MOST IMPORTANT POST EVER

NEW -> Contingent Buyer Assistance Program
True, but it also gives access to lower interest rates for people that have no business spending close to that much money as it is.





We've already discovered that we can't rely on financial institutions to be responsible when it comes to lending out money. They either assume the market will forever increase or that someone will come along and bail em out.





The beauty of this entire situation if you ask me is that everyone from the top to the bottom that participated in it gets screwed. I'm not just anti-Joe-6-Pack-paying-his-too-expensive-mortgage, but I'm also anti-irresponsible-broker, anti-irresponsible-lending-institutions, and anti-irresponsible-securitization.





They all broke precedent under the guise that everything would forever be great. I think they should all learn their lesson.
 
I don't see how increasing the conforming level will make any difference. . . as Janet stated FM loans are full docs with strict debt to income requirements. You can raise the conforming level to $1 million and 95%+ of the people will never qualify. Those who do qualify were prime to begin with.
 
<em>I don't see how increasing the conforming level will make any difference. . . as Janet stated FM loans are full docs with strict debt to income requirements. You can raise the conforming level to $1 million and 95 of the people will never qualify. Those who do qualify were prime to begin with.





</em>Based on what I read, even earlier in this thread, I don't see it that way.





You may need 20% down to be prime, and you may need a 780+ FICO. But the information given out here says some institutions are still handing out loans as high as 60% DTI. That's not acceptable.





And if they only held prime rates for people with lower DTI, you might as well forget about the entire housing market in this area. What's it take for a traditional 33% DTI for a 600k house, 175-225k a year?
 
JW, I agree that it is silly. BUT (and this is a big but). There are many people out there who have good credit that will not be able to refinance because the investors whom previously bought jumbo loans are no longer buying them. I'd like to see fannie and freddie increase the amounts, even if it's only temporary, to provide a conduit for the jumbo loan people to refi. Make it so they can only do a 30 year fixed??? I don't know. I just know that in the absence of other investors, fannie and freddie need to make some decisions within reason.
 
Being upside-down in your loan precludes you from any re-financing of any kind, correct?





I think that's going to be the main problem when it comes to re-fi's the next couple of years.





For the people that bought 7 or 8 years ago and still have equity, I can't say anyone ever promised them that interest rates would stay low forever. I think when my parents bought their first house in 1989, it was conforming for 8.25%, and they had spotless credit.





Anyway, not trying to start an argument. I have to yield to the people who are experts. I'm still learning!
 
Why could we not have a similar experience as Thailand in 1997.





Situation preadjustment:





-Exporters kept funds abroad while importers prepaid and bought forward in advance of the currency adjustment.


-Large Current Account Deficit


-A sharp adjustment of the solvency of financial institutions


-High debt/equity ratios of public companies


-Excessive issuance of money by the central bank


-Thais borrowed in dollars to support unproductive investments in real estate and stocks





Results:


IMF intervention which resulted in large tax increases (fiscal adjustment)


1.1 trillion baht was spent on aid to financial institutions


Bad debt was 20% of GDP


Thai stock market fell from 850 to 550


The baht/dollar exchange rate went from 25 to 56


GDP growth was -7.9% in 1998


Car sales fell 70%


Inflation increased from 5.6% in 1997 to 8.1% in 1998


Imports declined 32.3%


Exports declined 6.6% (export financing became quite expensive)


Interest rates increased dramatically to attract foreign capital


The turn in your gold program in 1998 by Thai Private citizens to shore up central bank reserves.





Excluding IMF involvement is anything here implausible for the US?





Our current situation:


-Mortgage instruments are not receiving bids


-New issuance of mortgage instruments are at significantly higher credit spreads and rates


-High yield instruments are not receiving bids


-Fiscal balance is sharply negative:


-large spending on a war in Iraq


-promises of retirement for the baby boom generation - prescription drug plan for Medicare, nursing homes are


67% paid for by Medicaid.


-taxes have been cut on the wealthiest 1%: capital gains and estate taxes


-Even believing in some partial Ricardian Equivalence we should expect higher taxes sometime


-Companies borrowed heavily in 2006 and there are many companies with very levered balance sheets due to private equity and corporate borrowings to fund buybacks


-Large insider selling of public companies


-Issuance of money by the central bank is 8-13% depending on source for the data


-Inflation is 3-8% depending on survey methodology


-Car sales are falling


-Exports are rising and imports are falling as of 2Q07


-Congress is considering taxes on imported Chinese goods:


-the Chinese have threatened to respond by selling Treasuries


-Don't we nominally want yuan redemonination?Doesn't selling Treasuries and buying yuan effectively do this?


-Hasn't buying treasuries been vendor finance by the Chinese? Didn't this contribute to the huge asset/consumption


bubble in the US?





My 2 cents.
 
<p>(Glazed over).</p>

<p>Bishie,</p>

<p>We (at least I) am not worthy!</p>

<p>Now, where did I put the Tylenol?</p>
 
lendingmaestro,





I can see your point about raising the conforming limit, but I don't think that does anything significant because so few will qualify. If someone can actually afford to make the payments on a loan over $417, and they can prove it, they will still be able to get a loan from somebody. The people who took out liar loans or other exotic financing for over $417 probably cannot afford it, and they are going to go under whether or not the conforming loan limit is raised.





IMO, it ends up being a slippery slope because once you raise the limit and save a few people, there will be calls to relax the guidelines to save a few more, the next thing you know, the government ends up being the bagholder and we end up with a S&L type bailout. Remember the only reason we had an S&L bailout is because the government was financially liable under the FSLIC. If the government had not been liable, there would not have been an S&L bailout. I think any tinkering with loan guidelines while this disaster is unfolding is a back door to a bailout, and therefore, I would oppose it.
 
Hmmm-m-m. Let's start with where the "money" originates.<p>


Presently it created by the Japanese central bank and the Swiss central bank, the British central bank, the Chinese central bank, and finally the Federal Reserve. Most of the funds that end up in the mortgage market are created by the JCB. The JCB and other CBs create the money, (I am going to call it money for the sake of this diatribe, but actually it is not money, it is fiat currency), by entering electronic blips in the JCBs account. Yes, that is all there is to it. Imagine you could create money this way.<p>


Next, a financial institution with credentials borrows the newly created money from the JCB at 0.5% interest. Yes, at 0.5% interest. Those of you who are bright are now contemplating, "But is there a catch?" Well, of course there is. The financial institution, (let's call ours NIR's hedge fund), borrows yen at 0.5% interest, and in order to purchase CDOs which are denominated in $$$, they have to convert their newly borrowed yen into USD at the prevailing conversion rate, (tonight 119.67 yen for 1 USD). When they pay the JCB back, they have to pay in yen. And they are hoping yen do not cost more at that time. NIR's hedge fund purchases CDOs from, let's say, Bear Stearns investment bankers.<p>


BSC created these CDOs with a bunch mortgage backed securities as the underlying asset. BSC bought the MBSs from Countrywide who put them together from a whole lot of mortgages they funded. The mortgage paid Mr. Awgee for his home and Mr. Awgee put the money in the bank. He didn't really put it in the bank, but that is simpler than the truth. The bank, Downey Savings, loaned out Mr. Awgee's money for a mortgage, plus they get to loan out a whole bunch more of money they create by pointing to the reserves, (Mr. Awgee's deposit), they have.<p>


So, all this to show you that the money is not sitting in a bank or anywhere else. It is created. Out of thin air. Really. I am not exaggerating. Maybe misspelling, but not exaggerating.<p>


So what is the problem? Everything seems to going just fine, right? Well yeah, mostly.<p>


Except NIRs hedge fund decided she did not want Bear Stearns CDOs, at least not at the price BSC was selling them. Is NIR's hedge fund being unreasonable? Why won't NIR purchase the CDOs for the same price she did before? Because the last set of CDOs she bought stopped paying her. Would you buy a bond that didn't pay you?<p>


So, now we know, the credit market dried up. The money stopped being created. It is not a matter of how you see it. The money is not just coming from somewhere else. There is no where else for the money to come from, Unless there is.<p>


What if the Fed decides to lower the overnight rate so Goldman Sachs and JP Morgan can borow for 5% instead of 5.25%? Will that change anything? Will money be created again? Maybe, but I doubt it. NIR's hedge fund can already borrow at 0.5% interest and is not interested in buying the CDOs or the MBSs. Do you think 25 or 100 basis points from the Fed is going to change NIRs mind? She is very smart, and she knows what it takes to run money. Maybe GS or JPM will borrow from the Fed and buy conforming MBSs from Fannie Mae. Maybe. But what rate will the underlying mortgages have to written at for JPM to be willing to borrow from the Fed at 5%?<p>


I could bore you forever, but I have to put my girls to bed.
 
Doh! The cookie-post monster got me... Oh well, here goes again.





awgee says, "When they pay the JCB back, they have to pay in yen. And they are hoping yen do not cost more at that time." This is subtle, yet very important.





In a typical market, as things go south, the rates goes up. This attracts foreign investment. The inflow of foreign cash makes the US look better and the dollar goes from bad to better.





In a US where no growth market except crappy loans is leading, the consumer is loaded with debt, and the hedge funds and private equity are taking the 'good' targets, foreign investment does not come in. Just as the cost of Irvine real estate is beyond fundamentals and few are buying, the exact same can be said for our overvalued dollar. Our dollar will have to go down considerably and the interest rates up for investors to see a worthwhile risk. Additionally, the investments will need to be sound and not the leftover bloated carcasses of private equity groups.





This will take a long time, my (pull it out of my ass) guess, 10 year hangover before anyone will want to kiss U.S. In the meantime, inflation will rise and Bernanke will gobble Tums like popcorn.





*********


OT: (Rhetorical) You think we'll have Jimmy Carter 2 doing another 'malaise' speech about being stuck in the doldrums???
 
<p>awgee,</p>

<p>Must you mock me? Anyway, that is alright. I am still holding my stand on the money supply being available. Investors lost faith in mortgage brokers for good reasons. Granted that investors lost money on bad loans, I ought to think they have ways to recoup them. The move-up market rarely need the 2nd mortgage; therefore, loaning money for this market is a safe bet. Who would not want to?</p>
 
<p>awgee - Wins for best comment ever in the most important post ever. At least with NIRs hedgefund you can be sure to have a pleasant voice on the other side of the phone when you are demanding your money while they tell you there is a freeze on any withdrawals.</p>

<p>NIR - You have to admit that was pretty funny for the regular readers. Just be cautious about rates as they could turn on the move up buyers if they haven't already.</p>
 
NIR,





You keep saying that "the money is still there, but the players are just different." No offense, but this makes no sense whatsoever.





Am I to assume that you think multi-billion dollar financial monsters like Bear Stearns, Deutsche Bank, Lehman Bros, etc.. are ceasing to buy MBS, but other multi-billion dollar firms are stepping in their place?? Please enlighten me to who these people are.





I honestly never mean to come across as condescending, but do you understand how the money supply is calculated, and what it has to do with mortgages? What an investor is willing to pay for a MBS is completely irrelevant to the money supply. Secondly, if your argument interprets the money supply as the willingness of investors to continue to purchase bonds secured by American's mortgage payments, then you are sorely mistaken. The party is over. Investors aren't willing to bear the risk. They'd rather invest overseas in a currency that's appreciating.





I also am confused as to what basis you are using to justify your argument that move up buyers are in the market. A move up buyer can only "move up" if he/she sells the current home they are in. Sales are slumping, prices are dropping, and rates are rising fast. Your math also is flawed.





Assume a buyer bought a 3 bd condo in 2003 for 350k with 20% down payment and just sold it for 550k 4 years later. This equates to a ridiculous 12% rate of appreciation. After 3% concession the buyer will walk away with 183k plus their 70k original down payment. In order to "move up' as you so aptly put it, they'll need to buy a bigger, better , newer place. Since their 3bd condo sold for 550k, their new 4 bd SFR will cost at least 700k. A down payment of 253k is MORE than 20% of 700K. BUT, they will still now need to carry a mortgage of 447k instead of 280k. Now I guarantee you that they will not only have a higher mortgage balance but they also will have a higher interest rate, as well as higher taxes and insurance premiums. Rates are at least 2% higher on every loan type since 2003. Assume a 5% rate in 2003 on 280k. The payment is $1,167 a month. Now the payment on a 447k loan @ 7% is $2,608 a month. The payment more than DOUBLES, and this doesn't even take into account the increased taxes and insurance.!





You see, trading up has a very short life span. It requires that you continue to make significantly more money every year, and we know that many people in OC are getting laid off. It also requires that you can continually finance your debt at the same rate.





As someone in the real estate industry, I wish we would see continued prosperity. Unfortunately we are in for a long, hard road.
 
Just when everyone thought it was safe to get back into the stock market. . . dum dum...dum dum. . . dum dum dum dum...








Stocks Plunge on Rising Credit Anxiety


Thursday August 9, 10:02 am ET


By Tim Paradis, AP Business Writer















Stocks Plunge As Investors Following Renewed Subprime Concerns NEW YORK (AP) -- Wall Street plunged in early trading Thursday, yanking the Dow Jones industrials down more than 180 points after a French bank said it was freezing three securities funds that struggled to find liquidity in the U.S. subprime mortgage market.

<p>The announcement by BNP Paribas raised the specter of a widening impact of U.S. credit market problems. The idea that anyone -- institutions, investors, companies, individuals -- can't get money when they need it unnerved a stock market that has suffered through weeks of intense volatility triggered by concerns about available credit.</p>

<p>A move by the European Central Bank to provide more cash to money markets intensified Wall Street's angst -- although the bank's loan of more than $130 billion in overnight funds to banks at a bargain rate of 4 percent was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems.</p>

<p>The Federal Reserve followed suit, adding $12 billion to U.S. markets to help ease liquidity constraints, according to Dow Jones Newswires.</p>
 
<p>I don't think this problem will be over until the final products (homes) have been valued. Only at that point will we know the actual damage and be able to calculate each loss of every player of the game. ie. Right now with Countrywide holding all this REO inventory that they are unwilling to sell, how can one truly value the assets. All we know right now is the carnage in terms of number of foreclosers and deliquency rates. But we still don't know how much these properties are worth.</p>

<p>Awgee - that was a great explanation. Thanks!</p>

<p> </p>
 
<p>NIR - Please accept my apology if my inclusion of your handle was interpreted as mocking you. And be assured, I had no intention in mocking you. I had need for a naming of the hedge fund and my use of your handle was only a desire to grab your attention, but was in no way meant to mock you, put you down, or in any way denigrate you. I may challenge your assertations, but I hope I never attack you personally.</p>

<p>That said, the main point of my post was to show you and others that when we think of money in a stasis, we do not understand what is and isn't money in a fractional reserve fiat currency system. Money is always available, just like any other commodity, but at what price? The money used to fund mortgages is not just sitting around. It was created by a bank when someone was willing to borrow it. Money in our system is actually debt. And credit is either expanding or contracting. It is never a constant. Once you understand this, you will realize that re is no more valuable than it was 20 or 30 years ago. The economic cycle adjusted and re was the asset of choice for folks to incur debt with inflated currency.</p>

<p>Eva - I was lucky and my Econ 100 instructor was wonderful and Econ became my favorite subject.</p>
 
<p><em>I also am confused as to what basis you are using to justify your argument that move up buyers are in the market.</em></p>

<p>They are. Don't ask me what kind of voodoo magic they're using, but they're in the market. Take a look at San Diego, their market is slightly ahead of ours, but a local Realtor put together some nice charts highlighting why the median isn't accurate but also showing move-up buyers are still there.</p>

<p>This chart shows raw sales for July for the last five years. Look at the top three groupings and you see they're nearly flat over last year. <a href="http://www.bobcasagrand.com/3/W0000015543/P0000279294.htm">http://www.bobcasagrand.com/3/W0000015543/P0000279294.htm</a>.</p>

<p>This one shows percentage of sales by size, see how the bigger homes make up a larger share. <a href="http://www.bobcasagrand.com/3/W0000015543/P0000279881.htm">http://www.bobcasagrand.com/3/W0000015543/P0000279881.htm</a></p>

<p>This one shows price by size. Look at the increasing average price in the top three size groups. <a href="http://www.bobcasagrand.com/3/W0000015543/P0000279317.htm">http://www.bobcasagrand.com/3/W0000015543/P0000279317.htm</a></p>
 
<p>>>>This one shows price by size. Look at the increasing average price in the top three size groups. <a href="http://www.bobcasagrand.com/3/W0000015543/P0000279317.htm">http://www.bobcasagrand.com/3/W0000015543/P0000279317.htm</a><<<</p>

<p>That chart shows that the average San Diego home in the ranges 2500-2800, 2801-3100, and >3101 all increased in value from 2006 to 2007<strong>???</strong></p>

<p>I thought the data was legit until I saw that chart. Now I question the validity of these charts and want to verify the data.</p>
 
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