A Level Gaze

A Level Gaze

"What effect must it have on a nation if it learns no foreign languages? Probably much the same as that which a total withdrawal from society has upon an individual."
--G.C. Lichtenberg

Saturday, December 08, 2007

Sucker Trap

I had thought the Paulson Plan rather a poor deal for homeowners:

The basic outline is that loans are put into three segments:

1. Borrower appears (from fairly superficial analysis of the data, not any deep digging) to be eligible for a refinance. These borrowers are to be encouraged to refinance.
2. Borrower appears able to make payment at current rate, but appears (again, from fairly superficial analysis) to be unlikely to be able to refinance (generally because LTV is too high with FICO too low). These borrowers are eligible for the “fast-tracked” mod (the rate freeze) if they meet some FICO and payment increase tests.
3. Borrower appears unable to make payment even at current rate; these borrowers are presumed to be unable to refinance. They are not eligible for the “fast track” rate freeze mod; they may be eligible for some kind of work out, but it would have to be handled the old-fashioned fully-analyzed case-by-case way.

Which the inimitable Tanta further boils down to:

1. Not in default and default not imminent
2. Not in default and default reasonably foreseeable
3. In default or default imminent

As I mentioned in the previous post, the plan was specifically targeted to freeze the rates of only those homeowners who were at the very limit of their financial wherewithal, to squeeze the absolute last nickel out of them. As Tanta explained, there is a good reason for this: the securitization contracts specify that the terms of only those loans in imminent danger of default may be modified without (complex, expensive) renegotiation.

In an environment of decreasing prices, spiking inventory, and tighter credit, a provision that makes it barely possible for homeowners who bought at the top of the market to stay current on their mortgages is at best dubiously advantageous. Against the ability to stay in their homes would have to be weighed the fact that they would be overpaying for the privilege with the last of their financial resources. Unless their incomes increase significantly during the five years the Plan covers, they would be in much the same position in which they find themselves today: facing a significant payment increase they can't to afford. In the then-likely event of foreclosure, they would be left with nothing. If, instead, they just mailed the keys to their servicers now and walked away, they could then rent essentially the same houses for much less money, save the difference, and be in a position to make downpayments on rationally-priced homes when their credit ratings reset.

This looked like a bad enough deal considering what many thought to be the Plan's other major stipulation: that the loan-to-value ratio (LTV) of the first mortgage could be no less than 97%. As such, mortgagees facing hopeless levels of debt on their homes would be excluded from participation, and wouldn't be thereby tempted to prolong their impossible situations. However, as Mike Shedlock pointed out yesterday afternoon, that provision had been widely misread: the Plan covers only those with LTVs of more than 97%. That is, only those in the worst shape, many of them already owing more than the value of their homes, would "benefit".

In light of this clarifcation, the Plan can no longer be construed as possibly a good deal for certain people in very specific circumstances. It is, in Mish's very apt characterization, nothing more than a "sucker trap" that will ultimately ruin nearly every homeowner who participates in it.

posted by David at 12/08/2007 11:09:00 AM ::

Friday, December 07, 2007

Felix Salmon Thinks I'm a Bad Person

Salmon Sez:

"If you're hoping to get a home [on] the cheap out of foreclosure, then maybe you're damaged."

My response:

Excuse me?

Real estate is overvalued. Those who, like me, did not buy for that reason will naturally wait for prices to come down before considering buying. Foreclosure is one means by which the the expected price reductions will be effected. That's how the market works. There is nothing normative about it.

I'm not going to buy a house until I find one that I like at a reasonable price. If that house is available as a result of foreclosure, so be it. *I* didn't cause the previous owners to buy more house than they could afford, nor did I scam them into signing an impossible mortgage. I strongly resent your characterization of those who hope to benefit from the coming rationalization of the real estate market as "damaged."

Just because I saw this train wreck coming and anticipate the availability on the market of decent housing I can actually afford doesn't make me some kind of ghoul. I might feel good that I haven't overextended myself, but that's my right. And it doesn't make me "damaged."

On the subject of what a good deal this plan is for everyone, I'd like to point out that the plan will give "relief" only to those who are already stretched to the limit. To the extent the plan is carried out, there will be that many more people stuck paying top dollar for a depreciating asset. Unless their incomes rise substantially, they won't be able to afford much else, and when the interest resets in five years, they'll be in the same boat they're in now: facing foreclosure.

Yeah, this is a great deal.

Update: Exclusive to ALG! Felix says he didn't mean it. See comments and judge for yourself.

posted by David at 12/07/2007 11:48:00 AM ::

Thursday, December 06, 2007

"Freedom requires slavery just as slavery requires freedom. Freedom opens the windows of the soul so that man can discover his most profound beliefs and commune with Master. Freedom and slavery endure together, or perish alone."

- ~~Mitt Romney~~

Also, read this.

posted by David at 12/06/2007 10:04:00 PM ::

Thursday, November 01, 2007

Ironically,

since 9/11 there hasn't been a dropoff in foreign tourism in New York City, where the attacks actually took place.

It's at places like Disney World, Graceland, and the Grand Canyon where they're getting the dirty looks.

posted by David at 11/01/2007 09:11:00 PM ::

Monday, September 24, 2007

The Most Important Post You will Read This Year

Although this blog is basically moribund at this point, I feel an obligation to spread the word about this post by Karl Denninger by any and every means necessary. It is about the housing market, the credit markets, and the US economy in general.

Although I disagree fairly thoroughly with his politics, he is an extraordinarily sharp cookie when it comes to financial matters. And in this post, he cranks it up at least 3 notches.

An excerpt to whet your appetite:

If you think this housing market mess won't get that bad, you're very wrong. Well, at least the market says you're very wrong. Take a look at this; the CME now lists housing futures.... where you can place futures bets on the price of housing in major markets. Have a gander..... they don't see a bottom coming for years.

Now maybe you can tell me how we can have any "home equity withdrawals" to fund consumer spending if this view is correct? Oh, and by the way, these futures are of course priced in nominal dollars - add inflation and things get REALLY bad.

Ok, so what has really happened here up until now?

We need to identify this with some degree of confidence if we are going to figure out what's coming around the bend! Why? Well, I hear the rails singing and past experience tells me that this usually means you better get the hell off the tracks..... but am I right or wrong?

Let's postulate a few things from what we do know, because it has been published.

First, Bernanke pulled the safety pins out of the banking system when he waived the 10% affiliated capital limits. This was done for ONE bank back earlier this year, but just recently, he did it for four large primary banks. WHY? One can assume that their affiliated entities, which are the "trading" or "securities" arms of these organizations, were on the verge of collapse!

I urge you to read the whole post.

posted by David at 9/24/2007 12:32:00 AM ::

Thursday, May 31, 2007

These people have no credibility at all

The operational commander of US troops in Iraq on Thursday said officers are seeking local ceasefire deals with insurgents, after the deadliest month for American forces in two-and-a-half years.
Lieutenant General Raymond Odierno, the number two US officer in Iraq, told reporters that about four-fifths of the militants currently fighting American forces were thought to be ready to join Iraq's political process.

Now who's getting close to terrorists?

This initiative reeks of desperation.

We're not going to offer the insurgents anything close to what they want in the longer term. They know it, and we know it, and in no case does any potential party to these agreements have the first reason to trust the other. Whatever 'agreements' we come to with the insurgents are going to be entirely of the moment, and will ultimately leave the situation on the ground unchanged.

After all the talk about how U.S. military might could "win" in Iraq, the very idea that the strategy going forward should be to engage with the people who have been shooting and (mostly) blowing us up is an insult. They're stabbing in the dark, and it is pathetically obvious.

posted by David at 5/31/2007 11:25:00 PM ::

Sunday, March 18, 2007

It's not quite that simple

Atrios puts forward the rudiments of his response to the mortgage crisis:

Essentially you need to make it possible for people to refinance, both by getting rid of prepayment penalties and strongly "encouraging" lenders who gave out a bunch of mortages they shouldn't have to renegotiate the terms in order to make repayment more realistic.

I know Mr. Black is an actual, like, economist, and I'm just some schmuck, but I think he's entering into some very dangerous territory with his prescriptions. We're only weeks away from this story jumping to the top of every newspaper, and politicians and rabble-rousers are going to be climbing all over one other with their "solutions" to this Grave and Serious Problem. Eschaton is very widely read (for good reason) by just about all of the lefty Establishment types. I'm worried they'll follow him up on it.

In my mind, I liken the situation to an auditorium full of people who have just discovered the exits are locked and there is a very powerful bomb in the room, which, for all the world, exactly resembles an M-80. Not a trifling problem, but a threat they think they can handle. In reality, it's going to completely blow out one of the auditorium's walls no matter what they do. If they don't do everything right, it will bring the whole building down on them.

If mortgagees are allowed to reduce their payments, a cascade of effects follows:

Payments to the investors who bought these loans will decrease. They will demand compensation. These costs will run to hundreds of billions of dollars, the bill ultimately falling on the U.S. taxpayer.
If interest rates on such a large part of the credit market are reduced to accomodate
mortgagees, the value of the dollar will decrease. Those holding dollar-denominated assets will see their values eroded. In addition to foreign central banks and investors, pension and mutual funds will be affected.
If the dollar goes down, inflation and interest rates will go up. In the long term, this will be good for manufacturing and exports, but the shorter term effects will be disastrous for the economy.
Financial markets price things according to the future. If they get much more than a whiff of any of this going down, prices of all kinds of assets are going to be marked to their future market value, and very, very quickly. The loss of value will be staggering.

Unfortunately, much of the above is probably unavoidable at this point, and throwing money at the problem will only postpone and worsen the inevitable.

I agree that people who were given loans they had no hope of repaying should get relief, but meddling in the markets, especially at a point where conditions are so far from equilibrium, is extremely dangerous.

A better approach would be to allow those (and only those) who were given clearly unrealistic mortgages to walk away from their obligations with no or significantly reduced penalties. This would include an exception in the bankruptcy laws (which need to be completely overhauled, anyway), and a reduction or elimination of the credit score penalty. It's not as though anyone will be trying to throw money at them anytime soon, anyway.

Such an strategy would split the hurt between the banks and those who bought the mortgages, and allow former homeowners to make a clean start without the mortgage monkey on their backs.

There is no silver bullet for this monster of a credit bubble; the contraction is going to work itself through the economy one way or another. Somebody is going to wind up holding the bag, and it shouldn't be the already overextended lower and middle classes. I violently object to saving the banks' bacon with what limited money consumers have left.

There are a lot of elected Democrats who carry the water of the financial industry, and this conflicts intrinsically with the interests of the vast majority of the American people. How the members of our new congressional majority react to the credit crisis will be a crucial litmus test of their commitment to our well-being.

In fairness to Atrios, he may know in his political savant's heart of hearts that some form of stupid populist tubthumpery is going to be adopted, and he's just trying to wear a path to the least harmful of them. In my naivete, I think it is important that we push for the best solution. He could very well be right.

posted by David at 3/18/2007 08:37:00 PM ::

Saturday, March 03, 2007

Mitt is a Buffoon

Josh, what I think you mean to say is that Mitt is feckless. He is unserious, a thoroughgoing opportunist.

People will sense this.

posted by David at 3/03/2007 02:00:00 AM ::

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