It is a widely held belief that the bailout of the banking system prevented the second Great Depression. This belief is wrong.
Today's featured high-end property is scheduled for auction on April 28th. Will the short sale be approved in time?
Irvine Home Address … 7 BUELLTON Irvine, CA 92602
Resale Home Price …… $1,224,800
Monday finds you like a bomb
That's been left ticking there too long
Some days there's nothing left to learn
From the point of no return
Hey hey, I saved the world today
And everybody's happy now
The bad thing's gone away
And everybody's happy now
The good thing's here to stay
Please let it stay
Eurythmics — I Saved The World Today
Did our brilliant politicians and the cool heads at the Federal Reserve save the world? Popular public opinion says yes. Me and many other astute observors say no. The only thing our collective actions has accomplished is to stop a group of greedy and ignorant fools from experiencing the consequences of their actions. Instead, the consequences have been passed on to us in the form of huge government bailouts and locally inflated house prices.
Politicians and the media continue to refer to the economic downturn as being the result of a financial crisis. This is wrong. We have 15 million people out of work because the housing bubble that drove the economy since the last recession finally burst. The financial crisis may have been good entertainment for those who like to see huge banks collapse, but it was a sidebar. The real story was the rise and demise of the housing bubble.
Those who claim that the real problem was the financial system and its faulty regulation can be disproved with a single word: Spain. Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system is often held up as model for the United States.
Spain did have a horrific housing bubble. As a result, the share of construction in the economy rose from less than 8% of GDP at the end of the 90s to 12.3% in 2007. By comparison, it is typically less than 6% of GDP in non-bubble years in the United States. This rapid rate of construction led to enormous overbuilding, which meant that a collapse was inevitable with construction falling to far below normal levels.
The run-up in house prices also had the predictable effect on consumption. Because people believe that the run-up in house prices is based on fundamentals, homeowners assume that their newly created housing wealth is real and they spend accordingly. Spain's saving rate fell from just under 6% in 2000 to 3% in 2007. When the housing wealth created by the bubble disappeared people naturally cut back their consumption.
This is Spain's crisis. According to the IMF, housing starts in Spain fell by 80% from the peak of the boom. While total construction has not fallen as much (repairs and non-residential construction did not decline nearly as much), if construction in Spain fell by 50%, this would imply a loss in annual demand of more than 6% of GDP. That would translate into a drop in demand of more than $800bn in the United States.
Similarly the loss of housing wealth reverses the housing wealth effect. If consumption fell enough to return the savings rate to its pre-bubble level, then this would imply a loss in annual consumption demand of more than three percentage points of disposable income. In the US this would amount to more than $300bn in lost annual consumption.
There is no easy mechanism to replace more than $1tn in lost demand. This is why Spain's economy is in a severe slump right now. Note that just about all analysts agree, Spain's financial system was well regulated and it had none of the loony loans and outright corruption that pervades Wall Street and the US financial system. Yet, it is suffering from this economic downturn even more than the United States.
The moral of this story is that the problem is not first and foremost a financial crisis. It might be fun to watch the Wall Street and government boys sweat as they stay up late trying to keep the big banks from drowning in the cesspools they created. But this is all a sideshow. No one saved us from a "second Great Depression," they just saved the jobs and wealth of the Wall Street crew.
The economy's real problem is simply the loss of demand created by collapse of the bubble. Throwing even more money at the banks is a way to ensure that they don't suffer from the consequence of their own greed and stupidity. It is not a way to restore the economy to health.
Restoring the economy to health is about finding a replacement for the demand lost as a result of the collapse of the bubble. In the short-term, this means increased government spending and tax cuts. Deficits put money in the economy, and using the old-fashioned view that people work for money, we can determine how much money we need to spend for the government to get the economy back towards full employment levels of output.
In the longer term, we need to move towards more balanced trade, with higher exports and fewer imports making up for the demand lost due to collapse of the housing bubble. This will require a lower-valued dollar – everything else in the trade picture is just for show.
We do need financial reform. We have an incredibly wasteful and reckless financial industry. But bad financial regulation by itself did not give us 10% unemployment, nor would good regulation have been sufficient to prevent it. Just ask the workers in Spain.
I have profiled hundreds of cases of HELOC abuse (or use depending on your point of view). This was an enormous economic stimulus that is now gone, and it isn't coming back. Our current economic woes are largely caused by the loss of HELOC demand and the unemployment caused by laying off most of the building industry and much of the finance industry. We still don't know how to replace that demand. We probably won't.
Why did we bail out the banks? We could have wiped out all the equity and bond holders, recapitalized with taxpayer funds, then sold the public interest later. Sweden did this in the mid 90s, and it worked well. The only reason we did not do this is because the equity and bond holders like Goldman Sachs control our government and knew they could pass the losses off to us.
Mike Whitney: firstname.lastname@example.org
Housing is still on the rocks and prices are headed lower. Master illusionist Ben Bernanke has managed to engineer a modest 7-month uptick in sales, but the fairydust is set to wear off later this month when the Fed stops purchasing mortgage-backed securities (MBS). When the program ends, long-term interest rates will creep higher and sales will begin to flag. The objective of Bernanke's $1.25 trillion quantitative easing program was to transfer the banks’ toxic assets onto the Fed's balance sheet. Having achieved that goal, Bernanke will now have to find a way to unload those same assets onto the public. Freddie and Fannie, which have already been used as a government-backed off-balance-sheet dumping ground, appear to be the most likely candidates.
Bernanke's liquidity injections have helped to buoy stock prices and stabilize housing, but the economy is still weak. There's just too much inventory and too few buyers. Now that the Fed is withdrawing its support, matters will only get worse.
Of course, that hasn't stopped the folks at Bloomberg News from cheerleading the "nascent" housing rebound. Here's a clip from Monday's column:
"The U.S. housing market is poised to withstand the removal of government and Federal Reserve stimulus programs and rebound later in the year, contributing to annual economic growth for the first time since 2006. Increases in jobs, credit and affordable homes will help offset the end of the Fed’s purchases of mortgage-backed securities this month and the expiration of a federal homebuyer tax credit in April. ‘The underlying trend is turning positive,’ said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York."
Just for the record; there have been no "increases in jobs". Unemployment is stuck at 9.7 percent with underemployment checking in at 16.8 percent. There's no chance of housing rebound until payrolls start to rise. Jobless people cannot afford to buy homes.
I discussed the lag between the peak in unemployment and the bottom of house prices in UCLA Anderson Forecast 2010 with a chart from Calculated Risk:
The lag is caused by the foreclosure excess from the bubble that preceeded the recession. House prices really could turn up in 2010 if we were not facing a five-year overhang of foreclosures and distressed property owners who will sell at breakeven when given the chance.
Also, while it is true that the federal homebuyer tax credit did cause a spike in home purchases its effect has been short-lived and sales are gradually returning to normal. It's generally believed that "cash for clunker-type" programs (like the homebuyer tax credit) merely move demand forward and have no meaningful long-term impact.
So, it's likely that housing prices — particularly on the higher end — will continue to fall until they return to their historic trend. (probably 10 to 15 per cent lower) That means more trouble for the banks which are already using all kinds of accounting flim-flam ("mark-to-fiction") to conceal the wretched condition of their balance sheets. Despite the surge in stock prices, the banks are drowning in the losses from their non-performing loans and toxic assets. At the same time, they're about to get hit by the next wave of Option ARMs and Alt-As resets which will require another $1 trillion in financing.
I enjoy writers with a clear grasp of the situation.
So, let's summarize:
1–Bank bailout #1–$700 billion TARP which allowed the banks to continue operations after the repo and secondary markets froze-over from the putrid loans the banks were peddling to credulous investors.
2–Bank bailout #2–$1.25 trillion Quantitative Easing program which transferred banks toxic assets onto Fed's balance sheet (soon to be dumped on Fannie and Freddie) while rewarding the perpetrators of the biggest financial crackup in history.
3–Bank bailout #3–$1 trillion (or more) to cover all mortgage cramdowns, second liens, as well as any future liabilities including gym fees, energy drinks, double-tall nonfat mocha's, parking meters etc. ad infinitum. Basically, carte blanche for the banksters.
And as far as the banks taking "haircuts"? Forget about it! Banks don't take "haircuts". It looks bad on their quarterly reports and cuts into their bonuses. Taxpayers take haircuts, not banksters. Besides, that's what Geithner gets paid for–to make sure bigshot tycoons don't have to pay for their mistakes or bother with the niggling details of fleecing the little people.
It is hard to argue with the author's conclusions about the behavior of our government and the banksters. We have bailed them out and in the process provided them with the money to lobby and fight any real financial reform that might cut into their profits.
We have created moral hazard. Lenders know they can take unlimited risks an we will absorb the losses.
We are pwned. Our leaders have failed us.
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” — Andrew Jackson
- This property was purchased on 4/17/2006 for $1,580,000. The owner used a $1,000,000 first mortgage, a $580,000 down payment, and simultaneously opened a $422,000 HELOC which probably wasn't used as purchase money (there is no way to be sure).
- On 1/16/2007 the owners refinanced the first mortgage for $1,268,000 and opened a stand-alone second for $158,000.
- Total property debt is $1,426,000
Recording Date: 10/27/2009
Document Type: Notice of Sale (aka Notice of Trustee's Sale)
Click here to get Foreclosure Report.
Recording Date: 07/22/2009
Document Type: Notice of Default
The owners must feel good about the refinance that pulled their cash out of the property. They are stil going to lose $150,000 to $200,000, but they are passing much of the loss on to the lender.
Gazumping Short Sales
Have you heard the term gazumping? According to Wikipedia,
"Gazumping" is to refuse to formalise a property sale agreement at the last minute usually in order to accept a higher offer.
This phenomenon is not common here in the United States as it is in England because our purchase and sale agreements are binding; however, gazumping is alive and well in today's market with short sales and trustee sales.
Most short sales go to auction. When they do, all short sale offers are void because the previous owner is no longer in control of the property. Now that we can help people transact in the trustee market, we can gazump short sale offers. If you are in a back-up position — or even primary for that matter — if you want to ensure you get the property, you should be sending us to the aution just to make sure.
Irvine Home Address … 7 BUELLTON Irvine, CA 92602
Resale Home Price … $1,224,800
Home Purchase Price … $1,580,000
Home Purchase Date …. 4/17/2006
Net Gain (Loss) ………. $(428,688)
Percent Change ………. -22.5%
Annual Appreciation … -6.3%
Cost of Ownership
$1,224,800 ………. Asking Price
$244,960 ………. 20% Down Conventional
5.11% …………… Mortgage Interest Rate
$979,840 ………. 30-Year Mortgage
$256,792 ………. Income Requirement
$5,326 ………. Monthly Mortgage Payment
$1061 ………. Property Tax
$333 ………. Special Taxes and Levies (Mello Roos)
$102 ………. Homeowners Insurance
$145 ………. Homeowners Association Fees
$6,968 ………. Monthly Cash Outlays
-$1466 ………. Tax Savings (% of Interest and Property Tax)
-$1154 ………. Equity Hidden in Payment
$491 ………. Lost Income to Down Payment (net of taxes)
$153 ………. Maintenance and Replacement Reserves
$4,993 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$12,248 ………. Furnishing and Move In @1%
$12,248 ………. Closing Costs @1%
$9,798 ………… Interest Points @1% of Loan
$244,960 ………. Down Payment
$279,254 ………. Total Cash Costs
$76,500 ………… Emergency Cash Reserves
$355,754 ………. Total Savings Needed
Baths: 3 full 1 part baths
Home size: 3,627 sq ft
($338 / sq ft)
Lot Size: 7,617 sq ft
Year Built: 2002
Days on Market: 271
MLS Number: S580023
Property Type: Single Family, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Excellent interior deep cul-de-sac location, huge pool size lot, impressive curb appeal with flagstone/brick walkway, main floor bedroom/bath plus den/office, elegant entry w/cathedral ceiling/travertine floor, formal living/dining rooms w/wrought iron, gourmet kitchen w/sit-up center island, granite countertops, upgraded cabinets w/glass display, stainless appliance package, five burner cooktop, butler's pantry w/dual wine compartments, work desk, fireplace w/custom mantel, built-in media center, surround sound, decorator paint, crown moulding, shutters, ceiling fans, high baseboards, inside laundry w/sink, master suite extends to lavish bath w/travertine floor, separate shower, deep oval soaking tub w/marble surround, twin china sinks, individual vanity, professionally designed front/backyards w/patio cover, built-in counter space, fountain, garage w/epoxy floor, resort life-style amenities: pools, parks, spas,meandering greenbelts, clubhouse, tennis/sports courts
/w is annoying. Reading through slashes is very difficult.
Prior to decorating this house, the owners must have taken a trip to Italy and toured the great Italian Villas and the Sistine Chapel.
Can you picture Michelangelo lying on his back on a scaffold painting this ceiling?
Do you like the view of the grounds of your Italian Villa?
I like this property. I think that means I have no taste….