Saturday, February 11, 2012

Obama's Plan to Save the "Homeowner" (Note Holder)

Obama and his minions are going to save the underwater home owners. Below is a graph of the distressed home owners from 2006 to the present. 29 percent of these people owe more than the house is worth.

The banks in 2006 were writing loans to anyone who could fog a mirror. An in essence, every loan they wrote was a winner even if the borrower defaulted; the house was worth more than the original note. The banks were nothing more than a machine, taking depositors money, writing a loan, paying the seller his cash and then selling the note to private investors. Repeat cycle again. I wrote a letter to the head of Federal Reserve Allen Greenspan in 2005 complaining about it to no avail (see this link from August 28, 2009). The problem was obvious, home speculation was more profitable than working for a living.

So if we examine these underwater buyers, the phrase comes up “no skin in the game.” Most of these underwater owners had very little or nothing down. The person who made out like a bandit, was the seller, they got cash on the barrel-head. All the new owner did was sign a piece of paper and he was handed the keys.

The phrase “Strategic Default,” is the educated solution to the problem of being underwater. Don’t pay. Pocket the mortgage payment and move when evicted. Many defaulters maintain, “The banks shouldn’t have loaned us the money in the first place.” So better terms and free money from the Federal government are not going to turn their lives around. The average homeowner moves every 5 years and it’s about that time again.

The real question you have to ask is; who is the Obama administration helping, the home owner under water or the “private parties” who hold the notes? The home owner can ride rent free on the home now for almost 2 years in California and in places like New York for a lot longer. We hear the phrase “the poor underwater home owner.” I just don’t see it, the guy bought something for nothing and has decided he paid too much and will walk.

Fannie, Freddie and the FHA, hold a majority of the foreclosures. If marked to market at existing sale prices, they have about a 20% loss. The loss would probably approach 70% if markets were allowed to find their own bottom. Instead of an 800 billion dollar taxpayer bill, it could end up costing many trillions of dollars. The neat thing about letting housing prices hit bottom, our kids could afford to buy a home again.

Just who holds the debt? The banks drop out of the equation. They write home loans and sell them, but they do tend to get nailed on commercial loans. The banks usually have to hold 5 year construction loans, and this is probably what has gotten many a bank in trouble the last three years where the Fed has had to bail them out.

It’s the private investors that hold all of this real estate paper. Insurance companies, mutual funds, and Retirement plans come to mind just to mention a few. These fund managers are wondering where the monthly income they were counting on has gone to? No worry, it's all guaranteed by the taxpayer.

The humorous thing about this whole mess is that the Congress back in the 1930’s passed legislation to prevent this from ever happening again. Then from 1990 to 2003 we got rid of those safeguards. We were smarter now and knew what we were doing. Congress is now replaying the same 1930’s script. Let’s lock the barn door. Why? ---- There is nothing in the barn! Do we really need to protect the consumer? He’s the one who created this mess when he decided to buy a house and get rich. Of course we can wrongly blame the Banksters and Wall Street for our predicament. They supplied the clearing house to securitize our borrowing. But it was individual greed that got us to where we are now. The government couldn't stop you from buying that house in 2006 anymore than they can force you to buy one in 2012.

It’s a little like the problem in Greece, the European countries are not trying to help Greece get out of debt; they want to get paid what they are owed and kick the can down the road a bit further. The only trouble, the can has gotten bigger and heavier--it doesn't kick like it used to.


AIM said...

Well said Jim. Obama is going to be pulling all sorts of nutty ploys like this "save the homeowner" plan that will screw the economy up even more, all so that he can get re-elected. We the people just don't seem to get the fact that it's been a very very long time since we've had leaders and Congress people that really cared and worked for the future of our country. We're all paying now for our lack of vigilance. Morality has eroded in every aspect of our culture.

What do we have to look forward to in the next 20 years? Gulp!

Anonymous said...

A grsat read. (I couldn't get the link to the 2009 letter to work though)

Anonymous said...

Sorry, I meant "A great read."

Jim in San Marcos said...

I fixed the link. I originally wrote the link using MS Word. Some extra formatting transfered when I uploaded it to publish.

Thanks for pointing out the error.

If you are reading from a second source, the link is The Great Depression of 2006: The Federal Reserve's Madoff "Manuer" Maneuver said...

Great post. With government programs/bailouts and banks slowly-releasing foreclosures back onto the market to artificially prop up housing prices, do you think market forces will ever prevail here, resulting in even lower prices down the road? I noticed the Calculated Risk blog is calling a bottom in prices in March 2012.

Jim in San Marcos said...


You might have something there. Our next big Gulp might not be the one we buy at 7-Eleven. I'm not as pessimistic. 5 years downside I could live with, but 20 years would be a real nightmare.

Jim in San Marcos said...

Hi Survival & Pros

I don't think the housing market can be looked at on a national level. Certain states have really hit bottom and gone even further below it. Other states like California think that this drop is a buying opportunity.

Here in San Diego, either rental rates have to double or housing still has to drop 50 percent in value.

I'm not as confident as Calculated Risk as to a bottom. If the Federal government wasn't supporting Fannie and Freddie things might happen faster in California. The FHA thinks that a starter home in California is 729K, and it makes me wonder how poor can you be, to buy a house costing that much?

I thought the mission statement of the FHA was to make housing affordable to everyone-- I guess that includes rich people.

Anonymous said...

I sure would like to ask the "president" Obama why I need to contribute to bailing out the homeowner when i sold my house in 2007 and rented ever since. Since when is it the place of the government to punish people like me.

Anonymous said...

Anon 4:51

Because Obama is the boss of YOU. He lives in the biggest white house in the country and has an army and prisons. And thanks to the National Defense Authority Act that he just signed he can put you in prison, for as long as he wants without a trial or a lawyer and no habeas corpus. Any other questions?

Anonymous said...

anon 4:51,

bc you are in the minority and the others in the majority. that's how a democracy works, so join the crowd next time and spend away ;)

Anonymous said...

... and because morality has gone down the drain. The hard worker, saver, planner, fair player, law abider, punished and the lazy, zombie, spender, borrower, taker, etc. gets the attention and support from the government.

The old rules and maxims have been thrown out the window. It's a new immoral world based on instant gratification. The time tested and proven laws of survival are being ignored.

Take the Economics 101 law that is the keystone of financial survival "income must always be greater than outgo" -- how long has it been since Congress has followed and adhered to that rule?

Anonymous said...

Check out this interview with Lacy Hunt. He really tells it like it is and lets you know what to expect based on some very interesting charts and statistics. You can get snippets of it from the site below and from there you can get a link to read the whole interview.

Congress, Obama and Bernanke have us on a runaway train heading off a cliff. This is surreal.

Maggie@SquarePennies said...

I'd love to see more of those in their 20s and 30s be able to afford a home when the prices are low. Too many still owe quite a lot on college loans and thus can't really take on a mortgage. The solution? Jobs.

Anonymous said...

Due to job transfer, I'm trying to buy a house in Oregon (Portland metro). Fannie/Freddie/et. al. are trying to "stabilize" prices by offering homes above market and refusing to negotiate. To lure in buyers, they offer 0% down, no closing costs, no appraisal loans. Sound familiar? HAFA short sales dictate price, but pay the seller cash to move out and offer deed in lieu if the short sale doesn't work out. And Fannie/Freddie/et. al. don't disclose serious defects. I tried to buy a Fannie home - turned out to be in a flood plain - no disclosure. So the house goes in and out of contract, with Fannie hoping to find the sucker who doesn't discover the flood plain. If they wait 'til summer, when the waters recede until next winter, they'll probably get their wish. Kicking the can, indeed.

Meanwhile, realtors are back to their old games. Every property "has an offer coming in," and agents swear that most houses sell within 2 days of list unless they're seriously defective. Half the inventory is short sales. There's another 100% of current inventory somewhere in the foreclosure process.

The risk in a low-rate environment is that buyers generally buy on payment - when rates rise, payments have to rise or prices have to fall. 4% mortgages are far below historic norms. We are creating a new generation of underwater homeowners, with NAR collecting their 6% tip as the housing Titanic takes on water. Low rates are a godsend if you're going to stay put for 30 years, but the average homeowner will be short-selling in 7 years when rates revert to normal and salaries haven't kept pace with rising rates and inflated home prices. How long can the 3% loan keep the ship afloat? I am actually hearing agents repeat 2006 asking prices (so high that houses didn't sell even in the greed bubble of 2006!) and saying "look what a bargain it is now!" Are buyers still that stupid?

Jim in San Marcos said...

Hi Anon 12:35

I used your comments in my latest post.

Thank you for your comments, It's nice to read a fresh face.

Take care