“President George W. Bush today will announce a [five year] freeze on some subprime mortgage rates in an effort to stop a wave of foreclosures undoing the six-year expansion.”
“The agreement addresses homeowners unable to afford higher interest rates once starter rates increase, and offers help in one of three ways, a White House official said. The options are freezing rates or refinancing into either a new private mortgage or a Federal Housing Administration-backed loan, he said on condition of anonymity.”
“The freeze will apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said the people familiar with the plan. To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property [and have a FICO score below 660].”
∙ Bush Aims to Prolong Expansion With Subprime Freeze [Bloomberg]
Sounds like a good time to go trash your credit score to get it below 660 and miss a few payments so that you can qualify for the bailout … let’s just hope these people put zero down so that they have no equity.
When a bandaid needs to be removed… removing it quickly is the only way to do it.
If a correction is needed then a short sharp shock is probably the best way to deal with it.
This seems like a bad idea to me and court ‘moral hazard’
http://en.wikipedia.org/wiki/Moral_hazard
Mark Hanson, a 20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena, explains why this ‘bailout’ isn’t going to solve the mortgage problems and why several other bailouts will likely be needed. The piece is rather long but he wraps up explaining how this impacts the Bay Area specifically.
@BDB: It’s apparently too late (July 2007) to qualify 😉
The “FHA-backed loan” is pretty disturbing. Anyone know the details on that? Hopefully you can’t do that unless you have some equity.
Un-#!$*@&! believable!
I read from some other blog that these are the terms:
* Mortgage had to be issued between January 2005 and July 2007
* ARM must reset January 2008 to July 2010
* You must not have more than 3% equity in your home
* Home must be worth more than the mortgage
* You must have income
* You must prove that you can make the payments
* You must not be more than 60 days past due
* Program is voluntary with the lenders – government has no authority or legal status
If this is the case, I don’t think it will help any SF home owners(if at all they are looking for help). So, this doesn’t affect us.
I doubt if will have any affect on bay area at all… even the far reaching cities..
Why isn’t it obvious to everyone that any type of bailout is a bad idea? It will just cause distortions and new types of misbehavior and ultimately prolong the underlying problems. Hanson makes a good point in his comments: the housing market will revive when exotic loans are available again or when prices take a big drop. The credit markets – left to their own without gov’t intervention – will decide what types of loans are available. If investors will no longer support Option ARM zero down-type loans, then prices must drop. Great – let’s get it on.
I saw some different factors. You need to be beneath 660 FICO. You need to have “at least” 3% equity, not “at most.” And I disagree. I think plenty of Bay Area buyers will meet the requirements.
This likely will help a few, but probably not significantly more than would have been able to work something out with their lender anyway because it makes sense from the lender’s standpoint (i.e. lender will take a slight haircut to avoid what is likely to be a more expensive foreclosure).
A critical limitation is that it is 100% voluntary — there is no right of action or enforcement mechanism (as I understand it). In other words, if the homeowner thinks he falls squarely within the terms, but the lender disagrees, there is nothing the homeowner can do. You can’t go to court or to a regulatory body and force the lender to reconsider. Thus, the lenders will be free to do whatever they want without obligation — just as is the current practice.
This is really politics and not much more.
At Bush’s announcement of this plan today, he urged people in trouble with their mortgage to call a new hot line: 1-888-995-HOPE. Here is the number that the rest of us can call: 1-800-328-7448.
We can take comfort in the fact that Bush is endorsing it, it is destined to fail, just like everything else he has touched.
And yes, it is all politics, no doubt. A band-aid at best.
I think the main purpose of this program is to convince the stock market that the housing market issues will be contained.
Am I missing something? This only applies to folks who have less than 3% equity in their homes, right? Who in the world’s going to have less than 3% equity in their homes, other than somebody who put zero-down, and I just can’t see that being the case for much of SF.
I think that is must NOT “have less than 3% equity”. From CNN:
“It excludes anyone more than 30 days late at the time the mortgage would be modified or anyone who has been more than 60 days late at any time within the previous 12 months.
It also only covers borrowers with adjustable rate mortgages (ARMs) resetting beginning in 2008 and leaves out any who are judged capable of continuing to make mortgage payments at the higher reset rates.
Borrowers who can’t afford the loan even at low introductory rates also will be ineligible, according to Anne Canfield, executive director of the Consumer Mortgage Coalition, which represents lenders and mortgage servicers. Those borrowers will have to work with servicers on a case-by-case basis to determine if their homes can be saved.
Of the 2.2 million subprime ARMS that are expected to reset through the end of 2008, only 240,000 of those would be covered by the freeze, according to an analysis made by investment bank Barclays Capital as reported in The New York Times. Other borrowers will gain relief through FHASecure and other, lender-initiated refinancing efforts.”
http://money.cnn.com/2007/12/06/real_estate/Bush_plan_is_limited/index.htm
Looks like we are going to need a program for auto loans as well. According to an article in the WSJ:
“In the second quarter, borrowers were at least 30 days beind on 2.77% of all auto loans made by nonbank lenders, the main players in the market, according to the ABA. That was the highest delinquency rate since 1991.”
I wonder how things went in the 3rd quarter when the credit crunch accelerated.
A lot of this reaction seems way off.
The auto market has nowhere near the trillions of dollars of capital, nor does it have even close to the same rate of depreciation. Most cars are nearly spent in only a few years. Credit is often involved, but everything else from the terms to the rates and more are typically completely different.
There is an equity requirement and some other stuff that should filter out much of the worst abuse. Many of the scenarios that show up in angry reactions aren’t actually a part of this plan.
All this stuff about bailout and moral hazard confounds me to no end. These are bank loans vended by banks as affordability programs. The idea isn’t to take people’s houses. They don’t want the houses. That is why the banks are demanding politicians do something to at least slow the bleeding a little. The people who simply can’t afford their houses still won’t be able to even with this, and many were going to have to refinance anyway and they and the banks already knew that. All this is just playing for the time, and the only people doing any serious bailing with this program are the same banks that insisted on it.
It is amazing that this whole mess went from outside the mainstream radar to understood only in terms of long held agendas in no time at all. Presumably that means that as soon as this stuff eventually flattens out at the bottom, possibly before 2020, we will go right on to the next fraud saturated credit hypercharged property boom to be followed by a predictable meltdown and cries to hang the immoral bad apples responsible this time around.
“Why isn’t it obvious to everyone that any type of bailout is a bad idea?”
Well, as stated by one of the Governers of the Fed, it’s idiotic to allow the entire economy to suffer in order to teach a lesson to a to a relatively small number of lenders and institutions.
Badlydrawnbear hit the nail on the head with the article by Herb Greenberg/Mark Hanson – one of the better assessments of the entire residential loan quagmire I’ve seen in a long time. Basically, subprime is only one fourth of the loan portfolio problem nationwide, the other three being (1) pay option ARMS; (2) high LTV 2nds of up to 100% of value, and (3) hybrid 3/1 5/1 and 7/1 ARMS. All of these loans had lax lending standards with stated income loans being typical and now people can’t make their payments and their homes have not appreciated them out of the mess. These last three are the most typical in the Bay Area. Seriously – who knows of anyone who got a subprime loan with a starter rate at 7-9% that is going to jump to 11-12% around here? And jeez, if the program is voluntary, this bailout will have less teeth than a kitten.
Oh man do I miss the good old days. Where are all the discussions about heated towel racks?
@anon — “You’ll need a heated towel rack to thaw the credit freeze that’s coming!” is the best I can do, and still stay on-topic…
The person who posted that fianchetto comment in another thread can obviously do better 🙂
nonanon–I don’t see where your link addresses the 3% equity issue.
Regardless, with only 1.2M people apparently eligible nationwide, not sure this is the “bailout” many were hoping for.
“Seriously – who knows of anyone who got a subprime loan with a starter rate at 7-9% that is going to jump to 11-12% around here?”
Maybe not in San Francisco but a significant portion of East Bay “owners” are faced with this very scenario.
Foolio, I always enjoy your posts, but you’ve got to be kidding:
“Who in the world’s going to have less than 3% equity in their homes, other than somebody who put zero-down, and I just can’t see that being the case for much of SF.”
Try just about 70-80% (only a guess) of the first-time buyers in SF since about 2004 or so! SF is a pretty diverse place – lots of neighborhoods. Not just the glamour ones! Go to the SF property tax website, and check out some of your neighbors, and especially look up some of the houses that fail to sell. You’ll see a lot of delinquent taxes and failures to pay. Here’s an example – 396 Stratford. That’s a relatively cheap HELOC fiasco that recently couldn’t be sold. There are plenty of others!!
Moreover, there are many (perhaps most?) properties sold after 2004 that have now depreciated by more than 5%.
Now, if you are talking about trade-up buyers who’ve put down a lot, well, I agree with you, but beware the HELOC monster lurking in the shadows!
fluj and nonanon,
With all respect, you guys (girls?) are wrong. You have to have LESS than 3% equity. In fact, there is NO lower limit. You could have -10% equity. Go to Mish’s blog (google Mish), and you can see it, also follow related links to sources.)
Think about what’s going on here. The goal is to keep people paying on an asset that is depreciating (yes, even here in SF, but that’s a different subject).
People who have significant equity in their homes will keep paying. In fact, it’s very sad, but most will continue to throw all sorts of dollars in excess of the rental value into this depreciating asset, because they don’t want to “lose” their equity. Foolish. The equity is gone already.
It’s really pretty eveil when you think about it. The system is set up so that borrowers can simply walk away from their loan if they get into trouble. It was set up this way to entice people to spend more on housing than its intrinsic value. In order to inflate it further, all sorts of tax breaks were extended (1986, and then 1996, the most notable). The only limit on the system, and protection for the lenders, was that buyers had to put down 20%, and they were reluctant to take a “loss” and so would soldier on.
Even the tax advantages (and a multitude of other government subsidies) was not enough to keep the bubble expanding, so the lenders relaxed standards, all the way down to where the borrowers literally had no skin in the game. That’s where we are now. So modify their loans a bit, anything to keep them paying as much as they can. They are judging that people are such irrational actors that merely 3% equity is enough to keep people paying because of loss aversion. Given the pacity of savings in the US (and yes, even in SF, as we’ve so richly seen), they’re probably right. Watch for this to expand into the Alt-A space, as prices crater in the nicer areas – especially if this becomes politically resonant before the next election.
The asset class will deflate. Real values will come into alignment with fundamentals, they always do. The baghilders will be those who have “equity” in their homes today. They will absorb the real loss of value that has been extracted on the front end of the bubble by the financiers and the smart sellers who saw this for what it was. It is always the same in bubble. Always. It’s usually pretty easy to recognize when you are in a bubble, but much harder to time the exit. I am always early in getting out. As Warren Buffett once said when asked how he got so rich, “By selling too early.” Invest accordingly.
“It was set up this way to entice people to spend more on housing than its intrinsic value. In order to inflate it further, all sorts of tax breaks were extended (1986, and then 1996, the most notable). The only limit on the system, and protection for the lenders, was that buyers had to put down 20%, and they were reluctant to take a “loss” and so would soldier on.”
I have to disagree. It’s perfectly reasonable to allow borrower’s who have skin in the game and are unable to pay due to some personal disaster to walk away. It’s only when you couple that provision with 100% loans (or 125% as we saw in this bubble) that it becomes a disaster for the system and a source of systemic risk.
Hey Satchel,
Hmmm…OK, so maybe I’m wrong about 3% thing…HELOs definitely change the equation, but I still think this isn’t going to make much of a difference in most of SF, because on paper these folks still have equity in their homes, right?
So, let’s say it’s 2005 and little Johnny gets his yearly $50k trust fund allowance from the folks. He puts 5% down on a $1M 1 bedroom starter TIC on Bay Street in the Marina, and he’s feeling pretty good despite his 630 FICO score because hey, they’re still not making any more land.
Now, flash forward to 2007. The Taiwanese investors who own the place upstairs (which has better views and less street noise) sell their place for $900k in July. Lucky for them, because they bought in 2002 for $400k. Not as good for Johnny, who’s now looking at a pretty bad comp. But on paper, he’s still got that 5% “equity,” right? I don’t think he’d qualify for Bush’s bailout.
Oh–as for owners in “less prime” neighborhoods, I absolutely agree there’s more chance that folks in the Bayview, Excelsior, etc. are seriously underwater. But I’m not sure keeping those folks in their homes will do much to help stablize the SF market.
All this is academic — the whole program is voluntary. The lender decides who qualifies, whether the homeowner is over-or-under the 3% threshold or any other factor. Lenders will work with those when it is to the lender’s benefit to do so, and will not work with those when it is not.
“I think the main purpose of this program is to convince the stock market that the housing market issues will be contained.”
Totally agree. Let’s not forget there’s an election coming up.
diemos, you know I love you (a far more reasonable, rational and agreeable bear than I), and I agree that it is definitely reasonable for people to be able to walk away due to unforeseen personal problems.
But historically, it actually was set up that way, and for the very purposes of raising equilibrium housing value. The ability to walk away, like so many other bad ideas, had its genesis in the FHA/FHLB system, and the dark times of the Depression. It was done mostly through moral suasion through local member banks, with the government acting as backstop. It worked, sort of, in that real housing values actually rose from 1934 or so, although of course nominal prices continued to go down because of generalized deflation in those years. You can look at the Case Shiller historical charts for some confirmation of this, but it’s of course a little sketchy (as all real estate statistics always are).
You’ll notice today, that some vestiges of the old system (where debtors cannot simply jingle mail in the keys and walk away) remain, in states like Nevada. You are still personally on the hook if you default there. Typically, the distinction between states is referred to as “recourse” or “nonrecourse” states. Clownifornia is a nonrecourse state for acquisition debt.
If you HELOC, though, or if you refinance, generally you put yourself back “on the hook”. Again, lenders are not stupid. When the potential bagholder discovers to his joy and wonderment that he is in the right place and the right time for a bubble, AND does the smart Satchel thing of stripping out the phantom bubble wealth through a HELOC or refi, the lender wants to make sure it’s protected. That lucky homedebtor (partial homeowner now) thinks himself an investment genius. That he doesn’t strip out the equity and invest it in something with better odds of generating high real returns confirms that he isn’t.
Getting back to historical trivia, the Federal gov, of course continuing its ever-increasing encroachment under FDR into economic activity through an overly broad interpretation of its commerce clause powers, extended bankruptcy protection. So, the bagholder who walks away in a recourse state today generally must file federal BK to get out from under the debt.
The tension continues – look at the tightening of BK laws in 2005 to address all sorts of debt (in truth, more aimed towards credit card and other personal debt rather than the jingle mail problem). The banks leaned back against the trend.
Note that the IRS has refused to go along (up to now). IRS would ding you for “phantom income” in foreclosure or short sale situations (that’s a little simplified, but you get the idea). Note also that IRS debt is NOT discharged in BK – you need to go tail between your legs and cut your own deal with them.
Now, the politicos are looking to eviscerate the IRS’s ability to tax the phantom income. They’re not doing that with regard to forgiveness of debt with regard to car loans, personal loans, credit card debt, etc., are they? It’s pretty clear they are trying everything possible to inflate housing as an asset class. It won’t work. Economics always wins….
Just like in Japan in the late 1980s, people today are being locked into an asset class that historically has provided ZERO real returns over all but vey short investment horizons (of course, this is an average – California has had real returns post-WWII to be sure, Detroit, Buffalo, etc. have had negative returns).
In feudal times, the landed gentry did this with their farmers. Sharecropping was a similar system. In each case, real economic surplus (through the labor of the occupiers of the land) was extracted by the owners, enriching the owners in real terms and pauperizing the occupiers. Today, the owners are the banks, hedge funds and the taxing authorities, and the homedebtor-owners are the providers of surplus capital and economic rents. Serf’s up!!
No arguements Satchel (and I feel the love.)
As I’ve studied the economic system I’ve come to the conclusion that the root of all evil is allowing people to spend money that they don’t have. If I we’re annointed God emporer of the economy I’d refound it to eliminate borrowing altogether.
Unfortunately, as you point out, that is the mechanism by which the rentier class extracts wealth from the system and they will never give it up without a fight.
Foolio,
I basically agree with what you’re saying – my post was really more general about what’s going on in the US as a whole.
Howeer, there are a lot of “nice” neighborhoods now to the west of Twin Peaks where it would be pretty easy to find houses that have gone down more than 5% since 2005, or even 2004. (Some have gone up, too, of course.) Keeping in mind that in general it’s the ones that have gone up that sell (adverse deselection – the ones that result in a loss are often taken off the market), I really think that if you randomly threw darts at houses in places like Glen Park, West Portal, Sunnyside, Diamond Heights, even St. Francis proper and Forest Hill, back back on 1/1/2005, and sold those same houses today at auction there would be an average loss, and likely larger than 5% IMHO.
Also, agree that places like the Bayview historically have not affected equilibrium valuation in SF overall. But areas like the ones I mentioned above have, and I think will again. Nicer areas of the East Bay have historically affected valuation too. There are substitution effects. Over time, I do expect all the outlying areas (save the hopeless ones where no one wants to live who has a choice) will effect everything, but time will tell!
demios,
People were a lot smarter a few hundred years ago (maybe more time to think – less distractions). Around the turn of the 20th century it would have cost about the same (in nominal dollars) to purchase a house as to purchase that same house in 1780. The average person’s real wealth/standard of living increased dramatically over that period, as the price of just about everything FELL in nominal terms. Since the introduction of the Fed in 1913 and the ensuing system of using credit as money, well, you can see what happened. Remember, the homedebtor/future bagholder who buys that lovely 1910 Craftsman in Rockridge has roughly the same standard of living (at least as far as the structure itself) as the warehouse worker who originally bought it 100 years ago (incidentally for about $4 or $5 thousand dollars TOTAL back when his annual wage was likely to be around $2.5K) at 2x income for a lower middle class or even lower class person.
The Founders foresaw this – you must have seen this famous quote from Thomas Jefferson:
“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.”
Last thing to think about: if real estate is such a great investment in terms of real returns, AND 50-70% of people in the country own their own property (historical range of ownership), why is wealth so unequally distributed, and why are there such large numbers of people without any real net worth? (Oh, I know, they all should have bought in San Francisco! That was easy….)
Hey Satchel…yeah, I think we pretty much agree on this, especially the softness in the Western parts of SF. If you can deal with the cold, there are real bargains to be had out there (and they’ll only get cheaper in the next 12 months).
Foolio– if properties in Western SF are “only going to get cheaper in the next 12 months …” how is it that they are now “bargains” as you put it? Since when is a depreciating asset EVER a “bargain”? “Albatross” is a more apt description…
Jimmy–buy now or be priced out forever. You don’t want to be in your 60s, renting some hovel in the Excelsior, do you?
Remember, they’re not making any more land.
I’ll throw it out here b/c it seems to be the most appropriate active thread. I see the November 2007 SF sales numbers from another site (cannot vouch for their accuracy). They do show a pretty serious drop in volume, and thus corresponding increase in inventory. Here they are — I’m sure everyone will read them to support their position on the market trends:
Single Family Homes
* 172 Homes Sold
* Median Sale Price was $927,500
* Minimum Sale Price was $275,000
* Maximum Sale Price was $7,950,000
* Median Selling Price was 103% of asking price
* Median Days on Market was 32
* Median Selling Price for homes that sold within 30 days was 105% of asking price
Condominiums, Lofts & Co-ops
* 177 Homes Sold
* Median Sale Price was $766,000
* Minimum Sale Price was $210,000
* Maximum Sale Price was $7,000,000
* Median Selling Price was 101% of asking price
* Median Days on Market was 39
* Median Selling Price for homes that sold within 30 days was 104% of asking price
TIC’s
* 37 Homes Sold
* Median Sale Price was $639,000
* Minimum Sale Price was $259,000
* Maximum Sale Price was $1,375,000
* Median Selling Price was 103% of asking price
* Median Days on Market was 46
* Median Selling Price for homes that sold within 30 days was 105% of asking price
It’s pretty interesting to compare these trailing numbers with the current MLS numbers — found here:
http://www.sfnewsletter.com/Docs/Altos_SF_News_CA_SAN_FRANCISCO_2007-11-30.pdf