I wonder what that means for current mortgage-holders and if they would be able to get a better rate as well? As someone who purchased within my means I should not have a worse rate than soemone that behaved recklessly.
One of the Treasury plans that has been under consideration for some time was to reset all mortgages to 5.5%. The idea would be to stabilize housing, but it would also stimulate consumer spending by people like myself who would take that extra money on a monthly basis and plow it right back into the economy.
yes, I will be more than pissed if responsible home owners get stuck with high rates and people that want to come along and buy a home get a rate 1.5% points less than most people.
well, lets see. Greenspan took rates down to 1%, and left them there for a while. How did that turn out? Now, the answer to all the problems is more rate meddling? You cant keep rates artificially low forever, at some point, the markets will normalize and what happens then? There are no free lunches.
The fed has been meddling with rates and cut FFR 500bps and look what its done so far! We also have 19 lending facilities and 7.4Trln worth of govt pledges, swaps, and borrowings to handle this crisis. Now they want to get rates 100 bps lower with more meddling! Between moral hazard, more people buying because rates came down not because they should buy, and all this stimulus/borrowing, dont you think the end can get serious?
Our economy is over 60% consumer-driven so that should help. Plus it would help stabilize housing and lessen the risk for the banks. It is a bottom-up approach to dealing with the situation versus just throwing money at the banks and letting it trickle-down to the people.
It will do long-term damage to the mortgage market, & will do nothing to affect housing prices. As soon as the program goes away, prices continue their fall. Nothing can stop the inevitable - it will just postpone it at best.
The leak came from the NAR and National Association of Home Builders.
The end wil possibly be a train wreck urbandigs. But I don't care. I just want the market to be stimulated long enough so that I can sell my crapshack in New Jersey without taking a bath.
I keep thinking that eventually inflation will kick in with all this government spending. Obviously not now but probably in 2/3 years. At that time I prefer to have bought over renting. Any opinion on this?
If they would just let the market sort it out (look at the volume in CA) then everything will be fine. Yes, prices dropped 30% but most people don't need to sell this year, and most didn't buy in the last 2.
Steve - Obviously the leak should be taken with a grain of salt due to the source and the fact that it hasn't happened yet. I don't belive that they will be able to pass any sort of plan like this without allowing current mortgage-holders to benefit as well.
UD - what do you suggest to help the situation? Should we just hand over money to the banks? No lending and no buying is not helping the economy and will hasten job losses.
Heck, for the auto industry, the government could buy 2 million $20,000 cars from them and turn around and sell them for 70% of their value and it would be more beneficial (and cheaper for the taxpayers)than just handing these incompetent fools $40 billion to bail them out of their own mess.
And yes, I know that most of the volume in CA is foreclosures, but I always thought that prices will be set at the margins anyway. Once the foreclosures are allowed to post in NY, we'll see if the canary is still alive in the coal mine.
I find the language in the first round of press confusing. Everything online says "new home loans." A new loan is a new loan, not a new home purchase. stevejhx - can you elaborate?
Install the primary residence capital tax exemption benefit to INVESTORS with a catch that the property must be held for a period of at least 5 years, and any gains for a single is up to 250K exempt, and 500K for married investors filing exempt
Replaces the 1031 exchange deferment benefit
This will get investors in that will buy and rent out units, and hold units for at least 5 years, clear up supply!
I would think they are trying to move inventory, not refi your house. Lower rates means a lower chance of default means these loans can be bundled up and sold as....wait for it......bonds!
Lowering the rates for current mortgages lessens the risk of foreclosure and that is invaluable right now. The banks will benefit in the long run, but the individuals will benefit more and sooner. Consumers will have more money to put into the economy and less risk over job losses and money. Scared consumers don't make purchases and that freezes the economy. An economy that isn't growing is contracting.
it will make buyers come to the market for the wrong reasons. And it will have unintended consequences. Rates are low right now, at 5.5%..ARMs are adjusting downard now. Leave it alone. Govt meddling with mortgage markets is never good
The economy is more than just people buying an apartment in Chelsea. This type of plan could help in a number of areas at once. Obviously, tight lending standards should be followed (wait for laughter to die down), but this makes a lot more sense than any of the other plans that have been thrown out there so far.
No doubt Fannie and Freddie have done some dumb things but they did avoid most of the neg am and option arm and liar loans. Their portfolios are prime for the most part and currently have about 2% in serious deliquencies. Their borrowers are generally not the ones in trouble and generally not the ones that need help.
Seems to me that artificially low rates and excess leverage is how we got here in the first place. Unfortunately, the only answer the Fed and Treasury are able to come up with is more leverage and further artificially lower rates.
And if Fannie and Freddie would not have done this for their shareholders how exactly is this a good idea for the taxpayers, the new owners of Fan/Fred?
What we have found out is that many people who bought in the last few years really should be renters. The government's efforts to move the home ownership dial from 64% to 70% via lax lendiing standards and highly risky, affordable mortgage products was a mistake.
How absurd that Barney Frank spent the last 15 years screaming about the need to lend to riskier and riskier borower types and after he got what he wanted he now screams about stopping foreclosures.
I agree with UD. Tax credits and incentives for investors and well qualified borrowers make a lot of sense.
In religious Muslim countries like Saudi Arabia, they have 0% interest since Islamic la does not allow interest to be charged. So how about it? Who would be willing to pray toward Mecca 5 times a day for a 0% interest loan?
"In religious Muslim countries like Saudi Arabia, they have 0% interest since Islamic la does not allow interest to be charged."
Alpine, alpine, alpine. That is as dum as anything spunky ever said. They lend you $100 and they tell you you owe $110 after a year. No interest. It's a fee.
Points.
BTW if you're a fundamentalist Christian, interest is also illegal under Biblical rule.
Now then, this stupid plan would do NOTHING to stop home prices from falling, except delay it a few months, and cost us all a fortune. Realtors and builders don't want prices to fall, so they're looking for a way out. Well, unfortunately, there isn't one.
And the auto bailout isn't going to work, either. Not enough votes. Thank g-d. Let them have Chapter 11 like every other company, fire the entire management, get rid of 50% of blue collar workers and 75% of white collar workers, cut capacity 50%. Then you'll have a viable industry.
It just galls me that Nardelli - who got FIRED from Home Depot with a $25 million golden parachute, and now works for a PRIVATE EQUITY FIRM that bought Chrysler, would demand a payout. If there's bankruptcy, the only ones who lose are the PRIVATE EQUITY FIRMS.
Why the f*ck are we bailing them out? Nobody's bailing me out.
people just built such unrealistic views of what homeownership means in terms of wealth creation and have the wrong idea that renting is for deadbeats.
holding both views, they had no chance at all to make a reasonable financial decision instead of buying at the peak.
Let me get this right..... we outsourced all good paying jobs, sent all our manufacturing overseas, built an economy based on credit and leverage by borrowing 9 trillion dollars from the rest of the world which was our national debt last year not counting the 2 trillion dollars loaned out the back of the Fed window with no transparency, plus another trillion for AIG, Bear Stearns and the 700 billion bailout, sold toxic securities all over the world, kept interest rates artificially low to create a housing bubble which created a ton on jobs to provide a magical home ATM for credit card refi's and HELOCS to go on a mad spending spree which we now can't pay back, so now we are teeing up for the final crisis so the Treasury is borrowing more money and the FED is printing it, which will be the final blow when the dollar collapsing within the next couple of years............. it's FM......FUCKING MAGIC!!!!!!
"And the auto bailout isn't going to work, either. Not enough votes. Thank g-d. Let them have Chapter 11 like every other company, fire the entire management, get rid of 50% of blue collar workers and 75% of white collar workers, cut capacity 50%. Then you'll have a viable industry."
Amen to that. If they can't innovate, let them die.
There isn't enough money in the world to support housing at these prices. Not at 4.5%, not at -4.5%.
The people who took the risks - developers - want to keep the money from the good times, get bailed out from the bad. The people whose 6% commission hasn't changed despite a fivefold increase in property prices don't want to lose their excessive compensation.
I say let them lower their commissions to 1%, or work for a flat fee. On retainer. Then watch housing prices plummet.
I would snap up a property right away, seriously if i can get 4.5 or lower (i have excellent credit)
i don't have much money, i like the opportunity though
It won't. Look at FIG (fortress) they announced how many people wanted to withdraw funds yesterday at the stock was down 40%. A friend of mine works there and after they went public, people were walking around with Gulfstream brochures. The stock is now trading at $1.65. When all the funds calculate how much people want to pull, there will be TONS of layoffs that don't hit the wire. If you have money in a few hedge funds, and one tells you to wait until May for your money, you go to the next one. Rates don't matter when you have to raise cash and you're out of a job.
people think this will help refi's and make the house finally affordable because its rate 100 bps lower. This is wrong for a few reasons:
1) homeowners - its a debt problem in a declining asset. Refinancing to lower rate doesnt change the debt load/principal. it may delay the inevitable
2) new buyers - if you cant afford to buy a house at 5.5%, then you shouldnt be buying a house at 4.5%. I mean holy sh*t batman, we have got to the point where 5.5% 30 yr rates are HIGH? Are you kidding me? And we are willing to accept govt meddling with mortgage markets and buying up GSE loans to peg the rate 100bps lower. Think about this.
3) risky assets - stop taking on more risky assets!
4) artifically lowering rates - stop meddling with the markets, especially the mortgage markets. you cant keep rates low forever, forces will let the market do what it wants. govt intervention here is not the answer to our problem
5) prices - home prices still need to correct, let the forces play out. Stop delaying the process and taking on bad debts/assets in the process or we will end up like Japan for the next 10 years
4.5% is opportunity of a lifetime, same thing happened in 03 which started the boom, however this time [I hope] they've become smarter in not lending money to any joey on the street
Honestly, what most people aren't talking about is how incredibly difficult it is to now get a mortgage. Gone are the 10% down days for condos, now the banks, or at least ours, wants AT LEAST 30% down. Considering how much money was lost in the rapid, but should never have been unanticipated, 'crash' in the world financial markets, and declining real estate values finally hitting NYC, very few people's balance sheets look as pristine as they did even back in summer'08. And to those brokers who are still relying on foreigners buying up NYC real estate, they need a reality check of their own, or a good schooling in the economy as it stands now.
As an owner it pains me to say this, but the 'bid' for prime NYC real estate is no where near the 'offer' and until most buyers understand this, and until credit unfreezes, it's going to be at least another quarter of very little activity.
Wall Street and Main Street are slashing jobs accross the board. Who is left to feel safe and confident?
buyin 09 - you just dont get it. there is a price to pay to get that rate to 4.5% and peg it there and the unintended consequences with it. How could 4.5% be an opp of a lifetime, and 5.5% be expensive? Seriously now. they have to stop meddling with markets in this type of manner. It is not going to do what they think its going to do, but there will be a price to pay for it later on. there are alternatives.
"same thing happened in 03 which started the boom"
which is precisely the problem EXCEPT in 03 prices were 50% lower. You can lower the rate to 1% or 0% - it will do nothing in the long-term except delay the pain more.
Noah, I think you're being far to aggressive. Why do you care if 09 buys? You stated your opinion. I agree with you that we need to let the economy bleed out but you can't be so agitated that lower rates might tempt people. We're bot in charge, if the rates get lowered, people will refi and buy if they have been dying to own or think they can save money. What else is there discuss?
Steve - you cannot layoff 2 million autoworkers. That would absolutely cripple the economy. The UAW is going to have to rework their contract, the Big 3 will need to be consilidated into the Big 2, cut a lot of the fat at the top, give them some financial assistance and maybe they should consider making some cars that aren't total pieces of crap from now one.
I do agree that the PE firms should not be bailed out at all.
eah - I dont care if 09 buys or not, that is not the discussion. The discussion is whether the Treasury should peg rates to 4.5% and what they will do to achieve this. Thats the discussion here. rates are at 5.5% now, is this really the reason why people are not buying?
refi? No! Thats not the problem with existing homeowners. Its a principal problem, underwater problem. Refi'ing doesnt solve this problem. I am being aggressive eah because I see this couuntry deferring debt and problems to us down the road. Bill at CR agrees. Barry Ritholtz agrees. David Merkel agrees. Rick Santelli agrees. Mish agrees. Govt meddling with rates is not the answer here.
Besides , REFIS DO NOT APPLY FOR THIS PROGRAM, IT IS ONLY FOR NEW BUYERS!! This is a BIG mistake with side effects and unintended consequences that come with govt meddling eah! In addition,l Lawrence Yun of NAR lead the push for this program, that right there tells you its bad!
"The Journal story suggested only that Treasury “would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration.”
Which, of course, leaves plenty of questions unanswered. But it appears that the plan under consideration, if consistent with the lobbying efforts put forth by the NAR and others, would only apply to purchase transactions, not refis."
Who said anything about laying them off? What you can't do is have more than you need. Chapter 11 does that, and if you need only 1 million autoworkers, then so be it.
Otherwise, we will just keep on pouring money at these obsolete industries. Steel died, and America seemed to have survived. Textiles died, furniture died, all these industries died because they couldn't compete.
Noah, as I said, I agree that this is not a wise move for the Fed to make or even be discussing. However, I do not agree that people would be foolish to exploit it if it does happen.
You seema bit overinvested and hysterical. Yes, it is a scary time but we have no control over it so where are you coming from?
In terms of refis, rate sare lowering, even outside this plan. All my properties in Washington Heights, which falls under a much lower rate because it is a gentrifying area, have had their mortgages recast to 4.875. Over the course of the loans this will result in a tremendous savings. Would I rather rates not lower and true fixing of the situation occur..yes, of course. But will I have my prop. manager exploit every savings opportunity...of course.
I think UD is a little off base on this one. If rates dropped to 4.5%, more buyers would enter the market. Rates just dropped to 5.5% in the last week or two. People who were looking at 6 to 6.5% rates two weeks ago who then could get 4.5% would be more inclined to buy. If the government can get rates there by buying MBS, there would be little harm as long as they use strong risk controls to determine which MBS are eligible for purchase by the Treasury.
UD is right - this plan will do nothing but save a few homebuilders and realtors - temporarily. Once you implement this, how do you stop it? Rates will then overcompensate the other way, and we're right back where we came from: housing is too expensive, and there's too much of it at this price.
well Steve, that wont happen because the govt will artificially keep the rates low forever and ever for fear of what may result if rates rise.
Im being sarcastic. YES!!! 2009 & 2010 will be about weaning us off 19 lending facilities and other actions that have been implemented. The more you meddle with rates, the more the snap back reaction will be down the road. Its an unintended consequence. We are at 5.5% now, and people here are saying that is too high, and at this level, there is no incentive to buy a home cause its not 4.5%. Its such a ridiculous argument, that I just dont get. So, the market wont function because rates are at 5.5%, but it will thrive at 4.5%. And to get there is worthwhile no matter the methods or costs to do so.
Its just not worth it. If more buyers did not come to the market because rates dropped from 6.5% to 5.5%, who says 4.5% is the magic number and thats where we need to be to get them in! When does this end?
If there are strict controls in place and only qualified people are given mortgages I don't see the catastrophic damage that will be done.
If they go to a plan like this they will have to allow refis, or else people will just sell their property to a friend/family-member and then buy it back to get the 4.5% rate.
Allowing refis would also do more to increase consumer spending. When people have another $500 or $800 a month they will go out and buy a tv, a laptop, go to dinner and buy a car. There are a lot of way this plan can help individuals and then trickle-up to help companies and banks.
Money is going to be thrown at this economic situation and I would rather it go more directly to people than right to banks, the Big 3 and PE firms.
Steve - the Big 3 employ approximately 3 million people and the overwhelming % of these are blue-collar workers. They need their contract, pension and benefits reworked for sure, but they need to have jobs and we need them to have their jobs.....maybe they all cannot stay employed, but we cannot just slash 1-2 million jobs.
"Under the initiative, the Treasury would offer to buy securities that finance newly issued loans for home purchases, according to the sources."
Whatever, they will do what they will do. I don't like it. This wont matter and will not produce the desired effect, but there will be a price to pay for this later on. lenders are already very very tight, so those represent some controls. Im worried about govt intervention in mortgage markets and the side effects of this. Thats all. The risks far outweigh the rewards here with this NAR sponsored plan
I have no respect for Yun or NAR, after seeing their statements for the past 3 years
well thats a monetary action, as the BOE cuts rates to stimulate. They are lagging us. But our fed has exhausted most of their rate cuts, and so have been quantitatively easing. Your right, not same plan as the one I have an issue with is govt meddling with mortgage rates to peg rate to 4.5% for new loans and what needs to be done to achieve this feat, and the side effects later on.
"I don't see the catastrophic damage that will be done."
Because you mustn't understand how markets work. Prices play a function. That's what the Soviet Union didn't understand, it's what Venezuela doesn't understand. Housing is already very socialized in the US. Artificially lowering credit rates may temporarily prop up house prices, but it can't last. The only way out of this bubble is either to deflate it, or inflate the price of everything else.
"When people have another $500 or $800 a month they will go out and buy a tv, a laptop, go to dinner and buy a car."
It's cheaper just to go out and buy a tv, laptop, dinner, or a car for them.
And more effective.
"maybe they all cannot stay employed, but we cannot just slash 1-2 million jobs."
First, the Big 3 don't employ that many people. Second, Chrysler is owned by a bunch of rich guys who made a bad bet. Ford is still owned by the Ford family. Why are we bailing them out?
Far more efficient it is to let market forces work. Even if the UAW reworks its contract, there is an OVERSUPPLY of cars and EXCESS CAPACITY that is never going to come back. Either you reduce that supply and capacity, or you subsidize forever.
That's the fight that Margaret Thatcher won against the colliers in the UK - why subsidize coal-mining jobs when it was cheaper to import coal?
"intended for new loans only."
Then, UD, you buy my house and I'll buy yours.
It is really, really stupid. Now Bernake wants the government to do more to prevent foreclosures.
Here's the solution: bankruptcy protection. Borrowers lose something, lenders lose something, investors lose something, and taxpayers are saved an enormous amount of money.
This is what bankruptcy is for. I won't stop home prices from falling, but it will stop entire neighborhoods from going under. The banks weren't complaining when they were handing out all this money and making tons, borrowers weren't complaining when they were borrowing money they couldn't afford to pay back, investors weren't complaining when they were getting huge yields on misrated AAA paper backed by subprime loans.
But now that the bubble has burst - gimme, gimme, gimme!
I didn't see anybody bail out investors in the dot.com bubble. Why should we bail out Nardelli, who ran Home Depot into the ground and got a $210 million golden parachute?
Rates just dropped to 5.5%. They haven't been that low all along. And mortgage applications and refis have significantly recently. I agree that the low rates would have to be available for refis for this to work best. The government is throwing hundreds of billions at banks already. Why not use the spending to affect homebuyers by producing low mortgage rates since the government has poured so much directly into the banks already? People facing rate resets could have a better chance of avoiding big monetary problems if a low rate fixed loan is available, and 4.5% makes a big difference in a monthly payment from 6%. Buyers on the fence would be more likely to buy. UD, I respect your opinion, but please give some detail of why you think this would be more harmful than good. Do you think the government would lose money on its MBS purchases? If this helps stabilize the market, and once things are stabilized (and hopefully once the economy and job market stabilizes) rates move back up again, does that cause more harm than good?
"According to the Alliance for American Manufacturing, the total number of Big Three employees, parts-supplier employees and car-dealer employees comes to 1.59 million. Add the multiplier effect of other jobs dependent on these jobs for their own existence -- in construction, retail, restaurants, and so on -- and you've easily exceeded 3 million jobs, perhaps 4 million. That's a big chunk to take down at a time when the economy is already headed into the steepest recession we've seen in decades. Nor does that include the 2 million people reliant on the industry for health care, and the 775,000 retirees who collect auto-industry pensions."
It is not so cut-and-dry that bankruptcy is the best route for the economy. This is a very challenging situation that needs to be dealt with appropriately. There is always a lot of talk about the jobs lost related to Wall Street layoffs, well it happens to other industries too. I understand your anger at Nardelli (and agree with it), but we cannot just lop-off jobs without trying to find a better solution.
No it's not. If your property falls 50% in value, what good would it do you to have a mortgage with an interest rate of -4.5%?
"It is not so cut-and-dry that bankruptcy is the best route for the economy."
Bankruptcy law is enshrined in our Constitution. It has been the way for over 200 years. Why save jobs that aren't doing anything? Sitting around and getting paid for nothing? Where is the incentive to change?
I'm not angry at Nardelli - I just don't feel like subsidizing him. Or anybody who has a mortgage they can't afford. Or the people who bought the securities representing them. Or the banks that made the loans. It does nothing. This bubble must deflate, people who took the risks must accept the results, and we move on.
you guys,,,,, you just don't get it do you?? (well, some of you do)
all I meant with opportunity of a life time was that for a 29 year old first time buyer who's paying 2k a month for rent in the city to some 35 year old apartment building (i.e. me), a mortgage of 400k at 4.5% to a brand new condo would definitely 'entice'.
In the past year or so, you've heard a lot of people saying the crisis won't heal (or at least starts to) before stabilizing housing market. So, when/how to stabilize housing? stabilize New York first. how to do that? 1) get rid of foreign buyers (they're doing that themselves, look at pound and euro going down the pooper, pardon my French); 2) come up with revolutionary/attractive programs LIKE 4.5% mortgage.
"Bankruptcy law is enshrined in our Constitution. It has been the way for over 200 years."
So what? Slavery was Constitutionally-allowed for 100 years and that was a pretty bad idea. You seem to like things to be all black or all white and quickly come to a conclusion that is infallible. The situation and the economy has a lot more grey areas than black & white and right & wrong.
Money is going to be needed to fix this and I am more in favor of consumers getting it and then putting it back into the economy. You want to fire the autoworkers, collapse the autor industry and fire all the teachers. You would be a great Treasury Secretary.
LIC - okay here are the unintended consequences, which is why its called unintended, that I see in order of priority:
1) govt meddling with rates/mortgage markets - temporary, not permanent. When this is called in, rates will naturally move to where they SHOULD be and that rise will likely come at a very bad time for our economy when unemployment is much higher, businesses are hurting bad, consumers are still tapped out and becoming savers to correct their own balance sheets.
2) buyers who buy not because they want to, but because they could now barely afford it and they are at the very edge of their affordability. They decide to go for it to take advantage of the 'once in a lifetime' opportunity. Usually these buyers already are ridden with debt, or at least its safe to assume they have some debt to service already. These buyers could not afford to buy now, with rates at 5.5%. They can only afford to buy, because of this plan at 4.5%. Im sure there will be plenty of these. So they buy, and the economy is difficult for years, their job situation may change, and they end up being distressed as the purchase was too much to handle. Sound familiar?
3) delaying the adjustment process. History as shown that meddling too much with markets not only doesnt work, but delays the playout of the cycle. Do we really want to drag this process on for a few more years because we interfered too much, and declared that 5.5% mortgage rates simply are NOT LOW ENOUGH! If 5.5% is not low enough, 4.5% wont be either!
4) they are buying up MBS. Excellent, so lets see here, what will the marks be, what will the quality be, what will it cost us to keep up this buying, what happens when it ends and market loses its big bid, how much will this add to treasury issuance, etc..how long can they artificially keep this going on for and what happens to the market when this period ends?If it goes right back to where it was before, how did we get anywhere?
to name a few specific reasons....I understand your side, I just dont think that reward outweighs the above noted risks. you think it does, or disagree with these risks above. This is what makes for good discussions..
"Slavery was Constitutionally-allowed for 100 years"
First of all, despite the stupidity of that comment, slavery is not mentioned in the Constitution until the 13th Amendment. All it says was that Congress could not change the present law until 1808:
"The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person."
Now that that's done with, despite this pun - "You seem to like things to be all black or all white and quickly come to a conclusion that is infallible" - you're wrong. The PURPOSE of bankruptcy is to restructure. Most bankruptcies are restructurings. If you have a brain tumor you don't take an aspirin; you have surgery.
With the car companies, they have massive overcapacity that needs to be reduced. They have a proven inability to design cars people want. They have excessive retirement and labor costs that need to be reduced. Why should I, as a Lexus-owning taxpayer, subsidize them? I don't subsidize airlines in bankruptcy, or Bally's, or anything else for that matter. There is no good reason why not to reorganize under Chapter 11.
"You want to fire the autoworkers"
No I don't. I want them to exactly as many people they need at a price that they can afford.
"collapse the auto industry"
Absolutely not. Shrink it to the size it needs to be, get rid of excess production and distribution capacity. All a bailout will do is postpone the inevitable.
"and fire all the teachers."
Absolutely not. Pay them according to their performance, and bring their benefits in line with the private sector. What's so hard to understand about that?
waverly, you sound like a true socialist, but while socialization of certain things makes sense (the army, health care), it does not for cars or real estate. It will only delay the inevitable.
Steve - My point of bringing up the Constitution and slavery was that by not having an ammendment making it illegal it was legal and the conclusion can be drawn that the Constitution, by not outlawing something, also make it legal....added to the fact that ti was an issue specifically addressed by the framers and was purposely left out so that it would remain legal.
Bankruptcy is a restructuring, but it is not the only way to restructure and may not be the best idea for the auto industry. Just becasue you don't think so proves nothing.
"fire the entire management, get rid of 50% of blue collar workers and 75% of white collar workers, cut capacity 50%. Then you'll have a viable industry."
That is your opinion of how to fix the audit industry and I think that is a naive answer to the problem that would cause far greater damage. There are other options that are better for the employees and better for the economy.
Socialist? Not even close. I believe there are more ways to fix the problems and other than calling ideas stupid and then giving even more ridiculous solutions you have proposed nothing of substance that would actually help.
UD - Your #2 and #3 points can be lessned if strict lending standards are actually maintained. There is also less risk for people who would refi. That would temper some of the foreclosure risk and also put a lot more money back into the economy with the extra money that people would have. I am not suggesting allowing rampant specualtion, liar loans or huge helocs.
The 4th point would also be helped by less foreclosures. That is where some of the stabilization would occur. If people could only get those rates up to $625,500 it is not going to lead to a huge upswing in the NYC RE market.
It is a way to help stabilize some of the banks without just handing them the money. It has the added benefit of increasing consumer spending without it coming from credit cards or helocs. There is value to this. The banks would also loosen up lending and that will help small businesses and the employment situation.
"No it's not. If your property falls 50% in value, what good would it do you to have a mortgage with an interest rate of -4.5%?"
Steve, so you are saying negative rates won't support property price because property price will fall by 50% anyway. Nice circular logic there.
If you think price will fall 50% when rates are at today's 5.5%+ level, why would it still fall 50% when banks are paying owners 4.5%/year? i.e., financing rates are better by 10 percentage points?
Why don't you do your favaorite carry cost versus rent analysis assuming -4.5% rate, and tell us what happens?
" the 'bid' for prime NYC real estate is no where near the 'offer' and until most buyers understand this, and until credit unfreezes, it's going to be at least another quarter of very little activity"
Agreed
"Prices play a function. That's what the Soviet Union didn't understand, it's what Venezuela doesn't understand.........Artificially lowering credit rates may temporarily prop up house prices, but it can't last. The only way out of this bubble is either to deflate it, or inflate the price of everything else."
Agreed
"Ford is still owned by the Ford family. Why are we bailing them out?"
Exactly, WTF?
"now that the bubble has burst - gimme, gimme, gimme!"
Right
I will never understand why the powers that be off shored & out sourced our manufacturing, so dumb & short sighted for so many reasons. The big 3 have been on life support for many years, enough is enough; they should go bankrupt & restructure.
This 4.5% is also dumb. Let the bubble burst & zero out, then start with a relatively clean sheet. Right, UD, stop messing with markets. Barney Frank (& his ilk) & Greenspan created this housing bubble & now the sheeple who bought into it face foreclosure & plunging values. Wall St securitized these crappy loans, which caused a global banking crisis. The whole thing was a Potemkin village, house of cards.
It seems that the decision makers in both government & industry are stupid. We were a producer, lender nation, now we're a debtor who created wealth based on paper & consumer spending. How & why did government & industry decision makers condone this? They did not anticipate the unintended consequences which we face today. It boggles my mind.
UD - good post. There are pros and cons to this, I agree it isn't a silver bullet or a black and white issue.
1) Government meddling - Government policy always has an effect on interest rates and mortgage rates. Government intervention during the worst housing crisis in decades is not necessarily bad. Lower mortgage rates would strike directly at the source of the current economic problems - the housing market. If this helps stabilize the economy, jobs and the financial sector, a subsequent rise in rates to the 6% level should be absorbed fine if the economy is in better shape.
2) Low rates 4-8 years ago were a factor in the bubble, but the bigger problem was lax lending standards. Greenspan fed low rates fuel to an already heated economy, this would be lowering rates in a downturn, big difference. And I agree that in order for this to work, the low rates must be combined with strict lending standards, so those with too much debt or poor credit do not become all-of-a-sudden buyers.
3) Who is to say what the right equilibrium is for the "adjustment process"? It is a moving target based on overall economic conditions. Housing nationwide is already down substantially. Lower rates to decrease costs for good buyers could help avoid overshooting to the downside and the ripple effects that would have.
4) I agree that the government would need strong risk management controls on these purchases. This can be done, there are money management firms that saw this coming because of strong risk management data and models.
We disagree on the cost-benefit analysis of this plan, but I am glad to finally see a plan that is designed to address the source of the problem, housing, and I think its positive effects outweigh the risks. Agree to disagree.
"and the conclusion can be drawn that the Constitution, by not outlawing something, also make it legal"
It said it couldn't be made illegal for 20 years, it could not be made legal in states where it was currently illegal, or in new states. That's it. Slavery is, BTW, perfectly allowable under the Old Testament, as well, as long as the slaves aren't Jews.
"I think that is a naive answer to the problem that would cause far greater damage."
Then you've never been through a bankruptcy procedure, and you don't know how delicately they are balanced. The threat of "cramdown" really does focus the mind.
Why should we give money to a) private equity firms, and b) the Ford family, and c) GM, with obsolete brands and thousands of unnecessary dealerships?
Why?
"then giving even more ridiculous solutions you have proposed nothing of substance that would actually help."
Yes I did. Bankruptcy would help.
"so you are saying negative rates won't support property price because property price will fall by 50% anyway. Nice circular logic there."
Not circular at all. You have a home worth $100,000. They PAY you 4.5% on the money you borrow. You have an $80,000 mortgage. At the end of the 30 year mortgage, you will have received $42,332.94 in interest. But if your property falls in value by 50%, you're STILL underwater.
That said, property prices would probably rise. Then you stop the subsidy, and BANG! It all collapses.
I don't really think Barney Frank (& his ilk) had much to do with this - they were out of power for many years when this was happening. The Community Reinvestment Act (if that's what you're referring to) has been around since the 70's. This had nothing to do with it.
"Not circular at all. You have a home worth $100,000. They PAY you 4.5% on the money you borrow. You have an $80,000 mortgage. At the end of the 30 year mortgage, you will have received $42,332.94 in interest. But if your property falls in value by 50%, you're STILL underwater."
But I get to live in the apartment rent-free for 30 years. How much is that worth? Am I still underwater?
"But I get to live in the apartment rent-free for 30 years."
No. The interest rate would have to be -45% for you to live for free. You would ALWAYS have to pay something below that point.
But that's not the point. The point is that if you did that, home prices would rise until they reached PRECISELY the point where people could marginally not afford any more. For instance, at that rate a $3 million mortgage would cost $3,923.65.
So what would happen? Prices would rise to get there. It happens that at 5.5% a $700,000 mortgage costs $3,974.52 - practically the same as a $3 million at -4.5%. So change the interest rate and property prices will rise from $700,000 to $3 million.
And since you can't keep the subsidy going forever, as soon as you get rid of it prices will collapse right back down to $700,000.
"There is no good reason why not to reorganize under Chapter 11."
steve, you are 100% correct. Bankruptcy is the best option but Obama will never let it happen because he and his party are union loving Hippocrates. No special interest money eh?
Total interest paid on a 4.5% 30 year fixed mortgage of 80k is actually $65,925.37. I'm real curious where you got your number from steve. Made something up to support your claim?
Even your own numbers don't make sense. You start with a 20k down payment (lost money). Over 30 years, the bank pays you 42k according to your made up numbers. Now you own the home free and clear, but its only worth 50k. You sell it and pocket it all. 50k+42k-20k is a positive number. More than the 20k you started with, in fact.
"All my properties in Washington Heights, which falls under a much lower rate because it is a gentrifying area, have had their mortgages recast to 4.875."
eah, can you explain? Are these conforming ARM's where you are riding out the adjustable period?
no, they were traditional 80/20 mortgages - totally vanilla. HSBC offers an amazing program called Community Works, Typically it requires income restrictions but for certain zip codes they waive it. The original rates on the properties were from 5.75 to 6.2. My property manager called looking into refinancing and the rep at HSBC said they would recast the loans since I did not want to pull money out or change any of the loan terms. Check out their site.
Today the rate is 4.75. So, I didn't time it exact but what can you do.
Bankruptcy is not the only way to solve the problem, which is why I find that suggestion not to be helpful. I think the negative ramifications of bankruptcy on the overall economy and jobs situation make that an unwise choice.
You are quick to point out how Wall Street jobs lost add up to other NYC jobs lost and therefore hurt RE in NYC (and I agree), but you refuse to see the impact that bankruptcy would have on the auto industry and related busineses and the overall economy and jobs situation.
There are more creative ways to solve problems and I think they should be explored. I don't think this Treasury plan is perfect, but I think it is a step in the right direction. Jobs must be protected to contain the damage, banks have to lend money to businesses and individuals and people have to be able to go out an buy things. Our economy is not driven by how much an apartment sells for at 350 Bleecker. It is driven by consumers and right now no one is buying anything, banks aren;t lending money and people are losing jobs or scared they will lose their job. This calls for some out-of-the-box solutions and thankfully we have elected someone who is far more up to the task than what we have had.
"I don't think this Treasury plan is perfect, but I think it is a step in the right direction."
What plan? They don't have a plan.
"Jobs must be protected to contain the damage"
You can't "protect" a job that has no reason to be. If you are subsidizing a job that is counterproductive, and why we're where we are in the first place. Some jobs will be saved. Others will be lost. You can't maintain a 20 million car workforce when only 10 million cars are being sold.
Why is that so hard to understand?
Should we also subsidize hot vendors in Central Park?
"banks have to lend money to businesses and individuals"
Banks have to lend money to businesses and individuals who have a likelihood of paying it back. Otherwise, again, that's how we got ourselves here in the first place.
"and people have to be able to go out an buy things."
Well go ahead, buy something. But until the uncertainty is removed and people are sure they'll have jobs, then no one is going to buy anything.
"Our economy is not driven by how much an apartment sells for at 350 Bleecker."
That has a lot more to do with it than you know - it's the cause of today's crisis.
"It is driven by consumers and right now no one is buying anything, banks aren;t lending money and people are losing jobs or scared they will lose their job."
That's what I just said.
"This calls for some out-of-the-box solutions"
Socialism?
"and thankfully we have elected someone who is far more up to the task than what we have had."
I don't doubt that, but I do doubt he does what you think he will. Obama has chosen about the most conservative people in the world. If you think Paul Volcker is a bleeding heart liberal out to save unnecessary auto jobs, you're crazy.
The only way to force people to accept what they don't want to accept is to - force them. That's what bankruptcy does, that's why the auto industry doesn't want it. It's why banks don't want it for mortgages. Yet it exists precisely to return economic equilibrium, and its underlying philosophy is that it's better for everyone to suffer a little than to suffer a lot. Bankruptcy would force the autoworkers to give up more than they otherwise would. Dealers ditto. Management ditto.
"You are quick to point out how Wall Street jobs lost add up to other NYC jobs lost and therefore hurt RE in NYC (and I agree)"
Absolutely not. The best thing that ever happened to NYC real estate, in fact: these artificially high prices cannot subsist.
There are fundamental reasons why banks are not allowed to go bankrupt, but rather they are taken over by the government and unwound. Banks operate on confidence, and there is counterparty risk. There is no such thing as a "debtor-in-possession" for banks, or bank workouts. Manufacturing companies are quite different.
You may think the autoworker jobs are counterproductive, but I bet they feel a whole lot differently, as do all of the other people who's employment is tied to the auto industry. They can be reorganized without bankruptcy and Nardelli does not need to be bailed out at all. I think the autoworkers are more open to making concessions than you think. This can be an opportunity to fix the auto industry once and for all and there may be 2 companies left standing.
Of course banks have to lend money to peopl and businesses who can pay it back. If the controls are in place and lending guidelines are actually followed this should happen. If companies are able to get loans to continue operating they won't lay people off. If people have jobs they can buy things. if homeowners can refinance they will have additional money to put into the economy. I am not suggesting the rates be 4.5% forever, but it is one idea that can potential fix several problem areas.
Really? Not effectively, they can't. If you're going to make a concession, why should I? Sort of like the mortgage bondholders not wanting to take a cut on mortgage restructurings. They want the bank to.
The changes needed in Detroit are massive. They MUST be cut by 50% to be competitive. There are too many employees making too much money, too many retirees with too many benefits, too many dealerships with selling too few cars.
Apart from that, it's fine.
"If the controls are in place and lending guidelines are actually followed this should happen."
I think you're naive about how banks work.
"if homeowners can refinance they will have additional money to put into the economy."
Unless they use it to pay off their bills, which is what they did the last time.
"I am not suggesting the rates be 4.5% forever, but it is one idea that can potential fix several problem areas."
It won't work. It will make matters worse in the medium- to long-term, and is eminently unfair to people who didn't buy what they couldn't afford, and now have to pay off the debts of those who got into trouble.
"don't really think Barney Frank (& his ilk) had much to do with this " Weren't Maxine Waters & Frank pushing for making mtg loans available to lower socio eco people, which encouraged a lowering of credit standards?
We are all going to be paying for a whole lot they we didn't deserve to pay for.
Actually, Steve, I think you are naive about how flexible the auto industry will actually be at this point. They aren't stupid....wait a minute, they are stupid. Okay, they know that everyone in the world knows they are bluffing with a pair of 2's. so they can and will be pushed to make hard concessions all around (the unions, the pensions, healthcare, executives...everyone).
I just disagree with you that the Treasury plan (whatever plan it can possibly be at this point) is a greater risk than some of their other ideas.
Frank: More rules on mortgage securitizations
Says House should reject $350 billion to Treasury without loan modification
WASHINGTON (MarketWatch) - A key lawmaker on Thursday outlined a broad agenda to hike regulations on securitized mortgage products, hedge funds and beef up controls on executive compensation.
House Financial Services Committee chairman Barney Frank, D-Mass., told consumer advocates that he plans to introduce legislation that would require lenders to have a stake in the mortgage before packaging and selling the loans as securitized products. Mortgage backed assets are considered a key contributor to the financial crisis.
If rates go down to 4.5%, I'll definitely want to buy even more. On a $400k mortgage, that would equate to at least $4,000 a year in savings. Over 30 years that would save me $120,000. I know there is a present value analysis and all but if I use the $4k a year in savings and apply it toward my principal balance, I would have a much shorter repayment term (i.e. instead of 30 years, it'll be 20 years).
And I don't necessarily think it's artifically inflating real estate prices. This program is intended to bridge the present downturn until things get better. Once the economy recovers, the current prices will be sustained by true fundamentals (strong job market, population growth, etc.) Thus, I think it's a brilliant idea.
And besides if the recovery period takes longer than expected, real estate is cyclical anyway...but my rate will be locked in for 30 years. So if prices do fall further, it'll go back up again eventually. On the other hand, I can't see mortgage rates for 30 year fixed programs ever going back to 4.5% naturally. It is truly an opportunity of a lifetime.
Incidentally, I can afford - like many people - to buy at 5.5% but would be more enticed to buy at 4.5%. Isn't this the point?
very interesting point regarding 4.5% mtg rates from calculated risk:
"Landlords, already struggling with high vacancy rates and falling rents, would probably lower their rents further and make the rent vs. buy decision more difficult again. So lower interest rates might not boost demand very much, it might just lead to lower rents."
"A rational buyer wouldn't pay more just because the interest rate is lower - although they might have to pay more because the demand is greater. But the current buyer wouldn't pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price."
i would add, as a renter on the sidelines, why on earth would i jump to buy a house at an obviously artificially inflated value? let the market work out the needed further declines in prices and then you will see increase demand for houses from renters. the more the government manipulates prices, the longer the price adjustments will take.
Admin - you are assuming real estate prices will fall once this low interest rate ends.
I'm betting on the economy recovering by then which will support the current price levels without this government intervention.
It's just bridging the gap until the economy recovers. Most economist are predicting a recovery in 2Q-4Q of 2009.
But I will be locked into a 30 year fixed program at 4.5% until the loan is paid off. I think it is a once in a lifetime opportunity and if prices don't fall after the end of the program, I'll be one lucky person.
I look at this as free money being given away by Uncle Sam. And I am hoping the program gets enacted.
Besides, I hate everything about renting in the city. The rental buildings are usually subpar, with cookie cutter apts, cheap finishes, worn out kitchens/bathrooms and tons of residents not caring because there is no pride of ownership.
And I'm always envisioning a landlord laughing every month upon receiving a rent check...thinking what an idiot this renter is for paying his/her mortgage for them.
It's just bridging the gap until the economy recovers. Most economist are predicting a recovery in 2Q-4Q of 2009.
This economy is in shambles, we've become a debtor nation to the tune of at least 12 trillion dollars. We coulsn't fifnance a lemonade stand never mind the big three. Most economists predict heavy job losses well into 2010. Do you think we can go on borrowing trillions to go on financing an economy based on spending? Americans two primary sources of spending money, home equity extractions and unlimited credit card availability, have been shut down now with massive job losses. With only dwindling paychecks to rely on, Americans are justifiably economizing. As a result, many more retailers will file for bankruptcy over the next few years, and those that remain solvent will only do so by drastically cutting their capacity. Just wait till the dollar collapses and inflation spikes.
With the Fed borrowing trillions more and the treasury printing it this will come to and end and hard decisions will need to be made and the politicians need to bee honest with us. This is now become an end game, no longer pushed into the future for our kids to deal with.
They would use fannie and freddie to push rates down. www.wsj.com
I wonder what that means for current mortgage-holders and if they would be able to get a better rate as well? As someone who purchased within my means I should not have a worse rate than soemone that behaved recklessly.
One of the Treasury plans that has been under consideration for some time was to reset all mortgages to 5.5%. The idea would be to stabilize housing, but it would also stimulate consumer spending by people like myself who would take that extra money on a monthly basis and plow it right back into the economy.
yes, I will be more than pissed if responsible home owners get stuck with high rates and people that want to come along and buy a home get a rate 1.5% points less than most people.
I have a 30 year fixed at 5.6%. If I can't re-finance, I'm heading to Washington with pitchforks! Who wants to join my angry mob?
I wonder if we will see 4.% rates before Bush leaves or if this is something that won't happen until Obama is president.
more meddling with rates...yea, that is a proven model with no side effects.
What are the side effects?
See, isn't socialism good? Who needs the free market and 6.5% rates?
well, lets see. Greenspan took rates down to 1%, and left them there for a while. How did that turn out? Now, the answer to all the problems is more rate meddling? You cant keep rates artificially low forever, at some point, the markets will normalize and what happens then? There are no free lunches.
The fed has been meddling with rates and cut FFR 500bps and look what its done so far! We also have 19 lending facilities and 7.4Trln worth of govt pledges, swaps, and borrowings to handle this crisis. Now they want to get rates 100 bps lower with more meddling! Between moral hazard, more people buying because rates came down not because they should buy, and all this stimulus/borrowing, dont you think the end can get serious?
Our economy is over 60% consumer-driven so that should help. Plus it would help stabilize housing and lessen the risk for the banks. It is a bottom-up approach to dealing with the situation versus just throwing money at the banks and letting it trickle-down to the people.
waverly, it's supposedly only for new purchases.
It will do long-term damage to the mortgage market, & will do nothing to affect housing prices. As soon as the program goes away, prices continue their fall. Nothing can stop the inevitable - it will just postpone it at best.
The leak came from the NAR and National Association of Home Builders.
great, i just refied today for free .625 point reduction. now this.
The end wil possibly be a train wreck urbandigs. But I don't care. I just want the market to be stimulated long enough so that I can sell my crapshack in New Jersey without taking a bath.
I keep thinking that eventually inflation will kick in with all this government spending. Obviously not now but probably in 2/3 years. At that time I prefer to have bought over renting. Any opinion on this?
If they would just let the market sort it out (look at the volume in CA) then everything will be fine. Yes, prices dropped 30% but most people don't need to sell this year, and most didn't buy in the last 2.
Steve - Obviously the leak should be taken with a grain of salt due to the source and the fact that it hasn't happened yet. I don't belive that they will be able to pass any sort of plan like this without allowing current mortgage-holders to benefit as well.
UD - what do you suggest to help the situation? Should we just hand over money to the banks? No lending and no buying is not helping the economy and will hasten job losses.
Heck, for the auto industry, the government could buy 2 million $20,000 cars from them and turn around and sell them for 70% of their value and it would be more beneficial (and cheaper for the taxpayers)than just handing these incompetent fools $40 billion to bail them out of their own mess.
And yes, I know that most of the volume in CA is foreclosures, but I always thought that prices will be set at the margins anyway. Once the foreclosures are allowed to post in NY, we'll see if the canary is still alive in the coal mine.
I find the language in the first round of press confusing. Everything online says "new home loans." A new loan is a new loan, not a new home purchase. stevejhx - can you elaborate?
Install the primary residence capital tax exemption benefit to INVESTORS with a catch that the property must be held for a period of at least 5 years, and any gains for a single is up to 250K exempt, and 500K for married investors filing exempt
Replaces the 1031 exchange deferment benefit
This will get investors in that will buy and rent out units, and hold units for at least 5 years, clear up supply!
I would think they are trying to move inventory, not refi your house. Lower rates means a lower chance of default means these loans can be bundled up and sold as....wait for it......bonds!
Lowering the rates for current mortgages lessens the risk of foreclosure and that is invaluable right now. The banks will benefit in the long run, but the individuals will benefit more and sooner. Consumers will have more money to put into the economy and less risk over job losses and money. Scared consumers don't make purchases and that freezes the economy. An economy that isn't growing is contracting.
it will make buyers come to the market for the wrong reasons. And it will have unintended consequences. Rates are low right now, at 5.5%..ARMs are adjusting downard now. Leave it alone. Govt meddling with mortgage markets is never good
The economy is more than just people buying an apartment in Chelsea. This type of plan could help in a number of areas at once. Obviously, tight lending standards should be followed (wait for laughter to die down), but this makes a lot more sense than any of the other plans that have been thrown out there so far.
No doubt Fannie and Freddie have done some dumb things but they did avoid most of the neg am and option arm and liar loans. Their portfolios are prime for the most part and currently have about 2% in serious deliquencies. Their borrowers are generally not the ones in trouble and generally not the ones that need help.
Seems to me that artificially low rates and excess leverage is how we got here in the first place. Unfortunately, the only answer the Fed and Treasury are able to come up with is more leverage and further artificially lower rates.
And if Fannie and Freddie would not have done this for their shareholders how exactly is this a good idea for the taxpayers, the new owners of Fan/Fred?
What we have found out is that many people who bought in the last few years really should be renters. The government's efforts to move the home ownership dial from 64% to 70% via lax lendiing standards and highly risky, affordable mortgage products was a mistake.
How absurd that Barney Frank spent the last 15 years screaming about the need to lend to riskier and riskier borower types and after he got what he wanted he now screams about stopping foreclosures.
I agree with UD. Tax credits and incentives for investors and well qualified borrowers make a lot of sense.
this latest plan is awful, absolutely awful
very misguided
In religious Muslim countries like Saudi Arabia, they have 0% interest since Islamic la does not allow interest to be charged. So how about it? Who would be willing to pray toward Mecca 5 times a day for a 0% interest loan?
Alpine,
They get around it. Banks make money.
"In religious Muslim countries like Saudi Arabia, they have 0% interest since Islamic la does not allow interest to be charged."
Alpine, alpine, alpine. That is as dum as anything spunky ever said. They lend you $100 and they tell you you owe $110 after a year. No interest. It's a fee.
Points.
BTW if you're a fundamentalist Christian, interest is also illegal under Biblical rule.
Now then, this stupid plan would do NOTHING to stop home prices from falling, except delay it a few months, and cost us all a fortune. Realtors and builders don't want prices to fall, so they're looking for a way out. Well, unfortunately, there isn't one.
And the auto bailout isn't going to work, either. Not enough votes. Thank g-d. Let them have Chapter 11 like every other company, fire the entire management, get rid of 50% of blue collar workers and 75% of white collar workers, cut capacity 50%. Then you'll have a viable industry.
It just galls me that Nardelli - who got FIRED from Home Depot with a $25 million golden parachute, and now works for a PRIVATE EQUITY FIRM that bought Chrysler, would demand a payout. If there's bankruptcy, the only ones who lose are the PRIVATE EQUITY FIRMS.
Why the f*ck are we bailing them out? Nobody's bailing me out.
Pardon - Nardelli got $210 MILLION as a Golden Parachute.
And he's begging for my money?
NOT.
"What we have found out is that many people who bought in the last few years really should be renters."
jake you are right. when prices are too high, everybody but bill gates and buffett should rent instead of buying.
people just built such unrealistic views of what homeownership means in terms of wealth creation and have the wrong idea that renting is for deadbeats.
holding both views, they had no chance at all to make a reasonable financial decision instead of buying at the peak.
Let me get this right..... we outsourced all good paying jobs, sent all our manufacturing overseas, built an economy based on credit and leverage by borrowing 9 trillion dollars from the rest of the world which was our national debt last year not counting the 2 trillion dollars loaned out the back of the Fed window with no transparency, plus another trillion for AIG, Bear Stearns and the 700 billion bailout, sold toxic securities all over the world, kept interest rates artificially low to create a housing bubble which created a ton on jobs to provide a magical home ATM for credit card refi's and HELOCS to go on a mad spending spree which we now can't pay back, so now we are teeing up for the final crisis so the Treasury is borrowing more money and the FED is printing it, which will be the final blow when the dollar collapsing within the next couple of years............. it's FM......FUCKING MAGIC!!!!!!
"And the auto bailout isn't going to work, either. Not enough votes. Thank g-d. Let them have Chapter 11 like every other company, fire the entire management, get rid of 50% of blue collar workers and 75% of white collar workers, cut capacity 50%. Then you'll have a viable industry."
Amen to that. If they can't innovate, let them die.
There isn't enough money in the world to support housing at these prices. Not at 4.5%, not at -4.5%.
The people who took the risks - developers - want to keep the money from the good times, get bailed out from the bad. The people whose 6% commission hasn't changed despite a fivefold increase in property prices don't want to lose their excessive compensation.
I say let them lower their commissions to 1%, or work for a flat fee. On retainer. Then watch housing prices plummet.
Which they're doing anyway.
How much would a 4.5% interest help to keep NY real esate up?
I would snap up a property right away, seriously if i can get 4.5 or lower (i have excellent credit)
i don't have much money, i like the opportunity though
It won't. Look at FIG (fortress) they announced how many people wanted to withdraw funds yesterday at the stock was down 40%. A friend of mine works there and after they went public, people were walking around with Gulfstream brochures. The stock is now trading at $1.65. When all the funds calculate how much people want to pull, there will be TONS of layoffs that don't hit the wire. If you have money in a few hedge funds, and one tells you to wait until May for your money, you go to the next one. Rates don't matter when you have to raise cash and you're out of a job.
rates are 5.5% now? Your saying that because rates are 5.5%, you wont touch a house, but at 4.5% you would rush in and snap one up fast? Really?
people think this will help refi's and make the house finally affordable because its rate 100 bps lower. This is wrong for a few reasons:
1) homeowners - its a debt problem in a declining asset. Refinancing to lower rate doesnt change the debt load/principal. it may delay the inevitable
2) new buyers - if you cant afford to buy a house at 5.5%, then you shouldnt be buying a house at 4.5%. I mean holy sh*t batman, we have got to the point where 5.5% 30 yr rates are HIGH? Are you kidding me? And we are willing to accept govt meddling with mortgage markets and buying up GSE loans to peg the rate 100bps lower. Think about this.
3) risky assets - stop taking on more risky assets!
4) artifically lowering rates - stop meddling with the markets, especially the mortgage markets. you cant keep rates low forever, forces will let the market do what it wants. govt intervention here is not the answer to our problem
5) prices - home prices still need to correct, let the forces play out. Stop delaying the process and taking on bad debts/assets in the process or we will end up like Japan for the next 10 years
4.5% is opportunity of a lifetime, same thing happened in 03 which started the boom, however this time [I hope] they've become smarter in not lending money to any joey on the street
Honestly, what most people aren't talking about is how incredibly difficult it is to now get a mortgage. Gone are the 10% down days for condos, now the banks, or at least ours, wants AT LEAST 30% down. Considering how much money was lost in the rapid, but should never have been unanticipated, 'crash' in the world financial markets, and declining real estate values finally hitting NYC, very few people's balance sheets look as pristine as they did even back in summer'08. And to those brokers who are still relying on foreigners buying up NYC real estate, they need a reality check of their own, or a good schooling in the economy as it stands now.
As an owner it pains me to say this, but the 'bid' for prime NYC real estate is no where near the 'offer' and until most buyers understand this, and until credit unfreezes, it's going to be at least another quarter of very little activity.
Wall Street and Main Street are slashing jobs accross the board. Who is left to feel safe and confident?
buyin 09 - you just dont get it. there is a price to pay to get that rate to 4.5% and peg it there and the unintended consequences with it. How could 4.5% be an opp of a lifetime, and 5.5% be expensive? Seriously now. they have to stop meddling with markets in this type of manner. It is not going to do what they think its going to do, but there will be a price to pay for it later on. there are alternatives.
"same thing happened in 03 which started the boom"
which is precisely the problem EXCEPT in 03 prices were 50% lower. You can lower the rate to 1% or 0% - it will do nothing in the long-term except delay the pain more.
Noah, I think you're being far to aggressive. Why do you care if 09 buys? You stated your opinion. I agree with you that we need to let the economy bleed out but you can't be so agitated that lower rates might tempt people. We're bot in charge, if the rates get lowered, people will refi and buy if they have been dying to own or think they can save money. What else is there discuss?
Steve - you cannot layoff 2 million autoworkers. That would absolutely cripple the economy. The UAW is going to have to rework their contract, the Big 3 will need to be consilidated into the Big 2, cut a lot of the fat at the top, give them some financial assistance and maybe they should consider making some cars that aren't total pieces of crap from now one.
I do agree that the PE firms should not be bailed out at all.
eah - I dont care if 09 buys or not, that is not the discussion. The discussion is whether the Treasury should peg rates to 4.5% and what they will do to achieve this. Thats the discussion here. rates are at 5.5% now, is this really the reason why people are not buying?
refi? No! Thats not the problem with existing homeowners. Its a principal problem, underwater problem. Refi'ing doesnt solve this problem. I am being aggressive eah because I see this couuntry deferring debt and problems to us down the road. Bill at CR agrees. Barry Ritholtz agrees. David Merkel agrees. Rick Santelli agrees. Mish agrees. Govt meddling with rates is not the answer here.
Besides , REFIS DO NOT APPLY FOR THIS PROGRAM, IT IS ONLY FOR NEW BUYERS!! This is a BIG mistake with side effects and unintended consequences that come with govt meddling eah! In addition,l Lawrence Yun of NAR lead the push for this program, that right there tells you its bad!
http://www.housingwire.com/2008/12/04/treasury-considering-45-percent-mortgages-report/
"The Journal story suggested only that Treasury “would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration.”
Which, of course, leaves plenty of questions unanswered. But it appears that the plan under consideration, if consistent with the lobbying efforts put forth by the NAR and others, would only apply to purchase transactions, not refis."
"you cannot layoff 2 million autoworkers"
Who said anything about laying them off? What you can't do is have more than you need. Chapter 11 does that, and if you need only 1 million autoworkers, then so be it.
Otherwise, we will just keep on pouring money at these obsolete industries. Steel died, and America seemed to have survived. Textiles died, furniture died, all these industries died because they couldn't compete.
What's so different about cars?
Noah, as I said, I agree that this is not a wise move for the Fed to make or even be discussing. However, I do not agree that people would be foolish to exploit it if it does happen.
You seema bit overinvested and hysterical. Yes, it is a scary time but we have no control over it so where are you coming from?
In terms of refis, rate sare lowering, even outside this plan. All my properties in Washington Heights, which falls under a much lower rate because it is a gentrifying area, have had their mortgages recast to 4.875. Over the course of the loans this will result in a tremendous savings. Would I rather rates not lower and true fixing of the situation occur..yes, of course. But will I have my prop. manager exploit every savings opportunity...of course.
I think UD is a little off base on this one. If rates dropped to 4.5%, more buyers would enter the market. Rates just dropped to 5.5% in the last week or two. People who were looking at 6 to 6.5% rates two weeks ago who then could get 4.5% would be more inclined to buy. If the government can get rates there by buying MBS, there would be little harm as long as they use strong risk controls to determine which MBS are eligible for purchase by the Treasury.
well I disagree. I think its a bad idea.
UD is right - this plan will do nothing but save a few homebuilders and realtors - temporarily. Once you implement this, how do you stop it? Rates will then overcompensate the other way, and we're right back where we came from: housing is too expensive, and there's too much of it at this price.
well Steve, that wont happen because the govt will artificially keep the rates low forever and ever for fear of what may result if rates rise.
Im being sarcastic. YES!!! 2009 & 2010 will be about weaning us off 19 lending facilities and other actions that have been implemented. The more you meddle with rates, the more the snap back reaction will be down the road. Its an unintended consequence. We are at 5.5% now, and people here are saying that is too high, and at this level, there is no incentive to buy a home cause its not 4.5%. Its such a ridiculous argument, that I just dont get. So, the market wont function because rates are at 5.5%, but it will thrive at 4.5%. And to get there is worthwhile no matter the methods or costs to do so.
Its just not worth it. If more buyers did not come to the market because rates dropped from 6.5% to 5.5%, who says 4.5% is the magic number and thats where we need to be to get them in! When does this end?
If there are strict controls in place and only qualified people are given mortgages I don't see the catastrophic damage that will be done.
If they go to a plan like this they will have to allow refis, or else people will just sell their property to a friend/family-member and then buy it back to get the 4.5% rate.
Allowing refis would also do more to increase consumer spending. When people have another $500 or $800 a month they will go out and buy a tv, a laptop, go to dinner and buy a car. There are a lot of way this plan can help individuals and then trickle-up to help companies and banks.
Money is going to be thrown at this economic situation and I would rather it go more directly to people than right to banks, the Big 3 and PE firms.
Steve - the Big 3 employ approximately 3 million people and the overwhelming % of these are blue-collar workers. They need their contract, pension and benefits reworked for sure, but they need to have jobs and we need them to have their jobs.....maybe they all cannot stay employed, but we cannot just slash 1-2 million jobs.
The plan is the product of the NAR & Home Builders, and is intended for new loans only.
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/03/AR2008120302889.html?nav=rss_business
"Under the initiative, the Treasury would offer to buy securities that finance newly issued loans for home purchases, according to the sources."
Whatever, they will do what they will do. I don't like it. This wont matter and will not produce the desired effect, but there will be a price to pay for this later on. lenders are already very very tight, so those represent some controls. Im worried about govt intervention in mortgage markets and the side effects of this. Thats all. The risks far outweigh the rewards here with this NAR sponsored plan
I have no respect for Yun or NAR, after seeing their statements for the past 3 years
urbandigs...read the Guardian, it's going on in Europe also. Obviously not the same plan or sponsorship but the concept of rate cutting is there.
http://www.guardian.co.uk/business/2008/dec/04/interest-rates-bank-of-england1
well thats a monetary action, as the BOE cuts rates to stimulate. They are lagging us. But our fed has exhausted most of their rate cuts, and so have been quantitatively easing. Your right, not same plan as the one I have an issue with is govt meddling with mortgage rates to peg rate to 4.5% for new loans and what needs to be done to achieve this feat, and the side effects later on.
"I don't see the catastrophic damage that will be done."
Because you mustn't understand how markets work. Prices play a function. That's what the Soviet Union didn't understand, it's what Venezuela doesn't understand. Housing is already very socialized in the US. Artificially lowering credit rates may temporarily prop up house prices, but it can't last. The only way out of this bubble is either to deflate it, or inflate the price of everything else.
"When people have another $500 or $800 a month they will go out and buy a tv, a laptop, go to dinner and buy a car."
It's cheaper just to go out and buy a tv, laptop, dinner, or a car for them.
And more effective.
"maybe they all cannot stay employed, but we cannot just slash 1-2 million jobs."
First, the Big 3 don't employ that many people. Second, Chrysler is owned by a bunch of rich guys who made a bad bet. Ford is still owned by the Ford family. Why are we bailing them out?
Far more efficient it is to let market forces work. Even if the UAW reworks its contract, there is an OVERSUPPLY of cars and EXCESS CAPACITY that is never going to come back. Either you reduce that supply and capacity, or you subsidize forever.
That's the fight that Margaret Thatcher won against the colliers in the UK - why subsidize coal-mining jobs when it was cheaper to import coal?
"intended for new loans only."
Then, UD, you buy my house and I'll buy yours.
It is really, really stupid. Now Bernake wants the government to do more to prevent foreclosures.
Here's the solution: bankruptcy protection. Borrowers lose something, lenders lose something, investors lose something, and taxpayers are saved an enormous amount of money.
This is what bankruptcy is for. I won't stop home prices from falling, but it will stop entire neighborhoods from going under. The banks weren't complaining when they were handing out all this money and making tons, borrowers weren't complaining when they were borrowing money they couldn't afford to pay back, investors weren't complaining when they were getting huge yields on misrated AAA paper backed by subprime loans.
But now that the bubble has burst - gimme, gimme, gimme!
I didn't see anybody bail out investors in the dot.com bubble. Why should we bail out Nardelli, who ran Home Depot into the ground and got a $210 million golden parachute?
To save auto jobs that aren't needed?
I don't think so.
Rates just dropped to 5.5%. They haven't been that low all along. And mortgage applications and refis have significantly recently. I agree that the low rates would have to be available for refis for this to work best. The government is throwing hundreds of billions at banks already. Why not use the spending to affect homebuyers by producing low mortgage rates since the government has poured so much directly into the banks already? People facing rate resets could have a better chance of avoiding big monetary problems if a low rate fixed loan is available, and 4.5% makes a big difference in a monthly payment from 6%. Buyers on the fence would be more likely to buy. UD, I respect your opinion, but please give some detail of why you think this would be more harmful than good. Do you think the government would lose money on its MBS purchases? If this helps stabilize the market, and once things are stabilized (and hopefully once the economy and job market stabilizes) rates move back up again, does that cause more harm than good?
correction - mortgage apps and refis have increased significantly recently.
"There isn't enough money in the world to support housing at these prices. Not at 4.5%, not at -4.5%."
Mortgage rate at NEGATIVE 4.5% will not support today's housing prices? Steve, that's the dumbest thing I have ever heard.
"According to the Alliance for American Manufacturing, the total number of Big Three employees, parts-supplier employees and car-dealer employees comes to 1.59 million. Add the multiplier effect of other jobs dependent on these jobs for their own existence -- in construction, retail, restaurants, and so on -- and you've easily exceeded 3 million jobs, perhaps 4 million. That's a big chunk to take down at a time when the economy is already headed into the steepest recession we've seen in decades. Nor does that include the 2 million people reliant on the industry for health care, and the 775,000 retirees who collect auto-industry pensions."
It is not so cut-and-dry that bankruptcy is the best route for the economy. This is a very challenging situation that needs to be dealt with appropriately. There is always a lot of talk about the jobs lost related to Wall Street layoffs, well it happens to other industries too. I understand your anger at Nardelli (and agree with it), but we cannot just lop-off jobs without trying to find a better solution.
"that's the dumbest thing I have ever heard."
No it's not. If your property falls 50% in value, what good would it do you to have a mortgage with an interest rate of -4.5%?
"It is not so cut-and-dry that bankruptcy is the best route for the economy."
Bankruptcy law is enshrined in our Constitution. It has been the way for over 200 years. Why save jobs that aren't doing anything? Sitting around and getting paid for nothing? Where is the incentive to change?
I'm not angry at Nardelli - I just don't feel like subsidizing him. Or anybody who has a mortgage they can't afford. Or the people who bought the securities representing them. Or the banks that made the loans. It does nothing. This bubble must deflate, people who took the risks must accept the results, and we move on.
you guys,,,,, you just don't get it do you?? (well, some of you do)
all I meant with opportunity of a life time was that for a 29 year old first time buyer who's paying 2k a month for rent in the city to some 35 year old apartment building (i.e. me), a mortgage of 400k at 4.5% to a brand new condo would definitely 'entice'.
In the past year or so, you've heard a lot of people saying the crisis won't heal (or at least starts to) before stabilizing housing market. So, when/how to stabilize housing? stabilize New York first. how to do that? 1) get rid of foreign buyers (they're doing that themselves, look at pound and euro going down the pooper, pardon my French); 2) come up with revolutionary/attractive programs LIKE 4.5% mortgage.
"Bankruptcy law is enshrined in our Constitution. It has been the way for over 200 years."
So what? Slavery was Constitutionally-allowed for 100 years and that was a pretty bad idea. You seem to like things to be all black or all white and quickly come to a conclusion that is infallible. The situation and the economy has a lot more grey areas than black & white and right & wrong.
Money is going to be needed to fix this and I am more in favor of consumers getting it and then putting it back into the economy. You want to fire the autoworkers, collapse the autor industry and fire all the teachers. You would be a great Treasury Secretary.
LIC - okay here are the unintended consequences, which is why its called unintended, that I see in order of priority:
1) govt meddling with rates/mortgage markets - temporary, not permanent. When this is called in, rates will naturally move to where they SHOULD be and that rise will likely come at a very bad time for our economy when unemployment is much higher, businesses are hurting bad, consumers are still tapped out and becoming savers to correct their own balance sheets.
2) buyers who buy not because they want to, but because they could now barely afford it and they are at the very edge of their affordability. They decide to go for it to take advantage of the 'once in a lifetime' opportunity. Usually these buyers already are ridden with debt, or at least its safe to assume they have some debt to service already. These buyers could not afford to buy now, with rates at 5.5%. They can only afford to buy, because of this plan at 4.5%. Im sure there will be plenty of these. So they buy, and the economy is difficult for years, their job situation may change, and they end up being distressed as the purchase was too much to handle. Sound familiar?
3) delaying the adjustment process. History as shown that meddling too much with markets not only doesnt work, but delays the playout of the cycle. Do we really want to drag this process on for a few more years because we interfered too much, and declared that 5.5% mortgage rates simply are NOT LOW ENOUGH! If 5.5% is not low enough, 4.5% wont be either!
4) they are buying up MBS. Excellent, so lets see here, what will the marks be, what will the quality be, what will it cost us to keep up this buying, what happens when it ends and market loses its big bid, how much will this add to treasury issuance, etc..how long can they artificially keep this going on for and what happens to the market when this period ends?If it goes right back to where it was before, how did we get anywhere?
to name a few specific reasons....I understand your side, I just dont think that reward outweighs the above noted risks. you think it does, or disagree with these risks above. This is what makes for good discussions..
"Slavery was Constitutionally-allowed for 100 years"
First of all, despite the stupidity of that comment, slavery is not mentioned in the Constitution until the 13th Amendment. All it says was that Congress could not change the present law until 1808:
"The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person."
Now that that's done with, despite this pun - "You seem to like things to be all black or all white and quickly come to a conclusion that is infallible" - you're wrong. The PURPOSE of bankruptcy is to restructure. Most bankruptcies are restructurings. If you have a brain tumor you don't take an aspirin; you have surgery.
With the car companies, they have massive overcapacity that needs to be reduced. They have a proven inability to design cars people want. They have excessive retirement and labor costs that need to be reduced. Why should I, as a Lexus-owning taxpayer, subsidize them? I don't subsidize airlines in bankruptcy, or Bally's, or anything else for that matter. There is no good reason why not to reorganize under Chapter 11.
"You want to fire the autoworkers"
No I don't. I want them to exactly as many people they need at a price that they can afford.
"collapse the auto industry"
Absolutely not. Shrink it to the size it needs to be, get rid of excess production and distribution capacity. All a bailout will do is postpone the inevitable.
"and fire all the teachers."
Absolutely not. Pay them according to their performance, and bring their benefits in line with the private sector. What's so hard to understand about that?
waverly, you sound like a true socialist, but while socialization of certain things makes sense (the army, health care), it does not for cars or real estate. It will only delay the inevitable.
UD is right. It's a stupid idea.
Steve - My point of bringing up the Constitution and slavery was that by not having an ammendment making it illegal it was legal and the conclusion can be drawn that the Constitution, by not outlawing something, also make it legal....added to the fact that ti was an issue specifically addressed by the framers and was purposely left out so that it would remain legal.
Bankruptcy is a restructuring, but it is not the only way to restructure and may not be the best idea for the auto industry. Just becasue you don't think so proves nothing.
"fire the entire management, get rid of 50% of blue collar workers and 75% of white collar workers, cut capacity 50%. Then you'll have a viable industry."
That is your opinion of how to fix the audit industry and I think that is a naive answer to the problem that would cause far greater damage. There are other options that are better for the employees and better for the economy.
Socialist? Not even close. I believe there are more ways to fix the problems and other than calling ideas stupid and then giving even more ridiculous solutions you have proposed nothing of substance that would actually help.
UD - Your #2 and #3 points can be lessned if strict lending standards are actually maintained. There is also less risk for people who would refi. That would temper some of the foreclosure risk and also put a lot more money back into the economy with the extra money that people would have. I am not suggesting allowing rampant specualtion, liar loans or huge helocs.
The 4th point would also be helped by less foreclosures. That is where some of the stabilization would occur. If people could only get those rates up to $625,500 it is not going to lead to a huge upswing in the NYC RE market.
It is a way to help stabilize some of the banks without just handing them the money. It has the added benefit of increasing consumer spending without it coming from credit cards or helocs. There is value to this. The banks would also loosen up lending and that will help small businesses and the employment situation.
"No it's not. If your property falls 50% in value, what good would it do you to have a mortgage with an interest rate of -4.5%?"
Steve, so you are saying negative rates won't support property price because property price will fall by 50% anyway. Nice circular logic there.
If you think price will fall 50% when rates are at today's 5.5%+ level, why would it still fall 50% when banks are paying owners 4.5%/year? i.e., financing rates are better by 10 percentage points?
Why don't you do your favaorite carry cost versus rent analysis assuming -4.5% rate, and tell us what happens?
" the 'bid' for prime NYC real estate is no where near the 'offer' and until most buyers understand this, and until credit unfreezes, it's going to be at least another quarter of very little activity"
Agreed
"Prices play a function. That's what the Soviet Union didn't understand, it's what Venezuela doesn't understand.........Artificially lowering credit rates may temporarily prop up house prices, but it can't last. The only way out of this bubble is either to deflate it, or inflate the price of everything else."
Agreed
"Ford is still owned by the Ford family. Why are we bailing them out?"
Exactly, WTF?
"now that the bubble has burst - gimme, gimme, gimme!"
Right
I will never understand why the powers that be off shored & out sourced our manufacturing, so dumb & short sighted for so many reasons. The big 3 have been on life support for many years, enough is enough; they should go bankrupt & restructure.
This 4.5% is also dumb. Let the bubble burst & zero out, then start with a relatively clean sheet. Right, UD, stop messing with markets. Barney Frank (& his ilk) & Greenspan created this housing bubble & now the sheeple who bought into it face foreclosure & plunging values. Wall St securitized these crappy loans, which caused a global banking crisis. The whole thing was a Potemkin village, house of cards.
It seems that the decision makers in both government & industry are stupid. We were a producer, lender nation, now we're a debtor who created wealth based on paper & consumer spending. How & why did government & industry decision makers condone this? They did not anticipate the unintended consequences which we face today. It boggles my mind.
UD - good post. There are pros and cons to this, I agree it isn't a silver bullet or a black and white issue.
1) Government meddling - Government policy always has an effect on interest rates and mortgage rates. Government intervention during the worst housing crisis in decades is not necessarily bad. Lower mortgage rates would strike directly at the source of the current economic problems - the housing market. If this helps stabilize the economy, jobs and the financial sector, a subsequent rise in rates to the 6% level should be absorbed fine if the economy is in better shape.
2) Low rates 4-8 years ago were a factor in the bubble, but the bigger problem was lax lending standards. Greenspan fed low rates fuel to an already heated economy, this would be lowering rates in a downturn, big difference. And I agree that in order for this to work, the low rates must be combined with strict lending standards, so those with too much debt or poor credit do not become all-of-a-sudden buyers.
3) Who is to say what the right equilibrium is for the "adjustment process"? It is a moving target based on overall economic conditions. Housing nationwide is already down substantially. Lower rates to decrease costs for good buyers could help avoid overshooting to the downside and the ripple effects that would have.
4) I agree that the government would need strong risk management controls on these purchases. This can be done, there are money management firms that saw this coming because of strong risk management data and models.
We disagree on the cost-benefit analysis of this plan, but I am glad to finally see a plan that is designed to address the source of the problem, housing, and I think its positive effects outweigh the risks. Agree to disagree.
"and the conclusion can be drawn that the Constitution, by not outlawing something, also make it legal"
It said it couldn't be made illegal for 20 years, it could not be made legal in states where it was currently illegal, or in new states. That's it. Slavery is, BTW, perfectly allowable under the Old Testament, as well, as long as the slaves aren't Jews.
"I think that is a naive answer to the problem that would cause far greater damage."
Then you've never been through a bankruptcy procedure, and you don't know how delicately they are balanced. The threat of "cramdown" really does focus the mind.
Why should we give money to a) private equity firms, and b) the Ford family, and c) GM, with obsolete brands and thousands of unnecessary dealerships?
Why?
"then giving even more ridiculous solutions you have proposed nothing of substance that would actually help."
Yes I did. Bankruptcy would help.
"so you are saying negative rates won't support property price because property price will fall by 50% anyway. Nice circular logic there."
Not circular at all. You have a home worth $100,000. They PAY you 4.5% on the money you borrow. You have an $80,000 mortgage. At the end of the 30 year mortgage, you will have received $42,332.94 in interest. But if your property falls in value by 50%, you're STILL underwater.
That said, property prices would probably rise. Then you stop the subsidy, and BANG! It all collapses.
That's the point of my argument.
"Barney Frank (& his ilk)"
I don't really think Barney Frank (& his ilk) had much to do with this - they were out of power for many years when this was happening. The Community Reinvestment Act (if that's what you're referring to) has been around since the 70's. This had nothing to do with it.
"Not circular at all. You have a home worth $100,000. They PAY you 4.5% on the money you borrow. You have an $80,000 mortgage. At the end of the 30 year mortgage, you will have received $42,332.94 in interest. But if your property falls in value by 50%, you're STILL underwater."
But I get to live in the apartment rent-free for 30 years. How much is that worth? Am I still underwater?
"But I get to live in the apartment rent-free for 30 years."
No. The interest rate would have to be -45% for you to live for free. You would ALWAYS have to pay something below that point.
But that's not the point. The point is that if you did that, home prices would rise until they reached PRECISELY the point where people could marginally not afford any more. For instance, at that rate a $3 million mortgage would cost $3,923.65.
So what would happen? Prices would rise to get there. It happens that at 5.5% a $700,000 mortgage costs $3,974.52 - practically the same as a $3 million at -4.5%. So change the interest rate and property prices will rise from $700,000 to $3 million.
And since you can't keep the subsidy going forever, as soon as you get rid of it prices will collapse right back down to $700,000.
And that's why it's so stupid.
"There is no good reason why not to reorganize under Chapter 11."
steve, you are 100% correct. Bankruptcy is the best option but Obama will never let it happen because he and his party are union loving Hippocrates. No special interest money eh?
http://www.detnews.com/apps/pbcs.dll/article?AID=/20081007/POLITICS01/810070453/1409/METRO
Try the link again:
http://www.detnews.com/apps/pbcs.dll/article?AID=/20081007/POLITICS01/810070453/1409/METRO
Total interest paid on a 4.5% 30 year fixed mortgage of 80k is actually $65,925.37. I'm real curious where you got your number from steve. Made something up to support your claim?
Even your own numbers don't make sense. You start with a 20k down payment (lost money). Over 30 years, the bank pays you 42k according to your made up numbers. Now you own the home free and clear, but its only worth 50k. You sell it and pocket it all. 50k+42k-20k is a positive number. More than the 20k you started with, in fact.
Pretty obnoxious, ha? But you asked.
"All my properties in Washington Heights, which falls under a much lower rate because it is a gentrifying area, have had their mortgages recast to 4.875."
eah, can you explain? Are these conforming ARM's where you are riding out the adjustable period?
no, they were traditional 80/20 mortgages - totally vanilla. HSBC offers an amazing program called Community Works, Typically it requires income restrictions but for certain zip codes they waive it. The original rates on the properties were from 5.75 to 6.2. My property manager called looking into refinancing and the rep at HSBC said they would recast the loans since I did not want to pull money out or change any of the loan terms. Check out their site.
Today the rate is 4.75. So, I didn't time it exact but what can you do.
Bankruptcy is not the only way to solve the problem, which is why I find that suggestion not to be helpful. I think the negative ramifications of bankruptcy on the overall economy and jobs situation make that an unwise choice.
You are quick to point out how Wall Street jobs lost add up to other NYC jobs lost and therefore hurt RE in NYC (and I agree), but you refuse to see the impact that bankruptcy would have on the auto industry and related busineses and the overall economy and jobs situation.
There are more creative ways to solve problems and I think they should be explored. I don't think this Treasury plan is perfect, but I think it is a step in the right direction. Jobs must be protected to contain the damage, banks have to lend money to businesses and individuals and people have to be able to go out an buy things. Our economy is not driven by how much an apartment sells for at 350 Bleecker. It is driven by consumers and right now no one is buying anything, banks aren;t lending money and people are losing jobs or scared they will lose their job. This calls for some out-of-the-box solutions and thankfully we have elected someone who is far more up to the task than what we have had.
"I don't think this Treasury plan is perfect, but I think it is a step in the right direction."
What plan? They don't have a plan.
"Jobs must be protected to contain the damage"
You can't "protect" a job that has no reason to be. If you are subsidizing a job that is counterproductive, and why we're where we are in the first place. Some jobs will be saved. Others will be lost. You can't maintain a 20 million car workforce when only 10 million cars are being sold.
Why is that so hard to understand?
Should we also subsidize hot vendors in Central Park?
"banks have to lend money to businesses and individuals"
Banks have to lend money to businesses and individuals who have a likelihood of paying it back. Otherwise, again, that's how we got ourselves here in the first place.
"and people have to be able to go out an buy things."
Well go ahead, buy something. But until the uncertainty is removed and people are sure they'll have jobs, then no one is going to buy anything.
"Our economy is not driven by how much an apartment sells for at 350 Bleecker."
That has a lot more to do with it than you know - it's the cause of today's crisis.
"It is driven by consumers and right now no one is buying anything, banks aren;t lending money and people are losing jobs or scared they will lose their job."
That's what I just said.
"This calls for some out-of-the-box solutions"
Socialism?
"and thankfully we have elected someone who is far more up to the task than what we have had."
I don't doubt that, but I do doubt he does what you think he will. Obama has chosen about the most conservative people in the world. If you think Paul Volcker is a bleeding heart liberal out to save unnecessary auto jobs, you're crazy.
The only way to force people to accept what they don't want to accept is to - force them. That's what bankruptcy does, that's why the auto industry doesn't want it. It's why banks don't want it for mortgages. Yet it exists precisely to return economic equilibrium, and its underlying philosophy is that it's better for everyone to suffer a little than to suffer a lot. Bankruptcy would force the autoworkers to give up more than they otherwise would. Dealers ditto. Management ditto.
I see no reason to bail out Bob Nardelli.
"You are quick to point out how Wall Street jobs lost add up to other NYC jobs lost and therefore hurt RE in NYC (and I agree)"
Absolutely not. The best thing that ever happened to NYC real estate, in fact: these artificially high prices cannot subsist.
There are fundamental reasons why banks are not allowed to go bankrupt, but rather they are taken over by the government and unwound. Banks operate on confidence, and there is counterparty risk. There is no such thing as a "debtor-in-possession" for banks, or bank workouts. Manufacturing companies are quite different.
You may think the autoworker jobs are counterproductive, but I bet they feel a whole lot differently, as do all of the other people who's employment is tied to the auto industry. They can be reorganized without bankruptcy and Nardelli does not need to be bailed out at all. I think the autoworkers are more open to making concessions than you think. This can be an opportunity to fix the auto industry once and for all and there may be 2 companies left standing.
Of course banks have to lend money to peopl and businesses who can pay it back. If the controls are in place and lending guidelines are actually followed this should happen. If companies are able to get loans to continue operating they won't lay people off. If people have jobs they can buy things. if homeowners can refinance they will have additional money to put into the economy. I am not suggesting the rates be 4.5% forever, but it is one idea that can potential fix several problem areas.
"They can be reorganized without bankruptcy"
Really? Not effectively, they can't. If you're going to make a concession, why should I? Sort of like the mortgage bondholders not wanting to take a cut on mortgage restructurings. They want the bank to.
The changes needed in Detroit are massive. They MUST be cut by 50% to be competitive. There are too many employees making too much money, too many retirees with too many benefits, too many dealerships with selling too few cars.
Apart from that, it's fine.
"If the controls are in place and lending guidelines are actually followed this should happen."
I think you're naive about how banks work.
"if homeowners can refinance they will have additional money to put into the economy."
Unless they use it to pay off their bills, which is what they did the last time.
"I am not suggesting the rates be 4.5% forever, but it is one idea that can potential fix several problem areas."
It won't work. It will make matters worse in the medium- to long-term, and is eminently unfair to people who didn't buy what they couldn't afford, and now have to pay off the debts of those who got into trouble.
Not to mention US cars are cr*p and guzzle too much gas...
"don't really think Barney Frank (& his ilk) had much to do with this " Weren't Maxine Waters & Frank pushing for making mtg loans available to lower socio eco people, which encouraged a lowering of credit standards?
We are all going to be paying for a whole lot they we didn't deserve to pay for.
Actually, Steve, I think you are naive about how flexible the auto industry will actually be at this point. They aren't stupid....wait a minute, they are stupid. Okay, they know that everyone in the world knows they are bluffing with a pair of 2's. so they can and will be pushed to make hard concessions all around (the unions, the pensions, healthcare, executives...everyone).
I just disagree with you that the Treasury plan (whatever plan it can possibly be at this point) is a greater risk than some of their other ideas.
"pushing for making mtg loans available to lower socio eco people"
Not unless they were creditworthy.
"I think you are naive about how flexible the auto industry will actually be at this point."
Right. This time they drove instead of taking their corporate jets!
"the Treasury plan (whatever plan it can possibly be at this point) is a greater risk than some of their other ideas."
What is the treasury plan?
Frank: More rules on mortgage securitizations
Says House should reject $350 billion to Treasury without loan modification
WASHINGTON (MarketWatch) - A key lawmaker on Thursday outlined a broad agenda to hike regulations on securitized mortgage products, hedge funds and beef up controls on executive compensation.
House Financial Services Committee chairman Barney Frank, D-Mass., told consumer advocates that he plans to introduce legislation that would require lenders to have a stake in the mortgage before packaging and selling the loans as securitized products. Mortgage backed assets are considered a key contributor to the financial crisis.
http://www.marketwatch.com/news/story/Frank-More-rules-mortgage-securitization/story.aspx?guid={F43C05FC-931C-4857-A33C-8FE30820C258}&dist=hplatest
If rates go down to 4.5%, I'll definitely want to buy even more. On a $400k mortgage, that would equate to at least $4,000 a year in savings. Over 30 years that would save me $120,000. I know there is a present value analysis and all but if I use the $4k a year in savings and apply it toward my principal balance, I would have a much shorter repayment term (i.e. instead of 30 years, it'll be 20 years).
And I don't necessarily think it's artifically inflating real estate prices. This program is intended to bridge the present downturn until things get better. Once the economy recovers, the current prices will be sustained by true fundamentals (strong job market, population growth, etc.) Thus, I think it's a brilliant idea.
And besides if the recovery period takes longer than expected, real estate is cyclical anyway...but my rate will be locked in for 30 years. So if prices do fall further, it'll go back up again eventually. On the other hand, I can't see mortgage rates for 30 year fixed programs ever going back to 4.5% naturally. It is truly an opportunity of a lifetime.
Incidentally, I can afford - like many people - to buy at 5.5% but would be more enticed to buy at 4.5%. Isn't this the point?
very interesting point regarding 4.5% mtg rates from calculated risk:
"Landlords, already struggling with high vacancy rates and falling rents, would probably lower their rents further and make the rent vs. buy decision more difficult again. So lower interest rates might not boost demand very much, it might just lead to lower rents."
"A rational buyer wouldn't pay more just because the interest rate is lower - although they might have to pay more because the demand is greater. But the current buyer wouldn't pay much more, because the rational buyer would realize interest rates will probably not be artificially low when they try to sell, and their future buyer would have a higher interest rate and a lower price."
http://calculatedrisk.blogspot.com/2008/12/house-prices-and-interest-rates.html
i would add, as a renter on the sidelines, why on earth would i jump to buy a house at an obviously artificially inflated value? let the market work out the needed further declines in prices and then you will see increase demand for houses from renters. the more the government manipulates prices, the longer the price adjustments will take.
Admin - you are assuming real estate prices will fall once this low interest rate ends.
I'm betting on the economy recovering by then which will support the current price levels without this government intervention.
It's just bridging the gap until the economy recovers. Most economist are predicting a recovery in 2Q-4Q of 2009.
But I will be locked into a 30 year fixed program at 4.5% until the loan is paid off. I think it is a once in a lifetime opportunity and if prices don't fall after the end of the program, I'll be one lucky person.
I look at this as free money being given away by Uncle Sam. And I am hoping the program gets enacted.
Besides, I hate everything about renting in the city. The rental buildings are usually subpar, with cookie cutter apts, cheap finishes, worn out kitchens/bathrooms and tons of residents not caring because there is no pride of ownership.
And I'm always envisioning a landlord laughing every month upon receiving a rent check...thinking what an idiot this renter is for paying his/her mortgage for them.
It's just bridging the gap until the economy recovers. Most economist are predicting a recovery in 2Q-4Q of 2009.
This economy is in shambles, we've become a debtor nation to the tune of at least 12 trillion dollars. We coulsn't fifnance a lemonade stand never mind the big three. Most economists predict heavy job losses well into 2010. Do you think we can go on borrowing trillions to go on financing an economy based on spending? Americans two primary sources of spending money, home equity extractions and unlimited credit card availability, have been shut down now with massive job losses. With only dwindling paychecks to rely on, Americans are justifiably economizing. As a result, many more retailers will file for bankruptcy over the next few years, and those that remain solvent will only do so by drastically cutting their capacity. Just wait till the dollar collapses and inflation spikes.
With the Fed borrowing trillions more and the treasury printing it this will come to and end and hard decisions will need to be made and the politicians need to bee honest with us. This is now become an end game, no longer pushed into the future for our kids to deal with.