare or where to run for cover.

Anonymous said...

Well folks, it's pretty obvious isn't it? The average homedebtor, since '01, the last tech/IT recession, bought homes, witnessing the disconnect between the average rent and the average mortgage payment in the entire northeast corridor [ Boston to DC ] , So Cal, SF-SiVal, Miami, Phoenix, Chicago, etc. Perhaps 2/3 of the nation's populated regions outside of the oil patch (Houston/Austin/Dallas areas which hasn't had a RE bubble since their harding landing back in the mid-80s) and the Great Lakes rust belts were bubbling over.

Now, why is it that no one (meaning those outside of & like blogs) connected the fact that in a healthy economy, one can't have a housing run up without a corresponding demand in the various employment sectors? That was critical, as the IT/telecom sectors weren't replaced by other high paying work (sans hedge fund traders).

It was clear that a 2x rent ~ 1 mortgage payment, for much of the regions w/o much white collar job growth, was unsustainable. In essence, outside of the Texas triangle, there was really no better decently populated (with energy work) area worth buying a house for much of the 2000s. The rent to mortgage rate there is still near 1:1.

Jim in San Marcos said...

Hi Anon 1:32

I think you are going too far with Suziclue.

Your right about a home being the worst investment you'll ever make.

But when prices settle down, you will find that is it cheaper to own a house than rent one. The reason being, a renter can pick up and move on a moments notice an owner can't. You pay extra for that freedom. (buying and selling a house that doesn't appreciate can cost 5 to 12 thousand)

This is where the original idea came from of owning a home, it always was cheaper to own than rent. Right now that world has turned upside down

Rentals are a very good money maker if the price is right. 20% return on the initial investment isn't uncommon.

Anonymous said...

I'll tell you what it was like starting out in this decade... Your choices were A) live with your parents, B) rent a crappy apartment with noisy neighbors for $1,000/month, or C) rent from the bank, buy an entire house for $1,000/month.

If you go the bank and say "I make $25,000, how much house can I afford?" and they give you $200,000, you're not stealing.... I however am getting screwed because I saved and paid 50% down so I could actually afford the mortgage. Oh well, at least I didn't have a 401k...

Whose big idea was it to allow 0% down anyway? More to the point, why the hell did everyone vote them back into office?

Tyrone said...

They knew exactly what they were doing.
People lied.
Bail them out.

The focus for each of us should now be... what is the next step?

All of the mistakes, or accidents, or fraud have led us to this point. What's the next step to maximize capital preservation and/or % return?

Personally, I was out of the stock market last year near the peak. Dollars preserved, but now dollars are at risk(?). Got 20% into gold/silver, but what next? Accumulation of food? Will it get that bad?

Unemployment rising, GDP falling, states/municipalities in trouble, prices falling,... It's getting dicey.

Jim in San Marcos said...

Hi Tyrone

I like your point of lets not worry about what caused it, rather, what is the fix? That concept really irritated a previous employer I worked for, he wanted accountability.

I think that rental real estate might be the next frontier. Prices are still way too high right now. But if you can purchase a place for 100 times the monthly rental with 20% down for an investor loan, you might have a good thing going.

With the economy tanking, you would need deep pockets. I foresee the potential problem of having to forgive the tenant half of the rent over a two year period. Better to keep it occupied than referb and try to re rent.

The big short coming with this could be rent control. As with any position, government intervention could really mess you up if you took on several rentals. Don't be greedy and bet the farm.

I see deflation in the near future and severe inflation in the not too distant future-- say two years out. I'm due to be wrong on something here so be careful

Thank you for your post

Anonymous said...

Prosecuting the liars, including the mortgage agents, real estate apprasers, realators, rating agencies, investment bankers, as well as the loan applicants would go a long way towards finding a bottom. However, don't wait for this to happen, as it will not.

Art Vandelay said...

How about prosecuting poor spellers.

Anonymous said...

Anon in CA:
I agree with you Jim. Deflation for a few more years... then, after the government has exhausted all of its unusual solutions, it will put us into hyperinflation as a last stand resort to avoiding a depression and zeroing out of asset values. Cash will be king for a few years. Then you'd better take those dollars and turn them into some sort of wealth before the USD becomes worth less than toilet paper. Right?

Also, the only solution I see for owning income property in the future is to wait for the bottom (while you are very busy amassing as much cash as possible) and then buy rentals (as foreclosures or REOs) at the cheapest rate since probably 1950... buy them cash so they are free and clear. Then you'll be able to lower rents (if needed) with impunity. Right?

USD could become worthless. Best to have that money converted to wealth... rental homes that cash flow to you monthly and give you tax advantages. Right?

Of course, as you said... govt intervention with rent control could screw up the landlord's cash flow... but owning free and clear would be the best protection for that. Right?

Jim in San Marcos said...

Hi Anon in CA

With all cash you lose the 5 to 1 leverage with a 20% down bank loan. With the loan your return on investment is the rents minus expenses.

It wouldn't be a very good return on an all cash purchase. It would be a very good hedge against inflation.

Whereas if inflation takes off, paying off the bank should be very easy. Plus if you had an earthquake, your real loss is only 20%.

We can figure out what will happen in the future, the only problem is that the dates might not be what we thought they would be. Somebody said "Being right at the wrong time is the same as being wrong." So be careful

toeg said...

About ten years ago, when I applied for a loan to buy a condo, I had to prove how much money I made FOR THE PREVIOUS TEN YEARS, as well as provide documentation that could easily choke a horse. It seemed that the bank wanted to make sure I was legitimate before lending me the money.

Now I hear that most people over the past few years didn't even have to provide ANY SOURCE of income. EXCUSE ME?????? They don't even have to prove that they can pay the first month's mortgage and yet they get loans upwards of $500,000?????

And you blame the poor shmuck that was promised a house for a buck because that's all he could afford?? You guys actually have the gall to say that a person who never even finished high school and who has been making near minimum wage all of his/her life, can outsmart a bank loan officer!!!!!! I don't know if you're too stupid to even hear the idiocy you're spewing, or if you just don't like the term predatory lending, so you look for any scape goat so that the rich, fat cats who thought up these idiotic lending rules can go free, take the millions of dollars they stole from the American taxpayer (because WE will have to pay for their predatory lending practices), and go to the next Club Med vacation worry free.

According to your sorry theory semi-illiterate, minimum wage earner, is INFINITELY SMARTER than a CPA with an MBA who has been writing loans for thirty years!!! Pathetic. You deserve to be taken for a ride if you believe that bs.

These poor shmucks probably mortgaged their life away trying to keep their only shot at the "American dream" and now you want them to suffer even more. Wait, hold on a minute, your CPA banker friend is on the line from Jamaica. He wants to know when you're going to send him the rest of the 2 trillion dollars in bailout money you promised him. Seems his pedicurist has raised her rates and he doesn't want to be bothered writing a check.

Tyrone said...

You're absolutely correct about people getting loans that should not have. The classic example is the Strawberry Picker that got $720,000.

Jim in San Marcos said...

Hi Toeg

I think the thing you need to realize in our society, money is brains. If you have no money you are stupid.

No amount of intelligence in 2006 would sway a home investor. My views were laughed at as absurd. Housing prices always go up. Right!

To sit there and blame the banks for taking away the ATM is just not facing reality. Everybody was getting a slice of this pie that was playing the game.

A lot of these people signed a note and sucked the equity out of the house and left. It didn't cost them a dime, and they're not too worried about losing the house.

The result of this mess has lowered prices on houses to where people who put good money down are now in jeopardy of losing their nest egg, which is sad.

I have no sympathy for these poor smucks pursuing the "American Dream." Greed is a form of stupidity. If you don't have any "Street Smarts," you'll get your plow cleaned every time.

If the bankers are smarter than the people taking out the loans, how come its the banks that are broke? My neighbor can pack up his Corvette, Mercedes and BMW and go rent a home and the bank eats 1,000,000 of his real estated loans. He's spent more than I have saved in a lifetime.

A Fool and his money are soon parted.

Anonymous said...

Jim... I'm confused regarding this excerpt from an article:

"From the day of its founding in 1913 to September 24, 2008 the Fed's assets - the aforementioned cornerstone capital for the US financial system - grew to $1 trillion. By November 14, 2008 the amount had grown to over $2 trillion. And in a speech in Texas, the head of the Dallas branch of the Fed said he expected the total to reach $3 trillion by year-end.

For the moment, this explosion of monetary inflation is hardly noticed. Asset deflation has the headlines. People worry about having too few dollars, not about having too many."

It seems like we are in a deflation but the above points to inflation. Can't have both at same time can you? Do we begin with a short burst of deflation and then go into heavy inflation or hyper-inflation... is that how it will manifest?

Tyrone said...

Anon @ 6:51,
That argument is raging. Here is more food for thought...
Inflation or deflation?

Hope it helps.

Jim in San Marcos said...

Hi Anon 6:51

I'm with you, I see deflation first and then inflation.

The reason we are seeing deflation right now with the Fed and the Treasury injecting funds, it because about 10 trillion dollars has been vaporized. The financial system is still settling and could take a while to stabilize. The losses are massive and everyone is leery of spending for anything. The lack of buying will be deflationary. Garage Sales will be competing with Walmart.

I think that when the dust settles, the government tax base will drop by 2/3's and the government will have to print money to "stimulate" the economy.

State budgets (which have to be balanced) have already been trashed. It looks like retirement pensions will have to have to be trimmed and general services curbed. No one is going to like what happens next.

This is just my best guess. Thank you for your comments.

Tyrone said...

Anon @ 6:51,
Here's another one...

The Crisis Has Hardly Begun
Generally, when countries acquire more debt than they can service, they inflate away the debt. If foreign creditors do not save the Obama administration, the Treasury will print bonds and give them to the Federal Reserve, which will issue money.

The inflation will be severe, particularly as Americans will not be able to pay for the imports of manufactured goods from abroad on which they have become dependent. The exchange value of the dollar will decline with the domestic inflation. Once inflation is off and running, the printing press dollars will only have goods made in America to chase after. The real crisis has not yet begun.

* However, your own due diligence is always required.

Anonymous said...

I swear you people scare the sh**e out of me.
What the heck can we do? All our money is tied up in a 401K that we cannot touch for 9 and 1/2 years - it has been in safe government fund for 7 months but I want it before the government just TAKES it. Does anyone think this is a real possibility or just the ideas of crazy people?
And if I had the money I understand we can't buy gold any more- because it is now scarce AND even if I owned gold I understand the government could confiscate it! Honestly, it ALL looks so bleak. And my last rant is WHO is still left in the market?? Who are these investors that aren't bailing as fast as they can? On a brighter note, Buffalo New York was one of the few real estate markets that increased in value this past year according to USA Today hahahaha oh well, I may not have the money to snowbird as planned but at least we'll keep our house.
Catholic girl

Anonymous said...

Catholic Girl: good luck freezing your butt off in Buffalo with huge heating bills on the horizon. Move to Florida.
Can't you change your 401k holdings into a money market fund that only contains treasuries? Can't you switch into gold mining stocks or funds?
Your ok now in deflation, but when inflation begins there is only commodities, gold, energy and foreign currencies (unless they are devaluing as well). Only a real smart stock/fund picker could've held his own over the last 10 years and will be the only one to do well in the future stock market. Find out what all your options are for your 401k, get advice from a professional on the best positioning for inflation and be prepared to pull the switch when needed, or just pull it now.

Tyrone said...

I understand your frustration. I moved my 401K into a stable value fund a year ago at the peak. In terms of inflation and/or government default, it may not be safe, but it's safe at the moment. All other managed funds that I have access to are losing money--ALL. My only option to diversify is to allocate dollars into a self-managed account, but here is the catch: I cannot transfer money directly from the stable value fund to the self-managed account. I would have to move money to another fund for 90 days before transferring to the self-managed acount. UNBELIEVABLE! I'm still fighting this B.S.

Anyway, if you have a self-managed account option, you could go that route.

I have heard talk about seizing 401Ks for "our protection" (BWAHAHAHA), but I'm skeptical that it could happen. Keep your radar on it, though. I believe there would be some sign or hint that it was approaching.

Tyrone said...

One more thing on seizing 401Ks: I'm not sure they could take control of your money if it was in a self-managed account.

Any thoughts on this?

Jim in San Marcos said...

Hi Catholic Girl and Tyrone

Let's think outside the box on this. Savings are a great thing to have. Why continue to contribute to the 401K, unless it is matched by your employer?

The 401K was created by Congress to get people to save money so that the government could borrow at cheaper rates. It worked.

The main drawbacks of a 401k are the withdrawal penalties, and the losses are not deductible. The advantage is that you pay less taxes.

The thing to realize in the long run, never invest your money because of tax consequences. The rules change over time and the
conditions that seemed safe then are rather precarious now. Consider tax benefits as a plus, but don't bet the farm on them.

A nice piece of rental real estate can return 20% a year, but you can't get there from a 401k. Plus any sort of investment loss on an investment outside a 401K is tax deductible.

I did move my 401k into short term bonds to preserve my capital, but that is no long term solution to retirement investing.

I am staying in short term bonds at a loss and figure when no one else wants to buy stock, say two years down the pike, it will be time to buy. Look for stocks paying a dividend.

Anonymous said...

Anyone figure out why Wall Street must be saved rather than prosecuted?

They basically robbed Americans blind! If you're gonna point your finger at the homeowner, you've got to point it at Wall Street too.

Anonymous said...

Agreed! I have an open non-recourse LOC that can still soak the bank if I wanted to because measured equity does not change on this one no matter what... Oh I'm grinning. BUT, I love my local bank b+ rating... and I only draw on the LOC to eliminate out of state check cashing delays... IE I take cash using my LOC and then I immediately pay it off with an out of state check, earning interest on the float. They do get nervous when I come in though cause if I don't deposit the physical cash, they often need to call Wells Fargo right after to meet other demands.... Clerks eyeballs bulge out when I say sure, if twenties are all you have I'll take em... start counting.. he he he! They usually find some 100s and 50s then. Hell ya, I'm pure evil.

Anonymous said...

I noticed that one guy here moved his 401K money out of the market and into a "stable value" fund. If I were you, I would investigate the assets in that "stable value" fund. I had my money in one until six months ago when I remembered reading something about the fund loaning money to banks and insurance companies under guaranteed contracts. It sounded a little vague to me, so I did some investigating, and the first thing I found was that it's very hard to find out what your stable value fund holds. But I can guarantee you this, it is not the same thing as a money market fund. These contracts that the fund holds are essentially swap agreements, I think. At any rate they involve guarantees by banks and insurance companies, which ones I still don't know in the case of my fund. As far as I'm concerned the terms "bank" and "insurance company" now evoke the fight-or-flight response in me. I got my money out and put it into something called a "liquid savings" fund which is FDIC insured. It pays about .3% less but I'd rather have return of capital than return on capital at this point, though to be honest I'm not sure that any funds deposited in the U.S. banking system or the equity markets guarantee that with a satisfactory probability these days.

Anonymous said...

In the most parts of the UK the house prices have dropped almost 15% on average since their peak last year. Some economists predicted this crash back in 2005 and are expecting a further 20% drop. The sale and rent back market has been growing at phenomenal rate due to the rising number of homeowners struggling with their mortgages.