Will the proposed Federal bailout Dodd and Schumer hurt us who have waited?

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theBigD_IHB

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<p>I sent this email to Irvine Renter. Let me know your thoughts on this matter as well.</p>

<p>"I will either be purchasing a house or renting in the next year in Irvine or the surrounding area. I read your comments about the 40% drop in prices in Irvine on another blog and have a question regarding this general theme. I, personally, do not believe such a huge drop will take place. I see a 25 - 30% drop, but even assuming what you're saying is true, what happens if a federal government bailout occurs (i.e.- Dodd and Schumer proposing hundreds of millions of federal dollars)</p>

<p class="MsoPlainText">Do you still see prices in OC/Irvine dropping as this would reduce inventory and keep prices high, forcing me to buy a 600K worthless condo. Will this bailout have such a negative effect in OC?</p>

<p class="MsoPlainText">I did see Ohio with their refinance program, but it's been slow going since most people do not know about it and even if they do, they do not meet the qualifications.</p>

<p class="MsoPlainText"> Your thoughts would be appreciated."</p>
 
If, and I doubt it will happen, a bailout occurs, the only beneficiaries would be the banks. They would still forclose on defaulting homeowners.





The bailout won't change anything. 40% reduction (or more) will happen.
 
I thought the bail out, like the current one in Ohio, would have current homeowners get into 30 year fixed rates that would allow them to keep their homes and not foreclose. Am I wrong?
 
As follow-up questions what exactly does a bailout entail? How do you determine who gets bailed out or who does not get bailed?





I for one don't really think it could happen but I am uneasy about it b/c our government tends to think more interms of getting votes than what is the greater good for our society.
 
<p>As mentioned, the banks will get the money, use me and everybody else will have to wait. PLUS, the schillers will get off scot free. (Assuming nobody does anything....) Why do they make it SO hard to make honest money and make it SO easy to cheat the system?</p>

<p>-bix</p>
 
<p>bailout is unlikely according to this past article -> <a href="http://www.latimes.com/business/la-fi-bailout30mar30,0,4631382,email.story?coll=la-home-headlines">http://www.latimes.com/business/la-fi-bailout30mar30,0,4631382,email.story?coll=la-home-headlines</a></p>

<p>But even if a fed or local state bailout plan is implemented, i'm sure the qualification will be strict and only few would qualified...not enough to impact the local RE market. Those who are in trouble have a better chance to do a workout plan with their lender, if possible. </p>

<p> </p>
 
I agree with the statements above. The main reason a bailout will not impact the housing markets is due to the scale of the problem. The solution Ohio is trying to implement would be a drop in the bucket. If they tried to do that in California, it would be a drop in the ocean. The entire federal budget would be required to bail out this problem. The whole bailout thing is a chance for politicians to grandstand and it may give a few FBs a few more months of denial, but it won't do much other than that.
 
<p>SCHB,</p>

<p>Would it be nice if the bailout is self-funded?. This is just a pilot bailout so tons of more cash needed. To be fair, long term rate has to drop to 5% range for those folks that loan adjust later this year. If my off-the-wall theory sticks, then there will be a price run-up. Am I puffing?</p>
 
<p>I agree with the comments above as well... but I will offer my own summation. </p>

<p>1) At this point, the problem is so unbelievably large that no stimulus package can work. The size of this bubble is unprecedented, and the only alternative at this point is to allow it to run its course in as orderly a manner as possible. I have been happy to see that most of the banks involved are doing their best to ride the drop as intelligently as they can.. without jumping out of windows (which I am sure that they are tempted to do.) However, the banks WILL lose in this..... the decisions that the banks make at this point will be to survive the crash and still have a company to work for... not to maximize profits.</p>

<p>2) The Fed basically has 2 choices. CHOICE 1: Lower interest rates to reduce the number of foreclosures and essentially kill the dollar. CHOICE 2: Raise interest rates to protect the dollar and basically kill the housing market.</p>

<p>Since I own a chemical distribution company that imports many of its products, I have been watching the Fed very closely. Thus far, it seems like the Fed has recognized that lowering interest rates will only delay the inevitable... and seems to have opted for CHOICE 2.... which is a relief for me. The economy has the best chance of recovering relatively quickly if the Fed recognizes the problem, realizes that no "levers" can be pulled to "solve" the problem, and allows the necessary reversion to the mean.... with all of the pain that goes with it. Americans have a hard time losing... and are always looking for a way to miraculously dodge the bullet aimed at them. It will be those entities that realize that we have already lost, and take measures to avoid a complete collapse of the economy that will deal with this problem most effectively.</p>

<p>3) There is ABSOLUTELY no way to use stimulus to solve the affordability problem. I don't care what kind of loan terms are made available to American homeowners. A family cannot take on debt that amounts to 8 - 10 times their annual salary. Sure, they can get into 30 year fixed loans.. but unless the sttimulus package includes paying down the principal to a level that can be handled by the borrower... a foreclosure will result inevitably. If you read the data carefully, you will see that almost ALL of the home purchases in Orange County using standard financing are for people moving within the Orange County market... which is nothing more than shifting existing equity from one home to another within the same market... which doesn't count... since the selling price of their original home was inflated due to the bubble along with all of the new house they buy. </p>

<p>Essentially, (in engineering speak) that means that the artificial increase in the price of the home being purchased will be cancelled out by the artificial increase in the price of the original house being sold. Remember that when you are wondering "WHY THE HELL ARE PEOPLE STILL BUYING?" Most are just moving within Orange County. The first time home buyers had to use exotics with virtually no money down. The flippers really didn't care about the loan terms, since they were planning on selling fairly quickly anyway. In fact, since a bubble effects home prices more or less the same within a given market, the flippers were looking for the most expensive homes they could find... since a 10% increase on a 1 million dollar home makes twice the profit than a 10% increase on a $500,000 home.</p>
 
<p>4) The total amount of mortgage fraud cannot be reported on since it is currently unknown. However, BELIEVE ME, it will be discovered soon enough. The FBI reported 37,000 complaints for mortgage fraud in 2006 and admitted that they couldn't handle the case load. However, these cases will be discovered quickly enough since the secondary loan market (holders of MBS and CDO's) are hiring lawyers as we speak to pore over the loan applications to looking for fraud so that they can force the originators to buy back the loans. There is a race to do this as quickly as possible, since everyone pretty well knows that the originators are going to go bankrupt quickly, and there will be no one left to buy the loans back.... so they want to be first in line. However, there is one thing to note. NONE of the government agencies want to report on fraud.... so you can make a pretty good guess that the actual damange due to fraud is considerably greater than is being reported.... and certainly no one can make an educated calculation on how much fraud added artificially to the value of homes across the country. Whatever that value may be will certainly vanish from home values as this bubble unwinds.</p>

<p>5) Some of the reactions of Senate and Congress are actually going to make the problem worse. I have been reading articles about how the bond holders are going to be held criminally liable for predatory lending practices. This was tried before and it almost immediately dried up the availability of loans, which of course only made things worse. Ultimately the laws had to be watered down to avoid a complete market collapse in these areas. I don't mind using taxpayer dollars to allow the real estate market to adjust without panic and mayhem, since I don't want to go through a 10 year recession. However, any plan that is proposed to actually reverse the downward trend in Real Estate will be disastrous. </p>

<p>-------------------------------------</p>

<p>The trick to dealing with this problem is the recognition that our economy has already lost... and to take measures to minimize the damage to the economy as a whole. Since it would appear that the Fed is resisting lowering interest rates.... I think they understand the message loud and clear. (THANK GOD). Things are going to be bad for a long time... but if the problem is dealt with intelligently... the economy at large will enter a recession... but will have the ability to continue forward.</p>

<p>So... keep renting and wait to buy. This is only the tip of the iceberg. A 50% drop in Real Estate values is almost a certainty.</p>
 
Thanks Nick for your detailed input.





As a first time home buyer that just moved in the OC





I praying that the market becomes more affordable for me and my wife in the next few years. We have lots of cash to put down but not enough for a SFR. The current market change might change that. I for one am hoping for a 30% drop, more would'nt hurt as well.
 
<p>NickStone - I clicked the thank you link for your post but it doesn't do it justice with a post like yours. I am happy to see that someone else has read what the FED has said in regards to rates as me. I like you think that they should sit and wait and if inflation rears its head they should raise. I do think it is in our best interest to boost the dollar. Too bad foreign participation in our bond auctions were weak.</p>

<p>You stated that the MBS holders are hiring on attorneys to handle the situation. Do you have any links? This is very interesting to me and I would greatly appreciate any info and links you could provide.</p>

<p>I know I need to look into the bonuses too. This sleep thing keeps getting in the way.</p>
 
Politicos blowing smoke. There will be no bailout. The figure would be in the billions of dollars...not the few hundred million Chuck has in mind.





Just playing it up as tho he cares and getting his name out there, with a less than 5% chance he will actually move forward with the bailout.





Take it with a grain of salt!
 
<p>Graphix:</p>

<p>I am looking for the exact passages in Calculated Risk. Tanta makes several statements about it when answering comments to her posts. This information is coming from her friends that are still active in the industry who are reporting that lawyers are now poring over the contracts looking for fraud.</p>

<p>Note: For any of you out there who have not read the blog Calculated Risk... do so. Both CR and Tanta are the most knowledgeable bloggers out there that I have found. There is absolutely no way that you can walk away from that site without having learned something. Check the UberNerd sections for the theory (its excellent) and then go through the comments section for more specific information and answers to questions. (Also, keep another Tab open for <a href="http://www.investopedia.com">www.investopedia.com</a> while you read Calculated Risk, since they use many acronyms. If you see something you don't recognize, just look it up at investopedia. After a few hours of reading, you should have the jargon down pretty well.)</p>

<p> </p>
 
<p>I want to thank you, housing bears, to still allow me, a housing bull, to blog here. I think it's a good balance for me.</p>

<p>I do think real estate will not drop 50%. Over the next 2 year, I think there will be a big price increase. Hm, I am puffing. I do have my theory base on my own observations.</p>

<p>I do not have formal education in finance (I do have in something else though), and that was by choice. My spouse is a big time finance guru, and a very intelligent person I may add; this combo of finance knowledge did very little good for our portfolio. We are both still working instead of retiring already.</p>

<p>I will share my theory on my next post. I have to run now.</p>
 
<p>Along the lines of government intervention actually doing more harm than good.... here is an excerpt from today's Calculated Risk Blog, referring to the article "<a href="http://www.bizjournals.com/philadelphia/stories/2007/04/09/daily31.html?surround=lfn">N.J. legislator wants freeze on subprime-related foreclosures</a>":</p>

<p>The article states that: </p>



<p>"A New Jersey lawmaker called upon the state's attorney general on Wednesday to impose a moratorium on subprime mortgage loan foreclosures, to give the state time to investigate and address problems. </p>

<p>The moratorium, requested by Assembly Deputy Speaker Neil M. Cohen in a letter to Attorney General Stuart Rabner, would bar subprime lending firms from initiating new foreclosures, pursuing pending foreclosures and evicting homeowners for up to six months."</p>



<p>I think Tanta's questions about this pretty much sum up the many holes in the logic of the possible bailout, and the fact that interfering with the market will actually have catastrophic results:</p>

<p>"......could you ask next time whether this is also a moratorium on charging interest on delinquent loans? Does it require the lender to keep the asset in accrual status--even though normal accounting rules would suggest otherwise--because the collectability of the loan is now a matter of politics? If the moratorium expires without new magical escape routes being invented, and the delinquent borrower now owes six months worth of additional interest on the debt, effectively wiping out whatever tiny slice of equity that borrower might have had, will the taxpayers of New Jersey happily pay that? Will the lender eat it? The mortgage insurer? The HELOC holder? Or will the borrower just be screwed later rather than sooner? At least one inquiring mind would like to know."





----------------------------------------------</p>

<p>You can decide for yourself... but I certainly agree with Tanta.... the politicians looking to make headlines by going after the lenders and originators have certainly not thought things through... and are only looking to make headlines. Hopefully the politicians will be forced to answer basic questions such as these before they can go through with their legislation.


</p>
 
<p>nirvinerealtor:</p>

<p>Please do post your opinions on the matter. I would honest be curious to hear your opinions. Since I am actually afraid of the effect the housing meltdown would have on the economy as a whole... any bullish news would be welcome. </p>
 
<p>All right, here is why I think real estate in OC is going increase in the near future. Please note this theory is for OC only.</p>

<p>Well, if you have tons of cash, where would you put it now? I am talking about the global market. The cash buyers kept coming!</p>

<p>1. Stocks: Oh, most of us (nationally and internationally) still feel the pain of the dot-com burst. We all lost dearly. And we have not forgotten so we are not buying stocks. I do not think anyone of us have any use for stocks except to have equity.</p>

<p>2. Bonds: International investors were buying up US bonds, especially mortgage-backed ones because analysts said they are must-haves! Well, we pulled a fast one, did we?. We only can hope these investors are easy! Ditto here.</p>

<p>3. Gold: Good old gold. We can keep them burried in the backyards. Not very exciting here.</p>

<p>4. Cash: Good old cash. We can keep them under our mattresses. Not very exiting here.</p>

<p>5. Real Estate (checked): We all need real estate as a roof over our heads. Stocks can evaporate, but can real estate? Land in OC is all allocated and will be completely built out by 2011 (source: from our chief accessor - you can call him and chat). So we are running out of land.</p>

<p>#5 is my choice, naturally. </p>

<p>Comment on the forclosures: Easy money did not come in until 2005, that was when the scammers came in. These loans already went into defaults. Easy money stopped by early 2007. So we had about 18 months of exposure. These foreclosed homes are being listed on the MLS with current market asking price.</p>

<p>The mortgage frauds were mainly for loans less than $1M (100% financing was limit at $999K). That is why we do not see much or any $1.1M homes in forclosure. </p>

<p>September 2006, the guideline for 100% financing increase the amount to $1.25M; however, 4 months later, it got terminated. I saw a few of these $1M+ homes bought by scammers that surely will show up soon on foreclosure.com.</p>

<p>That is why we are seeing $1M+ homes are holding price.</p>

<p>OK guys, please be gentle with my theory of home price increase. Thank you.</p>
 
<p>nirvinerealtor --</p>

<p>Although you have some valid points (although subjective) of the Orange County market, what do you think is happening to home equity right this very second in Orange County? Evaporating! You say that no one "has any use for stocks except for equity". I'm not what you mean by this as stocks are pure equity vehicles and are fairly liquid investments. Care to elaborate?</p>
 
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