More Unintended Consequences of the Bailout:

Diana Olick of CNBC reports that lenders have slowed the efforts to workout discounts on nonperforming mortgages in anticipation of the government bailout:

As the government's Hope for Homeowners program, designed to fend off foreclosures, kicks in this month, it could face hurdles from the government itself.

Hope for Homeowners gives the FHA the authority to back 300 billion dollars worth of restructured loans, if, among other things, the lenders voluntarily agree to drop the value of the principal to 90 percent of the home's current value.

But with the 700 billion dollar bailout also in gear, which includes the government buying whole loans and bundles of loans owned by banks, I'm hearing that many banks and lenders are choosing to hold off on modifying or restructuring loans--thinking they might get a better deal from the bailout.

Banks are also holding off on selling foreclosed properties and doing short sales, again hoping to get a better deal on those as well (short sales are when the bank agrees to let the owner sell the home for less than the value of the mortgage, which can cost less than foreclosure).

Well that sucks.

Not that it wasn't utterly predictable.

Government action passed because "Someone has to do something" never turns out well. The unintended consequences are always worse than the benefits.
10.15.2008 6:41pm
This is unfortunate for the homeowners at this instant but the reduction in short sales and foreclosure sales/auctions might reduce inventory and help stabilize prices.

If banks are going to have to write down to 90% of current market value, further reductions in price serve to benefit homeowners quite a bit since, realistically, housing prices are going to be fine in the very long run. IOW, getting to write down to 90% of market value at the bottom of the market is a fantastic deal whereas getting to mark down to 90% of reasonable long-term value is in the interests of the banks.
10.15.2008 6:56pm
Perseus (mail):
I'm still waiting for the government to provide bread and circuses to renters and prudent home buyers who have been patiently waiting for prices to return to more normal historical levels.
10.15.2008 8:06pm
Dr. T (mail) (www):
This exemplifies the waste and mismanagement that occur when a too powerful government addresses a financial crisis by slapping $100,000 bill bandages on each financial institution, whether it is wounded or not.
10.15.2008 8:07pm
glangston (mail):
Yes, they are attempting to stabilize prices. The question (like the old story about the prostitute) is just what is that level going to be. Banks have little incentive at the moment with Uncle Sugar holding the bag. Pretty painless for the bureaucrats but you and I will see the damage to our pocketbook.
10.15.2008 9:12pm
PatHMV (mail) (www):
I'm shocked, shocked that the private businesses would hold out for the best deal possible, and take full advantage of the loopy give-aways our federal government has embarked upon. The government is, by nature, too incompetent to meddle with the economy the way it is right now.
10.16.2008 12:01am
Dan Melson (www):
Todd, I am a mortgage and real estate person, have an accounting degree and financial planning licenses.

The "write down to 90% of value" was a non-starter for many many reasons, even with an equity sharing arrangement to go with it. Reason: The lenders have to take a direct write down against the value of the company IMMEDIATELY, plus it allows the homeowner to make some profit off what the lender gave up. Knowing it was voluntary to begin with, I predicted less than a 1% approval rate, on a case by case basis for proven hardship - things like death of primary breadwinner, divorce, etcetera.

There is a perfectly good alternative in place that is starting to get a lot of cooperation from the lenders: Modification of the loan to a lower interest rate, either temporarily or permanently. It negates the need to refinance, does not allow people to make profits with money that used to be the lender's, and stops the forced sale (either short or foreclosure)

People hoping for a principal modification are going to mostly be disappointed - but lenders are evidently approving interest rates that are lower than I would have believed. It lets people afford the property payments, keeps them in the property, stabilizes the market by not adding to supply/inventory, is *NOT* a direct write off of company value, and allows them to recover their investment over time if the market recovers - which my local market of San Diego is starting to do.
10.16.2008 12:34am
David Schwartz (mail):
There are two problems with interest rate modification. First, especially in non-recourse states, if home prices keep dropping, people will walk away from their mortgages regardless of the interest rate. Second, if unemployment keeps rising, someone with no job won't be able to pay off their loan even at a low interest rate.

So if the economy is recovering, this may work. If the economy continues to tank, this won't help all that much.

If I lived in a non-recourse state (which I do, in fact) and I had a $200,000 mortgage on a house that was worth $125,000, I'd buy the house next door for $100,000 and walk away from my first mortgage.
10.16.2008 3:22am
More Unintended Foreseeable Consequences of the Bailout That Congress Didn't Explain to Voters Shortly Before An Election:

Fixed the article's title for you.
10.16.2008 4:28pm
Big Bill (mail):
Hope for Homeowners was doomed from the outset. Y'all ought to read Doctor Housing Bubble's website. He explained the fundamental futility of the program back in July.

Read his explanation at: Scroll down to "Requirements for FHA Insured Mortgages" and he will explain why it doesn't/won't/can't work.

Thank goodness someone (other than lobbyists, obviously) is reading and interpreting these laws.
10.16.2008 4:42pm
Dan Melson (www):
David Schwarz:

>If I lived in a non-recourse state (which I do, in fact) and I had a $200,000 mortgage on a house that was worth $125,000, I'd buy the house next door for $100,000 and walk away from my first mortgage.

No, you wouldn't. You wouldn't be able to get the loan. You won't be able to get the loan for an absolute minimum of two years, more likely 5 to 7.

Walking away is not a good option. It turns a theoretical loss on paper into a hard loss with very real consequences. I (along with many others) was upside down in the early to mid 90s, but we didn't have idiots on the world wide web telling us to bail. I kept making the payments, and the property eventually turned a VERY tidy profit. Had I bailed, like some unscrupulous folks are advising people to do know, I would have been a renter with poor credit for 7 years minimum.
10.16.2008 6:01pm
big picture (mail):

I think we have a little 'definition' problem here; which is likely misleading folks into dangerous fantasy expectations.

In several comments, the word 'inventory' has been used in a way that I'm almost certain was meant as "properties for sale but unsold". But that much-hyped MSM metric is totally irrelevant; only a micro-view of a much larger factor.

The real problem in RE is the vast oversupply in inventory of housing in toto. At the moment, I'd estimate it to be at least 10 MILLION empty dwelling-units (Michigan alone has 1.2 million empty).

Further, as the biggest depression in history (global, no less) really sinks its teeth in, people will bail in droves and move in with their friends/family, and that inventory will grow to 20 or even 30 million empty dwellings.

Thus, Dan's comment/view is mistaken. This is not the 1990's; and the hypothetical owner would be well-advised to bail in some way on his 75K-underwater 200K property. It's going to get more underwater each month, not less; and for years to come.

The above inventory-issue is related to, and one aspect of, the big-picture...

First, the notion that we've generated all this 'wealth' over the past 30 years is pure nonsense; a delusional feel-good fantasy. Comparing the rise in asset-prices with the staggering increase in combined public and private debt over the past 30 years, shows the solid correlation between them.

In other words, as we all knew somewhere in our gut, the obscene growth in consumption of homes, cars, plasma-tvs, new bling cell-phones every month, and endless junk, ad nauseum, was mostly bought with DEBT, and very little of it has actually been paid for.

Thus, the near-infinite overhang of asset-backed (ha ha) securities in the tens of trillions. Not to mention the tens of trillions more in munis and fed-gov t-bills (with our name on every one of them as 'debtor')

For clarity of thought, it's important to understand closed-loop systems from a mathematical/engineering perspective. The feedback that closes the loop can be negative or positive in 'sign' or phase.

Negative-feedback stabilizes a system; always driving it towards the center. But our economic-system loop is closed by positive-sign feedback, by design, via the imposition of fed-reserve and fractional-banking instead of a stable standard.

Positive-feedback DEstabilizes a system, by reinforcing a trend; thus driving it harder and harder to the extreme of the current direction; until it hits a hard limit.

What we're witnessing this year is the limit-reversal of an enormous financial 'oscillator', in engineering-terms. We've seen the positive-feedback of rising assets (and debt) cause people to bid them even higher, extract more 'equity', take on even more debt, pay even more for the next RE to flip, which creates even more debt, less equity, even higher infinitum.

Whups...did I say infinitum?

Nope, sorry....that's the problem right there, you see.

Despite the Gov/MSM's din of exhortation that this can go up up up forever, I'm afraid that's really a blatant lie.

The underlying problem is of course the very structure of the system itself; the fractional-reserve and debt-is-money system; which is inherently positive-feedback and exponential, and which therefore inherently collapses dramatically upon the cessation of debt-growth or inflation, or both.

After 30 yrs of unprecedented debt-growth, and with incomes flattening in the 2000's, of course the 'signal' slammed into the oscillator's limit; the limit of debt-service capacity.

While 99% let themselves be hypnotized by the din, about 1% kept their eyes open, and converted dollars to gold as the currency-collapse became evident in 2002; and sold their RE at the first signs of the entirely predictable 'topping' circa 2005.

This brings us back to the engineering-view again. In an oscillatory (positive-phase feedback) system, when the signal saturates, i.e. hits a limit, the direction of signal-motion reverses.

Today's rapidly crashing economy isn't an anomaly or something 'surprising', it is exactly what one expects of such a positive-feedback closed-loop system.

Finally, it's important to recognize that the same positive-phase feedback that drove the signal higher and higher, faster and faster, on the way UP, is indeed going to identically self-reinforce the complementary plunge DOWN.

What we are witnessing right now is an enormous DEflationary destruction of all that fake 'money'; i.e., all that inflated debt that's been borrowed against to create yet more 'money', multiple times, level after level (e.g. derivatives).

Sadly, I must deflate another false belief. This isn't going to 'drift' quietly back to 'normal'. It is another inherent characteristic of oscillatory-systems that they always sweep with high impetus past the long-term mean, all the way to the opposite extreme (remember the self-reinforcement is constantly adding energy).

Do not be led into thinking that all that's happened is 'accidental'; regardless of the MSM/Gov constantly using words like 'surprising' or 'unexpected' in every economic report.

The principles of economic-cycles, and the certainty of repeated boom-bust in any fractional-reserve 'debt is money' exponential system, have been well-known for over 100 years. Our private-bank-owned fed-reserve, fractional-money, and taxation-by-inflation were installed deliberately, not by random chance.

The congressional debates, speeches, etc. of 1850-1920; especially the history of 'national bank' efforts (i.e. Jackson's resistance and warnings) show a clear understanding of the menace to the citizens; and a hard fight to keep it away. Sadly, they were overpowered; and here we are today.

It is also worth studying the excellent material at on business-cycles and better ways to organize our economic society. Mises and Hayek et al showed long ago that fractional-reserve and gov/tax/spending/inflationary systems are inherently 'positive-feedback', i.e. 'boom-bust'. They will always induce themselves to expand debt and devalue money until they hit the limits of reality; then collapse.

In sum; no, you're not going to get the 2005 price for your house next year, or in 2010, or any other time soon. We are witnessing the phase-change, the turnaround, of a massive 70 year cycle; a slow-motion socioeconomic trainwreck of unprecedented scale.

In other words, yeah, bail now if you
10.18.2008 10:07pm