I have an MBA so everything you described above I get, but I work in a non-related field. I don’t like the cost of inflation either. I just wanted to see your view.

Prices are coming down, and yes I think they’ll come down further regardless of what is done. I paid just x thousand for a home in the summer of 2004, last April when I deployed to Iraq it was ’supposedly’ worth x = 100,000. When I got back late last year, things had changed quite a bit. I’ve been trying to sell the place for 70 days at less than x – $100,000 and haven’t gotten one offer. That’s 20% down from purchase price four years ago and nearly 40% from only one year ago.

I’d say the prices coming down theory is playing out fairly well.

Additionally, I understand that adjustable rate loans adjust – and that the value of something can come down. I just didn’t think it would come down this much, nor this fast; and for the record I don’t think my lender banked on that either.

Have a great weekend.

While i detect a hint of sarcasm in your comments, i’ll play along anyway and try to respond to some of your questions.

There is no panacea or, as the treasury secretary tells us, silver bullet for the fallout from the housing market. Prices must correct before a recovery can occur. Before prices can correct, sellers must capitulate and accept lower prices. Until prices correct and buyers sense a bottoming of the market, they will remain sidelined for fear of buying a depreciating asset. As a sympton of this condition, consider the growing overhang of unsold new & existing homes.

The treasury & Fed, among other groups, recognized that a housing correction was inevitable & necessary. Knowing this, they designed a series of coordinated efforts to attempt to prevent a disorderly correction, to avoid a fire sale situation. So far it seems they’ve been somewhat effective in avoiding such a situation. However this approach delays and prolongs the housing ills, as market participants are denied price discovery. No one knows where the bottom is because too many variables and uncertainties exist (e.g., what will the government do…will they void mortgage contracts?). In this environment, how can you expect someone to reenter the market and buy mortgage debt?

The biggest bailout effort so far has been the Federal Reserve’s decision to adopt a policy of rising inflation. Inflation benefits homeowners as it counteracts house price declines making real house price declines far less severe. Inflation benefits debtors because it allows debtors to pay back their fixed debts in depreciated dollars while their incomes keep pace with prices. Most homeowners fail to recognize or appreciate the benefits accrued to them from this approach. Yet with this approach comes several costs, chief among them higher borrowing and commodity costs.

It took us a long time to get to this point, and it will likely take some time before the market recovers & confidence returns. To help you better understand our current situation, i offer the following basic outline of the events giving rise to the current situation.

The U.S. entered a recession in early 2001 following the tech-stock bust & amid several accounting scandals. In response the Federal Reserve lowered the fed funds rate a total of 5% beginning in the fall of 2001. Cheap money fueled housing demand. Housing demand fostered house price apprecition and encouraged lenders to increase capacity to support or meet the rising demand for loans. As markets experienced dramatic house price appreciation, speculators entered the market, providing excess demand and further fueling house price appreciation.

As housing grew unaffordable many new “non-traditional” mortgage products were introduced, which borrowers increasingly relied on to stay in the market and buy homes they otherwise would be unable to afford. This in turn allowed further unsustainable house price appreciation. As you’re well aware by now, these products included, among others, pay-option, hybrid arms and products having 40yr amortization schedules.

Finally, the Federal Reserve began a campaign of interest rate increases. This had the effect of cooling housing demand. Lenders, left with excess capacity in the face of cooling demand, relaxed underwriting standards to maintain volume. Also contributing to weakened underwriting standards was the originate & distribute model. Such weakened underwriting practices left many with unaffordable mortgages.

Over this period the relationship between income and house prices became hugely distorted by any measure. To anyone looking at that relationship in late 2005 it was plain to see a correction was inevitable. And if you examine that relationship now you’ll understand why the market has further to fall.

While i sympathize with your situation, my view on borrowers is this: it is incumbent upon borrowers to understand the risks they assume when obtaining a loan, namely the potential for rising interest rates and resulting payment shock and the potential for declining house prices. That borrowers would claim ignorance regarding either of those possibilities is absurd.

Yet being the key word there, you obviously know a lot about RMBAs, so what is the cure all here – or are you just on a soap box that the government should stay out of the ‘free’ markets? I can respect that, and if the lenders get on board with making some adjustments I think they well. So far the government seems to be crafting things in their favor, so I think if I were them I’d wait it out too. That’s just my personal opinion.

But – I’m just a guy with a $500k mortgage on a house I can’t seem to short sell for $355k. I’m trying to make sense of all this mess, but it’s all quite complicated.

I’m moving next month and keeping up a payment on two homes will eventually go bust, although the ‘new’ home in the new state will definately be a rental. Tried loan modification, looked in renting it out, none of these bailout programs you speak of have any meat and potatos to them (not for homeowners anyway); so I’ll continue to try and short sell until I run outta cash and then NOD/foreclosure is next I presume. And I’m okay with that, but I’m not just walking. Of course, my loan servicer says they’ll give me a deed-in-lieu if I ask for it now that the place has been on the market for a while, but I’ll believe that when I see it.

I’m going to sit the housing market out for a while. I’d love to strangle all the folks that convinced me to buy, but most of them were good friends – so the feeling fades rather quickly. Actually, I’m kidding altogether here. I really don’t want to strangle any of my friends or co-workers – but I’m sure you get the idea.

Your comments above are quite interesting actually. Thanks for contributing. For the record; I haven’t seen any of these bailouts help homeowners yet, and the tax code you refer to is so complicated that accountants and lawyers don’t even really understand it yet. Going to see a CPA to have this explained to me was a real treat about a month back; I think I shared that experience on here a few months ago, but I can’t remember under what posting.

Who is invested in these private debt and equity markets you refer too exactly? Additionally, exactly how long do you think before their buffer is gone, many of them are in hot water already? Then what? My 401k is doing horribly the past few months.

With your knowledge base perhaps you could shed some light on this from another perspective. We all know there’s a problem – what’s the solution, from your perspective of course?

Nonetheless, taxpayers are already paying for foreclosures, albeit not for the reasons you outlined. Consider what taxpayers are paying for the following bailout efforts: the fiscal stimulus package 160bln; changes & potential changes to the tax code, including changes to prevent forgiven principal reductions from being subject to income taxes and allowing home builders & banks, among other companies, to carry back current losses 4 years vs the 2yrs currently allowed; expansion of FHA, including FHASecure; loans to cities & states to use to buy, manage & redevelop distressed properties. There are likely many other bailout programs i’ve omitted; it’s difficult to keep current with the exploding list of bailout programs.

Your discussion of investor incentives related to GSE loans is misguided. The GSEs guarantee RMBS sold to investors (i.e., they guarantee a fixed P&I payment to investors) rather than the underlying loans. Therefore GSEs still have an incentive to maximize the P&I payments on the underlying loans, whether through loan modifications, principal reductions, etc., in order to maximize the amount of funds available to provide to MBS holders. Moreover, loan servicers are held to the same servicing standards regardless of the loan holder. Accordingly, when services consider a loan workout versus foreclosure, they must evaluate which option produces a greater PV of future cash flows. The servicer is limited by its responsibility to maximize cash flows and investors don’t own whole loans guaranteed by the GSEs.

That’s about right, but the 2nd to last sentence spells out exactly why the servicer and the investors aren’t going to do this. If they foreclose they get paid regardless, assuming the loan has FNMA backing or in the case of Jumbo Loans in California this is the role of Bond insurers like Ambac, etc. I anticipate most of these private bong insurance companies are ailing though. Fannie and Freddie are on the hook at taxpayer expense. Folks just don’t get this, you’re exactly right. Why should the good banks and brokers that did everything 100% right have to suffer too?

You certainly have a point on the taxpayers picking up the tab.

“Fannie Mae puts a loan guarantee on the MBS (mortgage-backed secuities), for which it earns a fee. Fannie Mae promises that in case there is a default on the MBS, Fannie Mae will pay the interest and principal “fully and in a timely fashion.” The MBS, once it has Fannie Mae’s guarantee on it, is sold to outside investors in denominations of $1,000 and up. The insurance funds, pension funds, and so forth, become the owners of the MBS, but if anything goes wrong, Fannie Mae is responsible.”

Excerpt from the link in the post.

June 21, 2002 issue of Executive Intelligence Review.
‘Fannie and Freddie Were Lenders’:
U.S. Real Estate Bubble Nears Its End
by Richard Freeman