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What the Economy Needs Now is More/Faster Foreclosures

Posted in Just the Facts, Stories with tags , , , , , , , , , , , on April 15, 2010 by marcitz

Recently I read the following quote about how to “save” the housing market and the overall economy:

Indeed, Casey Mulligan, an economics professor at the University of Chicago, argued that both the Bush and Obama administrations had focused too much on making house payments affordable, based on income levels, and not enough on reducing debt.

Here’s a great way to reduce debt, GET OUT OF IT. 

For some reason all those people who are walking away for their houses (or are threatening to do so) seem to understand that much better than the government who keeps trying to keep people in debt.  Further proof that people understand this is shown by the high rate (>50%) of re-defaults by people who were already helped once. (high recidivism rate). 

Given that the public is embracing this approach to solving their own problems maybe the solution should be making it EASIER for people to actually walk away.

Here is why this is a potentially great (and new-fangled) solution.  At the heart of the current logjam is that different people are upset about approaches to saving the economy for different reasons.  Here are the most prevalent of those arguments:

  • Bailouts help the evil banks by having the government make their bad (or worse yet fraudulent) investments almost whole.
  • Bailouts reward individuals who were irresponsible.
  • Not propping up housing prices will keep unemployment high because any economic recovery will be hampered.
  • Taxpayer money shouldn’t be used to help those (individuals OR banks) who took egregious risk with no downside.

So if we look at making it easier for people to walk away everyone gets a sense of satisfaction (but also has to contribute to the pain). Specifically:

  • Banks will have more foreclosures on their hands (pain) but they won’t have the overhead of formal foreclosure proceedings because the owner willing ceded the property (benefit).  Also they won’t face increasing pressure from the government to abrogate contracts (and deal with the lawsuits that will inevitably follow) with their investors.
  • Homeowners who walk away give up the asset they treasured (pain) but get to move on to a life where they don’t have day-to-day financial worries of this magnitude (benefit).  Also they can quickly make amends for that one-time lapse in judgement like a hangover cure or the morning-after pill.
  • Unemployed homeowners get the added benefit of being able to go where the jobs are and NOT be stuck in a house they can’t afford in an area where they can’t work.   Their pain and their benefit is having to relocate.
  • Taxpayers – In the short-term home prices will drop (pain) but will quickly recover as a new wave of buyers can finally jump in and this won’t cost them a single nickel (benefit).

How can this be accomplished?  The government needs to create a “credit amnesty” program where people have a fixed time  (6 – 12 Month period) to walk away from their houses without any penalty on their credit reports and no taxes on forgiven debt.  Just write it off and start over.  They also need to find a way to faciliate faster foreclosures.  Finally (and there would be some additional taxpayer pain in this) the government could offer tax credits for moving expenses.  This has two benefits.  One it facilitates the move for both sellers (underwater homeowners) and buyers (to pick up those homes that are now available but in a different area), not to mention it funds jobs for movers.

The added bonus to this plan, like King Solomon dividing the baby,  is that the truly committed long-term homeowner will surface.  They are the ones that will, of their own accord, make whatever sacrifice is needed to keep their home.  Those that aren’t committed will simply take the opportunity to walk away and start anew, also a laudable goal.

Granted I’m not the biggest fan of this idea but in the spirit of shared sacrifice its the best I’ve seen so far and much better than any artificially cramming down of interest rates and principle balances.  So I vote for this.

(Follow Me on Twitter at watchingmarcitz) 

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Your House “Value” Has NOT Changed

Posted in Just the Facts, Stories with tags , , , , , , , , , , on April 8, 2010 by marcitz

There is a mad rush to protect the American Dream of home ownership.   But its not under any threat because the “American Dream” value of that home hasn’t changed.  People buy homes because they want that American Dream.  The most commonly reasons people VALUE having a home are:

  • A place to call my own
  • A place to raise my children (schools, friends, etc…)
  • A place to plant a garden
  • Build up a nest egg for when I retire

Well last time I checked none of that has changed so why the panic and the rush to save people?   Granted your nest egg may be a little smaller but at least you won’t waste your money all those years on rent and over the long term this will recover, you just have to be in it for the long term.

Why do I bring this up?  Well its because I think we, in our rush to help the so-called “vicitms” of the housing crash, are confusing the issues in a detrimental way.  If you bought a house for the above (long-term) reasons then nothing has changed so you don’t NEED a bailout. If you bought it solely as a short-term investment then you are a SPECULATOR and DON’T DESERVE a bailout.  Often the former is used to justify the latter and that needs to stop.

From a recent New York Times article came this quote,  ”There is also the risk that more people will decide that they are so far underwater — that is, they owe so much more than their homes are worth — that it makes more sense to just walk away.”

True but is that right?  Look when you bought your house you clearly said “this asset gives me value for the price I paid for it” otherwise you wouldn’t have made the single most expensive purchase in your life.  For most home owners that value is that “sense of place” (see the list above) and regardless of underlying “pricing comps” that place (and related value)  is still very much the same (garden, kid’s school, etc…) .  If you can still afford the payments isn’t it providing the same value/sense of place regardless of the underlying price?  Also if you plan on being there for a long time (isn’t the main reason for homeownership “stability”) then short term price drops don’t really matter.   When you invest in a stock you don’t drop it the minute it dips.  

If you feel you should walk away then you are treating your house MOSTLY as a short-term investment and not as your long-term commitment to the “American Dream” so you can’t use those arguments in justifying help for those investors.  Oh and if you can’t afford the payments then you can’t afford the house so its better to get you into a living situation you can afford so you can start your discretionary consumer spending again (which is what the economy really needs). 

One additional argument is “well they lost their job”.  Unfortunately we all are at risk of that so when chosing your living situation you need to assume that is part of the model when calculating the purchase price of a house.   Renters also lose their jobs and none of them are clamoring for rental reductions.

Given that here’s another crazy solution.  Why not put less money into housing subsidies and more into supporting all unemployed people regardless of their chosen model for putting a roof over their head.  This current HAMP plan (especially the unemployment provisions) show that the government doesn’t want everyone to have a roof over their heads.  Just the homeowner.  IMHO housing (regardless of financial structure) should be a right in general, the financial form it takes (renting versus mortgaging) to obtain it should not matter.

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Economic Racism is Alive and Well at the New York Times

Posted in Just the Facts, Stories with tags , , , , , , , , , , , , , , on April 3, 2010 by marcitz

My love-hate relationship with the New York Times continues.  Recently an article deal entitled Help Paying Mortgages Elicits Anger (by Tara Siegel Bernard who can be emailed at tsbernard@nytimes.com)  tried to make the point that fairness isn’t important what needs to be done should just be about the greater good over the long term.  Unfortunately, because of the prevailing and irrational home ownership bias in this country all assumptions were based on just that, preserving home ownership even if its bad for the owners themselves.   In pulling apart the arguments in the piece I found a new way to look at this homeownership bias.  It is actually a form of “economic racism” that, in a post Civil Rights world, fills the racism void.

For me the AHA! moment was when I read this quote that was designed to defend government bailouts of homeowners –   “It (the fall in house prices) shouldn’t be something people should be punished for,” said Robert Shilller.

AHA! Having some one leave a house they couldn’t afford and instead live in some other, presumably more affordable rental property is PUNISHMENT!  There it is – that subtle nasty  undercurrent (“economic racism”) that “renting is bad” that fuels even Robert “Da Man” Shiller’s argument.  Ms Bernard even says  ”a government should consider the greater good over the long-term” in which she is implying that home ownership is the “greater good”.  Categorically it is NOT true as per these sources:

Don’t get me wrong.  I think home ownership is a fine tool for many people (those with enough means to support all the ancillary costs of home ownership in both money and time, those for whom mobility is not an issue) but renting is a fine tool for many others (those with less means, who need mobility, don’t have time/money for all the home ownership maintenance issues).  Neither one is categorically better all the time and their mix of appropriateness changes as prices in both markets ebb and flow.

Recently (in the New York Times) there was a great piece (the “love” in my “love/hate” relationship) that pointed out that Tea Party arguments against health care reform are really about racism and having to embrace a new world of Blacks, Latinos and Women .  I would like to argue that Ms. Bernard’s (and Dr. Shiller’s and most other “pro-housing”  arguments) are about fear of embracing a world of renting as opposed to owning.  Like white majority, homeownership has been the goal and desire of those in power over the past 80 – 100 years at least.   It may be time for a change that no one wants to embrace.   Not surprising it was our current President who was the first one  to try and  find a way to phase out the mortgage income tax deduction.

Unfortunately the “greater good over the long-term” is that everyone gets over their social security blanket (or economic racism)  that home-ownership is the only valid and right way of living (it’s the “white makes right” equivalent of modern US economics).  Unfortunately the only way to do that is to encourage people to try other forms of living to see that in many (but not all) cases those other ways are actually better but that is not what is happening.  If you have easy access to a mortgage hammer then everything becomes a home ownership nail and we’ll never know.  I HAVE A (different view of the American) DREAM!!!…

(Follow Me on Twitter at watchingmarcitz) 

(Having problems with your Toyota.  Learn how to get more for your troubles)

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Stripping GM for Parts?

Posted in Stories with tags , , , , , , , , on April 27, 2009 by marcitz

Rumor alert – Silicon Valley Billionaires and VCs eye GM for parts…

(Menlo Park, CA) Combine a moribund IPO, housing, and startup market with idle capital and a large asset-laden American institution like General Motors valued at ONLY $1.3 Billion dollars and you have a recipe for something interesting.  Rumors have started to float around the valley, an area populated by many people who could, themselves, buy GM out of their own bank accounts, that GM may make sense as an Icahn style break-up play with some technology leftover to add auto-innovation to the Silicon Valley start-up playbook.

Elon Musk, Chairman of electric car company Tesla Motors, could buy GM outright from his personal fortune but he doesn’t need to go it alone.  VCs sitting on large investment pools of unproductive capital (for which they have received strong criticism as of late) also are looking to do something. 

So what is the idea that is floating around?  Simply put GM, according to one back-of-the-envelope calculation,  has assets worth well over $12 billion in a combination of technology, patents, and raw materials.   A series of investors have toyed with the idea of a hostile takeover and an immediate Chapter 7 bankruptcy filing.   That would effectively eliminate all the debt and union contracts leaving just the assets.  At an estimated cost of $500 million for the filling, legal clean-up and unproductive asset sales added to the current market cap of $1.33 billion plus a 50% purchase premium the total bill is $2.5 Billion.  In just asset value that leads to an almost 500%  ROI on a very large investment base.  It has been at least 4 years since Silicon Valley has seen such a return and never on such a large investment base.

To add to the attractiveness of this deal is the fact that the engine of Silicon Valley could cherry-pick and parlay the technology/patent assets of GM into many start-ups that could truly unlock their value and return much more than the $10 billion the initial sell-off would provide.  Some estimates put the lifetime value of those assets used to seed start-ups at $50 billion.  All of this just requires some risk-taking and vision, two assets found in abundance in the valley.

 See more posts on the GM bailout.

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Homeownership – So Many Chores, So Little Time

Posted in Stories with tags , , , , , , , , , , , , on April 15, 2009 by marcitz

See one of the problems with homelownership is that not only do you have to cover the mortgage but you also have to clean the roof, flush the pipes, paint the walls and, of course, you have to “Mow the Lawn”

Well at least that last part isn’t so bad…

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Rearranging Deck Chairs on the Peninsula

Posted in Stories with tags , , , , , , , , , , , , , , , , , , on March 29, 2009 by marcitz

With a good week on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.

To play it safe you need to think about where we are in the economic cycle the same way as an important scene in the movie Titanic.  This is the scene where the ship, which has been slowly sinking for about an hour, suddenly levels off when the submerged part of the boat (partially) breaks away.  Everyone is relieved that they are floating level when all of a sudden they get pulled down in a rush to the bottom.  The sinking part of the housing market just (partially) broke away and everyone is giving that sign of relief.  Strike up the band!
 
 
Here is why we are in for that second more hellish ride straight to the bottom.  In the short term the credit markets will get a swift kick when we finally have a large bank failure come to light. Give it 3-6 months and my FDIC insured money is on Bank of America. There goes the financing revival. Second of all housing will get another kick in the pants in two years when interest rates have to start going up again (to combat eventual inflation).  We have seen the recent good news being the result of lower interest rates so what happens when those interest rates go up? 
 

Also as any real estate agent will tell you “location, location, location”.  Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula.  Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year.  Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median.  That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median).  Its only a matter of time before it finally hits here.

My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs.  This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010.  Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.
 
Impossible you say?  Remember it was once said that the housing market could not possible crash the same way the NASDAQ did during our last bubble.  Really??  Have a look at this graph which offsets the NASDAQ peak to correspond with the peak in Bay Area housing prices.

housing-vs-nasdaq1

Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market).  For a detailed analysis of these myths please point your browser here.

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Obama Administration Says NO to Bankruptcy Loan Modifications

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , on March 15, 2009 by marcitz

So Congress has been trying to push a law that will allow bankruptcy judges to modify the terms of mortgages including reducing interest rates and “cramming-down” loan principal.  Many have opposed this because it violates contract law.  The highly justified fear is that if the government can just violate any contract at will then contracts of any kind (past, present or future) will no longer have any value.   Up until this morning the Obama administration has signaled that it supports these in-bankruptcy modifications.  That all changed on the Sunday morning talk show circuit when Larry Summers, head of President Obama’s National Economic Council, came out in strong defense of contract law.

According the the New York Times:

Mr. Summers, who also appeared on CBS’s “Face the Nation” suggested, however, that the government’s ability to require…scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts.”

Ok, now for a little truth telling.  Dr. Summers was actually talking about the bonuses being given to AIG employees but isn’t the sentiment the same?  After all, last time I checked a mortgage is a contract and by Dr. Summers own admission the government cannot “abrogate” them yet that is what congress wants to do. 

As an invisible renter I am sure you are thrilled because you want your shot to buy a house at a fair price and by NOT allowing in-bankruptcy loan modifications you will get your chance.  So please don’t forget to call and email Dr. Summers to thank him for his support of contract law (I just talked with his office) and for signaling that the Obama administration will now veto any in-bankruptcy loan modification legislation that Congress may propose.

Dr. Lawrence Summers  

Or is that not what he meant to say…

P.S.  See how the New York Times also seems to have come out against housing bailouts in this analysis of an article by Joe Nocera.

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Is Wells Fargo Playing Games? – Tell Us Your Scam Story…

Posted in Stories with tags , , , , , , , , , , on March 11, 2009 by marcitz

So talking to a friend the other day who is one of the lucky ones thanks, potentially, to some good old-fashioned game playing on the part of his mortgage appraiser.  Seems that he bought a house 3 years ago and was ready to refinance it so he called in Wells Fargo.  This is where it gets strange.

Apparently the only house that they could find to comp against his house for the appraisal was HIS house based on its purchase price from 3 years before.  What’s cool is that his house, even given all the stuff going on in the macro economy, hadn’t lost any value in the past three years based on that comp (neat trick!). 

Of course given the increase in houses on the market how is this possible that his house was the only comp they could use?  Afterall, not to far away there were many houses for sale (and many foreclosures) that were used as comps when he first bought his house (of course they weren’t in foreclosure then).  Turns out that Wells decided to “tighten-up” the radius from when he had bought his house 3 years before so, one might guess, the foreclosures wouldn’t be included in the appraisal and then they couldn’t give him the loan. (another neat trick!)

But why would they want to give him a loan that exceeded the true value of the house?  Well because (just like over the past few years) they weren’t going to keep it and if they didn’t get the appraisal they wouldn’t get the loan origination business.  Sure enough he said that they weren’t and that it was immediately going to Fannie Mae because he had a conforming loan. VOILA!

Well its nice to know in these crazy times that some things never change. 

So have you heard a recent story of financial “magic” (spelled “s-c-a-m”)?  If so please share it here because you, as a taxpayer, just bought my friends house.  He’s a responsible and talented guy and will make good on his loan but there are many out there that probably got the same treatment and may not be so responsible.

ARE YOU A RENTER - STOP  THEY NEW YORK TIMES FROM HURTING YOU

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RENTER ALERT – Stop the New York Times from Hurting You

Posted in Stories with tags , , , , , , , , , , , , , , , , , , , , , , , , on March 6, 2009 by marcitz

Dear Invisible Renters,

The New York Times today published an editorial in which it supports a law winding its way though congress to force banks to cram-down (AKA reduce) the principle balances on home mortgages and we must stop it.  This is ridiculous for many reasons stated in a letter below you can send to key departments and people at the Times.  Addresses and a draft letter are below:

Dear New York Times,

Why are you making homes less affordable to 68% of your New York readers and neighbors, who are renters, by encouraging the cram-downs of mortgage principle?  This is bad for everyone in the long run:

  • For Renters this will hold housing at unrealistic and high levels longer making it impossible for us to become responsible homeowners if we so choose (feel free to continue renting anyway its a valid lifestyle choice no matter what society says)
  • For the New York Times - 68% of your New York City readership are renters and this action is an attack on the majority of your readers.
  • For the Economy  by keeping people in homes they can’t afford we’ll only prolong the agony as we have a continuous stream of higher than normal foreclosures over years as opposed to in one big (and yes painful) lump.  By getting it over quickly you will see buyers come back into the market because they know we’ve reached the real (not a weak unsustainable subsidized) bottom AND homes will be much more affordable.

Here are some other things you need to know:

  • Housing prices will continue to fall at least another 10-15 points (ask any economist).  So what does that mean if a house is reset to a lower level only to find its not the LOWEST level.  Will there be another cram down?  Won’t those people only default later (after having received the first, now unsuccessful cram-down) for the same reasons you are stating now?
  • Housing prices will get another kick in the pants in two years when interest rates have to start going up again (to combat inflation from all this money being printed and flushed down the economy) so this will only get worse and require more cram-downs. Remember people tell you to buy when interest rates are low so the flip side is…

Why trash contract law in this country to delay the inevitable. 

Thank you for listening

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Just How Invisible are Renters?

Posted in Stories with tags , , , , , , , , , , , , , on March 3, 2009 by marcitz

INVISIBLE RENTER ALERT - STOP  THEY NEW YORK TIMES FROM HURTING YOU

So as I began to feel increasingly invisible as a renter I decided to gather some facts about how stealthy I really am.  I decided to go to the one oasis on the planet where renting is a normal and truly acceptable lifestyle choice, namely New York City, to see if even there renters were more visible.

Just for background New York City (across the five boroughs) has the highest percentage of renters of any urban area in the United States with a renter rate of 67.1% according to this study.  That means that only 32.9% of New York City residents own a home.  Compare that to the national average of 67.5% rate of homeownership at the end of 2008 and basically you see that New York City has TWICE as many renters (on a percentage basis) of the US average.  Clearly this is a city that lives (and dies) on renters.

So lets look at the other pillar of New York City, namely the New York Times, which must be covering the affect that the collapse of the housing market might have on its majority (plurality actually) renter base of citizens.  After all the reason why renting is so prevalent in New York is because it is so expensive to own.   While New Yorkers claim to be different I can’t see them being immune to the contagion that is the American Dream to own a home.  So, one would assume, that in a market of falling house prices there might be a flurry of stories about renters getting their chance to upgrade to be homeowners.  After all two-thirds of the New York Times local edition readers are, in fact, renters.

To understand this I did a very simple test.  I went to the New York Times web page and did two different searches of the archives over the past 12 month period.  The first search was for the word “homeowner” and it returned 291 results.  So then I tried, for the same period, the word “renter” and it returned only 106 results.   Basically in a city with 100% MORE renters than homeowners it returned 64% LESS in terms of news coverage about them.

So I decided to broaden my scope and look across papers.  For this I went to the Google News Search page.  I did a one month search for “homeowner” (try it to see the latest) and found 15,637 articles.   I then did the same one month search for “renter” (try it to see the latest) and found only 2,296 articles.   Renters had 86% less coverage than homeowners and they, on a national basis, represent about 50% of all homeowners.

So renters of the world you may be getting screwed by public policy but the upside is you can feel free to walk into any bank and grab what’s lying around or through any locker room to grab a peek because YOU ARE INVISIBLE.

What can you do to return to the visible spectrum?  Try the following three step plan:

  1. Understand how President Obama’s current “housing bailout” is hurting the invisible renter (all 100 Million of them) by reading this article.
  2. Email Treasury Secretary Timothy Geithner to help him see through our rental cloaking devices and consider our perspective as well.  After all homeowners are currently the problem and renters, who might eventually be able to afford those homes if given a chance, are the solution.  Oh and make sure to explain to him the definition of affordable.  Check out this Geithner classic from today when talking about the housing bailout, “It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets”.  So what he is saying is that to make things more affordable we must RAISE prices.  Somebody needs an economics refresher…
  3. Post a comment on this post telling us how you personally, as a renter, have felt invisible.  Or better yet give suggestions on how we can become even more visible as this crisis continues (so I don’t have to rename this blog “reallyfuckedrenter.com”).

Oh and for extra credit tell us a story of a really fucked homeowner (RFHO) at the bottom of this post.

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