Housing Guru Calls for Principal Reductions

No, not me. John Mulkey, Housing Guru from Waleska, Georgia, calls for principal reductions. Today we examine his arguments and a beautiful short sale in Shady Canyon.

96 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 96 CANYON Crk Irvine, CA 92603
Resale Home Price …… $4,500,000


Who are you?
Who, who, who, who?

I woke up in a Soho doorway
A policeman knew my name
He said “You can go sleep at home tonight
If you can get up and walk away”

I staggered back to the underground
And the breeze blew back my hair
I remember throwin’ punches around
And preachin’ from my chair

Who Are You — The Who

So who is John Mulkey, Housing Guru from Waleska, Georgia? He is a realtor who posts on Active Rain to network and find business. He expresses opinions shared by many realtors — and he couldn’t be more wrong. He managed to write a post I interpret as genius parody, a channeling of sheeple energy so full of unintentional irony that it casts reflective light on the tormented souls of the clueless masses.

Punishing Foreclosure Victims Only Continues The Pain For All Of Us

“While news stories, articles, and blogs continue to be written about “Strategic Default” and how those facing foreclosure shouldn’t be allowed to walk away or have their mortgage balance reduced, punishing foreclosure victims only continues the pain for all of us.
The problem we face isn’t one of a few hundred or even a few thousand
who carelessly spent beyond their means;”

It is way, way more than a few thousand who carelessly spent
beyond their means. Mortgage Equity withdrawal was fueling the US
economy for the last decade
. The attempt at minimizing the issue is
hereby exposed as fraud.

“this issue touches tens of
millions of U. S. homeowners, the majority of whom acted responsibly,
and with the knowledge available to them at the time. Most thought they
were making wise choices. How
can we blame the homebuyer for not seeing the fallacy of never-ending
home price escalation?”

The sheeple bought on the foolish advice of realtors, the experts, probably using a toxic loan per the foolish advice of their mortgage broker, another expert. I will acknowledge that we cannot blame homebuyers; we should blame realtors and mortgage brokers who peddled that bad advice as experts.

“In their recent testimony before Congress, the
heads of the big banks said they didn’t see it. Jamie Dimon,
Chairman and CEO of JP Morgan Chase said, “Somehow we just missed that
home prices don’t go up forever,” an erroneous assumption shared by the
U. S. Treasury.
And if the “brilliant” minds on Wall Street
didn’t see the crash coming, who could expect those on Main Street to
have superior knowledge? Regardless of what Mr. Dimon may have
known, few anticipated the intensity of the housing crash or the scope
of its reach.”

When I read this quote, I burst out laughing. The author of this post was using this quote as support for his argument that experts failed and therefore he is not responsible for anything. The irony of the quote and the subtle sarcasm in Mr. Dimon words completely escaped the author. And for the record, many people from Wall Street to Main Street saw this coming, me included.

“It’s time to stop blaming the home purchaser and to
accept the only workable solution for both them and for the housing
market in general. It’s time to see beyond what we perceive as the
“morality” of the solutions for those facing foreclosure, and to look
to what solution best serves the country as a whole. And that is to
reduce the principle of homes underwater to their current value.”

WTF? The reasons for me not wanting to give money to my underwater neighbor are many and complex, and “putting aside morality” and taking one for the team are not likely to persuade me to change my mind. Remember, responsible homeowners are NOT losing their homes. Who am I supposed to pity? The genius whose idea of personal finance is a Ponzi Scheme?

I have an idea; why doesn’t the author start writing personal checks to the lenders himself. Isn’t that what he is asking us to do? Somebody has to lose a great deal of money, and as someone who had nothing to do with the fiasco, I really don’t want it to be me. I don’t want the government to use my tax dollars to bail out anyone, much less a HELOC abuser who looks down on me as a lowly renter.

an action would immediately help to stabilize a large portion of the
market, and would protect neighboring homes from further declines in
value. It would not affect the bank’s or investor’s equity, for the
homes are only worth what they’re worth; and foreclosure sometimes
results in below market returns.”

The problem with banks is not the equity in the property, it is the book value of their loans. Writing off the balances would wipe out our banking system, that is the problem. The author thinks this has something to do with home values; it doesn’t. This crisis has everything to do with bank loan balances, capital ratios, and borrowers making payments. Since he has incorrectly defined the problem, any solution he comes up with will be erroneous.

“Those who speak of the inherent
unfairness of such a solution fail to consider the ultimate damage of
continued foreclosures, the consequences of which will depress home
prices for years.”

So what? Home prices are what they are. What difference does it make to society if home prices are up or if they are depressed? If people are living in their homes and making payments, it should not matter. Depressed or stagnating prices does rob realtors of their ability to stoke buyer fears to inflate housing bubbles, but it also makes housing affordable for real families and stimulates the economy by freeing up personal income for personal spending rather than spending on debt service.

“If we’re serious about solving the foreclosure
crisis, let’s address the underlying cause—homes worth less than their

The underlying cause of default is not negative equity. Negative equity is motivating defaults because the sheeple were told by realtors and mortgage brokers prices would go up forever, and when that did not happen, they bailed. Negative equity merely exposes the poor underlying motivation for home ownership: making a profit, and the people are making a rational business and investment decision when they default. Perhaps if realtors didn’t create false expectations through their ridiculous representations about appreciation, then negative equity will stop being a problem because owners will pay less attention. In addition, negative equity will stop occurring because people will not buy for foolish reasons and inflate housing bubbles.

“I’ve recently seen comments from some
who said, “I don’t care if my home declines in value, I don’t want to
save those who acted stupidly.” And while I doubt that those making
such statements really aren’t concerned about future decreases in the
value of their own home, I do think they want to punish those who they
perceive as taking advantage of the situation.”

Did this guy just call everyone who disagrees with him a vindictive liar?

“However, the problem
extends beyond housing, and millions will continue to suffer until we
begin to restore economic order and sanity. We must do something; and
the palliative measures of government have demonstrated their
inadequacy to bring solutions. What is needed is bold action, from
leaders unafraid of the political consequences. Whether it’s
legislation to allow for “cram-downs” or forcing banks to lower
principle balances on homes underwater, to fail to enact a workable
solution is to allow the morass to continue; indeed to perpetuate it.”

I agree with his conclusion that failing to act will cause the morass to perpetuate.

Great! Bring it on!

Populist appeals to self-serving instincts give false hopes to many, and contrary to the author’s desires, such false hopes from posts like his only serve to allow the morass to continue; indeed to perpetuate it.

Negative equity is not a a complicated or confused situation, and the defaults and foreclosures are not a social problem requiring government intervention. Calling for someone else to pay the price, notably shifting the entire burden of poor decision making from borrowers to lenders and US taxpayers is never going to sit well with me.

Lenders are more culpable than borrowers, but not that much more, and I am not thrilled about seeing lender’s share of the losses increase as long as I am guaranteeing them.

No twist of logic or compelling narrative is going to remove the moral hazard; principal reductions to restore equity are wrong, and I will speak out against them as often and as loudly as I can.

96 CANYON Crk Irvine, CA 92603 kitchen

Irvine Home Address … 96 CANYON Crk Irvine, CA 92603

Resale Home Price … $4,500,000

Income Requirement ……. $943,473
Downpayment Needed … $900,000
20% Down Conventional

Home Purchase Price … $5,700,000
Home Purchase Date …. 5/11/2007

Net Gain (Loss) ………. $(1,470,000)
Percent Change ………. -21.1%
Annual Appreciation … -8.5%

Mortgage Interest Rate ………. 5.11%
Monthly Mortgage Payment … $19,568
Monthly Cash Outlays ………… $25,200
Monthly Cost of Ownership … $17,980

Property Details for 96 CANYON Crk Irvine, CA 92603

Gourmet Kitchen Award

Beds 5
Baths 6 full 2 part baths
Home Size 9,489 sq ft
($474 / sq ft)
Lot Size 28,766 sq ft
Year Built 2009
Days on Market 373
Listing Updated 1/20/2010
MLS Number C10006941
Property Type Single Family, Residential
Community Turtle Rock
Tract Rb

According to the listing agent, this listing may be a pre-foreclosure or short sale.

Come see this beautiful Tuscan Style Estate with views of the canyon and city lights in the gated community of Shady Canyon! There is approx 9,489 square feet of living space including a separate pool house with 3/4 bathroom and kitchenet. The gourmet kitchen and butlers pantry has ample space to prepare for dinner parties yet functional for everyday cooking. Take the elevator to the basement for the theater room and an additional room that can be transformed into a wine room, gym or bonus craft room. The main floor boasts a library/study, formal living room, informal living room, TV family room, gourmet kitchen with butlers pantry. Outside you will find a pool and spa, built in BBQ and bar area, outdoor fireplace with seating area, three separate water features including the entry fountain. This Estate is awesome!

Gourmet Kitchen Award

Two gourmet kitchens? How many do you need? Do you often have visiting gourmets that need a place to work?

A few weeks ago in Foreclosures Ravage Irvine’s High End, I profiled 63 CANYON Crk Irvine, CA 92603, a new build in Shady Canyon where the owner walked and let the lender take back the property. On that property, the lender is holding out for an unrealistic asking price hoping to break even.

Today’s featured property is another big lender loss on the way. They are advertising the property as a short sale to generate interest, but I question if they will find much. Everyone knows more of these properties is coming, and nobody wants to be a knife catcher. Many will anyway.

How long before they give up on the short sale and move this property?

Foreclosure Record
Recording Date: 12/23/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)

Foreclosure Record
Recording Date: 09/21/2009
Document Type: Notice of Default

101 thoughts on “Housing Guru Calls for Principal Reductions

  1. FormerIrvinite


    “With regard to modifications, as I’ve argued in great detail in prior commentaries, I am not an advocate of providing public funds to make mortgage lenders whole, but instead advocate using the Treasury as a conduit (as a coordinating mechanism rather than a funding provider) to administer the aggregation of what I’ve called “property appreciation rights.” These would be tradable claims on future home price appreciation created in return for mortgage principal reduction.”

    1. AZDavidPhx

      This sounds like more tail wagging the dog economics. It ignores the prospect of a Japan style 2 decade declining market and goes back to the old house prices always rise law.

      If I am understanding this logic correctly, the treasury is being asked to basically make a 0% loan to house debtors using future inflation adjusted appreciation gains as a form of repayment.

      How is this not leaving tax payers holding the bag? A house debtor borrows 1.00 to reduce his principal on his house. A year later that dollar he borrowed is now worth 97 cents. He repays that dollar to the treasury who now has 3 cents less spending power on their loaned money.

      I see no reason for house debtors to enjoy this kind of sweetheart deal using money paid by renters such as myself. What’s even funnier is when you think about how much of this public money is paid by house debtors to be redistributed among the house debtor cartel just to keep their property prices from taking a dive. Just more circle jerk theory that our entire economy is founded upon.

      1. SAKMAN

        I see no reason for the principal values to be reduced for home debtors that need it in order to stay in their homes. . . IF in order to get the reduction to “market values” they are penalized.

        The problem with this whole situation is very simple. If the U.S. Government (i.e. it’s people) don’t pay up to the banks they threaten to crash the financial system. So, the banks won’t take the loss. If the U.S. Government or the banks attempt to penalize people in these houses, they will simply walk away. So, the debtors won’t take the loss. So, the only people to take the loss are people that aren’t involved, many of which don’t know what the hell is going on.

        A reduction in principal is massive social favoritism, and it is favoring the very people who are least productive in our society. I know droves of M.D.s, Ph. D.s and Lawyers in Southern California who didn’t buy, and who still refuse to buy on the basis of prices. These people are smart. . . and just like Halliburton they might move their headquarters off shore if things don’t change right quick.

        It’s the problem with Democracy – If more than 50% of the country are homeowners and they are all underwater, how will they vote?

        If more than 50% of the country work for a Union, government or otherwise, how will they vote?

        We are rapidly approaching a point where the people who are the least productive will attempt to vote for their own prosperity at the cost of everyone else.

  2. E

    I’d take the cramdown (with the agreement of sharing future equity) and then immidiately firesale my house for the new loan amount, split NOTHING with the bank, walk down the street and buy a house that I would get to keep ALL the equity.

    1. AZDavidPhx

      Exactly – this ‘future equity’ canard is complete nonsense. It is just code for a 0% loan from all your neighbors payable over a 30 year time period.

  3. AZDavidPhx

    Come on, money is just paper! We have lots of trees; we can always chop a few down and make more it! Why keep blaming homeowners?!


    Don’t you love this juvenile view of the world? He is essentially saying that the banks have unlimited money so writing off a portion of a house debtor’s principal is no big deal for them.

    punishing foreclosure victims only continues the pain for all of us

    So having to pay off your debt is now a form of punishment.

    How can we blame the homebuyer for not seeing the fallacy of never-ending home price escalation?

    The same way we blame carowners for not seeing the fallacy of never-ending car price escalation.

    “In their recent testimony before Congress, the heads of the big banks said they didn’t see it.

    LOL! Of course that is what they said! Why go before Congress, ruin your day, give up your B.S job, and incriminate yourself by making statements like “Yea, we all saw it coming and kept making loans anyway”. Who is going to do that? Are you a moron?


    It’s time to stop blaming the home purchaser and to accept the only workable solution for both them and for the housing market in general.

    He’s right! Let’s blame the realtors instead! Let them give back all of their 2003-2007 commissions to underwater house debtors so they can reduce their principals. It’s time we stopped blaming buyers and assigned realtors their fair share.

    I honor this realtor’s passion for wanting to help house debtors; I am sure that he will be ready to step up!

    1. matt138

      I’m assuming all of his commission checks were quickly spent on fancy crap and an overpriced home.

      Kamikaze Altruism. Give until it’s gone.

  4. Making Homes Cost More Programs

    There is no need for the public to worry their little heads about principal reductions; debating the pros and cons.

    The global banking system will decide what is necessary to make the banking system solvent. When all else fails (and it will) the government will step in yet again and pick up the tab for principal reductions.

    “Hey there sport, how would you like a principle reduction? What’s that you are afraid you may have a big balloon payment? No problem, how would you like a 100 year non recourse zero coupon bond backed by the government? Your kids won’t even have to pay for this, well they might with inflation *snicker*.”

  5. QueenCityEddie

    Well if defaulting on a no recourse mortgage is not a moral issue – and I believe it is not a moral issue – then the exercise of foreclosure rights should not be considered a punishment. It seems common sense that it is primarily the prospect of getting tax dollars through various schemes that is preventing a serious look at principal reduction by lenders. Sure, it’s a pipedream, but maybe the lender on a property that is mortgaged $80,000 more than it could sell for would consider a principal reduction if he/she understood that there was no help anywhere in making the best of this dud loan. But even then, if the lender refused to entertain the idea, an eventual foreclosure is not a puhishment.

    1. AZDavidPhx

      I like how these quacks act like reducing the principal on 10% of loans on a bank’s balance sheet will result in absolutely no consequences on the remaining 90%.

      You take 10 house debtors, bring them into a room together and announce that house debtor 1 “HD1” is having a hard time making his mortgage payments so he is being rewarded with a reduction of his overall balance without having to go through all that flipping cheeseburger, waiting tables production.

      As we all know, the rest of the story goes something like this:

      HD4: I chipped a finger nail and can’t work help me too!

      HD7: I am in shock from all the unfairness! I am going to the hospital and can no longer wash cars!

      HD1: If HD4 and HD5 don’t have to pay then why should I? Screw this!

      and on….. And on……

      It’s why these dumbass zero-sum arguments that drive policy NEVER work.

      1. ME

        This why our schools have failed to teach math over the past. They want to keep the sheeple stupid enough to pull of the biigest transfer of wealth in history.
        Don’t be suprised to hear our polititians declaring cramdows “the people’s bailout”.

        1. AZDavidPhx

          I actually see the ‘dumbing down’ of our culture as more of a willful act by a majority of folks who just don’t care as long as they ‘got a job’ and a hundred and fifty sports channels to wank themselves too on any given weekend.

          It’s a personal choice that corporations are more than willing to accommodate.

          We can make all sorts of educational claims using our University’s muster rolls – but that’s simply because a 4 year college degree is the new High School diploma in this country. It doesn’t mean that everybody went to realize their full potential. On the contrary, we have a society of under educated people walking around with a diploma that is nothing more than evidence of all tuition funds paid to that organization’s Bursar’s office.

          Just like subprime mortgages, the universities in this country are now all about subprime diplomas where lots of money can be made by hustling people with access to easy credit.

          I don’t see it as a grand scheme to dumb down everybody. It’s just a response to the wants of a lazy customer.

          1. nefron

            I totally agree with that. I can’t believe how people have been hustled into taking out huge loans to go to “college,” which is nothing more than glorified high school.

            Has the U.S. always been about one giant hustle after the next? Back in the middle of the bubble, all you would hear on the radio is how you can withdraw equity from your house to buy a boat, take a dream vacation, blah, blah, blah, you deserve it. Now the non-stop radio commercials are loan mods, loan mods, loan mods, and don’t dare try to talk to the bank yourself, ’cause you don’t know what you’re doing, you’re gonna get screwed. This “higher education” loan hustle has been going on for a couple of decades, when are people going to start walking from their college loans en masse because they feel like they got swindled? It just makes me wonder if this kind of stuff has been going on in the “land of opportunity” since I was a kid, and before, and I’m only now waking up to it.

          2. Jwinston2

            If both of you are suggesting that attending “college” is not a worthy goal then all subsequent posts from either of you should be questioned. Granted soft majors are questionable but engineers, chemists, mathematicians, and physicist hardly received educations that can be considered glorified high school general education degrees.

            Yes I am an engineer; and what I learned at “college” allowed me to have a fundamental understanding of what was necessary to perform my current job. I suggest you build a building of five or more stories without an engineer and see how comfortable you feel when an earthquake happens; or the next time you go to a hospital make sure you use one of those high school education made defibrillators to restart your heart and save your life.

          3. AZDavidPhx

            The majority of our ancestors in this country were farmers who used the land for their own production. There was no such thing as a 30 year mortgage. Often times the government gave away land (see Homestead Act). Followed was a second industrial revolution where people left farms to work in factories.

            Now we produce no goods – all services – especially ‘Financial’ services. You can see where all this has led . I would argue that we are in uncharted waters that we began sailing around the 1970’s.

          4. AZDavidPhx

            jwinston –

            Note the caveat in my original remark where I purposefully said ‘full potential’. I said this to imply what I said which is that not everyone goes to realize their full potential.

            The 25% prime students still get in and make it just fine.

            The remaining 75% subprime students show up for the party and get passed along until their four years are up and the next wave enters.

            That is the difference. The universities used to only go after that top 25% percent only and deny entrance to that 75% subprime student.

            Now they all let in anybody with access to a loan. Students shop universities like a pair of pants.

            Grade inflation policies pressure the instructors to dole out A’s to keep the paying customer happy. Have you noticed from all the resumes that EVERYONE is on the honor roll at their school? Come on.

          5. nefron

            Where did you see anything about engineers, chemists, etc… being high school level educations? I happen to have one of those degrees. And let me give you an example of why I eel the way I do. When I was a graduate student, more than 10 years ago, I had to tutor freshmen chemistry students. I was amazed then at the inability of some of these students, who, mind you, had to take chemistry for their own degree, couldn’t do some simple algebra. I naively wondered then how in the world someone could get a high school diploma (let alone get into college) without knowing how to multiply fractions – what, fourth or fifth grade level math? Yes, I think education has been dumbed down. Kids are mindlessly funnelled into college now to get some college degree they struggle to get a job with, at the cost of thousands of dollars when, a generation or two ago, they would have gone to a vocational/technical high school and gotten a trade job after school with no debt. To me, the higher education system in this country is just one more BS economic sector that is fueled by the debt of the middle class.

            I have enormous respect for people who are bright, work hard and earn a college degree at a respectable university in a difficult subject. They put me to shame. I have no respect for administrators at these second and third rate colleges and universities who admit students who are just burdening themselves with debt for a degree they can’t get a job with.

          6. Jwinston2

            Note you also said “but that’s simply because a 4 year college degree is the new High School diploma in this country.” This is a completely inaccurate description of any hard science education. You can try and spin your point but your point is still invalid. A college education in the hard sciences is still valuable and not the new high school diploma. Your full potential comment is a converse error argument. Anyone can not live up to ones potential regardless of education.

            The top universities do not let everyone in with a loan, of the top 25 schools in the United States, the highest acceptance rates were around 38% (http://colleges.usnews.rankingsandreviews.com/best-colleges/national-universities-rankings/). Everyone can go to high school; everyone cannot go to a top university.

            Grade inflation is a red herring and has nothing to do with whether going to college is similar to the “new high school diploma.”

          7. Jwinston2

            nefron did you say this?

            “I totally agree with that. I can’t believe how people have been hustled into taking out huge loans to go to “college,” which is nothing more than glorified high school.”

            That is the difference between our experiences. When I taught classes as a graduate student, most of the students understood the material and asked challenging questions.

            I agree with you that the low tier colleges are just in it for the money but your comments generalized “college” in general.

          8. AZDavidPhx

            jwinston –

            The 4 year degree is the new high school diploma whether you like it or not. You are taking a subset of 4 year diplomas being in the field of science and arguing that as proof of all 4 year degrees effectively trying to slam the square peg into the circular hole because I did not say a 4 year science degree is the new high school diploma.

            So stop with all the science talk. If you are going to come up with a counter example to disprove a statement then it has to encompass the entire statement that was made not a cherry picked sub-statement.

            We have all sorts of fluff degrees out there like Family Studies, Communications, Tourism, etc for our students to waste their time with. Notice that these are examples of 4 year degrees unrelated to Science.

            I would agree with you that Science degrees are more selective but it does not change the fact that a 4 year degree of some flavor to the students liking whether it be science or underwater basket weaving is the new high school diploma.

            I am not spinning anything. I think she blinded you with Science.

          9. nefron

            Your point is well-taken. I am generalizing, but I really am referring to those schools with low admission requirements who take students who would be marginal at a more demanding school. Justified or not, I feel like there is a college or university at every bend in the road these days, and most of those students would be better served learning a trade or occupation that doesn’t require taking out thousands of dollars in student loans.

          10. Fishhead

            I’ll definitely agree that an undergraduate degree is one of the best investments anyone can make (it really doesn’t matter which university you go to if it is solid, certified and offers what you want to study). It generally not only makes you a more well-rounded and employable person, but it is the ticket needed for entrance to most professional jobs. Generally, money well spent if your serious about what you’re studying.

            The degree that I think is often a bad investment is a graduate degree (especially MBAs and MPAs). Unless your working and the employer is paying for it or your working on a very specifc path (i.e. medical school, PhD in science, or something like that), the numbers just don’t add up. I’ve seen lots of friends run back for an MBA or JD because they thought that they would do better fincancially. So after 2 or 3 years of no income, $ 50 K or more in tuition, and lots of stress, they hop back in the work world and realize that they only making a few bucks a year more. The stats I’ve seen say that an MBA gives you about $ 10 K per year more. Great, you’re now $ 250 K behind the person who stayed in the field, worked and got lots of OTJ experience.

            The smart ones get their company to pay for the schooling. The real smart ones get their company to pay for their schooling and give them time off for it.


          11. Jwinston2

            “The 4 year degree is the new high school diploma whether you like it or not.” I did not know Gavin Newson posted on IHB.

            Being wrong must be hard but stop making a hasty generalization. You make a broad conclusion based upon a small number of fluff degrees offered at universities. If you make a general statement and then that argument fails when you apply a subset of degrees offered, your argument is a failure. Revise your argument to state “fluff degrees” or something equivalent otherwise your statement is incorrect. You cannot cherry pick subsets within a set and say “see my statement was correct,” while ignoring all the other subsets, such as science degrees.

          12. AZDavidPhx

            You just need to read more.

            Google ‘college education bubble’ to start with.

            Then try ‘college grade inflation’

            Then try ‘college education myths’

            Free readings – enjoy em.

          13. Jwinston2

            I was thinking the same about you. I would suggest reading the following:


            Then I would suggest you actually do a search in Google on:

            ‘college education benefits’
            ‘college education myths’

            In particular pay attention to the fallacy links, so you can hopefully understand your red herring arguments about grade inflation and the tuition bubble which are irrelevant to “bachelors of science = high school general education degree.”

          14. AZDavidPhx

            You might also enjoy some talks by Charles Murray available on youtube. Go on over there and type ‘Charles Murray education’

            I double dog dare ya!

          15. Jwinston2

            I do know about Murray and the Bell Curve. I triple dog dare you to read the criticism of his work:


            Also read,

            Fads and Fallacies in the Social Sciences by Steven Goldberg
            Stumbling on Happiness by Daniel Gilbert
            Intelligence and How to Get It: Why Schools and Cultures Count by Richard Nisbett
            Any of the recent research papers by Daniel Schacter in pubmed (www.pubmed.com)

            Also check out:

            Again this has nothing to do with your original assertion.

          16. AZDavidPhx

            Nice criticism.

            I particularly enjoyed the straw man deployed by the author rephrasing his views to “let’s ignore the bottom 90% and focus on the top 10% for academic development”.

            The above statement is a perversion of the view that journalists don’t need 4 years at college to become effective journalists.

            You are going to have to try harder than that winston.

          17. Jwinston2

            Continue to ignore the work of the other Harvard professors that disagree with Murray or the neuroscience work done by Daniel Schacter.

            “You are going to have to try harder than that winston.” Actually the ball is in your court not mine.

          18. Goatse

            I don’t know what college you went to, but mine was much more challenging (and interesting) than my high school.

          19. tonye

            Not all schools are like that. I agree that many of the public schools are becoming mills but there are good schools out there that do teach how to THINK.

            But, they are mostly private.

          20. Gemina13

            Exactly how I’m doing it. I plan to stay in my field, and the degree will help.

            What kills me are the people I know who get an MBA because they think they’ll double their yearly income. It’s going to take me a couple of years of additional education and OTJ experience to double my income, and most of my friends aren’t even getting the advanced degree in their fields. Hello, monstrous student loan debt; goodbye, time you could have spent building your career!

  6. awgee

    Now do you see why I am saying the government sponsored principal reductions are on the way? Why do you think these morons are getting media space? And the banking system will not crash. Principal reductions will support the current banking system because the government, your tax dollars, will pay for them, and the banks will be able to mark the new principal as equal to the loans, or no losses. Remember IR, it is all about enriching the banks. If you keep that in mind, the next steps are obvious. You can call me crazy. Thornburg can call Ron Paul loopy. But, who has been right?

    1. AZDavidPhx

      Not going to happen, Awgee. The government is clearly taking the inflation route. Their entire purpose now is to run a confidence game on the sheeple.

      Use the Federal reserve to buy up crap mortgages to pretend there is some kind of demand for these financial products and snooker rookie investors.

      Send your PR lapdogs out on a media blitz using the word ‘recovery’ 10 times in each sentence and always divert the conversation to stock market gains; their little black dress they can pull out for any occasion. More jobs lost? Stock market gains! Increasing foreclosures? Stock market gains! Out of control government spending? Stock market gains!

      The goal is to keep the debtors slaving away – your ‘enrich banks’ theory doesn’t go far enough. Banks have all the money they need but without a mass of eager beavers ready to run on a hampster wheel for it – it means nothing.

      1. Making Homes Cost More Programs

        David, puke, the government has already bought a ton of the toxic debt at par value from the banks. The government didn’t buy at 60 cents on the dollar, they bought at 100 cents on the dollar. Government subsidized principle reductions are the next logical step. For someone who spends so much time on this topic you show a personal desire to not accept reality. This has always been about saving the banks, this has nothing to do with the debtors, they are simply pawns in the game.

        1. AZDavidPhx

          The banks have already been saved; the Federal Reserve has pumped them full of liquidity to absorb the remaining losses. It’s now a mission to make believe that everything is better and recovering now while sweeping all the debri over to the central bank who cannot run out of money and in theory sustain infinite losses.

          How can you say it has nothing to do with debtors? Of course it does. Where do you think the money is coming from to make the interest payments on the crap CDOs that Wall Street peddles around the world?

      2. cut

        I can share a lot of frustrations.

        From 2008 president’s election, we know people looking for a change, and Obama promised us he can do it, let why he won.

        IMHO, with current national debts and Wall Street domination ours country, the change required to really change the destiny, maybe too big for Obama to take.

        IMHO, Obama maybe really try to do it, but the scale is too big for him to take. This requires a ‘war’, a leader that has battled in the real combat field, maybe win the county by a revolution war, to have courage to make change.

        Obama maybe a missionary lawyer, but he won the country by “speech” and as a US senator already, he’s actually a politician indeed.

        He may already miss the best opportunity make a change last March by give trillion dollars to the Street. IMHO, people can early interpret the recent efforts is just a political movement.

        1. AZDavidPhx

          The monetary base has ballooned and it is sitting in banks reserves to absorb their losses. You aren’t getting a rise in prices because unemployment remains high and the banks have circled the wagons keeping credit tight.

          It’s all there though. The Fed says they can claw it all back before it enters circulation but if we look at history they tend to act WAY too late.

          I don’t know about you, but my depreciating money is on history.

          Watch for the government to start doling out big contracts followed by large scale hiring – this is when you are going to see prices jump (especially oil)

          1. matt138

            The banks are borrowing money for nothing from the fed and buying treasuries with it.

            The gov/t takes this money, inefficiently bails out banks, and artificially props up real estate prices.

            This is inflation.

    2. IrvineRenter

      “Principal reductions will support the current banking system because the government, your tax dollars, will pay for them, and the banks will be able to mark the new principal as equal to the loans, or no losses.”

      I could see the zero-coupon notes at 1/2% being purchased by the Federal Reserve as principal buy-downs. Basically, they print the problem away.

      I see that principal reductions could be done in a number of ways, and in the post from 2007 I linked to above, I also see some big problems with it.

      How do you apportion the write downs?
      How do you avoid moral hazard and further write downs?

      I think the larger point with principal write downs is that borrowers believe any program to write down principal will somehow benefit them. The only beneficiary would be the lenders as there would almost certainly be a recapture mechanism that prevents borrowers who received a cram-down from profiting.

      1. awgee

        First to Fannie/Freddie/FHA backed loans with the pretense that we are saving American homes and backing our institutions.

        Moral hazard can not be avoided. Principal write downs are immoral. Taking money from one person to give to another is immoral. Further write downs will not be avoided. They will be embraced as long as the banks profit from them.

        I am not writing about what should be. I am writing about what is and will be. A principal write down many benfit an individual, but it is taking money from you to benefit someone else. There is nothing moral about that, in fact, quite the opposite. It is theft, but people can no longer distinguish. Four legs good, two legs better.

        1. matt138

          Taking money from one person to give to another is immoral.

          Not only that, it creates a political tarpit of gov/t favors and entities competing for those favors.

          To all who read this blog who “mean well”: the road to hell is paved with good intentions.

          People have been warning about the dangers of having gov/t dole out favors for decades. We are on that road.

          The only way we can change this is by having everyone repeat after awgee: “Taking money from one person to give to another is immoral.”

          1. IrvineRenter

            I hope people follow the link back to you. Content that rich in detail and clearly explained is rare. Kudos.

        2. Making Homes Cost More Programs

          “I am not writing about what should be. I am writing about what is and will be.”

          Exactly, well said, predicting government subsidized principal reductions is like predicting the next president will either be republican or democratic. It’s not quite the same thing as predicting the sun will rise tomorrow but it’s pretty darn close.

          1. AZDavidPhx

            This is just plain ridiculous. The Government is going to make to make sure that it’s banking business partners are made whole – we all agree on that.

            The banks may do principal cuts here and there on a case by case basis, but there is no way in hell that the government is going to announce principal reductions for house debtors and induce a mortgage default wave all across America.

            I’d say the liklihood is closer to a snowball’s chance in hell.

  7. lowrydr310

    “punishing foreclosure victims only continues the pain for all of us”

    Not for me. Ok, I guess I should look at this differently. Don’t PUNISH foreclosure ‘victims’ rather let them get out of their mortgages and into a rental home that they can actually afford. How is that punishment? You can’t have your cake and eat it too (free house money). The sooner this happens, the sooner the market returns to normal and schmucks like me can actually afford a place to live.

    Since I am not comfortable allocating 40% of my take home pay toward housing, I guess I need to find a better paying job, but unfortunately that’s not going to happen.

    1. AZDavidPhx

      Nobody is punishing anybody. It’s just keeping the debtor to his pledge.

      It reminds me of a guy I know named AZDavidPhx who once had a car with a 6K loan balance when the engine gasket blew and the cost of the repair was equal to the balance still due. He now owed way more than the car was worth and the heartless bank was punishing him by expecting that damn car payment next month on a car that was not drivable.

      AZDavidPhx had to pay off that loan too and he did – no help for underwater car debtors programs were being considered by the United States Congress for him to take advantage of.

      He paid off the loan and life went on even after being punished like that.

  8. Stock Investor

    “Mortgage Equity withdrawal was fueling the US economy for the last decade.”

    IMHO, the reality is much worse. For exapmple, buying made-in-China products fuels economy of China.

    US workers are not competitive. It can not be fixed by you blaming realtors or government printing money.

    Consumption must be less or equal to production. Reduction in US standards of living is the most logical solution.

    1. AZDavidPhx

      Your statement about US workers not being competitive is ridiculous.

      Have you noticed the trend of executive pay in this country?
      That is one job that I am not seeing handed off to other countries. Why is that? Nobody else in the world knows how to do it?

      This is what it all boils down to. The executive class in this country grabbing more for themselves by exporting the middle class jobs to countries with different forms of government that do not sign up it’s citizens for the same priviliges that we sign ours up for.

      It creates a completely different playing field. I am going to assume then that you would be in favor of eliminating our child labor regulations so we can make our US workers more competitive. Right? We do need to get with the program here in America. Which factory shall we send your kid to work for?

      1. Stock Investor

        Executive management is expected to protect economic interests of shareholders and other stakeholders. Not interests of food stampers.

        Outsourcing is not a big deal, but symptom of low productivity. It is outsourcing what keeps US economy going these days.

        Also, child labor is definitely better than foreign invasion, defeat and slavery.

        1. Goatse

          Executive management is expected to protect economic interests of shareholders and other stakeholders. Not interests of food stampers.

          Tell that to the shareholders of Enron, MCI Worldcom, Lehman, Washington Mutual, Countrywide Financial, etc etc.. need I go on?

    2. IrvineRenter

      “Consumption must be less or equal to production. Reduction in US standards of living is the most logical solution.”

      Unfortunately, that is what I see coming.

      Frugal people won’t notice much, but the debt dependent will really see a change in their lifestyles going forward.

  9. lowrydr310

    “Frugal people won’t notice much, but the debt dependent will really see a change in their lifestyles going forward.”

    I was at a giant ‘upscale’ mall (very similar to South Coast Plaza) just outside NYC this past weekend and there was NO sign of a recession whatsoever. It was packed with people, and there were lots of people carrying bags full of consumer happiness.

    Come to think of it, aside from a bunch of empty small storefronts there aren’t many obvious signs of any recession in the New York area (NYC and surrounding area, including the suburbs in dirty jersey). Despite these statistically meaningless observations, there are still many reports about a high unemployment locally; the NY newspapers always show pictures of massive lines near employment centers, full of well dressed out-of-work professionals.

  10. freedomCM

    “David, the government has already bought a ton of the toxic debt at par value from the banks. This has always been about saving the banks, this has nothing to do with the debtors, they are simply pawns in the game.”

    My take is not that they are buying up the debt directly, they are letting the FHA buy it all (40% of house sales in Cali!), then when all those knifecatchers default (already 9%!), the gov’t will step in and backstop the FHA.

    One big game of debt substitution.

    1. AZDavidPhx

      I’m watching for the FHA shoe to drop. I am guessing we’ll be seeing another pile of counterfeit money thrown their way by the end of the year.

      2008 buyers are completely hosed in my neck of the woods. Sales prices of 450K with comps now at 330K. This is when FHA started ramping up it’s subprime lender takeover. Anyone who bought early beginning of last year lost at least 50K in equity.

      This cannot be going over well with the unemployment numbers continuing to deteriorate.

      Right now all the attention in the media is on Haiti so it seems like all is quiet on the economic front.

  11. freedomCM

    Of course, FHA isn’t going to finance this shady palace.

    (btw, IR, did you calculate the after-tax cost correctly, since “only” $1M is deductible?)

    1. IrvineRenter

      No. When I created the formula for my post spreadsheet, I didn’t put in a ceiling on the deduction because it is uncommon. It is a change I will institute for next weeks posts because it does significantly distort the picture on expensive homes. Thanks for pointing it out.

  12. Soylent Green Is People

    The moment anyone’s neighbor has a principal reduction in the name of foreclosure avoidance, everyone is going to miss a couple of payments and the whole system will crash. Same with cramdowns. If I get a whiff of anyone having their mortgage balance crammed down just because they went tits up, believe me I’m rushing down to the courthouse for some sweet relief. Why should I remain responsible when there isn’t any consequence to do otherwise?

    My .02c

    Soylent Green Is People

  13. phil

    I’m trying to get my arms around exactly what the federal reserve has purchased vs. loaned. Specifically, a bank can borrow money from the Fed in exchange for “good” assets. I’m sure the definition of good has changed, but it’s a loan from the Fed, not a purchase.

    Separately, the Fed has been buying Fannie and Freddie bonds with printed money. That is on their balance sheet and when the current crop of loans blows up down the road they will take the hit.

    I don’t believe the Fed has outright purchased MBS from banks. If so, can someone provide a link describing this?

  14. phil

    Also, with the Christmas eve announcement of the unlimited Treasury backing Fannie and Freddie bonds, why does it matter if the Fed keeps purchasing them? It seems like a free ride for purchasers of those bonds? I guess interest rates are the issue if not enough investors come forth.

    I’m wondering what the likely cost of this program will ultimately be? I’m thinking it’s just another way to put the housing crisis cost on the backs of taxpayers. It will become even more of a national imperative to buoy house prices given how much more taxpayer money is on the line.


  15. newbie2008

    I’m observing and IMHO:
    1. Bailouts of the large WS investment banks is called wise and essential policy to prevent a world-wide collapse.
    2. Near interest free loan to the large banks used to boost the stock market instead of lending as great for the economy and making jobs.
    3. Moving bank liabilities to the taxpayers as preventing a meltdown.
    4. Loan modification for underwater homeowners or house debtors as a moral hazard
    5. FHA loans as the new subprime or 5% to move-in as necessary to stabilize house price. Really plans are to move liability from the banks to taxpayers.

    They all look like a bunch of welfare programs to me. Transfer taxpayers’ money to the rich and/ to the ill responsible. It’s called a moral hazard when the money goes to the middle or lower classes and necessary to prevent a melt down when transferred to the rich. Both need to stop and take back the ill gotten bonus’ and market manipulation.

    Martha Steward was sent to prison for much less.

    1. Chris

      “Both need to stop and take back the ill gotten bonus’ and market manipulation.”

      Hahahahahahahaha…….great Tongue-in-cheek comment.

      Ummmm…let me see…Obama, Benny boy, Geithner, Summer, and the list continues.

      Sure, both need to stop. Funny.

  16. norcal

    IR, I’d be interested in seeing an analysis comparing the costs, to banks vs. taxpayers, of cram-downs as opposed to mass strategic defaulting.

    That may be the ultimate policy decision, if extend and pretend doesn’t solve the problem in the next 2-3 years.

  17. tonye

    OK, I’ll take the cramdown if MY mortgage -which is very reasonable- gets reduced by as much. Hmmm… let’s see, I get a 500K reduction…. oh wait.. they’ll owe me money. No problem. Then I’ll be able to pay the taxes.

    How’s that?

  18. Swiller

    Too too funny! I hope all the people who have owned homes for the last 10 or 15 years have their equity cut by 50% and hopefully they will be underwater by $50,000-$200,000.
    People should be defaulting, and they should be living in that home trying to SAVE to move to a situation that is AFFORDABLE. Government should not give a dime and let the banks fail, they created the problem by FRAUD. People who cannot pay for their homes should LOSE THEM as fast as our current law requires….3-6 months. The FLOOD of inventory should be on the market and home prices should drop by hundreds of thousands, including all those “frugal and morally upright” homeowners!
    Won’t happen though. Banksters and their ilk want the average family in debt for life. Like I said, I hope home prices dive in California…I would be dancing in the street.

    1. Geotpf

      There’s a serious problem with letting every bank in the country fail at the same time. It would cause the Second Great Depression-every business that needed credit from said banks would also fold. The TARP was merely the least worst choice of a series of very bad choices.

  19. John Mulkey

    If you would like to have a logical and accurate discussion of my blog post, let’s first get the information correct. If you had bothered reading my profile, which you obviously didn’t, you would have immediately seen that I’m not a Realtor®, nor have I ever been one. I am a former construction executive sharing my knowledge with home buyers and sellers in order to help them make more prudent choices.

    Your attack of my post is interesting and is typical of so many who are either unaware or who haven’t bothered to analyze the crisis in which we now find ourselves; and your flippant asides to my arguments ring hollow, without substance or benefit. While clever utterances may amuse and incite your readers, they offer no solution to a problem which, if left unchecked, will seriously impact every single homeowner in this country.

    And contrary to your assertion, I’m a free market conservative, something you would have discovered if you had actually read any of the more than 350 posts I’ve written during the past year. I find it distasteful that some who made foolish choices may benefit from programs intended to help those whose actions were more reasoned. And I suspect you would be surprised to learn that I have received far more criticism for my opposition to such programs as TARP, Cash for Clunkers, The First-Time Buyer Tax Credit, and other government programs costing billions while providing little or no benefit.

    Regarding the foreclosure crisis, however, I have reached my conclusions after careful analysis of what I perceive to be the problem; but I understand that I have no monopoly on discovering the best possible answer. I offer my opinions, for they are the only one I can pose, and present the facts as I observe them. And my opinion of the current foreclosure crisis is that it is a potential flood of biblical proportions that will impact housing for more than a decade. More importantly, it will also make it impossible for the economy to experience reasonable growth. And my proposal, offered more for serious consideration and opinion than as a “one-size-fits-all” answer, was presented to encourage others to analyze the problem and hopefully, help to create workable solutions.

    In your post, you made several points that were either deliberate attempts to distort what I stated or were errors due to reading without thinking, just as you erroneously reported my occupation. You implied that I misinterpreted Jaime Dimon’s statement in his testimony before Congress. My reference to Dimon’s statement was subtle sarcasm, and subtlety seems something you fail to grasp. Indeed, the irony of your analysis was that you missed the intent of my remarks.

    What you and many others seem to ignore is that this problem is already upon us. We can work to find a solution, or we can, as you suggest, sit back and say, “Great! Bring it on!” But with the problem already here, many of those who made reasoned purchase decisions and who pay their mortgage, while criticizing others for their failures, may be somewhat less impassioned as they watch their home’s value and their equity wither.

    If, as many experts have suggested, we actually do have as many as 12 million potential foreclosures possible—more than a 2 year supply of inventory—how can we expect the housing market and the overall economy to absorb such a catastrophe? I have offered my input in an attempt to stimulate honest and reasoned discourse, and have yet to see a proposal with the scope to properly solve the problem. If you have one—I’ll use your words—“Bring it on!”

    Bold actions by their very nature will always receive vigorous criticism and opposition; and that’s a good thing. My goal was to stimulate dialogue, but with the hope that such dialogue would be meaningful, constructive, and would ultimately lead to practical solutions. However, criticism with the sole intent of demeaning all those with opposing views, seem little more than vapid blather.

    1. Geotpf

      The free market should decide what to do with those 12 million houses. Basically, the bank owning them should look at each one, and decide how to lose the least amount of money. In some cases, that will be a loan mod. In some cases, approving a short sale. In some cases, foreclosure. Now, for loan mods, principal reductions should be the absolute last choice-better to offer a zero percent loan than that, due to the macro moral hazard that happens if principal reductions become common place. There’s already a major moral hazard problem with the fact that the banks are taking up to two years to decide on which choice (loan mod/short sale/foreclosure) they wish to choose. The general public is becoming aware of this “free rent program”, and these delays are causing people who otherwise would remain current on their payments to stop paying to get the two years’ worth of free rent. Principal reductions would just make matters worse.

    2. AZDavidPhx

      John –

      Send your own money to help your fellow foolish debtors. Don’t ask for my help as I have tried to opt out of these ponzi schemes for awhile now.

      Just because you were dumb enough to play along don’t try to sell it to me as my problem.

      World’s smallest violin right here.

  20. awgee

    John, you are wrong. The problem is not that house prices will fall. The problem is that home prices appreciated beyond affordability and were paid for with debt which could not be paid back. There is no money to pay for principal reductions, just as there was no money to pay for inflated home prices. The government would have to continue to pretend to borrow money in order to pay for principal reductions. You can not solve a debt problem with more debt.

    Falling home prices and credit contraction are not the problems. They are the consequences of the problem behavior and they can not be mitigated or smoothed out with more debt. Principal reductions may temporarily alieve the junkies symptoms, but they will inevitably make the addiction and subsequent withdrawl worse.

    The solution is foreclosure and bank insolvency and imprudent lenders going out of business. Principal reductions will not help the economy, society, or taxpayers. Principal reductions will only enrich banks.

    1. John Mulkey

      Home prices will fall, and that will be a problem for everyone, including those who have lived in their homes for years. And the banks could simply reduce the balance on the loan to actual value, while establishing a non-interest bearing account representing the difference, and then the owner would be required to forfeit the proceeds of any sale as payment towards the remaining balance. Or should prices escalate, a system could be established requiring repayment.

      But, as I have stated, I don’t make the decisions, I’m only posing a possible method for alleviating a portion of the problem. In the end, we’ll all see which path the bankers choose; and we’ll be beneficiaries of the good or bad.

      1. awgee

        Could “simply” reduce the balance? Seriously? Where do the banks get the money to reduce the balance of the loans? And at a deleveraging rate of 9:1?

      2. awgee

        You may want to google principal forebearance. and you may want to ask an accountant what happens to a business that issues principal forebearance to its debtors instead of collecting payments.

      3. AZDavidPhx

        Falling prices are great for me I have been waiting for awhile now.

        Speak for yourself and stop with all this Populist ‘save the homeowners’ nonsense.

        1. AZDavidPhx

          I bet you John was quite the free marketeer during to good times! Now he is all for the Socialism when he is afraid of his ponzi scheme mortgage going under water.

          1. E

            I’d love to see John’s personal refi and speculative extra home purchasing activity. I’d be willing to bet that he’s not only ATMed his own house but probably owns an “investment” condo somewhere too.

        2. wheresthebeef

          Agreed, falling home prices would be great for me since I’m renting and waiting this storm out.

          It’s funny how if home prices fall then it’s everybody’s problem…on the other hand if home prices rise then it’s party time for home owners and sh*t outta luck for renters. During the run up, I didn’t hear any homeowners say “these price escalations are unsustainable and not fair for first time buyers or renters.”

          Let the chips fall where they may! There is still much blood letting that will have to take place.

      4. Joseph

        “Home prices will fall, and that will be a problem for everyone, including those who have lived in their homes for years.”

        Wrong. Home prices have already fallen in the rest of the country. However, home prices will continue to fall in specific uber-bubbly places like Irvine, San Francisco, Miami, parts of West L.A., Santa Monica, Seattle, etc.–that is, all those places that thought they could ride out the storm. In most of the Midwest, for example, the bubble has deflated (in some areas hardly inflated to begin with).

        So yes, there will be falling home prices. But not universally.

      5. matt138

        John it is more than apparent the keynesian, mixed economy (socialism under the guise of capitalism) solutions to problems are anything but.

        Your solution, at the most basic level, represents the true problem: “Taking money from one person and giving it to another”. This will occur either through taxation or inflation (silent taxation).

        The banks are big boys and girls. Let them fail. We will be better off long term. Slick accounting doesn’t solve the problem. No one should be forced to pay for their poor decisions.

        The only solution is the free market solution. Regardless of how the powers-that-be decide to take action, the end result will always be the free market solution.

  21. awgee

    There was no and is no housing crisis. There exists enough housing in America.

    There was and is a homeowner debt crisis. The solution to that crisis is foreclosure and debt forgiveness.

    There was and is a bank solvency crisis due to central bank manipulation of interest rates, fiat currency, and a fractional reserve banking system. The ONLY real solution to that crisis is let insolvent banks go bankrupt, get rid of the Federal Reserve, decriminalize free market currency and allow for free market interest rates, and criminalize fractional reserve banking making it the equivalent of counterfeiting which it is.

    The only real solution for heroin addiction is withdrawl. The only real solution to a debt problem is payment.

  22. Soylent Green Is People

    Agreed Awgee.

    Many people do not recollect the “good old days” of 1979-1982 when there were sky high interest rates. Rates were jacked up for very good reasons, causing terrific harm to many people…. yet we survived as a nation and thrived thereafter. That same tonic is required today. We might not like the taste of bitter medicine, but it sure beats dying slowly of cancer.

    My .02c

    Soylent Green Is People

  23. awgee

    Some people suggest loan mods as a solution as if they are magic and money comes from …, well wherever, but I do not think they understand the implications behind what they are suggesting. John is suggesting principal forebearance which is already occuring on loans through HARP and HAMP. A little explanation may go a long way in helping folks to understand what is being suggested and why it is not a solution, and it is acually the same problem that got us here.

    Banks borrow money in order to loan money. They borrow it from the Fed or from you or from …
    Banks make money on the spread between what they borrow at, plus expenses, and what they loan money at.

    The Bank of John, (don’t get all sensitive now, go with it and smile), borrowed money in 2005 at 4.5 percent for 30 years. (Actually they borrow in shorter time frames and leverage by borrowing short and lending long, but that just adds to their problems, so we will not approach that here) The BOJ loans $100,000 to Larry for 30 years at 6.5% for the purchase of a home. The NOJ has costs of 1.50% for Larry’s home loan including mortgage broker fees, bank building, advertising, and all the normal costs of a bank. The banks profit is the 0.5% per year spread remaining. In about 4 years Larry loses his high paying job at the IHB and can’t make his mortgage payment. The banks forecloses and gets back $70,000 and loses $30,000.

    But, Larry’s neighbors don’t want a foreclosed home on their block because it will affect the “value” of their home, so they tell their president he has to do something about this foreclosure crisis. The president tells the banks they must modify Larry’s loan so that Larry can pay his mortgage with the puny salary offered to him at the CHB. The prez says you must only charge Larry 2% interest. Ok, but the bank is paying 4.5% interest on the money it borrowed to loan to Larry and it already paid 1.5% up front. How can the bank make its monthly payments with less than it borrowed at? It can’t. The prez says, lengthen the loan period to forty years to make Larry’s loan affordable. And the bank still has to pay back its borrowed money in thirty years. How can it make its payments? It can’t. The prez says forebear some of the principal until Larry sells the house and he can pay you the forebearance then. (It is not principal forgiveness cuz Larry has to pay it back at some point) How does the bank make its payment on $100,000 of borrowed money when it is only receiving monthly payments on $80,000 from Larry? It can’t.

    I hope it is now obvious that banks can not modify loans without becoming instantly insolvent.

    Unless, the prez gives them the money to make up for all the money they will lose. And where will the prez get the money to pay the bank to keep it solvent even though the bank made a crappy loan to such a poor risk? Yup, from Larry’s neighbors, although unbeknownst to Larry’s neighbors, the costs end up being will be twice what they would have lost on the value of their homes. In real life, it is about 7 to 9 times more, but whose counting? Not Larry’s neighbors. They do not have a clue. Unless they are reading the IHB.

  24. Qwerty DC

    If principal reduction passes it is only fair that RESPONSIBLE BUYERS be granted an equal “principal reduction” in the purchase price on a future home thru a newly formed govt subsidy. If not then I will be outside the White House on my free time protesting- GET READY 🙂

  25. Cynic

    Anybody who cannot tell the difference between principle and principal has no right to be talking about mortgages.

    And he does it twice.

    Call it petty, but damn it, if you are supposedly an expert in this stuff, can you at least bother to spell it correctly?

  26. cklaus

    “Such an action (p-reductions)would immediately help to stabilize a large portion of the market, and would protect neighboring homes from further declines in value”

    Assuming neighboring homes are of comparable sq footage, age, and amenities. In many urban areas, like where I live, this is NOT the case. Why does it seem like all these mopes crying foul bought a shitbox in some subdivision where everyone salivates over zillow postings up until 2 years ago? If your investment is the exact same as everyone else’s, you are more exposed when shit goes south.

    If the Fed is going to underwrite bank and investor losses on my neighbor’s ridiculous math abilities, then I’ll be at the Casa Blanca too. How about The Scarlet Letter, or a reverse LINK card for them? How about they all home school their kids after their little P-red? Take your own trash to the landfill, no in-state tuition, IRS needs to mark these people and make them pay one way or the other!

  27. awgee

    Ya didn’t think princiPAL reductions were on the way, eh?

    “Under 2MP, when a borrower’s first lien is modified under HAMP and the
    servicer of the second lien is a 2MP participant, that servicer must offer either to modify the
    borrower’s second lien according to a defined protocol or to accept a lump sum payment from
    Treasury in exchange for full extinguishment of the second lien.”

    You can read about it on Calculated Risk.
    Click on the “guidelines” for the HAMP 2nd lien program.

    1. Making Homes Cost More Programs

      Will this program work? Probably not, but all of these experiments at the tax layers expense help keep home prices elevated.

      For every program like this that fails a new government subsidized program to support the banking system pops up. Eventually they will realize that the only program that will work is government subsidized principal reduction, paying the banks with tax payer money at 100 cents on the dollar.

      OMG awgee now that they announced this every home debtor is going to stop paying their mortgage tomorrow. LOL what a hilarious argument.

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