When not If

Save a Prayer — Duran Duran

Don’t say a prayer for me now,
Save it ’til the morning after

There will be some borrowers who will benefit from the ultra-low interest rates being engineered from the FED. Anyone who has not already refinanced into a 30-year fixed mortgage may have an opportunity to get out of their toxic mortgage. Of course, there are two problems: 1. Some people do not want the fixed rate mortgage, and 2. Very few people that do want it qualify for refinancing.

I remember having conversations with lenders in 2008 about the tightening loan terms. I was surprised by what they were telling me. Apparently, most people that were going in for refinancing were looking to refinance into another toxic mortgage with a low teaser rate. First, people with Option ARMs would ask for another one so they could stretch out their teaser rate period. Then, people who were getting out of Option ARMs (because they were no longer offered) were going with 1 year adjustables or whatever loan product gave them the smallest payment. People were not looking for stability, they were looking for the next bridge loan with the lowest possible payment. There is still a widespread perception among the borrowing public that serial refinancing from one teaser rate into another is a viable way to manage one’s mortgage obligations.


This dependency upon serial refinancing from one toxic loan to another is part of the reason people perceive today’s lending standards as being so restrictive even though by historic standards they are still quite loose (allowable DTIs are still at high-default levels, and they will tighten further). Everyone seems to be waiting for the return of toxic financing to re-inflate the housing bubble and allow them to continue serial refinancing their extreme indebtedness. I know I have said it a million times, but I will say it again: the loose financing of the bubble is not going to return.

Think about what the lenders just went through. Here at the IHB we have been documenting hundreds of thousands of dollars in lender losses on a daily basis. This is adding up to hundreds of billions if not trillions of dollars nationwide. This happened because the lenders were giving out too much money to people who could not pay them back. Does it seem likely they will do this again any time soon? Those people waiting for a HELOC dependant lifestyle to return might as well be awaiting the Rapture.

(Like all dreamers can’t find another way)
You don’t have to dream it all, just live a day

The people who do not want fixed-rate financing must be flushed out of the system. As long as these short-term adjustable rate loan programs are being offered, the foreclosure crisis is just being extended. Nobody using this form of financing is in a stable loan program, and they will experience one of two possible outcomes: 1. They will eventually get a fixed-rate loan, or 2. They will end up in foreclosure. The longer they wait until they go fixed, the more likely they are to end up in foreclosure. The only thing preventing their foreclosure is an interest rate reset while rates are higher.

The second group of people, those who do not qualify for refinancing, is actually must larger and much more of a problem, despite the spin to the contrary. To illustrate why this is a problem, let’s examine a typical Irvine homedebtor to see the circumstances he is facing.

26 Carver kitchen

Asking Price: $675,000IrvineRenter

Income Requirement: $168,750

Downpayment Needed: $135,000

Monthly Equity Burn: $5,625

Purchase Price: $822,500

Purchase Date: 10/26/2006

Address: 26 Carver, Irvine, CA 92620

IHB Get Together 2

Beds: 4
Baths: 3
Sq. Ft.: 2,077
$/Sq. Ft.: $325
Lot Size: 5,200

Sq. Ft.

Property Type: Single Family Residence
Style: Contemporary
Year Built: 1980
Stories: 2
Area: Northwood
County: Orange
MLS#: P645526
Source: SoCalMLS
Status: Active
On Redfin: 179 days

Unsold in 90+ days

Sparkling Pool & Spa with covered patio.Walking distance to
Elementary School,Huge park around the corner.Beautiful stair-railings
and hardwood floors, crown molding, french doors to pool area, cozy
fireplace in family room. Remodeled kitchen with granite top and center
island. Large master suite with walk-in closet with organizer,
his&her sink. Downstair has 1 bedroom and bath, Scraped high
ceilings,open floor plan. 2car garage with drive way, laundry in

This property was purchased on 10/26/2006 for $822,500. The owner used a $650,000 first mortgage, a $172,500 HELOC, and a $0 downpayment. Since he bought at the peak, he has not had a chance to refinance and start living off the HELOC.

How would this owner refinance? Let’s say he went in to try. First, he would get an appraisal that would show the current market value to be around $625,000-$650,000. The best he could hope for would be a refinance at 80% appraised value, so the bank would offer him a loan of $520,000, assuming he met the other loan underwriting standards. Do you see the problem? Does it seem likely he has $300,000 of cash handy to pay off the other two mortgages in order to refinance?

  • So here is a homeowner at least 20% underwater,
  • he has current mortgage payments that are likely crushing him,
  • there is an interest rate reset looming,
  • there is an amortization recast looming
  • there is little or no chance of appreciation bailing him out, and
  • he is unable to refiance into a supportable mortgage payment.

What do you think is going to happen?

In all likelihood, this owner, and all the homeowners in a similar circumstance are going to default and go into foreclosure. The low interest rates are not going to solve his problems. The best they could do is make his payment burden somewhat less arduous for a brief period of time. Unless he receives significant debt relief or a huge increase in wage income, he cannot be saved.

What kind of government program or bailout will save this guy? Mr. Mortgage has recommended large-scale mortgage principal reductions. That would mean all the responsible would be required to subsidize the foolish and irresponsible who crowded the responsible out of the housing market. That would probably make my head explode. Realistically, what Mr. Mortgage proposes is the only thing that would be effective. Fortunately, it is so expensive and politically untenable that it will not come to pass.

Ultra-low interest rates if combined with some kind of refinance loan guarantee program would be another workable solution. If the GSEs started to guarantee loans for refinance on borrowers who are underwater, it might save some of those owners who genuinely want to stay in their family homes. Of course, this would be very expensive for the US taxpayer because speculators and flippers would sign up for the program if they thought it might buy them a couple of years of waiting. When prices do not come back, they will give up, and we will end up paying for their losses through the loan guarantee program.

If someone out there can enlighten me as to how the government can possibly solve this problem, I would like to read your ideas. Denying there is a problem is not a solution…

I hope you have enjoyed this week at the Irvine Housing Blog. Come back next week as we
continue chronicling ‘the seventh circle of real estate hell.’ Have a great weekend.



You saw me standing by the wall,
Corner of a main street
And the lights are flashing on your window sill
All alone ain’t much fun,
So you’re looking for the thrill
And you know just what it takes and where to go

Don’t say a prayer for me now,
Save it ’til the morning after
No, don’t say a prayer for me now,
Save it ’til the morning after

Feel the breeze deep on the inside,
Look you down into your well
If you can, you’ll see the world in all his fire
Take a chance
(Like all dreamers can’t find another way)
You don’t have to dream it all, just live a day

Don’t say a prayer for me now,
Save it ’til the morning after
No, don’t say a prayer for me now,
Save it ’til the morning after
Save it ’til the morning after,
Save it till the morning after

Save a Prayer — Duran Duran

46 thoughts on “When not If

  1. Texas Triffid Ranch

    IrvineRenter, I wish I could see a way out of your quandary. As you pointed out, the only real option is to offer serious relief to those who actually want to keep their homes. Also as you pointed out, the problem is that any plan would ultimately be run by and for the same greedheads who caused the problem. Look at what happened with the S&L bailout in the early Nineties: the original intent of the bailout was to prevent banks from going under and subsequently wiping out the savings of ordinary folks. As it was implemented, it was a bailout not for the ordinary folks, but for politically-connected vermin who wanted and got subsidized risk.

    If you get the chance, look up “Bluebonnet Savings” one of these days, and read about how the savings & loan bailout made its new CEO really rich as he stripped the bank of anything approximating value. I regularly drive past the first and last Bluebonnet Savings branch: it’s literally an I-beam shell, and has been for nearly two decades, but nobody can build something new because the current owners are holding out for what they think the property is worth, not what it’s actually worth. We’re going to see a lot of this with any similar real estate bailout plan, especially if some lobbyist convinces the right Congresscritters that the bailout needs to cover office and retail real estate, too.

    1. tazman

      There is a way out of the quandry. Get the government out of the way and let the peeps who overcomitted go through bankruptcy. It’s that the simple; markets clear! Painful, yes, but at least your not punishing the prudent while rewarding the foolish.

  2. Another Smug Renter

    What if banks could let non-viable homeowners convert into renters living in the same property? Rent would be competitive enough so that the homeowner would be likely to stay. The bank would then have an income producing property on its books instead of a vacant foreclosure. Monthly upkeep costs might be about the same now that many municipalities require banks to maintain foreclosed properties. I’m sure this would be tricky for asset accounting etc., but consider that the foreclosed homeower is going to be paying rent somewhere whereas the bank is going to sit on an empty house or sell it at a huge loss. Wouldn’t it be better for the bank to receive monthly rent from the property while having it on their books as an income property?

    1. george8

      This concept , I believe, has been on the table except the landlords are not the bank but the government.

    2. Texas Triffid Ranch

      Well, that depends upon whether or not the bank wants to become a landlord or not. During the oil bust of 1986-88, a lot of Texas banks had no choice but to do so, as a bank would fail, a new bank would acquire its assets, and then promptly go bankrupt and get acquired by another. The problem here is (a) who maintains the property, (b) who’s liable for legal issues with the property (for instance, who’s responsible for the cleanup if a tenant turns a nice 4/3/2 into a meth lab), and (c) what happens if the nice bank that’s been leasing to the nice tenant switches hands and the new bank owner insists that the tenant buy the property. Most banks simply don’t want to have to mess with this.

      1. Walter

        You are right on here.

        One possibility that might work, have all the underemployed RE agents manage them for the usual 6% fee. The banks would still loose their a$$ in the deal, but maybe loose a little less and put some people to work.

        1. Texas Triffid Ranch

          Walter, that’s a good idea in principle, but that requires realtors willing to accept their current status. It’s like expecting programmers during the dotcom boom to take jobs at Starbucks or journalism majors to quit screwing around on internships and take real jobs: you’ll hear nothing but cries of “Oh, I’m so much better than this!”

          That said, the idea of suitably bonded rental companies that take care of the middleman status might not be a bad idea. True, you have a lot of realty companies that handle this already, but they generally handle it badly: I lived in one such house for four years, and any requests for repairs were ignored because the property manager was hoping that I’d just break down and pay everything out-of-pocket. (He made lots of noises about “If you do the work, just send in the receipts, and we’ll reimburse you,” but amazingly he wasn’t willing to put that deal into writing, and he insisted upon originals of the receipts instead of copies. I don’t have problems with greedheads thinking I’m dumb, but I have real problems with them thinking that I’m even dumber than they are.) Setting up companies that do nothing but fix up and maintain houses and put renters into them, with the houses being sold when the bank wants to put them into the market and the maintenance company gets a cut of the sale price, might be an idea. You’re right in that the bank will lose money, but it won’t lose that much money, and it’ll at least see some kind of return when the market surplus lets up a bit and these houses can be sold. Preferably to the current renter, if possible.

  3. alan

    I support government doing nothing and let the market correct. For all your good intentions, way to Christian of you, show me one instance where government intervention that has not in fact made the problem worse in some unexpected (Black Swan) way. Greenspan proved this very point by trying to minimize the 2000 mild recession by keeping interest rates very low. This worked for a while, but at the cost of leading of a worse recession later. At some point you have to throw up your hands and realize that there just is no way for Government to fix everything, that’s just the dem’s fallacy despite trying to convince their party members otherwise. I think the two party system is our best hope, since this leads to gridlock and so nothing too bad will pass Congress.

    1. Matt

      There’s a WORLD of difference between the government getting involved in finance and in general regulation. You want one example of government intervention working? The skies above LA. Anyone who lived here in the 1960s will tell you that the air in LA is SO much cleaner than it was 40 years ago. That is largely thanks to US & CA intervention. And, until a few months ago, the car companies and oil companies were doing just fine. Regulation gave us cleaner air (which reduces health care costs a great deal and improves quality of life), and it really didn’t cost our economy very much.

      BOTH parties are Keynesians: the GOP cuts taxes and runs a deficit to try to get the economy going, the Dems add money to the spending side.

      I would also add that Greenspan doing something stupid does not indicate that government intervention always makes a problem worse, just that that particular intervention at that time was bad.

      Government CAN’T fix everything, that’s right. However, government can help some things. In the case of the housing bubble, maybe all it SHOULD do is very little (I’m with you there).

    2. DeathToSinan

      What two party system??? Everyone’s being bought off by the same lobbyists. There’s no gridlock, since everyone is just passing laws that the corporations want.

  4. MalibuRenter

    Maybe you’d like my renter homesteading plan?

    1. Take an underwater home, with or without a current renter.

    2. Offer it for rent, at a rental rate which would be equal to the current aftertax mortgage payment at the low end of the currently appraised value. The interest rate used is for current FHA (i.e., low downpayment) financing. At 6% interest and a $600k home, 25% tax rate, that’s $3351 a month. Screen for FICO scores or references if you would like. Remember, the rent with lease option will usually be higher than comparable homes.

    3. The rent comes with an unusual lease option. At the end of three years, the renter can purchase the house for the lower of the 2009 appraised value when they moved in, or the 2012 appraised value when the option expires.

    4. The lease option comes with some terms. A. The renter must make every single rent payment on time. B. The renter can’t sublet. C. The renter must make the house his/her primary residence. It can’t be a summer home, investment property, etc.

    Why is this a good idea? Because the home doesn’t sit vacant. Because the renter proves their ability to make a particular payment, which will eventually be their mortgage payment if they buy. Because the renter will probably care for the home like a homeowner would.

    I am only mildly opposed to letting the current owner take the position of renter in this case. I don’t like the idea of them getting an option to repurchase their own house for much less without a foreclosure. However, if they can keep up with the rent for three year, they can probably make the payments long term.

    1. IrvineRenter

      I like your plan as a transitional step.

      What happens to the excess mortgage amounts? Is this a bank write-off? or is this a direct government subsidy (paying off the lender)? Either way, it still puts us in a position of subsidizing foolish bubble buyers.

      It does solve the vacancy problem, but how big of a problem is that? Are houses really deteriorating that much that we need to occupy them while they are bank owned?

      I think the lease to own concept will be a good way forward from here, particularly since so few have been saving for downpayments.

      1. Walter

        “What happens to the excess mortgage amounts? Is this a bank write-off? or is this a direct government subsidy (paying off the lender)? Either way, it still puts us in a position of subsidizing foolish bubble buyers.”

        If the homedebtor is taking over as renter, put a quite 2nd on the property such that if they sell it, they only keep what is over the original loan amount. If a new renter is moving in, us good natured tax payers will most likely take the hit. But the way things are going, that is going to happen anyway, so might as well keep warn bodies in the houses.

        “It does solve the vacancy problem, but how big of a problem is that? Are houses really deteriorating that much that we need to occupy them while they are bank owned?”

        In Irvine, vacant properties are not a huge problem, but go where you get freezing pipes and squatters, etc. and I would say yes, vacant properties are a big problem.

      2. Dejnov

        Actually someone’s blog pointed out that the average rate of home destruction due to vacancy was on the order of 18 to 24 months. This is how long it took before vandals, natural elements, wild animals, etc. made the structure aesthetically unusable and required the complete tear down of the building.

        The time frame does imply the structure has zero upkeep and is available to any random miscreant (which should not be the vast majority of vacant domiciles), but in these trying times, who’s to say?


      3. MalibuRenter

        In addition to the other hazards listed by Dejnov and Walter, much of the Southeastern US has a wicked problem with mold if all the utilities are shut off.

        Regarding the excess mortgage amount, let’s look at the situation where the renter wasn’t the former homeowner. The bank would initially have on their books the current assessed value of the home. That’s probably anywhere from 10-30% off of the loan value. If they tried to sell it as a foreclosure, they would get even less. In addition, an empty home gets less valuable over time. The grass dies, then maybe the rest of the landscaping, perhaps even the trees. Depending on the neighborhood and security arrangements, it may be gutted or people might start squatting there. Property taxes are still due.

        Compare this to renting with option to buy. The bank gets about 5-8% of the assessed value of the home as rent during a year. They usually get higher rent from a lease option than a straight rental.

        What’s the bank’s downside? 1. Banks don’t like being landlords. 2. Overall property values could drop considerably more over the next 3 years. The critical comparison is selling the foreclosure now vs in 3 years. If foreclosures in bad shape usually sell for 15-20% less than comparable occupied homes with live landscaping, the bank is probably better of with the lease option deal. Prices would have to drop considerably more than 20% over the next 3 years for it to be a bad deal. The bank would be getting rental income and not paying realtor commission. They would also get an unusually well-qualified buyer.

        I am looking for a radio interview which I heard about a month ago. A woman whose firm cleans out and fixes up foreclosures was recommending that people stay in the house until they got the eviction notice, because that left the home in the best condition to be sold.

  5. Lee in Irvine

    By the FED artificially depressing mortgage rates, it creates more tension in the entire system, and distorts our entire economy further.

    We’re doing the same bullsh*t that the Japanese did in the nineties, trying to prop up asset prices.

    These once “Free Market” now turned, EXTREME “Keynesian” Theorist, in our gov’t are making things worse. We’ve seen this administration go from being the most hands off, to the most hands on, within 15 months. It’s hard for me to believe that powerful people in the gov’t didn’t see this coming. When Alan Greenspan says he’s shocked by these events, or he never saw this coming, or he was wrong, he’s lying!

    There’s only one real cure to this massive ponzi scheme … TIME. Anything else just kicks the can down the road, and piles more debt on the shoulders of future generations.

    This “all-in” mentality by the FED & The Treasury will be judged accordingly by the historians.

    1. MalibuRenter

      So, if you saw it coming and were in a position of immense power in 2004-2007, what would you say?

      If you spoke up publicly about the problems, you would press that to your own great advantage.

      If you saw it coming, didn’t say anything publicly, and continued down the path the led us to the current mess, what would you say? The only types of explanation which do not brand you as a huge coward, shill, or other undesirable is to say “who could have known?” or “despite considerable academic research, there is no reliable way to diagnose bubbles when they occur, and no clear strategy to deal with them”.

      1. Lee in Irvine

        Further proof that foolish, uncompromising, ideologues, that wielded tremendous power, ruined the economy. This coming from Barry Ritholtz’s, Big Picture Blog:

        –One of the biggest outright lies of this housing, economic and financial collapse is that “No one saw it coming.”

        –This is a patently absurd comment. Anyone who makes it — and there have been lots and lots of people saying as much – reveal themselves as either clueless or liars or both.

        –The most striking example is found in Justin Lahart’s column, Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party:

        It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. — and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.

        Mr. Rajan, a professor at the University of Chicago’s Booth Graduate School of Business, chose that moment to deliver a paper called “Has Financial Development Made the World Riskier?”

        His answer: Yes.

        Mr. Rajan quickly came under attack as an antimarket Luddite, wistful for old days of regulation. Today, however, few are dismissing his ideas. The financial crisis has savaged the reputation of Mr. Greenspan and others now seen as having turned a blind eye toward excessive risk-taking.”

  6. Perspective

    In the “what’s in it for me” vein, Mr. Mortgage is throwin’ me a bone: “…For the small percentage of folks who can afford the payments with DTI’s under 28/36 but are underwater solely due to house price depreciation, principal balance reductions to 90% of the present value of the property is likely in order WITH a full-recourse provision to thwart fraud…”

    Not quite sure how you accomplish this? Would the government really try to mandate this? The owners of my mortgage would and should fight it considering our DTI on the mortgage is 24% [18% tax-adjusted ;)].

    1. IrvineRenter

      Yes, I imagine the lenders would fight giving principal reductions to those who do not need it. This of course creates the same moral hazard problem of the responsible paying for the irresponsible. If you don’t get a principal reduction, you are getting screwed for being conservative. And obviously, any such deal totally screws any and all renters, particularly those like myself that rent by choice because we did not want to play the game of musical mortgages.

      Plus, making the loan recourse is not a big deterrent for fraud. Most of the loans I profile are recourse loans due to refinancing. Unless the lender goes through a judicial foreclosure, the recourse provisions are significantly weakened. Basically, if you were already insolvent, recourse or not, I doubt the borrower really cares.

  7. Dan

    What appears most likely to happen is that the bankruptcy laws will be amended to allow cram downs in Chapter 13 cases. One of the DC lobbyists for a client of mine says this idea is now back on the table and likely to pass unless Obama strongly objects to it (during the campaign, he supported it.) Mr. Mortgage has convinced me that large scale principal reductions are essential to any kind of mortgage modification program that is viable. I’m not sure there is any other way to get there.

    1. IrvineRenter

      As long as the principal reduction happens during a bankruptcy, I don’t care. I would prefer to see some kind of deferred principal arrangement where the borrower cannot profit from appreciation after the principal reduction.

      1. RichW

        I do care, whether it happens through bankruptcy or not, because it is likely the bank (or GSE or whomever owns the loan) will absorb the loss, and pass it on to us prudent taxpayers.

        But with the momentum that the ‘helping this guy’ crowd is gaining, with cramdowns or principal writedowns, I am very concerned.

        The BK judge can deal with the cramdown however he/she pleases, so the treatment may not be very consistent, and may still lead to huge bank (taxpayer) losses down the road.

        Now, if I’m the bank, and the gov’t. is not promising to absorb any of my losses, then I’m motivated to step into the BK proceedings and make ‘reasonable proposals’ as a secured creditor. Use of an amortizing first and a ‘silent second’ to assure recovery is one way… but is the second going to be at a below-market interest rate? Who’s subsidizing that?

        I would prefer the gov’t step in prior to BK and support banks offering to refi loans that are ‘underwater’ for the original principal amount, for a monthly payment at a reasonable DTI, taking it all as interest. Make it a long-term IO followed by a recast to a normal amortizing product.

        Sure, this kicks the can down the road. But at least it prevents losses from being foisted on the taxpayer upfront while allowing someone else to profit thereby. I daresay many won’t take the deal, and enough liquidations take place to allow prices to work their way down to reality. But at least this olive branch would prevent the principal writedown schemes from gaining traction in the government circles, the media and with the public at large.

        Such schemes would require changing law to allow the banks to knowingly write such ‘under-secured’ loans.

        But if many of these loans can be recast with terms that enable continued debt service while avoiding the losses from being dumped on the rest of us, I’m for it.

        I also am considering that the likely effect of price (and later, wage) inflation from the huge monetary inflation forces we will be under with multi-trillion dollar deficits and money supply expansion, for the next N years, will be to ‘reflate’ the paper value of the house to the original principal value, within those N years. I’m thinking it may happen for N=5-8, so a 10-year recast period ought to buy sufficient time.

        In the mean time, the ‘homeowner’ is really just a glorified renter. His/her choice. Just don’t stick the rest of us with the bill to gift them the property.

      2. Dan

        I’m not sure that this change in the law, if enacted, would result in all reductions in principal being made in bankruptcy. Back in the late 80’s or early 90’s, Congress added Chapter 12 to the Bankruptcy Code, which allowed farmers to have kind of a simplified Chapter 11/13 bankruptcy. I am not a bankruptcy practitioner, but one lawyer I know was with a small firm that cut a wide swath through the various ag lenders’ books in the rural South. Once patterns of what judges would allow in bankruptcy were established, then in many cases debtors and their lawyers could negotiate deals with lenders without ever filing bankruptcy. The same might well happen with home mortgages. Of course, those farm loans had not been syndicated.

    2. MalibuRenter

      One of the interesting things about cramdowns is how often they are the best course of action for the lender(s).

  8. granite

    Why should we “save this guy”? What’s the worst that can happen to this family if they foreclose, a bad credit rating for several years? Living in a (heaven forbid!) apartment? Letting it go into foreclosure and taking the neighborhood prices down a notch is fine with me. At current prices I have no interest in a lease-option.

    I think Mr. Mortgage has a personal stake in his solution.

    1. IrvineRenter

      “Why should we “save this guy”?”

      That is the question nobody is asking. Politicians want to save everyone so they can get reelected. Anyone else with a stake in the process simply wants to make money.

      This guy should not be saved, nor should anyone else in his circumstances.

      1. Fermi Pyle

        Suppose you don’t care about “saving this guy” but still want to do what is best for everyone else. If “this guy” could retain ownership with reduced principal and interest, all surrounding owners and lenders would benefit from one less shabby and abandoned forclosure hitting their local market. The lender (and taxpayer bailout) has already lost much of the mortgage value. Why take an additional forclosure hit of lost interest, fees and commissions to change owners?

        Why don’t more of you commenters admit that it isn’t that you don’t care about this guy. You do care about this guy, and intensely. You care so much about wanting him lose his house that you want all surrounding owners, lenders, and taxpayers to be worse off from another forclosure. Just as long as “this guy” gets some kind of punishment.

        1. freedomCM

          you are right. i want this guy out of his/the bank’s house.

          because i want to buy it at a fair price. and live in it, and maintain it.

          in fact, i want all these guys out.

          i want the market price to adjust so that median earners can buy median houses.

        2. Major Schadenfreude

          “You care so much about wanting him [to] lose his house that you want all surrounding owners, lenders, and taxpayers to be worse off from another forclosure.”

          Fermi Pyle is demonstrating the prevalent warped perception about home values.

          Foreclosures will be purchased at whatever the market deems it is worth. Homes will NOT sit vacant if it is priced properly. Sure, homes may sit vacant out in the bundocks of the IE, but that means homes should never have been built there!

          How is society going to be “worse off” because homes will become affordable?

        3. MalibuRenter

          “Why don’t more of you commenters admit that it isn’t that you don’t care about this guy. You do care about this guy, and intensely. You care so much about wanting him lose his house that you want all surrounding owners, lenders, and taxpayers to be worse off from another forclosure. Just as long as “this guy” gets some kind of punishment.”

          You bring up a group of what are often innocent victims: neighbors. A decent portion of them didn’t have anything to do with the bubble. Some of them didn’t even take out helocs.

          I am one of those who think people shouldn’t just get principal reductions. I think your principal reduction should come with consequences. Community service is one of my favorite consequences. Want your loan reduced? Alright, the Federal Govt will help subsidize that, but you’ll have to clean up trash by the freeway every saturday for the next two years.

        4. nefron

          Hey Fermi, we just don’t want to be the suckers who essentially pay off the debts of greedy home buyers. Let them pay for it. How about some sympathy for those of us who sat on the sidelines and didn’t live the high life because we knew we truly couldn’t afford it?

        5. NOT

          Hi all, lurking for about 1yr now, decided to start posting 🙂

          If the neighbors are/were responsible, they will not be affected by a return to “reasonable” home prices. Therefore they are not victims.

          If the lender were responsible, this person would not have been allowed to buy this property as they can not afford the monthly payments. The lender decided to get a short term gain by financing a loan that can not be paid off. Therefore they are not victims. (They are deciders! :-).

          The current tenant can’t afford the current tax rate, therefore the tax payers are a victim to the current home “owner”.

          The only way that the tax payers are going to catch a break here is if this house DOES go to foreclosure AND becomes affordable. Then some lucky tax payer will be allowed to pay more taxes and stimulate the economy by purchasing this property.

        6. IrvineRenter

          “Why don’t more of you commenters admit that it isn’t that you don’t care about this guy. You do care about this guy, and intensely.”

          I think most don’t care what happens to this guy, but we do care that he not benefit at our expense. In many ways he already has. He has had the use of real estate for which he was not entitled, and now he expects us to step up and subsidize him so he can keep it. I really don’t care if he is punished or not, I just want him out of my house.

          1. mwwatcher

            yes, get out of my house, I already paid thru 700 billion, we are calling America back: Honesty, Justice, Courage

          2. Fermi Pyle

            IR, I’ll grant you the assumption that this owner did not have the means to have bought this house with traditional down payment/DTI so therefore he was “not entitled” to it. I won’t make the leap that everyone else “not entitled” should have their homeownership stripped away.

            They have already benefitted at our expense. The question is, are there further shared expenses we could avoid if there are fewer forclosures? I say yes. Would it mean that when the market bottoms you wouldn’t get your house as cheap? Yes. You personally would incur greater costs, while the rest of us will pay more shared expenses.

            Banks will lose more money with higher forclosures. We taxpayers will pay more as buyers like you benefit.

            If there are “innocent victim” neighbors, it goes beyond them having theoretical value decreases. There is an oversupply of houses and a great shortage of traditionally qualified buyers. More forclosures means replacing owner(buyer) homes with non-owner occupied homes. You want more renters in our neighborhoods so you can buy cheaper.

            If there is some kind of morality involved, I see both they and you practicing “I don’t care about anyone else, I want to get mine”

  9. Jim Jones

    “That would mean all the responsible would be required to subsidize the foolish and irresponsible who crowded the responsible out of the housing market. That would probably make my head explode.”

    I find myself getting angry at the mere suggestion of this. I don’t understand how the current housing situation discussion got framed as a “foreclosure crisis.” The only “crisis I see is one of lack of affordability. How is it a crisis that irresponsible people need to return to renting? Principle reduction? Huh? Give me a freaking break. So if I go out and take out a loan for a Lamborgini will the bank offer me a principle reduction after I realize I can’t afford the payments?

    I see two sets of groups with some overlap. We have renters who decided to purchase a home that was well beyond their means with loan products that were not sustainable and then we have HELOC abusers. I don’t understand what is so bad about these folks becoming renters again. Why is everyone so desperate to keep these people in homes that they have no equity and really no financial stake in. In one sense they aren’t really homeowners as they don’t own anything. The banks own their homes the “owners” are merely the current occupants. What is so special about their situation that warrants a bailout? I don’t get it.

    I don’t understand what these people’s long term plan was. Were they simply going to refinance every year? Forever? With the exception of those who are about to retire and wish to cash out their equity in their home the only home owners I see who are being negatively impacted by falling home prices are by definition people who never should have purchased a home in the first place.
    Crisis? What crisis?

    1. zubs

      Home owners and flippers are very similar. They switch between the two quite readily. When they need help, they are home owners. When housing is going up, they flip their house and move to a bigger one.

      I find no distinction between greedy home owner and greedy flipper.

    2. MalibuRenter

      “I don’t understand how the current housing situation discussion got framed as a “foreclosure crisis.”

      Good point. Perhaps something neutral like “home price crisis”? Maybe something a bit more angry like “Irresponsible lending crisis”?

      Maybe what you really mean is that the foreclosure part is the cure, and the irresponsible lending and borrowing was the crisis?

      1. Jim Jones

        “Maybe what you really mean is that the foreclosure part is the cure, and the irresponsible lending and borrowing was the crisis?”

        In the grand scheme of things the fact that responsible people got (temporarily) priced out of the housing market is not a crisis. But conversly I don’t beleive that irresponsible buyers having to go back to renting again is a crisis either.

        Foreclosures are a natural and easily predictable consequence of poor purchase (and post purchase) decision making.

        The MSM for the most part has consistantly failed to point out that the primary cause of foreclosures is not sagging home prices but instead it is a consequence of buyers over extending themselves and utilizing financing (ARMs, Option ARMs, etc) that were not sustainable for longer than a short period of time.

        It’s not that complicated. People who took out 30 year fixed loans with affordable payments are not at risk of losing their homes due to falling prices. PERIOD. I don’t think that the majority of Americans grasp this this simple fact. If they did I can’t imagine there would be any significant support at all for any of the various foreclosure bailout proposals.
        Excepting job loss the majority foreclosures are the direct result of poor decision making. Maybe the tax payers will eventually figure this out. If they do I’m pretty sure if won’t be the result of MSM reporting.

  10. SeattleDave

    IR — I, like you, think that the days of lax lending standards are over in the mortgage market. However, it might be instructive to observe what has recently occurred in the automotive segment, another area where I thought lax standards had fallen by the wayside.

    Recently, the feds used TARP funds to prevent GMAC from going into bankruptcy (to the tune of $5B, with another $1B to GM to buy GMAC preferred stock). The first thing GMAC did with the money was announce that they were lowering their FICO score for auto loans from over 700 to 621; one point above subprime. They felt that this was the best way to get people to qualify for auto loans who had been shut out of the market for cars.

    So if they can use taxpayer funds to backslide in autos, then perhaps they can do the same with mortgages.

    Lord, I hope not, because it didn’t work the last time around.

  11. Shalom Patrick Hamou

    Sorry! Quantitative Easing Won’t Work

    In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

    Hence, the Keynesian paradigm I = S is not verified.

    The purpose of Quantitative Easing being to lower the yield on long-term savings it doesn’t create $1 of investment.

    It does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on savings.

    This and other issues are explored in my tract:

    A Specific Application of Employment, Interest and Money
    Plea for a New World Economic Order


    This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

    It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

    It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes’ Liquidity Trap…

    It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

    A Credit Free, Free Market Economy will correct all of those dysfunctions.

    The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

    A Specific Application of Employment, Interest and Money

  12. Lal

    Dear IR,
    First time I write here, though I learn from you for quite a while. We are foreigners, about to relocate to Irvine, and apart for a very unwelcoming reply to a question I posted in the forum here, we are quite enthusiastic (along with the normal level of hysteria).

    As to the specific question in this post – No one needs to save the homeowner. He is in no trouble. He has put 0 $ on this house so he is going to loose 0$ when foreclosure comes. As I understood in those last few months (in which I try to learn American way of leaving) what he is going to loose is his “credit” for 7 years. During those 7 years he will have to live from cash that he earns, and from savings. Isn’t this a better way of financing your day to day life? I believe life can be really difficult without credit but this is a small penalty compare to the one his bank is going to have, they will have to pay whatever the house selling will not. Am I wrong?
    If I am wrong – please enlighten me.

    If I am right – what I would do if I was this home “owner” – is stop immediately paying the mortgage, and go to foreclosure and to live in rent. This house was never his any-way.

    One remark as to one of the suggestions here – I would have loved to have the chance to “lease to own”. I was looking for that for a long time, and could not find any in Irvine. A 2-3 years of leasing and buying the house means I could buy in a better price, without the need to move again (because now buying doesn’t make sense).

    Thank you for your blog, we learn a lot from it.
    Have a great 2009.

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