Captain's Quarters Comments - Latest Comments in A Market Free Of Consequences Is Not Free

Re: A Market Free Of Consequences Is Not Free

cognitorex — Tue, 11 Dec 2007 14:07:21 -0000

What you espouse seems so right; so logically straight forward. It however for the most part is simply dead wrong.
Forget entirely who made the loans, both the borrower and the initial lender. Trillions of dollars of mortgage loans were made and having been made these promises to pay became assets; account receivables to the hedge funds and institutions that subsequently purchased them.
Any middling good economist knew that excesses were going on and that with a rise in interest rates a ton of these CMO assets would default or otherwise decline in value.
So,and nevertheless, the pros, the hedge funds and their mega wealthy clients and other financial institutions still gobbled up these assets.
There was indication aplenty that the ratings were hyped on CMOs and that the financiers were buying a portion of junk assets.
In summary, the big boys bought crap assets and being leveraged their entire equity is exposed. As and if it were to be 'free marketly' allowed to happen the big boys equity and concommitent lending resources would evaporate.
Hence the government steps in and says, "You know, the two hundred billion in mortgages that are shaky? Well, we're going to going to say that they are okay for the next cycle at least."
And you say, "Oh, they're now okay and I don't have to write off my entire equity and go out of business. How swell is that?"
Bottom line. The government cares not a whit that Jane, Joe, Dick or Harry will default and lose homes. They care that the big boys will tank due to their stupidity and that the credit resources of America will then hemorrhage.
Unfortunately, allowing the free market to work in this instance could be a mega disaster for all so the big money guys will of necessity be bailed out.
Jane and Joe, not so much.!

Re: A Market Free Of Consequences Is Not Free

TrollFeeder — Sun, 09 Dec 2007 23:13:40 -0000

Bingo. It is voluntary. As I understand it, the Administration simply acted as a mediator so that there was one general plan that all lenders were willing to adopt, simplifying the general public's understanding of how the situation would fall out.

The lenders lose some profit if they adopt this plan, but potentially not as much as having to foreclose on a bunch of properties. The lenders will adopt the plan if it makes more financial sense that having to foreclose. If it does not, then they will not.

I do not see the problem.

Re: A Market Free Of Consequences Is Not Free

njcommuter — Sun, 09 Dec 2007 22:12:36 -0000

"Trillions of dollars DON'T just get 'lost'."

If I have a business making DVDs, and I sell that business to you for a billion dollars, and over the next two years people decide that they want to download video instead of buying DVDs, that business, once valued at a billion dollars, is now worth very little.

That billion dollars (a market capitalization) was a value based on expectations. When the expectations failed, the value disappeared.

Yes, billions of dollars can vanish. As a former employee of Lucent, I saw it happen as a series of management tomfooleries and a few big mistakes destroyed the company, and left a lot of livelihoods in doubt.

Re: A Market Free Of Consequences Is Not Free

runawayyyy — Sun, 09 Dec 2007 20:18:48 -0000

Gee, a minute ago it was a BILLION dollar scam....and now it's a TRILLION dollar scam? Talk about moving the goal posts, but that's what we've all come to expect from you. Do you even read your own previous posts???

Re: A Market Free Of Consequences Is Not Free

burt — Sun, 09 Dec 2007 11:04:18 -0000

Perceptive and funny.

Re: A Market Free Of Consequences Is Not Free

burt — Sun, 09 Dec 2007 10:49:18 -0000

"This is a pretty remarkable act by a 'conservative' administration."

This statement is a truism but also a nonsequiter. The only thing a conservative and a compassionate conservative administration have in common is similar names.

"When newspapers start filling with stories about how young couples and people who endured a few tough years can't get home loans, readers should recall how a supposedly free-market administration forced lenders to protect themselves."

This statement is on point.

Re: A Market Free Of Consequences Is Not Free

GawainsGhost — Sun, 09 Dec 2007 10:40:34 -0000

What is missing in this discussion is a real understanding of what created this mess in the first place. My grandfather was a Realtor. My mother is a Realtor; she owns one of the largest, most successful real estate coorporations in South Texas. I am a third-generation Realtor. We deal almost exclusively with repossessed homes and count Fannie Mae, Freddie Mac, Option One, Centex, MGIC, Nation Star, Fidelity, among others as our clients. Here is the inside story of what is going on.

Prior to the 1980s, brokers could perform property appraisals. After the savings and loan debacle, Congress, in its infinite wisdom, changed the law so that only licensed appraisers could perform appraisals. But, and this is the key, the appraiser must be given a copy of the sales contract prior to performing the appraisal. What this did was provide the appraiser with a target price to meet for the valuation of a given property. Instead of providing the fair market value of a home, the appraiser's job thus became to justify the loan, even if the house is overpriced. If the appraiser does not value the home at the sales price or higher, the loan cannot be approved. And the lender will not hire that appraiser for future valuations. This created upward pressure on the prices of homes, as houses where not valued at their real fair market value but at their often inflated sales price or loan amount.

In the 2000s, particularly the years 05-06, as housing prices soared, lenders abandoned all standards and began handing out no-documentation, interest-only and adjustable-rate loans, in the name of "creative financing" (i.e., predatory lending). These loans were then bundled as securities and sold on the secondary market. The problem is that when a lender sells a loan on the secondary market, he is supposed to write and have signed an assignment to designate the investor as the "holder in due course." But these lenders didn't do that, because they didn't want to bother with the paperwork. They simple bundled thousands of loans together and sold them.

There have been several court cases recently, the first out of Ohio, in which the judge ruled that the investor did not have the right to foreclosure, even though the borrower was in default, because, without the assignment, the investor could not prove he was the holder in due course of the note. That's the problem right there.

No one can determine who owns the real property (that would be the rights, as opposed to the real estate which is the house and land) on these notes. Neither the lender who made the loan nor the investor who bought it without an assignment has the right to foreclosure, even if the borrower defaults, and thus neither can repossess the house for resale to recover the losses on the bad loan or poor investment.

This is why the lenders and investors are willing to agree to the government's "solution." It's not to stave off foreclosures. It's to buy time to get all the assignments written to designate the holders in due course! Because until that happens, the foreclosure process cannot even begin.

Welcome to the wonderful world of 21st century financing, where no one seems to have any idea of what to do with money other than lose it. It's going to cost a whole lot of money to get the assignments written before the foreclosure process, which in itself is expensive, can begin. Meanwhile, housing prices are declining (returning to fair market value), credit is tightening (making it harder to get a loan) and sales are slowing (keeping more and more inventory on the market). All of this will only be exacerbated as foreclosures inevitably increase.

The whole thing is a mess, and a lot of people are going to lose a lot of money. Anyone who thinks the government can solve this problem does not understand that the government, by corrupting the appraisal process and turning a blind eye to questionable lending practices, created the problem to begin with. It's just like the old saying, if the disease doesn't kill you, the cure will.

I defer to Mark Twain. "Imagine you were an idiot. Imagine you were a member of Congress. But I repeat myself."

Re: A Market Free Of Consequences Is Not Free

Flyover Frank — Sun, 09 Dec 2007 09:59:59 -0000

Bikerken writes: "I know at least a dozen people who are close friends who are or were working in the housing market as realtors, house flippers, titlers, appraisers, you name it."

Ever time the wife would watch one of those "flip that house" shows, I'd be bothered by nagging thoughts from college finance and economics about the longevity of super-normal profits. Every time, it seemed we'd have a guy buying a house for $200K, adding $50K of slapped-together improvements, and selling it for $650 for a one-month profit of $400K. Keep that up for a year and you've got a decent salary.

Incidentally, it'd be interesting to see what happens to farmland pricing, especially if the ethanol welfare for farmers is curtailed. Even given current grain prices, an acre of row crop land in western Iowa has a payback period of between 25 and 30 years (after seed, apportioned equipment costs, labor, chemicals, fuel). Not many investments would permit waiting nearly 30 years before they got their original money back, without any interest and compounding. This is a serious bubble that hasn't yet popped.

Re: A Market Free Of Consequences Is Not Free

Flyover Frank — Sun, 09 Dec 2007 09:44:40 -0000

As someone who took a 15-year fixed in 2003, we paid more in interest than these ARM people have. By fixing ARM rates, you're locking them permanently at the lower rate, destroying the incentive for fixed rates and impairing both lender and borrower risk management incentives. Increasingly, we're allowing special interests to destroy market processes, distorting rational economic behavior.

Doug Henderson comments that home prices are too high. As a household of two professionals, we too were troubled with west Omaha prices for a "moderate" home at $325,000 (yes, many in other cities are probably laughing). But instead of seeking political favor or other artificial means to lower the market price, we put a manufactured home on farm property far outside of the city. 50 acres and a 2500 square foot house for well less than the inflated Omaha home and 1/4 acre price. We solved the problem by adjusting our expectations, not pleading for government interference.

Furthermore, there are countless houses in the countryside seeking an owner, only requiring someone to put serious effort into fixing them up. Of course, you'll have a long commute or have to telework, and sacrifice having movie theaters, sports arenas and such nearby. Their neglected presence seems to suggest very few who want but lack homes seem to be capable of action without a government handout.

Re: A Market Free Of Consequences Is Not Free

Gahrie — Sun, 09 Dec 2007 09:04:02 -0000

Right...because Neil Bush pocketed all of those billions of dollars, and the Democratic Congress and their contributors had nothing to do with the whole thing.

It's one thing to bring up something that happened 20 years ago to make an arguement that Congress was too lax in its oversight (which you don't attempt to do), and another to bring up something that happened 20 years ago to make a cheap attack on the Bush family. Especially when there are far more recent, far more on point examples that involve Democrats like the Clintons and Reid.

Re: A Market Free Of Consequences Is Not Free

cdor — Sun, 09 Dec 2007 08:48:03 -0000

Mike, I do agree with you. This temporary freeze on interest rates is indeed intervention. I prefer minimal intervention philosophically. Capitalism is the best economic system Man has developed so far. But it is an amoral system. Unbridled capitalism can be very destructive to society if left totally unchecked.
In this instance, the reverberation throughout our entire economy if nothing were done, could have extremely dilitarious effects on us all. Why would that be the correct approach? Bush does nothing and the stock market drops precipitously, housing values collapse, our economy goes into a recession...who's the winner here?
There is plenty of blame to go around. Builders, bankers, home buyers all feeding like pigs at a trough. Yea it pisses me off. But I'd be a lot more pissed if because of them my hard earned savings dropped like a lead ballon.
I say "Go Bush" soften the blow.

Re: A Market Free Of Consequences Is Not Free

runawayyyy — Sun, 09 Dec 2007 06:46:19 -0000

Oh come on. You can't refinance your house because you don't know who owns the loan? Tell ya what, just "forget" to make your payment this month and see how long it takes to find out "who owns the loan". I predict 3 days from the due date.

Re: A Market Free Of Consequences Is Not Free

Christopher Balsz — Sun, 09 Dec 2007 02:46:07 -0000

Call it "Whip Interest Now" and we can recycle the buttons.

Re: A Market Free Of Consequences Is Not Free

newton — Sun, 09 Dec 2007 01:44:36 -0000

"If some of these borrowers lose their homes, those homes will go on the market at a discount and be sold to another person who wants a home. Financial institutions do not hold property for extended periods. The person/family that buys the discounted home will benefit."

That's how the sig.other and I were able to buy our nice little house, almost ten years ago. It had been placed on the market by a bank as a pre-foreclosure sale. We saw it during a weekend excursion of the South TX area - the sig.other was considering a new career here, and we were itching to get the hell out of the DC area - and immediately made a bid for it. We were told by the next week that we got it. A month later, we said "Adiós" to DC and "Howdy!" to TX. We have never looked back.

Oh, we sure have benefited from it. There are still some remnants from the previous owners who, for some reason, couldn't keep it together - family, marriage and house. We still have the BB's inside their holes from the spiteful act committed by the previous owner and his son (we were told whodunit by our neighbors), who sneaked into the house right after the bank had repossessed it, and began shooting to all corners of our great room. The Realtor and the bank had to replace a few windows and lights before we moved in, but that was it. We have patched the holes over the years, but there are a few places where you can still see the BBs: they're encrusted and impossible to remove.

And not only that: we got it with a fixed-rate mortgage, which we refinanced a few years later. With the increase in the property value, we no longer need mortgage insurance. Our monthly payments are lower than before... and we didn't have to go for an ARM.

That's how it's done. And we sleep at night, too!

Re: A Market Free Of Consequences Is Not Free

NAFTALI — Sun, 09 Dec 2007 01:07:38 -0000

Lots of extreme comments here--but I think the reason is that a free market does two extreme things. When it works well, prices are lowered, quality is raised. But it also moves to chaos and can cause folks lots of pain. To live in a free market system, I believe you have to learn how it all works, what's wise and what's not wise. That is not in our school system--doesn't even begin to teach how to live in and by this country's very own system of government and economic principles.

The reason the federal government grew in the first place is because of the free market's tendency towards chaos. A society that values democracy and freedom in economics shouldn't also take a sink or swim attitude with its citizens. The economy is complicated enough even if you work for the Fed or on Wall Street. In some ways the economy is like sex--somewhere along the way, from whatever the source, a little education can help the uninitiated to avoid some very serious problems.

So in the cultural chain, the links of institutions, whether government or family, whether public or private whose task is to perpetuate the culture, some links are missing. And that's usually when the feds hop in, because no one else is doing what's necessary. I think that is the history of government growth.

But I could be wrong. That's just how it looks from here.

Re: A Market Free Of Consequences Is Not Free

BurfordHolly — Sat, 08 Dec 2007 23:44:08 -0000

Just google "Neil Bush" and "savings and loan scandal" for a quick history lesson about how to make billions of dollars in middle class savings vanish like a soap bubble.

Trillions of dollars DON'T just get "lost." Lost like what, the quarter under the sofa cushion? No, every penny ends up in someones pocket. This is just one more trillion dollar fraud, and when they say "lost," it means the taxpayer ultimately picks up the tab.

Re: A Market Free Of Consequences Is Not Free

Gahrie — Sat, 08 Dec 2007 23:23:53 -0000

Yeah...because it's not like there are any prominent Democrats who have been involved in real estate scandals. Certainly not the Clintons or Harry Reid.

You have to have a real bad case of BDS to use this topic to attack the Bush family, but lucky for us, there's a lot of that going around.

Re: A Market Free Of Consequences Is Not Free

Gahrie — Sat, 08 Dec 2007 23:23:53 -0000

Yeah...because it's not like there are any prominent Democrats who have been involved in real estate scandals. Certainly not the Clintons or Harry Reid.

You have to have a real bad case of BDS to use this topic to attack the Bush family, but lucky for us, there's a lot of that going around.

Re: A Market Free Of Consequences Is Not Free

BurfordHolly — Sat, 08 Dec 2007 20:41:23 -0000

What we have here is a system of resellers that have no interest in putting together a reliable product. They bundle these crappy loans that are basically junk because the high rate of defaults is predictable. Then they resell these mortgage portfolios to retirements funds and municipalities. The middlemen get rich, the school systems go broke from relying on their junk investments, and the tax payers have to take up the slack.

It's a billion dollar scam, and you bet your house that there a couple Bush cousins pocketing millions in the process.

Re: A Market Free Of Consequences Is Not Free

unclesmrgol — Sat, 08 Dec 2007 20:25:45 -0000

HNAV, your position would be right for those ARMs which aren't "capped" in their contract to a maximum interest rate. Most are. For those that aren't, imposing a cap of some sort (such as setting a cap similar to that of the already-capped ARMs) would be fine.

But capping it at the current rate the homeowner is paying leads where the Captain points out. I offer my own case as an example -- I had the choice a few years ago of an ARM at 3% (rate guaranteed for 2 years) capped at 12.5% or a fixed rate mortgage at 4.5% plus 3 points. I chose the fixed rate mortgage even though the points cost thousands of dollars and the rate was higher, because I didn't want to bet that inflation might not kick in and raise the rates on the ARM to their maximum.

Other borrowers might have made a different decision from what I did. My feeling is that I have paid for being wise in a manner that the government's intercession will absolve my 3% peers from paying, and instead force payment for their unwisdom onto the loan provider.

Since my peers are "locked in" forever at 3%, I think the government owes me the 1.5% extra and the 3 points I paid for my loan. It's fair, given that the government has stepped in and made this private market into a public one, right?

Re: A Market Free Of Consequences Is Not Free

starfleet_dude — Sat, 08 Dec 2007 19:53:46 -0000

You can stand down Ed - Steyn, as usual, is full of B.S. Here's a link to a website that isn't and has a rundown of what this plan is all about:

Ten things to know about the Freeze - Calculated Risk

O.K., for those here who are allergic to links that aren't in sync with suppositions, here's the skinny:

10) This is not a bailout. There is no federal money involved.

9) The Paulson mortgage plan does not violate any contracts.

8) There will be no lawsuits from investors (other than lawsuits that would have happened anyway).

7). These are not teaser rates.

6) The plan is voluntary - not a mandate - and this is not government regulation.

5) The plan targets homeowners with weak credit who owe more than their house is worth.

4) This is an industry / investor plan. Don't be confused about the happy talk about helping homeowners stay in their homes. This is about helping the investors, and trying to slow the impact of the housing Depression on the economy.

3) The savings for the investors will be small.

2) Recidivism will be high.

1) For the Home Builders: Nothing.

AND FINALLY: The purpose of the plan is to publicize that lenders will modify loans. ... The goal of this plan is get homeowners to pick up the phone.

Ed, please, start paying attention to people who know what they're talking about for a change. Even if they're not slavish pundits. Especially if they're not slavish pundits.

Re: A Market Free Of Consequences Is Not Free

biwah — Sat, 08 Dec 2007 16:35:17 -0000

Thus endeth the free market.

That is an amazing bit of breathless hyperbole, and a dangerous one, for all the people who are buying it. The administration very properly used its power to mediate toward the public interest. It did not force anyone into anything, but rather addressed the blocs of mortgage holder and homeowners toward what is probably in everyone's better interest. Any positive effects will be marginal IMO, but that's another story.

The mortgage holders do see the bigger picture, and it's not pretty. With many of these mortgages, the investors left holding the bag never ensured that they became holder "in due course", thus they are left legally unable to foreclose! So their interest in avoiding defaults is greater than ever, because they have been extremely sloppy in ensuring that they have recourse.

And that's on top of their already having made irresponsible loans that put them in this boat. So the administration's role as an intermediary is limited and mitigates a complex harm that is threatening the national economy, all without the direct application of the police or legislative powers of government. That realizes some of the better, and certainly not the worst, potential of governmental power.

I see now that wolfwaler basically commented on this aspect already, but I'll post it for good measure.

Re: A Market Free Of Consequences Is Not Free

gregdn — Sat, 08 Dec 2007 15:51:09 -0000

I can't believe how anyone who calls him or herself a Conservative can agree with the government getting involved in this manner. There are two types of people who got caught with their pants down in this market: the greedy ones who were either speculating or pulled equity out of their houses to buy boats etc. and the truly ignorant who didn't understand the terms of their loans.
No amount of government intervention will help the second group, but losing a home is good lesson for those who fall in the first category.

Re: A Market Free Of Consequences Is Not Free

Bikerken — Sat, 08 Dec 2007 15:40:53 -0000

I'm just now watching Paulson on CNN defending this stupid idea. He isn't really that enthusiastic about it either. About the best he could say was that "It's not perfect, but I haven't heard any better ideas." Really?!? This guy is older than his IQ. Anytime someone tells you that this plan might have some positive effects, you can bet your butt that they didn't look at the possible negative effects.

Re: A Market Free Of Consequences Is Not Free

olddeadmeat — Sat, 08 Dec 2007 14:38:03 -0000

I absolutely am not defending the freeze - see below.