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Agreed. What is terrifying though is the fact that this bubble will directly affect a person's survival. We are talking about where people live. They violated a code of survival that even animals don't violate. "Don't sh*t where you sleep."
 
lendingmaestro,





I would argue the crash and resulting flushing of people out of expensive mortgages will have a better long-term impact on the economy than dragging things out with some kind of bailout. If someone has a loan payment that increases $1,000 a month, that is $1000 a month taken out of our local economy and sent to service some CDO somewhere. It the borrower defaults, gets foreclosed on, and moves into a rental, they will have a lot more spending money with which to stimulate the economy.





When you really think about a bailout, it comes down to who gets screwed. A no-bailout scenario has the lenders and wall street hedge funds getting totally screwed because the money which was going to flow into their coffers is going to go somewhere else. Any bailout is going to benefit lenders above all others. Homedebtors will think it is benefiting them, but they have signed up for a life of indentured servitude and slavery without realizing it.





People might complain about the short-term pain of not having a bail out, but it will be much better for them in the long run if there isn't.
 
<p>>>>I wouldn't mind a recession either. Recessions are ripe with opportunities for those who are prepared. They are an efficient (and relatively quick, believe it or not) way of rebalancing and flushing out economic ills. <<<</p>

<p>I agree, also.</p>
 
LendingMaestro





<em>"Agreed. What is terrifying though is the fact that this bubble will directly affect a person's survival. We are talking about where people live. They violated a code of survival that even animals don't violate. "Don't sh*t where you sleep.""





</em>That might be the funniest and best way to put it....I will forever be quoting you on that one.
 
<p>"How many thousands of loan officers, processors, underwriters, managers, and appraisers have lost their jobs in the last week "</p>

<p>Arguably, most of these jobs should never have occurred in the first place. They were appended to the mortgage industry's "normal times" work force to capture all the extra business due to the excess of liquidity. They were essential to channeling the liquidity into the housing market. Now those days are gone and it is time to completely dismantle that mechanism - hopefully for good, but probably not. These folks will need to go back to what they were doing 8 years ago.</p>

<p>"Many of these people have mortgage payments to make. "</p>

<p>That's their problem, don't make it mine. In fact, the way I see it, these people are living in the houses that the patient renters were suppose to purchase, but they and their industry drove up the prices, keeping the prudent in rentals. Really, it's time for them to forfeit their homes to the rightful owners (at heavily discounted prices of course!)</p>

<p>"Do you know of a single industry that can absorb thousands of employees within a few months time? I don't. "</p>

<p>The armed forces could absorb all these people instantly.</p>

<p>"However stupid and financially retarded these borrowers were, they were vital to our GDP and thus our economy as a whole"</p>

<p>I like BB's approach of strictly looking at the numbers. Certainly, consumer spending will go down in the coming months, but how badly will it hurt our economy? Perhaps we are so integrated with the other world economies which are booming that ours won't suffer so much. Wouldn't that be something if our economy just slows a little, but not a lot? We would learn then that although our consumerism used to be one of the main engines of the world economy, it is now not the "only game in town". How indignant would that be!</p>
 
lendingmaestro:





The way I see it, people always have to live somewhere. If their financed homes are foreclosed on, they'll simply rent, or move in with relatives. If they lose their jobs, there's unemployment (I know from extensive personal experience before my current job).





It may indeed be terrifying for those people, but I have a real hard time being too sorry for them. Paying 600k for a condominium is just flat insanity. No reasonable person that cares to buy a condo can afford 3500+ a month to service the mortgage. People with that sort of income are just too rare, and I'm sure they don't think a 3br condo is good value compared to the careers they pursue.





I say flush it all down the toilet. Those who were responsible with their money (i.e. us) will benefit, and that's the way it should be.
 
This has happened time and time again throughout history. Every bubble is the same. . . unrealistic price followed by crash followed by stablization. We saw this 15 years ago and we'll probably see another one in 15 years.





As much as I respect economists and business people, investment of any kind (bonds, houses, stock, tulips) is simply calculated gambling. You try and assess the risk and rewards to the best of your ability and put in your chips. Diversification is another word for playing more numbers on a roulette wheel. Thus, markets of any sort is fundamentally based on human psychology. Thus, people need to get burned a little in order learn their lesson.





I think government bailouts are necessary when the actions of a few crooked individuals cause harm to the general public (i.e. Enron). .. how is this situation any different than when the dot.com crash occurred. It was good for the economy in the long run.
 
<p><em>I would argue the crash and resulting flushing of people out of expensive mortgages will have a better long-term impact on the economy than dragging things out with some kind of bailout.</em></p>

<p>You nailed it. To see how it would work, look at the impact of the Government Ethanol program on food costs. That is the result of artificial price support for a commodity.</p>

<p> </p>
 
<p><em>Homedebtors will think it is benefiting them, but they have signed up for a life of indentured servitude and slavery without realizing it. </em></p>

<p>I'd betcha we'll get some modifications to BK law thanks to this mess. The recent reform won't be held in high regard when we're in a steep recession.</p>
 
<p>While I understand many of you want to see some pain inflicted on the irresponsible, I think you are underestimating the potential consequences.</p>

<p>Just like chemotherapy kills everything in its path, so does a collapsing market.</p>

<p>What say you of the responsible family, who purchased with traditional loans with 20% down, who could be entirely wiped-out (or worse)?</p>

<p>Measures such as increasing conforming loan limits, and tinkering with rates, is much more about preventing a wider catastrophe.</p>

<p>As for those who decry raising loan limits as a bailout - should Fannie Mae be in the business of determining all real estate values should be capped at a certain level? So California, New York, etc. should just wait for Ohio to catch up?</p>

<p> </p>
 
<em>"What say you of the responsible family, who purchased with traditional loans with 20% down, who could be entirely wiped-out (or worse)?"





</em>The responsible family you are talking about should still be able to afford their mortgage even if their home depreciates as much as 50%. The question is are they responsible enough to bailout now, rent for a few yrs, and buy back in at a later date or can they stay in the same place and wait for home prices start appreciate at a normalized rate.





<em>"As for those who decry raising loan limits as a bailout - should Fannie Mae be in the business of determining all real estate values should be capped at a certain level? So California, New York, etc. should just wait for Ohio to catch up?"





</em>We shouldn't wait for Ohio to catch up rather Ohio should wait for the home prices in Las Vegas, FL, NY, California...etc to come back down to reasonable prices. When $250,000 in OH gets you an acre of land in a very nice community and it can't get you anything in Southern California or just a condo in FL then something is fundamentally wrong.





Fannie Mae and Freddie Mac increasing their limit does absolutely nothing, IMO, b/c still the majority of people here in California still couldn't meet their loan requirements.
 
<p><em>What say you of the responsible family, who purchased with traditional loans with 20% down, who could be entirely wiped-out (or worse)?</em></p>

<p>They can mail their keys to the bank, find a rental home, and improve their monthly cash flow. Little Johnny can start eating something other than ramen again. Next question?</p>

<p><em>As for those who decry raising loan limits as a bailout - should Fannie Mae be in the business of determining all real estate values should be capped at a certain level? So California, New York, etc. should just wait for Ohio to catch up?</em></p>

<p>Lending support to a housing market that is wildly detached from market fundamentals is outside of the scope and charter of the GSE's. They exist to provide housing affordability to the common citizen by facilitating liquidity in the secondary mortgage market. They do not exist so that yuppies can continue to hold housing stock at a price level 8-11x the local income median.</p>

<p>If anything, the California limits should be lowered to Ohio's, not the other way around. </p>
 
<em>"What say you of the responsible family, who purchased with traditional loans with 20% down, who could be entirely wiped-out (or worse)?"</em>





This won't happen unless they have to sell when prices are depressed. In fact, the whole reason the 90's deflation wasn't worse is because most buyers had traditional financing. When I am ready to buy -- when rents come back into line with mortgage payments -- I will be indifferent as to the resale value of the asset. If I can save money on renting, have a long-term hedge against the effects of inflation, and have a stable home I can do with as I please, I will not care what the day-to-day resale value of my home is. Besides, I also know the value can't drop much further from that point because I am buying at fundamental values.
 
<p><em>"...how is this situation any different than when the dot.com crash occurred. "</em></p>

<p>It isn't. Anyone who invested in the NASDAQ index in early 2000 is still down about 50%. They didn't get bailed out.</p>

<p><em>"What say you of the responsible family, who purchased with traditional loans with 20% down, who could be entirely wiped-out (or worse)?"</em></p>

<p>I would say you can't substitute a large downpayment for responsibility. If they paid $550/sq foot in 2006 for a property that cost $200/sq ft in 2001, then that was their decision. If there's no correction and their property is worth $800/square foot in 2008 would they donate the windfall to their renting neighbors? If there's no correction will the government step in to provide subsidies so renters can afford $800/sq foot? Of course not. </p>
 
<p>The problem is that this bubble permeates all levels of education, and job descriptions. Doctors, Teachers, Lawyers, Engineers, Scientists, etc...all got suckered in over their heads. The ARM resets are just going to blow these people away... </p>

<p>It all starts with jobs. If you have a 30 year fixed and can afford the payment then you don't have to worry about getting evicted. The issue I was trying to bring up is that when we take into account massive layoffs, rate increases, foreclosures, and the declining dollar, it is very scary and very real. Your job may be in engineering, but if your company's bottom line is affected even slightly by a recession, then your job may be affected as well.</p>

<p>Our entire economy, its banking centers, and the like all revolve around one thing. Debt. Our entire civilization was based upon people leveraging their assets to make more assets. When you deposit 100 bucks into an account, your bank loans that 100 bucks to someone else. The bank has now increased the money supply. The Great Depression was facilitated by the "run on banks. " Everyone was trying to get there money, but there is more funny money in circulation than actual dollars. There is an FDIC that insures deposits now, but there is no insurance for housing. The only reason America survived is because our government adapted a socialism approach and bailed out people. We are nowhere near capable of that now with our massive budget deficit. The gov't would be printing money so fast that the dollar would be declining by the second.</p>

<p>If you tinker with the system, whether it be CDO's, Credit lines, interest rates, or exchange rates, you run the risk of collapse. Think of the economy as an ecosystem. If you change only one thing the results could be disastrous.</p>
 
<p>Some of these posts have a disturbing masochistic tone to them. </p>

<p>At the end of the year the resets will hit and things will be mush worse than they are right now.</p>

<p>As Janet stated, "While I understand many of you want to see some pain inflicted on the irresponsible, I think you are underestimating the potential consequences. Just like chemotherapy kills everything in its path, so does a collapsing market."</p>

<p>This will hurt everyone. You will not be immune to this. </p>
 
<p>mino,</p>

<p>I do not think you are being rude. Financing is the heart of my business; therefore, I had to have a pulse of it any given time. We all do look at the picture from different angles.</p>
 
<p><em>This will hurt everyone. You will not be immune to this.</em> </p>

<p><em>is much more about preventing a wider catastrophe.</em></p>

<p>I think we're moving to a stage 3 of the bubble is dead grief. I've been seeing more and more of the above comments, which looks like bargaining (and not anger). i.e. We have to bail out, it's going to take everybody down...</p>
 
interloper,





I don't know if the tone is masochistic or realistic. The fallout from this bubble is going to be very, very bad. Perhaps it feels a bit masochistic as this may be the first time you have opened yourself up to see how bad it will probably be?





Over the last year I have seen all of this coming and taken personal measures to prepare for the fallout. I work in the REIC, so it is entirely possible I may lose my job along with everyone else. I have done all I can do to prepare (paid off all debts, rented an affordable place, saved money, etc.)





IMO, what the this bubble will show us is how dependent our economy is on borrowed money. It is my opinion that homeowners have been tapping their home equity lines of credit to finance a lifestyle that is well beyond their current incomes. If my supposition is correct, the local economy is going to be obliterated because consumer spending will drop precipitously. If I am wrong, if people really have been living within their means, then the local economy will come through OK. It will still take some time to absorb all the newly unemployed mortgage brokers and real estate agents, but if our economy is as resilient as some believe it to be, the absorption of these people will happen without much hardship.
 
interloper,





I understand the concept of collateral damage. I understand that if a lot of people lose their homes, there will be a huge economic fallout. I am a liberal when it comes to just about everything (health care, social choices) but believe that the government cannot bail people out every time there is a bursting of the financial bubble. The government tried to do that for the savings and loan scandal (which was infinitely more evil than what we have now) and what did that do?





You have to look at this from a historical point of view. The more you feed into a bubble, more problems you get. If you try to save people now, there will just be more problem down the line. Japan took years to get out of their recession because big business tried to bail out small business which then caused the government to have to bail out the big business (same in Korea)(BTW: Japan's Fed Rate was 0% through that entire time). Japan had to reinvent itself, ditching the old golden bowl philosophy and adopting a more "cruel" American economic system, in order to get out of its deep recession. We went through the same thing in the early 1990s and the United State is still alive and kicking. Don't people remember the days when everyone thought that Japan was going to buy up everything (if not, go rent Rising Sun)?





Do I want people to lose their homes? Of course not. But there is a reason why market fundamentals are market fundamentals. It is irrational to keep housing price at this level. No one can afford it. My wife and I are in the top 5 percent earning bracket and we're nowhere near to being able to buy a home with the standard loan qualifications. Even if you bail people out now, who in world will be able to buy when those people want to sell? Supply and demand still governs. People buying a house that has been marked up 300% is no different those who bought pet.com at its height? The dot.com bubble burst and resulted in huge loss of job and capital (I know, I lived in the Bay Area at the time) Yet, seven years later, good technology companies like cisco and google are still around. It's just like those antelopes you see on nature shows. . .. the weak and the old have to get weeded out in order to maintain the health of the entire herd. It's cruel but true.





The USA has stayed on top economically because it believes in allowing bad businesses to go down and go down hard. Other countries bail out industry after industry but not the US. Remember Pan Am, Bank of New England, TWA, and all those dot.com companies? Yes, it hurt to lose those company in the short run but it was much better for the country in the long run.
 
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