Pretty graphic title. I'm a little more in-your face than most pundits. Neither of those scenarios sound good, in fact, both are horrific. California's going to bleed...hell, it's bleeding already.
I wrote an article about the California Governor's brokered deal with loan servicers:
Is this measure politically motivated? You betchya. The Governator is taking care of his own, regardless of the inequities it levies on the rest of the country. The lenders are in a bind so they’ll appreciate this artificial market stabilization until the rest of the country catches up. This is Nixonian economics, plain and simple. THAT interventionist policy exacerbated rather than solved the problem of inflation.
What I’m about to say will be unpopular in the Golden State; housing prices are artificially inflated and need to come down meet rational economic models. Borrowers who make $90,000 annually can’t afford $700,000 homes. You can intervene in markets but the price of Amsterdam tulips will naturally gravitate towards its real economic value.
While I don't like the idea of reckless borrowers getting a free ride, Robert Kerr exposed the insidious nature of the lenders' motivation in this comment:
This CA proposal has to rank right up there with the most well-disguised scams of all time. The Governor is busy patting himself on the back, the press is fawning over the lenders’ benevolence …and the lenders are laughing all the way to the bank.
This isn’t a bailout, it’s Loan Sharking 101. When your borrower starts drowning under the vig, you cut back the vig, roll it over onto the principal and keep bleeding, at a slower rate.
Did Arnold’s advisors get this great idea from watching Richie Aprile run his shy on The Sopranos?
An upside-down borrower with a $400K mortgage on a $300K home isn’t helped with temporarily frozen payments. If the lenders really wanted to help, they would reappraise and write off some or all of the overvaluation.
Did he really just say that? He compared the loan servicers to organized crime? CONTINUED
I wrote something similar to this a month ago. It is a band-aid for a flesh wound. As I mentioned before, if we took the speculators out of the equation we would be experiencing what I believe would be "normal" foreclosure rates.
Lenn even mentioned that government intervention has helped this along by the fed softening up rates and handing out easy money post 9/11.
Interesting theory and I have tossed it around.
Brian,
The blood in the streets will simply be the result of the fat being cut off of those over-valued houses. I agree. If the lenders want to help, re-appraise, cut the fat and bring the prices back to reality. The market will right itself, one way or another, and it'll be just that. Die from losing the limb or bleed to death slowly because the bandage doesn't cover the wound.
Brain... it basically comes down to giving these clients the license not to pay their mortgage, instead of trying. Sure, there will be certain income and asset tests to see if the consumer will qualify for the bailout. But as some have said, those with nothing invested into their home, how can you say that they lost anything....???
Overall, it seems that the loan officers & realtors that have been doing this for 10 plus years have a better idea than the politicians who as Renee mentioned, just using a band-aid like approach to patch things for now. Let it take its course as you and so many have mentioned.
Brian,
You are absolutely right. Nobody fooled anybody. People knew that this was too good. They gambled, they lied to themselves, and NAR kept saying that the market was strong.
And now Realtors are screaming that media scares buyers, that we need to make them buy homes now, as if it was not enough that we had them buy more than they could 3-4 years ago, as if the licensees did not talk people into stretching themselves and grabbing as many properties for flipping, as they could afford to put the down payment for.
We were looking the other way, and now we should have some decency at least to acknowledge it, and not keep bashing the media. I love it when agents write "the media was late to warn us about the sub-prime..." as if the media, and not us, Realtors, were working with the buyers.
I am not surprised that buyers do not have much regard for Realtors.
Thank for a sober voice. We need to stop being on drugs.
Brian, I know sellers, right now, who are deliberately missing payments so they can negotiate a "short sale" with their Lender. They could afford to make their payments if they just got rid of one of their brand new vehicles. But why should they? They are "entitled" to a short sale because they are "victims" of unscrupulous lenders. It's all a joke. Modifying their loans will NOT solve the problem. The problem is lack of personal responsibility.
It is with out a doubt time for us to take our licks like a man and then move forward. Postponing the inevitable will do nothing but sink us further into denial.
parking to watch the debate.
umkolo
Here's my Bloodhound response reprised for AR viewers:
The actions of the Governor-brokered payment freeze as it relates to these four lenders might have been a logical forthcoming event anyway for those companies, but let's not forget that they are servicers on these loans at this point, not the actual owners, so it's more significant than them just deciding this - it's a collateralized pool of owners that is taking the hit. They aren't doing it just out of the goodness of their hearts, of course, they are doing it because if lenders hate ending up owning real estate, wall street syndicates REALLY hate it - they don't have the first idea what to do, so they will do anything to avoid having to foreclose. This is the next logical step.
That said, I have to say this: it doesn't matter how underwater a borrower is on their appraised value vs. market value if they make their payments. Caveat emptor - buyer beware - and be prepared to take responsibility for your actions. If you unexpectedly lose your job, well, that's a bit hard to plan for, but if you just overextend yourself and want me as an investor in lending conduits or instituations, or worse as a fellow taxpayer, to bail you out, guess what, you're not getting my sympathy.
We all make bad decisions, but just expecting continual get out of jail free cards is not right. Sure, it might take another 5 years for the market to more moderately move itself back to where those buyers can sell their home and get out from under their "oppresive" mortgage, but that's hardly horrific - my grandparents owned the same house for 50 years and probably never knew what it was worth in between buying it and the time they left this world. It doesn't matter if you buy high, unless you're a flipper. If you buy a home to live in it and you take out a responsible mortgage, who cares if it goes down 20% in value one year, and conversely, what does it matter if it goes up 30% in over the next two years?
This is why the bankruptcy laws were overhauled in recent years - people would just rack up big credit charges and then get them written off without having to face up to their own actions. Welcome to reality Mr. Subprime Borrower.
We all make bad decisions, but just expecting continual get out of jail free cards is not right.
Powerful words.
Kaye, while I agree with you in principle, I think the "exempt" areas are much smaller than you do.
Brian, As you know know a forebearance isn't actually any help at all. The piper still needs to be paid.
All the politicians will do is "posture." Since most of these loans are NOT OWNED by depository institutions, the government (and the FDIC) is not going to take the hit. It is not like the S&L crisis by any stretch of the imagination.
Time will cure everything. Prices in ten years will make todays prices look cheap.
Bill Roberts